|
on Macroeconomics |
|
Issue of 2016‒08‒14
forty-six papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Evans, George W.; Honkapohja, Seppo; Mitra, Kaushik |
| Abstract: | Stagnation as the new norm and fiscal policy are examined in a New Keynesian model with adaptive learning determining expectations. We impose inflation and consumption lower bounds, which can be relevant when agents are pessimistic. The inflation target is locally stable under learning. Pessimistic initial expectations may sink the economy into steady-state stagnation with deflation. The deflation rate can be near zero for discount factors near one or if credit frictions are present. Following a severe pessimistic expectations shock a large temporary fiscal stimulus is needed to avoid or emerge from stagnation. A modest stimulus is sufficient if implemented early. |
| Keywords: | Adaptive Learning; Deflation; Expectations; Fiscal policy; New Keynesian Model; Output Multiplier; Stagnation |
| JEL: | D84 E21 E43 E62 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11428&r=mac |
| By: | Matej Opatrny (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic) |
| Abstract: | In this paper I evaluate the quantitative effects of the Czech National Bank's commitment to keep the Koruna from appreciating that were put in place in 2013. I focus its on the impact on output, unemployment, and inflation. I use the synthetic control method, which allows me to compute the counter-factual development of the Czech economy in the absence of the commitment. I find that, until the end of 2015, the commitment helped create about 100,000 jobs. The effect on overall output is also strongly positive, almost 2% for growth in 2015, but only marginally statistically significant, which might be connected to disturbances created by changes in excise taxes. The effect of the commitment on inflation is positive but not statistically significant at standard levels. |
| Keywords: | Inflation, Unemployment, Output, Currency, Monetary Policy, Synthetic Control Method |
| JEL: | E42 E47 E50 E51 E52 E58 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2016_17&r=mac |
| By: | Tara Sinclair (George Washington University); Pao-Lin Tien (Bureau of Economic Analysis); Edward Gamber (Congressional Budget Office) |
| Abstract: | This paper constructs a measure of a forecast error shock for the Fed based on the assumption that it follows a forward-looking Taylor rule. The shock can be viewed as analogous to a monetary policy shock. However, it differs from a monetary policy shock in that it is completely unintended by the Fed rather than simply unanticipated by the public. We 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. |
| Keywords: | Federal Reserve, Taylor rule, forecast evaluation, monetary policy shocks |
| JEL: | E32 E31 E52 E58 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:gwi:wpaper:2016-14&r=mac |
| By: | Edward C. Prescott; Ryan Wessel |
| Abstract: | We explore monetary policy in a world without fractional reserve banking. In our world, banks are purely transaction institutions. Money is a form of government debt that bears interest, which can be negative as well as positive. Services of money are a factor of production. We show that the national accounts must be revised in this world. Using our baseline economy, we determine a balanced growth path for a set of money interest rate policy regimes. Besides this interest rate, the only policy variable that differs across regimes is the labor income tax rate. Within this set of policy regimes, there is a balanced growth welfare-maximizing regime. We show that Friedman monetary satiation without deflation is possible in this world. We also examine a set of inflation rate targeting regimes. Here, the only other policy variable that differs across regimes is the inflation rate. |
| JEL: | E4 E5 E6 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22431&r=mac |
| By: | Edward C. Prescott |
| Abstract: | This essay reviews the development of neoclassical growth theory, a unified theory of aggregate economic phenomena that was first used to study business cycles and aggregate labor supply. Subsequently, the theory has been used to understand asset pricing, growth miracles and disasters, monetary economics, capital accounts, aggregate public finance, economic development, and foreign direct investment. The focus of this essay is on real business cycle (RBC) methodology. Those who employ the discipline behind the methodology to address various quantitative questions come up with essentially the same answer—evidence that the theory has a life of its own, directing researchers to essentially the same conclusions when they apply its discipline. Deviations from the theory sometimes arise and remain open for a considerable period before they are resolved by better measurement and extensions of the theory. Elements of the discipline include selecting a model economy or sometimes a set of model economies. The model used to address a specific question or issue must have a consistent set of national accounts with all the accounting identities holding. In addition, the model assumptions must be consistent across applications and be consistent with micro as well as aggregate observations. Reality is complex, and any model economy used is necessarily an abstraction and therefore false. This does not mean, however, that model economies are not useful in drawing scientific inference. The vast number of contributions made by many researchers who have used this methodology precludes reviewing them all in this essay. Instead, the contributions reviewed here are ones that illustrate methodological points or extend the applicability of neoclassical growth theory. Of particular interest will be important developments subsequent to the Cooley (1995) volume, Frontiers of Business Cycle Research. The interaction between theory and measurement is emphasized because this is the way in which hard quantitative sciences progress. |
