nep-mac New Economics Papers
on Macroeconomics
Issue of 2016‒11‒13
75 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Abductive reasoning in macroeconomics By Ashima Goyal
  2. The myth of economic growth in the United States By De Koning, Kees
  3. Macroeconomic and financial sector policies to better serve the economy and society By Jesus Ferreiro
  4. Supplementary Paper Series for the "Comprehensive Assessment" (3): Policy Effects since the Introduction of Quantitative and Qualitative Monetary Easing (QQE) -- Assessment Based on Bank of Japan's Large-scale Macroeconomic Model (Q-JEM) -- By Kazutoshi Kan; Yui Kishaba; Tomohiro Tsuruga
  5. Monetary Policy and the Stock Market: Time-Series Evidence By Michael Weber; Andreas Neuhierl
  6. Deflation probability and the scope for monetary loosening in the United Kingdom By Haberis, Alex; Masolo, Riccardo; Reinold, Kate
  7. Public Debt as Private Liquidity: Optimal Policy By George-Marios Angeletos; Fabrice Collard; Harris Dellas
  8. Forecasting the Probability of Recessions in South Africa: The Role of Decomposed Term-Spread and Economic Policy Uncertainty By Goodness C. Aye; Christina Christou; Luis A. Gil-Alana; Rangan Gupta
  9. Characterising the financial cycle in Luxembourg By Gaston Giordana; Sabbah Gueddoudj
  10. The shadow rate as a predictor of real activity and inflation: Evidence from a data-rich environment By Hännikäinen Jari
  11. Non-standard monetary policy, asset prices and macroprudential policy in a monetary union By Lorenzo Burlon; Andrea Gerali; Alessandro Notarpietro; Massimiliano Pisani
  12. When does the yield curve contain predictive power? Evidence from a data-rich environment By Jari Hännäkäinen
  13. The Power of Unconventional Monetary Policy in a Liquidity Trap By Masayuki Inui; Sohei Kaihatsu
  14. Optimal Inflation to Reduce Inequality By Lorenzo, Menna; Patrizio, Tirelli;
  15. Development of the economic cycle on labour market in the national economy and industry of the Czech Republi By Bozena Kaderabkova
  16. A Survey of the Empirical Literature on U.S. Unconventional Monetary Policy By Bhattarai, Saroj; Neely, Christopher J.
  17. Should Central Banks Care About Fiscal Rules? By Eric M. Leeper
  18. Confidence Cycles and Liquidity Hoarding By Volha Audzei
  19. Unsurprising shocks: information, premia, and the monetary transmission By Miranda-Agrippino, Silvia
  20. An Unconventional Approach to Evaluate the Bank of England's Asset Purchase Program By Matthias Neuenkirch
  21. LOLA 3.0: Luxembourg OverLapping generation model for policy Analysis By Luca Marchiori; Olivier Pierrard
  22. Mathematical model of the economic trend By Krouglov, Alexei
  23. Price Dispersion and Inflation Persistence By Kurozumi, Takushi; Van Zandweghe, Willem
  24. Putting Money to Work: Monetary Policy in a Low Interest Rate Environment By Steve Ambler
  25. Economic Policy Uncertainty and Unemployment in the United States: A Nonlinear Approach By Giovanni Caggiano; Efrem Castelnuovo; Juan Manuel Figueres
  26. Labour Shortages Driving Economic Growth? By Vasily Astrov; Serkan Çiçek; Rumen Dobrinsky; Vladimir Gligorov; Doris Hanzl-Weiss; Peter Havlik; Mario Holzner; Gabor Hunya; Michael Landesmann; Sebastian Leitner; Isilda Mara; Olga Pindyuk; Leon Podkaminer; Oliver Reiter; Sandor Richter; Robert Stehrer; Hermine Vidovic
  27. Does the volatility of commodity prices reflect macroeconomic uncertainty ? By M. Joëts; V. Mignon; T. Razafindrabe
  28. The Effect of ECB Forward Guidance on Policy Expectations By Paul Hubert; Fabien Labondance
  29. Sticky consumption and wealth effects in Switzerland By Alain Galli
  30. Saving behavior and housing wealth: Evidence from German micro data By Gröbel, Sören; Ihle, Dorothee
  31. Identifying Oil Price Shocks and Their Consequences:Role of Expectations and Financial Factors in the Crude Oil Market By Takuji Fueki; Hiroka Higashi; Naoto Higashio; Jouchi Nakajima; Shinsuke Ohyama; Yoichiro Tamanyu
  32. Cross-Sectional Features of Wealth Inequality in South Africa: Evidence from the National Income Dynamics Study By Samson Mbewe; Ingrid Woolard
  33. A dynamic factor model for forecasting house prices in Belgium By Marina Emiris
  34. Capitalist Spirit and the Markets: Why Income Inequality Matters By Aristotelis Boukouras
  35. Entrepreneurship in the Shadows: Wealth Constraints and Government Policy By Semih Tumen
  36. Latin America at a Crossroads: Controversies on Growth, Income Distribution and Structural Change By Aguiar de Medeiros, Carlos; Trebat, Nicholas
  37. Partially Disaggregated Household-level Debt Service Ratios: Construction and Validation By Elvery, Joel; Schweitzer, Mark E.
  39. The Pass-Through to Consumer Prices in CIS Economies: the Role of Exchange Rates, Commodities and Other Common Factors By Mariarosaria Comunale; Heli Simola
  40. The pass-through to consumer prices in CIS economies: The role of exchange rates, commodities and other common factors By Comunale, Mariarosaria; Simola, Heli
  41. Do Business Cycles Trigger Corruption? By Kouramoudou Keita; Hannu Laurila
  42. A Comparison of Weighted Time-Product Dummy and Time Dummy Hedonic Indexes By Jan de Haan; Rens Hendriks; Michael Scholz
  43. Training and Search on the Job By Lentz, Rasmus; Roys, Nicolas
  44. La provision forfaitaire permet-elle de réduire la procyclicalité de l'activité bancaire au Luxembourg ? By Gaston Giordana; Jean-Baptiste Gossé
  45. Would DSGE Models have predicted the Great Recession in Austria? By Fritz Breuss
  46. Macroeconomic revolution on shaky grounds: Lucas/Sargent critique’s inherent contradictions By Ronald Schettkat; Sonja Jovicic
  47. Are firm-level idiosyncratic shocks important for U.S. aggregate volatility? By Chen Yeh
  48. Do Seasonal Adjustments Induce Noncausal Dynamics in Inflation Rates? By Hecq, Alain; Telg, Sean; Lieb, Lenard
  49. Monetary Paradoxes of Baby-Sitting Cooperatives By Asad Zaman
  50. The European Stability Mechanism - bastion of calm or crisis accelerant? By Alexandra M. D. Hild; Bernhard Herz; Christian Bauer
  51. Which combination of fiscal and external imbalances to determine the long-run dynamics of sovereign bond yields? By M. Ben Salem; B. Castelletti-Font
  52. What is the Expected Return on a Stock? By Martin, Ian; Wagner, Christian
  53. Le fruit est mûr, il faut le cueillir By Bruno Tinel
  54. La competencia y la eficiencia en la banca colombiana By Astrid Martínez Ortiz; Luis Alberto Zuleta; Martha Misas; Lino Jaramillo
  55. Student responses to the changing content of school meals in India By Farzana Afridi; Bidisha Barooah; Rohini Somanathan
  56. Ben Bernanke in Doha: The effect of monetary policy on optimal tariffs By Lechthaler, Wolfgang
  57. Fiscal Policy, Government Polarization, and the Economic Literacy of Voters By Samuele Murtinu; Giulio Piccirilli; Agnese Sacchi
  58. The Aggregate Implications of Size Dependent Distortions By Roys, Nicolas
  59. Adaptive state space models with applications to the business cycle and financial stress By Delle Monache, Davide; Petrella, Ivan; Venditti, Fabrizio
  60. The missing assets and the size of Shadow Banking: an update By Davide Fiaschi; Imre Kondor; Matteo Marsili; Valerio Volpati
  61. Demand, Supply and Markup Fluctuations By Carlos Santos; Luis F. Costa; Paulo Brito
  62. Fiscal Policy, Government Polarization, and the Economic Literacy of Voters By Murtinu, Samuele; Piccirilli, Giulio; Sacchi, Agnese
  63. Inflation in Pakistan: Money or Oil Prices By Mehak Moazam; M. Ali Kemal
  64. The Long Shadow of a Fiscal Expansion By Chong-En Bai; Chang-Tai Hsieh; Zheng Michael Song
  65. Tracking Changes in the Intensity of Financial Sector's Systemic Risk By Xisong Jin; Francisco Nadal De Simone
  66. Macroeconomic Research After the Crisis : a speech at "The Elusive 'Great' Recovery: Causes and Implications for Future Business Cycle Dynamics" 60th annual economic conference sponsored by the Federal Reserve Bank of Boston, Boston, Massachusetts, October 14, 2016. By Yellen, Janet L.
  67. Imperfect Markets and the Properties of Macro-Economic-Environmental Models as Tools for Policy Evaluation By Bernd Meyer; Gerd Ahlert
  68. Essays on sovereign bond pricing and inflation-linked products By Simon, Zorka
  69. Finansal Küreselleşme Sürecinde Türkiye’de Para Politikalarının Evrimi, 1980-2014 By Hasan Cömert; Oktar Türel
  70. Housing and credit markets in Italy in times of crisis By Michele Loberto
  71. Geldpolitik, Arabellion, Flüchtlingskrise By von Prollius, Michael; Schnabl, Gunther
  72. Le fonctionnement des comptes d'opérations et leur rôle dans les relations entre la France et les pays africains By Bruno Tinel
  73. Synthesis Report; Empirical analysis for new ways of global engagement By Carolina Alves; Vivienne Boufounou; Konstantinos Dellis; Christos Pitelis; Jan Toporowski
  74. "Completing Europe's Economic and Monetary Union": Any support from the citizens? By Farina, Francesco; Tamborini, Roberto
  75. Observatorio Fiscal y Financiero de las CC.AA. By J. Ignacio Conde-Ruiz; Carmen Marín; Juan F. Rubio-Ramírez

  1. By: Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: Macroeconomic analytical frameworks change with events they are unable to explain. The process is closer to abductive reasoning that is based on both events and analysis, unlike induction which is data-based and deduction where analysis dominates. Abduction reasons backwards from the outcome, to deduce the framework with which it is compatible. Therefore it is useful to study how macroeconomic conceptual frameworks evolve after anomalous outcomes such as crises. The post-crisis churning is assessed from this perspective using criteria such as greater generality, systemic feedback, and structural aspects. Abductive reasoning is also used to extract the structure of aggregate demand and supply consistent with the observed negative correlation inflation and growth in India. If prolonged growth slowdowns do not reduce inflation, it suggests underlying aggregate supply is elastic but volatile, so that supply-side issues, not excess demand, are primary inflation drivers. Monetary and fiscal policy need to focus on elements that reduce costs, while avoiding sharp cuts in aggregate demand.
