nep-mac New Economics Papers
on Macroeconomics
Issue of 2016‒06‒14
74 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The interaction of monetary and macroprudential policies in economic stabilisation By Silvo, Aino
  2. The golden rule of public investment – a necessary and sufficient reform of the EU fiscal framework? By Achim Truger
  3. Bernanke's No-arbitrage Argument Revisited: Can Open Market Operations in Real Assets Eliminate the Liquidity Trap? By Gauti B. Eggertsson; Kevin Proulx
  4. Allocative and Remitted Wages: New Facts and Challenges for Keynesian Models By Susanto Basu; Christopher L. House
  5. Doves for the Rich, Hawks for the Poor? Distributional Consequences of Monetary Policy By Gornemann, Nils; Kuester, Keith; Nakajima, Makoto
  6. The interest rate effects of government bond purchases away from the lower bound By De Rezende, Rafael B.
  7. Leverage dynamics and the burden of debt By Juselius, Mikael; Drehmann, Mathias
  8. Monetary policy transmission in China: A DSGE model with parallel shadow banking and interest rate control By Funke, Michael; Mihaylovski, Petar; Zhu, Haibin
  9. Global Commodity Prices and Inflation in a Small Open Economy By Muhammad Nadeem Hanif; Javed Iqbal; Imran Naveed Khan
  10. A Basic Model of Real-Financial Market Interactions with Heterogeneous Opinion Dynamics By Florian Hartmann; Matthieu Charpe; Peter Flaschel; Roberto Veneziani
  11. How Friedman and Schwartz became monetarists By James R. Lothian; George S. Tavlas
  12. On the Nexus of Monetary Policy and Financial Stability: Effectiveness of Macroprudential Tools in Building Resilience and Mitigating Financial Imbalances By H. Evren Damar; Miguel Molico
  13. Quantitative Easing and Financial Stability By Michael Woodford
  14. Economic Policy Uncertainty and the Credit Channel: Aggregate and Bank Level U.S. Evidence over Several Decades By Michael D. Bordo; John V. Duca; Christoffer Koch
  15. On the Sources of Business Cycles: Implications for DSGE Models By Michal Andrle; Jan Bruha; Serhat Solmaz
  16. Band or Point Inflation Targeting? An Experimental Approach By Camille Cornand; Cheick Kader M'baye
  17. Estimating Egypt’s Potential Output: A Production Function Approach By El-Baz, Osama
  18. Terms of Trade Shocks and Monetary Policy in India By Ghate, Chetan; Gupta, Sargam; Mallick, Debdulal
  19. Population growth, saving, interest rates and stagnation: Discussing the Eggertsson-Mehrotra model By Spahn, Peter
  20. Political Economics of Fiscal Consolidations and External Sovereign Accidents By Carolina Achury; Christos Koulovatianos; John Tsoukalas
  21. Commodity prices and fiscal policy design: Procyclical despite a rule By Hilde C. Bjornland; Leif Anders Thorsrud
  22. Leverage constraints and real interest rates By Isohätälä, Jukka; Kusmartsev, Feo; Milne, Alistair; Robertson, Donald
  23. The age-structure–inflation puzzle By Juselius, Mikael; Takats, Elod
  24. Fiscal Consolidation Under Imperfect Credibility By M. Lemoine; J. Lindé
  25. Demographics and real interest rates: inspecting the mechanism By Carvalho, Carlos; Ferrero, Andrea; Nechio, Fernanda
  26. Analysis of aggregated inflation expectations based on the ECB SPF survey By Oinonen, Sami; Paloviita, Maritta
  27. Is there a need for additional monetary stimulus? Insights from the original Taylor Rule By Alcidi, Cinzia; Busse, Matthias; Gros, Daniel
  28. Monetary Policy and Efficiency in Over-the-Counter Financial Trade By Athanasios, Geromichalos; Kuk Mo, Jung
  29. How informative are aggregated inflation expectations? Evidence from the ECB Survey of Professional Forecasters By Oinonen, Sami; Paloviita, Maritta
  30. Do nations just get the inequality they deserve? The ‘Palma Ratio’ re-examined By José Gabriel Palma
  31. Carbon Emissions and Business Cycles By Hashmat Khan; Christopher R. Knittel; Konstantinos Metaxoglou; Maya Papineau
  32. Islamic Financing and Bank Behaviour in a Dual Banking System: Evidence from Malaysia By Zulkhibri, Muhamed
  33. Turkey; 2016 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Turkey By International Monetary Fund. European Dept.
  34. Seychelles; Staff Report for the 2015 Article IV Consultation, Second Review Under the Extended Arrangement, and Request for Waiver and Modification of Performance Criteria By International Monetary Fund
  35. Stabilisation and rebalancing with fiscal or monetary devaluation: a model-based comparison By Lukas Vogel
  36. Insurance in Human Capital Models with Limited Enforcement By Krebs, Tom; Kuhn, Moritz; Wright, Mark L. J.
  37. Gauging financial conditions in South Africa By Nicolaas van der Wath
  38. Nowcasting Turkish GDP and News Decomposition By Modugno, Michele; Soybilgen, Baris; Yazgan, M. Ege
  39. Respuesta del producto a perturbaciones de oferta y demanda en Colombia: 1981-2015 By Daniel Felipe Cuervo; Javier Mondragón
  40. Can the Chinese bond market facilitate a globalizing renminbi? By Ma, Guonan; Yao, Wang
  41. A note on money creation in emerging market economies By Ponomarenko, Alexey
  42. Currency demand stability in the presence of seasonality and endogenous financial innovation: Evidence from India By Singh, Sunny Kumar
  43. Multiple Equilibria in Open Economy Models with Collateral Constraints: Overborrowing Revisited By Stephanie Schmitt-Grohé; Martín Uribe
  44. Bangladesh Quarterly Economic Update (March-June 2015) By Asian Development Bank (ADB); Asian Development Bank (ADB); Asian Development Bank (ADB); Asian Development Bank (ADB)
  45. Yield Curve for Japanese Agency Bonds: From 2002 to the Present By Hattori, Takahiro; Miyake, Hiroki
  46. The Collateral Channel of Open Market Operations By N. Cassola; F. Koulischer
  47. Slow Normalization or No Normalization? :a presentation at OMFIF City Lecture, Beijing, China, May 23, 2016. By Bullard, James B.
  48. Moving to a new job: the role of home equity, debt, and access to credit By Demyanyk, Yuliya; Hryshko, Dmytro; Luengo-Prado, Maria Jose; Sorensen, Bent E.
  49. Macroprudential Policy and Financial Stability in the Arab Region By Ananthakrishnan Prasad; Heba Abdel Monem; Pilar Garcia Martinez
  50. Bundling Governance: Finance versus Institutions in Private Investment Promotion By Asongu, Simplice; Batuo, Enowbi; Tchamyou, Vanessa
  51. Does bank liquidity creation contribute to economic growth? Evidence from Russia By Fidrmuc, Jarko; Fungáčová, Zuzana; Weill, Laurent
  52. Paraguay; 2016 Article IV Consultation-Press Release; and Staff Report By International Monetary Fund
  53. Estimating the impact of monetary policy on inequality in China By Sánchez-Fung, José R.
  54. Sentiments in SVARs By Fève, Patrick; Guay, Alain
  55. Real-time forecasting with a MIDAS VAR By Mikosch, Heiner; Neuwirth, Stefan
  56. Volatility transfers between cycles: A theory of why the "great moderation" was more mirage than moderation By Crowley, Patrick; Hughes Hallett, Andrew
  57. Long-Run Drivers of Current Account Imbalances in the EU: the Role of Trade Openness By Giuseppe Caivano; Nicola D. Coniglio
  58. Cash management and payment choices: a simulation model with international comparisons By Arango, Carlos; Bouhdaoui, Yassine; Bounie, David; Eschelbach, Martina; Hernandez, Lola
  59. China’s Slowdown and Global Financial Market Volatility: Is World Growth Losing Out? By Paul Cashin; Kamiar Mohaddes; Mehdi Raissi
  60. The Centralization-Decentralization Issue By Charles Wyplosz
  61. Monopoly Power and Endogenous Product Variety: Distortions and Remedies By Bilbiie, Florin Ovidiu; Ghironi, Fabio; Melitz, Marc J
  62. Why fiscal regimes matter for fiscal sustainability analysis : an application to France By Aldama Pierre; Jérôme Creel
  63. Un Análisis de la Capacidad Predictiva del Precio del Cobre sobre la Inflación Global By Carlos Medel
  64. The effects of ratings-contingent regulation on international bank lending behavior: Evidence from the Basel 2 accord By Hasan, Iftekhar; Kim, Suk-Joong; Wu, Eliza
  66. What does it take to grow out of recession? An error-correction approach towards growth convergence of European and transition countries By Olivier Damette; Mathilde Maurel; Michael A. Stemmer
  67. The internationalization of the RMB, capital market openness, and financial reforms in China By Aizenman, Joshua
  68. SIMTASK: Public finance baseline scenario By Erik Bugyi
  69. Student loans, fertility, and economic growth By Miyazaki, Koichi
  70. Determinacy analysis in high order dynamic systems: The case of nominal rigidities and limited asset market participation By Guido, Ascari; Andrea, Colciago; Lorenza, Rossi
  71. The 'Real' Explanation of the PPP Puzzle By Nicholas Ford; Charles Yuji Horioka
  72. Why Do Children Take Care of Their Elderly Parents? Are the Japanese Any Different? By Charles Yuji Horioka; Emin Gahramanov; Aziz Hayat; Xueli Tang
  73. Human Capital, Inequality and Growth By Torben M Andersen, Department of Economics and Business Economics Aarhus University, CEPR, CESifo and IZA
  74. Analysis of the long term effects of a company tax cut By Michael Kouparitsas; Dinar Prihardini; Alexander Beames

  1. By: Silvo, Aino
    Abstract: I analyse the dynamics of a New Keynesian DSGE model where the financing of investments is affected by a moral hazard problem. I solve for jointly Ramsey-optimal monetary and macroprudential policies. I find that when a financial friction is present in addition to the standard nominal friction, the optimal policy can replicate the first-best if the social planner can conduct both monetary and macroprudential policy to control both inflation and the level of investments. Using monetary policy alone is not enough to fully stabilise the economy: it leads to a policy trade-off between stabilising inflation and the output gap. When policy follows simple rules instead, the source of fluctuations is highly relevant for the choice of the appropriate policy mix.
