nep-mac New Economics Papers
on Macroeconomics
Issue of 2016‒11‒06
seventy papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Macrofinancial History and the New Business Cycle Facts By Jordà, Òscar; Schularick, Moritz; Taylor, Alan M.
  2. Macroeconomics and Consumption By Muellbauer, John
  3. Productivity Shocks and Uncertainty Shocks in a Model with Endogenous Firms Exit and Inefficient Banks By Lorenza Rossi
  4. Why are labor markets in Spain and Germany so different? By Mikel Casares; Jesús Vázquez
  5. Monetary Policy Tradeoffs Between Financial Stability and Price Stability By Malik Shukayev; Alexander Ueberfeldt
  6. Stock market cycles and supply side dynamics: two worlds, one vision? By Paul De Grauwe; Eddie Gerba
  7. How secular is the current economic stagnation? By Maria Roubtsova
  8. The Estimation of Financial Conditions Indices for the Major OECD Countries By E. Philip Davis; Simon Kirby; James Warren
  9. Macro-financial linkages in the Polish economy: combined impulse-response functions in SVAR models By Dobromił Serwa; Piotr Wdowiński
  10. The E-Monetary Theory By Duong Ngotran
  11. Asymmetric Government Expenditure: A Comparison of Advanced and Developing Countries By Ali Askin Culha
  12. The Value of Constraints on Discretionary Government Policy By Martin, Fernando M.
  13. Implications of Shadow Bank Regulation for Monetary Policy at the Zero Lower Bound By Falk Mazelis; ;
  14. Forward Guidance without Common Knowledge By George-Marios Angeletos; Chen Lian
  15. Lithuania in the Euro Area: Monetary Transmission and Macroprudential Policies By Margarita Rubio; Mariarosaria Comunale
  16. Financial Development and Economic Growth in Sri Lanka By Rasika Perera; Masaru Ichihashi
  17. Local Public Investment and Regional Business Cycle Fluctuations in Japan By Tomomi Miyazaki; Haruo Kondoh
  18. Fragility of Resale Markets for Securitized Assets and Policy of Asset Purchases By Martin Kuncl
  19. Log-linear Approximation versus an Exact Solution at the ZLB in the New Keynesian Model By Gauti B. Eggertsson; Sanjay R. Singh
  20. Cyclical Variation of Fiscal Multiplier in Turkey By Cem Cebi; K. Azim Ozdemir
  21. Systemic risk, macroprudential policy, bank capital requirements, real estate. By Stijn Ferrari; Mara Pirovano; Pablo Rovira Kaltwasser
  22. Why Has Inflation Been So Unresponsive to Economic Activity in Recent Years? By Robert G. Murphy
  23. Policy Responses to Commodity Price Fluctuations By Javier G. Gómez-Pineda
  24. Structural factors, unemployment and monetary policy: the useful role of the natural rate of interest By Francesco Furlanetto; Paolo Gelain
  25. Currency Manipulation By Hassan, Tarek; Mertens, Thomas; Zhang, Tony
  26. Currency Manipulation By Tarek A. Hassan; Thomas M. Mertens; Tony Zhang
  27. Investigating the Interaction between the Volatility of Exchange Rate and Stock Returns in Four Asian Countries By SEK, SIOK KUN
  28. Managing Risk Taking with Interest Rate Policy and Macroprudential Regulations By Simona E. Cociuba; Malik Shukayev; Alexander Ueberfeldt
  29. Optimal policy rules at home, crisis and quantitative easing abroad By McNelis, Paul D.
  30. Managing Risk Taking with Interest Rate Policy and Macroprudential Regulations By Simona Cociuba; Malik Shukayev; Alexander Ueberfeldt
  31. Managing Risk Taking with Interest Rate Policy and Macroprudential Regulations By Cociuba, Simona; Shukayev, Malik; Ueberfeldt, Alexander
  32. Macroprudential tools, transmission and modelling By Oriol Carreras; E Philip Davis; Rebecca Piggott
  33. Do Consumers Really Follow a Rule of Thumb? Three Thousand Estimates from 130 Studies Say "Probably Not" By Tomas Havranek; Anna Sokolova
  34. Business Cycles in Small, Open Economies: Evidence from Panel Data Between 1900 and 2013 By Wataru Miyamoto; Thuy Lan Nguyen
  35. Unemployment Hysteresis and Structural Change in Europe By Kurmas Akdogan
  36. Fighting Crises By Gary Gorton; Guillermo Ordoñez
  37. A Macroeconomic Model with Financially Constrained Producers and Intermediaries By Tim Landvoigt; Stijn Van Nieuwerburgh; Vadim Elenev
  38. The Use of Models in Producing OECD Macroeconomic Forecasts By David Turner
  39. Layoff risk, the welfare cost of business cycles, and monetary policy By Yuta Takahashi; Lawrence Schmidt; Konstantin Milbradt; Ian Dew-Becker; David Berger
  40. Optimal Monetary Policy in Behavioral New Keynesian Model By Lahcen, BOUNADER
  41. Buffer-Stock Saving and Households' Response to Income Shocks By Fella, Giulio; Frache, Serafin; Koeniger, Winfried
  42. Public Capital and Asset Prices: Time-series Evidence from Japan By Kazuki Hiraga; Masafumi Kozuka; Tomomi Miyazaki
  43. Alternative Resolution to the Mehra?Prescott Puzzle: Verification by the Original Data By Hideaki Tamura; Yoichi Matsuabayashi
  44. International R&D Funding and Patent Collateral in an R&D-Growth Model By Huang, We-Chi; Chen, Ping-ho; Lai, Ching-Chong
  45. Optimal Fiscal Policy in a Model with Uninsurable Idiosyncratic Shocks By Marcelo Zouain Pedroni; Sebastian Dyrda
  46. Macroprudential Policies in Low-Income Countries By Filiz Unsal; Margarita Rubio
  47. Does foreign bank penetration affect the risk of domestic banks? Evidence from emerging economies By Jeon, Bang; Wu, Ji; Chen, Minghua; Wang, Rui
  48. Optimal Monetary Policy when Information is Market-Generated By Isabella Blengini; Kenza Benhima
  49. The Eurozone deposit rates' puzzle: choosing the right benchmark By Julien Pinter; Charles Boissel
  50. Optimal policy with heterogeneous agents and aggregate shocks : An application to optimal public debt dynamics By François Legrand; Xavier Ragot
  51. Determinants of joblessness during the economic crisis: the impact of criminality in the Italian labour market By Silvia Fedeli; Vito Mariella; Marco Onofri
  52. Understanding Wage Floor Setting in Industry-Level Agreements: Evidence from France By Fougère, Denis; Gautier, Erwan; Roux, Sébastien
  53. Lifecycle Consumption Under Different Income Profiles: Experimental Evidence By John Duffy; Yue Li
  54. Size and Development of the Shadow Economies of 157 Countries Worldwide: Updated and New Measures from 1999 to 2013 By Hassan, Mai; Schneider, Friedrich
  55. Is there really a Global Business Cycle? A Dynamic Factor Model with Stochastic Factor Selection By Tino Berger; Lorenzo Pozzi
  56. Forecasting Chilean Inflation with the Hybrid New Keynesian Phillips Curve: Globalisation, Combination, and Accuracy By Carlos Medel
  57. Determinants of Chinese Government Size: An Extreme Bounds Analysis By Philip Gunby; Yinghua Jin
  58. Monetary Policy, Credit Markets and Banking Regulation By Daniel Sanches; Todd Keister
  59. Housing, Mortgages, and Self Control By Schlafmann, Kathrin
  60. Optimal Central Bank Communication By Mirko Wiederholt
  61. Public debt frontiers: The Greek case Abstract: This paper attempts to quantify the maximum amount of debt that a government can sustain by itself. Using a Dynamic General Equilibrium model where the government is fully characterized, we compute the steady state inverse relationship between the public debt to output ratio and the size of the government, measured as the total public expenditures to output ratio. This line, called the debt frontier, divides the debt/output, expenditure/output space in two regions: The upper contour set corresponds to debt to output ratios where public debt is long-run unsustainable. Calibration of the model for the Greek economy to ?scal targets reveals that, for the period just before the current recession, i.e. 2002-2006, the debt to GDP ratio was well below the calculated frontier, and that Greek ?scal ?gures where in line with other euro area countries. We conclude that an original ?scal indiscipline did not cause the debt crisis and we have to look for alternative causes such as self-ful?lling crises such as the gambling for redemption hypothesis. By Gonzalo F. de-Córdoba; José L. Torres
  62. Chances and risks of a European unemployment benefit scheme By Dolls, Mathias
  63. Heterogeneous firms and the micro origins of aggregate fluctuations By Glenn Magerman; Karolien De Bruyne; Emmanuel Dhyne; Jan Van Hove
  64. Consumption and Expenditure in Sub-Saharan Africa: The Role of Self-Farming over the Lifecycle By Leandro Magalhaes; Dongya Koh; Raül Santaeulàlia-Llopis
  65. The Real GDP Rate in European Union. A Panel Data Approach By Mihaela Simionescu
  66. Vocational Considerations and Trends in Social Security Disability By Michaud, Amanda M.; Nelson, Jaeger; Wiczer, David
  67. The Heterogeneous Effects of Government Spending: It's All About Taxes By Gaston Navarro; Axelle Ferriere
  68. Marriage and Marriage Markets By Grossbard, Shoshana
  69. Exogenous Macroeconomic Shocks and their Propagation in Bosnia And Herzegovina By Bojan Baskot
  70. Relume: A fractal analysis for the US stock market By Taro Ikeda

  1. By: Jordà, Òscar; Schularick, Moritz; Taylor, Alan M.
    Abstract: In advanced economies, a century-long near-stable ratio of credit to GDP gave way to rapid financialization and surging leverage in the last forty years. This "financial hockey stick" coincides with shifts in foundational macroeconomic relationships be- yond the widely-noted return of macroeconomic fragility and crisis risk. Leverage is correlated with central business cycle moments, which we can document thanks to a decade-long international and historical data collection effort. More financialized economies exhibit somewhat less real volatility, but also lower growth, more tail risk, as well as tighter real-real and real-financial correlations. International real and finan- cial cycles also cohere more strongly. The new stylized facts that we discover should prove fertile ground for the development of a new generation of macroeconomic models with a prominent role for financial factors.
