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on Macroeconomics |
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Issue of 2016‒08‒28
67 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Brunnermeier, Markus K; Sannikov, Yuliy |
| Abstract: | A theory of money needs a proper place for financial intermediaries. Intermediaries diversify risks and create inside money. In downturns, micro-prudent intermediaries shrink their lending activity, fire-sell assets and supply less inside money, exactly when money demand rises. The resulting Fisher disinflation hurts intermediaries and other borrowers. Shocks are amplified, volatility spikes and risk premia rise. Monetary policy is redistributive. Accommodative monetary policy that boosts assets held by balance sheet impaired sectors, recapitalizes them and mitigates the adverse liquidity and disinflationary spirals. Since monetary policy cannot provide insurance and control risk-taking separately, adding macroprudential policy that limits leverage attains higher welfare. |
| Keywords: | (Inside) Money; Endogenous Risk Dynamics; Financial Frictions.; Monetary Economics; Paradox of Prudence |
| JEL: | E32 E41 E44 E51 E52 E58 G01 G11 G21 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11444&r=mac |
| By: | Markus K. Brunnermeier; Yuliy Sannikov |
| Abstract: | A theory of money needs a proper place for financial intermediaries. Intermediaries diversify risks and create inside money. In downturns, micro-prudent intermediaries shrink their lending activity, fire-sell assets and supply less inside money, exactly when money demand rises. The resulting Fisher disinflation hurts intermediaries and other borrowers. Shocks are amplified, volatility spikes and risk premia rise. Monetary policy is redistributive. Accommodative monetary policy that boosts assets held by balance sheet-impaired sectors, recapitalizes them and mitigates the adverse liquidity and disinflationary spirals. Since monetary policy cannot provide insurance and control risk-taking separately, adding macroprudential policy that limits leverage attains higher welfare. |
| JEL: | E32 E41 E44 E51 E52 E58 G01 G11 G21 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22533&r=mac |
| By: | Gregory Bauer; Gurnain Pasricha; Rodrigo Sekkel; Yaz Terajima |
| Abstract: | This paper analyzes the implications of the global financial cycle for conventional and unconventional monetary policies and macroprudential policy in small, open economies such as Canada. The paper starts by summarizing recent work on financial cycles and their growing correlation across borders. The resulting global financial cycle may be followed by a financial crisis that is quite costly. The cycle causes time variation in global risk premia in fixed income, equity and foreign exchange markets. In turn, time-varying global risk premia affect the transmission mechanisms of both conventional and unconventional monetary policies in small, open economies. While there are large costs associated with financial crises, the paper summarizes new work showing that the central banks’ leaning against the effects of the global financial cycle would typically be too costly. The paper concludes with some suggestions for the formation of macroprudential policies that are designed to offset the financial imbalances that grow during the boom phase of the cycle. |
| Keywords: | International financial markets; Financial stability; Housing; Monetary policy framework |
| JEL: | E42 E43 E44 E52 F41 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:16-38&r=mac |
| By: | William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Marcelle Chauvet (University of California at Riverside); Danilo Leiva-Leon (Central Bank of Chile); Liting Su (Department of Economics, The University of Kansas;) |
| Abstract: | While credit cards provide transactions services, as do currency and demand deposits, credit cards have never been included in measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities, such as credit card balances, to assets, such as money. However, economic aggregation theory and index number theory measure service flows and are based on microeconomic theory, not accounting. We derive theory needed to measure the joint services of credit cards and money. Carried forward rotating balances are not included in the current period weakly separable block, since they were used for transactions services in prior periods. The theory is developed for the representative consumer, who pays interest for the services of credit cards during the period used for transactions. This interest rate is reported by the Federal Reserve as the average over all credit card accounts, including those not paying interest. Based on our derived theory, we propose an empirical measurement of the joint services of credit cards and money. These new Divisia monetary aggregates are widely relevant to macroeconomic research.1 We evaluate the ability of our money aggregate measures to nowcast nominal GDP. This is currently topical, given proposals for nominal GDP targeting, which require monthly measures of nominal GDP. The nowcasts are estimated using only real time information, as available for policy makers at the time predictions are made. We use a multivariate state space model that takes into account asynchronous information inflow, as proposed in Barnett, Chauvet, and Leiva-Leon (2016). The model considers real time information that arrives at different frequencies and asynchronously, in addition to mixed frequencies, missing data, and ragged edges. The results indicate that the proposed parsimonious model, containing information on real economic activity, inflation, and the new augmented Divisia monetary aggregates, produces the most accurate real time nowcasts of nominal GDP growth. In particular, we find that inclusion of the new aggregate in our nowcasting model yields substantially smaller mean squared errors than inclusion of the previous Divisia monetary aggregates. |
| Keywords: | Credit Cards, Money, Credit, Aggregation Theory, Index Number Theory, Divisia Index, Risk, Asset Pricing, Nowcasting, Indicators. |
| JEL: | C43 C53 C58 E01 E3 E40 E41 E51 E52 E58 G17 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:201605&r=mac |
| By: | Barnett, William; Chauvet, Marcelle; Leiva-Leon, Danilo; Su, Liting |
| Abstract: | While credit cards provide transactions services, as do currency and demand deposits, credit cards have never been included in measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities, such as credit card balances, to assets, such as money. However, economic aggregation theory and index number theory measure service flows and are based on microeconomic theory, not accounting. We derive theory needed to measure the joint services of credit cards and money. Carried forward rotating balances are not included in the current period weakly separable block, since they were used for transactions services in prior periods. The theory is developed for the representative consumer, who pays interest for the services of credit cards during the period used for transactions. This interest rate is reported by the Federal Reserve as the average over all credit card accounts, including those not paying interest. Based on our derived theory, we propose an empirical measurement of the joint services of credit cards and money. These new Divisia monetary aggregates are widely relevant to macroeconomic research. We evaluate the ability of our money aggregate measures to nowcast nominal GDP. This is currently topical, given proposals for nominal GDP targeting, which require monthly measures of nominal GDP. The nowcasts are estimated using only real time information, as available for policy makers at the time predictions are made. We use a multivariate state space model that takes into account asynchronous information inflow, as proposed in Barnett, Chauvet, and Leiva-Leon (2016). The model considers real time information that arrives at different frequencies and asynchronously, in addition to mixed frequencies, missing data, and ragged edges. The results indicate that the proposed parsimonious model, containing information on real economic activity, inflation, and the new augmented Divisia monetary aggregates, produces the most accurate real time nowcasts of nominal GDP growth. In particular, we find that inclusion of the new aggregate in our nowcasting model yields substantially smaller mean squared errors than inclusion of the previous Divisia monetary aggregates. |
| Keywords: | Credit Cards, Money, Credit, Aggregation Theory, Index Number Theory, Divisia Index, Risk, Asset Pricing, Nowcasting, Indicators |
| JEL: | C43 C53 C58 E1 E3 E40 E41 E51 E52 E58 G17 |
| Date: | 2016–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:73246&r=mac |
| By: | Juselius, Mikael; Borio, Claudio; Disyatat, Piti; Drehmann, Mathias |
| Abstract: | Do the prevailing unusually and persistently low real interest rates reflect a decline in the natural rate of interest as commonly thought? We argue that this is only part of the story. The critical role of financial factors in influencing medium-term economic fluctuations must also be taken into account. Doing so for the United States yields estimates of the natural rate that are higher and, at least since 2000, decline by less. As a result, policy rates have been persistently and systematically below this measure. Moreover, we find that monetary policy, through the financial cycle, has a long-lasting impact on output and, by implication, on real interest rates. Therefore, a narrative that attributes the decline in real rates primarily to an exogenous fall in the natural rate is incomplete. The influence of monetary and financial factors should not be ignored. Exploiting these results, an illustrative counterfactual experiment suggests that a monetary policy rule that takes financial developments systematically into account during both good and bad times could help dampen the financial cycle, leading to higher output even in the long run. |
| Keywords: | natural interest rate, financial cycle, monetary policy, credit, business cycle |
