nep-mac New Economics Papers
on Macroeconomics
Issue of 2016‒12‒11
sixty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The macroeconomic effects of progressive taxes and welfare By Engler, Philipp; Strehl, Wolfgang
  2. The Role of Money in Federal Reserve Policy By Qureshi, Irfan
  3. The Macroeconomic Effects of Progressive Taxes and Welfare By Philipp Engler; Wolfgang Strehl
  4. Excess Reserves and Monetary Policy Implementation By Armenter, Roc; Lester, Benjamin
  5. Relationship Lending and the Great Depression: Measurement and New Implications By Jon Cohen; Kinda Cheryl Hachem; Gary Richardson
  6. Price-Setting in Mexico and the Real Effects of Monetary Shocks By Kochen Federico
  7. Credit spreads, financial crises, and macroprudential policy By Akinci, Ozge; Queralto, Albert
  8. DSGE Model with Interbank Market Failure - The Role of Macro-prudential Policies By Tobias Schuler; Luisa Corrado
  9. The Effectiveness of Unconventional Monetary Policy in the Euro Area: An Event and Econometric Study By Steve Ambler; Fabio Rumler
  10. Estática comparativa e indeterminación de signos en un modelo macroeconómico neoclásico sencillo By Cendejas Bueno, José Luis
  11. Effects of Fiscal Policy in the DSGE-VAR Framework: The Case of the Czech Republic By Jan Babecky; Michal Franta; Jakub Rysanek
  12. Joining the Dots: The FOMC and the future path of policy rates By Gerlach, Stefan; Stuart, Rebecca
  13. Divergent Risk-Attitudes and Endogenous Collateral Constraints By Curatola, Giuliano; Faia, Ester
  14. A Proposal to Clarify the Objectives and Strategy of Monetary Policy By Hetzel, Robert L.
  15. Joseph A. Schumpeter: Ein Pionier der Makrofinanz By Gerald Braunberger
  16. Growth-enhancing effect of openness to trade and migrations: What is the effective transmission channel for Africa? By Rachidi Kotchoni; Dalibor Stevanovic
  17. Uncertainty and the effectiveness of fiscal policy By Vladimir Arčabić; James Peery Cover
  18. Private Consumption in The WAEMU Zone: Does Interest Rate Matter? By Combey, Adama
  19. Estimating Matching Efficiency with Variable Search Effort By Hornstein, Andreas; Kudlyak, Marianna
  20. The dynamic effect of public expenditure shocks in the United States By Susana Párraga Rodríguez
  21. Liquidity Shocks and Real GDP Growth: Evidence from a Bayesian Time–varying Parameter VAR By Michael Ellington; Chris Florackis; Costas Milas
  22. Adaptive models and heavy tails with an application to inflation forecasting By Delle Monache, Davide; Petrella, Ivan
  23. Financial Shocks and Job Flows By Mehrotra, Neil; Sergeyev, Dmitriy
  24. Long-term interest rate spillovers from major advanced economies to emerging Asia By Belke, Ansgar; Dubova, Irina; Volz, Ulrich
  25. The Transfer and Adjustment Problems in the Balkans By Vladimir Gligorov
  26. Opportunity to Move: Macroeconomic Effects of Relocation Subsidies By Parkhomenko, Andrii
  27. 'Liquidity Regulation, Monetary Policy and Welfare' By George J. Bratsiotis
  28. Changes in Inflation Predictability in Major Latin American Countries By Garcés Díaz Daniel
  29. Three Lectures on the Theory of Money and Financial Institutions: Lecture 1: A Nontechnical Overview By Martin Shubik
  30. The National and Regional Economic Outlook and Monetary Policy, 11-30-2016; The African American Chamber of Commerce of Western Pennsylvania Annual Business Luncheon, Pittsburgh, PA By Mester, Loretta J.
  31. A New Perspective on the Finance-Development Nexus By Amaral, Pedro S.; Corbae, Dean; Quintin, Erwan
  32. Bankruptcy and Delinquency in a Model of Unsecured Debt By Athreya, Kartik B.; Sanchez, Juan M.; Tam, Xuan S.; Young, Eric R.
  33. Remittance Infl ows and State-Dependent Monetary Policy Transmission in Developing Countries By Immaculate Machasio; Peter Tillmann
  34. The effects of the supply of credit on real estate prices: Venezuela as a policy laboratory By Boeing-Reicher, Claire; Pinto, David
  35. Money Illusion and Household Finance By Thomas A. Stephens; Jean-Robert Tyran
  36. Estimating Light-Vehicle Sales in Turkey By Ufuk Demiroglu; Caglar Yunculer
  37. Banks Interconnectivity and Leverage By Barattieri, Alessandro; Moretti, Laura; Quadrini, Vincenzo
  38. Fiscal policy in Indonesia: Analysis of state budget 2017 in Islamic economic perspective By Jaelani, Aan
  39. Three Essays on the Theory of Money and Financial Institutions: Essay 1: A Nontechnical Overview By Martin Shubik
  40. Investment-less Growth: An Empirical Investigation By Germán Gutiérrez; Thomas Philippon
  41. Accelerator or Brake? Cash for Clunkers, Household Liquidity, and Aggregate Demand By Daniel Green; Brian T. Melzer; Jonathan A. Parker; Arcenis Rojas
  42. Welfare Effects of TTIP in a DSGE Model By Philipp Engler; Juha Tervala
  43. A New Test of Ricardian Equivalence Using the Narrative Record on Tax Changes By Haug, Alfred A.
  44. 'The Resilience of UK Regional Employment Cycles' By Marianne Sensier; Michael Artis
  45. Exchange Rate Pass-Through to Domestic Prices in the European Transition Economies By Rajmund Mirdala
  46. Price Rigidity, Inflation and the Distribution of Relative Price Changes By Sartaj Rasool Rather; S. Raja Sethu Durai; M. Ramachandran
  47. The Main Determinants of Private Investment in The WAEMU Zone: The Dynamic Approach By COMBEY, Adama
  48. The Main Determinants of Private Investment in The WAEMU Zone: The Dynamic Approach By Combey, Adama
  49. Natural cycles and pollution By Stefano Bosi; David Desmarchelier
  50. Extending the Determinants of Dollarization in Sub-Saharan Africa: The Role of Easy Access to Foreign Exchange Earnings By Raheem, Ibrahim D.; Asongu, Simplice A.
  51. History dependence in the housing market By Bracke, Philippe; Tenreyro, Silvana
  52. The Systematic Component of Monetary Policy in SVARs: An Agnostic Identi By Arias, Jonas; Caldara, Dario; Rubio-Ramírez, Juan Francisco
  53. Public Economics and Sustainable Developments Policy By Naveen Srinivasan; Vidya Mahambare; Francesco Perugini
  54. Aggregate liquidity and banking sector fragility By Mark Mink
  55. Money and Inflation: Evidence from P-Star Model By Sunil Paul; Sartaj Rasool Rather; M. Ramachandran
  56. The countercyclical capital buffer and the composition of bank lending By Raphael Auer; Steven Ongena
  57. Recession Propagation in Small Regional Economies: Spatial Spillovers and Endogenous Clustering By Sergei Shibaev
  58. The Great Recession and Charitable Giving By Jonathan Meer; David H. Miller; Elisa Wulfsberg
  59. Identifying the Benefits from Home Ownership: A Swedish Experiment By Paolo Sodini; Stijn Van Nieuwerburgh; Roine Vestman; Ulf von Lilienfeld-Toal
  60. MPC heterogeneity and household balance sheets By Andreas Fagereng; Martin B. Holm; Gisle J. Natvik
  61. Bayesian Expectations and Strategic Complementarity: Implications for Macroeconomic Stability By Hacıoğlu, Volkan

  1. By: Engler, Philipp; Strehl, Wolfgang
    Abstract: We analyze the positive and normative effects of a progressive tax on wages in a nonlinear New Keynesian DSGE model in the presence of demand and technology shocks. The non-linearity allows us to disentangle the effects of the progressive tax on the volatility and the level of macroeconomic variables, for both intertemporally optimizing ("Ricardian") and non-Ricardian ("rule-of-thumb") households. We find that the interaction of the two household types is of crucial importance. When only Ricardian households are considered, progressive taxes increase welfare (compared to at taxes) in the presence of technology shocks. Aggregate welfare falls, however, when rule-of-thumb households are added to the analysis. The progressive tax increases the welfare of the latter household by lowering its consumption volatility, but this is overcompensated for by the destabilization of Ricardian household consumption. Under demand shocks, progressive taxes reduce the welfare of both household types, with the welfare of rule-of-thumb households falling despite a decline in their consumption volatility. The reason is a lower average consumption level which is related to the changed curvature of the marginal cost function.