    Keywords: monetary policy, macroprudential policy, financial frictions
    JEL: E32 E44 E52 G28
    Date: 2016–02–10
  2. By: Achim Truger
    Abstract: It is by now a widely shared insight that fiscal policy needs to be re-strengthened as a macroeconomic policy instrument within European macroeconomic policies: Recent experiences with austerity policies, new research regarding the size of the fiscal multiplier and the fact that monetary policy is obviously overstrained have led to this conclusion. As a consequence, increases in public investment are particularly necessary. Against this background this contribution discusses and proposes the introduction of the traditional public finance golden rule into the EU/Eurozone fiscal framework (Stability and growth pact (SGP), Fiscal Compact (FC)). Such a rule would exempt public (net) investment suitably defined from the relevant deficit targets of both the preventive and the corrective arm of the SGP as well as the FC. That way, fiscal policy would be upgraded and receive larger room for manoeuvre and public investment as a particularly growth enhancing public expenditure category would be strengthened. Different definitions are discussed and a pragmatic definition based on the national accounts with some modifications is proposed. The standard reservations against a golden rule are critically assessed, but mostly discarded. However, the potential limits of the golden rule are examined by way of pragmatic multiplier-based macroeconomic assessments: Would a golden rule have prevented the austerity crisis since 2010? Would other expenditure categories - particularly spending on social policy - have necessarily suffered? Would a golden rule leave sufficient fiscal leeway for expansionary fiscal policy in the current situation? The results are encouraging, yet they show, that the golden rule alone would not be sufficient to stabilise the Euro area economies.
    Keywords: Golden rule, public investment, fiscal policy austerity, Euro area
    JEL: E22 E61 E62 E65 H54 H62
    Date: 2016
  3. By: Gauti B. Eggertsson; Kevin Proulx
    Abstract: We first show that, at least in theory, open market operations in real assets can be a useful tool for overcoming a liquidity trap because they change the inflation incentives of the government, and thus change private sector expectations from deflationary to inflationary. We argue that this formalizes Ben Bernanke's arbitrage argument for why a central bank can always increase nominal demand, despite the zero lower bound. We illustrate this logic in a calibrated New Keynesian model assuming the government acts under discretion. Numerical experiments suggest, however, that the needed intervention is incredibly high, creating a serious limitation of this solution to the liquidity trap. Our experiments suggest that while asset purchases can be a helpful commitment device in theory, they may need to be combined in practice with fiscal policy coordination to achieve the desired outcome.
    JEL: E31 E4 E42 E43 E50 E51 E52 E58 E61 E62
    Date: 2016–05
  4. By: Susanto Basu; Christopher L. House
    Abstract: Modern monetary business-cycle models rely heavily on price and wage rigidity. While there is substantial evidence that prices do not adjust frequently, there is much less evidence on whether wage rigidity is an important feature of real world labor markets. While real average hourly earnings are not particularly cyclical, and do not react significantly to monetary policy shocks, systematic changes in the composition of employed workers and implicit contracts within employment arrangements make it difficult to draw strong conclusions about the importance of wage rigidity. We augment a workhorse monetary DSGE model by allowing for endogenous changes in the composition of workers and also by explicitly allowing for a difference between allocative wages and remitted wages. Using both individual-level and aggregate data, we study and extend the available evidence on the cyclicality of wages and we pay particular attention to the response of wages to identified monetary policy shocks. Our analysis suggests several broad conclusions: (i) in the data, composition bias plays a modest but noticeable role in cyclical compensation patterns; (ii) empirically, both the wages for newly hired workers and the "user cost of labor" respond strongly to identified monetary policy innovations; (iii) a model with implicit contracts between workers and firms and a flexible allocative wage replicates these patterns well. We conclude that price rigidity likely plays a substantially more important role than wage rigidity in governing economic fluctuations.
    JEL: E24 E3 E31 E32
    Date: 2016–05
  5. By: Gornemann, Nils; Kuester, Keith; Nakajima, Makoto
    Abstract: We build a New Keynesian business-cycle model with rich household heterogeneity. A central feature is that matching frictions render labor-market risk countercyclical and endogenous to monetary policy. Our main result is that a majority of households prefer substantial stabilization of unemployment even if this means deviations from price stability. A monetary policy focused on unemployment stabilization helps "Main Street" by providing consumption insurance. It hurts "Wall Street" by reducing precautionary saving and, thus, asset prices. On the aggregate level, household heterogeneity changes the trans mission of monetary policy to consumption, but hardly to GDP. Central to this result is allowing for self-insurance and aggregate investment.
    Keywords: General Equilibrium; Heterogeneous Agents; Monetary policy; Search and Matching; Unemployment
    JEL: E12 E21 E24 E32 E52 J64
    Date: 2016–04
  6. By: De Rezende, Rafael B. (Monetary Policy Department, Central Bank of Sweden)
    Abstract: I analyze the recent experience of unconventional monetary policy in Sweden to study the interest rate transmission mechanisms of government bond purchases when interest rates are not constrained by a lower bound. Using dynamic term structure models and event study regressions I find that government bond purchases have important portfolio balance and signaling effects. The signaling channel operates mainly by lowering short-rate expectations in the intermediate segment of the yield curve, while the portfolio balance channel is effective in lowering longer maturity term premia. In addition, I find that target interest rate policy and government bond purchases operate in different segments of the yield curve. This suggests that a combination of the two policies can be used to lower interest rates across the whole maturity spectrum, making monetary policy more expansionary.
    Keywords: quantitative easing; signaling channel; portfolio balance channel; yield curve; dynamic affine term structure models; short rate expectations; term premium
    JEL: E43 E44 E52
    Date: 2016–05–01
  7. By: Juselius, Mikael; Drehmann, Mathias
    Abstract: In addition to leverage, the debt service burden of households and firms is an important link between financial and real developments at the aggregate level. Using US data from 1985 to 2013, we find that the debt service burden has sizeable negative effects on expenditure. Its interplay with leverage also explains several data puzzles, such as the lack of above-trend output growth during credit booms and the depth and length of ensuing recessions, without appealing to large shocks or non-linearities. Using data up to 2005, our model predicts paths for credit and expenditure that closely match actual developments before and during the Great Recession.
    Keywords: business cycle, credit boom, leverage, debt service burden, financial-real interactions, financial stability
    JEL: E20 E32 E44 G01
    Date: 2016–04–01
  8. By: Funke, Michael; Mihaylovski, Petar; Zhu, Haibin
    Abstract: The paper sheds light on the interplay between monetary policy, the commercial banking sector and the shadow banking sector in mainland China by means of a nonlinear stochastic general equilibrium (DSGE) model with occasionally binding constraints. In particular, we analyze the impacts of interest rate liberalization on monetary policy transmission as well as the dynamics of the parallel shadow banking sector. Comparison of various interest rate liberalization scenarios reveals that monetary policy results in increased feed-through to the lending and investment under complete liberalization. Furthermore, tighter regulation of interest rates in the commercial banking sector in China leads to an increase in loans provided by the shadow banking sector.
    Keywords: DSGE model, monetary policy, financial market reform, shadow banking, China
    JEL: E32 E42 E52 E58
    Date: 2015–03–09
  9. By: Muhammad Nadeem Hanif (State Bank of Pakistan); Javed Iqbal (State Bank of Pakistan); Imran Naveed Khan (State Bank of Pakistan)
    Abstract: Global commodity prices surge of 2007-08 sent an inflationary shock across the countries. 2014 global prices descend resulted in significant disinflation in many countries and even deflation in some economies. We have explored the linkages between global commodity prices fluctuations and inflation in small open economy, Pakistan. Global price fluctuations are found to be dominant sources of inflation dynamics in Pakistan during July 1992 to June 2014. Food inflation and overall inflation in Pakistan is linked to international food prices changes. Non-food and administered prices’ inflation are result of global oil price increases. For core inflation, global prices of metal and cotton matter most. Global commodity prices changes impact overall inflation in Pakistan rather quickly compared to monetary policy actions. Core inflation takes longer to respond to all type of shocks including global price fluctuations. Monetary and exchange rate policies do have role in influencing inflation outcome in Pakistan (barring administrated prices’ inflation).
    Keywords: Global Commodity Prices, Exchange Rate, Money Supply, Inflation
    JEL: E31 E51 F62
    Date: 2016–04
  10. By: Florian Hartmann (Universitaet Osnabrueck); Matthieu Charpe (International Labor Organization (ILO), Genf, Schweiz); Peter Flaschel (Universitaet Bielefeld); Roberto Veneziani (Queen Mary University, London, England)
    Abstract: We consider an alternative modelling approach to the mainstream DSGE paradigm, namely a Dynamic Stochastic General Disequilibrium (DSGD) baseline model of continuous and gradual adjustment processes on interacting real and financial markets. Heterogeneous capital gain expectations (chartists and fundamentalists) are introduced in place of rational expectations and we show that the first type of agents tends to destabilise the economy. An additional feature is that the share of prevailing opinion types is able to switch endogenously. Global stability can be ensured if opinions favour fundamentalist behaviour far off the steady state. This interaction of expectations and population dynamics is bounding the potentially explosive real-financial market interactions, but can enforce irregular behaviour within these bounds when the dynamics is dominated by fundamentalist behavior far off the steady state (at least in the downturn). The size of output and share price fluctuations can be reduced however by imposing suitably chosen policy measures on the dynamics of the private sector.
    Keywords: Output and share price dynamics, heterogeneous expectations, boundedness, persistent irregular fluctuations, policy measures
    JEL: E12 E24 E31 E52
    Date: 2016–05–22
  11. By: James R. Lothian (Fordham University); George S. Tavlas (Bank of Greece and University of Leicester)
    Abstract: During the late-1940s and the early-1950s Milton Friedman favored a rule under which fiscal policy would be used to generate changes in the money supply with the aim of stabilizing output at full employment. He believed that the economy is inherently unstable because of endogenous movements in money supply under a fractional-reserve banking system. In her work, Anna Schwartz downplayed the role of monetary factors in business cycles and the role of monetary policy as a stabilization tool. We show how the joint work of Friedman and Schwartz from 1948 to 1958 led Friedman to view money as the “primary mover” of the business cycle and underpinned his shift to a rule based on money growth so that discretionary monetary policy would not act as a source of destabilizing shocks. The decisive factor in the evolution of Friedman’s thinking was the empirical confirmation that the Great Depression had been both initiated and deepened by the Fed. The largely neglected influence of Clark Warburton on the evolution of Friedman’s thinking provides a missing -- but crucial -- link in explaining Friedman’s recognition of the role of monetary factors in the Great Depression and of the Fed’s ability to offset the destabilizing effects produced by shifts from deposits into currency under a fractional-reserve banking system.