    Keywords: Abduction; Evolution of macroeconomics; Global financial crisis; Aggregate demand and supply
    JEL: E10 E44 E32
    Date: 2016–07
  2. By: De Koning, Kees
    Abstract: Many economic philosophies –whether subscribed to by left or right wing politicians or economists- have as their shared aim to promote economic growth rates. Such growth in output is seen as the solution to many problems, including reducing unemployment and increasing household income levels. A key area of contention between right and left is whether such growth should be achieved primarily by actions taken in the private sector or those organized by a government. Main drivers to support economic growth include the option of additional fiscal spending and/or the use of monetary policy in which a central bank’s interest rate plays a key role. After 2008, central banks introduced quantitative easing in the policy mix. Output growth reflects a short-term positive change in the volume of goods and services produced. Output growth does not reflect the changes taking place in individual household disposable income levels, their debt obligations or their employment status. Output growth does neither reflect government nor corporate debt levels nor does it reflect the savings built up in pension funds and the lending based on such savings. In the U.S. over the period 1997-2007 total household mortgage debt as a percentage of nominal GDP grew from 43.6% in 1997 to 73.3% by 2007: a debt explosion relative to income growth levels. The Federal Reserve took no action to slow down this debt accumulation when it was happening. In the aftermath, due to its nature, the Federal Reserve was not equipped to help individual households with their subsequent liquidity crisis. It could do nothing for the 23.250 million households who were confronted with foreclosure proceedings over the period 2005-2014. Lowering interest rates does not solve outstanding household debt problems and neither does buying up government bonds or mortgage-backed securities. The commercial banking sector was no help either. Their overriding profit objective forced them to claim back outstanding mortgage debt as quickly as possible, irrespective of the economic consequences. The U.S. government saw its revenues drop by $3 trillion over the period 2007-2015 as a consequence of the household debt crisis. It also borrowed and spent another $7 trillion to help restore economic growth over this period. The result was a lack-luster period of economic growth. Economic evidence supports the view that households should have been helped in overcoming their liquidity squeeze. A lender of last resort for individual households is needed. Once operational, the myth of economic growth will turn into reality.
    Keywords: economic growth in U.S., financial crisis, mortgage debt levels in U.S.,foreclosures, home ownership in U.S., Fed funds rate, quantitative easing, lender of last resort for individual households, National Mortgage Bank, early warning system, home mortgage quality control system,index-linked Treasuries for pensioners
    JEL: E21 E3 E32 E4 E41 E5 E52 E58 E6
    Date: 2016–10–24
  3. By: Jesus Ferreiro (Department of Applied Economics V, University of the Basque Country UPV/EHU)
    Abstract: Financialisation processes have been generated by the widespread liberalization and deregulation measures adopted in most developed and emerging economies. The result of these processes has been an unparalleled increase in the size of financial systems. Recent empirical research is showing that the relation between the size of financial system and economic activity is not a linear one and that in many countries we can talk of a an excessive size of financial systems as far as the current size of finances is well above the threshold that leads to a negative impact of finance on economic activity and growth and welfare. On the other hand, financialisation has come in parallel, fuelling them and being fuelled by, a change in the macroeconomic policy strategy (with the dominance of a monetary policy focused on price stability), a re-distribution of income in favour of top incomes and capital incomes, and a de-regulation and liberalization of financial markets and institutions. The paper argues that to promote a better financial system, economic authorities must adopt measures rationalizing (i.e., reducing) the size of financial markets at the same time that a more strict regulation of all financial markets and units be implemented. Moreover, the strategy of macroeconomic policy must be reformed, upgrading the current role given to fiscal policy and giving more relevance to real economic objectives, like economic growth and full employment. Finally, there must be an income redistribution in favour of lowest incomes and labour incomes.
    Keywords: Financialisation, macroeconomic policies, financial system, financial regulation, income distribution
    JEL: E44 E50 E61 E62 E63 E64 F45 F65 G01 G10 G28
    Date: 2016–06–30
  4. By: Kazutoshi Kan (Bank of Japan); Yui Kishaba (Bank of Japan); Tomohiro Tsuruga (Bank of Japan)
    Abstract: Three and a half years or so have passed since the Bank of Japan introduced Quantitative and Qualitative Monetary Easing (QQE) in April 2013. This paper presents a simulation exercise based on the Bank of Japan's large-scale macroeconomic model (Q-JEM) to assess the impact of policies since the introduction of QQE on Japan's economic activity and prices. In this exercise, we consider hypothetical scenarios assuming that QQE and subsequent easing measures had not been introduced, and conduct counterfactual simulations to examine how the Japanese economy and prices would have evolved under these scenarios. In this setting, we estimate the policy effects as the difference between the actual data and the counterfactual paths. We use two different starting points for the simulation: the introduction of QQE in Q2 2013, and the quarter before the introduction of QQE, when the Bank introduced its inflation target and markets may have anticipated a major policy change. Moreover, for each of the two different starting points, we consider two different cases in terms of what is regarded as part of the monetary policy shock brought about by QQE and subsequent policy measure. Specifically, in the first case, the monetary policy shock includes only the decline in real interest rates, and changes in exchange rates and stock prices are regarded as consequences of the policy shock only to the extent that they are explained within the model. In the second case, it includes all the changes in exchange rates and stock prices (beyond those predicted by the model). The simulation results indicate that in three out of the four scenarios, the year-on-year rate of change in the CPI (all items less fresh food and energy) would have stayed negative or close to zero percent without the introduction of QQE and subsequent policy measures.
    Keywords: Inflation; Inflation expectation; Macroeconomic model; Unconventional monetary policy; Asset purchase; Quantitative easing
    JEL: E17 E37 E52 E58
    Date: 2016–11–07
  5. By: Michael Weber (University of Chicago Booth School of Business); Andreas Neuhierl (Mendoza College of Business, University of Notre Dame)
    Abstract: We construct a slope factor from changes in federal funds futures of different horizons. Slope predicts stock returns at the weekly frequency: faster monetary policy easing positively predicts excess returns. Investors can achieve increases in weekly Sharpe ratios of 20% conditioning on the slope factor. The tone of speeches by the FOMC chair correlates with the slope factor. Slope predicts changes in future interest rates and forecast revisions of professional forecasters. Our findings show that the path of future interest rates matters for asset prices, and monetary policy affects asset prices throughout the year and not only at FOMC meetings. Â
    Keywords: Return Predictability, Policy Speeches, Expected Returns, Macro News
    JEL: E31 E43 E44 E52 E58 G12
    Date: 2016
  6. By: Haberis, Alex (Bank of England); Masolo, Riccardo (Bank of England); Reinold, Kate (Bank of England)
    Abstract: In this paper, we use an estimated DSGE model of the UK economy to investigate perceptions of the effectiveness of monetary policy since the onset of the 2007–08 financial crisis in a number of measures of deflation probability — the Survey of Economic Forecasts, financial-market option prices, and the Bank of England's Monetary Policy Committee’s (MPC) forecasts. To do so, we use stochastic simulations of the model to generate measures of deflation probability in which the effectiveness of monetary policy to offset deflationary shocks is affected by different assumptions about the existence and level of a lower bound on policy rates. We find that measures of deflation probability are consistent with the perception that the MPC was not particularly constrained in its ability to offset deflation shocks in the post-crisis period.
    Keywords: Deflation; forecasting and simulation; models and applications; interest rates; monetary policy
    JEL: E31 E37 E43 E47 E52
    Date: 2016–11–04
  7. By: George-Marios Angeletos; Fabrice Collard; Harris Dellas
    Abstract: We study the Ramsey policy problem in an economy in which public debt contributes to the supply of assets that private agents can use as buffer stock and collateral, or as a vehicle of liquidity. Issuing more debt eases the underlying financial friction. This raises welfare by improving the allocation of resources; but it also tightens the government budget by raising the interest rate on public debt. In contrast to the literature on the Friedman rule, the government’s supply of liquidity becomes intertwined with its debt policy. In contrast to the standard Ramsey paradigm, a departure from tax smoothing becomes desirable. Novel insights emerge about the optimal long-run quantity of public debt; the optimal policy response to shocks; and the sense in which a financial crisis presents the government with an opportunity for cheap borrowing.
    JEL: D52 D53 E13 E32 E51 E60 H21 H63
    Date: 2016–11
  8. By: Goodness C. Aye (Department of Economics, University of Pretoria, South Africa); Christina Christou (School of Economics and Management, Open University of Cyprus, Cyprus); Luis A. Gil-Alana (Universidad de Navarra, Faculty of Economics and Business Administration, Spain); Rangan Gupta (Department of Economics, University of Pretoria, South Africa)
    Abstract: This paper extends the vast literature forecasting the probability of recession by including the different components of the term spread, namely the expectation and the term premium components obtained from a fractional integration approach. We also augment these with the economic policy uncertainty index. We use 10 specifications of the probit prediction model and quarterly data from South Africa covering the period 1990:1 to 2012:1 for analyses. Our out-of-sample results show that the model that incorporates the expectation component of the yield spread in addition to economic policy uncertainty provides the best forecast of recession in South Africa. All three recession periods in our sample were accurately dictated by the prediction models and the best forecast occurred at the four quarters ahead horizon. These results were also robust to the full sample prediction
    Keywords: Expected term spread; term premium; economic policy uncertainty; recession; out-of-sample forecast; Probit model
    JEL: C25 E37 E44 E52 E62
    Date: 2016–11
  9. By: Gaston Giordana; Sabbah Gueddoudj
    Abstract: This paper characterises the financial cycle in Luxembourg using both the growth and classical cycle definitions. We implement both a frequency-based approach -using band-pass filters- to measure the growth cycle and a turning-point approach to capture the classical cycle. The financial cycle is characterized using varibales related to domestic credit and asset prices. We identify the dates of peaks/troughs for growth and classical cycles, describe the characteristics of cycle phases and analyze the synchronisation between cycles for each macro-financial variable considered and the real activity. Additionally, we evaluate the synchronisation of credit and house prices across the neighbouring countries, based on the medium-term classical cycle. Finally, we introduce two novel tools to monitor the evolution of the financial cycle which are intended to contribute to informing macroprudential policy. The first tool is an optimal decision rule in the form of two warning thresholds signalling growth cycle phases related to a possible classical turning­point. The second tool is a measure of the probability of a turning­point in the classical cycle in each quarter after a peak in the growth cycle. The tools are built on the lead/lag relationships between peaks and troughs of growth and classical cycles. A composite index of the growth cycle is proposed as well.
    Keywords: financial cycles, turning­points, synchronisation, band­pass filter, survival data, Area Under the Receiver Operating Characteristic Curve, Luxembourg.
    JEL: E32 G01 G18
    Date: 2016–10
  10. By: Hännikäinen Jari (School of Management, University of Tampere)
    Abstract: This paper examines the predictive content of the shadow rates for U.S. real activity and inflation in a data-rich environment. We find that the shadow rates contain substantial out-of-sample predictive power for inflation in non-zero lower bound and zero lower bound periods. In contrast, the shadow rates are uninformative about future real activity.
    Keywords: shadow rate, zero lower bound, unconventional monetary policy, forecasting, data-rich environment
    JEL: C53 E37 E43 E44 E58
    Date: 2016–06
  11. By: Lorenzo Burlon (Bank of Italy); Andrea Gerali (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the macroeconomic and financial effects of the Eurosystem’s Asset Purchase Programme (APP) and its interaction with a member country’s macroprudential policy. We assume that some households in a euro-area (EA) country are subject to a borrowing constraint, and that their local real estate acts as the collateral. In order to highlight the interaction between the APP and region-specific macroprudential policies, we simulate a situation in which, as the APP is carried out, households in one EA region develop overly optimistic expectations about local real estate prices. We report four main findings. First, a relatively large loan-to-value (LTV) ratio in one region can greatly amplify the expansionary effect of the union-wide non-standard monetary policy measures on domestic households’ borrowing. Second, while the APP is being implemented, an increase in households’ borrowing in one region can be further magnified by the combination of a high LTV ratio and overly optimistic expectations. Third, region-specific macroprudential measures can stabilize private sector borrowing with limited negative effects on economic activity. Fourth, our results hold also in the case of area-wide overly optimistic expectations.