    Keywords: progressive taxation,rule-of-thumb households,monetary policy
    JEL: E2 E3 E52 E62
    Date: 2016
  2. By: Qureshi, Irfan (Department of Economics, University of Warwick)
    Abstract: Is the classic Taylor rule misspecified? I show that the inability of the Taylor rule to explain the federal funds rate using real-time data stems from the omission of a money growth objective. I highlight the significant role played by money in the policy discourse during the Volcker-Greenspan era using new FOMC data, benchmarking a novel characterization of “good” policy. An application of this framework offers a unified policy-based explanation of the Great Moderation and Recession. Welfare analysis based on the New-Keynesian model endorses the rule with money. The evidence raises significant concerns about relying on the simple Taylor rule as a policy benchmark and suggests why money may serve as a useful indicator in guiding future monetary policy decisions.
    Keywords: Taylor rule ; policy objectives ; money aggregates ; macroeconomic stability
    JEL: E30 E31 E42 E52 E58 E61
    Date: 2016
  3. By: Philipp Engler; Wolfgang Strehl
    Abstract: We analyze the positive and normative effects of a progressive tax on wages in a nonlinear New Keynesian DSGE model in the presence of demand and technology shocks. The non-linearity allows us to disentangle the effects of the progressive tax on the volatility and the level of macroeconomic variables, for both intertemporally optimizing (“Ricardian") and non-Ricardian (“rule-of-thumb") households. We find that the interaction of the two household types is of crucial importance. When only Ricardian households are considered, progressive taxes increase welfare (compared to at taxes) in the presence of technology shocks. Aggregate welfare falls, however, when rule-of-thumb households are added to the analysis. The progressive tax increases the welfare of the latter household by lowering its consumption volatility, but this is overcompensated for by the destabilization of Ricardian household consumption. Under demand shocks, progressive taxes reduce the welfare of both household types, with the welfare of rule-of-thumb households falling despite a decline in their consumption volatility. The reason is a lower average consumption level which is related to the changed curvature of the marginal cost function.
    Keywords: Progressive Taxation, Rule-of-thumb Households, Monetary Policy
    JEL: E2 E3 E52 E62
    Date: 2016
  4. By: Armenter, Roc (Federal Reserve Bank of Philadelphia); Lester, Benjamin (Federal Reserve Bank of Philadelphia)
    Abstract: In response to the Great Recession, the Federal Reserve resorted to several unconventional policies that drastically altered the landscape of the federal funds market. The current environment, in which depository institutions are flush with excess reserves, has forced policymakers to design a new operational framework for monetary policy implementation. We provide a parsimonious model that captures the key features of the current federal funds market along with the instruments introduced by the Federal Reserve to implement its target for the federal funds rate. We use this model to analyze the factors that determine rates and volumes under the new implementation framework and to study the effects of changes in the policy rates and other shocks to the economic environment. We also calibrate the model and use it as a quantitative benchmark for applied analysis, with a particular emphasis on understanding the role of the overnight reverse repurchase agreement facility in supporting the federal funds rate.
    Keywords: excess reserves; federal funds market; federal funds rate
    JEL: E42 E43 E52 E58
    Date: 2016–11–29
  5. By: Jon Cohen; Kinda Cheryl Hachem; Gary Richardson
    Abstract: The Great Depression remains ground zero for studying the non-monetary effects of financial crises. Despite the abundant scholarship on the period, lack of disaggregated data on lending activities has constrained our ability to measure the impact on the real economy of a collapse in long-term lending relationships. We propose here a novel way to extract cross-sectional differences in relationship lending from geographically aggregated financial statements. We find that the banking crises of the early 1930s, by destroying these relationships and the soft yet crucial information garnered from them, explain one-eighth of the economic contraction observed during the Depression. This effect comes specifically from small bank failures which alone explain one-third of the Depression. Large bank failures, on the other hand, were accompanied by a reallocation of deposits towards surviving relationship lenders, leading to economic gains which mitigated the overall negative impact of the banking crises. We show that ignoring cross-sectional differences in continuing relationships on the eve of the Great Depression understates by a factor of 2 the fall in economic activity directly attributable to the banking panics of the early 1930s. We also show that the rebuilding of lending relationships in the mold of those that existed in the 1920s was an important determinant of cross-sectional differences in economic performance during the 1937-38 recession.
    JEL: E44 G01 G21 L14 N22
    Date: 2016–12
  6. By: Kochen Federico
    Abstract: In this paper I use novel micro data underlying the Mexican CPI to establish stylized facts about prices in the Mexican economy. I then analyze the implications and consistency of the empirical results for the degree of monetary non-neutrality generated in both time and state-dependent pricing models. I find that the real effects of monetary shocks importantly depend on the type of nominal rigidity considered and on the treatment of sales in the statistics that are calibrated into the models.
    Keywords: Price Micro Data;Price Rigidity;Menu Cost Models
    JEL: E30 E31 E32
    Date: 2016–12
  7. By: Akinci, Ozge (Federal Reserve Bank of New York); Queralto, Albert (Board of Governors of the Federal Reserve System)
    Abstract: Credit spreads display occasional spikes and are more strongly countercyclical in times of financial stress. Financial crises are extreme cases of this nonlinear behavior, featuring deep recessions and sharp losses in bank equity. We develop a macroeconomic model with a banking sector in which banks’ leverage constraints are occasionally binding and equity issuance is endogenous. The model captures the nonlinearities in the data and produces quantitatively realistic crises. Endogenous equity issuance makes crises infrequent but does not prevent them altogether. Macroprudential policy designed to enhance banks’ incentive to issue equity lowers the probability of a crisis and increases welfare.
    Keywords: financial intermediation; sudden stops; leverage constraints; occasionally binding constraints; financial stability policy
    JEL: E32 E44 F41
    Date: 2016–11–01
  8. By: Tobias Schuler; Luisa Corrado
    Abstract: This paper analyses the effects of several macro-prudential policy measures on the banking sector and its linkages to the macroeconomy. We employ a dynamic general equilibrium model with sticky prices, in which banks trade excess funds in the interbank lending market. We find that an increase in the liquidity requirement effectively reduces the impact of an interbank shock on output and employment, while an increased capital requirement propagates only through financial variables as inflation and interest rates. We conclude that stricter liquidity measures which limit inside money creation, dampen the severity of a breakdown in interbank lend- ing. Targeting interbank financing directly through liquidity measures along with a moderate capital requirement generates lower welfare losses. We thereby provide a comprehensive rationale in favor of the regulatory measures in Basel III.
    JEL: E40 E51 E58 G28
    Date: 2016–12–05
  9. By: Steve Ambler (ESG, Université du Québec à Montréal, Canada; C.D. Howe Institute, Canada; The Rimini Centre for Economic Analysis, Italy); Fabio Rumler (Economic Analysis Division, Oesterreichische Nationalbank, Austria)
    Abstract: We use daily data on government bond yields and market-based inflation expectations (from inflation-linked swaps) to measure the effectiveness of unconventional monetary policy (UMP) in the euro area. We focus on the effects of policy announcements on ex-ante real interest rates, since the main transmission mechanism of monetary policy is through real interest rates and their effect on aggregate demand. We find evidence of significant impacts of UMP announcements of the ECB on real interest rates at maturities of five and ten years that operate mainly by raising inflation expectations. When distinguishing among UMP announcements that exceeded or disappointed market expectations, we find that the former significantly reduced nominal and real interest rates and increased inflation expectations while the latter had the opposite effect.
    Date: 2016–11
  10. By: Cendejas Bueno, José Luis
    Abstract: In this paper, we analyse a simple two-period neoclassical macroeconomic model -short and long term- that exclusively considers the real sector of the economy (labour and goods markets). It is shown how, under a general characterization, some important signs of comparative statics are undetermined. This ambiguity is a consequence of the ubiquity of the real interest rate tying intertemporarily the four markets considered. By adding simplifying assumptions, the signs are determined at the cost of losing generality and empirical adequacy. This fact limits the empirical relevance of a large part of the models commonly used in teaching macroeconomics, where ambivalent results are avoided because of the need of clear answers on the effects of fiscal and monetary policy interventions. Taking a positive view, these results compels to take general interdependence seriously and to pay more attention to the complete set of theoretical possibilities that arise when modelling macroeconomic systems.