    Keywords: B22; E52
    Date: 2016–05
  12. By: H. Evren Damar; Miguel Molico
    Abstract: This paper reviews the Canadian and international evidence of the effectiveness of macroprudential policy measures in building resilience and mitigating financial imbalances. The analysis concludes that these measures have broadly achieved their goal of increasing the overall resilience of the financial system to the buildup of imbalances and increasing the financial system’s ability to withstand adverse shocks. However, evidence of their effectiveness in providing countercyclical stabilization by curbing credit growth (“leaning against the financial cycle”) is limited. Among the different types of macroprudential measures, those that are “sectoral” in nature and/or those that target borrowers are most effective in leaning against the financial cycle. Overall, the observed effectiveness of macroprudential tools in addressing systemic risk implies that these policies can be complementary to monetary policy in achieving the goals of macroeconomic and financial stability.
    Keywords: Credit and credit aggregates, Financial stability, Financial system regulation and policies
    JEL: E51 E58 G18 G28
    Date: 2016
  13. By: Michael Woodford
    Abstract: The massive expansion of central-bank balance sheets in response to recent crises raises important questions about the effects of such "quantitative easing" policies, both their effects on financial conditions and on aggregate demand (the intended effects of the policies), and their possible collateral effects on financial stability. The present paper compares three alternative dimensions of central bank policy — conventional interest-rate policy, increases in the central bank's supply of safe (monetary) liabilities, and macroprudential policy (possibly implemented through discretionary changes in reserve requirements) — showing in the context of a simple intertemporal general-equilibrium model why they are logically independent dimensions of variation in policy, and how they jointly determine financial conditions, aggregate demand, and the severity of the risks associated with a funding crisis in the banking sector. In the proposed model, each of the three dimensions of policy can be used independently to influence aggregate demand, and in each case a more stimulative policy also increases financial stability risk. However, the policies are not equivalent, and in particular the relative magnitudes of the two kinds of effects are not the same. Quantitative easing policies increase financial stability risk (in the absence of an offsetting tightening of macroprudential policy), but they actually increase such risk less than either of the other two policies, relative to the magnitude of aggregate demand stimulus; and a combination of expansion of the central bank's balance sheet with a suitable tightening of macroprudential policy can have a net expansionary effect on aggregate demand with no increased risk to financial stability. This suggests that quantitative easing policies may be useful as an approach to aggregate demand management not only when the zero lower bound precludes further use of conventional interest-rate policy, but also when it is not desirable to further reduce interest rates because of financial stability concerns.
    JEL: E44 E52
    Date: 2016–05
  14. By: Michael D. Bordo; John V. Duca; Christoffer Koch
    Abstract: Economic policy uncertainty affects decisions of households, businesses, policy makers and financial intermediaries. We first examine the impact of economic policy uncertainty on aggregate bank credit growth. Then we analyze commercial bank entity level data to gauge the effects of policy uncertainty on financial intermediaries' lending. We exploit the cross-sectional heterogeneity to back out indirect evidence of its effects on businesses and households. We ask (i) whether, conditional on standard macroeconomic controls, economic policy uncertainty affected bank level credit growth, and (ii) whether there is variation in the impact related to banks' balance sheet conditions; that is, whether the effects are attributable to loan demand or, if impact varies with bank level financial constraints, loan supply. We find that policy uncertainty has a significant negative effect on bank credit growth. Since this impact varies meaningfully with some bank characteristics - particularly the overall capital-to-assets ratio and bank asset liquidity-loan supply factors at least partially (and significantly) help determine the influence of policy uncertainty. Because other studies have found important macroeconomic effects of bank lending growth on the macroeconomy, our findings are consistent with the possibility that high economic policy uncertainty may have slowed the U.S. economic recovery from the Great Recession by restraining overall credit growth through the bank lending channel.
    Keywords: money and banking, economic policy uncertainty, business cycle
    JEL: E40 E50 G21
    Date: 2016–02
  15. By: Michal Andrle; Jan Bruha; Serhat Solmaz
    Abstract: What are the drivers of business cycle fluctuations? And how many are there? By documenting strong and predictable co-movement of real variables during the business cycle in a sample of advanced economies, we argue that most business cycle fluctuations are driven by one major factor. The positive co-movement of real output and inflation convincingly argues for a demand story. This feature-robust across time and space-provides a simple smell test for structural macroeconomic models. We propose a simple statistic that can compare data and models. Based on this statistic, we show that the recent vintage of structural economic models has difficulties replicating the stylized facts we document.
    Keywords: Business cycle, demand shocks, DSGE models, dynamic principal component analysis
    JEL: C10 E32 E50
    Date: 2016–03
  16. By: Camille Cornand (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France); Cheick Kader M'baye (University of Bamako, Bamako, Mali)
    Abstract: We conduct laboratory experiments with human subjects to test the rationale of adopting a band versus point inflation targeting regime. Within the standard New Keynesian model, we evaluate the macroeconomic performances of both regimes according to the strength of shocks affecting the economy. We find that when the economy faces small shocks, the average level of inflation as well as its volatility are significantly lower in a band targeting regime, while the output gap and interest rate levels and volatility are significantly lower in a point targeting regime with tolerance bands. However, when the economy faces large shocks, choosing the suitable inflation targeting regime is irrelevant because both regimes lead to comparable performances. These findings stand in contrast to those of the literature and question the relevance of clarifying a mid-point target within the bands, especially in emerging market economies more inclined to large and frequent shocks.
    Keywords: band inflation target, point inflation target, inflation expectations, monetary policy, New Keynesian model, macroeconomic shocks, laboratory experiments
    JEL: E58 E52 C91 C92
    Date: 2016
  17. By: El-Baz, Osama
    Abstract: The Egyptian economy has witnessed deterioration in its main macroeconomic indicators over the period (2008-2014). The main purpose of the paper was to estimate Egypt's potential output and identify the factors that might be responsible for the divergence of actual and potential output from each other. We used the production function approach to derive estimates of potential output and output gap over the period (1990-2014). The results of the analysis revealed that capital stock was the dominant factor contributing to GDP growth in Egypt, while the share of both labor and total factor productivity in GDP growth rate has been fluctuating over time. Intellectual property protection, efficiency of legal framework in settling disputes, strength of investor protection, and other factors exhibited a strong positive relationship with output gap in Egypt over the period (2010-2014).
    Keywords: Potential Output, Output Gap, HP Filter, Production Function Approach
    JEL: C1 E6 E65 E66
    Date: 2016–05–20
  18. By: Ghate, Chetan; Gupta, Sargam; Mallick, Debdulal
    Abstract: Central banks in emerging markets often grapple with understanding the monetary policy response to an inter-sectoral terms of trade shock. To address this, we develop a three sector closed economy NK-DSGE model calibrated to India. Our framework can be generalized to other emerging markets and developing countries. The model is characterized by a manufacturing sector and an agricultural sector. The agricultural sector is disaggregated into a food grain and vegetable sector. The government procures grain from the grain market and stores it. We show that the procurement of grain leads to higher inflation, a change in the sectoral terms of trade, and a positive output gap because of a change in the sectoral allocation of labor. We compare the transmission of a single period positive procurement shock with a single period negative productivity shock and discuss what implications such shocks have for monetary policy setting. Our paper contributes to a growing literature on monetary policy in India and other emerging market economies.
    Keywords: Multi-sector New Keynesian DSGE Models, Terms of Trade Shocks, Reserve Bank of India, Indian Economy, Agricultural Procurement
    JEL: E31 E52 E58 Q18
    Date: 2016–05–09
  19. By: Spahn, Peter
    Abstract: Post Keynesian stagnation theory argues that slower population growth dampens consumption and investment. A New Keynesian OLG model derives an unemployment equilibrium due to a negative natural rate in a three-generations credit contract framework. Besides deleveraging or rising inequality, also a shrinking population is a triggering factor. In all cases, a saving surplus drives real interest rates down. In other OLG settings however, with bonds as stores of value, slower population growth, on the contrary, causes a lack of saving and thus rising rates. Moreover, the recent fall in market interest rates was brought about by monetary factors.
    Keywords: overlapping generations,zero lower bound,deflation equilibrium,natural versus market interest rates
    JEL: E12 E21 E43 J11
    Date: 2016
  20. By: Carolina Achury; Christos Koulovatianos; John Tsoukalas
    Abstract: As the recent chain of EU sovereign crises has demonstrated, after an unexpected massive rise to the debt GDP ratio, several EU countries manage to proceed with scal consolida- tion quickly and e¤ectively, while other countries, notably Greece, proceed slowly, fuelling Graccidentand Grexitscenarios, even after generous rescue packages, involving debt haircuts and monitoring from o¢ cial bodies. Here we recursively formulate a game among rent-seeking groups and propose that high debt-GDP ratios lead to predictable miscoordina- tion among rent-seeking groups, unsustainable debt dynamics, and open the path to political accidents that foretell Graccidentscenarios. Our analysis and application helps in under- standing the politico-economic sustainability of sovereign rescues, emphasizing the need for scal targets and possible debt haircuts. We provide a calibrated example that quanti es the threshold debt-GDP ratio at 137%, remarkably close to the target set for private sector involvement in the case of Greece.
