nep-mac New Economics Papers
on Macroeconomics
Issue of 2016‒08‒07
74 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Investment in fixed assets in Russia in 2015 By Izryadnova Olga
  2. Do Fed forecast errors matter? By Pao-Lin Tien; Tara M. Sinclair; Edward N. Gamber
  3. Russia’s Monetary Policy in 2015 By Bozhechkova Alexandra; Trunin Pavel; Kiyutsevskaya Anna
  4. Investment in fixed assets in Russia in 2015 By Izryadnova Olga
  5. Do heterogeneous expectations constitute a challenge for policy interaction? By Gasteiger, Emanuel
  6. Housing Market Dynamics and Macroprudential Policy By Gabriel Bruneau; Ian Christensen; Césaire Meh
  7. Starting from a Blank Page? Semantic Similarity in Central Bank Communication and Market Volatility By Michael Ehrmann; Jonathan Talmi
  8. Structural transformation, services deepening, and the transmission of monetary policy By Alessandro Galesi; Omar Rachedi
  9. Output Comovement and Inflation Dynamics in a Two-Sector Model with Durable Goods: The Role of Sticky Information and Heterogeneous Factor Markets By Tomiyuki Kitamura; Tamon Takamura
  10. Forecasting using a Nonlinear DSGE Model By Sergey Ivashchenko; Rangan Gupta
  11. Do long term interest rates drive GDP and inflation in small open economies? Evidence from Poland By Grzegorz Wesołowski
  12. 经济增长与政府债务的非线性研究及其政策治理 By CAI, YIFEI
  13. The signalling content of asset prices for inflation: Implications for Quantitative Easing By Leo de Haan; Jan Willem van den End
  14. Firms' Inflation Expectations and Wage-setting Behaviors By Sohei Kaihatsu; Noriyuki Shiraki
  15. An exploration of real-time revisions of output gap estimates across European countries. By Pablo Hernández de Cos; Aitor Lacuesta; Enrique Moral-Benito
  16. Liquidity Management and Central Bank Strength: Bank of England Operations Reloaded, 1889-1910 By Stefano Ugolini
  17. On the Distribution of the Welfare Losses of Large Recessions By Krueger, Dirk; Mitman, Kurt; Perri, Fabrizio
  18. Influence de la politique monétaire sur le taux long Quelques évidences empiriques, cas du Maroc By EL FAIZ, Zakaria; ZIANI, Manal
  19. Cost Channel, Interest Rate Pass-Through and Optimal Policy under Zero Lower Bound By Chattopadhyay, Siddhartha; Ghosh, Taniya
  20. Secular Stagnation, Rational Bubbles, and Fiscal Policy By Coen N. Teulings
  21. Menu Costs, Uncertainty Cycles, and the Propagation of Nominal Shocks By Isaac Baley; Julio A. Blanco
  22. Menu costs, uncertainty cycles, and the propagation of nominal shocks By Isaac Baley; Julio A. Blanco
  23. How competitiveness shocks affect macroeconomic performance across euro area countries By Karsten Staehr; Robert Vermeulen
  24. Global Macro Risks in Currency Excess Returns By Kimberly Berg; Nelson C. Mark
  25. Wage Flexibility and Employment Fluctuations: Evidence from the Housing Sector By Pischke, Jörn-Steffen
  26. Wage Flexibility and Employment Fluctuations: Evidence from the Housing Sector By Pischke, Jörn-Steffen
  27. Assessing the appropriateness of zero and negative interest rate regimes: recent developments and comparative analyses By Ojo, Marianne; Newton, Sarah
  28. Are Bubbles Bad? Is a higher debt target for the Euro-zone desirable? By Coen N. Teulings
  29. Recalibrarea sistemului bancar european in contextul noilor cerinte si realitati By Danila, Marius
  30. Exchange Rate Pass-Through in a Small Open Economy: A Structural VAR Approach By Tunc, Cengiz; Kılınç, Mustafa
  31. A Unified Approach to Estimating Demand and Welfare By Redding, Stephen J.; Weinstein, David E.
  32. Fan chart – a tool for NBP’s monetary policy making By Paweł Pońsko; Bartosz Rybaczyk
  33. Is Inflation Default? The Role of Information in Debt Crises By Carlo Galli; Marco Bassetto
  34. The Palmer Rule and the convertibility of bank notes in Spain By Yolanda Blasco-Martel
  35. Insurance in human capital models with limited enforcement By Tom Krebs; Moritz Kuhn; Mark Wright
  36. Gray's Anatomy: Understanding Uncertainty By Samaniego, Roberto; Sun, Juliana
  37. Existence and uniqueness of solutions to dynamic models with occasionally binding constraints By Holden, Tom D.
  38. La estrategia de inflación objetivo en Colombia. Una visión histórica By Enrique A. López-Enciso; Hernando Vargas-Herrera; Norberto Rodríguez-Niño
  39. Turbulence and the Employment Experience of Older Workers By Lalé, Etienne
  40. Cash and non-cash payments in a long run perspective, Spain 1989-2014 By Maixe-Altes, J. Carles; Mourelle, Estefanía
  41. The Decision to Move House and Aggregate Housing-Market Dynamics By L. Rachel Ngai; Kevin Sheedy
  42. Household Debt and Macrodynamics - How do Income Distribution and Insolvency Regulations interact? By Nadja König
  43. Relationships in the Interbank Market By Jonathan Chiu; Cyril Monnet
  44. Why ZLB Economics and Negative Interest Rate Policy (NIRP) are wrong By Thomas I. Palley
  45. La política económica del Presidente Santos está en contravía a los acuerdos de la Habana By Álvaro Zerda Sarmiento
  46. Predictability of Growth in Emerging Markets: Information in Financial Aggregates By Banegas, Ayelen
  47. The Effect of Inflation and Interest Rates on Forward-Looking Effective Tax Rates By Centre for European Economic Reserach (ZEW)
  48. The Role of Central Banks in Promoting Financial Stability: An International Perspective By Rose Cunningham; Christian Friedrich
  49. Credit Constraints and Aggregate Economic Activity Over the Business Cycles By Giorgadze, Tamar; Vasilev, Aleksandar
  50. “One size does not fit all” – institutional determinantsof financial safety net effectiveness By Aleksandra Masłowska-Jokinen; Anna Matysek-Jędrych
  51. International Trade Fluctuations and Monetary Policy By Ana Maria Santacreu; Fernando Leibovici
  52. Computation of solutions to dynamic models with occasionally binding constraints By Holden, Tom D.
  53. Cash-Only Real Estate Transactions and Property Prices in San Francisco, California By Abdala Rioja, Yamile E
  54. Bank Lending Channel of Transmission of Monetary Policy: Does the Financial Structure of Banks Matter? By Jose E. Gomez-Gonzalez; Ali M. Kutan; Jair N. Ojeda-Joya; María Camila Ortiz
  55. Industrial production dynamics in particular sectors of Russian industry By Idrisov Georgy; Kaukin Andrey; Ponomarev Yuri
  56. Monetary Policy and Sovereign Debt Vulnerability By Carlos Thomas; Galo Nuño
  57. Central bank and asymmetric preferences: An application of sieve estimators to the U.S. and Brazil By de Sá, Rodrigo; Savino Portugal, Marcelo
  58. The U.S. economic outlook and the implications for monetary policy: remarks at Bank Indonesia–Federal Reserve Bank of New York Joint International Seminar, Bali Indonesia By Dudley, William
  61. Exchange Rate Targeting in the Presence of Foreign Debt Obligations By James Staveley-O'Carroll; Olena M. Staveley-O'Carroll
  62. The stability of money demand in the long-run: Italy 1861–2011 By Vittorio Daniele; Pasquale Foresti; Oreste Napolitano
  63. Macroeconomic effects of public-sector unions By Vasilev, Aleksandar
  64. Are banks’ below-par own debt repurchases a cause for prudential concern? By Lubberink, Martien; Renders, Annelies
  65. The End of Cheap Labour: Are Foreign Investors Leaving China? By Donaubauer, Julian; Dreger, Christian
  66. The Formation of Consumer Inflation Expectations:Evidence From Japan's Deflation Experience By Jess Diamond; Kota Watanabe; Tsutomu Watanabe
  67. La teoria dell'austerità nel sistema economico europeo By Luigi Campiglio
  68. Russian industrial enterprises in 2015 (on the basis of business surveys) By Tsukhlo Sergey
  69. Understanding the Sources of Macroeconomic Uncertainty By Barbara Rossi; Tatevik Sekhposyan; Matthiew Soupre
  70. A Perfect Specialization Model for Gravity Equation in Bilateral Trade based on Production Structure By Einian, Majid; Ravasan, Farshad
  71. The Italian Blitz: a natural experiment on audit publicity and tax compliance By Pietro Battiston; Denvil Duncan; Simona Gamba; Alessandro Santoro
  72. In Europe We Trust? By Ritzen, Jo; Haas, Jasmina
  73. Speculative bubbles or market fundamentals? An investigation of US regional housing markets By Shuping Shi
  74. The Inherent Benefit of Monetary Unions By Groll, Dominik; Monacelli, Tommaso

  1. By: Izryadnova Olga (Gaidar Institute for Economic Policy)
    Abstract: The crisis of 2008-2009 determined main structural changes in the formation of investment resources during post-crisis period up to 2015. Easing of economic growth rates was accompanied by a contraction of the share of gross savings in GDP from 30.2% in 2008 to 22.9% in 2014 and 23.1% in 2015. During 2010-2013 investment in fixed assets constituted around 20.0%. In 2014, owing to a reduction of revenues in the economy the share of investment in fixed assets fell to 17.8% and in 2015 came to 18.1% of GDP.