| JEL: | B4 C10 E00 E13 E32 E60 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22422&r=mac |
| By: | Ricardo Reis |
| Abstract: | Analysis of quantitative easing (QE) typically focus on the recent past studying the policy’s effectiveness during a financial crisis when nominal interest rates are zero. This paper examines instead the usefulness of QE in a future fiscal crisis, modeled as a situation where the fiscal outlook is inconsistent with both stable inflation and no sovereign default. The crisis can lower welfare through two channels, the first via aggregate demand and nominal rigidities, and the second via contractions in credit and disruption in financial markets. Managing the size and composition of the central bank’s balance sheet can interfere with each of these channels, stabilizing inflation and economic activity. The power of QE comes from interest-paying reserves being a special public asset, neither substitutable by currency nor by government debt. |
| JEL: | E44 E58 E63 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22415&r=mac |
| By: | Stephanie Schmitt-Grohé; Martín Uribe |
| Abstract: | This paper contributes to a literature that studies optimal capital control policy in open economy models with pecuniary externalities due to flow collateral constraints. It shows that the optimal policy calls for capital controls to be lowered during booms and to be increased during recessions. Moreover, in the run-up to a financial crisis optimal capital controls rise as the contraction sets in and reach their highest level at the peak of the crisis. These findings are at odds with the conventional view that capital controls should be tightened during expansions to curb capital inflows and relaxed during contractions to discourage capital flight. |
| JEL: | E44 F41 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22481&r=mac |
| By: | Laurence Ball |
| Abstract: | Why did the Federal Reserve let Lehman Brothers fail? Fed officials say they lacked the legal authority to rescue the firm, because it did not have adequate collateral to borrow the cash it needed. This paper summarizes a monograph that disputes officials’ claims (Ball, 2016). These claims are incorrect in two senses: a perceived lack of legal authority was not why the Fed did not rescue Lehman; and the Fed did in fact have the authority for a rescue. |
| JEL: | E52 E58 E65 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22410&r=mac |
| By: | Dirk Krueger; Kurt Mitman; Fabrizio Perri |
| 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. |
| JEL: | E21 E32 J65 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22458&r=mac |
| By: | Strachman, Eduardo |
| Abstract: | The article aspires to understand the monetary policy transmission mechanisms and whether they result in the aimed effects. We define and detail these monetary policy transmission mechanisms, showing some recent changes in monetary economics. We emphasize that modern CBs use interests as their fundamental mechanism for monetary policies, instead of goals for some monetary aggregates. We clarify the transmission channels of monetary policies, exposing the differentiated effectiveness of the monetary policy transmission mechanisms, according to the phase of the business cycle, analyzing impacts and endogeneity of risks in relation to these phases, without leading to an optimum |
| Keywords: | Monetary Economics; Monetary Policy, Transmission Mechanisms |
| JEL: | E44 E5 E58 |
| Date: | 2016–08–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:72856&r=mac |
| By: | Osińska, Magdalena; Kufel, Tadeusz; Błażejowski, Marcin; Kufel, Paweł |
| Abstract: | The aim of the study is to evaluate business cycle synchronization in the EU economies including determination of the impact of the global financial and economic recession of the years 2007-2009. In general, the economic recession can be understood as one of the phase of the global business cycle because all countries had suffered somehow from this enormous collapse. It is commonly assumed that GDP series in constant prices measure both: business activity and business cycle. In the presented research seasonally adjusted quarterly GDP series from the years 1995-2012 were analyzed. We proposed to apply the tools of cross-spectral analysis such as coherence, phase and amplitude of the specified frequencies taking into account the time window of 48 quarters. Such a procedure allows indicating a rapid change in business cycle synchronization conditionally on the period of the analysis that includes the years 2007-2009. The empirical findings show that the assumption of business cycle synchronization within the EU was confirmed for the strongest economies of the European Union like Germany, Great Britain or France. Moreover, Poland and Spain can also be included to the club of synchronized economies. Other EU economies, like Hungarian, Italian and Portugal were less synchronized with the EU business cycle, although in the period of crisis they were closer to the whole economic area. For the non-EU countries, significantly weaker synchronization with the EU was observed. The hypothesis that the financial crisis caused similarities in the business cycle paths of the EU countries and the USA was confirmed, while for Japan and Switzerland it could not be confirmed in the light of the obtained results. |