    Keywords: sovereign debt, rent seeking, international lending, tragedy of the commons, EU crisis, Grexit, Graccident
    JEL: H63 F34 F36 G01 E44 E43 D72
    Date: 2016–05
  21. By: Hilde C. Bjornland; Leif Anders Thorsrud
    Abstract: We analyse if the adoption of a fiscal rule insulates the domestic economy from commodity price fluctuations in a resource-rich economy. To do so we develop a timevarying Dynamic Factor Model, in which both the volatility of structural shocks and the systematic fiscal policy responses are allowed to change over time. We focus on a particular country, Norway, that is put forward as exemplary with its handling of resource wealth; income from the sale of petroleum is first saved in a sovereign wealth fund for then to be spent following a fiscal rule. We find that, contrary to common perception, fiscal policy has been more (not less) procyclical with commodity prices since the adoption of the rule. Fiscal policy has thereby exacerbated the commodity price fluctuations on the domestic economy. Still, compared to many other resource-rich economies practising a more spend-as-you-go strategy the responses are modest, as also documented in our counterfactual analysis. From a policy point of view, the implications of our findings are therefore of general interest since they highlight strengths and weaknesses of fiscal rules adopted in resource rich countries.
    Keywords: Time-varying Dynamic Factor Model, commodity prices, fiscal policy, sovereign wealth fund
    JEL: C32 E32 E62 F41 Q33
    Date: 2016–05
  22. By: Isohätälä, Jukka; Kusmartsev, Feo; Milne, Alistair; Robertson, Donald
    Abstract: This paper investigates the macroconomics of real interest rates when there are constraints on debt finance, used both for insurance against income shocks and transferability of resources over time. We amend a standard continuous-time deterministic model of international exchange, with patient and impatient countries, introducing country level shocks fully diversifiable at the global level. A series of shocks that push one country towards its leverage limit induces substantial pre-cautionary saving and a collapse of real interest rate relative to the deterministic benchmark. We discuss the resulting dynamics of interest rates and the broader implications for macroeconomic modelling. Keywords: borrowing constraints, debt management, incomplete financial markets, international macroeconomics, finance and macroeconomics, macroeconomic propagation, precautionary saving, systemic risk
    JEL: E44
    Date: 2014–11–17
  23. By: Juselius, Mikael; Takats, Elod
    Abstract: We uncover a puzzling link between low-frequency inflation and the population age-structure: the young and old (dependents) are inflationary whereas the working age population is disinflationary. The relationship is not spurious and holds for different specifications and controls in data from 22 advanced economies from 1955 to 2014. The age-structure effect is economically sizable, accounting eg for about 6.5 percentage points of US disinflation from 1975 to today’s low inflation environment. It also accounts for much of inflation persistence, which challenges traditional narratives of trend inflation. The age-structure effect is forecastable and will increase inflationary pressures over the coming decades.
    Keywords: demography, ageing, inflation, monetary policy
    JEL: E31 E52 J11
    Date: 2016–04–02
  24. By: M. Lemoine; J. Lindé
    Abstract: This paper examines the effects of expenditure-based fiscal consolidation when credibility as to whether the cuts will be long-lasting is imperfect. We contrast the impact limited credibility has when the consolidating country has the means to tailor monetary policy to its own needs, with the impact when the country is a small member of a currency union with a negligible effect on interest rates and on nominal exchange rates of the currency union. We find two key results. First, in the case of an independent monetary policy, the adverse impact of limited credibility is relatively small, and consolidation can be expected to reduce government debt at a relatively low output cost given that monetary policy provides more accommodation than it would under perfect credibility. Second, the lack of monetary accommodation under currency union membership implies that the output cost may be significantly larger, and that progress in reducing government debt in the short and medium term may be limited under imperfect credibility.
    Keywords: monetary and fiscal policy, front-loaded vs. gradual consolidation, DSGE model, sticky prices and wages, currency union.
    JEL: E32 F41
    Date: 2016
  25. By: Carvalho, Carlos (PUC-Rio); Ferrero, Andrea (University of Oxford); Nechio, Fernanda (Federal Reserve Bank of San Francisco)
    Abstract: The demographic transition can affect the equilibrium real interest rate through three channels. An increase in longevity—or expectations thereof—puts downward pressure on the real interest rate, as agents build up their savings in anticipation of a longer retirement period. A reduction in the population growth rate has two counteracting effects. On the one hand, capital per-worker rises, thus inducing lower real interest rates through a reduction in the marginal product of capital. On the other hand, the decline in population growth eventually leads to a higher dependency ratio (the fraction of retirees to workers). Because retirees save less than workers, this compositional effect lowers the aggregate savings rate and pushes real rates up. We calibrate a tractable life-cycle model to capture salient features of the demographic transition in developed economies, and find that its overall effect is a reduction of the equilibrium interest rate by at least one and a half percentage points between 1990 and 2014. Demographic trends have important implications for the conduct of monetary policy, especially in light of the zero lower bound on nominal interest rates. Other policies can offset the negative effects of the demographic transition on real rates with different degrees of success.
    JEL: E52 E58 J11
    Date: 2016–03–01
  26. By: Oinonen, Sami; Paloviita, Maritta
    Abstract: This paper examines aggregated inflation expectations based on the ECB Survey of Professional Forecasters (ECB SPF). We analyse possible impacts of changing panel composition on short and long term point forecasts and forecast uncertainties using approach, which is based on a set of sub-panels of fixed composition. Our results indicate that the unbalanced panel data do not cause systematic distortions to aggregated survey information. However, micro level analysis of expectations would also be useful, especially in times of wide disagreement across forecasters and high levels of inflation uncertainty. Keywords: survey data, expectations, changing panel composition
    JEL: C53 E37 E31
    Date: 2014–11–28
  27. By: Alcidi, Cinzia; Busse, Matthias; Gros, Daniel
    Abstract: Central banks in the developed world are being misled into fighting the perceived dangers of a ‘deflationary spiral’ because they are looking at only one indicator: consumer prices. This Policy Brief finds that while consumer prices are flat, broader price indices do not show any sign of impending deflation: the GDP deflator is increasing in the US, Japan and the euro area by about 1.2-1.5%. Nor is the real economy sending any deflationary signals either: unemployment is at record lows in the US and Japan, and is declining in the euro area while GDP growth is at, or above potential. Thus, the overall macroeconomic situation does not give any indication of an imminent deflationary spiral. In today’s high-debt environment, the authors argue that central banks should be looking at the GDP deflator and the growth of nominal GDP, instead of CPI inflation. Nominal GDP growth, as forecasted by the major official institutions, remains robust and is in excess of nominal interest rates. They conclude that if the ECB were to set the interest rate according to the standard rules of thumb for monetary policy, which take into account both the real economy and price developments of broader price indicators, it would start normalising its policy now, instead of pondering over additional measures to fight deflation, which does not exist. In short, economic conditions are slowly normalising; so should monetary policy.
    Date: 2016–04
  28. By: Athanasios, Geromichalos; Kuk Mo, Jung
    Abstract: We develop a monetary model that incorporates Over-the-Counter (OTC) asset trade. After agents have made their money holding decisions, they receive an idiosyncratic shock that affects their valuation for consumption and, hence, for the unique liquid asset, namely, money. Subsequently, agents can choose whether they want to enter the OTC market in order to sell assets and, thus, boost their liquidity, or to buy assets and, thus, provide liquidity to other agents. A unique feature of our model is that inflation affects welfare not only through the traditional channel, i.e., through determining equilibrium real balances, but also through influencing agents' entry decisions in the financial market. We use our framework to study the effect of inflation on welfare, asset prices, and OTC trade volume. In contrast to most monetary models, which predict a negative relationship between inflation and welfare, we find that inflation can be welfare improving within a certain range, because it mitigates a search externality that agents impose on one another when they make their OTC market entry decision.
    Keywords: monetary-search models, liquidity, asset prices, over-the-counter markets
    JEL: E31 E50 E52 G12
    Date: 2016–05
  29. By: Oinonen, Sami; Paloviita, Maritta
    Abstract: This study examines aggregated short- and long-term inflation expectations in the unbalanced panel of the ECB Survey of Professional Forecasters. The focus of the study is on heterogeneity of expectations and changing panel composition. First, we compare two sub-groups of survey respondents divided on the basis of forecast accuracy. Then, we examine possible differences between regular and irregular forecasters. Finally, we assess the relevance of aggregated forecast revisions in the unbalanced panel by constructing alternative forecast revisions based on the set of sub-panels of fixed composition. The results show that, because of heterogeneity across individual views, aggregated inflation expectations in the ECB SPF must be analysed also on a micro level.
    Keywords: survey data, aggregated inflation expectations, euro area, ECB SPF
    JEL: C53 E37 E31
    Date: 2016–05–24
  30. By: José Gabriel Palma
    Abstract: This paper aims to re-examine inequality in the current era of neo-liberal globalisation, with an emphasis on both highly unequal middle-income countries that have already implemented full-blown economic reforms (like Latin America and South Africa), and on OECD countries (like the US) now intent on replicating the inequality heights of the former. i) How do those middle-income countries end up having such unequal distributional outcomes? ii) Since oligarchies all over the world would gladly reproduce the same conditions, why until recently have only a few been able to get away with this degree of inequality? And iii) Why are there suddenly so many new entrants to the high-inequality club, especially from the OECD? In other words, how did Reagan and Thatcher and the fall of the Berlin Wall trigger a new process of "reverse catching-up", by which now it is the highly-unequal middle-income countries showing the advanced ones the shape of things to come? One might even argue that in the US not only is the 1% catching up with their Latin counterparts (who are used to appropriating between a quarter and a third of overall income), but that new developments such as Trump may be part of the same phenomenon: it is now the South that seems to show the North 'the image of their own future'. And regarding that future, it is tempting to say "welcome to the Third World"! We are all indeed converging in this neo-liberal era but, somehow unexpectedly, this convergence is towards features that so far have characterised a number of middle-income countries - e.g. huge inequalities due to mobile élites creaming off the rewards of economic growth, and 'magic realist' politics (that may lack self-respect but not originality). I also discuss why Piketty's persistence with the neo-classical theory of factor shares - a pretty much obsolete 1950s-style approach to the distribution of income - prevents him from bringing our understanding of current distributive affairs forward as much as he might. His neo-classical analysis not only does not 'fit the facts' (he has to resort to questionable parameters), but also leads him into a methodology and social ontology that assumes that particularly complex and over-determined processes (like the distribution of income) are just the simple sum of their parts. Therefore, their account can be reduced to the algebraic description of individual constituents (e.g., inequality as basically an endogenous outcome of r>g - and that would be all). I also outline an alternative narrative regarding why inequality is becoming so extreme in formerly more enlightened affluent societies. I conclude that in order to understand current distributive dynamics what really matters is to comprehend the forces determining the share of the rich — and in terms of growth, what they choose to do with it!