    Keywords: neoclassical macroeconomics; intertemporal choice; teaching of macroeconomics;
    JEL: A20 B41 E13
    Date: 2016–12–07
  11. By: Jan Babecky; Michal Franta; Jakub Rysanek
    Abstract: In this paper we explore the potential of the DSGE-VAR modelling approach for examining the effects of fiscal policy. The combination of the VAR and DSGE frameworks leads theoretically to more accurate estimates of impulse responses and consequently of fiscal multipliers. Moreover, the framework allows for discussion about the differences of the effects of fiscal shocks in DSGE and VAR models and to some extent discussion about misspecification in fiscal DSGE models. The DSGE-VAR model is estimated on Czech data covering the period from 1996 to 2011 at quarterly frequency. The government consumption multiplier attains a value close to 0.4 at the horizon of four years. The public investment multiplier is about 0.4 higher, which confirms findings in the literature. On the other hand, the DSGE model alone implies a similar government consumption multiplier but a much lower public investment multiplier, suggesting misspecification of the fiscal DSGE model.
    Keywords: DSGE-VAR model, fiscal multipliers, fiscal shocks, identification, model misspecification
    JEL: C11 E62 F41 H30
    Date: 2016–11
  12. By: Gerlach, Stefan (BSI Bank and CEPR); Stuart, Rebecca (Central Bank of Ireland)
    Abstract: The Federal Reserve publishes since 2012 Federal Open Market Committee (FOMC) members' views regarding what federal funds rate will be necessary for the FOMC to achieve its statutory targets. The views or "projections" pertain to the end of the current and the next two or three years, and the "longer run." We use a simple model to interpolate the projections between these discrete points in time, estimate the interest rates one, two and three years ahead, and study how they evolve with macroeconomic conditions. News regarding the labour market, but not inflation, effects the projections in the sample period.
    Keywords: Federal Reserve, monetary policy, interest rate expectations, interpolation
    JEL: E52 E58
    Date: 2016–10
  13. By: Curatola, Giuliano; Faia, Ester
    Abstract: Consensus exists that financial crises are triggered by excessive leverage and low risk-sensitivity at the tails, together leading to endogenous risk-formation. A large body of literature explored the first determinant. None combined the two. We build a model with heterogenous agents, occasionally binding collateral constraints and loss-averse borrowers with kinked preferences (diminishing risk-sensitivity on the tails). The shadow price of debt (the tightness of the constraint), hence the risk of a crisis, derives endogenously by the distance in borrowers/lenders pricing kernels. Analytically we prove that: the tightness of the borrowing limit increases in the pricing kernels' distance and decreases in borrowers' risk-tolerance; the borrowers' Sharpe ratio raises with respect to his pricing kernel and to the shadow price of debt. We quantify the transmission channels by simulating the model with Markov-switching regimes, which account for anticipatory effects of the occasionally binding borrowing limit and of the preference status around the kink. Among other things we find that our model matches well several facts about asset prices, returns and consumption.
    Keywords: endogenous price of risk; excessive leverage; loss averse borrowers; occasionally binding constraints; risk-tolerance
    JEL: E0 E5 G01
    Date: 2016–12
  14. By: Hetzel, Robert L. (Federal Reserve Bank of Richmond)
    Abstract: Academic economists have perennially made arguments for the conduct of monetary policy constrained by an explicit rule. These arguments have gone nowhere. This paper advances a proposal to clarify Fed objectives and strategy in order to facilitate discussion leading to consensus over a desirable rule. Economists are likely to have more success in their quest for a rule if they follow the indirect strategy of pushing the Fed for more transparency about the systematic character of policy.
    JEL: E52 E58
    Date: 2016–09–12
  15. By: Gerald Braunberger (Frankfurter Allgemeine Zeitung)
    Abstract: Since the outbreak of the Great Financial Crisis in 2007, „Macrofinance“ has evolved as an exciting field for economists. The idea of marrying macroeconomics and financial economics has a long tradition, however, which should not remain buried in almost forgotten books. A couple of seemingly new ideas can be traced back to the work of the eminent economist Joseph A. Schumpeter. His dynamic model of the business cycle is built upon a close interaction between entrepreneurs and banks. Fire-sales of assets, liquidity spirals and feedback loops can turn a mild recession into a devastating depression. Schumpeter’s analysis of the role of monetary policy bears a striking resemblance to contemporary discussions.
    JEL: B10 B13 B20 B22 E30 E44
    Date: 2016–12
  16. By: Rachidi Kotchoni; Dalibor Stevanovic
    Abstract: This paper proposes a framework to produce real time multi-horizon forecasts of business cycle turning points, average forecasts of economic activity as well as conditional forecasts that depend on whether the horizon of interest belongs to a recession episode or not. Our forecasting models take the form of an autoregression of order one that is augmented with either a probability of recession or an inverse Mills ratio. Our empirical results suggest that a static Probit model that uses only the Term Spread as regressor provides comparable fit to the data as more sophisticated non-static Probit models. We also find that the dynamic patterns of the Term Structure of recession probabilities are quite informative about business cycle turning points. Our most parsimonious augmented autoregressive model delivers better out-of-sample forecasts of GDP growth than the benchmark models considered. We construct several Term Structures of recession probabilities since the last official NBER turning point. The results suggest that there has been no harbinger of a recession for the US economy since 2010Q4 and that there is none to fear at least until 2018Q1. GDP growth is expected to rise steadily between 2016Q3 and 2018Q1 in the range [2.5%,3.5%].
    Keywords: Augmented Autoregressive Model, Conditional Forecasts, Economic Activity, Inverse Mills Ratio, Probit, Recession.
    JEL: C35 C53 E27 E37
    Date: 2016
  17. By: Vladimir Arčabić (Faculty of Economics and Business, University of Zagreb); James Peery Cover (Department of Economics, Finance, & Legal Studies, University of Alabama)
    Abstract: During the Great Recession of 2007-2009 uncertainty in the United States reached historically high levels. This paper analyzes the effectiveness of fiscal policy under different uncertainty regimes in the U.S. High uncertainty is known to make economic agents postpone their decisions on consumption and investment (real-options channel), making economic policy less effective. We use several uncertainty measures in a threshold vector autoregressive model (TVAR) to endogenously estimate different uncertainty regimes. Then we analyze the effectiveness of different fiscal policy shocks in each uncertainty regime. We measure uncertainty using S&P 100 volatility index (VXO) and Baa corporate bond yield relative to yield on 10-year treasury constant maturity (Baa10ym). Our benchmark model consists of aggregate government spending, taxes, uncertainty, and GDP. In addition to the benchmark model, we estimate three extensions. First, we differentiate between government consumption, investment, and defense expenditures. Second, we check the robustness using two different measures of uncertainty – VXO and Baa10ym. Third, we compute impulse responses of GDP aggregates: consumption and investment. Nonlinear impulse response functions differentiate between positive and negative fiscal shocks, as well as between small and big fiscal shocks. Confidence intervals are obtained by bootstrapping in order to determine the statistical significance of impulse responses. This paper has five important findings. (1) We find that fiscal policy shocks have a much larger effect on the economy during periods of high uncertainty. (2) We also find that during periods of average or low uncertainty government spending shocks tend to crowd out private sector investment spending, but during periods of high uncertainty, after a one-year delay, government spending shocks “crowd-in” private sector investment expenditures. (3) We find large shocks typically do not have the same dollar for dollar effect on GDP as small shocks. That is, 2SD shocks tend to have only a 33-50% larger effect than 1SD shocks. (4) We find that expansionary tax shocks are not as powerful as contractionary tax shocks. And finally and perhaps most importantly (5) we find that government investment spending shocks are far more potent that government consumption and government defense spending shocks. This last result suggests that infrastructure investment expenditures are a much better way to stimulate the economy than other types of government spending.