| Keywords: | business cycle, synchronization, cross-spectrum, moving window, European Union |
| JEL: | C22 E32 F44 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:72888&r=mac |
| By: | Luca Benati; Robert E. Lucas, Jr.; Juan Pablo Nicolini; Warren Weber |
| Abstract: | We explore the long-run demand for M1 based on a dataset comprising 31 countries since 1851. In many cases cointegration tests identify a long-run equilibrium relationship between either velocity and the short rate, or M1, GDP, and the short rate. Evidence is especially strong for the United States and the United Kingdom over the entire period since World War I, and for high-inflation countries such as Israel. For low-inflation countries the data often prefer the specification in the levels of velocity and the short rate originally estimated by Selden (1956) and Latané (1960) to either the log-log, or the semi-log ones. This is especially clear for the United States. |
| JEL: | E4 E41 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22475&r=mac |
| By: | Jörn-Steffen Pischke |
| 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. |
| JEL: | E24 J20 J44 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22496&r=mac |
| By: | Hasan, Zubair |
| Abstract: | Islam banishes interest. This raises two questions contextual to Central Banking. First, can Islamic banks create credit like the conventional? We shall argue that Islamic banks cannot avoid credit creation; an imperative for staying in the market where they operate in competition with their conventional rivals. Evidently, the interest rate policy would not be applicable to them as a control measure. This leads us to the second question: What could possibly replace the interest rate for Islamic banks? In reply, the paper suggests what it calls a leverage control rate (LCR) as an addition to Central Banks’ credit control arsenal. The proposed rate is derived from the sharing of profit ratio in Islamic banking.It is contended that the new measure has an edge over the old fashioned interest rate instrument which it can in fact replace with advantage. It can possibly be a common measure in a dual system. |
| Keywords: | Central banking; Credit creation; Leverage ControlRate (LCR); Islamic banks; Profit sharing |
| JEL: | E3 E31 E5 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:72898&r=mac |
| By: | John H. Cochrane |
| Abstract: | Macro-finance addresses the link between asset prices and economic fluctuations. Many models reflect the same rough idea: the market's ability to bear risk varies over time, larger in good times, and less in bad times. Models achieve this similar result by quite different mechanisms, and I contrast their strengths and weaknesses. I outline how macro-finance models may illuminate macroeconomics, by putting time-varying risk aversion, risk-bearing capacity, and precautionary savings at the center of recessions rather than variation in “the” interest rate and intertemporal substitution. I emphasize unsolved questions and profitable avenues for research. |
| JEL: | E00 G10 G12 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22485&r=mac |
| By: | Tobias Broer; Niels-Jakob H. Hansen; Per Krusell; Erik Öberg |
| Abstract: | We argue that a 2-agent version of the standard New Keynesian model—where a “worker” receives only labor income and a “capitalist” only profit income— offers insights about how income inequality affects the monetary transmission mechanism. Under rigid prices, monetary policy affects the distribution of consumption, but it has no effect on output as workers choose not to change their hours worked in response to wage movements. In the corresponding representative-agent model, in contrast, hours do rise after a monetary policy loosening due to a wealth effect on labor supply: profits fall, thus reducing the representative worker’s income. If wages are rigid too, however, the monetary transmission mechanism is active and resembles that in the corresponding representative-agent model. Here, workers are not on their labor supply curve and hence respond passively to demand, and profits are procyclical. |
| JEL: | E00 E32 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22418&r=mac |
| By: | Viktors Ajevskis (Bank of Latvia) |
| Abstract: | This paper proposes a ZLB/shadow rate term structure of interest rates model with both unobservable factors and those of non-standard monetary policy measures. The non-standard factors include the ECB's holdings of APP and LTROs as well as their weighted average maturities. The model is approximated by the Taylor series expansion and estimated by the extended Kalman filter, using the sample from July 2009 to September 2015. The results show that the 5-year OIS rate at the end of September 2015 was about 60 basis points lower than it would have been in the case of the absence of the non-standard monetary policy measures. |
| Keywords: | term structure of interest rates, lower bound, non-linear Kalman filter, non-standard monetary policy measures |
| JEL: | C24 C32 E43 E58 G12 |
| Date: | 2016–08–03 |
| URL: | http://d.repec.org/n?u=RePEc:ltv:wpaper:201602&r=mac |
| By: | Homburg, Stefan |
| Abstract: | While the target federal funds rate represents a policy instrument, the effective federal funds rate is determined in a competitive interbank market. The paper proposes a theory of its determination. This yields a specific term structure of interest rates, an account of why the money multiplier approach failed, and a demonstration that interest on reserves does not change bank incentives. |