    Keywords: income distribution; inequality; ‘Palma Ratio’; homogeneous middle; ideology; neoliberalism; ‘new left’; institutional persistence; Latin America; Chile; South Africa; United States.
    JEL: D31 E11 E22 E24 E25 I32 J31 N16 N30 N36 O50 P16
    Date: 2016–05–03
  31. By: Hashmat Khan; Christopher R. Knittel; Konstantinos Metaxoglou; Maya Papineau
    Abstract: U.S. carbon dioxide emissions are highly procyclical—they increase during expansions and fall during recessions. Given this empirical fact, we estimate the response of emissions to four prominent technology shocks from the business-cycle literature using structural vector autoregressive methodologies and data for 1973–2012. By studying the response of emissions to these shocks, we provide a novel approach to assess the shocks’ relevance as sources of aggregate output fluctuations. We find that emissions rise on impact only after an anticipated investment-specific technology shock; the response is statistically significant after the first quarter. The same shock explains most— roughly a third—of the total variation in emissions at a horizon of 5 years. Notably, emissions decrease on impact after an unanticipated neutral technology shock in a statistically significant way. This negative empirical response has the opposite sign from its theoretical counterpart in recent environmental DSGE (E-DSGE) models. Since the positive response of emissions drives the E-DSGE models’ recommendation for an optimal procyclical policy, our findings suggest that such a policy recommendation should be treated cautiously.
    JEL: E32 Q43 Q48 Q54
    Date: 2016–05
  32. By: Zulkhibri, Muhamed (The Islamic Research and Teaching Institute (IRTI))
    Abstract: Abstract The paper examines the cross-sectional differences in the way that Islamic banks respond to base financing rate across bank-specific characteristics in a dual banking system using panel regression methodology. The evidence suggests that the bank-specific characteristics are important for Islamic banking financing behaviour. The Islamic banks financing behaviour is consistent with behaviour of conventional banks that the bank lending operates via banks depending on the level of size, liquidity and capital. The findings also suggest that there is no significant difference between Islamic bank financing and conventional bank lending behaviour with respect to interest rates.
    Keywords: Islamic Banks; Base Financing Rate; Bank Financing; Panel Regression Analysis
    JEL: E44 E52 G21 G22
    Date: 2016–05–01
  33. By: International Monetary Fund. European Dept.
    Abstract: Growth in 2015 was resilient to several shocks, supported by buoyant domestic demand. In 2016, a 30 percent minimum wage increase, relaxation of macro prudential regulations, and accommodative monetary and fiscal policies will continue fuelling domestic consumption, keeping growth at about 4 percent. The fiscal stance is projected to relax somewhat in 2016, with tightening delayed to 2017. The central bank has kept the policy rate unchanged, has postponed normalization of the monetary framework, and is using international reserves to offset pressures on the Lira. Inflation is set to exceed the target again by a wide margin. Macro prudential measures have successfully curbed consumer credit growth but some relaxation will occur in April. The current account deficit is declining thanks to lower oil prices. Nonetheless, the net international investment position remains heavily negative and external financing needs are substantial. The government has announced an ambitious program of reforms aiming at increasing potential growth and reducing external vulnerabilities over the medium term.
    Date: 2016–04–22
  34. By: International Monetary Fund
    Abstract: Context: The robust recovery from the 2008 balance of payments and debt crisis has resulted in improved economic and social outcomes. Continued policy discipline and reforms are needed for the microstate to mitigate its geographical and population constraints and maintain momentum in developing a diversified and resilient economy. Focus: With the fiscal stance anchored by the authorities’ debt reduction objective, macroeconomic discussions concentrated on the smooth functioning of monetary and exchange rate policies. On the structural agenda, the dialogue focused on policies to promote sustained and inclusive growth, particularly on the appropriate role for state-owned enterprises (SOEs). Review: The program is on track. The authorities met the end-December quantitative performance criteria except for narrowly exceeding the ceiling on reserve money. The structural agenda remains broadly on track despite some delays. Staff recommends completion of the second review under the Extended Arrangement and modification of the performance criteria for end-June and end-December 2015, and supports the authorities’ request for a waiver for the end-December 2014 performance criterion for reserve money. Outlook and risks: With the external position having stabilized since the last review, fundamentals are strengthening. However, the economy remains highly vulnerable to global developments, including weakness in the key European markets, while domestic risks center on the role of the SOEs. Recommendations: The authorities’ objective of reducing public debt below 50 percent of GDP by 2018 remains an appropriate and attainable anchor for fiscal policy. The monetary policy framework should be further enhanced by increasing its forward orientation in the context of a flexible exchange rate. Structural measures should focus on fostering inclusiveness and private sector-led growth, while improving economic governance and the focus of SOEs. Data: Data provision is broadly adequate for surveillance. Priority areas include improved GDP statistics, strengthening external sector statistics, and extending coverage of the international investment position.
    Keywords: Seychelles;Article IV consultation reports;Fiscal policy;Fiscal reforms;Monetary policy;Economic indicators;Letters of Intent;Debt sustainability analysis;Staff Reports;Press releases;Extended arrangement reviews;Performance criteria modifications;Performance criteria waivers;debt, exchange, exchange rate, monetary fund, reserve
    Date: 2015–07–22
  35. By: Lukas Vogel
    Abstract: The paper uses a small open economy general-equilibrium model to compare fiscal and nominal exchange rate devaluation with respect to their impact on economic activity and the current account. In particular, it investigates the extent to which fiscal devaluation mimics nominal exchange rate adjustment and mitigates the output loss associated with demand rebalancing and external adjustment. The results suggest that internal or external devaluation can support external adjustment and mitigate its impact on economic activity, without leading to lasting adjustment themselves. However, the quantitative contribution of a tax shift from labour to consumption, the standard example of fiscal devaluation, remains moderate.
    JEL: E52 F41 F47
    Date: 2015–12
  36. By: Krebs, Tom (University of Mannheim); Kuhn, Moritz (University of Bonn); Wright, Mark L. J. (Federal Reserve Bank of Chicago)
    Abstract: This paper develops a tractable human capital model with limited enforceability of contracts. The model economy is populated by a large number of long-lived, risk-averse households with homothetic preferences who can invest in risk-free physical capital and risky human capital. Households have access to a complete set of credit and insurance contracts, but their ability to use the available financial instruments is limited by the possibility of default (limited contract enforcement). We provide a convenient equilibrium characterization that facilitates the computation of recursive equilibria substantially. We use a calibrated version of the model with stochastically aging households divided into 9 age groups. Younger households have higher expected human capital returns than older households. According to the baseline calibration, for young households less than half of human capital risk is insured and the welfare losses due to the lack of insurance range from 3 percent of lifetime consumption (age 40) to 7 percent of lifetime consumption (age 23). Realistic variations in the model parameters have non-negligible effects on equilibrium insurance and welfare, but the result that young households are severely underinsured is robust to such variations.
    Keywords: human capital risk, limited enforcement, insurance
    JEL: E21 E24 D52 J24
    Date: 2016–05
  37. By: Nicolaas van der Wath (Bureau for Economic Research)
    Abstract: This paper investigates the relevance of financial conditions indices (FCIs) as an additional gauge of South Africa’s economic metabolism. As a starting point, a background is provided on FCIs in terms of evolution, methodologies and uses. In general, FCIs were found to have a very broad definition, are used for different purposes and can be calculated with different statistical techniques. The first step in developing an FCI for South Africa was to identify a purpose for it. From the purpose followed the data selection, sourced from regular updated financial data since 2003. The selection was differentiated from other South Afri-can FCIs by including commodity prices, as well as BER financial survey data. The final selection of indicators was tested for unit roots. The second process was the calculation of weights, in which case the principle components method was used. However, to avoid revising the historical data of the FCI each new month, a real-time principle component series was constructed. This method implies that the weights are recalculated every month, based on a rolling window of 60 months historical data, starting from 2005 onwards. In the third and final step, the real-time principle component series was purged from the real-time nominal GDP growth rate (capturing both output and inflation). The purged real-time principle component series was taken as the final FCI. The impact of the global financial crisis and the drastic monetary policy that followed is clearly visible in the FCI. The periodical divergence between the FCI and the real economy also served as an indication on the effectiveness of monetary policy. This FCI was found, over shorter horizons, to lead economic growth by nine months, and it improved on a naive forecast of GDP growth.
    Keywords: financial conditions, principle components, factor models, leading indicator, financial survey, business cycle
    JEL: G19 E39 C10
    Date: 2016
  38. By: Modugno, Michele; Soybilgen, Baris; Yazgan, M. Ege
    Abstract: Real gross domestic product (GDP) data in Turkey are released with a very long delay compared with other economies, between 10 and 13 weeks after the end of the reference quarter. To infer the current state of the economy, policy makers, media, and market practitioners examine data that are more timely, that are released at higher frequencies than the GDP. In this paper, we propose an econometric model that automatically allows us to read through these more current and higher-frequency data and translate them into nowcasts for the Turkish real GDP. Our model outperforms nowcasts produced by the Central Bank of Turkey, the International Monetary Fund, and the Organisation for Economic Co-operation and Development. Moreover, our model allows us to quantify the importance of each variable in our dataset in nowcasting Turkish real GDP. In line with findings for other economies, we find that real variables play the most important role; however, contrary to the findings for other economies, we find that financial variables are as important as surveys.
    Keywords: Developing economy ; dynamic factor model ; emerging market ; gross domestic product ; news ; nowcasting
    JEL: C33 C53 E37
    Date: 2016–05
  39. By: Daniel Felipe Cuervo; Javier Mondragón
    Abstract: Este documento tiene como objetivo estimar la respuesta del producto real en Colombia a perturbaciones de oferta y demanda durante el periodo 1981Q1-2015Q3. Para tal fin, a partir de un modelo SVAR con restricciones de largo plazo, se realizan pruebas de causalidad de Granger, análisis de impulso respuesta, descomposición de varianza y descomposición histórica. Por último, se realizan estimaciones del producto potencial, brecha del producto y se prueba la hipótesis del cumplimiento de la ley de Okun para Colombia en el periodo considerado.