    Keywords: DSGE models, open-economy macroeconomics, non-standard monetary policy, zero lower bound, macroprudential policy
    JEL: E43 E52 E58
    Date: 2016–10
  12. By: Jari Hännäkäinen (School of Management, University of Tampere)
    Abstract: This paper analyzes the predictive content of the level, slope and curvature of the yield curve for U.S. real activity in a data-rich environment. We find that the slope contains predictive power, but the level and curvature are not successful leading indicators. The predictive power of each of the yield curve factors fluctuates over time. The results show that economic conditions matter for the predictive ability of the slope. In particular, inflation persistence emerges as a key variable that affects the predictive content of the slope. The slope tends to forecast output growth better when inflation is highly persistent.
    Keywords: yield curve, factor model, data-rich environment, forecasting, macroeconomic regimes, conditional predictive ability
    JEL: C53 C55 E43 E44 E47 E52
    Date: 2016–04
  13. By: Masayuki Inui (Bank of Japan); Sohei Kaihatsu (Bank of Japan)
    Abstract: In this study, we examine what unconventional monetary policy measures are effective in escaping from a liquidity trap. We develop a heterogeneous agent New Keynesian model with uninsurable income uncertainty and a borrowing constraint. We show that adverse effects of income uncertainty deteriorate in the liquidity trap, which crucially undermines the transmission mechanism of unconventional monetary policy through an increase in precautionary savings. We then draw the following implications: (1) decreasing risk premiums by quantitative easing (QE) is more effective than forward guidance (FG) in the liquidity trap; (2) when the liquidity trap becomes deeper, central banks should conduct QE with sufficiently rapid pace of asset purchases; and (3) the combination of QE and FG yields synergy effects that strengthen the power to escape from the liquidity trap through mitigating precautionary saving motives.
    Keywords: unconventional monetary policy; liquidity trap; uninsurable income uncertainty; incomplete market; quantitative easing; forward guidance
    JEL: E21 E31 E52 E58
    Date: 2016–11–11
  14. By: Lorenzo, Menna; Patrizio, Tirelli;
    Abstract: A popular argument in favour of price stability is that the inflation-tax burden would disproportionately fall on the poor because wealth is unevenly distributed and portfolio composition of poorer households is skewed towards a larger share of money holdings. We reconsider the issue in a DSGE model characterized by limited participation to the market for interest bearing assets (LAMP). We show that a combination of higher in ation and lower income taxes reduces inequality. When we calibrate the share of constrained agents to fit the wealth Gini index for the US, the optimal inflation rate is above 4%. This result is robust to alternative foundations of money demand equations.
    Keywords: in ation, monetary and fiscal policy, Ramsey plan, inequality
    JEL: E52 E58 J51 E24
    Date: 2016–11–01
  15. By: Bozena Kaderabkova (Czech technical University in Prague, Faculty of Civil Engineering)
    Abstract: This paper assesses phases of the economic cycle on labour market in whole national economy and in the industry of the Czech Republic. The set of methods and models used in this paper lowers the uncertainty of estimation of unobservable variables. Estimated phases of the economic cycle were further verified by development of indicators in the real economy. The analysis localized unstable time period in whole national economy and in the industry, which was assessed by signs of instability, pace and its duration. A great deal of attention related to this issue was given to the transformation of the economy in the last decade of previous century and to period of recession in the first decade of 21st century.
    Keywords: Phillips curve, NAIRU, HP filter, Kalman filter, Stochastic trend and unemployment gap on macro-economic and meso-economic level
    JEL: E24 E32 E37
  16. By: Bhattarai, Saroj (University of Texas at Austin); Neely, Christopher J. (Federal Reserve Bank of St. Louis)
    Abstract: This paper reviews and critically evaluates the empirical literature on the effects of U.S. unconventional monetary policy on both financial markets and the real economy. In order to understand how such policies could work, we also briefly review the literature on the theory of such policies. We show that event studies provide very strong evidence that U.S. unconventional policy announcements have strongly influenced international bond yields, exchange rates, and equity prices in the desired manner. In addition, such studies indicate that such policies curtailed market perceptions of extreme events. Calibrated modeling and vector autoregressive (VAR) exercises strongly suggest that these policies significantly improved macroeconomic outcomes, raising U.S. GDP and CPI, through these changes in asset prices. Both event studies and VARs imply positive international spillovers of such policies.
    Keywords: Quantitative easing; event study; unconventional monetary policy; zero lower bound
    JEL: E51 E58 E61 F31 G12
    Date: 2016–11–28
  17. By: Eric M. Leeper
    Abstract: This essay aims to explain the nature of monetary and fiscal policy interactions and how those interactions could inform the fiscal rules that countries choose to follow. It makes two points: (1) monetary policy control of inflation requires appropriate fiscal backing; (2) European fiscal frameworks appear unlikely to provide the necessary fiscal backing.
    JEL: E31 E5 E62 E63
    Date: 2016–11
  18. By: Volha Audzei
    Abstract: Market confidence has proved to be an important factor during past crises. However, many existing general equilibrium models do not account for agents' expectations, market volatility, or overly pessimistic investor forecasts. In this paper, we incorporate a model of the interbank market into a DSGE model, with the interbank market rate and the volume of lending depending on market confidence and the perception of counterparty risk. In our model, a credit crunch occurs if the perception of counterparty risk increases. Our results suggest that changes in market confidence can generate credit crunches and contribute to the depth of recessions. We then conduct an exercise to mimic some central bank policies: targeted and untargeted liquidity provision, and reduction of the policy rate. Our results indicate that policy actions have a limited effect on the supply of credit if they fail to influence agents' expectations. Interestingly, a policy of a low policy rate worsens recessions due to its negative impact on banks' revenues. Liquidity provision stimulates credit slightly, but its efficiency is undermined by liquidity hoarding.
    Keywords: DSGE, expectations, financial intermediation, liquidity provision
    JEL: E22 E32 G01 G18
    Date: 2016–10
  19. By: Miranda-Agrippino, Silvia (Bank of England)
    Abstract: Central banks’ decisions are a function of forecasts of macroeconomic fundamentals. Because private sector forecasts are not bound to be equal to central banks’ forecasts, what markets label as unexpected may or may not be unanticipated by the central bank. Monetary surprises can thus incorporate anticipatory effects if market participants fail to correctly account for the systematic component of policy when they are surprised by an interest rate decision. Depending on how market participants perceive the policy decision, their economic projections and the associated risk compensations move in opposite directions, and do so at the time of the announcement. Hence, and regardless of the width of the measurement window, monetary surprises capture more than just the monetary policy shock, and their use as external instruments for identification is potentially compromised. Monetary ‘surprises’ are dependent on, and shown to be predictable by both central banks’ forecasts and past information available to market participants prior to the announcement. A New-Keynesian framework sketches the intuition. The resulting distortions in the estimated impulse response functions can be dramatic, both qualitatively and quantitatively. A new set of monetary surprises, free of anticipatory effects and unpredictable by past information, are shown to retrieve transmission coefficients to a monetary policy shock consistent with macroeconomic theory even in informationally deficient VARs.
    Keywords: Monetary surprises; identification with external instruments; monetary policy; expectations; information asymmetries; event study; proxy SVAR
    JEL: C36 E44 E52 G14
    Date: 2016–11–04
  20. By: Matthias Neuenkirch
    Abstract: Empirical papers analysing the transmission of (unconventional) monetary policy typically rely on a vector autoregressive framework. In this paper, I complement these studies and employ a matching approach to examine the impact of the Bank of England's asset purchase program on macroeconomic quantities in the UK. My sample covers the period March 2001-December 2015 and five small open inflation targeting economies. Using entropy balancing, I create a synthetic control group comprised of credible counterfactuals for the sample of observations subject to the asset purchase program. My key results are that a 100 bn GBP increase in asset purchases has a significant and positive effect on GDP growth with a peak effect of 0.66-0.69 percentage points (pp) after 30 months. The same increase leads to a reduction in the inflation gap with a peak effect between -0.77 and -0.94 pp after 30 months. An in-depth analysis reveals that the latter finding is not driven by the choice of the empirical methodology. In contrast, I find that the returns on asset purchases are decreasing (i) over time and (ii) with the level of asset purchases. This causes the impact of asset purchases on the inflation gap to eventually become negative.
    Keywords: Asset Purchases, Bank of England, Entropy Balancing, Matching, Quantitative Easing, Treatment Effects, Unconventional Monetary Policy
    JEL: E52 E58
    Date: 2016
  21. By: Luca Marchiori; Olivier Pierrard
    Abstract: LOLA 2.0 is a dynamic general equilibrium model for the Luxembourg economy, which features overlapping generation dynamics, labormarket frictions à la Diamond-Mortensen-Pissarides and a New Open Economy Macroeconomics structure. This paper presents the model LOLA 3.0, which essentially integrates a financial sector to LOLA 2.0. In contrast to the existing dynamic stochastic general equilibrium (DSGE) literature, the financial sector does not intermediate between resident households and resident firms, but exports wealth management services. We calibrate the model to match the size of the financial sector in terms of employment, value added, net exports and taxes. The 2008 financial crisis has affected Luxembourg's financial sector and slowed inflows of cross-border workers. Because there is a lot of uncertainty surrounding future growth of the Luxembourg financial sector and cross-border worker inflows, we use LOLA 3.0 to study the evolution of the Luxembourg economy between 2015 and 2060 under alternative scenarios (high - medium - low).
    Keywords: Overlapping generations, Long-run projections, Financial sector, Luxembourg.
    JEL: D91 E24 E62 F41 J11
    Date: 2015–11
  22. By: Krouglov, Alexei
    Abstract: Presented here is a simplified mathematical model to reflect a weak recovery after the financial crisis. The model confirms hypothesis that the weak recovery is caused by a decline in investment not compensated by the interest rate decrease. The model explains a transformation of economic trend lines. Graphical representation shows how the transformation of economic trend occurs either with or without fluctuations of short-time variations. The graphical representation agrees with practically observable tendencies.
    Keywords: economic trend; investment; weak recovery
    JEL: E22 E32 E43
    Date: 2016–11–05
  23. By: Kurozumi, Takushi; Van Zandweghe, Willem (Federal Reserve Bank of Kansas City)
    Abstract: Persistent responses of inflation to monetary policy shocks have been difficult to explain by existing models of the monetary transmission mechanism without embedding controversial intrinsic inertia of inflation. This paper addresses this issue using a staggered price model with trend inflation, a smoothed-off kink in demand curves, and a fixed cost of production. {{p}} In this model, inflation exhibits a persistent response to a policy shock even in the absence of its intrinsic inertia, because the kink causes a measure of price dispersion, which is intrinsically inertial, to become a key source of inflation persistence under the positive trend inflation rate. {{p}} JEL Classification: E31, E52
    Keywords: Disinflation; Inflation; Monetary policy; Prices; Fixed production cost
    JEL: E31 E52
    Date: 2016–10–01
  24. By: Steve Ambler
    Keywords: Monetary Policy
    JEL: E43 E52 E58
    Date: 2016–11
  25. By: Giovanni Caggiano (University of Padova); Efrem Castelnuovo (University of Padova); Juan Manuel Figueres (University of Padova)
    Abstract: We model U.S. post-WWII monthly data with a Smooth Transition VAR model and study the effects of an unanticipated increase in economic policy uncertainty on unemployment in recessions and expansions. We ?find the response of unemployment to be statistically and economically larger in recessions. A state-contingent forecast error variance decomposition analysis confi?rms that the contribution of EPU shocks to the volatility of unemployment at business cycle frequencies is markedly larger in recessions.