| Keywords: | Federal funds rate; term structure of interest rates; excess reserves; money multiplier; zero lower bound. |
| JEL: | E43 E51 E58 G01 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-578&r=mac |
| By: | Ambrogio Cesa-Bianchi (Bank of England; Centre for Macroeconomics (CFM)); Jean Imbs (Paris School of Economics; Centre for Economic Policy Research (CEPR)); Jumana Saleheen (Bank of England) |
| Abstract: | In the workhorse model of international real business cycles, financial integration exacerbates the cycle asymmetry created by country-specific supply shocks. The prediction is identical in response to purely common shocks in the same model augmented with simple country heterogeneity (e.g., where depreciation rates or factor shares are different across countries). This happens because common shocks have heterogeneous consequences on the marginal products of capital across countries, which triggers international investment. In the data, filtering out common shocks requires therefore allowing for country-specific loadings. We show that finance and synchronization correlate negatively in response to such common shocks, consistent with previous findings. But finance and synchronization correlate non-negatively, almost always positively, in response to purely country-specific shocks. |
| Keywords: | Financial linkages, Business cycles synchronization, Contagion, Common shocks, Idiosynchratic shocks |
| JEL: | E32 F15 F36 G21 G28 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1622&r=mac |
| By: | Stephen J. Redding; David E. Weinstein |
| 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: | elasticity of substitution, price index, consumer valuation bias, new goods, welfare |
| JEL: | D11 D12 E01 E31 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1445&r=mac |
| By: | William Elming (Institute for Fiscal Studies and Institute for Fiscal Studies); Andreas Ermler (Institute for Fiscal Studies) |
| Abstract: | This paper uses the large and heterogeneous house price shocks in Denmark from 2006-2009 to provide new evidence on the contested determinants of the correlation between house prices and saving. Crucially, to compare the savings behaviour of home-owners who experienced di fferent house price shocks but similar shocks to income expectations, we exploit the structure of the wage setting process in the Danish public sector. We fi nd strong evidence of a causal link between changes in house prices and saving for young and old home-owners, both through a direct wealth eff ect and through housing equity serving as collateral or precautionary wealth. |
| Keywords: | Housing, Saving, Wealth e ect, Collateral, Debt dynamics |
| JEL: | D14 D91 E21 R20 |
| Date: | 2016–08–02 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:ifsewp:16/12&r=mac |
| By: | Stephen J. Redding; David E. Weinstein |
| 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 that exactly rationalizes observed micro data on prices and expenditure shares while permitting exact aggregation and meaningful macro comparisons of welfare 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. |
| JEL: | D11 D12 E01 E31 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22479&r=mac |
| By: | Sergey Egiev (National Research University Higher School of Economics) |
| Abstract: | I study real e ects of uncertainty shocks. Using time-varying volatility of the forecast error, I construct a two-part uncertainty metric that consists of persistent and volatile, burstlike components. These indices are used to study empirically several predictions of uncertainty models: that uncertainty shocks have real e ects, that these e ects realize in a downturn/overshoot pattern and that persistence of uncertainty shocks decreases this pattern's frequency and increases its amplitude. Using the constructed metric in a simple VAR framework I show that real e ects are there, that shock to the volatile uncertainty causes signi cant downturn/overshoot pattern, and that shock to the persistent component causes severe and prolonged damage. |
| Keywords: | uncertainty, business-cycles, real business cycles |
| JEL: | C53 E32 G12 G35 L25 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:144/ec/2016&r=mac |
| By: | Danila, Marius |
| Abstract: | Negative interest rates, as an instrument of monetary policy, are regarded by the central authorities as a stimulant for the growth of real economy through: decrease of lending costs, increase of consumption, decrease of volatility and so on. However this policy has a negative influence within certain areas of the financial industry, and has the potential to create instead increased market volatility, uncertainty and mistrust in institutions and decision makers. Profitability of banking institutions, volume of NPLs, capital adequacy, liquidity risk, challenges for investment funds and stock exchanges are several issues analysed by this paper, together with several recommendations on tackling the most pressing effects of negative interest rates. |
| Keywords: | European banking, European Central Bank, negative interest rates, capital adequacy, financial industry, investment funds, non performing loans, monetary policy |
| JEL: | E43 E52 E58 G15 G21 G23 |
| Date: | 2016–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:72634&r=mac |
| By: | Emily Breza; Supreet Kaur; Yogita Shamdasani |