    Keywords: Modelos SVAR, Brecha del Producto, PIB potencial, Ley de Okun
    JEL: E23 E27 E32
    Date: 2016–05–18
  40. By: Ma, Guonan; Yao, Wang
    Abstract: A global renminbi needs to be backed by a large, deep and liquid renminbi bond market with a world-class Chinese government bond (CGB) market as its core. China’s CGB market is the seventh largest in the world while sitting alongside a huge but non-tradable and captive central bank liability in the form of required reserves. By transforming the non-tradable cen-tral bank liabilities into homogeneous and tradable CGBs through halving the high Chinese reserve requirements, the size of the CGB market can easily double. This would help over-come some market impediments and elevate the CGBs to a top three government bond mar-ket globally, boosting market liquidity while trimming distortions to the banking system. With a foreign ownership similar to that of the JGBs, CGBs held by foreign investors may increase ten-fold by 2020, approaching 5 percent of the 2014 global foreign reserves and facilitating a potential global renminbi, especially in the wake of the renminbi’s inclusion into the basket of the IMF Special Drawing Rights.
    Keywords: bond market, government bond market, renminbi internationalization
    JEL: F02 E42 E44 E58 G10 H63
    Date: 2016–02–06
  41. By: Ponomarenko, Alexey
    Abstract: This paper discusses the money creation mechanisms in emerging markets with special focus on external transactions. We argue that one should not rule out the possibility that fluctuations in the loans-to-deposits and non-core liabilities ratios are driven by the banks. We also argue that, under a flexible exchange rate regime in which the central bank is not trying to accumulate foreign reserves, external transactions are unlikely to contribute significantly to money growth. To make our argument, we analyze a historical episode of these flows in Korea and Russia and conduct a canonical correlation analysis for a cross-section of emerging market economies.
    Keywords: Money supply, non-core liabilities, loans-to-deposits ratio, emerging markets
    JEL: E51 F30 G21
    Date: 2016–03–15
  42. By: Singh, Sunny Kumar
    Abstract: Based on the money-in-the-utility function, this paper intends to examine the stability of the currency demand function for India with real private consumption expenditure, tax-GDP ratio and deposit rate as explanatory variables by applying the seasonal cointegration technique developed by EGHL (1993) and HEGY (1990) for the period 1996:1 to 2014:4. The empirical findings show that there is absence of long-run cointegrationg relationship among the variables at the zero and annual frequency, however, there is evidence of a relationship among the variables at the biannual frequency. Moreover, the time-varying coefficient of deposit rate elasticity, used to test the Gurley-Shaw hypothesis, suggests that innovations in financial markets, especially improvements in the payment technology, raises the deposit rate elasticity, beginning from 2010 onward.
    Keywords: Currency demand; Seasonal cointegration; Seasonal error correction; Financial innovation; State-space Modeling
    JEL: E51 O3
    Date: 2016–01–01
  43. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: This paper establishes the existence of multiple equilibria in infinite-horizon open- economy models in which the value of tradable and nontradable endowments serves as collateral. In this environment, the economy displays self-fulfilling financial crises in which pessimistic views about the value of collateral induces agents to deleverage. The paper shows that under plausible calibrations, there exist equilibria with underborrowing. This result stands in contrast to the overborrowing result stressed in the related literature. Underborrowing emerges in the present context because in economies that are prone to self-fulfilling financial crises, individual agents engage in excessive precautionary savings as a way to self-insure.
    JEL: E44 F41 G01 H23
    Date: 2016–05
  44. By: Asian Development Bank (ADB); Asian Development Bank (ADB) (South Asia Department, ADB); Asian Development Bank (ADB) (South Asia Department, ADB); Asian Development Bank (ADB)
    Abstract: The Bangladesh Quarterly Economic Update (QEU) has been produced by the Bangladesh Resident Mission of the Asian Development Bank since March 2001. The QEU provides information and analysis on Bangladesh’s macroeconomic and sector developments, key development challenges, and policy and institutional reforms. The QEU has wide readership in government, academia, development partners, private sector, and civil society.
    Keywords: bangladesh economy, bangladesh macroeconomic updates, fiscal year 2015, bangladesh gdp growth estimates, revenue collection, bangladesh economic growth, bangladesh agriculture growth, bangladesh services sector growth, inflation, fy2015, fiscal management
    Date: 2015–12
  45. By: Hattori, Takahiro; Miyake, Hiroki
    Abstract: In this study, we aim to estimate the daily par yield curve for Japanese agency bonds since 2002. The agency bond market is one of the most practically and academically disputatious areas in terms of whether public agencies as issuers are disciplined by the market. Given the drastic reformation of it public agencies in the 2000s, this topic holds far more importance in Japan than in other countries. To the best of our knowledge, this research is the first to make the par rate of Japanese agency bonds publicly available. Our estimation is based on the well-known parametric and spline methods, of which we found that the latter fits well, as in previous studies. Further, we have posted the estimation data on our website and will continue to update it regularly:
    Keywords: Term structure; Interest rates; Par yield curve; Agency bond; Fiscal Investment and Loan Program; Japan
    JEL: E43 G12 H81
    Date: 2016–05–20
  46. By: N. Cassola; F. Koulischer
    Abstract: We build a model of collateral choice by banks to quantify how changes in the haircut policy of the central bank affect the collateral used by banks and the funding cost of banks. We estimate the model using data on assets pledged to the European Central Bank from 2009 to 2011. Our results suggest for example that a 5% higher haircut on low rated collateral would have reduced the use of this collateral by 10% but would have increased the average funding cost spread between high yield and low yield countries by 5% over our sample period.
    Keywords: Collateral, Haircut, Central Bank, Money market.
    JEL: E52 E58 G01 F36
    Date: 2016
  47. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: St. Louis Fed President James Bullard discussed two views of future policy rate increases: the FOMC’s scenario and the market-based scenario. The former suggests a gradual pace of rate increases over the next several years, while the latter is much shallower—only a few increases over the forecast horizon. He cited evidence to back both views. For the FOMC scenario, he cited strong labor markets, waning international headwinds and inflation measurements moving closer to the 2 percent target. For the market-based scenario, the evidence included slow real GDP growth and low inflation expectations. Bullard spoke at the Official Monetary and Financial Institutions Forum’s City Lecture in Beijing.
    Date: 2016–05–23
  48. By: Demyanyk, Yuliya (Federal Reserve Bank of Cleveland); Hryshko, Dmytro (University of Alberta); Luengo-Prado, Maria Jose (Federal Reserve Bank of Boston); Sorensen, Bent E. (University of Houston)
    Abstract: The severe decline in house prices during and after the Great Recession may have hampered adjustment in U.S. labor markets by limiting mobility of unemployed workers. Mobility will suffer if unemployed workers are reluctant to leave homes that, with debt exceeding value, cannot be disposed of without injecting cash or defaulting—a pattern referred to as "housing lock-in." If such reluctance keeps workers from moving from depressed areas to areas with available jobs, the Beveridge curve, which depicts the relationship between vacancies and joblessness, may shift outward. To examine whether this has been the case in the United States in recent years, the authors use individual-level credit reports merged with loan-level mortgage data to estimate how mobility relates to home equity when labor markets are weak or strong, and they develop and calibrate a dynamic quantitative model of consumption, housing, employment, and mobility that replicates the data well.
    JEL: E21 J61 R23
    Date: 2016–01–25
  49. By: Ananthakrishnan Prasad; Heba Abdel Monem; Pilar Garcia Martinez
    Abstract: Several characteristics of the structure of the Arab economies, their economic policy framework, and their banking systems make macroprudential policy a particular relevant tool. For most oil exporters, heavy reliance on the extractive sector for generating fiscal revenues and export earnings translates into increased vulnerabilities to oil price shocks. In the case of oil importers, relatively small external and fiscal buffers make them highly vulnerable to shocks. This paper discusses the experience of Arab countries in implementing macroprudential policies and contains recommendations to strengthen their macroprudential framework.
    Date: 2016–05–20
  50. By: Asongu, Simplice; Batuo, Enowbi; Tchamyou, Vanessa
    Abstract: Abstract Purpose – The study extends the debate on finance versus institutions in the promotion of investment documented by Acemoglu and Johnson (2005), Ali (2013) and Asongu (2014). We assess the effects of various components of governance on private investment, notably: political, economic and institutional governances. Financial indicators of depth, allocation efficiency, activity and size are used. Design/methodology/approach – An endogeneity robust dynamic system GMM estimation technique is employed. Principal component analysis is also employed to reduce the dimensions of governance variables. The empirical evidence is based on 53 African countries for the period 1996-2010. Findings – The findings provide support for the quality of governance as a better determinant of private investment than financial intermediary development. Moreover, the evidence of finance and governance as substitutes in their impact on investment implies that good governance fuels private investment and this positive impact is stronger in nations with less developed financial systems. This finding is consistent with Ali (2013) and contrary to the results of Asongu (2014c). Practical implication – Policy measures for fighting involuntary and voluntary surplus liquidities are discussed. The paper provides additional support for the need of strengthening governance institutions to promote investment on the one hand and fighting financial allocation inefficiency by mitigating surplus liquidity issues on the other hand. Originality/value – The paper extends the debate on the substitution of finance and institutions in the promotion of private investment.
    Keywords: Finance; Institutions; Investment: Property Rights; Africa
    JEL: E02 G20 G24 O55 P14
    Date: 2015–12
  51. By: Fidrmuc, Jarko; Fungáčová, Zuzana; Weill, Laurent
    Abstract: ​The financial crisis has shown that the liquidity creation function of banks is critical for the economy. In this paper, we empirically investigate whether bank liquidity creation fosters economic growth in a large emerging market, Russia. We follow the methodology of Berger and Bouwman (2009) to measure bank liquidity creation using a rich and exhaustive dataset of Russian banks. We perform fixed effects and GMM estimations to examine the relation of liquidity creation to economic growth for Russian regions in the period 2004–2012. Our results suggest that bank liquidity creation fosters economic growth. This effect was not washed out by the financial crisis. Our conclusion thus supports a positive impact of financial development on economic growth in Russia.