    Keywords: credit; financial hockey stick; leverage; Macroeconomics; moments
    JEL: E01 E13 E30 E32 E44 E51 F42 F44 G12
    Date: 2016–10
  2. By: Muellbauer, John
    Abstract: The failure of the ubiquitous New Keynesian "Dynamic Stochastic General Equilibrium"(NK-DSGE) models to capture interactions of finance and the real economy is widely-recognized since the 2008-9 financial crisis. NK-DSGE models exclude money, debt and asset prices and, importantly, ignore changing credit markets. These problems stem from assuming unrealistic micro-foundations for household behaviour, and that aggregate behaviour mimics a fully-informed "representative agent" (both assumptions are embodied in the underlying "rational expectations permanent income" hypothesis (REPIH)). This survey critiques the NK-DSGE models and its integral REPIH model, and discusses alternative post-crisis general equilibrium models which do incorporate debt and allow crises to occur. But neither model type can be directly applied to policy-making. The survey reviews misspecifications in standard non-DSGE macro-models used by central banks (e.g. the Fed.'s FRB-US), and related co-integration literature linking consumption with household portfolios. These too omit most of the "financial accelerator", ignoring credit shifts and crucially, aggregating liquid, illiquid assets, debt and housing into a single "net worth" construct. The survey's second focus is to improve non-DSGE models for policy using the Latent Interactive Variable Equation System (LIVES) approach, in which aggregate consumption is jointly modelled with the main elements of household balance sheets, extracting credit conditions as a latent variable. Empirical work on aggregate data is surveyed revealing the important role of debt and financial assets and the time and context-dependent role of housing collateral. Rather than "one-size-fits-all" monetary and macro-prudential policy, institutional differences between countries then imply major differences for monetary policy transmission and policy.
    Keywords: asset prices.; Consumption; credit constraints; DSGE; finance and the real economy; financial crisis; Household portfolios; macroeconomic policy models
    JEL: E17 E21 E44 E51 E52 E58 G01
    Date: 2016–10
  3. By: Lorenza Rossi (Department of Economics and Management, University of Pavia)
    Abstract: We consider a NK-DSGE model with endogenous firms' creation and destruction together with monopolistic competitive banks, where defaulting ?firms do not repay loans to banks. This framework implies: i) an endogenous and countercyclical number of firms destruction; ii) an endogenous and countercyclical bank markup. We study the effects of a shock to both the level and the volatility of the aggregate productivity. In response to a level shock, the interaction between i) and ii) generates a stronger propagation mechanism with respect to a model with exogenous exit and to a model with efficient banks. Remarkably, our model shows that a shock to the volatility of productivity, referred as an uncertainty shock, is recessionary. It implies a decline in firms’ creation, an increase in firms' destruction and an increase in banks’ markup. Estimating a small BVAR we find that our theoretical results are well supported by the empirical responses to uncertainty shocks.
    Keywords: fi?rms' ?endogenous exit, countercyclical bank markup, productivity shocks, uncertainty shock, BVAR.
    JEL: E32 E44 E52 E58
    Date: 2016–10
  4. By: Mikel Casares (Departamento de Economía-UPNA); Jesús Vázquez (Universidad del País Vasco (UPV/EHU))
    Abstract: The volatility of unemployment fluctuations has been about 3 times higher in Spain than in Germany over the recent business cycles (1996-2013). In contrast, fluctuations of the rate of wage inflation were significantly more volatile in Germany than in Spain. We estimate a New-Keynesian model and find several explanatory factors: wage rigidity has been higher in Spain, the labor force has been more elastic in Germany than in Spain, large and persistent shocks augmenting the labor force have been estimated for Spain whereas in Germany there have been substantial shocks reducing the intensity of hours per worker, and the ECB’s policy design brought monetary shocks with much greater influence to the Spanish unemployment.
    Keywords: unemployment, Germany versus Spain, DSGE models
    JEL: E12 E23 E32
    Date: 2016
  5. By: Malik Shukayev; Alexander Ueberfeldt
    Abstract: We analyze the impact of interest rate policy on financial stability in an environment where banks can experience runs on their short-term liabilities, forcing them to sell assets at fire-sale prices. Price adjustment frictions and a state-dependent risk of financial crisis create the possibility of a policy tradeoff between price stability and financial stability. Focusing on Taylor rules with monetary policy possibly reacting to banks’ short-term liabilities, we find that the optimized policy uses the extra tool to support investment at the expense of higher inflation and output volatility.
    Keywords: Financial stability, Monetary policy framework, Transmission of monetary policy
    JEL: E44 D62 G01 E32
    Date: 2016
  6. By: Paul De Grauwe (LONDON SCHOOL OF ECONOMICS); Eddie Gerba (Banco de España)
    Abstract: This paper compares two state-of-the-art but very distinct methods used in macroeconomics: rational-expectations DSGE and bounded rationality behavioural models. Both models are extended to include financial frictions on the supply side. The result in both frameworks is that production, supply of credit and the front payment to capital producers depend heavily on stock market cycles. During phases of optimism, credit is abundant, access to production capital is easy, the cash-in-advance constraint is lax, risks are undervalued, and production booms. But with a reversal in market sentiment, the contraction in all these parameters is deep and sometimes asymmetric. This is all the more evident in the behavioural model, where economic agents’ cognitive limitations exacerbate the contraction. While both models capture the empirical regularities very well, the validation exercise is even more favourable to the behavioural model
    Keywords: supply side, beliefs, financial frictions, model validations
    JEL: B41 C63 C68 E22 E23 E37
    Date: 2016–10
  7. By: Maria Roubtsova (Centre d'Economie de l'Université de Paris Nord (CEPN))
    Abstract: From the burst of the dotcom bubble in 2000, until the global financial crisis that started in August 2007, the global economy was growing. During that phase, macroeconomics went through an era of general optimism around the idea of having reached a great moderation, with high steady growth and low stable inflation. Central bankers thought they managed to dampen the economic cycles. This era came to an end following the meltdown which started with the global financial crisis of 2007. And as among economic agents, macroeconomists’ general state of mind went from optimism to pessimism. Almost ten years since the beginning of the crisis, growth is not back to its pre-crisis trends. Therefore, macroeconomists are debating the notion of a secular stagnation. Is the economy on a long-term stagnation trend, if so, for what reasons, and how to address this situation? This paper offers a critical review of the debates among macroeconomists around this notion of secular stagnation, a concept which was invented by Alvin Hansen following the global economic crisis of the 1930s, and was brought back into the public debate largely by Lawrence Summers since the end of 2013. This literature review starts with a brief synthesis of the original debate about secular stagnation, launched by Hansen in 1938, and ended in the mid-1950s, since these debates inspired contemporary theorists. The second part highlights the main elements of neoclassical explanations for secular stagnation. The third part focuses on the Minskian idea of the end of a debt super-cycle. The last part offers a contemporary reading of the unleashing of the contradictions of capitalism, and the tendency of mature capitalism to generate oligopolies, as a cause for long stagnation.
    Keywords: macroeconomics, secular stagnation, balance sheet recession, financialization, private debt, growth and distribution
    JEL: E39 E44 E66 G01
    Date: 2016–10
  8. By: E. Philip Davis; Simon Kirby; James Warren
    Abstract: Financial conditions indices (FCIs) have been developed to summarise financial conditions and also supplement more traditional macroeconomic forecasting. They capture market expectations but also quantitative and survey information. This paper seeks to provide up to date financial conditions indices for six countries, France, Germany, Italy, Japan, the United Kingdom and the United States, as well as the euro area, updating earlier results by the OECD. The addition of the period of the financial crisis period has made radical changes to the original results of the FCI estimation. Country-specific estimates provide a number of wrong signs and insignificant coefficients. We find in general that the panel (and NiGEM) based FCIs are more satisfactory. Furthermore, a promising avenue for further research is the dynamic factor/principal components approach. Estimation des indices des conditions financières pour les grands pays de l'OCDE Les indices des conditions financières (ICF) ont été élaborés afin de récapituler les conditions financières et compléter les prévisions macroéconomiques plus classiques. Ils incluent les attentes des marchés mais aussi le traitement des informations quantitatives et les données d’enquêtes. Ce document vise à fournir les ICF les plus récents de six pays : Allemagne, États-Unis, France, Italie, Japon et Royaume-Uni, ainsi que la zone euro, et à actualiser les indices antérieurs établis par l'OCDE. La prise en compte de la période de la crise financière a radicalement modifié les estimations initiales de l’ICF. Les estimations nationales livrent un certain nombre de faux signaux et de coefficients non significatifs. D’une manière générale, nous pensons que les ICF estimés en panel (et à partir du modèle économétrique NiGEM) donnent des résultats plus satisfaisants. En plus, l’analyse des facteurs dynamiques /analyse des composantes principales représentent une approche prometteuse à explorer pour la suite des recherches.