    Keywords: Russian economy, fixed investment
    JEL: E20 E21 E22 E60
    Date: 2016
  2. By: Pao-Lin Tien; Tara M. Sinclair; Edward N. Gamber
    Abstract: There is a large literature evaluating the forecasts of the Federal Reserve by testing their rationality and measuring the size of their forecast errors. There is also a substantial literature and debate on the impact of the Fed’s monetary policy on the economy. We know little, however about the impact of the Fed’s forecast errors on economic outcomes. This paper constructs a measure of a forecast error shock for the Federal Reserve based on the assumption that the Fed follows a forward-looking Taylor rule. Given the effort the Fed puts towards producing forecasts that do not have an endogenous error component, we treat the Fed’s forecast errors as a shock, analogous to a monetary policy shock. Our shock, however, is different in that it is completely unintended by the monetary authority rather than simply unanticipated by the public. We follow Romer and Romer (2004) and investigate the effect of the forecast error shock on output and price movements. Our results suggest that although the absolute magnitude of the forecast error shock is large, the impact of the shock on the macroeconomy is quite small. This finding is robust across a range of different specifications. The maximum impact suggests a decline of less than 0.3 percent of real GDP and less than 0.4 percent of GDP deflator in response to a 100 basis point contractionary forecast error shock.
    Keywords: Federal Reserve, Taylor rule, forecast evaluation, monetary policy shocks
    JEL: E32 E31 E52 E58
    Date: 2016–07
  3. By: Bozhechkova Alexandra (Gaidar Institute for Economic Policy); Trunin Pavel (Gaidar Institute for Economic Policy); Kiyutsevskaya Anna (Gaidar Institute for Economic Policy)
    Abstract: In 2015, the Bank of Russia faced global challenges while implementing measures as part of its monetary policy. The economic situation in 2015 was marked by the following: Western sanctions and Russia’s countersanctions remained in effect, prices of Russia’s key export commodities continued to fall, economic agents’ expectations for high inflation remained intact. The sweeping depreciation of the Russian ruble in late 2014/early 2015 resulted in an inflation shock which kept the year-end inflation at high level: the Consumer Price Index (CPI) stood at 12.9% at the 2015 year-end, much higher than the 2017 mid-term target level (4%) set forth in the central bank’s Guidelines for the Single State Monetary Policy for 2015–2017. In its official 2015 forecast, Russia’s Ministry of Economic Development predicted inflation will not move beyond 6.3% in late 2014/early 2015, and Russia’s central bank expected it to stay at 8.2–8.7% under the baseline scenario and 9.3–9.8% under the risk scenario. At the same time, the Bank of Russia cut its key rate gradually from 17% in January down to 11% in December 2015 as inflation slowed down over the course of the year.
    Keywords: Russian economy, monetary policy, money market, exchange rate, INFLATION, BALANCE OF PAYMENTS
    JEL: E31 E43 E44 E51 E52 E58
    Date: 2016
  4. By: Izryadnova Olga (Gaidar Institute for Economic Policy)
    Abstract: The crisis of 2008-2009 determined main structural changes in the formation of investment resources during post-crisis period up to 2015. Easing of economic growth rates was accompanied by a contraction of the share of gross savings in GDP from 30.2% in 2008 to 22.9% in 2014 and 23.1% in 2015. During 2010-2013 investment in fixed assets constituted around 20.0%. In 2014, owing to a reduction of revenues in the economy the share of investment in fixed assets fell to 17.8% and in 2015 came to 18.1% of GDP.
    Keywords: Russian economy, fixed investment
    JEL: E20 E21 E22 E60
    Date: 2016
  5. By: Gasteiger, Emanuel
    Abstract: Yes, indeed; at least for macroeconomic policy interaction. We examine a Neo-Classical economy and provide the conditions for policy arrangements to successfully stabilize the economy when agents have either rational or adaptive expectations. For a contemporaneous-data monetary policy rule, the monetarist solution is unique and stationary under a passive fiscal/active monetary policy regime if monetary policy appropriately incorporates expectational heterogeneity. In contrast, the active fiscal/passive monetary policy regime's fiscalist solution is prone to explosiveness due to empirically plausible expectational heterogeneity. Nevertheless, this can be a well-defined, rather orthodox equilibrium. For operational monetary policy rules, only the results for the fiscalist solution prevail. Moreover, our results are plausible from an adaptive learning viewpoint.
    Keywords: inflation,heterogeneous expectations,fiscal and monetary policy interaction
    JEL: E31 D84 E52 E62
    Date: 2016
  6. By: Gabriel Bruneau; Ian Christensen; Césaire Meh
    Abstract: We perform an analysis to determine how well the introduction of a countercyclical loanto- value (LTV) ratio can reduce household indebtedness and housing price fluctuations compared with a monetary policy rule augmented with house price inflation. To this end, we construct a New Keynesian model in which a fraction of households borrow against the value of their houses and we introduce news shocks on housing demand. We estimate the model with Canadian data using Bayesian methods. We find that the introduction of news shocks can generate a housing market boom-bust cycle, the bust following unrealized expectations on housing demand. Our study also suggests that a countercyclical LTV ratio is a useful policy to reduce the spillover from the housing market to consumption, and to lean against news-driven boom-bust cycles in housing price and credit generated by expectations of future macroeconomic developments.
    Keywords: Business fluctuations and cycles, Financial stability, Housing, Monetary policy framework, Transmission of monetary policy
    JEL: E31 E42 H23
    Date: 2016
  7. By: Michael Ehrmann; Jonathan Talmi
    Abstract: Press releases announcing and explaining monetary policy decisions play a critical role in the communication strategy of central banks. Because of their market-moving potential, it is particularly important how they are drafted. Often, central banks start from the previous statement and update the earlier text with only small changes. This way, it is straightforward to compare statements and see how the central bank’s thinking has evolved. This paper studies to what extent such similarity in central bank statements matters for the reception of their content in financial markets. Using the case of the Bank of Canada (the G7 central bank that had to rely the least on unconventional monetary policy following the global financial crisis and has therefore broadly continued standard monetary policy communications), the paper shows that press releases with larger differences in wording lead to higher volatility in financial markets, suggesting that their content is more difficult to absorb. At the same time, while press releases that are similar to the previous one generate less market volatility, once their wording is updated, volatility increases substantially.
    Keywords: Central bank research, Financial markets, Interest rates
    JEL: E43 E52 E58
    Date: 2016
  8. By: Alessandro Galesi (Banco de España); Omar Rachedi (Banco de España)
    Abstract: Advanced economies are undergoing a structural transformation from manufacturing to services. We document that structural change comes with a process of services deepening: over time, both services and manufacturing become more intensive in service inputs. We argue that structural transformation and services deepening affect the transmission of monetary policy by increasing the relative importance of services, which have stickier prices than manufacturing. We study the implications of the U.S. sectoral reallocation with a New Keynesian model with two sectors connected by an input-output matrix, which varies endogenously over time. The rise of services dampens the responses of aggregate and sectoral inflation rates to a monetary policy shock. The changes in the responses of sectoral inflation rates are entirely driven by services deepening.
    Keywords: New Keynesian model, intermediate inputs, input-output matrix
    JEL: E31 E43 E52 O41
    Date: 2016–07
  9. By: Tomiyuki Kitamura; Tamon Takamura
    Abstract: In a simple two-sector New Keynesian model, sticky prices generate a counterfactual negative comovement between the output of durable and nondurable goods following a monetary policy shock. We show that heterogeneous factor markets allow any combination of strictly positive price stickiness to generate positive output comovement. Even if the prices of durable goods are flexible, adding sticky information ensures that the output of both sectors moves in the same direction. Furthermore, we find that the combination of sticky information and heterogeneous factor markets produces hump-shaped responses in both sectoral output and inflation, as observed in a vector-autoregression analysis. In contrast to backward indexation to past inflation, which is often assumed in the literature, sticky information leads to a hump-shaped response in the inflation of flexibly priced goods. Finally, the estimated information stickiness through the minimum-distance estimation method suggests that information rigidity is stronger in residential investment than nondurable goods and services.
    Keywords: Inflation and prices, Transmission of monetary policy
    JEL: E31 E32 E52
    Date: 2016
  10. By: Sergey Ivashchenko (Saint Petersburg Institute for Economics and Mathematics (Russian Academy of Sciences), National Research University Higher School of Economics,Russia); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria)
    Abstract: A medium-scale nonlinear dynamic stochastic general equilibrium (DSGE) model was estimated (54 variables, 29 state variables, 7 observed variables). The model includes an observed variable for stock market returns. The root-mean square error (RMSE) of the in-sample and out-of-sample forecasts was calculated. The nonlinear DSGE model with measurement errors outperforms AR (1), VAR (1) and the linearised DSGE in terms of the quality of the out-of-sample forecasts. The nonlinear DSGE model without measurement errors is of a quality equal to that of the linearised DSGE model
    Keywords: nonlinear DSGE; Quadratic Kalman Filter; out-of-sample
    JEL: E32 E37 E44 E47
    Date: 2016–08
  11. By: Grzegorz Wesołowski
    Abstract: I show that the long term interest rate that includes a time-varying term premium stabilizes GDP and it does not affect significantly inflation volatility in Poland. I derive this result from an estimated DSGE model of a small open economy. GDP volatility would have been much higher if the endogenous part of the term premium had been switched off in the model, while the inflation volatility has not been affected by the presence of the term premium. At the same time, the term premium shock had only a minor impact on GDP and inflation volatilities which suggests that the QE programs conducted by the major central banks did not have a substantial impact on the Polish economy.