| JEL: | E32 E40 E44 E50 E52 |
| Date: | 2016–08–10 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2016_024&r=mac |
| By: | William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Liting Su (Department of Economics, The University of Kansas;) |
| Abstract: | While credit cards provide transactions services, as do currency and demand deposits, credit cards have never been included in measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities, such as credit card balances, to assets, such as money. However, economic aggregation theory and index number theory measure service flows and are based on microeconomic theory, not accounting. Barnett, Chauvet, Leiva-Leon, and Su (2016) derived the aggregation and index number theory needed to measure the joint services of credit cards and money. They derived and applied the theory under the assumption of risk neutrality. But since credit card interest rates are high and volatile, risk aversion may not be negligible. We extend the theory by removing the assumption of risk neutrality to permit risk aversion in the decision of the representative consumer. |
| Keywords: | Credit Cards, Money, Credit, Aggregation, Monetary Aggregation, Index Number Theory, Divisia Index, Risk, Euler Equations, Asset Pricing |
| JEL: | C43 C53 C58 E01 E3 E40 E41 E51 E52 E58 G17 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:201606&r=mac |
| By: | William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Marcelle Chauvet (University of California at Riverside); Danilo Leiva-Leon (Central Bank of Chile); Liting Su (Department of Economics, The University of Kansas;) |
| Abstract: | While credit cards provide transactions services, credit cards have never been included in measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities to assets. However, index number theory measures service flows and is based on aggregation theory, not accounting. We derive theory needed to measure the joint services of credit cards and money. We provide and evaluate two such aggregate measures having different objectives. We initially apply to NGDP nowcasting. Both aggregates are being implemented by the Center for Financial Stability, which will provide them to the public monthly, along with Bloomberg Terminals. |
| Keywords: | Credit Cards, Money, Credit, Aggregation Theory, Index Number Theory, Divisia Index, Risk, Asset Pricing, Nowcasting, Indicators. |
| JEL: | C43 C53 C58 E01 E3 E40 E41 E51 E52 E58 G17 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:201604&r=mac |
| 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: | stagnation, deflation, expectations, output multiplier, New Keynesian model, adaptive learning, fiscal policy |
| JEL: | E62 D84 E21 E43 |
| Date: | 2016–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2016_025&r=mac |
| By: | Guillermo A. Calvo |
| Abstract: | The paper discusses policy relevant models, going from (1) chronic inflation in the 20th century after WWII, to (2) credit sudden stop episodes that got exacerbated in Developed Market economies after the 2008 Lehman crisis, and appear to be associated with chronic deflation. The discussion highlights the importance of expectations and liquidity, and warns about the risks of relegating liquidity to a secondary role, as has been the practice in mainstream macro models prior to the Great Recession. |
| JEL: | E31 E41 E42 E44 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22535&r=mac |
| By: | Barnett, William; Su, Liting |
| Abstract: | While credit cards provide transactions services, as do currency and demand deposits, credit cards have never been included in measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities, such as credit card balances, to assets, such as money. However, economic aggregation theory and index number theory measure service flows and are based on microeconomic theory, not accounting. Barnett, Chauvet, Leiva-Leon, and Su (2016) derived the aggregation and index number theory needed to measure the joint services of credit cards and money. They derived and applied the theory under the assumption of risk neutrality. But since credit card interest rates are high and volatile, risk aversion may not be negligible. We extend the theory by removing the assumption of risk neutrality to permit risk aversion in the decision of the representative consumer. |
| Keywords: | Credit Cards, Money, Credit, Aggregation, Monetary Aggregation, Index Number Theory, Divisia Index, Risk, Euler Equations, Asset Pricing. |
| JEL: | C43 C53 C58 E1 E3 E40 E41 E51 E52 E58 G17 |
| Date: | 2016–08–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:73248&r=mac |
| By: | Barnett, William; Chauvet, Marcelle; Leiva-Leon, Danilo; Su, Liting |
| Abstract: | While credit cards provide transactions services, credit cards have never been included in measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities to assets. However, index number theory measures service flows and is based on aggregation theory, not accounting. We derive theory needed to measure the joint services of credit cards and money. We provide and evaluate two such aggregate measures having different objectives. We initially apply to NGDP nowcasting. Both aggregates are being implemented by the Center for Financial Stability, which will provide them to the public monthly, along with Bloomberg Terminals. |
| Keywords: | Credit Cards, Money, Credit, Aggregation Theory, Index Number Theory, Divisia Index, Risk, Asset Pricing, Nowcasting, Indicators. |
| JEL: | C43 C53 C58 E1 E3 E40 E41 E51 E52 E58 G17 |
| Date: | 2016–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:73245&r=mac |
| By: | Firmin Doko Tchatoka (School of Economics, University of Adelaide); Nicolas Groshenny (School of Economics, University of Adelaide); Qazi Haque (School of Economics, University of Adelaide); Mark Weder (School of Economics, University of Adelaide) |
| Abstract: | This paper estimates a New Keynesian model of the U.S. economy over the period following the 2001 slump, a period for which the adequacy of monetary policy is intensely debated. To relate to this debate, we consider alternative inflation series in the estimation. We find that only when measuring inflation with core PCE monetary policy appears to have been reasonable and sufficiently active to rule out indeterminacy. We then relax the assumption that inflation in the model is measured by a single indicator and re-formulate the artificial economy as a factor model where the theoryÂ’s concept of inflation is the common factor to the empirical inflation series. We find that CPT and PCE provide better indicators of the latent concept while core PCE is less informative. Finally, we allow for positive trend inflation and the emerging results complement our previous findings. Again, even with these extensions, the only instance in which we can confidently rule out indeterminacy is when we measure inflation with core PCE. |
| Keywords: | Indeterminacy, Taylor Rules, Trend Infl?ation, Great Deviation. |
| JEL: | E32 E52 E58 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:adl:wpaper:2016-09&r=mac |
| By: | Carlos Garriga (Federal Reserve Bank of St. Louis); Finn E. Kydland (University of California-Santa Barbara and NBER); Roman Šustek (Queen Mary University of London, Centre for Macroeconomics, and CERGE-EI) |
| Abstract: | Standard models used for monetary policy analysis rely on sticky prices. Recently, the literature started to explore also nominal debt contracts. Focusing on mortgages, this paper compares the two channels of transmission within a common framework. The sticky price channel is dominant when shocks to the policy interest rate are temporary, the mortgage channel is important when the shocks are persistent. The first channel has significant aggregate effects but small redistributive effects. The opposite holds for the second channel. Using yield curve data decomposed into temporary and persistent components, the redistributive and aggregate consequences are found to be quantitatively comparable. |
| Keywords: | Mortgage contracts, Sticky prices, Monetary policy, Yield curve, Redistributive vs. aggregate effects. |
| JEL: | E32 E52 G21 R21 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp801&r=mac |
| By: | Tase, Manjola |
| Abstract: | I construct an index of sectoral dynamics to characterize changes in the sectoral composition of economic activity. There is evidence of asymmetry in different phases of business cycles with recessions being associated with larger changes in sectoral composition than expansions. I find that the correlation between dynamics in sectoral employment and aggregate output has weakened since the 1990s. Also, sectoral changes appear to be smaller and spread across more sectors, while their contribution to aggregate volatility has been increasing. I also perform a simulation exercise and replicate these documented facts. The results suggest that shifts in the sectoral composition of the economy likely contribute to the formation of business cycles. Also the duration of recessions implied by the impulse response functions from a VAR model of sectoral dynamics and aggregate output growth matches the duration of recessions observed in the data. |
| Keywords: | Structural changes ; Business cycles ; Labor share ; Employment |
| JEL: | E32 E24 |
| Date: | 2016–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2016-66&r=mac |
| By: | Ajello, Andrea; Laubach, Thomas; Lopez-Salido, J. David; Nakata, Taisuke |
| Abstract: | We study optimal interest-rate policy in a New Keynesian model in which the economy can experience financial crises and the probability of a crisis depends on credit conditions. The optimal adjustment to interest rates in response to credit conditions is (very) small in the model calibrated to match the historical relationship between credit conditions, output, inflation, and likelihood of financial crises. Given the imprecise estimates of key parameters, we also study optimal policy under parameter uncertainty. We find that Bayesian and robust central banks will respond more aggressively to financial instability when the probability and severity of financial crises are uncertain. |