    Keywords: uncertainty, fiscal policy, threshold, VAR model
    JEL: C32 D81 E62 H30
    Date: 2016–12–02
  18. By: Combey, Adama
    Abstract: This paper investigates the effect of interest rates on private consumption in the West African Economic and Monetary Union (WAEMU). After checking for unit root and co-integration, Error Correction Model is specified, and three estimators are performed: Mean Group, Pooled Mean Group and Dynamic Fixed-Effects. Hausman tests indicate that the Dynamic Fixed-Effects estimator is more efficient and consistent than others. Results suggest that there is no statistical evidence, both in short-run and long-run, impact of real and nominal saving interest rates on private consumption in the WAEMU region from 2006 to 2014. These finds imply that neither substitution effect, nor income effect, operate in this zone. However, the paper finds that the growth of private consumption is strongly depends positively in the long-run on the gross national disposable income and the credit to private sector ratio. The long-run income elasticity and semi-elasticity of liquidity constraints are statistically significant and average to 0.92 and 0.0085, respectively. These finds imply that there is a need for more proper financial market development and financial education policies implementation to have negative and significant impact of interest rates on private consumption in the WAEMU zone.
    Keywords: The views expressed in this paper are those of the author and should not be attributed to the Central Bank of West African States.
    JEL: C5 E21 F15
    Date: 2016–12–05
  19. By: Hornstein, Andreas (Federal Reserve Bank of Richmond); Kudlyak, Marianna (Federal Reserve Bank of San Francisco)
    Abstract: We introduce a simple representation of endogenous search effort into the standard matching function with job-seeker heterogeneity. Using the estimated augmented matching function, we study the sources of changes in the average employment transition rate. In the standard matching function, the contribution of market tightness (matching efficiency) is increasing (decreasing) in the matching function elasticity. For our augmented matching function, search effort is procyclical for small matching elasticity and accounts for most of the transition rate volatility, with small contributions from market tightness and matching efficiency. For a large matching elasticity search effort is strongly countercyclical and large movements in matching efficiency compensate for that. Regardless of the matching elasticity, we find a substantial decline of the matching efficiency after 2007
    JEL: E24 J63 J64
    Date: 2016–12–01
  20. By: Susana Párraga Rodríguez (University College London)
    Abstract: This paper estimates the dynamic aggregate effect of exogenous shocks to two key components of public expenditure in the United States: government income transfers and government spending. The identifi cation strategy positions the structural shocks to public expenditures in an SVAR framework with exogenous measures of public expenditure changes. Transfers shocks are based on a new narrative variable of legislated increases in U.S. social security benefi ts. I demonstrate that shocks to different types of public expenditure do not have the same macroeconomic impact. The estimated government spending multiplier is between 0 and 1, while increases in transfers generate a multiplier effect above 1.
    Keywords: government expenditures, transfer payments, social security
    JEL: E2 E62 H55 H56 I38
    Date: 2016–12
  21. By: Michael Ellington (Management School, University of Liverpool, UK); Chris Florackis (Management School, University of Liverpool, UK); Costas Milas (Management School, University of Liverpool, UK; The Rimini Centre for Economic Analysis, Italy)
    Abstract: We examine the dynamic impact of liquidity shocks resonating in stock and housing markets on real GDP growth. We fit a Bayesian time-varying parameter VAR model with stochastic volatility to US data from 1970 to 2014. GDP becomes highly sensitive to house market liquidity shocks as disruptions in the sector start to emerge, yet more resilient to stock market liquidity shocks throughout time. We provide substantial evidence in favour of asymmetric responses of GDP growth both across the business cycle, and among business cycle troughs. Stock and house market liquidity shocks explain, on average, 17% and 35% of the variation in GDP during the Great Recession, respectively.
    Keywords: Stock Market Liquidity, House Market Liquidity, Liquidity Shocks, Time-varying Parameter VAR
    JEL: C11 C32 E44 G12
    Date: 2016–12
  22. By: Delle Monache, Davide; Petrella, Ivan
    Abstract: This paper introduces an adaptive algorithm for time-varying autoregressive models in the presence of heavy tails. The evolution of the parameters is determined by the score of the conditional distribution, the resulting model is observation-driven and is estimated by classical methods. In particular, we consider time variation in both coefficients and volatility, emphasizing how the two interact with each other. Meaningful restrictions are imposed on the model parameters so as to attain local stationarity and bounded mean values. The model is applied to the analysis of inflation dynamics with the following results: allowing for heavy tails leads to significant improvements in terms of fit and forecast, and the adoption of the Student-t distribution proves to be crucial in order to obtain well calibrated density forecasts. These results are obtained using the US CPI inflation rate and are confirmed by other inflation indicators, as well as for CPI inflation of the other G7 countries.
    Keywords: adaptive algorithms, inflation, score-driven models, student-t, time-varying parameters.
    JEL: C22 C51 C53 E31
    Date: 2016–09–01
  23. By: Mehrotra, Neil; Sergeyev, Dmitriy
    Abstract: We argue that the creation and destruction margins of employment (job flows) at the aggregate level and disaggregated across firm age and size can be used to measure the employment effects of disruptions to firm credit. Using a firm dynamics model, we establish that a tightening of credit to firms reduces employment primarily by reducing gross job creation, exhibiting stronger effects at new/young firms and middle-sized firms (20-99 employees). We find that 18% of the decline in US employment during the Great Recession is due to the firm credit channel. Using MSA-level job flows data, we show that the behavior of job flows overall and across firm size and age categories in response to identified credit shocks is consistent with our model's predictions and hold within tradable and non-tradable industries.
    Keywords: Financial Frictions; Job flows
    JEL: E44 J60
    Date: 2016–12
  24. By: Belke, Ansgar; Dubova, Irina; Volz, Ulrich
    Abstract: This paper explores the extent to which changes to long-term interest rates in major advanced economies have influenced long-term government bond yields in Emerging Asia. To gauge long-term interest spillover effects, the paper uses VAR variance decompositions with high frequency data. Our results reveal that sovereign bond yields in Emerging Asia responded significantly to changes in US and Eurozone bond yields, although the magnitudes were heterogeneous across countries. The magnitude of spillovers varied over time. The pattern of these variations can partially be explained by the implementation of different unconventional monetary policy measures in advanced countries.
    Abstract: In diesem Papier wird untersucht, inwieweit die Änderungen der langfristigen Zinsen in den großen fortgeschrittenen Volkswirtschaften die langfristigen Staatsanleiherenditen der asiatischen Schwellenländer beeinflussen. Um langfristige Zinsübertragungseffekte zu messen, verwendet das Papier VAR-Varianzzerlegungen mit Daten hoher Frequenz. Unsere Ergebnisse zeigen, dass Staatsanleiherenditen in asiatischen Schwellenländern deutlich auf die Veränderungen der Anleiherenditen der USA und der Eurozone reagierten. Dabei fielen die Größenordnungen in den einzelnen Ländern allerdings nicht einheitlich aus. Das Ausmaß der Spillovers variierte zudem im Zeitablauf. Das Muster dieser Variationen kann teilweise durch die Implementierung verschiedener unkonventioneller geldpolitischer Maßnahmen in fortgeschrittenen Ländern erklärt werden.
    Keywords: Long-term interest rates,bond yields,monetary policy spillovers,Emerging Asia
    JEL: E52 E58 F42
    Date: 2016
  25. By: Vladimir Gligorov (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Abstract How to deal with significant external imbalances due to persistent cross-border financial flows which eventually dry out while accumulated foreign debts need to be financed from increased exports? Keynes and Ohlin, primarily, debated an apparently more specific issue of unilateral transfers in the case of German reparations after the World War I and that debate has had lasting influence on the theory of trade and international finance and even on the understanding of the dynamics of exchange rates in financial and fiscal adjustment. These issues have resurfaced in the discussions of financial crisis in a monetary union, like that of the euro area. The aim of this essay is to use the arguments presented in this debate and in subsequent clarifications and extensions to understand the development of external imbalances in the Balkans and the prolonged adjustment in the context of the financial crisis after 2008. The motivation is that this is an important topic in international macroeconomics and a recurrent problem in this region, though I will look more thoroughly only into the last episode of the financial crisis from 2008 onwards. The essay follows the arguments advanced in this classic debate and applies them to examples of post-crisis adjustment in the Balkans (not just in the post-socialist countries, but also looking at the problems that Greece is having with servicing its large foreign debt). The essay should provide the framework for the understanding of Balkan problems of adjustment to outward transfers to service in some cases of unsustainable foreign debts. It also seeks to develop hypotheses that invite a detailed look at the data and their assessment by somewhat more in depth discussion of particular cases.