| Abstract: | The idea that worker utility is affected by co-worker wages has potentially broad labor market implications. In a month-long experiment with Indian manufacturing workers, we randomize whether co-workers within production units receive the same flat daily wage or different wages (according to baseline productivity rank). For a given absolute wage, pay inequality reduces output and attendance by 0.24 standard deviations and 12%, respectively. These effects strengthen in later weeks. Pay disparity also lowers co-workers’ ability to cooperate in their self-interest. However, when workers can clearly observe productivity differences, pay inequality has no discernible effect on output, attendance, or group cohesion. |
| JEL: | D03 E24 J3 O15 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22491&r=mac |
| By: | Rachidi Kotchoni; Dalibor Stevanovic |
| Abstract: | This paper proposes a framework to produce multi-horizon forecasts of business cycle turning points, average forecasts of economic activity as well as conditional forecasts that depend on whether the horizon of interest belongs to a recession episode or not. Our forecasting models take the form of an autoregression (AR) of order one that is augmented with either a probability of recession or an inverse Mills ratio. Our empirical results suggest that a static Probit model that uses only the TS as regressor provides comparable fit to the data as more sophisticated non-static Probit models. We also find that the dynamic patterns of the term structure of recession probabilities are quite informative about business cycle turning points. Our most parsimonious AAR model delivers better out-of-sample forecasts of GDP growth than the benchmark models considered. We construct term structures of recession probabilities since the last oficial NBER turning point. The results suggest that there has been no harbinger of a recession for the US economy since 2010Q4 and that there is none to fear at least until 2018Q1. GDP growth is expected to rise steadily between 2016Q3 and 2018Q1 in the range [2.5%,3.5%]. |
| Keywords: | Augmented Autoregressive Model, Conditional Forecasts, Economic Activity, Inverse Mills Ratio, Probit, Recession, |
| JEL: | C35 C53 E27 E37 |
| Date: | 2016–08–05 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2016s-36&r=mac |
| By: | Hasan, Zubair |
| Abstract: | Islam banishes interest. This raises two questions contextual to Central Banking. First, can Islamic banks create credit like the conventional? We shall argue that Islamic banks cannot avoid credit creation; an imperative for staying in the market where they operate in competition with their conventional rivals. Evidently, the interest rate policy would not be applicable to them as a control measure. This leads us to the second question: What could possibly replace the interest rate for Islamic banks? In reply, the paper suggests what it calls a leverage control rate (LCR) as an addition to Central Banks’ credit control arsenal. The proposed rate is derived from the sharing of profit ratio in Islamic banking. It is contended that the new measure has an edge over the old fashioned interest rate instrument which it can in fact replace with advantage. It can possibly be a common measure in a dual system. |
| Keywords: | Central Banking; Credit creation; leverage control rate. (LCR); Islamic banks; Profit sharing |
| JEL: | E3 E5 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:72917&r=mac |
| By: | Cosmin L. Ilut; Rosen Valchev; Nicolas Vincent |
| Abstract: | Price rigidity is central to many predictions of modern macroeconomic models, yet, standard models are at odds with certain robust empirical facts from micro price datasets. We propose a new, parsimonious theory of price rigidity, built around the idea of demand uncertainty, that is consistent with a number of salient micro facts. In the model, the monopolistic firm faces Knightian uncertainty about its competitive environment, which has two key implications. First, the firm is uncertain about the shape of its demand function, and learns about it from past observations of quantities sold. This leads to kinks in the expected profit function at previously observed prices, which act as endogenous costs of changing prices and generate price stickiness and a discrete price distribution. Second, the firm is uncertain about how aggregate prices relate to the prices of its direct competitors, and the resulting robust pricing decision makes our rigidity nominal in nature. |
| JEL: | C1 D8 E3 L11 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22490&r=mac |
| By: | Hie Joo Ahn; James D. Hamilton |
| Abstract: | This paper develops new estimates of flows into and out of unemployment that allow for unobserved heterogeneity across workers as well as direct effects of unemployment duration on unemployment-exit probabilities. Unlike any previous paper in this literature, we develop a complete dynamic statistical model that allows us to measure the contribution of different shocks to the short-run, medium-run, and long-run variance of unemployment as well as to specific historical episodes. We find that changes in the inflows of newly unemployed are the key driver of economic recessions and identify an increase in permanent job loss as the most important factor. |
| JEL: | E24 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22451&r=mac |
| By: | Giancarlo Corsetti; Keith Kuester; Gernot J. Müller |
| Abstract: | We analyze macroeconomic stabilization in a small open economy which faces a large recession in the rest of the world. We show analytically that for the economy to remain isolated from the external shock, the exchange rate must depreciate not only upfront, to offset the collapse in external demand, but also persistently to decouple domestic prices from deflation in the rest of the world. If monetary policy becomes constrained by the zero lower bound, the scope of exchange rate depreciation is limited and the economy is no longer isolated from the shock. Still, in this case there is a "benign coincidence": fiscal policy is particularly effective in stabilizing economic activity. Under fixed exchange rates, instead, the impact of the external shock is particularly severe and the effectiveness of fiscal policy limited. |