| Keywords: | Financial crises ; Financial stability and risk ; Leverage ; Monetary policy ; Optimal policy |
| JEL: | E43 E52 E58 G01 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2016-67&r=mac |
| By: | Stéphane Lhuissier; Fabien Tripier |
| Abstract: | The answer to the title question is no. Fitting a Markov-switching structural vector autoregression to U.S. data, we show that uncertainty affects real economy differentially depending on the state of financial markets; e.g., an adverse shock that causes a 10 percentage points increase in the VIX index implies a one percent output decline in a regime of financial stress, but effects that are close to zero in tranquil regime. We use this evidence to estimate key parameters of a business cycle model, in which agents are aware of the possibility of regime switches in the transmission mechanism. We show that the differences in dynamics across regimes do not only result from changes in the degree of financial frictions, but also on agents’ expectations around these changes. Pessimistic expectations about future financial conditions amplify contractionary effects of uncertainty shocks on aggregate activity. |
| Keywords: | Uncertainty Shocks;Regime Switch;Financial Frictions;Expectation Effects |
| JEL: | C32 E32 E44 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2016-19&r=mac |
| By: | Masazumi Hattori (Hitotsubashi University); Steven Kong (Bank for International Settlements); Frank Packer (Bank for International Settlements); Toshitaka Sekine (Bank of Japan) |
| Abstract: | How central banks can best communicate to the market is an increasingly important topic in the central banking literature. With ever greater frequency, central banks communicate to the market through the forecasts of prices and output with the purposes of reducing uncertainty; at the same time, central banks generally rely on a publicly stated medium-term inflation target to help anchor expectations. This paper aims to document how much the release of the forecasts of one major central bank, the Bank of Japan (BOJ), has influenced private sector expectations of inflation, and whether the degree of influence depends to any degree on the adoption of an inflation target (IT). Consistent with earlier studies, we find the central bank's forecasts to be quite influential on private sector forecasts. In the case of next year forecasts, their impact continues into the IT regime. Thus, the difficulties of aiming at an inflation target from below do not necessarily diminish the influence of the central bank's inflation forecasts. |
| Keywords: | central bank communication; Bank of Japan; inflation forecast; inflation targeting |
| JEL: | E31 E52 E58 |
| Date: | 2016–08–15 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:wp16e11&r=mac |
| By: | Fausto Vieira (Fundação Getulio Vargas (FGV)); Fernando Chague (University of São Paulo); Marcelo Fernandes (Queen Mary University of London and FGV) |
| Abstract: | This paper proposes a forecasting model that combines a factor augmented VAR (FAVAR) methodology with the Nelson and Siegel (NS) parametrization of the yield curve to predict the Brazilian term structure of interest rates. Importantly, we extract the principal components for the FAVAR from a large data set containing forward-looking macroeconomic and financial variables. Our forecasting model significantly improves the predicting accuracy of extant models in the literature, particularly at short-term horizons. For instance, the mean absolute forecast errors are 15-40% lower than the random walk benchmark on predictions at the three month horizon. The out-of-sample analysis shows that including forward-looking indicators is the key to improve the predictive ability of the model. |
| Keywords: | Bonds, Factor-augmented VAR, Forecasting, term structure, Yield curve |
| JEL: | E58 C38 E47 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp799&r=mac |
| By: | Dudley Cooke (Department of Economics, University of Exeter); Tatiana Damjanovic (Department of Economics, Durham University) |
| Abstract: | This paper develops a general equilibrium model of firm entry and financial frictions. Movements in the volatility of firm-level shocks and aggregate productivity generate procyclical entry and a countercyclical firm default rate. We derive analytical results for optimal fiscal policy and show that the government faces two trade-offs. The first arises from a profit destruction and a consumer surplus effect when firm entry is endogenous. The second arises because financial frictions reduce firm entry and default is costly. We also study the optimal mix of taxes on labor-income and firm profits in a quantitative version of the model. We find that a countercyclical labor-income tax is always part of the optimal fiscal policy, whereas the cyclicality of the profit tax is sensitive to the source of aggregate fl uctuations. |
| Keywords: | Firm Entry, Financial Frictions, Optimal Fiscal Policy. |
| JEL: | E31 E52 F41 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:exe:wpaper:1606&r=mac |
| By: | Christine Ma; Chung Tran |
| Abstract: | In this paper we quantitatively explore implications of ageing demographic structure for government revenue raising capacity through lens of fiscal space. We base our analysis on dynamic general equilibrium, overlapping generations model calibrated to data from Japan and USA.We first map out fundamental-based fiscal limit using the Laffer curve approach, and then compute fiscal space in terms of budgetary room between the current revenue and the maximum revenue defined by the peak of Laffer curves. We demonstrate that the evolution of underlying demographic structures plays an important role in shaping a country’s fiscal limit and fiscal space. There will be significant contractions in fiscal space in Japan and USA when the two countries enter their late stage of demographic transition in 2040. In particular, the results from the model calibrated to Japan indicates that an increase in old-age dependency ratio to over 70 percent can reduce Japan’s fiscal space by 36 percent. When factoring in the increased fiscal cost of existing commitments to the age pension program, the net fiscal space for Japan turns negative. |
| Keywords: | Population Ageing, Laffer Curve, Fiscal Limit, Sustainability, Heterogeneity, Dynamic General Equilibrium. |
| JEL: | E62 H20 H60 J11 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2016-642&r=mac |
| By: | Katrin Rabitsch (Department of Economics, Vienna University of Economics and Business); Christian Schoder (The New School for Social Research) |
| Abstract: | We introduce the tractable buffer stock savings setup of Carroll (2009 NBER Working Paper) into an otherwise conventional New-Keynesian dynamic stochastic general equilibrium model with financial frictions. The introduction of a precautionary saving motive arising from an uninsurable risk of permanent income loss, affects the model's properties in a number of interesting ways: it produces a more hump-shaped reaction of consumption in response to both supply (technology) and demand (monetary) shocks, and more pronounced reactions in response to demand shocks. Adoption of the buffer stock savings setup thus offers a more microfounded way, compared to, e.g., habit preferences in consumption, to introduce Keynesian features into the model, serving as a device to curbing excessive consumption smoothing, and to attributing a higher role to demand driven fluctuations. We also discuss steady state effects, determinacy properties as well as other practical issues. |
| Keywords: | precautionary saving, buffer stock saving, dynamic stochastic general equilibrium model |
| JEL: | D91 E21 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp231&r=mac |
| By: | Mark Hayes (Durham University) |
| Abstract: | A core proposition of Keynes’s General Theory is that money wages do not determine real wages or employment at the aggregate level in a closed economy. What then is the macroeconomic role of trades unions in the determination of real wages and employment? What are the mechanisms through which bargaining power takes effect? The paper argues that trades unions play important roles in countering employer monopsony as well as in determining the non-wage terms and conditions of employment and the incidence of risk between capital and labour. In the former role, it is the money wage that is relevant, while the latter role is a factor in the determination of aggregate real income and profit, yet the aggregate real wage itself and the wage share are residuals. Trades unions have the potential to support the promotion of full employment with price stability as part of a policy of demand management through the adoption of co-ordinated wage bargaining institutions. |
| Keywords: | Collective bargaining, wage co-ordination, income distribution |
| JEL: | E23 E25 J30 J51 J52 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:pke:wpaper:pkwp1615&r=mac |
| By: | Christl, Michael; Köppl-Turyna, Monika; Lorenz, Hanno |
| Abstract: | Dieser Beitrag untersucht den Zusammenhang zwischen Investitionswachstum, Zinsen und Erwartungen für Österreich. Basierend auf einem Panel von 73 Wirtschaftssektoren zeigt sich, dass Zinsänderungen nur dann einen positiven Einfluss auf Investitionswachstum haben, wenn die Erwartungen stark zurückgehen. Sind die Erwartungen konstant (gut oder schlecht), so haben Zinsen jedoch kaum einen Einfluss. Ebenso zeigt sich, dass stark steigende Erwartungen einen positiven Effekt auf das Investitionswachstum aufweisen. Außerdem geht ein Anstieg der Produktionsbesteuerung sowie stärkere Kapitalmarktregulierung mit einem negativen Investitionswachstum einher. |