    Keywords: Economic Policy Uncertainty Shocks, Unemployment Dynamics, Smooth Transition Vector AutoRegressions, Recessions, Expansions.
    JEL: C32 E32 E52
    Date: 2016–10
  26. By: Vasily Astrov (The Vienna Institute for International Economic Studies, wiiw); Serkan Çiçek (The Vienna Institute for International Economic Studies, wiiw); Rumen Dobrinsky (The Vienna Institute for International Economic Studies, wiiw); Vladimir Gligorov (The Vienna Institute for International Economic Studies, wiiw); Doris Hanzl-Weiss (The Vienna Institute for International Economic Studies, wiiw); Peter Havlik (The Vienna Institute for International Economic Studies, wiiw); Mario Holzner (The Vienna Institute for International Economic Studies, wiiw); Gabor Hunya (The Vienna Institute for International Economic Studies, wiiw); Michael Landesmann (The Vienna Institute for International Economic Studies, wiiw); Sebastian Leitner (The Vienna Institute for International Economic Studies, wiiw); Isilda Mara (The Vienna Institute for International Economic Studies, wiiw); Olga Pindyuk (The Vienna Institute for International Economic Studies, wiiw); Leon Podkaminer (The Vienna Institute for International Economic Studies, wiiw); Oliver Reiter (The Vienna Institute for International Economic Studies, wiiw); Sandor Richter (The Vienna Institute for International Economic Studies, wiiw); Robert Stehrer (The Vienna Institute for International Economic Studies, wiiw); Hermine Vidovic (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Summary In most of the countries from Central, East and Southeast Europe (CESEE), the current virtuous circle of rising consumption and incomes is expected to continue at least in the near term, accompanied by solid GDP growth to the tune of some 3% p.a. Ongoing labour-market improvements and rising wages will continue to be the main growth driver throughout the region; they will be complemented by a recovery in fixed investments as new EU funds become available. The economies of Russia, other CIS countries (except Belarus) and the Ukraine are expected to bottom out, as the negative shocks of the past two years have already been largely absorbed. Turkey is heading for a ‘soft landing’. These are the main findings of the newly released medium-term macroeconomic forecast by the Vienna Institute for International Economic Studies (wiiw). Despite the sluggish external environment, economic growth remains fairly strong in the majority of CESEE countries; the economic dynamics in almost half of those countries have intensified over the current year compared to 2015. Growth in the EU Member States from Central and Eastern Europe (EU-CEE) has declined only modestly over the current year, mostly on account of temporary investment weaknesses. It remains 1.5 pp higher on average than in the euro area. In Turkey, economic dynamics were also very solid up until mid-2016, albeit accompanied by signs of ‘overheating’, while the CIS countries are experiencing a ‘bottoming out’. The main driver of growth throughout the CESEE region continues to be private consumption, underpinned by sharply rising wages and incomes as well as decreasing unemployment. The tightening of labour markets and the rising labour shortages are partly a consequence of sizeable outward migration over the past years, which has had a cumulative negative effect on labour supply. A number of countries have also introduced higher minimum wages, sometimes as part of a more general fiscal relaxation package. Inflationary pressures in most CESEE countries – with the exception of the CIS countries and Turkey – are almost non-existent, as solid wage growth has been largely offset by marked gains in labour productivity and a profit squeeze. The expansion of fixed investments, which were an important pillar of GDP growth in 2015, has largely run out of steam this year. In the EU-CEE region, the main reason for this lies in a temporary drop in EU transfers that, in previous years, used to be an important source of investments. EU funds disbursed under the previous 2007-2013 Multiannual Financial Framework (MFF) were absorbed in 2015 at the latest, whereas attracting new funds under the recently adopted 2014-2020 MFF will take time. At the same time, disregarding the ‘EU transfers effect’, the underlying dynamics of investments remain strong. The export dynamics in many CESEE countries have been better than those of imports, resulting in a positive contribution of net exports to GDP growth. In most EU-CEE countries and Serbia, this is largely a reflection of their ever-strengthening export base and further gains in competitiveness. However, in the CIS countries it is entirely due to the weakness of domestic demand which is still depressed following strong currency depreciations over the past two years. Credit expansion in the CESEE region remains rather modest no country, with the possible exception of Slovakia, is currently experiencing a credit boom. Other factors tend to be more important determinants of the demand for loans than interest rates, which in many CESEE countries are rather low. Going forward, this reduces the risk of ‘boom-and-bust’ developments that have characterised the trajectories of a number of CESEE countries in the run-up to and during the global financial crisis. Domestic demand in many CESEE economies is supported by fiscal policy relaxation, particularly in Romania and Ukraine. One reason for this may have been a decline in government borrowing costs. Furthermore, the general disenchantment with the practical results of ‘expansionary austerity’ pursued in the past has played a role as well. At the same time, in most Western Balkan countries and in the CIS, the fiscal stance tends to be either neutral or restrictive – and in the case of the CIS countries it is essentially pro-cyclical. The impact of the forthcoming Brexit on CESEE economies should be contained by those countries’ relatively low trade exposure to the UK economy. In the EU-CEE region, some 1.6% of GDP is accounted for by final demand from the UK, and that share is even lower in other CESEE countries. At the same time, from 2019 onwards the EU-CEE region potentially faces the prospects of much lower (by up to 20%) EU transfers once the UK – the second largest net contributor country to the EU budget after Germany – leaves the bloc. The migration flows from the EU-CEE region to the UK could fall by nearly half compared to the past two years even without any changes to the migration regime, as the UK will become less of a magnet for migrants.
    Keywords: CESEE, economic forecast, Europe, Central and East Europe, Southeast Europe, Western Balkans, new EU Member States, CIS, Russia, Ukraine, Kazakhstan, Turkey, growth divergence, external risks, macroeconomic imbalances, consumption-led growth, unemployment, inflation, competitiveness, public debt, private debt, current account
    JEL: C33 C50 E20 E29 F34 G01 G18 O52 O57 P24 P27 P33 P52
    Date: 2016–11
  27. By: M. Joëts; V. Mignon; T. Razafindrabe
    Abstract: While there exists numerous studies on the macroeconomic effects of oil and commodity shocks, the literature is quite silent on the impact of macroeconomic uncertainty on oil and commodity prices and, especially, on their volatility. This paper tackles this issue through the estimation of a threshold vector autoregressive (TVAR) model on a sample of 19 commodity markets. We aim at (i) assessing whether the effect of macroeconomic uncertainty shocks on commodity price returns depends on the degree of uncertainty, and (ii) investigating the transfer from macroeconomic uncertainty to price uncertainty using a newly developed measure of commodity price uncertainty. Our findings show that both agricultural and industrial markets are highly sensitive to the variability and the level of macroeconomic uncertainty, while the impact on precious metals is more parsimonious given their well-identified safe-haven role in time of economic turmoil. In addition, we find evidence that the recent 2007-09 recession has generated an unprecedented episode of high uncertainty in numerous commodity prices. Interestingly, our analysis further reveals that volatility and uncertainty in prices can be disconnected. This is especially true for the oil market as most important shocks in the 1990s and the beginning of the 2000s that lead to price volatility do not generate price uncertainty, highlighting the relevance of our uncertainty measure in linking uncertainty to predictability rather than to volatility.
    Keywords: macroeconomic uncertainty, commodity prices, threshold vector autoregressive model
    JEL: Q02 E32 C32
    Date: 2016
  28. By: Paul Hubert (OFCE, Sciences Po); Fabien Labondance (Université de Bourgogne Franche-Comté, CRESE)
    Abstract: This paper investigates the instantaneous and dynamic effects of ECB forward guidance announcements on the term structure of private short-term interest rate expectations. We estimate the static and dynamic impact of forward guidance on private agents’ expectations about future short-term interest rates using a high-frequency methodology and an ARCH model, complemented with local projections. We find that ECB forward guidance announcements decrease most of the term structure of private short-term interest rate expectations, this being robust to several specifications. The effect is stronger on longer maturities and persistent.
    Keywords: Central bank communication, Short-term interest rate expectations, OIS
    JEL: E43 E52 E58
    Date: 2016–10
  29. By: Alain Galli
    Abstract: When assessing the effect of changes in wealth on household expenditures, most empirical studies have used cointegration-based approaches. These approaches rely on the existence of a stable long-run relationship among consumption, wealth and income. However, in Switzerland no such relationship seems to be present after 2001. Motivated by this issue, this paper applies a recently suggested approach to estimating long-run wealth effects on consumption that does not rely on cointegration. This new approach relies on sticky consumption growth, which can be motivated by consumption habits or sticky expectations. In both cases, long-run wealth effects are the result of short-run reactions of households to changes in wealth which become long-lasting. Using this methodology, the estimated wealth effects on consumption in Switzerland are larger than suggested by cointegration-based estimates. Furthermore, the results show that there seems to be a remarkably high degree of consumption stickiness in Switzerland.
    Keywords: Wealth effects, consumption dynamics, habit formation, sticky expectations, Bayesian estimation
    JEL: D12 E21 E44 C22
    Date: 2016
  30. By: Gröbel, Sören; Ihle, Dorothee
    Abstract: Housing property is the most important position in a household's wealth portfolio. Even though there is strong evidence that house price cycles and saving patterns behave synchronously, the underlying causes remain controversial. The present paper examines if there is a wealth effect of house prices on savings using household-level longitudinal data from the German Socio-Economic Panel for the period 1996-2012. We find that young renters increase and young homeowners decrease their savings in response to unanticipated house price shocks, whereas old households only hardly respond to house price changes. We interpret this as evidence of a housing wealth effect.
    Keywords: housing wealth,saving behavior,SOEP,Germany
    JEL: D91 E21 R31
    Date: 2016
  31. By: Takuji Fueki (Bank of Japan); Hiroka Higashi (Bank of Japan); Naoto Higashio (Bank of Japan); Jouchi Nakajima (Bank of Japan); Shinsuke Ohyama (Bank of Japan); Yoichiro Tamanyu (Bank of Japan)
    Abstract: This paper proposes a simple but comprehensive structural vector autoregression (SVAR) model to examine the underlying factors of oil price dynamics by explicitly incorporating the role of expectations on future aggregate demand and oil supply as well as financial investors' role in the crude oil market. Our main findings are threefold. First, our empirical analysis shows that shocks on expectations and financial factors in the oil market explain more than 40 percent of historical oil price fluctuations. In particular, expected future oil supply shocks are more than twice as important as realized and expected aggregate demand shocks or financial factor shocks in accounting for the oil price developments. Second, focusing on a recent large drop in oil prices since 2014, the analysis reveals that expected future oil supply shocks were the dominant driver of oil price falls from January 2014 to January 2015, while expected and realized aggregate demand shocks played a major role in oil price falls from June 2015 to February 2016. Finally, we show that the influence of oil price shocks on global output varies by the nature of each shock.