    Keywords: long term interest rates, time-varying term premium, business cycle, small open economy
    JEL: E32 E43 E44
    Date: 2016
  12. By: CAI, YIFEI
    Abstract: This paper empirically analyze the nonlinear relation between real output per capital and public debt by employing threshold cointegration method based on ARDL model. Empirical results show that there exists a threshold cointegration relationship between government debt and real output per capital. In case of the empirical results, cutting government debt could boost economic growth in the long term. However, the short term variation of government debt makes little impact on real output per capital. Comparatively speaking, human capital and investment rate and trade openness make larger influence on real output per capital. From the perspective of economic policy, the government should take full advantage of the fiscal policy to cut the government debt with the operation space of monetary policy being compressed.
    Keywords: ARDL threshold cointegration method; Economic growth; Public debt; Policy Governance
    JEL: E52 E62 H63 O47
    Date: 2016–03–05
  13. By: Leo de Haan; Jan Willem van den End
    Abstract: We investigate the information content of financial variables as signalling devices of two abnormal inflationary regimes: (1) very low inflation or deflation, and (2) high inflation. Specifically, we determine the information content of equity and house prices, private credit volumes, and sovereign and corporate bond yields, for 11 advanced economies over the past three decades, using both the receiver operating characteristic (ROC) curve and a logit model. The outcomes show that high asset prices more often signal high inflation than low inflation/deflation. However, in some countries, high asset prices and low bond yields are a significant indicator of low inflation or deflation as well. The transmission time of financial developments to inflation can be quite long (up to 8 quarters). For monetary policy, these findings imply that stimulating asset prices through Quantitative Easing (QE) can effectively influence inflation, but that the effects are quite uncertain, both in timing and direction.
    Keywords: Quantitative Easing; Inflation; Financial markets
    JEL: E31 E44 E52
    Date: 2016–07
  14. By: Sohei Kaihatsu (Bank of Japan); Noriyuki Shiraki (Bank of Japan)
    Abstract: This paper aims to examine the formation mechanism of firms' inflation expectations and the relationship between those expectations and wage-setting behaviors. We conduct an empirical analysis based on microdata constructed by matching a business survey for inflation expectations and corporate financial data. Our empirical results demonstrate that firms' short-term and medium- to long-term inflation expectations have significantly increased after the Bank of Japan introduced a price stability target of two percent and quantitative and qualitative monetary easing in 2013. During this period, dispersions of distributions of inflation expectations increased temporarily and then shrank again. These changes vary across business attributes, such as the size of a firm. Therefore, differences in business attributes might result in the heterogeneous reaction of inflation expectations to monetary policy shocks. Furthermore, an empirical analysis using the data from 2004 to 2016 shows that (a) both wages and short-term inflation expectations tend to increase along with medium- to long-term inflation expectations and (b) both wages and operating profits tend to decrease when only short-term inflation expectations increase. The result implies that a balanced economic growth between prices and wages can be achieved when there is an increase in a wide range of firms' medium- to long-term inflation expectations.
    Keywords: firm's inflation expectation; wage-setting behavior; quantitative and qualitative monetary easing; panel VAR
    JEL: D21 D84 E31 E52
    Date: 2016–07–29
  15. By: Pablo Hernández de Cos (Banco de España); Aitor Lacuesta (Banco de España); Enrique Moral-Benito (Banco de España)
    Abstract: This document analyses real-time revisions in output gap estimates published by the European Commission for 15 countries over the period 2002-2014. We find that output gap revisions (both in levels and changes) are mainly driven by GDP growth forecast errors. Also, output gap revisions have opposite signs across expansions and recessions: real-time output gaps are downward biased (smaller than the final estimates) during expansions and upward biased (higher than the final estimates) in recessions. Our findings may have relevant implications for the conduct and assessment of fiscal policy in real time. For instance, according to our results, real-time estimates of the structural balance would be upward biased in expansions and downward biased in recessions. This implies that the fiscal stance of an economy estimated in real time would be excessively expansionary in recessions as compared to the final estimate. As a result, we argue that corrections to real-time estimates of the structural balance suggested in the literature should be contingent on the degree of slack in the economy.
    Keywords: output-gaps, real-time data, fiscal policy
    JEL: E32 E52 E60
    Date: 2016–07
  16. By: Stefano Ugolini (University of Toulouse (Institute of Political Studies and LEREPS))
    Abstract: Is a strong commitment to monetary stability enough to ensure credibility? The recent literature suggests it might not be if the central bank cannot perform pure interest rate policy and has to resort to balance sheet policy: the central bank’s financial strength (i.e. the long-term sustainability of its policy) is also a determinant of credibility. This paper provides historical evidence on the issue by focusing on the case of the Bank of England at the heyday of the classical gold standard. It shows that as the Bank was not perceived as having the means to fulfil all of its obligations, the efficacy of its interest rate policy was poor. Failing to reform for political economy reasons, the Bank eventually had to default on its formal convertibility mandate.
    Keywords: Central banking, institutional design, monetary policy implementation, reverse repos, term structure of interest rates, gold standard
    JEL: E42 E43 E58 N13
    Date: 2016–07–01
  17. By: Krueger, Dirk; Mitman, Kurt; Perri, Fabrizio
    Abstract: How big are the welfare losses from severe economic downturns, such as the U.S. Great Recession? How are those losses distributed across the population? In this paper we answer these questions using a canonical business cycle model featuring household income and wealth heterogeneity that matches micro data from the Panel Study of Income Dynamics (PSID). We document how these losses are distributed across households and how they are affected by social insurance policies. We find that the welfare cost of losing one's job in a severe recession ranges from 2% of lifetime consumption for the wealthiest households to 5% for low-wealth households. The cost increases to approximately 8% for low-wealth households if unemployment insurance benefits are cut from 50% to 10%. The fact that welfare losses fall with wealth, and that in our model (as in the data) a large fraction of households has very low wealth, implies that the impact of a severe recession, once aggregated across all households, is very significant (2.2% of lifetime consumption). We finally show that a more generous unemployment insurance system unequivocally helps low-wealth job losers, but hurts households that keep their job, even in a version of the model in which output is partly demand determined, and therefore unemployment insurance stabilizes aggregate demand and output.
    Keywords: great recession; Social Insurance; Wealth Inequality
    JEL: E21 E32 J65
    Date: 2016–07
  18. By: EL FAIZ, Zakaria; ZIANI, Manal
    Abstract: In an uncertain economic environment, long-term interest rates appear to be highly volatile and their sensitivity towards short-term interest rates appears to be still ambiguous. The aim of this work is to analyze this relationship, and to evaluate the impact of short-term interest rate on long-term interest rate in Morocco. We used a New Keynesian Model augmented with the term structure of interest rates, estimated with Bayesian methods on quarterly data for the period 2004-2015. The result shows that long-term interest rate increases in response to an increase in short term interest rate, which signifies that monetary policy in Morocco has the ability to influence long-term interest rates.
    Keywords: NKM Model, Monetary Policy, long-term interest rates, term structure
    JEL: E1 E12 E30 E43 E52
    Date: 2016–07
  19. By: Chattopadhyay, Siddhartha; Ghosh, Taniya
    Abstract: This paper analyzes optimal monetary policy under zero lower bound in the presence of cost channel. Cost channel introduces trade-off between output and inflation when economy is out of ZLB. As a result, exit time both under discretion and commitment is endogenous in the presence of cost channel. We also find that commitment outperforms discretion by promising future boom and inflation and a T-only policy closely replicates commitment both under presence and absence of cost channel. Moreover, the exit date (from ZLB) under discretion, commitment and T-only policy rises with the magnitude of demand shock given the degree of interest rate pass-through irrespective if the cost channel is present. We also show that, while exit date both under discretion and T-only policy rises with the degree of interest rate pass-through/credit market imperfection, it falls under commitment given demand shock.
    Keywords: New-Keynesian Model, Cost Channel, Liquidity Trap
    JEL: E52 E58 E63
    Date: 2016–07–20
  20. By: Coen N. Teulings
    Abstract: It is well known that rational bubbles can be sustained in balanced growth path of a deterministic economy when the return to capital r is equal to the growth rate g. When there is a lack of stores of value, bubbles can implement an efficient allocation. This paper considers a world where r fluctuates over time due to shocks to the marginal productivity of capital. Then, bubbles further efficiency, though they cannot implement first best. While bubbles can only be sustained when r = g in a deterministic economy, r > g "on average" in a stochastic economy. Fiscal policy improves welfare by adding an extra asset. Where only the elderly contribute to shifting resources between investment and consumption in a bubbly economy, fiscal policy allows part of that burden to be shifted to the young. Contrary to common wisdom, trade in bubbly assets implements intergenerational transfers, while fiscal policy implements intragenerational transfers. Hence, while bubbles and fiscal policy are perfect substitutes in the deterministic economy, fiscal policy dominates bubbles in a stochastic economy. For plausible parameter values, a higher degree of dynamic inefficiency should lead to a higher sovereign debt.
    Keywords: rational bubbles, fiscal policy, Secular Stagnation
    JEL: E44 E62
    Date: 2016–07–27
  21. By: Isaac Baley; Julio A. Blanco
    Abstract: Nominal shocks have long-lasting effects on real economic activity, beyond those implied by standard models that target the average frequency of price adjustment in micro data. This paper develops a price-setting model that explains this gap through the interplay of menu costs and uncertainty about idiosyncratic productivity. Uncertainty arises from firms' inability to distinguish between permanent and transitory productivity changes. Upon the arrival of a productivity shock, a firm's uncertainty spikes up and then fades with learning until the next shock arrives. These uncertainty cycles, when paired with menu costs, generate recurrent episodes of high adjustment frequency followed by episodes of low adjustment frequency at the firm level. A decreasing hazard rate of price adjustment results, as in the data. Taking into account this pricing behavior amplifies the persistence and reduces the pass-through of nominal shocks.