| Keywords: | External shock, Great Recession, Exchange rate, Zero lower bound, Fiscal Multiplier, External-demand multiplier, Benign coincidence |
| JEL: | F41 F42 E32 |
| Date: | 2016–08–04 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1644&r=mac |
| By: | Juan Carlos Suárez Serrato; Philippe Wingender |
| Abstract: | We propose a new source of cross-sectional variation that may identify causal impacts of government spending on the economy. We use the fact that a large number of federal spending programs depend on local population levels. Every ten years, the Census provides a count of local populations. Since a different method is used to estimate non-Census year populations, this change in methodology leads to variation in the allocation of billions of dollars in federal spending. Our baseline results follow a treatment-effects framework where we estimate the effect of a Census Shock on federal spending, income, and employment growth by re-weighting the data based on an estimated propensity score that depends on lagged economic outcomes and observed economic shocks. Our estimates imply a local income multiplier of government spending between 1.7 and 2, and a cost per job of $30,000 per year. A complementary IV estimation strategy yields similar estimates. We also explore the potential for spillover effects across neighboring counties but we do not find evidence of sizable spillovers. Finally, we test for heterogeneous effects of government spending and find that federal spending has larger impacts in low-growth areas. |
| JEL: | E62 H5 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22425&r=mac |
| By: | Iskrev, Nikolay; Ritto, Joao |
| Abstract: | In a recent article Canova et al. (2014) study the optimal choice of variables to use in the estimation of a simplified version of the Smets and Wouters (2007) model. In this comment we examine their conclusions by applying a different methodology to the same model. Our results call into question most of Canova et al. (2014) conclusions. |
| Keywords: | DSGE models, Observables, Identification, Information matrix, Cramér-Rao lower bounds |
| JEL: | C1 C9 E32 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:72870&r=mac |
| By: | Aysıt Tansel (Department of Economics, METU; Institute for the Study of Labor (IZA) Bonn, Germany; Economic Research Forum (ERF) Cairo, Egypt); Zeynel Abidin Özdemir (Department of Economics, Gazi University, Beşevler, 06500, Ankara, Turkey; Economic Research Form, Cairo, Egypt); Emre Aksoy (Department of Economics, Kırıkkale University, Kırıkkale, Turkey) |
| Abstract: | This article explores the long-run relationship between unemployment rate and labor force participation rate in Canada. The cointegration analysis vindicates the existence of a long-run relationship between these two variables. This finding leads us to doubt the pertinence of the unemployment invariance hypothesis for Canada. This is consistent with the empirical studies for Japan, Sweden and the United States, but contradicts the empirical studies for Australia, Romania and Turkey. There are contradictory studies for the United Kingdom. |
| Keywords: | Unemployment Invariance Hypothesis; Unemployment; Labor Force Participation; Cointegration; Canada |
| JEL: | E24 J64 J21 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:met:wpaper:1607&r=mac |
| By: | Tansel, Aysit; Ozdemir, Zeynel Abidin; Aksoy, Emre |
| Abstract: | This article explores the long-run relationship between unemployment rate and labor force participation rate in Canada. The cointegration analysis vindicates the existence of a long-run relationship between these two variables. This finding leads us to doubt the pertinence of the unemployment invariance hypothesis for Canada. This is consistent with the empirical studies for Japan, Sweden and the United States, but contradicts the empirical studies for Australia, Romania and Turkey. There are contradictory studies for the United Kingdom. |
| Keywords: | Unemployment Invariance Hypothesis; Unemployment; Labor Force Participation; Cointegration; Canada |
| JEL: | E24 J21 J64 |
| Date: | 2016–08–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:72869&r=mac |
| By: | Jordi Galí; Tommaso Monacelli |
| Abstract: | We study the gains from increased wage flexibility using a small open economy model with staggered price and wage setting. Two results stand out: (i) the effectiveness of labor cost reductions as a means to stimulate employment is much smaller in a currency union, (ii) an increase in wage flexibility often reduces welfare, more likely so in an economy that is part of a currency union or with an exchange rate-focused monetary policy. Our findings call into question the common view that wage flexibility is particularly desirable in a currency union. |
| JEL: | E32 E52 F41 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22489&r=mac |
| By: | Zorobabel Bicaba (African Development Bank); Zuzana Brixiova (IZA and University of Cape Town); Mthuli Ncube (University of Oxford) |