    Keywords: Oil demand and supply; Oil price; Financial factor; Structural vector autoregressive model
    JEL: C32 E44 G12 G15
    Date: 2016–11–11
  32. By: Samson Mbewe (University of Cape Town); Ingrid Woolard (SALDRU, University of Cape Town)
    Abstract: In this paper, we examine the cross-sectional distribution of wealth in South Africa by using survey data from the National Income Dynamics Study (NIDS) for 2010-2011 (wave 2) and 2014-2015 (wave 4). Our results show that wealth inequality is very high, with the bottom half of the population owning very little and the top decile holding about 85% of total wealth in 2010-2011 and 2014-2015. While the results also show that wealth inequality within-Race and between-Race are high, we find that wealth inequality within-Race is higher and particularly in the Black race, with a greater concentration of the Black population at the bottom end of the wealth distribution. Further, the results show that the racial wealth gap between the Black race and the White race is high, with a typical Black household holding relatively less than 5% of the wealth held by a typical White household. Finally, we find that wealth varies significantly over the age profile, suggesting support for the life cycle hypothesis.
    Keywords: Wealth Distribution; South Africa; Cross-Section
    JEL: E01 E10 E21
    Date: 2016
  33. By: Marina Emiris (Economics and Research Department, National Bank of Belgium)
    Abstract: The paper forecasts the residential property price index in Belgium with a dynamic factor model (DFM) estimated with a dataset of macro-economic variables describing the Belgian and euro area economy. The model is validated with out-of-sample forecasts which are obtained recursively over an expanding window over the period 2000q1-2012q4. We illustrate how the model reads information from mortgage loans, interest rates, GDP and inflation to revise the residential property price forecast as a result of a change in assumptions for the future paths of these variables
    Keywords: dynamic factor model, conditional forecast, house prices
    JEL: E32 G21 C53
    Date: 2016–11
  34. By: Aristotelis Boukouras
    Abstract: I develop a simple static general equilibrium model with capitalist-spirit preferences and prices set by firm owners (entrepreneurs). The model’s pure symmetric Nash equilibria differ markedly from the canonical model: (i) A positive output gap and unemployment may emerge in equilibrium, despite the absence of price rigidities or information asymmetries. (ii) Income and wealth inequality affect equilibrium prices and employment. (iii) The model generates ambiguous comparative statics. Specifically, an increase in inequality of either type may reduce employment and increase the output gap of the economy, while productivity reductions may have the opposite effect. As a result, minimum wage policies may increase employment. These results provide some justification for a number of arguments used in public debates.
    Keywords: capitalist spirit, general equilibrium, income distribution, income inequality, minimum wage, output gap, unemployment, wealth distribution, wealth inequality
    JEL: D31 D63 E24 E25
  35. By: Semih Tumen
    Abstract: I develop a dynamic model of forward-looking entrepreneurs, who decide whether to operate in the formal economy or informal economy and choose how much to invest in their businesses, taking government policy as given. The government has access to two policy tools: taxes on formal business activity and enforcement (or policing) discouraging informality. The main focus of the paper is on transitional dynamics under different initial wealth levels. Whether an initially small business will be trapped in the informal economy and remain small forever or grow quickly and become a large formal business depends on tax and enforcement policies. High tax rates accompanied by loose enforcement—which is mostly the case in less-developed countries (LDCs)—induce tax avoidance, discourage investment in formal businesses, and drive the entrepreneurial activity toward the informal sector even though the initial wealth level is high. Lowering taxes on formal activity joined with strict enforcement can help reducing the magnitude of poverty traps in LDCs—such as the MENA region, Latin America, and developing Asia.
    Keywords: Entrepreneurship, Informal economy, Government policy, Investment, Wealth constraints
    JEL: E21 E26 L26 O17
    Date: 2016
  36. By: Aguiar de Medeiros, Carlos (Institute of Economics, UFRJ); Trebat, Nicholas (Institute of Economics, UFRJ)
    Abstract: This paper discusses the connections established in recent non–neoclassical literature between growth, structural change and income distribution in large developing econo-mies. We argue that though many analyses have the merit of reintroducing income distribution as a factor in economic growth, they rely almost exclusively on macroeconomic theory, and thus ignore the structural changes that have taken place in recent decades and the ways in which structural aspects of an economy (such as resource availability, market size and geopolitical factors) affect policy options and growth. We argue that Latin American countries today face the same challenge that has constrained their development trajectory historically: to diversify their economic structure through new technological capabilities and greater equality and social progress.
    Keywords: Structuralism; profit–led; devaluation; New Developmentalism
    JEL: E60 O13 O40
    Date: 2016–10
  37. By: Elvery, Joel (Federal Reserve Bank of Cleveland); Schweitzer, Mark E. (Federal Reserve Bank of Cleveland)
    Abstract: Currently published data series on the United States household debt service ratio are constructed from aggregate household debt data provided by lenders and estimates of the average interest rate and loan terms of a range of credit products. The approach used to calculate those debt service ratios could be prone to missing changes in loan terms. Better measurement of this important indicator of financial health can help policymakers anticipate and react to crises in household finance. We develop and estimate debt service ratio measures based on individual-level debt payments data obtained from credit bureau data and published estimates of disposable personal income. Our results suggest that aggregate debt service ratios may have understated the payment requirements of households. To the extent possible with two very distinct data sources we examine the details on the composition of household debt service and identify some areas where required payments appear to have varied substantially from the assumptions used in the Board of Governors’ aggregate calculation. We then use our technique to calculate both national and state-level debt ratios and break these debt service ratios into debt categories at the national, state level, and metro level. This approach should allow detailed forecasts of debt service ratios based on anticipated changes to interest rates and incomes, which could serve to evaluate the ability of households to cope with potential economic shocks. The ability to disaggregate these estimates into geographic regions or age groups could help to identify the severity of the effects on more exposed groups.
    Keywords: debt service ratio; household finance; regional data;
    JEL: C8 D14 E50
    Date: 2016–10–31
  38. By: Francesco Rossi (Department of Economics (University of Verona)); Riccardo Zanrossi (Department of Economics, Master in Banking and Finance, University of Verona)
    Abstract: After a survey on the evolution of the italian public debt, the paper discusses its composition in tickets coins and deposits, securities other than shares excluding of derivative financial instruments, loans. The study analyses and discusses also the trend in interest expenditure, in the average interest rate, in the average residual life of the government bonds and the restructuring operations carried out to reduce the stock of the debt.
    Keywords: public debt, interest expenditure, average interest rate, average residual life, restructuring
    JEL: E43 G18 H63
    Date: 2016–11
  39. By: Mariarosaria Comunale (Bank of Lithuania); Heli Simola (Bank of Finland)
    Abstract: This empirical study considers the pass-through of key nominal exchange rates and commodity prices to consumer prices in the Commonwealth of Independent States (CIS), taking into account the effect of idiosyncratic and common factors influencing prices. In order to do that, given the relatively short window of available quarterly observations (1999–2014), we choose heterogeneous panel frameworks and control for cross-sectional dependence. The exchange rate pass-through is found to be relatively high and rapid for CIS countries in the case of the nominal effective exchange rate, but not significant for the bilateral rate with the US dollar. We also show that global factors in combination with financial gaps and commodity prices are important. In the case of large rate swings, the exchange rate pass-through of the bilateral rate with the US dollar becomes significant and similar to that of the nominal effective exchange rate.
    Keywords: Commonwealth of Independent States, Exchange Rate Pass-Through, Commodity prices, Dynamic Panel Data, Inflation, Exchange Rates, Cross-sectional dependence, Financial cycle.
    JEL: C38 E31 F31
    Date: 2016–11–02
  40. By: Comunale, Mariarosaria; Simola, Heli
    Abstract: ​This empirical study considers the pass-through of key nominal exchange rates and commodity prices to consumer prices in the Commonwealth of Independent States (CIS), taking into account the effect of idiosyncratic and common factors influencing prices. In order to do that, given the relatively short window of available quarterly observations (1999–2014), we choose heterogeneous panel frameworks and control for cross-sectional dependence. The exchange rate pass-through is found to be relatively high and rapid for CIS countries in the case of the nominal effective exchange rate, but not significant for the bilateral rate with the US dollar. We also show that global factors in combination with financial gaps and commodity prices are important. In the case of large rate swings, the exchange rate pass-through of the bilateral rate with the US dollar becomes significant and similar to that of the nominal effective exchange rate.
    Keywords: Commonwealth of Independent States, exchange rate pass-through, commodity prices, dynamic panel data, inflation, exchange rates, cross-sectional dependence, financial cycle
    JEL: C38 E31 F31
    Date: 2016–11–04
  41. By: Kouramoudou Keita; Hannu Laurila (School of Management, University of Tampere)
    Abstract: In the economic literature, the nexus between economic growth and corruption is well covered, but there are only few empirical studies on cyclical variation of corruption. Gokcekus & Suzuki (2011) in one such study. It finds that transitory income and corruption vary in parallel, thus confirming the famous claim of Galbraith (1997) that embezzlement flourishes in business booms and withers in recessions. This paper tests the general validity of the finding by using a more extensive dataset. The results are conflicting: corruption is found to shrink with the increase in transitory income and vice versa. In other words, economic booms foster integrity, and recessions make corruption bloom.
    Keywords: embezzlement, permanent income, transitory income
    JEL: D73 E32
    Date: 2016–03
  42. By: Jan de Haan (Division of Corporate Services, IT and Methodology, Statistics Netherlands); Rens Hendriks (Statistics for Development Division, Pacific Community (SPC)); Michael Scholz (University of Graz)
    Abstract: This paper compares two model-based multilateral price indexes: the time- product dummy (TPD) index and the time dummy hedonic (TDH) index, both estimated by expenditure-share weighted least squares regression. The TPD model can be viewed as the saturated version of the underlying TDH model, and we argue that the regression residuals are ``distorted towards zero'' due to overfitting. We decompose the ratio of the two indexes in terms of average regression residuals of the new and disappearing items (plus a third component that depends on the change in the matched items' normalized expenditure shares). The decomposition explains under which conditions the TPD index suffers from quality-change bias or, more generally, lack-of-matching bias. An example using scanner data on men's t-shirts illustrates our theoretical framework.
    Keywords: hedonic regression; multilateral price indexes; new and disappearing items; quality change; scanner data
    JEL: C43 E31
    Date: 2016–11
  43. By: Lentz, Rasmus (University of Wisconsin-Madison; NBER; LMDG; CAP); Roys, Nicolas (Federal Reserve Bank of St. Louis)
    Abstract: The paper studies human capital accumulation over workers’ careers in an on the job search setting with heterogenous firms. In renegotiation proof employment con- tracts, more productive firms provide more training. Both general and specific training induce higher wages within jobs, and with future employers, even conditional on the future employer type. Because matches do not internalize the specific capital loss from employer changes, specific human capital can be over-accumulated, more so in low type firms. While validating the Acemoglu and Pischke (1999) mechanisms, the analysis nevertheless arrives at the opposite conclusion: That increased labor market friction reduces training in equilibrium.