    Keywords: menu costs, uncertainty, information frictions, monetary policy, hazard rates
    JEL: D8 E3 E5
    Date: 2016–07
  22. By: Isaac Baley; Julio A. Blanco
    Abstract: Nominal shocks have long-lasting effects on real economic activity, beyond those implied by standard models that target the average frequency of price adjustment in micro data. This paper develops a price-setting model that explains this gap through the interplay of menu costs and uncertainty about idiosyncratic productivity. Uncertainty arises from firms' inability to distinguish between permanent and transitory productivity changes. Upon the arrival of a productivity shock, a firm's uncertainty spikes up and then fades with learning until the next shock arrives. These uncertainty cycles, when paired with menu costs, generate recurrent episodes of high adjustment frequency followed by episodes of low adjustment frequency at the firm level. A decreasing hazard rate of price adjustment results, as in the data. Taking into account this pricing behavior amplifies the persistence and reduces the pass-through of nominal shocks.
    Keywords: Menu costs, uncertainty, information frictions, monetary policy, hazard rates.
    JEL: D8 E3 E5
    Date: 2016–07
  23. By: Karsten Staehr; Robert Vermeulen
    Abstract: This paper considers the short-term effects of competitiveness shocks on macroeconomic performance in the euro area. Vector autoregressive models are estimated on quarterly data from 1995 to 2013 for individual countries and the whole euro area. The results show that competitiveness shocks help to explain subsequent GDP developments in most countries but have little explanatory power for the current account balance and domestic credit. These results apply for all of the competitiveness measures considered, but a non-traditional competitiveness measure accounting for quality differences fares better in some cases. The effects of the competitiveness measures vary substantially across the countries in the euro area, which likely reflects their different economic structures and institutions. This heterogeneity suggests that policy measures seeking to improve competitiveness may have very different effects on economic performance and financial stability in different countries.
    Keywords: Competitiveness; macroeconomic variables; transmission; euro area
    JEL: E32 E61 F32
    Date: 2016–07
  24. By: Kimberly Berg; Nelson C. Mark
    Abstract: We study a cross section of carry-trade-generated currency excess returns in terms of their exposure to global fundamental macroeconomic risk. The cross-country high-minuslow (HML) conditional skewness of the unemployment gap—our measure of global macroeconomic uncertainty—is a factor that is robustly priced in currency excess returns. A widening of the HML gap signifies increasing divergence, disparity and inequality of economic performance across countries.
    Keywords: Asset Pricing, Exchange rates, Interest rates
    JEL: E21 E43 F31 G12
    Date: 2016
  25. By: Pischke, Jörn-Steffen (London School of Economics)
    Abstract: Many economists suspect that downward nominal wage rigidities in ongoing labor contracts are an important source of employment fluctuations over the business cycle but there is little direct empirical evidence on this conjecture. This paper compares three occupations in the housing sector with very different wage setting institutions, real estate agents, architects, and construction workers. I study the wage and employment responses of these occupations to the housing cycle, a proxy for labor demand shocks to the industry. The employment of real estate agents, whose pay is far more flexible than the other occupations, indeed reacts less to the cycle than employment in the other occupations. However, unless labor demand elasticities are large, the estimates do not suggest that the level of wage flexibility enjoyed by real estate agents would buffer employment fluctuations in response to demand shocks by more than 10 to 20 percent compared to completely rigid wages.
    Keywords: wage setting, wage rigidity, commissions, real estate agents, architects, construction workers
    JEL: E24 J20 J44
    Date: 2016–07
  26. By: Pischke, Jörn-Steffen
    Abstract: Many economists suspect that downward nominal wage rigidities in ongoing labor contracts are an important source of employment fluctuations over the business cycle but there is little direct empirical evidence on this conjecture. This paper compares three occupations in the housing sector with very different wage setting institutions, real estate agents, architects, and construction workers. I study the wage and employment responses of these occupations to the housing cycle, a proxy for labor demand shocks to the industry. The employment of real estate agents, whose pay is far more flexible than the other occupations, indeed reacts less to the cycle than employment in the other occupations. However, unless labor demand elasticities are large, the estimates do not suggest that the level of wage flexibility enjoyed by real estate agents would buffer employment fluctuations in response to demand shocks by more than 10 to 20 percent compared to completely rigid wages.
    Keywords: architects; commissions; construction workers; real estate agents; wage rigidity; Wage setting
    JEL: E24 J20 J44
    Date: 2016–07
  27. By: Ojo, Marianne; Newton, Sarah
    Abstract: This paper explores the widely held theoretical view that zero interest rates should result in lower borrowing costs – propelling the demand for borrowing, “the theory and practice of monetary policy”, against the practical and broader acknowledgements that further negative consequences, namely bank runs - as well as the possibility of the occurrence of concerns of banks becoming more prone to the probabilities of greater unwillingness to lend, could occur. The latter negative consequence of banks’ unwillingness to lend, being considered to arise where “banks absorb the cost of negative rates themselves” such that this phenomenon “squeezes” the profit margin between their lending and deposit rates. However, as will be illustrated, different sources and authorities on the literature agree that it is still too early to draw conclusions on the impact of negative interest rates – be it in respect of i) whether it will work, ii) its wider impact and repercussions for the economy – as well as those economies where the policy has not yet been implemented (even where the policy is on the cards – namely in jurisdictions such as the United States), as well as (iii) its impact on the behavior of individuals (households) and firms. In exploring the appropriateness of its adoption – given prevailing global financial conditions and the economic environment, the paper also contributes to the extant literature from a theoretical, practical, empirical, as well as comparative jurisdictional perspective.
    Keywords: interest rates; monetary policy; central banks; market rates; lending rates
    JEL: E5 E58 E6 F3 G2 G3 K2 M4
    Date: 2016–07–28
  28. By: Coen N. Teulings
    Abstract: Bubbles are usually viewed as a threat to financial stability. This paper takes a more nuanced view. The world economy is going through an episode of Secular Stagnation, where the equilibrium rate of return on capital r is below the growth rate of the economy g. As is well known, rational bubbles are sustainable when r?g in a steady state equilibrium. Bubbles can then implement a dynamically efficient equilibrium. We show that from a structural point of view, bubbles, Pay-As-You-Go (PAYG) pensions and sovereign debt are perfect substitutes. However, when dealing with unexpected short run fluctuations in investment, sovereign debt is far more efficient than bubbles in shifting consumption over time and in risk sharing between generations. An increase in sovereign debt is therefore an efficient response to Secular Stagnation. Instead, the current Stability and Growth Pact for the Euro-zone embarks on an opposite course.
    Keywords: bubbles, dynamic efficiency, fiscal policy, Secular Stagnation
    JEL: E44 E62
    Date: 2016–07–27
  29. By: Danila, Marius
    Abstract: As of today any official or informal communication with respect to Europe’s economic future is most of the time accompanied by a unique keyword: „uncertainty”; several factors are at the same time being mentioned: global economy trends, fossil fuels price, Brexit, refugee crisis. With respect to the European financial industry a fundamental factor generates short and medium term uncertainty – the fact that, 8 years since the beginnings of the global financial crisis, the European financial sector, especially the banking industry, is still in transition. Despite the optimism shown by many European officials, the continental banking system is facing an impressive list of challenges. This analysis tries to put into spotlight some of the most important such challenges together with identifying appropriate ways of mitigation.
    Keywords: European banking, European Central Bank, non performing loans, asset quality, FinTech, interest rates
    JEL: E43 E44 F33 G15
    Date: 2016–04–16
  30. By: Tunc, Cengiz; Kılınç, Mustafa
    Abstract: Pass through from the exchange rate developments to consumer prices could be an important dimension of inflationary dynamics in small open economies. In such economies, the proper identification of exchange rate pass through (ERPT) is crucial for monetary policy analysis. In this paper, we study ERPT in Turkey for the period of 2006m1-2015m6, which starts with the launch of explicit inflation-targeting regime. We first show that commonly used recursive VAR model generates unrealistic dynamics like effects of domestic variables on external variables in small open economies and as result ERPT estimate is biased. This bias comes from the unrealistic decline in energy prices in response to depreciation of currency for the given period in Turkey. We then use a structural VAR model with block exogeneity assumption. This model generates more realistic dynamics and suggests that ERPT is around 18 percent in Turkey. Overall, the analysis demonstrates the importance of using realistic model setup and checking the relationships across variables when estimating ERPT in small open economies.
    Keywords: Inflation, Exchange Rates, Pass-through, Turkey
    JEL: E31 E52 F31
    Date: 2016–02–02
  31. By: Redding, Stephen J.; Weinstein, David E.
    Abstract: The measurement of price changes, economic welfare, and demand parameters is currently based on three disjoint approaches: macroeconomic models derived from time-invariant utility functions, microeconomic estimation based on time-varying utility (demand) systems, and actual price and real output data constructed using formulas that differ from either approach. The inconsistencies are so deep that the same assumptions that form the foundation of demand-system estimation can be used to prove that standard price indexes are incorrect, and the assumptions underlying standard exact and superlative price indexes invalidate demand-system estimation. In other words, we show that extant micro and macro welfare estimates are biased and inconsistent with each other as well as the data. We develop a unified approach to demand and price measurement that exactly rationalizes observed micro data on prices and expenditure shares while permitting exact aggregation and meaningful macro comparisons of welfare over time. We show that all standard price indexes are special cases of our approach for particular values of the elasticity of substitution, constant preferences for each good, and a constant set of goods. In contrast to these standard index numbers, our approach allows us to compute changes in the cost of living that take into account both changes in the preferences for individual goods and the entry and exit of goods over time. Using barcode data for the U.S. consumer goods industry, we show that allowing for the entry and exit of products, changing preferences for individual goods, and a value for the elasticity of substitution estimated from the data yields substantially different conclusions for changes in the cost of living from standard index numbers.