    Keywords: panel estimates, financial conditions index, macro-financial linkages
    JEL: E32 E44 E47
    Date: 2016–11–03
  9. By: Dobromił Serwa; Piotr Wdowiński
    Abstract: We estimated a structural vector autoregressive (SVAR) model describing the links between a banking sector and a real economy. We proposed a new method to verify robustness of impulse-response functions in a SVAR model. This method applies permutations of the variable ordering in a structural model and uses the Cholesky decomposition of the error covariance matrix to identify parameters. Impulse response functions are computed for all permutations and are then combined. We explored the method in practice by analyzing the macro-financial linkages in the Polish economy. Our results indicate that the combined impulse response functions are more uncertain than those from a single specification ordering but some findings remain robust. It is evident that macroeconomic aggregate shocks and interest rate shocks have a significant impact on banking variables.
    Keywords: vector autoregression, Cholesky decomposition, combined impulse response, banking sector, real economy.
    JEL: C32 C51 C52 C87 E44 E58
    Date: 2016
  10. By: Duong Ngotran
    Abstract: Using the Smolyak grid, we solve a DSGE model where there are two types of money: reserves (e-money that banks deposit at the central bank) and zero maturity deposits (e-money that is issued by banks). Transactions between bankers are settled by reserves, while other ones are settled by zero maturity deposits. Our model, featuring only one housing demand shock, can match some key facts in the Great Recession: (i) the investment falls sharply, (ii) the excess reserves skyrocket but the money multiplier plummets, (iii) the household debt declines, (iv) the long duration of the interbank rate at the lower bound - the interest rate paid on reserves, (v) the sharp deflation then back to inflation immediately after the central bank conducts quantitative easing. Due to the maturity mismatch between deposits and loans, we find that the large scale asset purchase program is very effective in the short run but creates deflation and lower outputs in the long run. After a period of time since conducting quantitative easing, a recommended policy is to slowly raise the interest rate paid on reserves even if the central bank does not see the inflation signal.
    JEL: E4 E5
    Date: 2016–10–29
  11. By: Ali Askin Culha
    Abstract: This paper studies the responsiveness of government expenditures to business cycles and introduces an index of asymmetric government expenditures using panel data for a broad set of advanced and developing countries during the period 1981-2014. The empirical findings show that government expenditures tend to be procyclical in developing countries but acyclical in advanced economies. In addition, it is found that government expenditures respond in a countercyclical manner during bad times in advanced countries, but in a strongly procyclical manner during good times in developing countries. The results also indicate that the index of asymmetric government expenditures for developing countries tend to be higher than that of the advanced countries.
    Keywords: Government expenditure, Procyclicality, Countercyclicality, Asymmetry
    JEL: E32 E62 H50
    Date: 2016
  12. By: Martin, Fernando M. (Federal Reserve Bank of St. Louis)
    Abstract: This paper investigates how institutional constraints discipline the behavior of discretionary governments and evaluates the welfare properties of such restrictions. The focus is on constraints implemented in actual economies: inflation and interest rate targets, and deficit and debt ceilings. I find that most welfare gains from these restrictions arise when constraining government behavior during normal times, which to a large extent is sufficient to discipline policy in adverse times. It is not optimal to ever suspend constraints when facing expenditure shocks, whereas for other types of shocks, the costs of suspending constraints during abnormal times is minimal. For a variety of aggregate shocks considered, the best policy is to impose a minimum primary surplus of about half a percent of output. The optimal design of policy constraints carries some risk, as choosing the wrong target or an inappropriate implementation time can lead to large welfare losses.
    Keywords: time-consistency; discretion; government debt; inflation; deficit; fiscal constraints; inflation targeting; institutional design; political frictions.
    JEL: E52 E58 E61 E62
    Date: 2016–02–27
  13. By: Falk Mazelis; ;
    Abstract: Counter to the credit channel of monetary transmission, monetary policy tightening induces a rise in lending by two di erent types of non-bank nancial institutions (NBFI): shadow banks and investment funds. A monetary DSGE model is able to replicate the empirical facts when augmented with interme- diaries that allow for regulatory arbitrage on the one hand, and household portfolio rebalancing on the other. Therefore NBFI reduce the e ectiveness of the bank lending channel, which posits a decrease in bank lending following monetary tightening. Given the pending regulation of the nancial system, I study how regulation of the shadow banking sector may a ect the monetary transmission mechanism, especially during a zero lower bound (ZLB) episode. I nd that bringing shadow banks back onto the balance sheets of commercial banks is bene cial for consumption smoothing. Alternatively, regulating them like investment funds results in a milder recession during, and a quicker escape from, the ZLB. This is because a large demand shock that moves the economy to the ZLB acts in a similar way to a monetary tightening due to the inability to lower the policy rate to the unconstrained level. Consequently, the bank lending channel becomes operational and its e ectiveness can be reduced via less reliance on deposit funding.
    JEL: E32 E44 E52 G11
    Date: 2016–10
  14. By: George-Marios Angeletos; Chen Lian
    Abstract: Forward guidance relies on shifting expectations of income and inflation. These expectations matter through general-equilibrium mechanisms, including two known as the deflationary spiral and the income multiplier. Recasting these expectations and these mechanisms in terms of higher-order beliefs reveals how the predictions of the New-Keynesian model—and some of its anomalies—hinge of the combination of a strong equilibrium concept with strong informational assumptions. Relaxing these assumptions anchors the expectations and attenuates the mechanisms. This attenuation increases with the horizon at which forward guidance operates, as well as with the degree of price flexibility. We thus lessen, not only the forward-guidance puzzle, but also the paradox of flexibility. We also operationalize the notion that policy makers may find it hard to shift expectations of income and inflation even if they can easily shift expectations of policy.
    JEL: C72 D82 E03 E32 E43 E52 E58
    Date: 2016–10
  15. By: Margarita Rubio (University of Nottingham); Mariarosaria Comunale (Bank of Lithuania)
    Abstract: In this paper, we develop a two-country monetary union new Keynesian general equilibrium model with housing and collateral constraints, to be calibrated for Lithuania and the rest of the euro area. Within this setting, and following the recent entrance of Lithuania in the EMU, the aim of this paper is twofold. First, we study how shocks are transmitted differently in the two regions, considering the recent common monetary policy. Then, we analyze how macroprudential policies should be conducted in Lithuania, in the context of the EMU. As a macroprudential tool, we propose a decentralized Taylor-type rule for the LTV which responds to national deviations in output and house prices. We find that, given the housing market features in Lithuania, common shocks are transmitted more strongly in this country than in the rest of the euro area. In terms of macroprudential policies, results show that the optimal policy in Lithuania with respect to the euro area may have a different intensity and that it delivers substantial benefits in terms of financial stability.
    Keywords: Macroprudential policy, housing market, LTV, monetary union, financial stability
    JEL: E32 F44 F36
    Date: 2016–10–27
  16. By: Rasika Perera (Graduate School for International Development and Cooperation, Hiroshima University); Masaru Ichihashi (Graduate School for International Development and Cooperation, Hiroshima University)
    Abstract: A well-developed financial sector can affect a country’s economic development by channeling financial resources in the most productive way and by providing sufficient credit to the private sector for investments. Studying the relationship between financial development and economic growth has become increasingly important. Although there are a significant number of studies on this subject, ideas about the relationship between financial development and economic growth are controversial due to mixed results. The theoretical background to this relationship has a long history. In 1911, Schumpeter argued that financial development plays an essential role in economic development because intermediary financial institutions have the capacity to allocate savings to more productive investments that promote economic progress. Other empirical studies have shown unidirectional, bidirectional or no relations between these two factors. Sri Lanka introduced reforms to its financial sector in 1977 by implementing an open economic policy. Therefore, studying the relationship between financial development and economic growth in this country is important. The objective of this study is to examine the relationship between financial development and economic growth in Sri Lanka for the period 1952 to 2014. After considering time series characteristics of the data, this study employs vector error correction methodology. This study uses five variables: real per capita GDP, ratio of broad money to GDP, ratio of investments to GDP, deposit interest rate in real terms and trade ratio.The results of this study confirm that there is a unidirectional relationship from financial development to economic growth in Sri Lanka. In addition, the investment ratio and trade ratio negatively affect the real per capita GDP and broad money ratio, while the deposit interest rate positively affects both variables. There are two cointegrating relationships among the five variables, and the error correction coefficients show economically and statistically significant results. The error correction coefficient of the GDP relationship is -0.0430 while error correction for broad money supply is -0.3693. This study highlights the importance of developing the financial sector in Sri Lanka to increase the growth of the country’s GDP. The interest rate has become the significant factor for GDP growth and for implementing monetary policy. The open economic policy has significant effect on money supply, and money supply affects the economic growth in the short term. Therefore, policy makers should consider about the time range in making policies.