| Abstract: | This article focuses on the relationship between investment growth, interest rates and economic expectations. Using a panel based on 73 sectors of the Austrian economy, we show that a reduction in the interest rate is associated with positive investment growth, but only if expectations decrease. If expectations remain stable, decreasing interest rates has no effect on investment growth. An increase in expectations is associated with higher investment growth. Additionally, we show that higher taxation on production as well as increasing capital market regulation tend to decrease investment growth. |
| Keywords: | investment,interest rate,expectations,Austria |
| JEL: | E22 E43 E66 H32 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:145294&r=mac |
| By: | Jung, Alexander |
| Abstract: | This paper examines whether monetary data releases by the European Central Bank (ECB) have provided markets with additional clues about the future course of its monetary policy. It conducts a novel econometric approach based on a combination of an Ordered Probit model explaining future policy rate changes (sample 2000 to 2014) and the Vuong test for model selection. Overall, our results suggest that information contained in press releases on monetary developments for the euro area has helped markets in forming their expectations on the next monetary policy decision. JEL Classification: C34, D78, E52, E58 |
| Keywords: | communication, monetary analysis, predictability, Probit model, Vuong test |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161926&r=mac |
| By: | Bjarni G. Einarsson; Kristófer Gunnlaugsson; Thorvardur Tjörvi Ólafsson; Thórarinn G. Pétursson |
| Abstract: | Claudio Borio recently quipped that “macroeconomics without the financial cycle is like Hamlet without the Prince” (Borio, 2014, p. 183). We rise to his call to arms and tackle the Prince’s existential question head-on. Our findings suggest that there exists a well-defined financial cycle in Iceland that has gradually become more prominent as the financial deepening and sophistication of the economy has increased. Using a dataset spanning more than a century, including data on credit, house prices, and bank balance sheet size and composition, we find that the aggregate financial cycle is much longer than the typical business cycle, with a median duration of sixteen years. We find that there is a large difference in economic performance over different phases of the financial cycle, suggesting that it has played a prominent role in the country’s macroeconomic development. In fact, we find that almost all of the peaks in the financial cycle coincide with some type of a financial crisis and that cyclical expansions provide a robust early-warning signal for subsequent crises. We find strikingly strong ties between the Icelandic financial cycle and its global counterpart (proxied by the US financial cycle), with almost all of the cyclical peaks in the Icelandic financial cycle occurring close to peaks in the global cycle. Our findings suggest that understanding economic fluctuations in Iceland is hard without understanding the financial cycle and that we ignore the financial cycle at our peril. We conclude with a first attempt at exploring some of the policy questions that our findings raise. |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:ice:wpaper:wp72&r=mac |
| By: | Tobal Martín; Yslas Renato |
| Abstract: | This paper empirically compares the implications of two distinct models of FX intervention, within the context of Inflation Targeting Regimes. For this purpose, it applies the VAR methodology developed by Kim (2003) to the cases of Mexico and Brazil. Our results can be summarized in three points. First, FX interventions have had a short-lived effect on the exchange rate in both economies. Second, the Brazilian model of FX intervention entails higher inflationary costs and this result cannot be entirely explained by differences in the level of pass-through. Third, each model is associated with a different interaction between exchange rate and interest rate setting (conventional monetary policies). |
| Keywords: | Foreign exchange intervention; Exchange rate pass-through; Exchange rate regime; Monetary policy coordination |
| JEL: | F31 E31 E52 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2016-14&r=mac |
| By: | Pierre Perron (Boston University); Tatsuma Wada (Keio University) |
| Abstract: | This paper first generalizes the trend-cycle decomposition framework of Perron and Wada (2009) based on unobserved components models with innovations having a mixture of normals distribution, which is able to handle sudden level and slope changes to the trend function as well as outliers. We investigate how important are the differences in the implied trend and cycle compared to the popular decomposition based on the Hodrick and Prescott (HP) (1997) filter. Our results show important qualitative and quantitative differences in the implied cycles for both real GDP and consumption series for the G7 countries. Most of the differences can be ascribed to the fact that the HP filter does not handle well slope changes, level shifts and outliers, while our method does so. Then, we reassess how such different cycles affect some socalled “stylized facts†about the relative variability of consumption and output across countries. |
| Keywords: | Trend-Cycle Decomposition, Unobserved Components Model, International Business Cycle, Non Gaussian Filter |
| JEL: | C22 E32 |
| Date: | 2015–10–29 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2015-016&r=mac |
| By: | Nikolaos Antonakakis (Webster University, Wien, Austria and University of Portsmouth, Portsmouth, United Kingdom); Juncal Cunado (University of Navarra, Pamplona, Spain); Luis A. Gil-Alana (University of Navarra, Pamplona, Spain); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria) |
| Abstract: | This study examines the inflation persistence using both online and official price indexes in Argentina, Brazil, China, Japan, Germany, South Africa, the UK and the US, using fractional integration technique. The main results suggest that the degree of persistence, estimated by the long-memory parameter, is smaller when using online price indexes (believed to be a more realistic measure of inflation), mainly in the cases of Argentina, Brazil, China and the UK. Monetary policy implications are discussed. |
| Keywords: | Official and online inflation indexes, fractional integration, persistence |
| JEL: | C22 E43 G12 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201663&r=mac |
| By: | Bofinger, Peter; Scheuermeyer, Philipp |
| Abstract: | Drawing on a panel of 29 advanced economies, this paper documents a concave and non-monotonic link between inequality and the aggregate household saving rate. We find that, at a low level of inequality, more inequality is associated with higher saving; but also show that a negative relationship between inequality and saving prevails, where inequality is high. Using different empirical approaches, we locate the turning-point, where the marginal effect of inequality turns from positive to negative, at a net income Gini coefficient of around 30. Moreover, we show that the relationship between inequality and saving also depends on financial market conditions: While inequality increases saving, when credit is scarce, it tends to reduce saving at high levels of credit. This paper primarily focuses on household saving, yet we also find some evidence for a non-monotonic effect of inequality on private saving, national saving, and the current account balance. |
| Keywords: | income distribution; non-linearities; panel data; Saving |
| JEL: | C23 D31 E21 O5 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11435&r=mac |
| By: | Tal Gross; Matthew J. Notowidigdo; Jialan Wang |
| Abstract: | This paper estimates how the marginal propensity to consume (MPC) varies over the business cycle by exploiting exogenous variation in credit card borrowing limits. Ten years after an individual declares Chapter 7 bankruptcy, the record of the bankruptcy is removed from her credit report, generating an immediate and persistent increase in credit score. We study the effects of “bankruptcy flag” removal using a sample of over 160,000 bankruptcy filers whose flags were removed between 2004 and 2011. We document that in the year following flag removal, credit card limits increase by $780 and credit card balances increase by roughly $290, implying an “MPC out of liquidity” of 0.37. We find a significantly higher MPC during the Great Recession, with an average MPC roughly 20–30 percent larger between 2007 and 2009 compared to surrounding years. We find no evidence that the counter-cyclical variation in the average MPC is accounted for by compositional changes or by changes over time in the supply of credit following bankruptcy flag removal. These results are consistent with models where liquidity constraints bind more frequently during recessions. |
| JEL: | D12 D14 E51 G21 K35 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22518&r=mac |
| By: | Brauning, Falk (Federal Reserve Bank of Boston); Fecht, Falko (Frankfurt School of Finance & Management) |
| Abstract: | We empirically investigate the effect that relationship lending has on the availability and pricing of interbank liquidity. Our analysis is based on a daily panel of unsecured overnight loans between 1,079 distinct German bank pairs from March 2006 to November 2007, a period that includes the 2007 liquidity crisis that marked the beginning of the 2007/08 global financial crisis. We find that (i) relationship lenders are more likely to provide liquidity to their closest borrowers, (ii) particularly opaque borrowers obtain liquidity at lower rates when borrowing from their relationship lenders, and (iii) during the crisis, relationship lenders provided cheaper loans to their closest borrowers. Our results hold after controlling for search frictions as well as a large set of (time-varying) bank and bank-pair control variables and fixed effects. While we find some indication that lending relationships help banks reduce search frictions in the over-the-counter interbank market, our results establish that bank-pair relationships have a significant impact on interbank credit availability and pricing due to mitigating uncertainty about counterparty credit quality. |