    Keywords: macroeconomic imbalances, current account adjustment, debt problems, Greece, Balkans, Keynes
    JEL: E12 E44 F32 F34
    Date: 2016–11
  26. By: Parkhomenko, Andrii
    Abstract: The unemployment insurance system in the U.S. does not provide incentives to look for jobs outside local labor markets. In this paper I introduce relocation subsidies as a supplement to unemployment benefits, and study their effects on unemployment, productivity and welfare. I build a job search model with heterogeneous workers and multiple locations, in which migration is impeded by moving expenses, cross-location search frictions, borrowing constraints, and utility costs. I calibrate the model to the U.S. economy, and then introduce a subsidy that reimburses a part of the moving expenses to the unemployed and is financed by labor income taxes. During the Great Recession, a relocation subsidy that pays half of the moving expenses would lower unemployment rate by 0.36 percentage points (or 4.8%) and increase productivity by 1%. Importantly, the subsidies cost nothing to the taxpayer: the additional spending on the subsidies is offset by the reduction in spending on unemployment benefits. Unemployment insurance which combines unemployment benefits with relocation subsidies appears to be more effective than the insurance based on the benefits only.
    Keywords: unemployment insurance, relocation subsidies and vouchers, local labor markets, moving costs, geographic mobility, internal migration
    JEL: E24 J61 J64 J65 R23
    Date: 2016–11–24
  27. By: George J. Bratsiotis
    Abstract: In the aftermath of the Great Recession, when various policies for regulating credit liquidity were introduced, the US Fed and other central banks placed more emphasis on the interest on reserves than the more traditional required reserve ratio. This paper employs a model with endogenous credit risk, a balance sheet channel, a cost channel and bank equity requirements, to examine the macroprudential role of the interest on reserves and the required reserve ratio and compare their welfare implications. Two transmission channels are identified, the deposit rate and the balance sheet channels. The required reserve ratio is shown to have conflicting effects through these two channels mitigating its policy effectiveness as a credit regulation tool. Conversely, with the interest on reserves both these channels complement each other in reducing the output gap, the cost channel and inflation. The results show that as a credit regulation tool the interest on reserves requires lower policy rate intervention and yields superior welfare outcomes to both the required reserve ratio and credit-augmented Taylor rules.
    Date: 2016
  28. By: Garcés Díaz Daniel
    Abstract: Forecasts of inflation in the United States since the mid eighties have had smaller errors than in the past, but those conditional on commonly used variables cannot consistently beat the ones from univariate models. This paper shows through simple modifications to the classical monetary model that something similar occurred in those major Latin American economies that achieved their own "Great Moderation." For those countries that did not attain macroeconomic stability, inflation forecasting conditional on some variables has not changed. Allowing the parameters that determine Granger causality to change when the monetary regime does, makes possible the estimation of parsimonious inflation models for all available data (eight decades for one country and five for the others). The models so obtained ouperform others in pseudo out-of-sample forecasts for most of the period under study, except in the cases when an inflation targeting policy was successfully implemented.
    Keywords: Money;exchange rate;cointegration;inflation forecasting
    JEL: C32 E41 E42 E52
    Date: 2016–12
  29. By: Martin Shubik (Cowles Foundation, Yale University)
    Abstract: This essay is the second of three. The first is nontechnical and in part autobiographical describing the evolution of my approach to developing a micro economic theory of money and financial institutions. This essay is devoted to a mathematical sketch of a closed economic exchange system with general equilibrium GE and rational expectations RE viewed game theoretically. It squeezes the last drop out of statics and an illusory dynamics in the form of the RE extension of GE with no other externalities beyond money and markets. The third essay builds on process models adding uncertainty,innovation, an active government, nonsymmetric information and other externaties that all lead away from a static equilibrium model to an evolving entity where competition involving finance and innovation is part of a dynamic non-equilibrium process.
    Keywords: Process models, Disequilibrium, Minimal institutions, Money, Playable games
    JEL: C7 D50 E4
    Date: 2016–11
  30. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Abstract: Today, I would like to focus on our monetary policy role by discussing my outlook for both the national and regional economy and my views on monetary policy. The economic expansion is now in its eighth year, and considerable progress has been and continues to be made on both parts of the Fed’s statutory goals of full employment and price stability. In my view, the underlying fundamentals supporting the economic expansion remain sound. As we gain more clarity about the policies that might be forthcoming, the FOMC will assess their effects, as well as the implications of economic and financial developments, on the medium-run economic outlook and appropriate monetary policy. Monetary policy is not on a pre-set course and we will continue to use the best available models, analysis, and judgment to assess the situation.
    Keywords: Labor Markets; Inflation; Small Businesses; Monetary Policy;
    Date: 2016–11–30
  31. By: Amaral, Pedro S. (Federal Reserve Bank of Cleveland); Corbae, Dean (Wisconsin School of Business); Quintin, Erwan (Wisconsin School of Business)
    Abstract: The existing literature on financial development focuses mostly on the causal impact of the quantity of financial intermediation on economic development. This paper, instead, focuses on the role of the financial sector in creating securities that cater to the needs of heterogeneous investors. To that end, we describe a dynamic extension of Allen and Gale (1989)’s optimal security design model in which producers can tranche the stochastic cash flows they generate at a cost. Lower tranching costs in that environment lead to capital deepening and raise aggregate output. The implications of lower tranching costs for TFP, on the other hand, are fundamentally ambiguous. In other words, our model predicts that increased financial sophistication/complexity—a securitization boom, e.g.—can have adverse consequences on aggregate productivity as it is conventionally measured.
    Keywords: Endogenous security markets; financial development; economic development;
    JEL: E30 E44
    Date: 2016–12–02
  32. By: Athreya, Kartik B. (Federal Reserve Bank of Richmond); Sanchez, Juan M. (Federal Reserve Bank of St. Louis); Tam, Xuan S. (City University of Hong Kong); Young, Eric R. (University of Virginia)
    Abstract: This paper documents and interprets two facts central to the dynamics of informal default or "delinquency" on unsecured consumer debt. First, delinquency does not mean a persistent cessation of payment. In particular, we observe that for individuals 60 to 90 days late on payments, 85% make payments during the next quarter that allow them to avoid entering more severe delinquency. Second, many in delinquency (40%) have smaller debt obligations one quarter later. To understand these facts, we develop a theoretically and institutionally plausible model of debt delinquency and bankruptcy. Our model reproduces the dynamics of delinquency and suggests an interpretation of the data in which lenders frequently (in roughly 40% of cases) reset the terms for delinquent borrowers, typically involving partial debt forgiveness, rather than a blanket imposition of the "penalty rates" most unsecured credit contracts specify.
    JEL: E43 E44 G33
    Date: 2016–12–01
  33. By: Immaculate Machasio (University of Giessen); Peter Tillmann (University of Giessen)
    Abstract: Remittance infl ows from overseas workers are an important source of foreign funding for developing and emerging economies. The literature is inconclusive about the cyclical nature of remittance infl ows. To the extent remittances are procyclical they pose a challenge to monetary policy: a tightening of policy will be less effective if at the same time remittances increase strongly. The same is true for a policy easing under exceptionally weak remittance in flows. This paper estimates a series of nonlinear (smooth-transition) local projections to study the effectiveness of monetary policy under different remittance in flows regimes. The model is able to provide state-dependent impulse response functions. We show that for Kenya, Mexico, Colombia and the Philippines monetary policy indeed has a smaller domestic effect under strong in flows of remittances. These results have important implications for the design of infl ation targeting in developing countries.
    Keywords: Remittance infl ows, monetary policy, in flation targeting, smooth-transition model, local projections
    JEL: E52 E32 O16
    Date: 2016
  34. By: Boeing-Reicher, Claire; Pinto, David
    Abstract: We identify the effects of the supply of mortgage credit on house prices, using the politicallydirected credit-targeting regime of Venezuela as quasi-natural experiment. We find a large effect of the supply of housing credit on time path of house prices (or housing Markups), with an elasticity of housing markups with respect to credit of about 0.23 under our baseline specification, and similar results under a set of alternative specifications. These estimates are close to previous panel estimates for the United States, which suggests that these estimates capture similar phenomena.