    Keywords: Wage contracts; human capital; training; wage dispersion; frictional labor markets; optimal contract design; firm heterogeneity; sorting
    JEL: D21 D43 D83 E24 J24 J31 J33 J41 J62 J63 J64
    Date: 2015–10–30
  44. By: Gaston Giordana; Jean-Baptiste Gossé
    Abstract: Cette étude s'attache à évaluer dans quelle mesure la provision forfaitaire contribue à atténuer la procyclicité de la profitabilité bancaire et à déterminer l'impact de ce dispositif sur les recettes fiscales de l'Etat. Cette provision représente certes un manque à gagner en termes de recettes fiscales à court terme, mais celui-ci est provisoire étant donné qu'elle est incorporée au résultat de la banque et, in fine, taxée. Les résultats des estimations indiquent que la provision forfaitaire suit une évolution oppose aux cycles financier et réel lorsque ceux-ci sont approximés, respectivement, par les écarts à la tendance de long terme du prix de l'immobilier résidentiel et du PIB luxembourgeois. Elle contribute également à lisser le profit des banques et, par là même, elle lisse les recettes fiscales et contribute à la stabilisation du solde budgétaire à la suite d'un retournement du cycle. La provision forfaitaire permet donc de mieux couvrir les pertes attendues - insuffisamment couvertes par les provisions spécifiques seules - et limite l'absorption des fonds propres des banques lors des phases basses du cycle. En ce sens, elle peut s'avérer un complément au coussin de fonds propres contracyclique pour préserver la résilience du système bancaire.
    Keywords: Provisions, Lissage du profit, Régulation bancaire
    JEL: E32 G21 G28
    Date: 2016–10
  45. By: Fritz Breuss (WIFO)
    Abstract: DSGE (Dynamic stochastic general equilibrium) models are the common workhorse of modern macroeconomic theory. Whereas story-telling and policy analysis were in the forefront of applications since its inception, the forecasting perspective of DSGE models is only recently topical. In this study, we perform a post-mortem analysis of the predictive power of DSGE models in the case of Austria's recession in 2009. For this purpose, 8 DSGE models with different characteristics (small and large models, closed and open economy models, one and two-country models) were used. The initial hypothesis was that DSGE models are inferior in ex-ante forecasting a crisis. Surprisingly however, it turned out that not all but those models which implemented features of the causes of the global financial crisis (like financial frictions or interbank credit flows) could not only detect the turning point of the Austrian business cycle early in 2008 but they also succeeded in forecasting the following severe recession in 2009. In comparison, non-DSGE methods like the ex-ante forecast with the Global Economic (Macro) Model of Oxford Economics and WIFO's expert forecasts performed not better than DSGE models in the crisis.
    Keywords: DSGE models, business cycles, forecasting, open-economy macroeconomics
    Date: 2016–11–08
  46. By: Ronald Schettkat; Sonja Jovicic
    Abstract: Expansionary macroeconomic policy is ineffective because, according to the policy ineffectiveness hypothesis (PIH), which is based on the rational expectations hypothesis (REH), it does not affect the real economy. This conclusion is false for several reasons. In their critique on Keynes’ theory, Lucas and Sargent (1978) argue that economic agents erroneously react with positive output and labor supply responses to expansionary macroeconomic policy. But they learn the long-run solution of the Lucas/Sargent model, which involves price reactions only, and do not repeat their mistakes when again confronted with expansionary macroeconomic policy. Thus, learning makes expansionary macroeconomic policy in the Lucas/Sargent model ineffective. The PIH is derived from models based on neoclassical micro-foundations where economic agents optimize in a stationary environment in ‘logical time.’ Experiencing and learning in ‘logical time’? In this paper, we take historical time seriously; that is, we investigate what economic agents actually experience regarding the effectiveness of expansionary macroeconomic policy in ‘historical time.’ We conclude that even if neoclassical micro-foundations are rigorously applied, if economic agents behave as assumed in the Lucas/Sargent model but that they move through time, the economy will not settle at the predicted long run equilibrium. Instead expansionary macroeconomic policy will be perceived as a virtue.
    Date: 2016–11
  47. By: Chen Yeh
    Abstract: This paper assesses the quantitative impact of firm-level idiosyncratic shocks on aggregate volatility in the U.S. economy and provides a microfoundation for the negative relationship between firm-level volatility and size. I argue that the role of firm-specific shocks through the granular channel plays a fairly limited role in the U.S. economy. Using a novel, comprehensive data set compiled from several sources of the U.S. Census Bureau, I find that the granular com-ponent accounts at most for 15.5% of the variation in aggregate sales growth which is about half found by previous studies. To bridge the gap between previous findings and mine, I show that my quantitative results require deviations from Gibrat’s law in which firm-level volatility and size are negatively related. I find that firm-level volatility declines at a substantially higher rate in size than previously found. Hence, the largest firms in the economy cannot be driving a sub-stantial fraction of macroeconomic volatility. I show that the explanatory power of granularity gets cut by at least half whenever the size-variance relationship, as estimated in the micro-level data, is taken into account. To uncover the economic mechanism behind this phenomenon, I construct an analytically tractable framework featuring random growth and a Kimball aggrega-tor. Under this setup, larger firms respond less to productivity shocks as the elasticity of demand is decreasing in size. Additionally, the model predicts a positive (negative) relationship between firm-level mark-ups (growth) and size. I confirm the predictions of the model by estimating size-varying price elasticities on unique product-level data from the Census of Manufactures (CM) and structurally estimating mark-ups using plant-level information from the Annual Survey of Manufactures (ASM).
    Date: 2016–01
  48. By: Hecq, Alain; Telg, Sean; Lieb, Lenard
    Abstract: This paper investigates the effect of seasonal adjustment filters on the identification of mixed causal-noncausal autoregressive (MAR) models. By means of Monte Carlo simulations, we find that standard seasonal filters might induce spurious autoregressive dynamics, a phenomenon already documented in the literature. Symmetrically, we show that those filters also generate a spurious noncausal component in the seasonally adjusted series. The presence of this spurious noncausal feature has important implications for modelling economic time series driven by expectation relationships. An empirical application on European inflation data illustrates these results. In particular, whereas several inflation rates are forecastable on seasonally adjusted series, they appear to be white noise using raw data.
    Keywords: seasonality; inflation; seasonal adjustment filters; mixed causal-noncausal models; autoregessive; noncausality; expectations
    JEL: C22 E37
    Date: 2016–11–04
  49. By: Asad Zaman (Pakistan Institute of Development Economics, Islamabad)
    Abstract: Many authors have described and modelled Keynesian effects in a Babysitting Cooperative (BSC), which has the underlying structure of a single good barter economy. We construct a simple model of the BSC economy to explore this issue, and find very surprising results. Outcomes depend on agents beliefs about the decision making process of others, as in the Keynesian beauty contest. For some structures of beliefs, money is neutral, while for others, money can have short and long run effects. The value of money can be high, low, or zero, depending purely upon expectational effects. Also, despite the fact that this is a single good economy, partial equilibrium supply and demand analysis do not work as expected. Some equilibria have excess supply, others have excess demand, and none have a match between supply and demand. Furthermore, flexible prices cannot fix this problem. An additional paradoxical property is that excessive trading can take place. Even though all trades are done with mutual consent, some of them decrease welfare, and banning certain types of trade can lead to Pareto improvements. Thus the superficially simple single good barter economy of BSC displays some subtle, complex and counter-intuitive properties.
    Keywords: Monetary Policy, Keynesian Economics, Sunspot Equilibria, Neutrality of Money
    JEL: D71 E52
    Date: 2015
  50. By: Alexandra M. D. Hild; Bernhard Herz; Christian Bauer
    Abstract: The European Stability Mechanism (ESM) is the permanent crisis resolution mechanism for euro area countries. We analyze the costs of the current (suboptimal) refinancing design of the ESM and evaluate an alternative asset-backed securities (ABS) structure under different scenarios. Our simulation results indicate that switching to an ABS structure could substantially lower ESM refunding costs by up to 3.5%. Moreover, the current structure severely limits the ESM’s potential to stabilize financial markets. In particular, in the most likely type of future crises, namely medium-sized requests for financial support from distressed ESM members accompanied by other ESM countries unwilling or unable to provide new capital, the ESM is likely to unintentionally act as a crisis accelerant rather than a stabilizer.
    Keywords: European Stability Mechanism (ESM), financial instruments, euro area, ABS
    JEL: E6 F34 F55 G15
    Date: 2016
  51. By: M. Ben Salem; B. Castelletti-Font
    Abstract: In the aftermath of the crisis, sovereign risk premium differentials have been increasingly widening. Although the perceived risk for core countries remains relatively low, financial markets seem to discriminate among peripheral economies requiring higher risk premia than what is justified by fiscal factors only. Our hypothesis in this study is that in peripheral countries this is not simply the result of fiscal indiscipline but the combination of both internal and external imbalances. We use a yearly post-1980 OECD-country panel data to estimate the joint dynamics of sovereign bond yields and their long-run determinants. We find that a net foreign position that is considered highly deteriorated can be a differentiating factor for investors. Indeed, the existence of a “twin deficit” put substantial upward pressures on sovereign bond yields in many advanced economies over the medium term.
    Keywords: Sovereign bond yields, Public Debt, Net Foreign Assets, Panel error-correction models.
    JEL: C23 E43 G12
    Date: 2016
  52. By: Martin, Ian; Wagner, Christian
    Abstract: We derive a formula that expresses the expected return on a stock in terms of the risk-neutral variance of the market and the stock's excess risk-neutral variance relative to the average stock. These components can be computed from index and stock option prices; the formula has no free parameters. We test the theory in-sample by running panel regressions of stock returns onto risk-neutral variances. The formula performs well at 6-month and 1-year forecasting horizons, and our predictors drive out beta, size, book-to-market, and momentum. Out-of-sample, we find that the formula outperforms a range of competitors in forecasting individual stock returns. Our results suggest that there is considerably more variation in expected returns, both over time and across stocks, than has previously been acknowledged.
    Keywords: expected returns; forecast; implied volatility; risk premia; risk-neutral variance
    JEL: E22 E44 G10 G12 G17 G31 G32
    Date: 2016–11
  53. By: Bruno Tinel (Centre d'Economie de la Sorbonne)
    Abstract: This paper is the conclusion of the book "Sortir l'Afrique de la servitude monétaire". It draws possible storylines about the after-CFA
    Keywords: CFA Franc; international monetary relations; decolonisation
    JEL: E58 F33 F54
    Date: 2016–10
  54. By: Astrid Martínez Ortiz; Luis Alberto Zuleta; Martha Misas; Lino Jaramillo
    Abstract: "El libro presenta, en primer lugar, un marco teórico y una revisión exhaustiva de la literatura internacional y colombiana acerca de la relación entre concentración y competencia en la banca, así como de los trabajos empíricos que comparan la eficiencia del sector en Colombia con la de otros países. En segundo lugar, Fedesarrollo hace sus propios ejercicios descriptivos y econométricos para aportar al estudio de la dinámica de la competencia, y de los logros y retos de la eficiencia en la prestación de los servicios financieros en Colombia. Del análisis teórico, destacamos la controversia con el paradigma EstructuraConducta- Desempeño el cual defiende la tesis de que la concentración en un mercado se traduce en una menor eficiencia y una reducción del bienestar social. La escuela de Chicago controvierte esa tesis mostrando que la concentración puede ser el resultado de la eficiencia y que se requiere un análisis de la conducta y las estrategias de las entidades grandes y/o conglomerados, y establecer si usan su poder de mercado en contra de los competidores y los consumidores. De forma complementaria, hay que señalar que el sector financiero, debido a la especificidad de sus funciones, tiene barreras a la entrada que le son connaturales. En este informe se evalúa si la industria bancaria en Colombia ha mantenido un nivel razonable de competencia con mejoras en su eficiencia y si ha diversificado los servicios bancarios ofrecidos a los usuarios, además de avanzar en su cobertura poblacional (inclusión financiera). Se analiza el período 1995-2014, el cual incluye un evento de crisis financiera, 1998-2001, y otros dos de expansión de la banca, principalmente privada, que cubren de 1996 a 1997 y de 2002 a 2014, sub-períodos en los que la cartera crece a tasas anuales que superan las del PIB, excepto para 2009, año en que la crisis financiera internacional golpeó con fuerza a la economía colombiana."