| Keywords: | interbank market; relationship lending; financial crisis; central counterparty; financial contagion |
| JEL: | D61 E44 G10 G21 |
| Date: | 2016–07–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:16-7&r=mac |
| By: | Simon Voigts; ; |
| Abstract: | To quantify fiscal multipliers in Eurozone countries, ECB, European Commission and IMF draw heavily on large-scale DSGE models. In these models, the value added tax (VAT) is implemented as consumption tax, implying essentially full contemporaneous pass-through of changes in the tax liability to consumers. However, empirical evidence suggests that VAT pass-through in Europe occurs only gradually. To investigate how realistic pass-through dynamics affect VAT multipliers, a DSGE model is augmented by a retail sector, which allows to replicate empirical pass- through estimates. The resulting short-run multipliers are dramatically smaller than those from a consumption tax, suggesting systematic over- estimation in institutional research. |
| Keywords: | Fiscal multipliers, value added tax, tax pass-through, DSGE models. |
| JEL: | E62 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2016-026&r=mac |
| By: | Freddy Heylen; Pieter Van Rymenant; Brecht Boone; Tim Buyse (-) |
| Abstract: | This paper investigates the possibility of today’s OECD economies entering into a very long period of poor per capita economic growth and very low real interest rates. We construct a general equilibrium model with overlapping generations of heterogeneous individuals, differing in ability and human capital, and with genetic and financial transfers from parents to children. Our model allows to study within one coherent framework the effects of those factors that are most often mentioned in the literature as possible drivers of secular stagnation: demographic change, a slowdown in the rate of technical progress, rising inequality, borrowing constraints, and downward rigidity in the real interest rate. We calibrate our model to Belgium and find that its predictions match key facts in Belgium in 1950-2009 very well. We then simulate projected future changes in technical progress and demography. In alternative scenarios we additionally impose rising inequality, borrowing constraints and/or a lower bound to the real interest rate. When we assume unchanged public policies and a modest future rate of technical progress, our conclusions about future per capita output and growth are rather pessimistic. Demographic change is by far the most influential cause of low growth. If a lower bound to the real interest rate is binding, it could considerably aggravate the problem of stagnation. |
| Keywords: | secular stagnation, overlapping generations, economic growth, ageing, demography, inequality |
| JEL: | C68 D91 E17 J11 O40 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:16/919&r=mac |
| By: | Marcelo Arbex (Department of Economics, University of Windsor); Dennis O'Dea (Department of Economics, University of Washington); David Wiczer (Research Division, Federal Reserve Bank of St. Louis) |
| Abstract: | We introduce a complex network into a search model in which workers find jobs through their network or directly from firms. This framework links heterogeneity in network position to heterogeneity in wage-employment dynamics: better-connected workers climb the job ladder faster, drawing more frequently from the network offer distribution which stochastically dominates the direct-search distribution. The mean- field approach allows a tractable, recursive formulation and our calibrated version is consistent with several empirical findings. Further, we present new evidence consistent with our model: Job-to-job switches use networks more frequently at higher rungs of the ladder. |
| Keywords: | Labor Markets; Social networks; Job search; Unemployment; Wages dispersion. |
| JEL: | D83 D85 E24 J31 J64 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:wis:wpaper:1606&r=mac |
| By: | Günes Kamber; Benjamin Wong (Reserve Bank of New Zealand) |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbans:2016/06&r=mac |
| By: | Staehr, Karsten; Vermeulen, Robert |
| 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. JEL Classification: E32, E61, F32 |
| Keywords: | competitiveness, euro area, macroeconomic variables, transmission |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161940&r=mac |
| By: | Gazzani, Andrea |
| Abstract: | Housing prices are subject to boom and bust episodes with long-lasting deviation from fundamentals. By considering a present value housing price model under noisy information, I study the macroeconomic implications of movements in housing prices related (news) and not related (noise) to future fundamentals. I provide empirical evidence of the sizable macroeconomic effects of news and noise shocks. Following Forni et al. (2014, 2016), I identify news and noise shocks through a non-standard VAR technique which exploits future information. In the US, news shocks are the main driver of the housing market at low frequencies, but in the short-medium horizon noise shocks explain a large share of the variability in housing prices, residential investment and GDP. Historically, many housing cycles are driven by noise. The empirical findings are consistent with a model à la Iacoviello which features a rental market. In this model, the usual optimal policy exercise concerns an augmented Taylor rule and a pro-cyclical loan-to-value ratio. I propose pro-cyclical property taxes as the most effective policy tool to deal with fluctuations originating from the housing market. JEL Classification: E30, E40, E50 |
| Keywords: | housing market, macro-prudential, noise, non-fundamental VAR, property tax |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161933&r=mac |
| By: | Joseph, Mawejje; Paul, Lakuma |
| Abstract: | The Uganda business climate index declined by 22.4 points to 94.8 during the July – September 2015 quarter from 117.2 during the July – September 2014 quarter. This indicates a remarkable slowdown in the conditions for doing business in Uganda. This is the first time in five survey rounds that the index points to an uncertain business environment and elevated business climate risks. The slowdown in business perceptions was largely driven by some persistent challenges in doing business and some new emerging ones. In particular, the business environment suffered on account of volatility in the macroeconomic environment characterized by the weakening of the Uganda Shilling, rising interest rates and an unfavorable inflationary outlook. Moreover, macroeconomic factors, substandard products, and tax policy were considered more of a problem in the current period than in the previous. At the sectoral level, business sentiment in the agricultural sector was particularly downcast due to falling international commodity prices particularly for coffee, tea and cotton. Business perceptions and expectations for the next quarter (October – December 2015) remain subdued on account of the forthcoming general election, rising inflation and interest rates, low global demand for commodities, and fragility of the regional political environment. The Uganda business climate index declined by 22.4 points to 94.8 during the July – September 2015 quarter from 117.2 during the July – September 2014 quarter. This indicates a remarkable slowdown in the conditions for doing business in Uganda. This is the first time in five survey rounds that the index points to an uncertain business environment and elevated business climate risks. The slowdown in business perceptions was largely driven by some persistent challenges in doing business and some new emerging ones. In particular, the business environment suffered on account of volatility in the macroeconomic environment characterized by the weakening of the Uganda Shilling, rising interest rates and an unfavorable inflationary outlook. Moreover, macroeconomic factors, substandard products, and tax policy were considered more of a problem in the current period than in the previous. At the sectoral level, business sentiment in the agricultural sector was particularly downcast due to falling international commodity prices particularly for coffee, tea and cotton. Business perceptions and expectations for the next quarter (October – December 2015) remain subdued on account of the forthcoming general election, rising inflation and interest rates, low global demand for commodities, and fragility of the regional political environment. |
| Keywords: | Agribusiness, Community/Rural/Urban Development, Consumer/Household Economics, Crop Production/Industries, Demand and Price Analysis, Production Economics, Public Economics, |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eprcug:243926&r=mac |
| By: | Dudley, William (Federal Reserve Bank of New York) |
| Abstract: | Remarks at the Economic Press Briefing on the Regional Economy, Federal Reserve Bank of New York, New York City. |
| Keywords: | upstate New York; Utica; Binghamton; Fairfield County; fiscal crisis; Commonwealth; public debt; middle-wage jobs |
| Date: | 2016–08–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsp:215&r=mac |
| By: | Pérez, Javier J.; Aouriri, Marie; Campos, Maria M.; Celov, Dmitrij; Depalo, Domenico; Papapetrou, Evangelia; Pesliakaitė, Jurga; Ramos, Roberto; Rodríguez-Vives, Marta |
| Abstract: | This paper examines the overall macroeconomic impact arising from reform in government wages and employment, at times of fiscal consolidation. Reform of these two components of the government wage bill appeared necessary for containing the deterioration of the public finances in several EU countries, as a consequence of the financial crisis. Such reforms entailed in some instances, but not always, the implementation of cost-cutting measures affecting the government wage bill, as part of broader consolidation packages that typically hinged more heavily on other fiscal instruments, like public investment. While such measures have adverse short-term macroeconomic effects, public wage bill restraining policy changes present the idiosyncrasy that they can yield medium- to longer-term benefits due to possible competitiveness and efficiency gains through their impact on labour market dynamics. This paper provides some evidence of such medium- to long-run effects, based on a wealth of micro and macro data in the euro area and the EU. It concludes that appropriately designed government wage bill moderation could indeed produce positive dividends to the economy, which depend on certain country-specific conditions. These gains can be reinforced by relevant fiscal-structural reforms. JEL Classification: H50, E62, J45 |