    Keywords: Financial development; economic growth; vector error correction; Sri Lanka;
    JEL: E44 F63 O16 R11
    Date: 2016–10
  17. By: Tomomi Miyazaki (Graduate School of Economics, Kobe University); Haruo Kondoh (Department of Economics, Seinan Gakuin University)
    Abstract: This paper examines the relationship between regional business cycle fluctuations and local public investment in Japan. The empirical results show the possibility that a part of the local public investment decided by political factors may amplify regional business cycle fluctuations. @ @
    Keywords: Local public investment; Volatility of the regional economy; Regional business cycles
    JEL: E32 E62 H30 H54 R53
    Date: 2016–09
  18. By: Martin Kuncl
    Abstract: Markets for securitized assets were characterized by high liquidity prior to the recent financial crisis and by a sudden market dry-up at the onset of the crisis. A general equilibrium model with heterogeneous investment opportunities and information frictions predicts that, in boom periods or mild recessions, the degree of adverse selection in resale markets for securitized assets is limited because of the reputation-based guarantees by asset originators. This supports investment and output. However, in a deep recession, characterized by high dispersion of asset qualities, there is a sudden surge in adverse selection due to an economy-wide default on reputation-based guarantees, which persistently depresses the output in the economy. Government policy of asset purchases limits the negative effects of adverse selection on the real economy, but may create a negative moral hazard problem.
    Keywords: Business fluctuations and cycles, Credit and credit aggregates, Economic models, Financial markets, Financial stability, Financial system regulation and policies
    JEL: E32 E5 G01 G2
    Date: 2016
  19. By: Gauti B. Eggertsson; Sanjay R. Singh
    Abstract: How accurate is a log-linear approximation of the New Keynesian model when the nominal interest rate is bounded by zero? This paper compares the solution of the exact non-linear model to the log-linear approximation. It finds that the difference is modest. This applies even for extreme events in numerical experiments that replicate the U.S. Great Depression. The exact non-linear model makes the same predictions as the log-linear approximation for key policy questions such as the size and sign of government spending and tax multipliers. It also replicates well known paradoxes like the paradox of toil and the paradox of price flexibility. The paper also reconciles different findings reported in the literature using Calvo versus Rotemberg pricing.
    JEL: E30 E50 E60
    Date: 2016–10
  20. By: Cem Cebi; K. Azim Ozdemir
    Abstract: This paper aims to investigate cyclical variation of government spending multiplier for Turkey over the period of 1990:q1-2015:q4. We use a time series model, namely local projection method, to estimate the variation in the fiscal multiplier under two different regimes: low and high growth regimes with respect to long-term economic growth. In line with the literature our results confirm that the effectiveness of fiscal policy enhances at times of low growth compared with times of high growth. Turning to the components of government spending, we find that the magnitude of government investment multiplier is larger than that of government consumption multiplier in both regimes. This evidence supports the view that an expansionary fiscal policy via public investment has a profound effect on output compared to public consumption. However, we find an evidence that the influence of government consumption on GDP increases substantially at times of low growth. All in all, we suggest policymakers to use public investment rather than public consumption in order to stimulate the economy during economic expansion and prefer to increase public consumption at the times of economic slow down.
    Keywords: Fiscal Policy, State-dependent fiscal multipliers, Local Projection
    JEL: E62 H30
    Date: 2016
  21. By: Stijn Ferrari (National Bank of Belgium); Mara Pirovano (National Bank of Belgium); Pablo Rovira Kaltwasser (National Bank of Belgium)
    Abstract: In December 2013 the National Bank of Belgium introduced a sectoral capital requirement aimed at strengthening the resilience of Belgian banks against adverse developments in the real estate market. This paper assesses the impact of this macroprudential measure on mortgage lending spreads. Our results indicate that affected banks reacted heterogeneously to the introduction of the measure. Specifically, mortgage-specialised and capital-constrained banks increase mortgage lending spreads by a greater amount. As expected, the impact of the measure on mortgage loan pricing has been rather modest in economic terms.
    Keywords: Regions, productivity, labour costs, linked panel data
    JEL: E44 E58 G21 G28
    Date: 2016–10
  22. By: Robert G. Murphy (Boston College)
    Abstract: Standard Phillips curve models relating price inflation to measures of slack in the economy suggest that the United States should have experienced an episode of deflation during the Great Recession and the subsequent sluggish recovery. But although inflation reached very low levels, prices continued to rise rather than fall. More recently, many observers have argued that inflation should have increased as the unemployment rate declined and labor markets tightened, but inflation has remained below the Federal Reserve’s policy target. This paper confirms that the slope of the Phillips curve has decreased over recent decades and is very close to zero today. I modify the Phillips curve to allow its slope to vary continuously through time drawing on theories of price-setting behavior when prices are costly to adjust and when information is costly to obtain. I find that adapting the Phillips curve to allow for time-variation in its slope helps explain inflation before, during, and after the Great Recession.
    Keywords: Inflation, Phillips curve, Great Recession
    JEL: E30 E31
    Date: 2016–04–30
  23. By: Javier G. Gómez-Pineda (Banco de la República de Colombia)
    Abstract: The world economy has recently been hit by commodity price fluctuations, with first round effects on noncore inflation and second round effects on core inflation. The policy response to commodity price fluctuations depends on the first and second round effects as well as on the strength of the central bank reaction to noncore inflation. The impulse responses and the historical error decomposition exercises show that the second round effects have followed two cycles, the first one before and after Lehman crisis; the second one, that started in 2010, exerted particularly strong downward pressure on interest rates during 2015-2016. The results are obtained with a global model of the largest five systemic economies plus one non systemic economy. In the model, latent variables are obtained with the multivariate Kalman filter and parameters are estimated with Bayesian methods. Classification JEL: E58; E37; E43; Q43
    Keywords: Commodity prices; Oil price shocks; Second round effects; Inflation
    Date: 2016–10
  24. By: Francesco Furlanetto (Norges Bank (Central Bank of Norway)); Paolo Gelain (Norges Bank (Central Bank of Norway))
    Abstract: We study the role of monetary policy in response to variations in unemployment due to structural factors, modeled as exogenous changes in matching efficiency and in the size of the labor force. We fi?nd that monetary policy should play a role in such a scenario. Both negative shocks to the matching efficiency and negative shocks to the labor force increase infl?ation, thus calling for an increase in the interest rate when policy is conducted following Taylor-type rules. However, the natural rate of interest declines in response to both shocks. The optimal Ramsey policy prescribes small deviations from price stability and lowers the interest rate, thus tracking the natural rate of interest in response to both shocks. Structural factors in the labor market may have contributed to the recent decline in the natural rate of interest in the US.
    Keywords: Optimal Monetary Policy, Taylor Rules, Natural Rate of Interest, Natural Rate of Unemployment, Labor Force Shocks
    JEL: E32
    Date: 2016–10–27
  25. By: Hassan, Tarek; Mertens, Thomas; Zhang, Tony
    Abstract: We propose a novel, risk-based transmission mechanism for the effects of currency manipulation: policies that systematically induce a country's currency to appreciate in bad times, lower its risk premium in international markets and, as a result, lower the country's risk-free interest rate and increase domestic capital accumulation and wages. Currency manipulations by large countries also have external effects on foreign interest rates and capital accumulation. Applying this logic to policies that lower the variance of the bilateral exchange rate relative to some target country (``currency stabilization''), we find that a small economy stabilizing its exchange rate relative to a large economy increases domestic capital accumulation and wages. The size of this effect increases with the size of the target economy, offering a potential explanation why the vast majority of currency stabilizations in the data are to the US dollar, the currency of the largest economy in the world. A large economy (such as China) stabilizing its exchange rate relative to a larger economy (such as the US) diverts capital accumulation from the target country to itself, increasing domestic wages, while decreasing wages in the target country.
    Keywords: currency returns; exchange rate stabilization; fixed exchange rate; managed float; uncovered interest parity
    JEL: E4 E5 F3 F4 G11 G15
    Date: 2016–10
  26. By: Tarek A. Hassan; Thomas M. Mertens; Tony Zhang
    Abstract: We propose a novel, risk-based transmission mechanism for the effects of currency manipulation: policies that systematically induce a country's currency to appreciate in bad times, lower its risk premium in international markets and, as a result, lower the country's risk-free interest rate and increase domestic capital accumulation and wages. Currency manipulations by large countries also have external effects on foreign interest rates and capital accumulation. Applying this logic to policies that lower the variance of the bilateral exchange rate relative to some target country (``currency stabilization''), we find that a small economy stabilizing its exchange rate relative to a large economy increases domestic capital accumulation and wages. The size of this effect increases with the size of the target economy, offering a potential explanation why the vast majority of currency stabilizations in the data are to the US dollar, the currency of the largest economy in the world. A large economy (such as China) stabilizing its exchange rate relative to a larger economy (such as the US) diverts capital accumulation from the target country to itself, increasing domestic wages, while decreasing wages in the target country.
    JEL: E4 E5 F3 F4 G11 G15
    Date: 2016–10
  27. By: SEK, SIOK KUN
    Abstract: In this paper, we are interested to investigate how changes in exchange rate regime/ flexibility can affect the interaction between the volatility of exchange rate and stock returns in four selected Asian countries (Indonesia, Korea, Philippines and Thailand). The reason to focus the study on these countries is due to the drastic change in their exchange rate regime from fixed to flexible regime and inflation targeting aftermath the Asia financial crisis of 1997. In particular, we are interested to investigate the above matter by comparing the results of pre- inflation targeting (IT) and post-IT periods in addition to reveal macroeconomic factors that determine the relationship. For the purpose of analyses, a wide range of generalized autoregressive conditional heteroskedasticity, GARCH-type models are used to model the volatility of exchange rate and stock returns respectively for each country. The generated volatility series are used to be analyzed for the interaction effects under vector autoregressive (VAR) model. Our results detect significant bi-directional relationship between volatility of exchange rate and stock returns in three markets: Indonesia, Korea and Thailand. Also, the monetary variables (interest rate, money supply, international reserves) have significant impacts on determining the volatility of exchange rate and stock returns in Indonesia, Korea and Thailand. In general, the adoption of inflation targeting leads to different significant impacts across the four countries.