    Keywords: house prices,credit supply,Venezuela,credit targeting
    JEL: E51 E65 R31
    Date: 2016
  35. By: Thomas A. Stephens (Department of Economics, WU Vienna University of Economics and Business); Jean-Robert Tyran (Department of Economics, University of Copenhagen)
    Abstract: We elicit money illusion and match it with financial and sociodemographic data from official registers on a quasi-representative sample of the Danish population. We find that people who are more prone to money illusion hold more of their gross wealth in nominal assets, including bank deposits and bonds, and less in real assets, including real estate and stocks. This bias is robust to controls for education, income, cognitive ability and other relevant characteristics. We further find that money illusion is a costly bias: 10-year portfolio returns are about 10 percentage points lower for individuals with high money illusion.
    Keywords: money illusion, loss aversion, household finance
    JEL: C91 D03 D14 E21 G11
    Date: 2016–12–01
  36. By: Ufuk Demiroglu; Caglar Yunculer
    Abstract: This paper is motivated by the surprising rapid growth of new light-vehicle sales in Turkey in 2015. Domestic sales grew 25%, dramatically surpassing the industry estimates of around 8%. Our approach is to inform the sales trend estimate with the information obtained from the light-vehicle stock (the number of cars and light trucks officially registered in the country), and the scrappage data. More specifically, we improve the sales trend estimate by estimating the trend of its stock. Using household data, we show that an important reason for the rapid sales growth is that an increasing share of household budgets is spent on automobile purchases. The elasticity of light-vehicle sales to cyclical changes in aggregate demand is high and robust; its estimates are around 6 with a standard deviation of about 0.5. The price elasticity of light-vehicle sales is estimated to be about 0.8, but the estimates are imprecise and not robust. We estimate the trend level of light-vehicle sales to be roughly 7 percent of the existing stock. A remarkable out-of-sample forecast performance is obtained for horizons up to nearly a decade by a regression equation using only a cyclical gap measure, the time trend and obvious policy dummies. Various specifications suggest that the strong 2015 growth of light-vehicle sales was predictable in late 2014.
    Keywords: Light vehicles, Light-vehicle stock, Number of registered cars, Light-vehicle scrappage, Automobile sales, Turkish economy
    JEL: E27 E32 L62
    Date: 2016
  37. By: Barattieri, Alessandro (Collegio Carlo Alberto and ESG UQAM); Moretti, Laura (Central Bank of Ireland); Quadrini, Vincenzo (University of Southern California)
    Abstract: In the period that preceded the 2008 crisis, US financial intermediaries have become more leveraged (measured as the ratio of assets over equity) and interconnected (measured as the share of liabilities held by other financial intermediaries). This upward trend in leverage and interconnectivity sharply reversed after the crisis. To understand the factors that could have caused this dynamic, we develop a model where banks make risky investments in the non-financial sector and sell part of their investments to other banks (diversification). The model predicts a positive correlation between leverage and interconnectivity which we explore empirically using balance sheet data for over 14,000 financial intermediaries in 32 OECD countries. We enrich the theoretical model by allowing for Bayesian learning about the likelihood of a bank crisis (aggregate risk) and show that the model can capture the dynamics of leverage and interconnectivity observed in the data.
    Keywords: Interconnectivity, Leverage
    JEL: G11 G21 E21
    Date: 2016–09
  38. By: Jaelani, Aan
    Abstract: This study of fiscal policy in State Budget (APBN) 2017 that the task of the Indonesian government to run them to create prosperity for the community. The state budget is prepared using the rules of public economics consisting of state revenues, state expenditures, and budget financing have the posture of the budget, the issues of fiscal policy, and the role of the government in carrying out its functions. With the analysis of Islamic economics, fiscal policy in the State Budget 2017 is the duty of the government to implement the budget for the public welfare with indicators on aspects of religion (religious life), life (justice and security), intellect (education), descent (health and social security family), and treasure (income distribution and access to employment).
    Keywords: fiscal policy, state budget, welfare, maqashid shariah, Islamic economics
    JEL: E62 F52 G18 H61 O23 P43
    Date: 2016–12–01
  39. By: Martin Shubik (Cowles Foundation, Yale University)
    Abstract: This is a nontechnical retrospective paper on a game theoretic approach to the theory of money and financial institutions. The stress is on process models and the reconciliation of general equilibrium with Keynes and Schumpeter’s approaches to non-equilibrium dynamics.
    Keywords: Bankruptcy, Innovation, Growth, Competition, Price-formation
    JEL: C7 E12
    Date: 2016–11
  40. By: Germán Gutiérrez; Thomas Philippon
    Abstract: We analyze private fixed investment in the U.S. over the past 30 years. We show that investment is weak relative to measures of profitability and valuation – particularly Tobin’s Q, and that this weakness starts in the early 2000’s. There are two broad categories of explanations: theories that predict low investment because of low Q, and theories that predict low investment despite high Q. We argue that the data does not support the first category, and we focus on the second one. We use industry-level and firm-level data to test whether under-investment relative to Q is driven by (i) financial frictions, (ii) measurement error (due to the rise of intangibles, globalization, etc), (iii) decreased competition (due to technology or regulation), or (iv) tightened governance and/or increased short-termism. We do not find support for theories based on risk premia, financial constraints, or safe asset scarcity, and only weak support for regulatory constraints. Globalization and intangibles explain some of the trends at the industry level, but their explanatory power is quantitatively limited. On the other hand, we find fairly strong support for the competition and short-termism/governance hypotheses. Industries with less entry and more concentration invest less, even after controlling for current market conditions. Within each industry-year, the investment gap is driven by firms that are owned by quasi-indexers and located in industries with less entry/more concentration. These firms spend a disproportionate amount of free cash flows buying back their shares.
    JEL: E22 G3
    Date: 2016–12
  41. By: Daniel Green; Brian T. Melzer; Jonathan A. Parker; Arcenis Rojas
    Abstract: We estimate the importance of household liquidity for the effect of the Car Allowance Rebate System (CARS) on vehicle transactions. We measure the average program impact by comparing households with "clunkers" eligible for CARS to households with similar vehicles that were ineligible. The liquidity provided by CARS contributed to its larger than anticipated take-up. Clunkers with existing loans, which required immediate repayment upon trade-in, were traded-in at much lower rates, an effect consistent with liquidity constraints and distinguishable from that of other debt, household income, and the size of the program subsidy. Household debt capacity did not measurably constrain participation.
    JEL: D14 E62 G18 H24 H31
    Date: 2016–12
  42. By: Philipp Engler; Juha Tervala
    Abstract: Several studies have analyzed the trade and output effects of the Transatlantic Trade and Investment Partnership (TTIP) between the United States and the European Union, but our paper is the first attempt to study its welfare effects. We measure the welfare effect of TTIP as the percentage of initial consumption that households would be willing to pay for TTIP in order to remain as well off with TTIP as without it. The discounted present value of the welfare gain of TTIP, which leads to the elimination of tariffs and cuts in non-tariff measures by 25%, is in the range of 1% to 4% of initial consumption, depending on the parameterization. The welfare gain increases in the elasticity of substitution between domestic and foreign goods. The bulk of the welfare gain is caused by cuts in non-tariff measures.
    Keywords: Tariffs, TTIP, trade agreement, trade liberalization
    JEL: F13 F41 E60
    Date: 2016
  43. By: Haug, Alfred A.
    Abstract: This paper empirically tests the Ricardian equivalence hypothesis with a narrative measure of tax shocks. The present value, at the time of legislation, of tax increases motivated solely by concerns for improving the fiscal health of the government is used for the tests. These tax news represent a switch from debt to tax financing that should have no effects on the economy if Ricardian equivalence holds as a good approximation. For the post-1980:IV period, I find evidence for fiscal anticipation as many of the tax increases are implemented with substantial delays and distortionary taxes increase economic activity before taxes go up, which iscaused by intertemporal substitution. Therefore, Ricardian equivalence is rejected.