| Abstract: | Eradicating extreme poverty for all people everywhere by 2030 is the first goal among the UN Sustainable Development Goals that guide the current development agenda. This paper examines its feasibility for Sub-Saharan Africa (SSA), the world's poorest but growing region. It finds that under plausible assumptions extreme poverty will not be eradicated in SSA by 2030, but it can be reduced to low levels. National and regional policies that focus on accelerating growth, while making it more inclusive would accelerate poverty reduction. International organizations, including informal ones such as the G20, can play a key role in this endeavor by encouraging policy coordination and coherence. |
| Keywords: | Poverty, sustainable development, inclusive growth, policies, governance |
| JEL: | E21 E25 I32 O11 O20 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ldr:wpaper:170&r=mac |
| By: | Dale W. Jorgenson; Mun S. Ho; Jon D. Samuels |
| Abstract: | Labor quality growth captures the upgrading of the labor force through higher educational attainment and greater experience. Our first finding is that average levels of educational attainment of new entrants will remain high, but will no longer continue to rise, so that growing educational attainment will gradually disappear as a source of U.S. economic growth. Our second finding is that the investment boom of 1995-2000 drew many younger and less-educated workers into employment. Participation rates for these workers declined during the recovery of 2000-2007 and dropped further during the Great Recession of 2007-2009. In order to assess the prospects for recovery of participation as a potential source U.S. economic growth, we project the participation rates of each age-gender-education group. Our third finding is that the recovery of participation rates will provide an important opportunity for the revival of U.S. economic growth. Participation rates for less-educated workers are unlikely to recover the peak levels that followed the investment boom of 1995-2000. However, these rates can achieve the levels that preceded the Great Recession. While labor quality will grow more slowly, hours worked will grow much faster. |
| JEL: | E01 E24 O4 O47 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22453&r=mac |
| By: | David Huffman; Raimond Maurer; Olivia S. Mitchell |
| Abstract: | This paper evaluates the extent of heterogeneity in time discounting among elderly Americans, as well as its role in explaining older peoples’ key behaviors. We first show how older Americans evaluate simple (hypothetical) intertemporal choices in which payments now are compared with payments in the future. This adds to the literature on time horizon experiments by focusing on a nationally representative sample of persons age 70+. Using the indicators derived from this experiment, we show how differences in discounting patterns are associated with characteristics of particular importance in elderly populations, such as serious health and mental conditions. We then relate our discounting measure to key outcome variables including wealth, the timing of retirement, investments in health, and decisions about end of life care. |
| JEL: | D01 D03 D12 D14 E21 G11 I12 J26 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22438&r=mac |
| By: | Charles Yuji Horioka; Akiko Terada-Hagiwara |
| Abstract: | This paper estimates a household saving rate equation for India and Korea using long-term time series data for the 1975-2010 period, focusing in particular on the impact of the pre-marital sex ratio on the household saving rate. To summarize the main findings of the paper, it finds that the pre-marital sex (or gender) ratio (the ratio of males to females) has a significant impact on the household saving rate in both India and Korea, even after controlling for the usual suspects such as the aged and youth dependency ratios and income. It has a negative impact in India, where the bride’s side has to pay substantial dowries to the groom’s side at marriage, but a positive impact in Korea, where, as in China, the groom’s side has to bear a disproportionate share of marriage-related expenses including purchasing a house or condominium for the newlywed couple. |
| JEL: | D12 D14 D91 E21 J11 J12 O16 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22412&r=mac |
| By: | Jean-Noel Barrot; Ramana Nanda |
| Abstract: | In 2011, the federal government accelerated payments to their small business contractors, spanning virtually every county and industry in the US. We study the impact of this reform on county-sector employment growth over the subsequent three years. Despite firms being paid just 15 days sooner, we find payroll increased 10 cents for each accelerated dollar, with two-thirds of the effect coming from an increase in new hires and the balance from an increase in earnings. Importantly, however, we document substantial crowding out of non-treated firms employment, particularly in counties with low rates of unemployment. Our results highlight an important channel through which financing constraints can be alleviated for small firms, but also emphasize the general-equilibrium effects of large-scale interventions, which can lead to a substantially lower net impact on aggregate outcomes. |
| JEL: | E2 G2 H57 J2 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22420&r=mac |
| By: | Andrew C. Johnston; Alexandre Mas |
| Abstract: | We examine how a 16-week cut in potential unemployment insurance (UI) duration in Missouri affected search behavior of UI recipients and the aggregate labor market. Using a regression discontinuity design (RDD), we estimate a marginal effect of maximum duration on UI and nonemployment spells of approximately 0.5 and 0.3 respectively. We use RDD estimates to simulate the unemployment rate assuming no market-level externalities. The simulated response closely approximates the estimated change in the unemployment rate following the benefit cut, suggesting that even in a period of high unemployment the labor market absorbed this influx of workers without crowding-out other jobseekers. |