    Keywords: growth, bank liquidity creation, financial development
    JEL: E44 G21
    Date: 2015–03–04
  52. By: International Monetary Fund
    Abstract: Context: Paraguay has solid macroeconomic fundamentals, with low inflation, sustained growth and sound public finances. Over the course of last year, however, the economy experienced a loss of momentum—largely linked to weak commodity prices and adverse regional spillovers. Downside risks to growth, mainly external, have risen. Over the medium term, authorities face challenges, including limited implementation capacity and political economy constraints, in the pursuit of their reform agenda to address structural weaknesses, reduce poverty, strengthen policy frameworks, increase productivity and promote inclusive growth. Focus: The consultation focused on policies to support macroeconomic resilience, contain financial sector vulnerabilities, and advance economic development.
    Keywords: Paraguay;Western Hemisphere;exchange, exchange rate, monetary fund, investment, currency
    Date: 2016–05–11
  53. By: Sánchez-Fung, José R.
    Abstract: ​The paper estimates the impact of monetary policy on income inequality in China. The empirical modelling finds that a battery of monetary indicators, including a monetary overhang measure derived from a money demand equation, and the change in the unemployment rate lead to increases in the Gini coefficient. However, only unemployment is statistically significant. The lack of significance of the monetary indicators is robust to alternative specifications with variability in nominal aggregate demand instead of unemployment.
    Keywords: monetary policy, inequality, inflation, unemployment, China
    JEL: E52 D31
    Date: 2015–05–13
  54. By: Fève, Patrick; Guay, Alain
    Abstract: This paper investigates the contribution of sentiments shocks to US fluctuations in a Structural VAR setup with long, medium and short run restrictions. Sentiments shocks are identified as shocks orthogonal to fundamentals that accounts for most of the variance of confidence. We assess our identification procedure from simulation experiments and show that it performs pretty well. From actual data, we obtain that, contrary to news shocks on total factor productivity, sentiments shocks explain very little of quantities and prices. Sentiments shocks mostly appear as an idiosyncratic component of confidence. These results are robust to various perturbations of the benchmark model.
    Keywords: Sentiment Shocks, News Shocks, SVARs, Identifying Restrictions
    JEL: C32 E32
    Date: 2016–05
  55. By: Mikosch, Heiner; Neuwirth, Stefan
    Abstract: This paper presents a MIDAS type mixed frequency VAR forecasting model. First, we propose a general and compact mixed frequency VAR framework using a stacked vector approach. Second, we integrate the mixed frequency VAR with a MIDAS type Almon lag polynomial scheme which is designed to reduce the parameter space while keeping models fexible. We show how to recast the resulting non-linear MIDAS type mixed frequency VAR into a linear equation system that can be easily estimated. A pseudo out-of-sample forecasting exercise with US real-time data yields that the mixed frequency VAR substantially improves predictive accuracy upon a standard VAR for dierent VAR specications. Forecast errors for, e.g., GDP growth decrease by 30 to 60 percent for forecast horizons up to six months and by around 20 percent for a forecast horizon of one year.
    Keywords: Forecasting, mixed frequency data, MIDAS, VAR, real time
    JEL: C53 E27
    Date: 2015–04–13
  56. By: Crowley, Patrick; Hughes Hallett, Andrew
    Abstract: In this paper we use a New Keynesian model to explain why volatility transfer from high frequency to low frequency cycles can and did occur during the period commonly referred to as the "great moderation". The model suggests that an increase in inflation aversion and/or a reduction to a commitment to output stabilization could have caused this volatility transfer. Together, the empirical and theoretical sections of the paper show that the "great moderation" may have been mostly an illusion, in that lower frequency cycles can be expected to be more volatile, given that there has been no apparent reversal in any of the policy parameters and hence in the volatility found in the low frequency cycles identified by use of time-frequency empirical techniques. In fact, those cycles appear to have increased in power and volatility in both relative and absolute terms. Keywords: New Keynesian model, business cycles, growth cycles, time-frequency domain, discrete wavelet analysis, Empirical Mode Decomposition
    JEL: C1 E2 E3
    Date: 2014–10–20
  57. By: Giuseppe Caivano (Università degli Studi di Bari "Aldo Moro"); Nicola D. Coniglio (Università degli Studi di Bari "Aldo Moro")
    Abstract: This paper investigates, using panel cointegration methods, the long-run drivers of current account imbalances in 15 EU member States during the period 1974-2011. We argue that the degree of trade openness greatly affects the relative strength of the different long-term drivers of current account imbalances. Our empirical results indicate that competitiveness factors strongly affect imbalances in countries with a low trade openness, while the effects weakens as trade openness increases. Similarly, we find evidence of a positive effects of government debt on current account deficits for high openness countries and a negative impact for medium and low openness countries. Our results suggest that the structural heterogeneity in the degree of openness across EU countries might be an important contributor to the diverging patterns in current account balances experienced in the last decades.
    Keywords: Current account imbalances; panel cointegration; trade openness
    JEL: D63 E24 O15 O40
    Date: 2016–05
  58. By: Arango, Carlos; Bouhdaoui, Yassine; Bounie, David; Eschelbach, Martina; Hernandez, Lola
    Abstract: Despite various payment innovations, today, cash is still heavily used to pay for low-value purchases. This paper proposes a simulation model based on two optimal cash management and payment policies in the payments economics literature to explain cash usage. First, cash is preferred to other payment instruments whenever consumers have enough balances at hand. Second, it is optimal for consumers to hold a stock of cash for precautionary reasons. Exploiting survey payment diaries from Canada, France, Germany and the Netherlands, the results of the simulations show that both optimal policies are well suited to understand the high shares of low-value cash payments in Canada, France and Germany. Yet, they do not perform as well in the case of the Netherlands, overestimating the share of low-value cash payments. We discuss how the differences in payment markets across countries may explain the limitations of the two optimal policies.
    Keywords: cash management, payment choices, international comparison
    JEL: C61 E41 E47
    Date: 2015–11–25
  59. By: Paul Cashin; Kamiar Mohaddes; Mehdi Raissi
    Abstract: China’s GDP growth slowdown and a surge in global financial market volatility could both adversely affect an already weak global economic recovery. To quantify the global macroeconomic consequences of these shocks, we employ a GVAR model estimated for 26 countries/regions over the period 1981Q1 to 2013Q1. Our results indicate that (i) a one percent permanent negative GDP shock in China (equivalent to a one-off one percent growth shock) could have significant global macroeconomic repercussions, with world growth reducing by 0:23 percentage points in the short-run; and (ii) a surge in global financial market volatility could translate into a fall in world economic growth of around 0:29 percentage points, but it could also have negative short-run impacts on global equity markets, oil prices and long-term interest rates.
    Keywords: China’s slowdown, global financial market volatility, international business cycle, and Global VAR
    JEL: C32 E32 F44 O53
    Date: 2016–03–18
  60. By: Charles Wyplosz
    Abstract: The make-up of the EU institutions, and their evolution, should explicitly be based on widely accepted federalism principles. This paper applies federalism principles to a few crucial questions, mainly fiscal policy, fiscal discipline and structural reforms, using where possible lessons from existing federations. After introducing the topic, Section 2 briefly reviews the key message from the fiscal federalism literature. The following sections use these principles to examine a number of areas where centralization may be insufficient or excessive in the EU. Section 3 looks at public spending, both in the aggregate and my main functions. Taxes are examined in Section 4. The next section looks at the issue of fiscal discipline, a weak spot of the Eurozone. The allocation of policy competences, a key characteristic of the UE, is the object of Section 6. The last section concludes.
    JEL: E62 H1 H7
    Date: 2015–09
  61. By: Bilbiie, Florin Ovidiu; Ghironi, Fabio; Melitz, Marc J
    Abstract: The inefficiencies related to endogenous product creation and variety under monopolistic competition are two-fold: one static---the misalignment between consumers and producers regarding the value of a new variety; and one dynamic---time variation in markups. Quantitatively, the welfare costs of the former are potentially very large relative to the latter. For a calibrated version of our model with these distortions, their total cost amounts to 2 percent of consumption. Appropriate taxation schemes can implement the optimum amount of entry and variety. Elastic labor introduces a further distortion that should be corrected by subsidizing labor at a rate equal to the markup for goods, in order to preserve profit margins and hence entry incentives.
    Keywords: efficiency; Entry; Monopoly power; Optimal fiscal policy; Product creation; Variety; Welfare costs
    JEL: D42 D50 E60 H21 H32 L16
    Date: 2016–05
  62. By: Aldama Pierre (Paris School of Economics, Université Paris I); Jérôme Creel (OFCE-Sciences Po and ESCP Europe)
    Abstract: This paper introduces a Regime-Switching Model-Based Sustainability test allowing for periodic (or local) violations of Bohn (1998, QJE)’s sustainability condition. We assume a Markov-switching fis- cal policy rule whose parameters stochastically switch between sustainable and unsustainable regimes. We demonstrate that long-run fiscal sustainability not only depends on regime-specific feedback coef- ficients of the fiscal policy rule but also on the average durations of fiscal regimes. Evidence on French data suggests that the No-Ponzi game condition weakly holds in the long run, when accounting for regime switches. Accounting for a potential fiscal limit, we test whether estimated Markov-switching fiscal policy rule fulfills a debt-stabilizing condition depending on two measures of the interest rate on public debt. With the average apparent rate, fiscal data rejects the null hypothesis of an explosive public debt-to-GDP ratio. Still, we are unable to reject it using the average market rate, thus suggesting unstable dynamics of the public debt-to-GDP ratio.
    Keywords: Fiscal rules, Fiscal regimes, Public debt sustainability, Time varying parameters, Markov switching models
    JEL: E6 H6
    Date: 2016–05
  63. By: Carlos Medel
    Abstract: In this article, I use a family of time-series models to compare the predictive ability between an ad hoc global inflation factor and the copper price when forecasting domestic inflation of a sample of 53 countries. Furthermore, I analise the forecasting ability that the price of copper could provide combined with the global inflation factor and, finally, over the oil price for a monthly sample covering 1995-2013. The countries belong to two groups: the Organisation for Co-operation and Development (OECD) and the Centre for Latin American Monetary Studies (CEMLA). The results indicate that the copper price show modest predictive gains compared to the forecast made without any factor augmentation for the majority of analised countries. When analysing the number of times in which the copper price deliver more accurate forecasts than those based on inflation factor, it is found that occur in a low 9, 17, and 28% of cases when predicting at one-, 12-, and 24-months ahead. Hence, when the copper price actually improves forecast accuracy, it is observed in the long run. It is discovered as well that when copper price helps, it is for Caribbean CEMLA countries. The information provided by oil price over inflation factor and copper price enhances forecast accuracy mainly in the long run, and for South American CEMLA countries gains are of a modest magnitude. These results are important since the information that a commodity price contains on future domestic inflation dynamics is of vital importance for policymakers, especially those concerned with imported inflation.