    Keywords: consumer valuation bias; elasticity of substitution; new goods; price index; welfare
    JEL: D11 D12 E01 E31
    Date: 2016–07
  32. By: Paweł Pońsko; Bartosz Rybaczyk
    Abstract: In this note we describe, in substantial detail, the methodology behind the construction of NBP’s fan chart. This note is meant to help the readers interpret information contained in the mid-term projection, understand the differences in the predicted uncertainty between the projection rounds, and the usefulness of the projection for the monetary policy conduct. We describe the process which leads to the final projection, the methodology of estimation of the variance of the final forecast probability distribution, the method used for quantifying asymmetry of the fan chart and the role the two-piece normal distribution plays in it. Finally, we describe the analysis of the changes in the fan charts between the projection rounds and explain how the narrative associated with the projection is consistent with its assessment of risk.
    Keywords: Projection, balance of risk, variance, probability distribution, fan chart
    JEL: E31 E37 E59
    Date: 2016
  33. By: Carlo Galli (University College London); Marco Bassetto (Federal Reserve Bank of Chicago)
    Abstract: In the aftermath of the financial crisis, countries which had control over their monetary policy, such as the United States, the United Kingdom, and Japan, were able to borrow at extremely low rates, even though they experienced very high deficit/GDP ratios (the UK) or debt/GDP ratios (Japan). In contrast, peripheral Eurozone countries with a high deficit/GDP ratio (Spain) or a high debt/GDP ratio (Italy) faced volatile interest rates. In a frictionless benchmark, default and inflation have the same economic effect. Creditors care about the real rate of return on their investment: whether they anticipate losing money to default or inflation, they will require an identical interest rate spread over risk-free bonds. We break this equivalence by introducing two classes of heterogeneously informed agents: bondholders, who decide whether to roll over their credit, and workers, who decide whether to accept currency in payment for their services. Domestic and foreign-currency borrowing are now distinguished by the identity of the marginal agent who triggers a crisis. We show conditions under which domestic-currency debt makes the economy more resilient to fiscal shocks.
    Date: 2016
  34. By: Yolanda Blasco-Martel (Universitat de Barcelona \cf0 Author-Email:
    Abstract: Research on banking systems has token as a frame of reference the English banking system. Precisely because the English banking system was early, it had opportunities to explore certain control mechanisms that favored the extension of the bill of bank. One such mechanism was known as Palmer Rule, a rule stating that a well-managed bank should keep in its cash box one third of its responsibilities. This rule allowed maintaining the convertibility of notes, giving confidence to customers and encouraging the spread paper money. In Spain it has been discussed about the convertibility of the note in the last quarter of the nineteenth century. This work includes to the discussion the Palmer rule, crucial to understanding why the ticket of the Bank of Spain ceased to be convertible de facto in the late nineteenth century, although the inconvertibility is not legally established until 1946.
    Keywords: Palmer rule, Convertibility, Banking history, Banking rules, Spain
    JEL: N14 N24 E42 E58
    Date: 2016–07
  35. By: Tom Krebs; Moritz Kuhn; Mark Wright
    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: 2016–08
  36. By: Samaniego, Roberto; Sun, Juliana
    Abstract: We explore the key mechanisms whereby uncertainty impacts the business cycle by exploring the interaction of uncertainty with growth in industries with different technologies of production. We find that uncertainty shocks are particularly detrimental to growth in industries with rapid capital depreciation or high investment adjustment costs. The findings are consistent with real options theory: uncertainty leads firms to delay investment in new projects, but high depreciation and fixed costs of investment make delay more costly. On the other hand, we do not find evidence of a significant role of financial markets in the generation nor propagation of uncertainty shocks.
    Keywords: Uncertainty, technology, industry growth, depreciation, capital adjustment costs, investment lumpiness, real options.
    JEL: D81 E22 E32
    Date: 2016–07–13
  37. By: Holden, Tom D.
    Abstract: We present the first necessary and sufficient conditions for there to be a unique perfect-foresight solution to an otherwise linear dynamic model with occasionally binding constraints, given a fixed terminal condition. We derive further conditions on the existence of a solution in such models. These results give determinacy conditions for models with occasionally binding constraints, much as Blanchard and Kahn (1980) did for linear models. In an application, we show that widely used New Keynesian models with endogenous states possess multiple perfect foresight equilibrium paths when there is a zero lower bound on nominal interest rates, even when agents believe that the central bank will eventually attain its long-run, positive inflation target. This illustrates that a credible long-run inflation target does not render the Taylor principle sufficient for determinacy in the presence of the zero lower bound. However, we show that price level targeting does restore determinacy in these situations.
    Keywords: occasionally binding constraints,zero lower bound,existence,uniqueness,price targeting,Taylor principle,linear complementarity problem
    JEL: C62 E3 E4 E5
    Date: 2016
  38. By: Enrique A. López-Enciso (Banco de la República de Colombia); Hernando Vargas-Herrera (Banco de la República de Colombia); Norberto Rodríguez-Niño (Banco de la República de Colombia)
    Abstract: Con el fin de la banda cambiaria en Colombia en 1999, la estrategia de inflación objetivo (IO) se convirtió en el marco de política monetaria implementado por la Junta Directiva del Banco de la República, el cual aún sigue vigente. Este trabajo presenta un recuento histórico del proceso de adopción de esa estrategia en Colombia, así como las mejoras a nivel institucional y técnico que fueron necesarias para adoptarla, además se explica el desempeño que éste régimen de política monetaria tuvo frente a la crisis financiera del 2008. También se hace una reflexión sobre su utilización en el mundo y se sugiere, mediante modelos ANOVA y ARIMAX, que la IO ha sido efectiva reduciendo la inflación. Classification JEL: E31, E52, E58
    Keywords: Inflación objetivo, banda cambiaria, crisis financiera
    Date: 2016–08
  39. By: Lalé, Etienne (University of Bristol)
    Abstract: This paper provides a unified account of the trends in unemployment and labor force participation pertaining to the employment experience of older male workers during the past half-century. We build an equilibrium life-cycle model with labor-market frictions and an operative labor supply margin, wherein economic turbulence à la Ljungqvist and Sargent (1998) interact with institutions in ways that deteriorate employment. The model explains simultaneously: (i) the fall in labor force participation in the United States, (ii) the similar but more pronounced decline in Europe alongside rising unemployment rates and (iii) differences across European countries in the role played respectively by unemployment and labor force participation. The model also shows that policies that fostered early retirement may have exacerbated the deterioration of European labor markets: raising early retirement incentives to reduce unemployment among older workers tends to increase unemployment at younger ages, especially in turbulent economic times and under stringent employment protection legislation.
    Keywords: job search, job loss, turbulence, European unemployment, labor force participation
    JEL: E24 J21 J64
    Date: 2016–07
  40. By: Maixe-Altes, J. Carles; Mourelle, Estefanía
    Abstract: This work investigates the relationships between the retail payment system, monetary aggregates and economic activity in Spain. This approach is taken from a new perspective: that of the transformations that have been favored by ICT in the payment system. The methodology used is based on cointegration analysis and the estimation of error correction models. Likewise, an indicator of cashless transactions is proposed in order to illustrate whether a particular society can be classified as “cashless”. We use the Johansen procedure to unveil long-run relationships that are integrated in the real sector, the monetary system and the value of cashless transactions. We prove the relevant (and direct) impact of changes in the monetary system and national income on the value of cashless transactions. Using error correction models, we observe that the most important short-run relationships in terms of the value of cashless transactions are those related to the real sector of the economy, while with regard to monetary variables, the relevance is focused on the more liquid sectors. The empirical results evidence the intensive progress of the cashless society in Spain, where the banking sector, the regulatory changes and ICT development have played a key role.
    Keywords: Cashless payments, money supply, ICT
    JEL: E42 E51 G20 N2
    Date: 2016–07–16
  41. By: L. Rachel Ngai (Centre for Economic Policy Research (CEP); Economics Department London School of Economics (LSE); Centre for Macroeconomics (CFM)); Kevin Sheedy (Centre for Economic Policy Research (CEP); Economics Department London School of Economics (LSE); Centre for Macroeconomics (CFM))
    Abstract: Using data on house sales and inventories, this paper shows that housing-market dynamics are driven mainly by listings and less so by transaction speed, thus the decision to move house is key to understanding the housing market. The paper builds a model where moving house is essentially an investment in match quality, implying that moving depends on macroeconomic developments and housing-market conditions. The endogeneity of moving means there is a cleansing effect - those at the bottom of the match quality distribution move first - which generates overshooting in aggregate variables. The model is applied to the 1995{2004 housing-market boom.