| JEL: | E24 H0 J6 J64 J65 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22411&r=mac |
| By: | María José Arteaga Garavito (Division of Economics, CIDE) |
| Abstract: | Este trabajo analiza teóricamente la relación entre justicia, medida como el papel que juegan factores meritocráticos (talento) versus azarosos (suerte) en la determinación del ingreso, y evasión fiscal en economías en donde la probabilidad de detectar la evasión es baja. Se presenta un modelo estático, basado en Alesina y Angeletos (2005), el cual toma en cuenta las decisiones de los agentes, quienes tienen la posibilidad de evadir un porcentaje de su ingreso, y del gobierno, quien fija la tasa de impuestos de acuerdo al criterio del votante mediano. El resultado principal es que es factible la existencia de múltiples equilibrios y la relación entre injusticia, redistribución y evasión es positiva. Por ejemplo: 1) impuestos relativamente bajos, menor injusticia, menor evasión y mayor desigualdad antes de impuestos (México) y 2) impuestos relativamente altos, mayor injusticia, mayor evasión y menor desigualdad (Perú). Es decir, dada una expectativa de impuestos alta y una probabilidad alta de no ser detectado, la evasión será mayor y los incentivos a esforzarse menores y, por lo tanto, políticas redistributivas son ex post óptimas. |
| Keywords: | impuestos, justicia, redistribución, evasión fiscal, informalidad, desigualdad |
| JEL: | H2 H71 D31 E62 P16 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:emc:thgrad:tesg005&r=mac |
| 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 signi cant 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. |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf388&r=mac |
| By: | Lunsford, Kurt Graden (Federal Reserve Bank of Cleveland); Jentsch, Carsen (University of Mannheim) |
| Abstract: | Proxy structural vector autoregressions (SVARs) identify structural shocks in vector autoregressions (VARs) with external proxy variables that are correlated with the structural shocks of interest but uncorrelated with other structural shocks. We provide asymptotic theory for proxy SVARs when the VAR innovations and proxy variables are jointly α-mixing. We also prove the asymptotic validity of a residual-based moving block bootstrap (MBB) for inference on statistics that depend jointly on estimators for the VAR coefficients and for covariances of the VAR innovations and proxy variables. These statistics include structural impulse response functions (IRFs). Conversely, wild bootstraps are invalid, even when innovations and proxy variables are either independent and identically distributed or martingale difference sequences, and simulations show that their coverage rates for IRFs can be badly mis-sized. Using the MBB to re-estimate confidence intervals for the IRFs in Mertens and Ravn (2013), we show that inferences cannot be made about the effects of tax changes on output, labor, or investment. |
| Keywords: | fiscal policy; mixing; residual-based moving block bootstrap; structural vector autoregression; tax shocks; wild bootstrap; |
| JEL: | C15 C32 E62 H24 H25 H3 H31 |
| Date: | 2016–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1619&r=mac |
| By: | Anbarci, Nejat; Dutu, Richard; Sun, Ching-jen |
| Abstract: | In most macroeconomic models inflation tends to be harmful. In this paper we show that by simply changing the timing of production decisions by firms from “on demand” to “in advance”, some inflation can boost welfare as long as goods are sufficiently perishable. The main conclusion from this research is that by effectively hiding the strategic interaction between supply and demand, assuming production on demand is not without loss of generality. |
| Keywords: | Timing, Perishability, Production, Money, Inflation, Search. |
| JEL: | C7 D2 E4 |
| Date: | 2016–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:72876&r=mac |
| By: | Ali, Amjad; Bibi, Chan |
| Abstract: | This study has analyzed the determinants of social progress in the presence of macroeconomic instability in Pakistan over the period of 1980 to 2015. Under-five survival rate is used for measuring social progress and a comprehensive macroeconomic instability index is constructed by incorporating inflation rate, unemployment rate, budget deficit and trade deficit. Augmented Dickey-Fuller (ADF), Philips-Perron (PP) and Dickey-Fuller Generalized Least Square (DF-GLS) unit root tests are used for examining the stationarity of the variables. ARDL bound testing approach is used for co-integration among the variables of the model. Granger causality test is used for causal relationship among variables of the model. The estimated results of the study show that macroeconomic instability has negative and significant impact on under-five survival rate in Pakistan. The results reveal that female education, family planning & health cares and availability of food have positive and significant impact on under-five survival rate in Pakistan. Hence, for increasing social progress there is dire need of stable macroeconomic environment. Moreover, for increasing social progress much attention should be paid on female education, family planning & health cares and availability of food in Pakistan. |
| Keywords: | social progress, macroeconomic instability, Pakistan |
| JEL: | A13 E60 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:72920&r=mac |