    Keywords: Competencia, Competencia Bancaria, Eficiencia en la BancaEstabilidad Financiera, Regulación Bancaria, Servicios Financieros, Sistemas Bancarios, Colombia
    JEL: D41 E50 G20 G21
    Date: 2016–09–30
  55. By: Farzana Afridi (Indian Statistical Institute); Bidisha Barooah (International Initiative for Impact Evaluation (3ie)); Rohini Somanathan (Department of Economics, Delhi School of Economics)
    Abstract: Can countries with binding budget constraints increase the benefits of school transfers through better program design? We use a cost-neutral change in the design of India's school meal program to study this question. Municipal schools in Delhi switched from packaged snacks to cooked meals in 2003, with no change in payments to meal providers. We use variation in the timing of this transition and child-level panel data to estimate a 3 percentage point rise in average monthly attendance in response to the new program. The effects are largest for early grades, morning school shifts and schools serving diverse menus.
    Keywords: school meals, attendance, program design
    JEL: D1 E31 F01
    Date: 2016–10
  56. By: Lechthaler, Wolfgang
    Abstract: Trade liberalization can imply slow and long adjustment processes. Taking account of these adjustment processes can change the evaluation of trade policy, especially when policy makers care more about the next couple of years than the infinite future. In this paper I analyze the setting of tariffs in a two-country model taking account of adjustment processes with special emphasis on the effects of nominal price rigidity and monetary policy. I show that nominal price rigidity induces policy makers with a short planning horizon to set lower tariffs because it enhances the short run boom following a cut in tariffs. Monetary policy that aggressively fights deviations from its inflation target leads to even lower tariffs.
    Keywords: tariffs,dynamic trade model,monetary policy
    JEL: E52 F11 F12 F13
    Date: 2016
  57. By: Samuele Murtinu (University of Groningen); Giulio Piccirilli (Universitas Mercatorum); Agnese Sacchi (Sapienza University of Rome & Governance and Economics research Network (GEN))
    Abstract: We model a two-parties electoral game in an environment where voters are imperfectly informed on the administrative ability of each party. In equilibrium, parties try to manipulate voters’ beliefs and implement fiscal policies that are looser than the social optimum. The size of this deviation from optimality increases with the incentive of parties to manipulate, the voters’ information disadvantage, and the interaction between these two elements. We test our theoretical predictions on a sample of 23 OECD countries over the period 1999–2008. We measure the incentive to manipulate voters’ beliefs through the ideological cohesion of the cabinet (i.e. government polarization), and the scope to manipulate such beliefs through the level of voters’ economic literacy. We find that polarized governments tend to worsen fiscal balances, and this is more likely in countries where the voters’ economic literacy is low. However, such tendency vanishes as literacy increases, suggesting that polarization leads to biased fiscal policies only when there is enough room for manipulation. Our results remain stable after controlling for potentially confounding differences across countries and over time – such as individuals’ education attainments, electoral and institutional systems, voter turnout –, several types of falsification tests, time dynamics and unobserved heterogeneity.
    Keywords: budget balance, government polarization, electoral game, economic literacy
    JEL: D72 E62 H62
    Date: 2016–11
  58. By: Roys, Nicolas (Federal Reserve Bank of St. Louis)
    Abstract: This paper examines the aggregate implications of size-dependent distortions. These regulations misallocate labor across firms and hence reduce aggregate productivity. It then considers a case-study of labor laws in France where firms that have 50 employees or more face substantially more regulation than firms that have less than 50. The size distribution of firms is visibly distorted by these regulations: there are many firms with exactly 49 employees. A quantitative model is developed with a payroll tax of 0.15% that only applies to firm above 50 employees. Removing the regulation improves labor allocation across firms, leading in steady state to an increase in output per worker slightly less than 0.3%.
    Keywords: Firm size distribution; regulation; threshold effect; reallocation
    JEL: E23 O1 O40
    Date: 2016–10–05
  59. By: Delle Monache, Davide; Petrella, Ivan; Venditti, Fabrizio
    Abstract: In this paper we develop a new theoretical framework for the analysis of state space models with time-varying parameters. We let the driver of the time variation be the score of the predictive likelihood and derive a new filter that allows us to estimate simultaneously the state vector and the time-varying parameters. In this setup the model remains Gaussian, the likelihood function can be evaluated using the Kalman filter and the model parameters can be estimated via maximum likelihood, without requiring the use of computationally intensive methods. Using a Monte Carlo exercise we show that the proposed method works well for a number of different data generating processes. We also present two empirical applications. In the former we improve the measurement of GDP growth by combining alternative noisy measures, in the latter we construct an index of financial stress and evaluate its usefulness in nowcasting GDP growth in real time. Given that a variety of time series models have a state space representation, the proposed methodology is of wide interest in econometrics and statistics.
    Keywords: Business cycle; financial stress.; score-driven models; State space models; time-varying parameters
    JEL: C22 C32 C51 C53 E31
    Date: 2016–11
  60. By: Davide Fiaschi; Imre Kondor; Matteo Marsili; Valerio Volpati
    Abstract: In a recent paper, using data from Forbes Global 2000, we have observed that the upper tail of the firm size distribution (by assets) falls off much faster than a Pareto distribution. The missing mass was suggested as an indicator of the size of the Shadow Banking (SB) sector. This short note provides the latest figures of the missing assets for 2013, 2014 and 2015. In 2013 and 2014 the dynamics of the missing assets continued being strongly correlated with estimates of the size of the SB sector of the Financial Stability Board. In 2015 we find a sharp decrease in the size of missing assets, suggesting that the SB sector is deflating.
    Date: 2016–11
  61. By: Carlos Santos; Luis F. Costa; Paulo Brito
    Abstract: The cyclical behavior of markups is at the center of macroeconomic debate on the origins of business-cycle fl?uctuations and policy e¤ectiveness. In theory, markups may fl?uctuate endogenously with the business cycle due to sluggish price adjustment or to deeper motives affecting the price-elasticity of demand faced by individual producers. In this article we make use of a large ?firm- and product-level panel of Portuguese manufacturing fi?rms in the 2004-2010 period. The biggest empirical challenge is to separate supply (TFP) from demand shocks. Our dataset allows to do so, by containing information on product-level prices at a yearly frequency. Furthermore, markups are mismeasured when calculated with the labor share. We use the share of intermediate inputs instead. Our main results suggest that markups are pro-cyclical with TFP shocks and generally counter-cyclical with demand shocks. We also show how markups become procyclical if the markup is obtained using the labour share instead of intermediate inputs. Adjustment costs create a wedge between the labour share and the actual markup which explain the observed correlations. JEL codes: C23, E32, L16, L22
    Keywords: Markups, Demand shocks, TFP shocks
    Date: 2016
  62. By: Murtinu, Samuele; Piccirilli, Giulio; Sacchi, Agnese
    Abstract: We model a two-parties electoral game in an environment where voters are imperfectly informed on the administrative ability of each party. In equilibrium, parties try to manipulate voters’ beliefs and implement fiscal policies that are looser than the social optimum. The size of this deviation from optimality increases with the incentive of parties to manipulate, the voters’ information disadvantage, and the interaction between these two elements. We test our theoretical predictions on a sample of 23 OECD countries over the period 1999–2008. We measure the incentive to manipulate voters’ beliefs through the ideological cohesion of the cabinet (i.e. government polarization), and the scope to manipulate such beliefs through the level of voters’ economic literacy. We find that polarized governments tend to worsen fiscal balances, and this is more likely in countries where the voters’ economic literacy is low. However, such tendency vanishes as literacy increases, suggesting that polarization leads to biased fiscal policies only when there is enough room for manipulation. Our results remain stable after controlling for potentially confounding differences across countries and over time – such as individuals’ education attainments, electoral and institutional systems, voter turnout –, several types of falsification tests, time dynamics and unobserved heterogeneity.
    Keywords: Budget balance; Government polarization; Electoral game; Economic literacy
    JEL: D72 E62 H62
    Date: 2016–11–01
  63. By: Mehak Moazam (Pakistan Institute of Development Economics, Islamabad); M. Ali Kemal (Pakistan Institute of Development Economics, Islamabad)
    Abstract: The study attempted to investigate the determinants of inflation in case of Pakistan and to check the validity of monetarist stance that inflation is always and everywhere a monetary phenomenon by investigating the impact of oil prices, M2 and GDP on prices. The descriptive analysis shows there is strong correlation between money supply and prices and also between GDP and prices while the correlation between oil prices and CPI is (0.60) less as compare to other variables. The important finding of the paper is that oil prices have short run impact on inflation whereas money supply is the long run determinant of inflation in case of Pakistan.
    Date: 2016
  64. By: Chong-En Bai; Chang-Tai Hsieh; Zheng Michael Song
    Abstract: In 2009 and 2010, China undertook a 4 trillion Yuan fiscal stimulus, roughly equivalent to 12 percent of annual GDP. The "fiscal" stimulus was largely financed by off-balance sheet companies (local financing vehicles) that borrowed and spent on behalf of local governments. The off-balance sheet financial institutions continued to grow after the stimulus program ended at the end of 2010. After the end of the stimulus program, spending by these off-balance sheet companies accounted for roughly 10% of GDP each year, with an increasing share used for what are essentially private commercial projects. The off-balance spending by local governments is likely responsible for a 5 percentage-point increase in the aggregate investment rate and part of the 7 to 8 percentage-point decline in current account surplus since 2008. Finally, we argue that local governments used their new access to financial resources to facilitate access to capital to favored private firms, which potentially worsens the overall efficiency of capital allocation. The long run effect of off-balance sheet spending by local governments may be a permanent decline in the growth rate of aggregate productivity and GDP.
    JEL: E0
    Date: 2016–11
  65. By: Xisong Jin; Francisco Nadal De Simone
    Abstract: This study provides the first available estimates of systemic risk in the financial sector comprising the banking and investment fund industries during 2009Q4­2015Q4. Systemic risk is measured in three forms: as risk common to the financial sector; as contagion within the financial sector and; as the build­up of financial sector's vulnerabilities over time, which may unravel in a disorderly manner. The methodology models the financial sector components' default dependence statistically and captures the time­varying non-linearities and feedback effects typical of financial markets. In addition, the study estimates the common components of the financial sector's default measures and by identifying the macro-financial variables most closely associated with them, it provides useful input into the formulation of macro­prudential policy. The main results suggest that: (1) interdependence in the financial sector decreased in the first three years of the sample, but rose again later coinciding with ECB's references to increased search for yield in the financial sector. (2) Investment funds are a more important source of contagion to banks than the other way round, and this is more the case for European banking groups than for Luxembourg banks. (3) For tracking the growth of vulnerabilities over time, it is better to monitor the most vulnerable part of the financial sector because the common components of systemic risk measures tend to lead these measures.