    Keywords: Housing market, Search and Matching, Endogenous moving, Match quality investment
    JEL: D83 E22 R31
    Date: 2016–06
  42. By: Nadja König (Universität Hamburg (University of Hamburg))
    Abstract: Using agent-based simulation methods we explore the interplay between income distribution, personal insolvency regulations and household borrowing focusing on the effects on macroeconomic dynamics. In order to capture the empirically observed distribution of income and wealth, we model them by means of a Generalised Pareto Distribution. In the presence of social comparison effects, the insolvency regime decides on lower income households' incentives to expose themselves to possibly unsustainable levels of debt. Our main findings can be summarised as follows: for both, creditor friendly and debtor friendly regimes, higher skewness in the distribution of income and wealth leads to an increase in the number of defaults and to lower levels of GDP. Comparing the two regimes, we observe a higher number of defaults and higher aggregate debt under pro-debtor laws given the same starting values for the distribution of income. While debt-financed consumption leads to higher levels of GDP under pro-debtor policies, over-borrowing low-income households put a downward pressure on economic growth. The opposite is true for pro-creditor policies, where we observe positive GDP growth rates, as they prevent households from taking up unsustainable levels of debt ex ante.
    Keywords: Optimal Insolvency Regulation, Income and Wealth distribution, Agent-based Model, Computational Simulation
    JEL: D10 D31 E02 E21
    Date: 2016–06
  43. By: Jonathan Chiu; Cyril Monnet
    Abstract: The market for central bank reserves is mainly over-the-counter and exhibits a core-periphery network structure. This paper develops a model of relationship lending in the unsecured interbank market. In equilibrium, a tiered lending network arises endogenously as banks choose to build relationships to insure against liquidity shocks and to economize on the cost to trade in the interbank market. Relationships matter for banks’ bidding strategies at the central bank auction and introduce a relationship premium that can significantly distort the observed overnight rate. For example, it can explain some anomalies in the level of interest rates—namely, that banks sometimes trade above (below) the central bank’s lending (deposit) rate. The model also helps to explain how monetary policy affects the network structure of the interbank market and its functioning, and how the market responds dynamically to an exit from the floor system. We also use the model to discuss the potential effects of bilateral exposure limits on relationship lending.
    Keywords: Interest rates, Monetary policy implementation, Transmission of monetary policy
    JEL: E4 E5
    Date: 2016
  44. By: Thomas I. Palley
    Abstract: NIRP is quickly becoming a consensus policy within the economics establishment. This paper argues that consensus is dangerously wrong, resting on flawed theory and flawed policy assessment. Regarding theory, NIRP draws on fallacious pre-Keynesian economic logic that asserts interest rate adjustment can ensure full employment. That pre-Keynesian logic has been augmented by ZLB economics which claims times of severe demand shortage may require negative interest rates, which policy must deliver since the market cannot. Regarding policy assessment, NIRP turns a blind eye to the possibility that negative interest rates may reduce AD, cause financial fragility, create a macroeconomics of whiplash owing to contradictions between policy today and tomorrow, promote currency wars that undermine the international economy, and foster a political economy that spawns toxic politics. Worst of all, NIRP maintains and encourages the flawed model of growth, based on debt and asset price inflation, which has already done such harm.
    Keywords: Negative interest rate policy, zero lower bound
    Date: 2016
  45. By: Álvaro Zerda Sarmiento
    Abstract: Las conversaciones del gobierno Santos con la dirigencia de las FARC que arrancaron en 2012 partieron de una premisa: el modelo económico no se negocia. Con este punto grueso por fuera de la agenda, la hoja de ruta acordada contempló seis temas centrales de los cuales el referido al desarrollo agrario integral es el de mayor incidencia en el plano económico. No sobra tener en cuenta que el posible acuerdo tendrá impacto en sí sobre la economía en su conjunto, sobre lo cual varían las especulaciones entre un optimismo desaforado y un pesimismo derrotista. Este artículo se centra en examinar la relación que puede existir entre los acuerdos parciales firmados en La Habana sobre desarrollo agrario, el modelo económico imperante en el país y las medidas económicas que ha tomado el gobierno del presidente Santos en los últimos años. Al final se hace una reflexión sobre las necesidades de financiamiento para poner en marcha los acuerdos y la realidad de la economía colombiana en el momento.
    Keywords: Política económica, Acuerdos de paz, Desarrollo rural, Reforma agraria
    JEL: E61 E62 Q00 Q15
    Date: 2016–07–26
  46. By: Banegas, Ayelen
    Abstract: This paper tests for predictability of output growth in a panel of 22 emerging market economies. We use pooled panel data methods that control for endogeneity and persistence in the predictor variables to test the predictive power of a large set of financial aggregates. Results show that stock returns, the term spread, default spreads and portfolio investment flows help predict output growth in emerging markets. We also find evidence that suggests that global aggregates such as the performance of commodity markets, a cross-sectional firm size factor, and returns on the market portfolio contain information about the future state of the economy. We benchmark our results against those from the U.S. and find that there are differences in the ability of financial markets in predicting economic growth. Our results generalize to emerging markets previous findings in the empirical macro-finance literature on the linkages between financial market performance and the real economy.
    Keywords: Output growth predictability ; Emerging markets ; Leading indicators ; Financial variables
    JEL: E44 G15
    Date: 2016–07
  47. By: Centre for European Economic Reserach (ZEW)
    Abstract: The study delivers qualitative assessments of the sensitivity mechanisms at work as well as quantitative results. Tax systems are related with interest and inflation rates through various mechanisms which sometimes act in qualitatively different directions. Such a mechanism is, for example, that usually nominal returns are taxed rather than real returns. The Devereux/Griffith model incorporates these mechanisms of real world tax systems and allows for precise quantification.The broad range of figures produced in this study helps to illustrate and indicate the levels of effective tax burdens in different countries for a series of relevant situations. For comparing tax systems in the member states, common assumptions on interest and inflation rates are essential. Although there are no “universally true values” for effective tax levels in the member states, the analysis shows that the base case gives a good indication of the member states’ effective tax levels and member states’ relative position in a cross-country comparison.
    Keywords: corporate taxation, effective tax rates, inflation, interest rates, tax burden
    JEL: H21 H26 E43
    Date: 2016–08
  48. By: Rose Cunningham; Christian Friedrich
    Abstract: The 2007–09 global financial crisis has led policy-makers around the world, including central banks, to refocus their efforts to promote financial stability. As part of this process, central banks became quite active in supporting financial stability in a variety of ways, such as publicly sharing their assessments of financial system vulnerabilities and risks and helping to strengthen regulation, supervision and macroprudential measures. However, the use of monetary policy instruments for managing financial stability risks is more widely debated because central banks may face a trade-off between attaining their inflation targets in a timely manner and exacerbating financial stability risks. Recent research suggests that central banks that tend to have stronger financial stability mandates and less influence over regulatory and macroprudential tools are more likely to use monetary policy to address financial stability risks.
    Keywords: Financial stability, Financial system regulation and policies
    JEL: E5 G01 G28
    Date: 2016
  49. By: Giorgadze, Tamar; Vasilev, Aleksandar
    Abstract: The paper examines that imperfections in financial markets are themselves a source of macroeconomic fluctuations. Small, temporary shocks to technology or income distribution can generate large fluctuations in output and asset prices and spill over to other sectors. The work is based on the original model by Kiyotaki and Moore (1997). This paper will simulate a one-unit technology shock and study the propagation through the credit channel, evaluating its quantitative impact. While in the Kiyotaki-Moore model there is a linear production function used, we will try to do the derivation using the non-linear function and analyze how it changes the previously obtained result.
    Keywords: Credit cycles,aggregate fluctuations
    JEL: E32
    Date: 2016
  50. By: Aleksandra Masłowska-Jokinen; Anna Matysek-Jędrych
    Abstract: The main objective of the study is to identify both similarities and differences among seemingly homogenous countries (OECD) in respect to their safety net de-sign and a supervisory role played by central banks. This goal is achieved using an extensive data set, describing financial supervisory institutions between 2000-2013, hence including recent modifications in response to global financial crisis. The data show the existence of similar supervisory standards in both crisis- and non-crisis countries. Whether it is a presence of single supervisory authority, allocation of macroprudential responsibilities in a country, or implementing capital adequacy re-quirements, while working well in certain countries, did not make others immune to a crisis. At the same time, data show that non-crisis countries implemented stricter rules than those in crisis-countries, and that this process started way before the burst of the Global Financial Crisis. Often, these more rigorous rules were observed in countries with past crisis experience, indicating an importance of learning mecha-nism. With empirical analysis, we prove that certain basic safety net elements (oblig-atory reserve requirements or sufficient coverage of deposit insurance scheme), as well as high level of central bank financial transparency are negatively correlated with the speed of credit growth. Based on our results and discussion on previous empirical analyses we give recommendations for institutions involved in the financial safety net.
    Keywords: central bank, financial regulation, financial supervision, monetary pol-icy, financial crisis, macroprudential policy, safety net
    JEL: E52 E58 G01 G18 G21 H12
    Date: 2016
  51. By: Ana Maria Santacreu (Federal Reserve Bank of Saint Louis and); Fernando Leibovici (York University)
    Abstract: This paper studies the role of trade openness for the design of monetary policy. We extend a standard small open economy model of monetary policy to capture cyclical fluctuations of international trade flows, and parameterize it to match key features of the data. We find that accounting for trade fluctuations matters for monetary policy: when the monetary authority follows a Taylor rule, inflation and the output gap are more volatile. Moreover, we find that the volatility of these variables is significantly higher when the central bank follows the optimal policy based on a model that cannot account for international trade fluctuations.
    Date: 2016
  52. By: Holden, Tom D.
    Abstract: We construct the first algorithm for the perfect foresight solution of otherwise linear models with occasionally binding constraints, with fixed terminal conditions, that is guaranteed to return a solution in finite time, if one exists. We also provide a proof of the inescapability of the “curse of dimensionality” for this problem when nothing is known a priori about the model. We go on to extend our algorithm to deal with stochastic simulation, other non-linearities, and future uncertainty. We show that the resulting algorithm produces fast and accurate simulations of a range of models with occasionally binding constraints.