    Keywords: inflation targeting, exchange rate regime, volatility of stock
    JEL: E0 F3 F30 F62
    Date: 2015
  28. By: Simona E. Cociuba (University of Western Ontario); Malik Shukayev (University of Alberta); Alexander Ueberfeldt (Bank of Canada)
    Abstract: We develop a model in which a financial intermediary's investment in risky assets - risk taking is excessive due to limited liability and deposit insurance, and characterize the policy tools that implement efficient risk taking. In the calibrated model, coordinating interest rate policy with state-contingent macroprudential regulations - either capital or leverage regulation, and a tax on profits - achieves efficiency. Interest rate policy mitigates excessive risk taking, by altering the return and the supply of collateralizable safe assets. In contrast to commonly-used capital regulation, leverage regulation has stronger effects on risk taking and calls for higher interest rates.
    Keywords: Financial Intermediation; Risk Taking; Interest Rate Policy; Macroprudential Regulations; Capital Requirements; Leverage Ratio
    JEL: E44 E52 G11 G18
    Date: 2016
  29. By: McNelis, Paul D.
    Abstract: This paper examines the international transmission of financial shocks which originate in, and are partially offset by, quantitative easing in a large financially-stressed country. Using a two-country model, we evaluate the adjustment in the non-stressed home country, following recurring negative shocks to productivity and banking-sector balance-sheet/terminal wealth ratios. We first examine the application of QE policies in the stressed foreign country. Coupling quantitative easing with crisis events abroad magnifies the financial instability transmitted to the rest of the world. Our results show that the non-stressed home country can make effective use of tax-rate rules for consumption, or taxes to stabilize financial-sector net worth in times of prolonged crisis abroad.
    Keywords: quantitative easing, financial frictions, unconventional monetary policy
    JEL: E44 E58 F38 F41
    Date: 2016–10–26
  30. By: Simona Cociuba; Malik Shukayev; Alexander Ueberfeldt
    Abstract: We develop a model in which a financial intermediary’s investment in risky assets—risk taking—is excessive due to limited liability and deposit insurance and characterize the policy tools that implement efficient risk taking. In the calibrated model, coordinating interest rate policy with state-contingent macroprudential regulations, either capital or leverage regulation, and a tax on profits achieves efficiency. Interest rate policy mitigates excessive risk taking by altering both the return and the supply of collateralizable safe assets. In contrast to commonly used capital regulation, leverage regulation has stronger effects on risk taking and calls for higher interest rates.
    Keywords: Financial system regulation and policies, Monetary policy framework
    JEL: E44 E52 G11 G18
    Date: 2016
  31. By: Cociuba, Simona (University of Western Ontario); Shukayev, Malik (University of Alberta, Department of Economics); Ueberfeldt, Alexander (Bank of Canada)
    Abstract: We develop a model in which a financial intermediarys investment in risky assets risk taking is excessive due to limited liability and deposit insurance, and characterize the policy tools that implement efficient risk taking. In the calibrated model, coordinating interest rate policy with state-contingent macroprudential regulations either capital or leverage regulation, and a tax on pro ts achieves efficiency. Interest rate policy mitigates excessive risk taking, by altering the return and the supply of collateralizable safe assets. In contrast to commonly-used capital regulation, leverage regulation has stronger effects on risk taking and calls for higher interest rates.
    Keywords: Financial intermediation; risk taking; interest rate policy; macroprudential regulations; capital requirements; leverage ratio
    JEL: E44 E52 G11 G18
    Date: 2016–11–01
  32. By: Oriol Carreras; E Philip Davis; Rebecca Piggott
    Abstract: The purpose of this paper is twofold. First, we review the theoretical and empirical literature on macroprudential policies and tools. Second, we test empirically the effectiveness of several macroprudential policies and tools using three datasets from the IMF and BIS that cover up to 19 OECD countries during 2000-2014, thus giving wide coverage of instruments. In addition, our focus on OECD countries gives us access to a wider range of control variables whose omission may lead to excessively favourable results on the impact of macroprudential policies. We find evidence that macroprudential polices are effective at curbing house price and credit growth, albeit some tools are more effective than others. These include, in particular, taxes on financial institutions and strict loan-to-value and debt-to-income ratio limits.
    Date: 2016–10
  33. By: Tomas Havranek; Anna Sokolova
    Abstract: We show that three factors combine to explain the mean excess sensitivity reported in studies estimating consumption Euler equations: the use of macro data, publication bias, and liquidity constraints. When micro data are used, publication bias is corrected for, and the households under examination do not face liquidity constraints, the literature implies no evidence for the excess sensitivity of consumption to income. Hence little remains for pure rule-of-thumb behavior. The results hold when we control for 45 additional variables reflecting the methods employed by researchers and use Bayesian model averaging to account for model uncertainty. The estimates of excess sensitivity are also systematically affected by the order of approximation of the Euler equation, the treatment of non-separability between consumption and leisure, and the choice of proxy for consumption.
    Keywords: Bayesian model averaging, excess sensitivity, liquidity constraints, publication bias, rule-of-thumb consumers
    JEL: C83 D12 E21
    Date: 2016–10
  34. By: Wataru Miyamoto; Thuy Lan Nguyen
    Abstract: Using a novel data set for 17 countries dating from 1900 to 2013, we characterize business cycles in both small developed and developing countries in a model with financial frictions and a common shock structure. We estimate the model jointly for these 17 countries using Bayesian methods. We find that financial frictions are an important feature for not only developing countries but also small developed countries. Furthermore, business cycles in both groups of countries are marked with trend productivity shocks. Common disturbances explain one-third of the fluctuations in small, open economies (both developed and developing), especially during important worldwide phenomena.
    Keywords: Business fluctuations and cycles, Economic models, International topics
    JEL: F41 F44 E13 E32
    Date: 2016
  35. By: Kurmas Akdogan
    Abstract: We examine the unemployment hysteresis hypothesis for 31 European countries, US and Japan, using alternative linear and nonlinear unit root tests, taking into account possible structural breaks. Two types of smooth transition models - Exponential Smooth Transition Autoregressive (ESTAR) and Asymmetric Exponential Smooth Transition Autoregressive (AESTAR) - are employed to account for the nonlinear mean-reverting behavior in unemployment due to heterogeneity in hiring and firing costs across firms. Four main results emerge: First, the hysteresis hypothesis is rejected for 60 percent of the countries in our sample. Second, nonlinear models capture the asymmetries in unemployment dynamics over the business cycle for some countries. Third, many of the series display multiple structural breaks which might point out shifts in mean level of unemployment. Fourth, forecasting powers of our nonlinear models display poor performance against the linear AR specification. The results have policy implications for the debate on the benefits of demand or supply side policies for tackling the current unemployment problem in Europe.
    Keywords: Unemployment hysteresis, Nonlinear adjustment, Structural breaks, Forecasting
    JEL: E24 C22 E27
    Date: 2016
  36. By: Gary Gorton; Guillermo Ordoñez
    Abstract: In fighting a financial crisis, opacity (keeping the names of banks borrowing at emergency lending facilities secret) and stigma (the cost of having a bank’s name revealed) are desirable to restore confidence. Lending facilities raise the perceived average quality of all banks’ assets. Opacity reduces the costs of these facilities, creating an information externality that prevents runs even on banks not participating in lending facilities. Stigma is costly but keeps banks from revealing their participation, making opacity sustainable. The key tool for implementing optimal opacity while fine tuning stigma is the haircut for bonds offered as collateral in lending facilities.
    JEL: E32 E58 G01
    Date: 2016–10
  37. By: Tim Landvoigt (University of Texas at Austin); Stijn Van Nieuwerburgh (NYU Stern School of Business); Vadim Elenev (NYU Stern)
    Abstract: We solve a general equilibrium model with three types of agents and a government. Borrower-entrepreneurs produce output financed with long-term debt issued by financial intermediaries, subject to a leverage constraint. Intermediaries fund these loans combining deposits and their own equity, and are subject to a regulatory capital constraint. Savers provide funding to banks and to the government. Both entrepreneurs and banks make optimal default decisions. The government issues debt to finance budget deficits and to pay for bank rescue operations. We solve for macroeconomic quantities, the price of capital, the yield on safe bonds, and the credit spread. We study how financial and non-financial recessions differ, show that high credit spread forecasts future declines in economic activity, and study macro-prudential policies. Policies that limit corporate leverage and financial leverage reduce welfare. Their benefits for financial and macro-economic stability are outweighed by the costs from a smaller-sized economy. The two types of macroprudential policies have different implications for the wealth distribution.