| Keywords: | fiscal consolidation, fiscal policies, labour market, public employment, public wages |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2016176&r=mac |
| By: | Joseph, Mawejje; Paul, Lakuam |
| Abstract: | The Uganda business climate index declined by 6.2 points to 93.5 during the January – March 2016 quarter from 99.7 during the October – December 2015 quarter. This indicates a slight slowdown in the conditions for doing business and is consistent with expectations from the previous quarter. The negative sentiment in the business environment was largely driven by some persistent challenges in doing business and some new emerging ones. In particular, the domestic political election cycle and concerns over waning domestic demand have elevated the perceived risks for doing business in the current quarter. In terms of business constraints, volatility in the macroeconomic environment, substandard products, tax policy, and concerns over the cost and reliability of electricity supply continue to constrain business competitiveness and their severity was perceived to have been elevated during the current period. Contrary to expectations, business sentiment in agriculture and industry was upbeat. However, business sentiment in the services sector was downcast. Perceptions about business sentiment in the next quarter (April – June 2016) are favourable on account of the expected recovery in domestic demand, macroeconomic environment, and improvements in domestic and regional political environment. |
| Keywords: | Community/Rural/Urban Development, Demand and Price Analysis, Environmental Economics and Policy, Food Security and Poverty, Industrial Organization, Institutional and Behavioral Economics, |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eprcug:243928&r=mac |
| By: | Gorbachev, Olga (University of Delaware); Luengo-Prado, Maria Jose (Federal Reserve Bank of Boston) |
| Abstract: | We use the 1979 National Longitudinal Survey of Youth to revisit what is termed the credit card debt puzzle: why consumers simultaneously co-hold high-interest credit card debt and low-interest assets that could be used to pay down this debt. This dataset contains unique information on intelligence, financial literacy, and preferences, while also providing a complete picture of households’ balance sheets. Relative to individuals with no credit card debt but positive liquid assets, individuals in the puzzle group have higher discount rates, slightly lower financial literacy scores, and very different perceptions on future credit risk: many individuals are using credit cards for precautionary motives. |
| Keywords: | household finance; risk aversion; time preferences; precautionary motives; bankruptcy; foreclosure |
| JEL: | D14 D91 E21 G02 |
| Date: | 2016–07–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:16-6&r=mac |
| By: | Hengjie Ai; Ravi Bansal |
| Abstract: | The paper develops a theory for equity premium around macroeconomic announcements. Stock returns realized around pre-scheduled macroeconomic announcements, such as the employment report and the FOMC statements, account for 55% of the market equity premium during the 1961-2014 period, and virtually 100% of it during the later period of 1997-2014, where more announcement data are available. We provide a characterization theorem for the set of intertemporal preferences that generate a positive announcement premium. Our theory establishes that the announcement premium identifies a significant deviation from expected utility and constitutes an asset market based evidence for a large class of non-expected models that features aversion to ”Knightian uncertainty”, for example, Gilboa and Schmeidler [30]. We also present a dynamic model to account for the evolution of equity premium around macroeconomic announcements. |
| JEL: | E0 G0 G02 G12 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22527&r=mac |
| By: | Luis Alberiko Gil-Alaña (Navarra Center for International Development) |
| Abstract: | In this paper we examine the time series evolution of the log-CPI series in South Africa disaggregating the data by sectors. We examine the time period 1990m1-20008m12, that is, focussing on the post-apartheid period. The results indicate that the (total) inflation rate in South Africa is long memory, with an order of integration in the range (0, 0.5). The same happens with most of the data disaggregated by sectors with values of d above 1 in the log-prices. Evidence of I(0) inflation is obtained in some cases for "fruits and nuts", "vegetables" and "sugar", and evidence of mean reversion in the log-prices is only obtained in the case of "fish and oather seafood". Policy implications are derived. |
| Keywords: | Inflation; South Africa; long range dependence |
| JEL: | C22 E31 |
| URL: | http://d.repec.org/n?u=RePEc:nva:unnvaa:wp04-2010&r=mac |
| By: | William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Liting Su (Department of Economics, The University of Kansas;) |
| Abstract: | In 2013, the Center for Financial Stability (CFS) initiated its Divisia monetary aggregates database, maintained within the CFS program called Advances in Monetary and Financial Measurement (AMFM), in accordance with Barnett (1980, 2012). The CFS is now making available Divisia monetary aggregates extended to include the transactions services of credit cards. The extended aggregates are called the augmented Divisia monetary aggregates and are available to the public in monthly releases. The new aggregates are also available to Bloomberg terminal users. The theory on which the new aggregates is based is provided in Barnett and Su (2014).3 In this paper, we provide detailed information on the data sources used in producing the new augmented Divisia monetary aggregates. |
| Keywords: | monetary aggregates; credit cards; aggregation theory; index number theory; data; Divisia index. |
| JEL: | G C8 E4 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:201603&r=mac |
| By: | Agust Arnorsson (University of Iceland); Gylfi Zoega (University of Iceland; Birkbeck, University of London) |
| Abstract: | We analyse the voting pattern in the June 23rd referendum on the continued participation of the United Kingdom in the European Union and evaluate the reasons for the results. We find that regions where GDP per capita is low, a high proportion of people have low education, a high proportion is over the age of 65 and there is strong net immigration are more likely to be apprehensive of the E.U., consider the enlargement of the E.U. as having gone too far, be suspicious of immigrants and not want them as neighbours and, most importantly, to vote for Brexit. The fear of immigration does not seem to be fully justified in terms of the literature on the labour market effects of immigrants in the UK. Looking at the response of the sterling exchange to poll numbers we find that investors appear to view Brexit as a negative event. |
| Keywords: | Brexit referendum, European Union. |
| JEL: | E24 J6 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:1605&r=mac |
| By: | Reifschneider, David L. |
| Abstract: | Current forecasts suggest that the federal funds rate in the future is likely to level out at a rather low level by historical standards. If so, then the FOMC will have less ability than in the past to cut short-term interest rates in response to a future recession, suggesting a risk that economic downturns could turn out to be more severe as a result. However, simulations of the FRB/US model of a severe recession suggest that large-scale asset purchases and forward guidance about the future path of the federal funds rate should be able to provide enough additional accommodation to fully compensate for a more limited to cut short-term interest rates in most, but probably not all, circumstances. |
| Keywords: | Monetary policy ; Asset purchases ; Forward guidance ; Zero lower bound |
| JEL: | E5 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2016-68&r=mac |
| By: | Luis Alberiko Gil-Alaña (Navarra Center for International Development); Borja Balprad; Guglielmo Maria Caporale; Hector Carcel |
| Abstract: | This paper uses fractional integration and cointegration techniques to analyze nominal exchange rate dynamics in three groups of African countries aiming to form currency unions in the near future. The proposed unions are the WAMZ (West African Monetary Zone), the EAC (East African Community), and the SADC (South African Development Community). The univariate results indicate that in all but three countries (Democratic Republic of Congo, Mauritius and Madagascar) the nominal exchange rate series exhibit a unit root. Concerning the multivariate results, for the WAMZ cointegration is only found in the case of Ghana with both Gambia and Guinea; for the EAC for Rwanda with Burundi, and Tanzania with both Rwanda and Uganda. Finally, for the SADC, cointegration is found in only 15 out of 66 cases, including Swaziland with South Africa, Zambia with Malawi, and Mozambique with both Lesotho and Tanzania. The policy implications of these findings are also discussed. |
| Keywords: | Monetary unions; Africa; Exchange rates |
| JEL: | C22 C32 E31 F15 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:nva:unnvaa:wp11-2015&r=mac |
| By: | Carlsson, Mikael (Uppsala University); Westermark, Andreas (Research Department, Central Bank of Sweden) |