    Keywords: financial stability? macro-prudential policy? banking sector; investment funds; default probability? non-linearities? generalized dynamic factor model? dynamic copulas
    JEL: C1 E5 F3 G1
    Date: 2016–10
  66. By: Yellen, Janet L. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2016–10–31
  67. By: Bernd Meyer (GWS - Institute of Economic Structures Research); Gerd Ahlert (GWS - Institute of Economic Structures Research)
    Abstract: Computable General Equilibrium Models and Macro-Econometric Models are deeply disaggregated macro-economic systems, which are used in economic environmental studies to explain the emissions of pollutions and the extraction of resources. CGE models are based on neoclassical theory depicting equilibrium of perfectly competitive markets, whereas the macro-econometric models – better characterized as neokeynesian – have been developed from a critical position vis-a-vis neoclassical theory stressing the importance of market imperfections. The paper at hand shows that this fundamental difference in approach to a large extent is responsible for differences in modelling results concerning the impact of policy instruments on the economy, social relations and the environment. Furthermore the outcome of concrete model applications is affected by differences in both the construction of the references and the concrete implementation of the policy instruments in the models.
    Keywords: Integrated Assessment Modelling, CGE models, Macro-Econometric Models, Neoclassical Theory, Neokeynesian Theory
    JEL: E12 E13 E17 E27 F62 Q01 Q56
    Date: 2016
  68. By: Simon, Zorka (Tilburg University, School of Economics and Management)
    Abstract: This doctoral dissertation consists of three chapters on the pricing of sovereign debt and inflation-linked products. The first chapter examines the relative pricing of nominal and inflation-linked debt of the three largest Eurozone sovereign issuers. Its main contribution is to present evidence of a selective default premium in real bond yields. The second chapter shifts its focus to the US inflation-linked product markets and quantifies liquidity premium in TIPS and inflation swap rates. The size of this compensation for exposure to asset level and liquidity risk helps to explain a large part of the TIPS-Treasury puzzle. The third chapter studies whether nominal bond markets are segmented across different maturities and contributes to the policy discussion on long term discount rates of the Solvency II Directive of the European Union.
    Date: 2016
  69. By: Hasan Cömert (Department of Economics, METU); Oktar Türel (Department of Economics, METU)
    Abstract: Dünya ekonomisinin son üç onyıldaki hızlı finansallaşması bağlamında, Türkiye’de para politikalarının geçirdiği evrimi konu alan bu yazı, kısa ve tanıtıcı Prolog da dâhil olmak üzere, dört bölümden oluşmaktadır. İkinci Bölüm’de 1980-2001 döneminde Türkiye’de para politikaları ve merkez bankacılığı (anlatının arka planına uluslararası gelişmeler yerleştirilerek) incelenmektedir. Çalışmanın en geniş ve ayrıntılı kısmını oluşturan Üçüncü Bölüm’de 1999-2001 Krizi ve 2001 tarihli (yeni) Merkez Bankası Kanunu’nun ardından Türkiye’de para politikalarının nasıl tasarlandığı ve yürütüldüğü ele alınmakta, bu politikaların eriştiği başarı düzeyleri tartışılmaktadır. Dördüncü (ve son) Bölüm, yazıyı sonuçlandırıcı gözlem ve değerlendirmelere ayrılmıştır. Makalenin bulguları TCMB’nin başarı veya başarısızlığının önemli ölçüde finansal akımlar ve enerji ve hammadde fiyatları gibi kendi etkisi dışındaki gelişmeler tarafından belirlendiğini göstermektedir. TCMB’nin daha etkin ve toplumsal olarak daha faydalı politikalar izlemesinin ön koşulu, bu kısıtların yapısal olarak aşılmasına bağlıdır.
    Keywords: Merkez bankacılığı; Ekonomik ve finansal krizler; Sermaye girişleri; Türkiye ekonomisi
    JEL: E52 G01 F31 F32 O53
    Date: 2016–11
  70. By: Michele Loberto (Bank of Italy Author-Name Francesco Zollino; Bank of Italy)
    Abstract: We investigate the determinants of Italian house prices and residential investments in a structural model with possible disequilibria in the market for lending to both households and firms in the building sector. Based on a structural approach that takes into account the multifold relationships between demand and supply within the housing and the credit markets, we find that, while house prices react mostly to disposable income and demographic pressures, lending conditions also exert a significant impact. During the recent crises the contribution of declining bank rates to household lending was limited, due to the greater deleveraging needs of Italian banks. Conventional monetary policy has supported house prices, albeit with declining intensity as policy rates have gradually approached the lower bound. At the same time, unconventional monetary policy measures have sustained house prices via their effect on Italian sovereign spreads, which have shrunk by a sizeable amount since they peaked in the period between late 2011 and early 2013. Finally, we find that house price developments stayed in line with the fundamentals, during both the global financial and sovereign debt crisis, with only minor and occasional discrepancies.
    Keywords: house prices, credit, system of simultaneous equations
    JEL: E52 G21 R20 R30
    Date: 2016–10
  71. By: von Prollius, Michael; Schnabl, Gunther
    Abstract: Seit dem Jahr 2015 ist Europa mit einer großen Flüchtlingswelle aus dem Nahen Osten und Nordafrika konfrontiert. Es wird argumentiert, dass die Geldpolitik der großen Industrieländer indirekt eine wichtige Bestimmungsgröße dieser Flüchtlingswelle ist. Ab der Jahrtausendwende haben starke Zinssenkungen der großen Zentralbanken in Reaktion auf das Platzen der Dotcom-Blasen Spekulation auf den Rohstoff- und Lebensmittelmärkten begünstigt. Der daraus resultierende drastische Anstieg der Rohstoff- und Lebensmittelpreise hatte einschneidende Verteilungswirkungen auf den Nahen Osten und Nordafrika, wo einerseits kleine Eliten große Rohstoffvorkommen kontrollieren und andererseits breite Bevölkerungsschichten in großer Armut leben. Die Arabellion wird nicht als Streben nach Demokratie, sondern als Brotunruhe und Aufbegehren gegen nicht zuletzt durch die Geldpolitik verstärkte soziale Missstände interpretiert.
    Keywords: Geldpolitik,Finanzmarktblasen,Krisen,Umverteilung,Arabischer Frühling,Flüchtlingskrise
    JEL: E52 E14 F22
    Date: 2016
  72. By: Bruno Tinel (Centre d'Economie de la Sorbonne)
    Abstract: The French authorities are responsible for the fixity of the CFA franc (XOF) / Euro exchange rate. Half of the currency reserves of the African countries of the Franc zone (ACFZ) are centralised on an operation account managed by the French Treasury. The CFA system is more flexible than a currency board, nevertheless it is not enough to match the monetary policy with the specific needs of a developing economy. On the external side, the CFA acts as an import subsidy and a tax on exports. On the internal side, the room to manœuvre remains limited in the present context as reserves are weakening with the decrease in commodity prices. The needs of the ACFZ could be better fulfilled through a more flexible exchange rate and the idea of monetary stability has to take into account the inevitable imbalances occurring on the goods and services market in a developing economy
    Keywords: operations account; CFA franc; currency board; monetary stability
    JEL: E58 F33 F54
    Date: 2016–10
  73. By: Carolina Alves; Vivienne Boufounou; Konstantinos Dellis; Christos Pitelis; Jan Toporowski (School of Oriental and African Studies, University of London)
    Abstract: There has been an increase of private non-guaranteed external debt (PNG) in developing countries and emerging economies in the last two decades reflects the increasing cross border flows of capital. The traditional literature, relaying on the current account, i.e. net capital flows, associates external debt in emerging and developing countries with deficits in current account, and cross border capital flows with global current account imbalances. This paper presents empirical evidences showing that during the 2000s that emerging markets have experienced a surge in private capital flows. As a result, emerging and developing countries cross-border asset positions have correspondingly increased, with the share of private sector claims on emerging markets increasing and the share of liabilities held by government and multilateral institutions decreasing. There is increasing involvement of the private sector in the developing countries’ external debt and the fact that the public sector, previously reliant almost entirely on official credit, has become able to access private debt markets reflects the increasing integration of developing countries into the global financial system. Gross capital flows data reveals that net capital flows do not explain and do not capture this global financial integration. The emerging and developing economies are at the margin of the process when it comes to cross-border financial flows that are still very much driven by developed economies, especially the EU and US and are concentrated in only a few countries. The surge in private capital flows within a context of current account surpluses has its mirror image in the accumulation of foreign exchange reserves. In turn this connects the capital flows towards these economies with factors such as the international monetary cycle. Lastly, it is discussed that the growing integration of developing and emerging countries into the global financial system is also the product of official development policy becoming more supportive of the private sector. The EU Aid policy has relentlessly supported the ‘pro-finance’ argument to achieve economic growth in these countries. Interestingly, one of the main tools to promote the development of the financial sector in developing countries relies on the notion of ‘blended finance’, which rests on using public Overseas Development Assistance (ODA) funds to leverage private funds and on developing broader types of public-private partnerships. There is therefore increasing increased integration of Emerging and Developing Economies in the global financial system, emerging 'financialization' in the economic and social development of developing countries and the increased role of the private sector, and inter-dependence between the European Union (EU) and the emerging countries and an assessment on the potential economic and social benefits for European sovereigns.
    Keywords: Development finance, international capital flows, international monetary cycle, financialisation, sovereign wealth funds, private equity, hedge funds
    JEL: E44 F33 F34 G15
    Date: 2016–08–30
  74. By: Farina, Francesco; Tamborini, Roberto
    Abstract: The aim of the 'Five Presidents Report' cited in the title acknowledges that an important driver of the European economic crisis has been the faulty original design of the Monetary Union, and that substantial steps are urgently needed towards the creation of truly supranational institutions. Yet economists tend to neglect that however compelling economic analyses may be, the stumbling block on the way of the reform of the Monetary Union is political will, and that in democracies the ultimate source of political will comes from electors. In this paper, first of all the authors wish to bring to the economists' attention some recent analyses of citizens' attitudes towards Europe from political science. Then, by cross-referencing the results of the 2014 elections of the European Parliament with Eurobarometer opinion polls eliciting judgements for the EU vis-à-vis home countries and an indicator of economic pain, they show the presence of a geo-economicpolitical cleavage across four groups of countries. This is more complex, and perhaps worse, than the simplistic divide between 'North' and 'South' or 'Core' and 'Periphery'. The main implication is that the EU experiences a stalemate between 'more Europe vs. less Europe' at the level of peoples, which seriously undermines support for further integration 'from below'.
    Keywords: European Economic and Monetary Union,economic crisis,European integration,Eurobarometer opinion polls,2014 elections of the European Parliament
    JEL: E02 E42
    Date: 2016
  75. By: J. Ignacio Conde-Ruiz; Carmen Marín; Juan F. Rubio-Ramírez
    Abstract: Fedea presenta hoy su Observatorio Fiscal y Financiero de las CC.AA que ha sido elaborado por Ignacio Conde, Carmen Marín y Juan Rubio. En la primera parte del boletín se analizan las cuentas autonómicas correspondientes a los primeros siete meses de 2016 a partir de los datos de Ejecución Presupuestaria. En la segunda parte, se realiza una proyección del Saldo en Contabilidad Nacional (CN) de cierre de 2016 bajo el supuesto de que las CC.AA. se comportan en términos fiscales durante el resto del año de la misma forma en que lo hicieron durante la parte final de 2015. Como principal resultado destaca el cumplimiento del objetivo de déficit de las CC.AA. debido principalmente a los mayores recursos recibidos del Sistema de Financiación Autonómico.
    Date: 2016–10

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