    Date: 2016–05
  64. By: Hasan, Iftekhar; Kim, Suk-Joong; Wu, Eliza
    Abstract: We investigate the effects of credit ratings-contingent financial regulation on foreign bank lending behavior. We examine the sensitivity of international bank flows to debtor countries’ sovereign credit rating changes before and after the implementation of the Basel 2 risk-based capital regulatory rules. We study the quarterly bilateral flows from G-10 creditor banking systems to 77 recipient countries over the period Q4:1999 to Q2:2013. We find direct evidence that sovereign credit re-ratings that lead to changes in risk-weights for capital adequacy requirements have become more significant since the implementation of Basel 2 rules for assessing banks’ credit risk under the standardized approach. This evidence is consistent with global banks acting via their international lending decisions to minimize required capital charges associated with the use of ratings-contingent regulation. We find evidence that banking regulation induced foreign lending has also heightened the perceived sovereign risk levels of recipient countries, especially those with investment grade status. Keywords: cross-border banking, sovereign credit ratings, Basel 2, rating-contingent financial regulation
    JEL: E44 F34 G21 H63
    Date: 2014–11–17
    Date: 2016
  66. By: Olivier Damette (BETA - Université de Lorraine); Mathilde Maurel (Centre d'Economie de la Sorbonne et FERDI); Michael A. Stemmer (Centre d'Economie de la Sorbonne et FERDI)
    Abstract: Consequences from the subsiding 2008 financial crisis on long-run economic growth are widely debated. Existing literature on previous recessions, such as Cerra and Saxena (2008), emphasizes the long-term loss inflicted on per capita GDP levels. This paper concentrates on typical business cycles in advanced European and transition countries and assumes that lower than normal growth during recessions is followed by a recovery period with above normal growth until the economy reaches its pre-crisis level. The objective is to assess the capacity to rebound, the speed of convergence towards a normal growth path as well as potential nonlinearities. Through exploiting the cointegration relationships among variables in long-run growth regressions and by employing a variety of panel error-correction models, results show a strong evidence of error-correction and different linear speed in the convergence process with the transition economies outpacing Western European countries. Our analysis is further extended into a Panel Smooth Transition Error-Correction Model (PSTR-ECM) to account for different regimes in convergence patterns according to a selection of transition variables. Whereas the velocity of convergence for European core countries exhibits a nonlinear pattern and differs with respect to price and flexibility, transition countries remain linear in their return to the growth trend. Ultimately, our results suggest that internal adjustments remain the key factors for both European and transition countries to recover from negative economic growth shocks
    Keywords: Economic growth; business cycles; transition economies; error-correction models; panel cointegration; smooth-transition models
    JEL: C23 C50 E32 F43 O40
    Date: 2016–04
  67. By: Aizenman, Joshua
    Abstract: ​This paper provides an overview of Chinese financial and trade integration in recent decades, and the challenges facing China in the coming years. China had been a prime example of export-led growth, benefiting from learning by doing, and by adopting foreign know-how, supported by a complex industrial policy. While the resultant growth has been spectacular, it comes with hidden but growing costs and distortions. The Chinese export-led growth path has been challenged by its own success, and the Global Financial Crisis forced China toward rebalancing, which is a work in progress. Reflecting on the internationalization of the CNY, one expects the rapid accelerating of the commercial internationalization of the CNY. In contrast, there are no clear-cut reasons to rush with the full CNY financial internationalization: The gains from CNY financial internationalization are overrated. Publication keywords: export led growth, CNY internationalization, mercantilism, financial integration, FDI
    JEL: E60 F36 F40 F60 O24 O40
    Date: 2015–02–12
  68. By: Erik Bugyi (Council for Budget Responsibility)
    Abstract: This paper describes the construction of the baseline scenario for next 50 years. The baseline scenario is based on the European System of National Accounts (ESA) methodology and compatible with all national budget classifications. To increase transparency, detailed calculation will be published regularly in order to assess the long-term sustainability (Report on the Long-Term Sustainability of Public Finances) or the general government budget (Evaluation of the General Government Budget).
    Keywords: long-term sustainability indicator (GAP), budgetary classification, revenues and expenditures, long-term projections
    JEL: E62 H68
    Date: 2015–04
  69. By: Miyazaki, Koichi
    Abstract: The cost of attaining higher education is growing in some developed countries. More young people borrow larger amounts than before to finance their higher education. Several media reports indicate that student loans might affect young people's decision making regarding important life events such as marriage, childbirth, purchasing a house, and so on. Specifically, this paper focuses on how the burden of student loans affects young people's decision making with regard to the number of children to have, and studies the fertility rate, gross domestic product (GDP) growth rate, and growth rate of GDP per capita using a three-period overlapping generations model. A young agent needs to borrow to accumulate his/her human capital, although for some reason, s/he faces the borrowing constraint. In the next period, the agent repays his/her debt as well as determines the number of children to have. Under this setting, this paper analyzes how the tightness of the borrowing constraints affects the growth rates of the population, GDP, and GDP per capita. The paper finds that when rearing children is time-consuming, the population growth rate decreases as the borrowing constraints are relaxed. Moreover, the paper shows a case in which the GDP growth rate decreases as the borrowing constraints are relaxed, whereas the growth rate of GDP per capita still increases. In addition, I show that if the cost of rearing children is mainly monetary, then the population growth rate is not necessarily decreasing as the borrowing constraints are relaxed. The paper also calibrates the model using U.S. data.
    Keywords: Student loans, human capital accumulation, fertility, growth rate of GDP, growth rate of GDP per capita, overlapping generations model
    JEL: E44 I25 J13 J24
    Date: 2016–05–24
  70. By: Guido, Ascari; Andrea, Colciago; Lorenza, Rossi
    Abstract: We show how to use Hurwitz polynomials to study the stability and uniqueness of Rational Expectation equilibria in Dynamic General Equilibrium models. We apply this method to a model characterized by staggered wage and price contracts and by limited asset market participation (LAMP). We prove analytically in a fourth-order dynamics system that, once nominal wage stickiness is taken into account, LAMP does not invalidate the Taylor Principle: for any plausible degree of asset market participation an active interest rate rule ensures the uniqueness of the rational expectation equilibrium.
    Keywords: determinacy, high-order dynamics, sticky wages, non-Ricardian household
    JEL: C62 E50
    Date: 2016–05–13
  71. By: Nicholas Ford; Charles Yuji Horioka
    Abstract: This article shows that global financial markets cannot, by themselves, achieve net transfers of financial capital and real interest rate equalisation across countries and that the integration of both global financial markets and global goods markets is needed to achieve net transfers of capital and real interest rate equalisation across countries. Thus, frictions (barriers to mobility) in one or both of these markets can impede the net transfer of capital between countries, produce the Feldstein and Horioka (1980) finding of high saving-investment correlations, and prevent real interest rates from being equalised across countries. Moreover, frictions in global goods markets can explain why real exchange rates deviate from PPP (purchasing power parity) for extended periods of time and can therefore also explain the PPP puzzle. Thus, we are able to resolve 2 of Obstfeld and Rogoff’s (2000) “6 major puzzles in macroeconomics” with essentially the same explanation.
    JEL: E40 F21 F31 F32 F36 G15
    Date: 2016–04
  72. By: Charles Yuji Horioka; Emin Gahramanov; Aziz Hayat; Xueli Tang
    Abstract: In this paper, we conduct a theoretical analysis of why individuals provide care and attention to their elderly parents using a two-period overlapping generations model with endogenous saving and a “contest success function” and test this model using micro data from a Japanese household survey, the Osaka University Preference Parameter Study. To summarize our main findings, we find that the Japanese are more likely to live with (or near) their elderly parents and/or to provide care and attention to them if they expect to receive a bequest from them, which constitutes strong support for the selfish bequest motive or the exchange motive (much stronger than in the United States), but we find that their caregiving behavior is also heavily influenced by the strength of their altruism toward their parents and social norms.
    JEL: D12 D64 D91 E21 J14
    Date: 2016–05
  73. By: Torben M Andersen, Department of Economics and Business Economics Aarhus University, CEPR, CESifo and IZA
    Abstract: Income inequality is increasing in most countries at the same time as traditional redistribution policies are under pressure, not least due to strained public finances. What are the underlying causes, and what is the scope to turn the trend? This is discussed from the perspective of the link between inequality and growth running via education and human capital formation. It is argued that imperfections arising from both capital market imperfections and social barriers imply that inequality may be a barrier to education, which in turn makes inequality persistent and reduces growth. In discussing redistribution it is thus important to distinguish between the traditional passive means of redistribution via taxes and transfers to repair on the distribution of market incomes, and active means which affect the distribution of market incomes. The latter may both lead to more income equality and efficiency improvements reflected in higher incomes or income growth. Policy options to improve educational outcomes and their distribution are discussed.
    JEL: I24 E02
    Date: 2015–09
  74. By: Michael Kouparitsas (Treasury, Government of Australia); Dinar Prihardini (Treasury, Government of Australia); Alexander Beames (Treasury, Government of Australia)
    Abstract: For a small open economy, such as Australia, its living standards (per capita income) are determined by the level of its terms of trade, labour productivity, labour force participation and population. Australia’s terms of trade, labour force participation and population growth are expected to be flat or declining in the foreseeable future which implies any improvement in Australia’s living standards must be driven by a higher level of labour productivity. This paper shows that a company income tax cut can do that, even after allowing for increases in other taxes or cutting government spending to recover lost revenue, by lowering the before tax cost of capital. This encourages investment, which in turn increases the capital stock and labour productivity. Analysis presented here also suggests the long-term benefits accrue to workers and households via permanently higher after-tax real wages and consumption.
    Keywords: optimal taxation, company tax, tax reform, policy simulation
    JEL: H21 H25 H30 E27
    Date: 2016–05

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