| Abstract: | We show that in micro data, as well as in a search and matching model with endogenous separations and rigid wages, separations and hence employment volatility are non-neutral to wage rigidities of incumbent workers. In contrast to when all wages are flexible, the standard deviation of unemployment in a model with rigid wages for incumbent workers (only) matches the standard deviation in the data. Thus, the degree of wage rigidity for newly hired workers is not a sufficient statistic for determining the effect of wage rigidities on macroeconomic outcomes in this class of models. |
| Keywords: | Search and matching; Unemployment volatility puzzle; Wage rigidities; Job Destruction |
| JEL: | E30 J63 J64 |
| Date: | 2016–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0326&r=mac |
| By: | Prayudhi Azwar (Business School, University of Western Australia and Bank Indonesia); Rod Tyers (Business School, University of Western Australia and Centre for Applied Macroeconomic Analysis (CAMA) Crawford School of Government, Australian National University) |
| Abstract: | The post-GFC era sees slower global growth, unusually combined with lower investment financing costs, a substantial Chinese slowdown and with the eventual prospect of a US-led re-tightening of global financial markets. For Indonesia in the medium term, these developments imply a slowing of export growth and a temporary surge in net inward investment incentives. These changes are examined here using a numerical macro model. The results suggest that recent fiscal reform is long run beneficial and that it will moderate the negative effects of expectations linked to the eventual financial tightening. Indeed, results depend importantly on whether expectations are formed on the short run effects or the prospective tightening. Expectations retard growth in either case. Depending on magnitudes, the prospect of financial tightening may be preferable to nearer term financial easing that is combined with comparatively unattractive export moderation. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:uwa:wpaper:16-19&r=mac |
| By: | De Santis, Roberto A. |
| Abstract: | Assessing the impact of the Asset Purchase Programme (APP) by the European Central Bank (ECB) on euro area sovereign yields is challenging, because the monetary policy announcement in January 2015 was already implicitly communicated to the market in the second half of 2014. Therefore, to identify the APP for the euro area, we rely upon Bloomberg news on euro area APP. The econometric results suggest that the impact of APP on euro area long-term sovereign yields is sizeable, albeit the programme was announced at a time of low fi?nancial distress. Most of the impact took place before the purchases took place with the vulnerable countries bene?fiting most. JEL Classification: E43, E52, E58, G14 |
| Keywords: | APP, quantitative easing, sovereign yields |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161939&r=mac |
| By: | Cai, Yifei |
| Abstract: | 本文在时变分析框架内对我国的短期资本流动、经济政策不确定性以及恐慌指数之间的动态 关系进行研究。基于滚动窗口拔靴方法的格兰杰因果检验的结果表明：短期资本流动与经济 政策不确定性之间存在时变的格兰杰因果关系，而2015年“股灾”期间，投资者由于“ 羊群效应”，使得经济政策不确定性不是短期资本流动的格兰杰原因；短期资本流动是恐慌 指数的单向格兰杰因果关系；而经济政策不确定性与恐慌指数之间存在双向的格兰杰因果关 系。随后，我们建立TVP-VAR模型，并利用等时间间隔的脉冲响应函数以及时点脉冲 响应函数分析了三个变量的动态调整路径。研究结果表明：近年来，我国经济政策对短期资 本流动的影响由“被动调节”转为“主动引导”。此外，由于我国资本账户尚未完全开放， 国际资本市场的金融恐慌对我国短期资本流动的影响较小。相反，由于我国经济不断发展， 短期资本流动已经成为影响国际金融恐慌的重要原因。 |
| Keywords: | 短期资本流动，经济政策不确定性，恐慌指数，滚动窗口拔靴法格兰杰因果检验，TVP-VAR模型 |
| JEL: | C11 C51 E22 |
| Date: | 2016–08–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:73213&r=mac |
| By: | Jeseph, Mawejje; Paul, Lakuma |
| Abstract: | The Uganda business climate continued to improve. The index for the current quarter (July - September 2014) is 117.2 and has improved by 24.2 points on a year-on-year basis and by 13.5 points on a quarter-on-quarter basis. The rise in the index suggests continued favourable conditions for doing business in Uganda. The continued improvement in the business climate was driven largely by: low inflation which ensured favourable input and product prices and stronger consumer confidence, which in turn drove business expectations of improved profitability. Despite these positive sentiments, production capacity remained well below potential thus constraining labour demand to a significant degree. Indeed, both indices for capacity utilization and employment improved only modestly indicating underlying risks to business expansion and employment creation. Business perceptions and expectations for the next quarter (October – December 2014) remain favourable on account of expected continuity in price stability. However, persistent challenges due to electricity outages, access to finance and the proliferation of substandard and counterfeit products pose serious risks for doing business. |
| Keywords: | Community/Rural/Urban Development, Consumer/Household Economics, Financial Economics, Institutional and Behavioral Economics, Labor and Human Capital, |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eprcug:243925&r=mac |
| By: | Kan Chen; Mario Crucini |
| Abstract: | This approach is characterized by two key assumptions. The first is that the world interest rate is unaffected by economic developments in the small open economy, an exogeneity assumption. The second assumption is that this exogenous interest rate combined with domestic productivity is sufficient to describe equilibrium choices |
| Keywords: | Economic Analysis , Global , USA , Working Paper |
| JEL: | C55 C68 F41 F44 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:bbv:wpaper:1612&r=mac |
| By: | García, Juan Angel; Werner, Sebastian E. V. |
| Abstract: | This paper investigates the power of macroeconomic factors to explain euro area bond risk premia using (i) a large dataset that captures the nowadays data-rich environment (ii) the Elastic Net variable selection. We find that macroeconomic factors, in particular economic activity and sentiment indicators, explain 40% of the variability of risk premia before the crisis, and up to 55% during the financial crisis, and both for core countries (from 40% to 60%) and periphery countries (from 35% to 44%). Moreover, macroeconomic factor models clearly outperform financial indicators like the CP-factor and credit default swap (CDS) premia, even in periods of significant market turbulence. JEL Classification: E43, E44, G01, G12, C52, C55 |
| Keywords: | bond risk premium, financial crisis, macro factors, model selection, variable selection |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161938&r=mac |
| By: | Barnett, William; Su, Liting |
| Abstract: | In 2013, the Center for Financial Stability (CFS) initiated its Divisia monetary aggregates database, maintained within the CFS program called Advances in Monetary and Financial Measurement (AMFM), in accordance with Barnett (1980, 2012). The CFS is now making available Divisia monetary aggregates extended to include the transactions services of credit cards. The extended aggregates are called the augmented Divisia monetary aggregates and are available to the public in monthly releases. The new aggregates are also available to Bloomberg terminal users. The theory on which the new aggregates is based is provided in Barnett and Su (2014). In this paper, we provide detailed information on the data sources used in producing the new augmented Divisia monetary aggregates. |
| Keywords: | monetary aggregates; credit cards; aggregation theory; index number theory; data; Divisia index. |
| JEL: | C8 E4 G1 |
| Date: | 2016–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:73242&r=mac |
| By: | Rick van der Ploeg |
| Abstract: | Policy prescriptions for managing natural resource windfalls are based on the permanent income hypothesis: none of the windfall is invested at home and saving in an intergenerational SWF is dictated by smoothing consumption across different generations. Furthermore, with Dutch disease effects the optimal response is to intertemporally smooth the real exchange rate, smooth public and private consumption, and limit sharp fluctuations in the intersectoral allocation of production factors. We show that these prescriptions need to be modified for the following reasons. First, to cope with volatile commodity prices precautionary buffers should be put in a stabilisation fund. Second, with imperfect access to capital markets the windfall must be used to curb capital scarcity, invest domestically and bring consumption forward. Third, with real wage rigidity consumption must also be brought forward to mitigate transient unemployment. Fourth, the real exchange rate has to temporarily appreciate to signal the need to invest in the domestic economy to gradually improve the ability to absorb the extra spending from the windfall. Fifth, with finite lives the timing of handing back the windfall to the private sector matters and consumption and the real exchange rate will be volatile. Finally, with nominal wage rigidity we show that a Taylor rule is a better short-run response to a crash in commodity prices than a nominal exchange rate peg. |
| Keywords: | Dutch disease, permanent income, volatility, capital scarcity, domestic investment, absorption constraints, overlapping generations, nominal wage rigidity |
| JEL: | E60 F34 F35 F43 H21 H63 O11 Q33 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:oxcrwp:178&r=mac |
| By: | Oscar Valencia (Banco de la República de Colombia); Daniel Osorio (Banco de la República de Colombia); Pablo Garay |
| Abstract: | This paper builds a general equilibrium model that incorporates banks, financial frictions, default and a capital requirements. Ex-ante heterogeneous households decide how much to save or borrow for the sake of consumption (consumer credit) or the provision of housing services(mortgages). These choices are subject to borrowing limits, which depend on the value of real estate assets (for mortgages) or labour income (for consumer loans). The model includes final goods producers who must borrow in order to finance working capital/labour requirements (business credit borrowing) and intermediate good producers subject to nominal rigidities. Saving and borrowing are intermediated by a bank facing different capital requirements for each credit category. Any shock that has an impact on bank capital (for instance, a default shock) directly affects the bank’s income, the cost of external finance and, eventually, interest rates on loans. Changes in interest rates have second-round effects on labour and consumption through the borrowing limits. Simulations of the model suggest that the business cycle properties of credit and credit quality for each credit category are consistent with what is observed in the data. Classification JEL: E5, G21, G28 |