    Keywords: Ricardian equivalence hypothesis; narrative record; exogenous tax changes; government budget deficits
    JEL: C51 E62
    Date: 2016–11–28
  44. By: Marianne Sensier; Michael Artis
    Abstract: This paper dates the classical business cycle of quarterly UK GDP, unemployment, aggregate and regional employment to assess turning points in the economic cycle. We analyse synchronisation of the regions with UK employment and investigate which regions lead into recession. We perform the McNemar Test on groups of regions and arrive at Northern and Southern regional clusters. We find that the northern regions have had a greater incidence of recession with southern regions suffering more severe recessions (in terms of total jobs lost). Finally we compare the resilience of the regional employment cycle to UK employment. This most resilient region to the 2008 recession was London from our Southern grouping and the least resilient has been the Northern Ireland in our northern grouping.
    Date: 2016
  45. By: Rajmund Mirdala (Department of Economics at the Faculty of Economics, Technical University of Kosice, Slovak Republic)
    Abstract: Vulnerability of exchange rates to the external price shocks as well as their absorption capabilities represents one of the most discussed area in the fixed versus flexible exchange rate dilemma. Ability of exchange rates to serve as a traditional vehicle for a transmission of external shocks to domestic prices is affected by exchange rate arrangement adopted by monetary authorities. As a result, exchange rate volatility determines the overall dynamics of pass-through effects and associated absorption capability of exchange rate. Ability of exchange rates to transmit external (price) shocks to the national economy represents one of the most discussed areas relating to the current stage of the monetary integration in the European single market. The problem is even more crucial when examining crisis related redistributive effects. In the paper we analyze exchange rate pass-through to domestic prices in the European transition economies. We estimate VAR model to investigate (1) responsiveness of exchange rate to the exogenous price shock to examine the dynamics (volatility) in the exchange rate leading path followed by the unexpected oil price shock and (2) effect of the unexpected exchange rate shift to domestic price indexes to examine its distribution along the internal pricing chain. Our results indicate that there are different patterns of exchange rate passthrough to domestic prices according to the baseline period as well as the exchange rate regime diversity.
    Keywords: exchange rate pass-through, inflation, VAR, Cholesky decomposition, impulse-response function
    JEL: C32 E31 F41
    Date: 2016–10
  46. By: Sartaj Rasool Rather (Madras School of Economics); S. Raja Sethu Durai (Madras School of Economics); M. Ramachandran (Department of Economics, Pondicherry University, Puducherry)
    Abstract: This study examines whether skewness of the cross sectional distribution of relative price changes is positively associated with aggregate inflation as predicted by the Menu cost model of Ball and Mankiw (1994, 1995). Further, the study examines the size and frequency of price changes across various commodities and the distribution of relative price changes. The results from highly disaggregated Indian Wholesale Price Index data suggest that the skewness of relative price changes explains a significant proportion of short-run fluctuations in aggregate inflation. More importantly, the results indicate that the average size of price increases is greater than the size of price decreases implying downward rigidity in the prices of various commodities.
    Keywords: Inflation, Skewness, Relative price changes, Menu costClassification-JEL: E30; E31; E52
    Date: 2015–08
  47. By: COMBEY, Adama
    Abstract: This article investigates the main determinants of private investment in the West African Economic and Monetary Union (WAEMU). After checking for unit root and co-integration, Error Correction Model is specified, and three estimators are performed: Dynamic Fixed-Effects, Mean Group, and Pooled Mean Group. Hausman tests show that the Dynamic Fixed-Effects Estimator is more efficient and consistent than others. Results suggest that, in the short-run, private investment in the WAEMU zone is determined by the aggregate demand conditions: gross domestic product and output gap, while, in the long-run, it is determined by gross domestic product, and political stability. The short-run elasticity of gross domestic product and output gap are statistically significant and average to 5.7 and 0.06, respectively. The long-run elasticity of gross domestic product and the semi-elasticity of political stability are statistically significant and average to 2.4 and -0.25, respectively. These finds imply that, to promote private investment in the WAEMU zone, there is a need among others for more proper design and implementation of aggregate demand management policies, and political framework stability.
    Keywords: Private Investment, WAEMU, Dynamic Fixed-Effects Estimator.
    JEL: C1 E2 F45
    Date: 2016–12–02
  48. By: Combey, Adama
    Abstract: This article investigates the main determinants of private investment in the West African Economic and Monetary Union (WAEMU). After checking for unit root and co-integration, Error Correction Model is specified, and three estimators are performed: Dynamic Fixed-Effects, Mean Group, and Pooled Mean Group. Hausman tests show that the Dynamic Fixed-Effects Estimator is more efficient and consistent than others. Results suggest that, in the short-run, private investment in the WAEMU zone is determined by the aggregate demand conditions: gross domestic product and output gap, while, in the long-run, it is determined by gross domestic product, and political stability. The short-run elasticity of gross domestic product and output gap are statistically significant and average to 5.7 and 0.06, respectively. The long-run elasticity of gross domestic product and the semi-elasticity of political stability are statistically significant and average to 2.4 and -0.25, respectively. These finds imply that, to promote private investment in the WAEMU zone, there is a need among others for more proper design and implementation of aggregate demand management policies, and political framework stability.
    Keywords: Private Investment, WAEMU, Dynamic Fixed-Effects Estimator.
    JEL: C1 E2 F45
    Date: 2016–12–02
  49. By: Stefano Bosi; David Desmarchelier
    Abstract: In this paper, we study a competitive Ramsey model where a pollution externality, coming from production, impairs a renewable resource which affects the consumption demand. A proportional tax, levied on the production level, is introduced to finance public depollution expenditures. In the long run, two steady states may coexist, the one with a low resource level, the other with a high level. Interestingly, a higher green tax rate lowers the resource level of the low steady state, giving rise to a Green Paradox (Sinn, 2008). Moreover, the green tax may be welfareimproving at the high steady state but never at the low one. Therefore, at the latter, it is optimal to reduce the green tax rate as much as possible. Conversely, the optimal tax rate is positive when the economy experiences the high steady state. This rate is unique. In the short run, the two steady states may collide and disappear through a saddle-node bifurcation. Since consumption and natural resources are substitutable goods, a limit cycle may arise around the high stationary state. To the contrary, this kind of cycles never occur around the low steady state whatever the resource effect on consumption demand. Finally, focusing on the class of bifurcations of codimension two, we find a Bogdanov-Takens bifurcation.
    Keywords: nature, logistic dynamics, Ramsey model, depollution, saddle-node bifurcation, Hopf bifurcation, Bogdanov-Takens bifurcation.
    JEL: E32 O44
    Date: 2016
  50. By: Raheem, Ibrahim D.; Asongu, Simplice A.
    Abstract: This study argues that the ease at which economic agents have access to foreign earnings would influence/increase the level of dollarization in the economy. The three sources of foreign currency earnings are financial integration, trade openness and natural resource rent. As such, we extend the determinants of dollarization to capture these variables. A dataset of 26 countries in sub-Saharan Africa (SSA) for the period 2001 – 2012 was built. Based on Tobit regression, we found that all the proxies of foreign currency earning, with the exception of natural resource rent, are significant contributors to the increasing rate of dollarization. Specifically, it was found that trade openness and financial liberalization are positive determinants of dollarization, while natural resource rent serves as drag to the dollarization process. These results remain valid to three robustness tests. Policy implications and suggestions for future research were proposed.
    Keywords: Dollarization; Openness; Resources; Tobit regression; SSA
    JEL: C21 E31 E41
    Date: 2016–09
  51. By: Bracke, Philippe (Bank of England); Tenreyro, Silvana (London School of Economics, Centre for Macroeconomics, and CEPR.)
    Abstract: Using the universe of housing transactions in England and Wales in the last 20 years, we document a robust pattern of history dependence in housing markets. Sale prices and selling probabilities today are affected by aggregate house prices prevailing in the period in which properties were previously bought. We investigate the causes of history dependence, with its quantitative implications for the post-crisis recovery of the housing market. To do so we complement our analysis with administrative data on mortgages and online house listings, which we match to actual sales. We find that high leverage in the pre-crisis period and anchoring (or reference dependence) both contributed to the collapse and slow recovery of the volume of housing transactions. We find no asymmetric effects of anchoring to previous prices on current transactions; in other words, loss aversion does not appear to play a role over and above simple anchoring.