    Keywords: occasionally binding constraints,zero lower bound,computation,DSGE,linear complementarity problem
    JEL: C61 C63 E3 E4 E5
    Date: 2016
  53. By: Abdala Rioja, Yamile E
    Abstract: In recent years, there has been the common shared belief that international investors and other buyers of real estate in cash-only transactions have exercised an upward pressure in property prices in the city of San Francisco in California, the consequence being the crowding-out on buyers requiring access to credit. This paper examines real estate prices and cash sales for the period beginning after the last recession to the year 2015, as well as other significant drivers since the year 1998. The results suggest a contradiction to the cash-only claim, at the same time that they reveal a strong relationship between the technology sector and the real estate prices in the city.
    Keywords: Real Estate, Mortgage, San Francisco Tech Pulse, Business Cycles, Interest Rates
    JEL: E32 E4 R31
    Date: 2016–06–15
  54. By: Jose E. Gomez-Gonzalez (Banco de la República de Colombia); Ali M. Kutan; Jair N. Ojeda-Joya (Banco de la República de Colombia); María Camila Ortiz
    Abstract: This paper tests the importance of the financial structure of banks in the bank lending channel of monetary policy transmission in Colombia, using an unbalanced panel of 51 banks for the period of 1996:4-2014:8. We find that an increase in the interbank rate (proxy of the intervention rate) has a response of a drop in the growth of the total loan portfolio of banks. When we breakdown by type of policy, the bank lending channel works better in times of monetary contraction, exhibiting significant reactions from banks with low levels of solvency rather than those with high solvency. In contrast, when the policy is expansionary, the high solvency banks are the only segment exhibiting the presence of the bank lending channel. We discuss the policy implications of findings. Classification JEL: E5, E52, E59, G21
    Keywords: Monetary Policy Transmission, Bank Lending Channel, Bank Financial Structure, Solvency, Heterogeneous Effects, Colombia
    Date: 2016–08
  55. By: Idrisov Georgy (Gaidar Institute for Economic Policy); Kaukin Andrey (Gaidar Institute for Economic Policy); Ponomarev Yuri (Gaidar Institute for Economic Policy)
    Abstract: Russia’s real economy continued throughout 2015 to accommodate itself to new terms of trade and a new geopolitical context, both of which rendered the dynamics of domestic market’s key indicators less stable and less foreseeable. To make sure that sectoral dynamics are interpreted correctly, analysis of time series in the short term should be attended with seasonal and calendar adjustments. In order to be certain that the available dynamics of industrial production indicates that a period of downturn (or growth) is over, recovery (or slowdown) processes are afoot, monthly series should be decomposed into calendar, seasonal, irregular and trend components.[1] It is the changes of the trend component that should be analyzed in order to provide a substantial interpretation of sectoral trends.
    Keywords: Russian economy, Russian industry, industrial production
    JEL: C53 E37 L21 L52
    Date: 2016
  56. By: Carlos Thomas (Banco de España); Galo Nuño (Banco de España)
    Abstract: We investigate the trade-o¤s between price stability and sovereign debt sustainability, in a small-open-economy model where the government issues nominal debt without committing not to default or inflate. Inflation allows to absorb the e¤ect of aggregate shocks on the debt ratio, which improves sovereign debt sustainability. But the government incurs an ‘inflationary bias’: it creates (costly) inflation even when default is distant. For plausible calibrations, we find that abandoning the ability to inflate debt away raises welfare, even when the economy is close to default: the benefits from eliminating the inflationary bias dominate the costs from losing inflation’s debt-stabilizing role.
    Date: 2016
  57. By: de Sá, Rodrigo; Savino Portugal, Marcelo
    Abstract: Whether central banks place the same weights on positive and negative deviations of inflation and of the output gap from their respective targets is an interesting question regarding monetary policy. The literature has sought to address this issue using a specific asymmetric function, the so-called Linex loss function. However, is the Linex an actually asymmetric specification? In an attempt to answer this question, we applied the sieve estimation method, a fully nonparametric approach, in which the result could be any proper loss function. This way, our results could corroborate the quadratic or Linex loss functions used in the literature or suggest an entirely new function. We applied the sieve estimation method to the United States and to Brazil, an emergent country which has consistently followed an inflation targeting regime. The economy was modeled with forward-looking agents and central bank commitment. Our results indicate that the FED was more concerned with inflation rates below the target, but no asymmetry was found in the inflation–output process in the Volcker–Greenspan period. As to Brazil, we found asymmetries in output gaps from 2004 onwards, when the Brazilian Central Bank was more concerned with positive output gaps; but we did not find any statistically significant asymmetries in inflation.
    Keywords: Monetary policy; Central bank's preference; Asymmetric preferences; Sieve estimators
    JEL: C14 E52
    Date: 2015–12
  58. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks at Bank Indonesia–Federal Reserve Bank of New York Joint International Seminar, Bali Indonesia.
    Keywords: financial market conditions; global economy; interdependency; domestic mandate; Summary of Economic Projections (SEP); FOMC statements; clarity; household longer-term inflation expectations
    Date: 2016–07–31
  59. By: Benjamin Eden (Vanderbilt University)
    Abstract: I use the Prescott (1975) hotels model to explain variations in price dispersion across items sold by supermarkets in Chicago. The effect of demand uncertainty on price dispersion is highly significant and quantitatively important: My estimates suggest that more than 40% of the cross sectional standard deviation of log prices is due to demand uncertainty. I also find that price dispersion measures are negatively correlated with the average price but are not negatively correlated with the revenues from selling the good (across stores and weeks) and with the number of stores that sell the good. Temporary sales are modeled as a reaction to "unwanted inventories" that are accumulated when the realization of demand is low. The effect of demand uncertainty on the frequency of temporary sales is also highly significant and quantitatively important: Items with more demand uncertainty tend to accumulate "unwanted inventories" more often and tend to have temporary sales more often.
    Keywords: Price Dispersion, Demand Uncertainty, Sequential Trade, temporary sales.
    JEL: D4 E3
    Date: 2016–08–04
  60. By: Renisha Chainani
    Abstract: Gold is a finite source and when global economic conditions make gold more attractive, gold demand increases, making the price of gold rise. It is used as a standard of value for currencies all over the world. Gold Price is impacted by production costs, money supply, comfort or discomfort with financial or geopolitical stability, the demand generated by jewelry and industry, value of various currencies and actions taken by central banks. Gold can also be used as hedge against inflation and diversifying tool in hard times. Key words: Gold, Safe-Heaven, Investment, Jewelry, Bullion, Interest Rate, Monetary Easing, Monetary Tightening, Crisis, Geopolitical Tensions, ETF, FED, Correlation
    Date: 2016–06
  61. By: James Staveley-O'Carroll (Economics Division, Babson College); Olena M. Staveley-O'Carroll (Department of Economics, College of the Holy Cross)
    Abstract: We study the impact of foreign debt on the trade-off between the three open economy objectives of a central bank - international risk sharing, the need to facilitate expenditure-switching, and the incentive to tilt international prices to lower the labor effort of domestic households - in a two-country DSGE model with incomplete asset markets and deviations from the purchasing power parity. We fi?nd that at low debt levels, a Taylor rule outperforms simple targeting rules. However, the central bank can improve welfare by up to 0.25 percent of consumption via an exchange rate peg when debt-to-GDP ratio reaches 100 percent.
    Keywords: international risk sharing, foreign debt, exchange rate policy
    JEL: E52 F32 F41
    Date: 2016–07
  62. By: Vittorio Daniele; Pasquale Foresti; Oreste Napolitano
    Abstract: Money demand stability is a crucial issue for monetary policy efficacy, and it is particularly endangered when substantial changes occur in the monetary system. By implementing the ARDL technique, this study intends to estimate the impact of money demand determinants in Italy over a long period (1861–2011) and to investigate the stability of the estimated relations. We show that instability cannot be excluded when a standard money demand function is estimated, irrespectively of the use of M1 or M2. Then, we argue that the reason for possible instability resides in the omission of relevant variables, as we show that a fully stable demand for narrow money (M1) can be obtained from an augmented money demand function involving real exchange rate and its volatility as additional explanatory variables. These results also allow us to argue that narrower monetary aggregates should be employed in order to obtain a stable estimated relation.
    Keywords: Italy; money demand stability; monetary aggregates; exchange rate; ARDL
    JEL: C22 E41 E52
    Date: 2016–04–26
  63. By: Vasilev, Aleksandar
    Abstract: Motivated by the highly-unionized public sectors, the high public shares in total employment, and the public-sector wage premia observed in Europe, this paper examines the importance of public-sector unions for macroeconomic theory. The model generates cyclical behavior in hours and wages that is consistent with data behavior in an economy with highly-unionized public sector, namely Germany during the period 1970-2007. The union model is an improvement over a model with exogenous public employment. In addition, endogenously-determined public wage and hours add to the distortionary effect of contractionary tax reforms by generating greater tax rate changes, thus producing higher welfare losses.
    Keywords: public sector labor unions,fiscal policy,public wages,public employment
    JEL: E62 J51
    Date: 2015
  64. By: Lubberink, Martien; Renders, Annelies
    Abstract: Leading up to the implementation of Basel III, European banks repurchased below-par debt securities. Banks are subjected to a prudential filter that excludes unrealized gains on liabilities from changes in own credit standing from the calculation of capital ratios. By repurchasing securities, unrealized gains become realized and increase Core Tier 1 capital. We show that poorly capitalized banks repurchased securities and lost about e9.1bn in premiums to compensate debt holders. Banks also repurchased the most loss-absorbing securities, for which they paid the highest premiums. These premiums increase with leverage and in times of stress. Hence debt repurchases are a cause for prudential concern.