    Date: 2016
  38. By: David Turner
    Abstract: This paper firstly describes the role of models in producing OECD global macroeconomic forecasts; secondly, reviews the OECD's forecasting track record; and finally, considers the relationship between forecast performance and models. OECD forecasts are not directly generated from a single global model, but instead rely heavily on expert judgment which is informed by inputs from a range of different models, with forecasts subjected to repeated peer review. For the major OECD economies, current year GDP growth forecasts exhibit a number of desirable properties including that they are unbiased, outperform naïve forecasts and mostly identify turning points. Moreover, there is a trend improvement in current-year forecasting performance which is partly attributed to the increasing use of high frequency ‘now-casting’ indicator models to forecast the current and next quarter’s GDP. Conversely, the track record of one-year-ahead forecasts is much less impressive; such forecasts are biased, often little better than naïve forecasts and are poor at anticipating downturns. Forecasts tend to cluster around those from other international organisations and consensus forecasts; it is particularly striking that differences in one-year-ahead forecasts between forecasters are relatively minor in comparison with the size of average errors made by all of them. This may reflect herding behaviour by forecasters as well as the mean reversion properties of models. These weaknesses in forecasting performance beyond the current year underline the importance of increased efforts to use models to characterise the risk distribution around the baseline forecast, including through the increased use of model-based scenario analysis. Le rôle des modèles dans la production des prévisions macroéconomique de l'OCDE Ce document décrit le rôle des modèles dans la production des prévisions macroéconomiques mondiales de l’OCDE, analyse a posteriori la performance des prévisions passées et examine le lien entre la qualité des prévisions et les modèles utilisés. Les prévisions de l’OCDE ne sont pas élaborées directement à partir d’un modèle mondial unique, mais reposent en grande partie sur des avis d’experts eux-mêmes formés à partir d’éléments provenant de différents modèles. Ces prévisions sont soumises à des spécialistes dans le cadre d’un processus itératif. En ce qui concerne les grandes économies de l’OCDE, les prévisions de croissance du PIB pour l’année en cours présentent un certain nombre de caractéristiques appréciables : elles sont non biaisées, plus exactes que les prévisions « naïves » et, dans la plupart des cas, identifient les points de retournement. En outre, on observe une amélioration tendancielle de la performance des prévisions pour l’année en cours, qui est en partie imputable au recours récent à des modèles d’indicateurs à haute fréquence permettant de prévoir le PIB du trimestre en cours et à venir (now-casting), mais aussi au poids croissant accordé à ces modèles et à l’amélioration de la qualité de leurs résultats. A contrario, l’analyse des prévisions à un an est bien moins convaincante ; ces prévisions sont biaisées, à peine meilleures que les prévisions « naïves » et peu efficaces pour prévoir les retournements de conjoncture. Elles sont généralement proches de celles des autres organisations internationales et du consensus des prévisionnistes, mais il est particulièrement frappant de constater que les disparités existant entre les prévisions à un an des différents prévisionnistes sont moindres comparées à l’ampleur des erreurs moyennes commises par l’ensemble de ces acteurs. Ce constat peut s’expliquer par le comportement moutonnier des prévisionnistes mais également par la tendance au retour à la moyenne qui caractérise les modèles. Ces faiblesses dans les prévisions à plus d’un an montrent qu’il importe d’intensifier les efforts visant à utiliser des modèles pour définir la distribution des risques autour de la prévision de référence, notamment en recourant davantage à l’analyse s’appuyant sur des modèles permettant de construire des scenarios.
    Keywords: forecasting, economic outlook, models, GDP growth
    JEL: E27 E32 F17
    Date: 2016–11–03
  39. By: Yuta Takahashi (Northwestern University); Lawrence Schmidt (University of Chicago); Konstantin Milbradt (Norwestern University); Ian Dew-Becker (Northwestern University); David Berger (Northwestern University)
    Abstract: The single strongest predictor of changes in the Fed Funds rate in the period 1982--2007 was the level of the layoff rate (initial unemployment claims divided by total employment). This fact is puzzling from the perspective of standard monetary models because they typically imply that the welfare gains of stabilizing employment fluctuations are small. We argue that these welfare costs are small because standard models do not capture the fact that when people lose their jobs, they tend to experience large, permanent, and largely uninsurable income losses. We augment a standard New Keynesian model with a labor market featuring endogenous countercyclical layoffs by firms that are associated with permanent reductions in human capital. In our benchmark calibration, welfare may be increased by 4 percent of lifetime consumption when the central bank's policy rule responds to the layoff rate. This provides a quantitative rationale for the Federal Reserve's dual mandate.
    Date: 2016
  40. By: Lahcen, BOUNADER
    Abstract: This paper conducts the first assessment of the optimal monetary policy in the case of behavioral New Keynesian model proposed by Gabaix (2016). Consistent with the previous studies, I find that monetary policy under commitment continues to be important for optimal policy, but the optimal policy is found to be more history-dependent than in the traditional New Keynesian model. Importantly, I find that monetary policy under discretion may be optimal under some constraints on the parameters of the model which seems to correspond better to the reality of the conduct of monetary policy in central banks of developing, emerging and transitional economies. This finding is considered as filling the gap that always has been between the practice and the theory of the optimal monetary policy.
    Keywords: Optimal Monetary Policy, Behavioral New Keynesian Model
    JEL: D84 E52
    Date: 2016–08–26
  41. By: Fella, Giulio (Queen Mary, University of London); Frache, Serafin (Central Bank of Uruguay); Koeniger, Winfried (University of St. Gallen)
    Abstract: We use the Italian Survey of Household Income and Wealth, a rather unique dataset with a long time dimension of panel information on consumption, income and wealth, to structurally estimate a buffer-stock saving model. We exploit the information contained in the joint dynamics of income, consumption and wealth to quantify the degree of insurance against income risk. The estimated model implies that Italian households can insure between 89 and 95 percent of a transitory and between 7 and 9 percent of a permanent income shock. Compared to existing empirical estimates for the same dataset, our findings suggest that Italian households do not have access to significant insurance beyond self-insurance.
    Keywords: consumption, wealth, income shocks, incomplete markets, insurance
    JEL: D91 E21
    Date: 2016–10
  42. By: Kazuki Hiraga (School of Political Science and Economics, Tokai University); Masafumi Kozuka (Faculty of Economics, University of Marketing and Distribution Sciences); Tomomi Miyazaki (Graduate School of Economics, Kobe University)
    Abstract: This research examines the effects of public infrastructure capital on asset prices in Japan over the periods from 1983:Q1 to 2008:Q4. The empirical results show that while public infrastructure capital forecasts the stock price returns and total factor productivity by Granger fs causality test after 1991, the contribution of public investment on stock returns is small by variance decomposition using Factor-Augmented VAR model. Our empirical evidence on the post high-growth era in Japan suggest that although public capital forecasts stock price returns and TFP, public infrastructure investment is not expected to play a key role of revitalizing capital markets. @
    Keywords: Public infrastructure capital in Japan; Stock price targeting; Lag-augmented VAR; Factor Augmented VAR;
    JEL: E44 G12 H54
    Date: 2016–09
  43. By: Hideaki Tamura (Graduate School of Economics, Kobe University); Yoichi Matsuabayashi (Graduate School of Economics, Kobe University)
    Abstract: Many extensive debates followed Mehra and Prescott fs (1985) sensational empirical results concerning the equity premium embodied in household equity portfolios. The problem of the equity premium?the Mehra?Prescott puzzle?arises because researchers overlook the factor of uncertainty in household consumption behaviour, thereby failing to account for the offsetting effect in the intertemporal substitution of consumption. Although many US empirical studies reject the consumption-based capital asset pricing model under a time-separable constant relative risk aversiontype utility function, we resolve this problem by formulating an expandedEuler equation that accommodates uncertainty using Mehra?Prescott fs original data.
    Keywords: Intertemporal consumption, Precautionary saving, Uncertainty, Offsetting effect, Euler equation, Equity premium puzzle
    JEL: C51 D81 D91 E21 G12
    Date: 2016–10
  44. By: Huang, We-Chi; Chen, Ping-ho; Lai, Ching-Chong
    Abstract: This paper develops an R&D-based growth model featuring international R&D funding and patent collateral. It then uses the model to examine how the international borrowing interest rate and the fraction of patent collateral will affect innovations and economic growth.
    Keywords: International R&D funding, patent collateral, R&D-based growth model
    JEL: E44 O31 O40
    Date: 2016–11–03
  45. By: Marcelo Zouain Pedroni (University of Amsterdam); Sebastian Dyrda (University of Toronto)
    Abstract: This paper studies optimal taxation in the standard incomplete markets model. We formulate a Ramsey problem and solve numerically for the optimal (time varying) paths of proportional capital and labor income taxes, (possibly negative) lump-sum transfers, and government debt. The solution maximizes welfare along the transition between an initial steady state, calibrated to replicate key features of the US economy, and an endogenously determined final steady state. We find that in the optimal (utilitarian) policy: (i) capital income taxes are front-loaded hitting the imposed upper bound of 100 percent for 33 years before decreasing to 45 percent in the long-run; (ii) labor income taxes are reduced to less than half of their initial level, from 28 percent to about 13 percent in the long-run; and (iii) the government accumulates assets over time reducing the debt-to-output ratio from 63 percent to ô€€€17 percent in the long-run. This leads to an average welfare gain equivalent to a permanent 4.9 percent increase in consumption. Though distortive, taxes reduce the variance both cross-sectionally and over time of after-tax income, increasing welfare for both a redistributive and an insurance motive which we quantify.
    Date: 2016
  46. By: Filiz Unsal (International Monetary Fund); Margarita Rubio (University of Nottingham)
    Abstract: In this paper, we develop a DSGE model to study the implementation of macroprudential policy in low-income countries (LICs). The model features an economy with two agents; households and entrepreneurs. Entrepreneurs are the borrowers in this economy and need capital as collateral to obtain loans. The macroprudential regulator uses the collateral requirement as the policy instrument. We compare two different ways of implementing the macroprudential policy: permanently increasing the collateral requirement (passive policy) versus an active time-varying rule responding to deviations of credit from its steady state. Results show that with perfect information, an active approach is more effective in increasing financial stability, without incurring in a long-run output cost. However, if the regulator is not able to observe the economic conditions perfectly, which is usually the case in LICs, a passive approach may be preferred.