| Keywords: | DSGE Models; Financial Frictions; Macroprudential Policy |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:954&r=mac |
| By: | Ásgeir Daníelsson; Bjarni G. Einarsson; Magnús F. Guðmundsson; Svava J. Haraldsdóttir; Thórarinn G. Pétursson; Signý Sigmundardóttir; Jósef Sigurðarson; Rósa Sveinsdóttir |
| Abstract: | This Handbook contains an updated version of the Quarterly Macroeconomic Model of the Central Bank of Iceland (qmm). qmm and the underlying quarterly database have been under construction since 2001 at the Research and Forecasting Division of the Economics and Monetary Policy Department at the Bank and was ?rst implemented in the forecasting round for the Monetary Bulletin 2006/1 in March 2006. qmm is used by the Bank for forecasting and various policy simulations and therefore plays a key role as an organisational framework for viewing the medium-term future when formulating monetary policy at the Bank. This paper is mainly focused on the short and medium-term properties of qmm. Steady state properties of the model are documented in a paper by Daníelsson (2009). |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:ice:wpaper:wp71&r=mac |
| By: | Ruzima, Martin; Veerachamy, P |
| Abstract: | Keeping low inflation rate is regarded as a measure of macroeconomic stability, to deal with it; determinants of inflation have to be well managed. This paper investigates the influence of government spending, import of goods and services, population growth, agriculture output and foreign direct investment on inflation. Time series data for the period of 1970-2013 have been used. The ordinary least squares (OLS) method was employed to estimate the regression model. We find that agriculture output and import of goods and services are the main drivers of inflation in Rwanda. Population growth is statistically significant and negatively correlated with inflation. Therefore, government spending and foreign direct investment have an insignificant negative and positive impact on inflation respectively. Policy implications of the findings have been discussed. |
| Keywords: | Inflation, Foreign Direct Investment, Agriculture, Rwanda, OLS |
| JEL: | E31 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:73222&r=mac |
| By: | Muyambiri, Brian; Odhiambo, Nicholas Mbaya |
| Abstract: | This paper examines the causal relationship between both bank-based and market-based financial development and investment in Mauritius for the period from 1976 to 2014. The study assumes that investment and financial development have an accelerator-enhancing relationship. To accommodate the accelerator-enhancing relationship, the indicators for bank-based and market-based financial development are multiplied by the per capita GDP. In addition, to avoid variable omission bias, savings are used as an intermittent variable, thereby creating a trivariate Granger-causality model. The study makes use of the autoregressive distributed lag bounds testing approach. For both models, results indicate that both bank-based and market-based financial development Granger-cause investment, both in the short run and in the long run. The study, therefore, recommends that policies in Mauritius should focus mainly on promoting and strengthening banking sector and stock market development in order to spur investment. |
| Keywords: | Mauritius, Investment, Bank-based financial development, Market-based financial development |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:uza:wpaper:21161&r=mac |
| By: | Hassan, Tarek A. (University of Chicago); Mertens, Thomas M. (Federal Reserve Bank of San Francisco) |
| Abstract: | We show that the stock market may fail to aggregate information even if it appears to be efficient, and that the resulting decrease in the information content of prices may drastically reduce welfare. We solve a macroeconomic model in which information about fundamentals is dispersed and households make small, correlated errors when forming expectations about future productivity. As information aggregates in the market, these errors amplify and crowd out the information content of stock prices. When prices reflect less information, the conditional variance of stock returns rises, causing an increase in uncertainty and costly distortions in consumption, capital accumulation, and labor supply. |
| JEL: | D83 E02 E03 G01 |
| Date: | 2016–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2016-16&r=mac |
| By: | Michael Weber |
| Abstract: | The term structure of equity returns is downward-sloping: stocks with high cash flow duration earn 1.10% per month lower returns than short-duration stocks in the cross section. I create a measure of cash flow duration at the firm level using balance sheet data to show this novel fact. Factor models can explain only 50% of the return differential, and the difference in returns is three times larger after periods of high investor sentiment. I use institutional ownership as a proxy for short-sale constraints, and find the negative cross-sectional relationship between cash flow duration and returns is only contained within short-sale constrained stocks. |
| JEL: | E43 G12 G14 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22520&r=mac |
| By: | Edward, Batte Sennoga; John Mary, Matovu |
| Abstract: | Using a computable general equilibrium model, this paper examines the growth and welfare effects of three macroeconomic shocks in Uganda during the period 2010 17:changes in terms of trade, changes in international oil prices, and changes in development assistance inflows. Our analysis reveals four key findings. First, the largely positive impact of these three shocks on agriculture and services appears to offset the negative impact on industry leading to minimal deviations in real GDP growth from the business-as usual scenario. Moreover, the three shocks only lead to short-term as opposed to permanent deviations from trend growth in real GDP. Second, the three shocks are transmitted to the domestic economy and real GDP growth through changes in the terms of trade, exchange rate, and cost of production. Third, household welfare decreases and remains below the business-as-usual scenario during the entire simulation. Fourth, the poverty reduction rate is lower under the three external shocks compared to the business-as-usual scenario. |
| Keywords: | Environmental Economics and Policy, Labor and Human Capital, Public Economics, Resource /Energy Economics and Policy, Sub-Saharan Africa, Uganda, Macroeconomic Shocks, Economic Growth, Employment and Household Welfare, Computable General Equilibrium, |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eprcop:244096&r=mac |
| By: | Kahn, Robert B.; Meade, Ellen E. |
| Abstract: | In this paper, we discuss the evolution of central bank interactions since the early 1970s following the breakdown of the managed exchange-rate system that was negotiated at Bretton Woods. We review the most important forums or organizations through which central banks have engaged in diplomacy. We then discuss the mobilization of coordination through diplomacy using three examples over the past 30 years: the Plaza Accord in 1985 negotiated by the G-5; the response to the Asian financial crisis in 1997-98, led by the International Monetary Fund (IMF) with heavy participation from G-7 finance ministries and central banks; and the response to the global financial crisis that began in 2007. For each of these examples, we provide the economic circumstances at the time, discuss how the response was mobilized, and evaluate its success. Our main conclusion is that the relationship-building that is inherent in multilateral interaction has provided a springboard for coordination in times of stress or crisis. Moreover, crises matter in that they can be turning points in terms of the actions taken and the countries included in the dialogue; thus, the groupings themselves are to some extent endogenous to events. Finally, we use the lens of diplomacy and coordination to trace out the path for central bank diplomacy going forward. |
| Keywords: | Central bank coordination ; Global financial institutions ; International monetary system |
| JEL: | F33 E58 F55 |
| Date: | 2016–07–30 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2016-62&r=mac |
| By: | Barroso, Ricardo Vieira; Lima, Joaquim Ignacio Alves Vasconcellos; Lucchetti, Alexandre Henrique; Cajueiro, Daniel Oliveira |
| Abstract: | We develop an agent-based model to study the impacts of a broad range of regulation policies over the banking system. It builds on an iterated version of the \citet{DiamondDybvig1983} framework and resorts to the experience-weighted attraction learning scheme of \citet{CamererHo1999} to model agents' adaptive learning. Thereby, we can capture not only the direct impacts of regulation policies, but also the ones that take part through shifting agents' adaptive strategies. Our results show that the introduction of an interbank clearinghouse is a good instrument to face the risk of contagion; the regulatory guidelines of the Basel Accord are effective in reducing the probability of bank failure; and the adoption of a deposit insurance can be adequate to avoid bank runs. However, we also show that these policies have drawbacks, and can either reduce bank activity or stimulate moral hazard. |
| Keywords: | Interbank network, regulation, agent-based model, adaptive learning |
| JEL: | E58 G18 G2 G28 |
| Date: | 2016–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:73308&r=mac |