    Keywords: Banking, repurchases, subordinated debt.
    JEL: E58 G21 G28 G32 G35 M41
    Date: 2016–06–15
  65. By: Donaubauer, Julian (Helmut Schmidt University, Hamburg); Dreger, Christian (DIW Berlin)
    Abstract: China's government is promoting the shift towards a consumption-based economy since a few years. The explicit goal to significantly raise the percentage of wages in the national household income is integral part of the 12th Five-Year Plan (2011-15). The changes in the economic strategy are likely to affect the attractiveness of the country to foreign investors. In this paper, we raise the hypothesis that soaring wages negatively affect FDI inflows to China and alter the distribution of FDI over Chinese provinces. In addition, low-wage countries in the geographical surrounding might benefit from the changed direction of FDI inflows. By performing panel models with spatial effects for both Chinese provinces and developing ASEAN countries, regional dependencies are explicitly addressed. We provide strong and robust evidence that the wage increases change the distribution of FDI within China. In addition, we show that the changes in China's economic strategy improve the chances of its low-income neighbours to attract FDI.
    Keywords: foreign direct investment, Chinese economic transformation, spatial correlation
    JEL: F15 F21 F63 E22
    Date: 2016–07
  66. By: Jess Diamond (Hitotsubashi University,); Kota Watanabe (CIGS and University of Tokyo); Tsutomu Watanabe (University of Tokyo)
    Abstract: Using a new micro-level dataset we investigate the relationship between the inflation experience and inflation expectations of individuals in Japan. We focus on the period after 1995, when Japan began its era of deflation. Our key findings are fourfold. Firstly, we find that inflation expectations tend to increase with age. Secondly, we find that measured inflation rates of items purchased also increase with age. However, we find that age and inflation expectations continue to have a positive correlation even after controlling for the individual-level rate of inflation. Further analysis suggests that the positive correlation between age and inflation expectations is driven to a significant degree by the correlation between cohort and inflation expectations, which we interpret to represent the effect of historical inflation experience on expectations of future inflation rates.
    Keywords: Inflation Expectations, Deflation, Monetary Policy, Panel Data, Japan
    Date: 2016–07
  67. By: Luigi Campiglio (DISCE, Università Cattolica)
    Abstract: We analyse the evolution of the European crisis, its intellectual roots and causes, and the consequence of the austerity economic policies: we rely on our previous econometric estimates, which show a positive impact of public investments as a jump start for private investments and employment. US and European economic impact on growth and public debt are assessed. According to our estimates the European economic crisis in Southern European countries has been precipitated by the sudden consumption drop caused by the austerity policies: the consequences of these policies have been widespread causing an economic and social fracture within the European countries, an upsurge of unemployment and poverty, and a slump of births. We argue that Germany was “fortunate”, enjoying the coincidence of accessing new Asian markets, when China joined the WTO in 2001, with the right high-quality products: the fast and huge increase of Germany current account balance has been coupled with the lack of its domestic and European aggregate demand. The deflationary pressures of the austerity policies have been amplified by the slowing growth rate of China and the economic impact on the unusually high export/GDP ratio of the Germany economy. We discuss in detail the positive role of the welfare state in the European countries, which is crucial to cope with the extreme heterogeneity of its demographic structure and the effort to resume economic growth in Europe.
    Keywords: European crisis, investment, Germany, welfare state
    JEL: E2 F4 I3
    Date: 2016–02
  68. By: Tsukhlo Sergey (Gaidar Institute for Economic Policy)
    Abstract: This section is prepared using the data of monthly business surveys conducted by the Gaidar Institute for Economic Policy (IEP) among managers of industrial enterprises since September 1992. The surveys are conducted on the basis of the European harmonized methodology and encompass the entire territory of the Russian Federation. The size of the panel is around 1,000 enterprises, which employ over 13% of the total number of employed in industry. The panel is biased towards large enterprises in each of the selected branches. The rate of response to questionnaires ranges from 70% to 75%. The business survey questionnaire contains quite a small number of questions (not more than 15-20). They are of qualitative rather than quantitative nature. The simple formulation of questions and answers allows the respondents to fill in the forms quickly and without consulting any documentation. It is essential that the respondent at each enterprise is an executive of the highest level possible who is fully aware of the situation at the enterprise and is directly involved in its management
    Keywords: Russian economy, industry, recession
    JEL: C53 E37 L21 L52
    Date: 2016
  69. By: Barbara Rossi; Tatevik Sekhposyan; Matthiew Soupre
    Abstract: We propose a decomposition to distinguish between Knightian uncertainty (ambiguity) and risk, where the ?rst measures the uncertainty about the probability distribution generating the data, while the second measures uncertainty about the odds of the outcomes when the probability distribution is known. We use the Survey of Professional Forecasters (SPF) density forecasts to quantify overall uncertainty as well as the evolution of the di¤erent components of uncertainty over time and investigate their importance for macroeconomic ?uctuations. We also study the behavior and evolution of the various components of our decomposition in a model that features ambiguity and risk.
    Keywords: uncertainty, risk, ambiguity, knightian uncertainty, survey of professional forecasters, predictive densities
    JEL: C22 C52 C53
    Date: 2016–07
  70. By: Einian, Majid; Ravasan, Farshad
    Abstract: Specialization models are important in providing a solid theoretical ground for gravity equation in bilateral trade. Some research papers try to improve specialization models by adding imperfect specialization to them, but we believe it is unnecessary complication. We provide a perfect specialization model based on the phenomenon that we call tradability, which overcomes the problems with simpler models. We provide empirical evidence using estimations on panel data of bilateral trade of 40 countries over 10 years that support the theoretical model.
    Keywords: bilateral trade, gravity equation, perfect specialization, tradability
    JEL: C23 E23 F11 F14
    Date: 2016–06–30
  71. By: Pietro Battiston; Denvil Duncan; Simona Gamba; Alessandro Santoro
    Abstract: Tax evasion is a major problem faced by governments across the world, and many strategies have been attempted to minimize its extent. One such strategy is the “fiscal blitz”, consisting in clusters of unexpected tax verification activities targeting businesses. Blitzes have been widely implemented in Italy: the ones taking place in the last years shared many common features, but differed in the level of publicity they received on the media. We use confidential data on Value Added Tax payments at the sector level in two cities to estimate the effect of such publicity on tax compliance of local sellers. By employing a Difference-in-Differences identification strategy, we find that the publicity of the blitz has a positive effect on fiscal declarations made shortly after. The results suggest that increasing awareness on future audits via the media can be an important instrument in the hands of tax authorities.
    Keywords: Tax evasion, Natural experiment, Audit publicity
    JEL: H32 K34 E62
    Date: 2016–07
  72. By: Ritzen, Jo (IZA and Maastricht University); Haas, Jasmina (Maastricht University)
    Abstract: The decrease in the rule of law and in control of corruption in several EU countries is a threat to the cohesion in the EU. Brexit has reinforced the centrifugal forces in the EU. To counter this threat the EU needs to engage in unpopular measures as they infringe on the Member States' sovereignty. We propose to introduce new measures in treaty revisions like the possibility of individuals to appeal to European courts to counter negative developments in governance in EU Member States.
    Keywords: governance, institutions, EU, economic growth
    JEL: D02 D72 D78 E02 I31 K20 K33 O43 O52
    Date: 2016–07
  73. By: Shuping Shi
    Abstract: This paper investigates the existence of speculative bubbles in the US national and in 23 regional housing markets over three decades (1978-2012). A new method for detecting exuberance in housing markets is proposed. By taking changes in the macroeconomic conditions (such as interest rate, per-capita income, employment, and population growth) into consideration, the new method provides a better control for housing market fundamentals and thereby it is expected to significantly reduce the chance of false positive identification. Compared with the method of Phillips, Shi and Yu (2015a,b), the new approach finds a dramatic reduction in the number of speculative housing markets and shorter bubble episodes in the US. It locates only one bubble episode in the early-to-mid 2000s over the whole sample period in the national housing market. At the regional level, it identifies three periods of speculation: late 1980s, early-to-mid 2000s, and the post-crisis period in 2011-2012. The early-to-mid 2000s bubble episode is the most severe one involving nine major metropolitan statistical areas.
    Keywords: Speculative bubbles, Housing market, Fundamentals, Macroeconomic conditions, Regional, Explosive
    JEL: C12 C51 R31 E31
    Date: 2016–07
  74. By: Groll, Dominik; Monacelli, Tommaso
    Abstract: The desirability of flexible exchange rates is a central tenet in international macroeconomics. We show that, with forward-looking staggered pricing, this result crucially depends on the monetary authority's ability to commit. Under full commitment, flexible exchange rates generally dominate a monetary union (or fixed exchange rate) regime. Under discretion, this result is overturned: a monetary union dominates flexible exchange rates. By fixing the nominal exchange rate, a benevolent monetary authority finds it welfare improving to tradeoff flexibility in the adjustment of the terms of trade in order to improve on its ability to manage the private sector's expectations. Thus, inertia in the terms of trade (induced by a fixed exchange rate) is a cost under commitment, whereas it is a benefit under discretion, for it acts like a commitment device.
    Keywords: commitment; discretion; flexible exchange rates; monetary union; nominal rigidities.; welfare losses
    JEL: E52 F33 F41
    Date: 2016–07

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