    Date: 2016
  47. By: Jeon, Bang (Drexel University); Wu, Ji (Southwestern University of Finance and Economics); Chen, Minghua (Southwestern University of Finance and Economics); Wang, Rui (Southwestern University of Finance and Economics)
    Abstract: We investigate whether foreign bank penetration affects the risk-taking of domestic banks in emerging economies. By using bank-level data from 35 markets during the period of 2000-2014, we find significant evidence that the riskiness of domestic banks increases with the presence of foreign banks, and this finding is shown to be consistent in a series of robustness examinations. We also explore various conditions for the heterogeneity of the nexus between foreign bank penetration and domestic banks’ risk-taking, including: (1) what types of domestic banks are affected more by the presence of foreign banks, and (2) what patterns of foreign penetration exert more pronounced impact.
    Keywords: Foreign bank penetration; bank risk-taking; emerging economies
    JEL: E44 F36 G15 G21
    Date: 2016–09–01
  48. By: Isabella Blengini (Ecole hôtelière de Lausanne); Kenza Benhima (University of Lausanne (HEC))
    Abstract: In this paper we study how the endogenous nature of the signals ob- served by the private sector affects optimal monetary policy. Agents learn from sources of information that are not market-determined, such as news, but also from variables that are endogenously determined on the markets, such as prices or production. In that case, how can the central optimally condition its monetary instrument on its information? When signals re- ceived by private agents are purely exogenous, it is optimal for the central bank to directly steer the economy towards the efficient allocation. This can be achieved through a price stabilization objective. In this case the public does not need to infer the state of the economy and the central bank is in charge of all the action. When information is endogenous, the policy of the central bank is aimed at maximizing the information content of the market-determined variables that agents use as sources of information. This is achieved by exacerbating the natural response of prices to shocks. This result holds independently of the possibility of the central bank to directly communicate its information through public announcements.
    Date: 2016
  49. By: Julien Pinter (Centre d'Economie de la Sorbonne, Amsterdam University, University of Saint-Louis); Charles Boissel (Paris HEC)
    Abstract: The paper proposes an alternative benchmark to the EURIBOR to analyze the post-crisis puzzling behavior of deposit rates in the Eurozone. Using bank-level CDS data for 6 major euro-countries, we build a simple country-level index for banks' cost of unsecured funding. The use of this index instead of the traditionally used EURIBOR restores the cointegration relationship between deposit rates and their reckoned opportunity cost. It also suggests that deposits have actually not been significantly over-remunerated in most euro area countries since the financial crisis, in contrast with what is often argued. Our index appears as a good alternative to the EURIBOR, which we show has become irrelevant for many countries
    Keywords: deposit rates; euribor; cointegration; panel estimates; banks
    JEL: E43 E50 G10 G21
    Date: 2016–08
  50. By: François Legrand (EM Lyon); Xavier Ragot (Paris School of Economics)
    Abstract: Abstract We show that allocations in incomplete insurance-market economies can be represented as the solution of the program of a constrained planner. This representation allows for solving Ramsey programs in incomplete-market economies with aggregate shocks, and thus determining optimal policies in such setups. We apply this framework to derive optimal public debt and fiscal policy after a technology, a government spending or an uncertainty shock. We find that, for any adverse shock, public debt decreases whereas capital taxes increases on impact. This policy limits the fall in capital after such shocks. Simulations of the optimal solutions can be obtained by simple perturbation methods.
    Date: 2016
  51. By: Silvia Fedeli; Vito Mariella; Marco Onofri
    Abstract: On the basis of a newly built regional panel data set that considers, not only the evolution of employment in the Italian regions, but also indicators of counterfeiting activities and criminality, we empirically explore the link between employment performance and criminality during the period of a deep economic and financial crisis. We consider both unemployment and inactivity rates in order to check whether and to what extent, in a period of widely recognized economic crisis, criminal activities of counterfeit and other forms of crime have affected the labour market. We present results of GMM regressions showing a positive/peculiar effect of criminal activities on both the components of joblessness.
    Keywords: Inactivity rate, unemployment rate, criminality counterfeit, joblessness
    JEL: E24 J6
  52. By: Fougère, Denis (Sciences Po, Paris); Gautier, Erwan (LEMNA - University of Nantes); Roux, Sébastien (CREST-INSEE)
    Abstract: This paper examines empirically how industry-level wage floors are set in French industry-level wage agreements and how the national minimum wage (NMW) interacts with industry-level wage bargaining. For this, the authors use a unique dataset containing about 50,000 occupation-specific wage floors in 365 French industries over the period 2007-2015. They find that the NMW has a significant impact on the seasonality and on the timing of the wage bargaining process. Inflation, past sectoral wage increases and real NMW increases are the main drivers of wage floor adjustments; elasticities of wage floors with respect to these macro variables are 0.6, 0.4 and 0.2 respectively. Wage floor elasticities to inflation and to the NMW both decrease along the wage floor distribution but are still positive for all levels of wage floors.
    Keywords: collective bargaining, wages, minimum wage
    JEL: J31 J51 E24
    Date: 2016–10
  53. By: John Duffy (Department of Economics, University of California-Irvine); Yue Li (SUNY-Albany)
    Abstract: We report on a series of economic decision-making experiments exploring how individuals make lifecycle consumption and saving plans when they face different income profiles. We find that for every income profile we consider, subjects on average over- consume in the early periods of life and under-consume in later periods of life relative to the conditional optimum and any sudden drop in income reduces their lifetime utility. We conduct a specification search for a model to explain our data and find that a two-type model with one type consuming the conditional optimum and the other type consuming endowments best fits our data.
    Keywords: Bond markets; Lifecycle model; Consumption and savings; Retirement planning; Behavioral and experimental economics
    JEL: C92 C91 D91 E21 H55
    Date: 2016–10
  54. By: Hassan, Mai (University of Marburg); Schneider, Friedrich (University of Linz)
    Abstract: This paper is a first attempt to study the size and development of the shadow economies of 157 countries over 1999 to 2013. Using a MIMIC model, we find that higher tax and regulatory burden, unemployment and self-employment rates are drivers of the shadow economy, meaning that an increase of these causal variables increases the shadow economy. Our result also confirms previous findings of Friedrich Schneider, Andreas Buehn and Claudia Montenegro (2010). The estimated average of informality of 157 countries around the world, including developing, eastern European, central Asian and high income OECD countries averaged over 1999 to 2013 is 33.77% of official GDP. A critical discussion about the size of these macro-estimates comes to the conclusion that most likely the "true" shadow economy of these countries is only 69% of their estimated macro-MIMIC-values.
    Keywords: shadow economies of 157 countries, quality of institutions, tax and regulatory burden, MIMIC model
    JEL: C51 C82 E26 E41 H11 H26
    Date: 2016–10
  55. By: Tino Berger (University of Goettingen, Germany); Lorenzo Pozzi (Erasmus University Rotterdam, The Netherlands)
    Abstract: We investigate the presence of international business cycles in macroeconomic aggregates (output, consumption, investment) using a panel of 60 countries over the period 1961 - 2014. The paper presents a Bayesian stochastic factor selection approach for dynamic factor models with predetermined factors. The literature has so far ignored model uncertainty in these models as common factors (i.e., global, regional or otherwise) are typically imposed but not tested for. We focus in particular on the existence of a global business cycle as the literature has, in our opinion unjustifiably, taken for granted its existence. In contrast to the literature, we find no evidence to support its presence.
    Keywords: Global business cycle; dynamic factor model; Bayesian; model selection
    JEL: F44 C52 C32
    Date: 2016–10–20
  56. By: Carlos Medel
    Abstract: This article analyses the multihorizon predictive power of the Hybrid New Keynesian Phillips Curve (HNKPC) covering the period from 2000.1 to 2014.12, for the Chilean economy. A distinctive feature of this article is the use of a Global Vector Autoregression (GVAR) specification of the HNKPC to enforce an open economy version. Another feature is the use of direct measures of inflation expectations—Consensus Forecasts—differing from a fully-founded rational expectations model. The HNKPC point forecasts are evaluated using the Mean Squared Forecast Error (MSFE) statistic and statistically compared with several benchmarks, including combined forecasts. The results indicate that there is evidence supporting the existence of the HNKPC for the Chilean economy, and robust to alternative specifications. In predictive terms, the results show that in a sample previous to the global financial crisis, the evidence is mixed between atheoretical benchmarks and the HNKPC by itself or participating in a combined prediction. However, when the evaluation sample is extended to include a more volatile inflation period, the results suggest that the HNKPC (and combined with the random walk) delivers the most accurate forecasts at horizons comprised within a year. In the long-run the HNKPC deliver accurate results, but not enough to outperform the candidate statistical models.
    Date: 2016–10
  57. By: Philip Gunby (University of Canterbury); Yinghua Jin
    Abstract: This paper studies the factors associated with the size of the public sector as measured by government spending at the level of Chinese provinces using the method of extreme bounds analysis to identify robust correlates with public sector size. We find that almost all traditional "economic" and "social stability" factors are insignificant and not robust to model specification changes. In contrast, "political" factors such as the degree of fiscal decentralization and national transfers to provincial governments tend to be significant and robust. Our findings suggest that repeated government attempts to reduce the relative size of the Chinese government sector have failed because the political factors determining government spending haven't changed.