    Keywords: Housing market; fluctuations; down-payment effects; reference dependence; anchoring; loss aversion
    JEL: D03 E32 R31
    Date: 2016–12–02
  52. By: Arias, Jonas; Caldara, Dario; Rubio-Ramírez, Juan Francisco
    Abstract: This paper studies the effects of monetary policy shocks using structural VARs. We achieve identification by imposing sign and zero restrictions on the systematic component of monetary policy. We consistently find that an increase in the fed funds rate induces a contraction in output. We also show that the identification strategy in Uhlig (2005), which imposes sign restrictions on the impulse responses to a monetary shock, does not satisfy our restrictions on the systematic component of monetary policy with high posterior probability. This finding accounts for the difference in results with Uhlig (2005), who found that contractionary monetary policy shocks have no clear effect on output. When we reconcile the two approaches by combining both sets of restrictions, monetary policy shocks remain contractionary.
    Date: 2016–11
  53. By: Naveen Srinivasan (Madras School of Economics); Vidya Mahambare (Madras School of Economics); Francesco Perugini (Department of Economics, Society, and Politics, University of Urbino, Italy)
    Abstract: This paper examines the concept of monetary policy credibility from both the theoretical and practical viewpoints. It also discusses the advantages of high credibility and explains measures that can be taken to enhance it. The article reviews a number of studies that have examined the credibility of monetary policy making over the past decade. Our main conclusion is that credibility is an elusive thing. The only way to be sure of acquiring it is to earn it by deeds. The existing theoretical literature would benefit a great deal by taking this into consideration.
    Keywords: Monetary Policy, Credibility, InstitutionsClassification-JEL: E31, E52, E58
    Date: 2015–06
  54. By: Mark Mink
    Abstract: As compared to non-banks, banks adopt relatively fragile balance sheet structures characterized by leverage, maturity mismatch, and asset diversification. This paper offers a new potential explanation for this observation, within a model where banks face lower aggregate (funding) liquidity risk than non-banks. This single difference between both provides banks with an incentive to adopt fragile balance sheets, even in the absence of tax distortions, moral hazard, or a special role for banks as liquidity providers. The model implies that banks engage in pro-cyclical risk-taking, are vulnerable to contagion, and will resist regulatory equity and liquidity requirements, while non-banks do not.
    Keywords: banks; balance sheet fragility; aggregate liquidity; bank equity and liquidity requirements; financial stability
    JEL: E50 G01 G21 G28
    Date: 2016–11
  55. By: Sunil Paul (Madras School of Economics); Sartaj Rasool Rather (Madras School of Economics); M. Ramachandran (Department of Economics, Pondicherry University, Puducherry)
    Abstract: This study uses P-star model to examine the role of money in explaining inflation in India. In particular, we compare the performance of traditional Phillips curve approach against P-star model in forecasting inflation. Moreover, the study estimates P-star model using the alternative measures of money such as simple sum and Divisia M3, to examine the relevance of aggregation theoretic monetary aggregates in explaining inflation. The empirical results indicate that P-star model with real money gap has an edge over traditional Phillips curve approach in forecasting inflation. More importantly, we found that the P-star model estimated with Divisia real money gap performs better than its simple sum counterpart. These results highlight the role of money in explaining inflation in India.Length: 39 pages
    Keywords: Inflation, P-star, Philips curve, Divisia monetary aggregates Classification-JEL: C43; E49
    Date: 2015–08
  56. By: Raphael Auer; Steven Ongena
    Abstract: Do macroprudential regulations on residential lending influence commercial lending behavior too? To answer this question, we identify the compositional changes in banks' supply of credit using the variation in their holdings of residential mortgages on which extra capital requirements were uniformly imposed by the countercyclical capital buffer (CCB) introduced in Switzerland in 2012. We find that the CCB's introduction led to higher growth in commercial lending, in particular to small firms, although this was unrelated to conditions in regional housing markets. The interest rates and fees charged to these firms concurrently increased. We rationalize these findings in a model featuring both private and firm-specific collateral. The corresponding imperfect substitutability between private and commercial credit for the entrepreneur's relationship bank is then shown to give rise to the compositional patterns we empirically document.
    Keywords: macroprudential policy, spillovers, credit, bank capital, systemic risk
    Date: 2016–12
  57. By: Sergei Shibaev (Queen's University)
    Abstract: This paper develops a statistical model for measuring spatial interactions when estimating macroeconomic regimes and regime shifts. The model is applied to study the contagion and propagation of recessions in small regional economies in the United States from 1990 to 2015. The empirical analysis identifies two geographical concentrations (or clusters) where small regional economies were affected by recessions in similar ways. These clusters are interpreted as groups of regions that are potentially at-risk to collective economic distress, which is useful for national and regional policy makers. The first identified cluster is characterized by regional economies with important roles in the financial sector, while the second cluster is characterized by the oil and gas extraction sector. The empirical findings uncover an important propagation dynamic that would be overlooked if one were to apply the model without the spatial extension developed in this paper. Specifically, the evidence shows significant spatial spillovers between small regional economies, meaning that shocks to regions are expected to be higher, when shocks to neighboring regions are high on average. The magnitude of this effect is amplified for the period spanning and following the Great Recession.
    Keywords: Bayesian statistics, business cycles, endogenous clustering, regime-switching, regional economic analysis, spatial econometrics, time series econometrics
    JEL: C11 C31 C34 E32 R10
    Date: 2016–11
  58. By: Jonathan Meer; David H. Miller; Elisa Wulfsberg
    Abstract: We examine the impact of the Great Recession on charitable giving. We find sharp declines in overall donative behavior that is not accounted for by shocks to income or wealth. These results suggest that overall attitudes towards giving changed over this time period.
    JEL: D64 E02 H41
    Date: 2016–12
  59. By: Paolo Sodini; Stijn Van Nieuwerburgh; Roine Vestman; Ulf von Lilienfeld-Toal
    Abstract: This paper studies the economic benefits of home ownership. Exploiting a quasi-experiment surrounding privatization decisions of municipally-owned apartment buildings, we obtain random variation in home ownership for otherwise similar buildings with similar tenants. We link the tenants to their tax records to obtain information on demographics, income, mobility patterns, housing wealth, financial wealth, and debt. These data allow us to construct high-quality measures of consumption expenditures. Home ownership causes households to move up the housing ladder, work harder, and save more. Consumption increases out of housing wealth are concentrated among the home owners who sell subsequent to privatization and among those who receive negative income shocks, evidencing a collateral effect.
    JEL: D12 D31 E21 G11 H31 J22 R21 R23 R51
    Date: 2016–12
  60. By: Andreas Fagereng; Martin B. Holm; Gisle J. Natvik (Statistics Norway)
    Abstract: Using Norwegian administrative data, we study how sizable lottery prizes affect household expenditure and savings. Expenditure responses (MPCs) spike in the year of winning, with a mean estimate of 0.35, and thereafter fall markedly. Controlling for all items on the household balance sheet and characteristics such as education and age, MPCs vary with the amount won and liquid assets only. Shock size matters: The MPC among the 25 percent winning least is twice as high as among the 25 percent winning most. Many households are wealthy, illiquid and have high MPCs, consistent with 2-asset models of consumer choice.
    Keywords: marginal propensity to consume; household expenditure response; household heterogeneity; income shocks
    JEL: D12 D14 D91 E21
    Date: 2016–11
  61. By: Hacıoğlu, Volkan
    Abstract: This paper examines the heterogeneous market in which economic agents of different information-processing abilities interact. In the theoretical framework, the market is composed of three different types of agents, “sophisticated” agents with rational expectations, “naive” agents with adaptive expectations, and Bayesian agents endowed with learning abilities. The behavior of these agents in the context of an important economic problem of nominal price adjustment after a fully anticipated one-time negative monetary shock is examined. If sophisticated agents with their perfect foresight find it profitable to imitate the biased behavior of naive agents, then the interaction of agents exhibits strategic complementarity. Thus the naive agents will have a disproportionately large effect on sluggish price adjustment towards equilibrium. However, the introduction of Bayesian agents with learning abilities into the market will have a compensatory effect by mitigating the price rigidity. Since Bayesian learning is allowed in heterogeneous market, Bayesian agents that first start as naive will undergo a learning process to become sophisticated after a certain period. In conclusion, the proportion of naive agents decreases in favor of sophisticated agents as depicted in the simulation model. As a result, the price adaptation towards equilibrium is accellerated.
    Keywords: nominal inertia; strategic complements; behavioral dynamics; heterogeneous expectations; Bayesian learning
    JEL: E37
    Date: 2015–07–03

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