    Keywords: Government Size; Fiscal Decentralization; Wagner's Law; Extreme Bounds Analysis
    JEL: C52 H70 P20
    Date: 2016–11–04
  58. By: Daniel Sanches (Federal Reserve Bank of Philadelphia); Todd Keister (Rutgers University)
    Abstract: We study a model in which both money and private credit instruments can potentially be used as media of exchange to overcome trading frictions in decentralized markets. Entrepreneurs in our model have access to productive projects, but face credit constraints due to limited pledgeability of their returns. If credit claims cannot circulate, the optimal monetary policy is the Friedman rule, which leads to efficient patterns of exchange, but the equilibrium level of investment is inefficiently low. When credit claims do circulate, monetary policy affects the liquidity premium on private credit and thereby influences the cost of borrowing and the level of investment. The Friedman rule is no longer optimal; we show that the optimal policy instead strikes a balance between easing borrowing constraints for entrepreneurs and promoting efficient exchange. We relate our result to the traditional bank lending channel of monetary policy and derive implications for optimal banking regulation.
    Date: 2016
  59. By: Schlafmann, Kathrin
    Abstract: Using a quantitative theoretical framework this paper analyzes how problems of self control influence housing and mortgage decisions. The results show that people with stronger problems of self control are less likely to become home owners, even though houses serve as commitment for saving. The paper then investigates the welfare effects of regulating mortgage products if people differ in their degree of self control. Higher down payment requirements and restrictions on prepayment turn out to be beneficial to people with sufficiently strong problems of self control, even though these policies further restrict access to the commitment device.
    Keywords: Commitment Device; Housing; Mortgages; Self Control; Temptation
    JEL: D91 E21
    Date: 2016–10
  60. By: Mirko Wiederholt (Goethe University Frankfurt)
    Abstract: Communication has become an increasingly important aspect of monetary policy. This paper studies optimal central bank communication in a monetary DSGE model. The basic model setup resembles a New Keynesian model, but private-sector agents have limited attention and optimally allocate attention. Households and decision-makers in firms choose the attention devoted to fundamentals and announcements by the central bank. I characterize the optimal communication strategy by the central bank.
    Date: 2016
  61. By: Gonzalo F. de-Córdoba (Departamento de Teoría e Historia Económica, Universidad de Málaga); José L. Torres (Departamento de Teoría e Historia Económica, Universidad de Málaga)
    JEL: H5 H6
    Date: 2016–10
  62. By: Dolls, Mathias
    Abstract: The Eurozone debt crisis has revived the debate about deeper fiscal integration in the European Economic and Monetary Union (EMU). Some observers argue that fiscal risk sharing is necessary to make the Eurozone more resilient to macroeconomic shocks and to avoid its break-up. However, the main concerns relate to the issues of permanent transfers across Member States and moral hazard. The 2012 Four Presidents' Report suggested that fiscal integration could include a common unemployment insurance system. A White Paper outlining further steps necessary to complete EMU is to be released by the European Commission in the spring of 2017. This ZEW policy brief presents new research findings on the stabilizing and redistributive effects of a common unemployment insurance scheme for the euro area (henceforth EMU-UI).1 It provides insights regarding its potential added value and discusses moral hazard issues.
    Date: 2016
  63. By: Glenn Magerman (KULeuven, University of Leuven, Faculty of Economics and Business, Centre for Economic Studies); Karolien De Bruyne (KULeuven); Emmanuel Dhyne (Economics and Research Department, National Bank of Belgium and UMons); Jan Van Hove (KULeuven and Group)
    Abstract: This paper evaluates the impact of idiosyncratic productivity shocks to individual firms on aggregate output. Two sources of firm-level heterogeneity contribute to aggregate fluctuations: (i) asymmetries in supplier-buyer relationships and (ii) the skewed distribution of sales to final demand. We first develop a model with monopolistic competitive firms and derive a generalized centrality measure that takes these two sources of heterogeneity into account. The model is subsequently estimated using unique data on firm-to-firm transactions across all economic activities in Belgium. The model generates aggregate volatility from micro origins in the same order of magnitude as observed volatility in GDP. The top 100 firms contribute to 90% of the volatility generated by the model, underlining a strong granularity of the economy. Counterfactual analysis further shows that both sources of micro heterogeneity contribute substantially to aggregate fluctuations, while the relative contribution of each channel crucially depends on the labor share in the economy.
    Keywords: Heterogeneous firms, networks, input-output linkages, aggregate volatility
    JEL: E3 L1
    Date: 2016–10
  64. By: Leandro Magalhaes; Dongya Koh; Raül Santaeulàlia-Llopis
    Abstract: Using novel micro data we explore the lifecycle profiles of consumption and expenditure in Sub-Saharan Africa. Adult-equivalent expenditure shows a hump over the lifecycle that is twice larger in urban areas than in rural areas. In contrast to expenditure, consumption (measured in caloric intake) remains relatively stable across ages in both rural and urban areas, including in old age. Interestingly, consumption in old age is sustained by the increasing role of self-farmed food over the lifecycle, as opposed to traditional savings mechanisms. The specialization in self-farmed staple food leads to a nutritional loss.
    Keywords: consumption, Expenditure, Sub-Saharan Africa, Lifecycle, Self-farming, Nutritional Loss
    JEL: E21 O11 R20
    Date: 2016–09
  65. By: Mihaela Simionescu (Institute for Economic Forecasting, Romanian Academy)
    Abstract: The main aim of this article is to explain the evolution of real GDP rate in European Union (EU-28) over the period 2002-2013 using panel data sets. Several dynamic models (6 models) explained the real GDP growth, an increase in the real GDP rate in the previous period with 1% generating an increase in the real GDP rate in the current period with a value between 0.3% and 0.4%. A fixed effects model with individual effects and effects in time explained the real GDP growth using as explanatory variable the employment. Moreover, a panel data model is estimated, but the assumptions related to errors are not checked. Simulations are made for 2014 and 2015 using the dynamic model and the fixed effects model, the latter anticipating higher GDP rate than most of the dynamic models.
    Keywords: GDP rate, dynamic model, fixed effects model, employment
    JEL: C15 C53
    Date: 2016–10
  66. By: Michaud, Amanda M. (Indiana University); Nelson, Jaeger (Indiana University); Wiczer, David (Federal Reserve Bank of St. Louis)
    Abstract: Along with health, Social Security Disability Insurance (SSDI) evaluates work-limiting disability by considering vocational factors including age, education, and past work experience. As the number of SSDI applicants and awards has increased, these vocational criteria are increasingly important to acceptances and denials. A unique state-level dataset allows us to estimate how these factors relate to the SSDI award process. These estimates are used to asses how changes to the demographic and occupational composition have contributed to awards trends. In our results, the prevalence of workers in their 50s are especially important. Further, increasing educational attainment lowers applications and vocational awards.
    Keywords: Disability Insurance; Vocational Criteria; Demographic Decomposition
    JEL: E62 I13
    Date: 2016–10–16
  67. By: Gaston Navarro (Federal Reserve Board); Axelle Ferriere (European University Institute)
    Abstract: Empirical work suggests that government spending generates large expansions of output and consumption. Most representative-agent models predict a moderate expansion of output, and a crowding-out of consumption. We reconcile these findings by taking into account the distribution of taxes. Using US data from 1913 to 2012, we provide evidence that government spending induces larger expansions in output and consumption when financed with more progressive taxes. We then develop a model with heterogeneous households and idiosyncratic risk, to show that a rise in government spending can be expansionary, both for output and consumption, only if financed with more progressive labor taxes. Key to our results is the model endogenous heterogeneity in households’ marginal propensities to consume and labor supply elasticities. In this respect, the distributional impact of fiscal policy is central to its aggregate effects.
    Date: 2016
  68. By: Grossbard, Shoshana (San Diego State University)
    Abstract: This paper reviews models of marriage, with special emphasis on how the sex ratio (the ratio of marriageable men to women) can help explain measurable outcomes such as marriage formation, intra-marriage distribution of consumption goods, savings, labor supply, leisure, type of relationship, divorce, and intermarriage. Predictions are based on Demand and Supply analyses by Becker and the author. Evidence in support of the predictions is reported, most of it based on recent literature.
    Keywords: marriage, marriage markets, sex ratio, savings, consumption, labor supply, cohort
    JEL: E2 J11 J12 J16 J22 O15 R2
    Date: 2016–10
  69. By: Bojan Baskot (Central Bank of Bosnia and Herzegovina)
    Abstract: Vector autoregressive (VAR) models are commonly used for macroeconomic analyses. However, there are several reasons why this tool has not been applied to the case of Bosnia and Herzegovina. As Bosnia and Herzegovina has a currency board system, I use a VAR model with exogenous variables (VARX) and consider two exogenous shocks: interest rates for countries in the Eurozone and remittances. My analysis confirms that Bosnia and Herzegovina is a small open economy highly dependent on foreign aid and remittances, and has no autonomous monetary policy because of the currency board system.
    Date: 2016–10
  70. By: Taro Ikeda (Graduate School of Economics, Kobe University)
    Abstract: This note relumes fractal analysis on macroeconomics. We present a fractal market hypothesis for US stock prices.
    Keywords: Fractal geometry, Hurst exponent, market efficiency, chaos
    JEL: C18 E39 G14
    Date: 2016–10

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