nep-mac New Economics Papers
on Macroeconomics
Issue of 2016‒12‒18
93 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. QE: the story so far By Haldane, Andrew; Roberts-Sklar, Matt; Wieladek, Tomasz; Young, Chris
  2. The Inverted Leading Indicator Property and Redistribution Effect of the Interest Rate By Pintus, Patrick A.; Wen, Yi; Xing, Xiaochuan
  3. Macroeconomic Stabilization, Monetary-fiscal Interactions, and Europe's monetary Union By Corsetti, G.; Dedola, L.; Jarociński, M.; Mańkowiak, B.; Schmidt, S.
  4. Optimal Debt Maturity and Firm Investment By Joachim Jungherr; Immo Shott
  5. Monetary Policy and Durable Goods By Barsky, Robert; Boehm, Christoph E.; House, Christopher L.; Kimball, Miles
  6. A Sustainable Euro Area with Exit Options By Ritzen, Jo; Haas, Jasmina
  7. Macroeconomic Fluctuations with HANK & SAM: An Analytical Approach By Ravn, Morten O; Sterk, Vincent
  8. Warum die Volkswirtschaften der Eurozone den USA und Großbritannien seit der Finanzkrise hinterherhinken: Zur Rolle von Unterschieden in der Geld- und Fiskalpolitik By Philipp Heimberger
  9. Putting the Cycle Back into Business Cycle Analysis By Beaudry, Paul; Galizia, Dana; Portier, Franck
  10. Nonlinearities of mortgage spreads over the business cycles By Cheng, Chak Hung Jack; Chiu, Ching-Wai (Jeremy)
  11. Labor Market Frictions and Monetary Policy Design By Anna Almosova;
  12. Is the Macroeconomy Locally Unstable and Why Should We Care? By Beaudry, Paul; Galizia, Dana; Portier, Franck
  13. The Effects of Monetary Policy and Other Announcements By Chao Gu; Han Han; Randall Wright
  14. On the exposure of the BRIC countries to global economic shocks By Ansgar Belke; Christian Dreger; Irina Dubova
  15. Financing of Firms, Labor Reallocation and the Distributional Role of Monetary Policy By Salem Abo-Zaid; Anastasia Zervou
  16. Population growth, saving, interest rates and stagnation By Peter Spahn
  17. Business Cycle Accounting: Bulgaria after the Introduction of the Currency Board Arrangement (1999-2014) By Aleksandar Vasilev
  18. A Network Analysis of the United Kingdom’s Consumer Price Index By Sarantitis, Georgios; Papadimitriou, Theophilos; Gogas, Periklis
  19. The productivity slowdown puzzle of European countries: a focus on Italy By Germana Giombini; Francesco Perugini; Giuseppe Travaglini
  20. Business cycle synchronization in the EMU: Core vs. periphery By Ansgar Belke; Clemens Domnick; Daniel Gros
  21. Should the Reserve Bank worry about the exchange rate? By Nguyen, Luan
  22. Equilibrium foreign currency mortgages By Marcin Kolasa
  23. Why Does Capital No Longer Flow More to the Industries with the Best Growth Opportunities? By Dong Lee; Han Shin; René M. Stulz
  24. Adaptive learning and labour market dynamics By Di Pace, Frederico; Mitra, Kaushik; Zhang, Shoujian
  25. An Augmented Taylor rule for India’s Monetary Policy: Does Governor Regime Matters? By Bhuyan, Biswabhusan; Sethi, Dinabandhu
  26. Can an Increase in Public Investment Sustainably Lift Economic Growth? By Annabelle Mourougane; Jarmila Botev; Jean-Marc Fournier; Nigel Pain; Elena Rusticelli
  27. Trend Inflation and Exchange Rate Dynamics : A New Keynesian Approach By KANO, Takashi
  28. Reconciling Hayek's and Keynes' Views of Recessions By Beaudry, Paul; Galizia, Dana; Portier, Franck
  29. A note on news about the future: the impact on DSGE models and their VAR representation By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick
  30. Output Decomposition and the Monetary Policy Transmission Mechanism in Bangladesh: A Vector Autoregressive Approach By Suranjit, K
  31. Welfare Gains from Reducing the Implementation Delays in Public Investment By Huseyin Murat Ozbilgin
  32. Product turnover and deflation: Evidence from Japan By Kozo Ueda; Kota Watanabe; Tsutomu Watanabe
  33. International Great Inflation and Common Monetary Policy By Jacek Suda; Anastasia Zervou
  34. When is Nonfundamentalness in SVARs A Real Problem? By Beaudry, Paul; Fève, Patrick; Guay, Alain; Portier, Franck
  35. 'Institutional Mandates for Macroeconomic and Financial Stability' By Pierre-Richard Agénor; Alessandro Flamini
  36. Monetary Policy Rules and the Equity Premium By Anastasia Zervou
  37. Response of Turkish Financial Markets to Negative Interest Rate Announcements of the ECB By Gokhan Sahin Gunes; Sumru Oz
  38. Central Bank Reputation, Cheap Talk and Transparency as Substitutes for Commitment: Experimental Evidence By John Duffy; Frank Heinemann
  39. "The Short- and Long-run Inconsistency of the Expansionary Austerity Theory: A Post-Keynesian/Evolutionist Critique" By Alberto Botta
  40. Lifecycle Central Bank Reputation, Cheap Talk and Transparency as Substitutes for Commitment: Experimental Evidence By John Duffy; Frank Heinemann
  41. Adaptive models and heavy tails with an application to inflation forecasting By Davide Delle Monache; Ivan Petrella
  42. Can indeterminacy and self-fulfilling expectations help explain international business cycles? By Stephen McKnight; Laura Povoledo
  43. The aggregate effects of government income transfer shocks - EU evidence By Susana Párraga Rodríguez
  45. Capital Controls and Competitiveness By Fabrizio Perri; Jonathan Heathcote
  46. Long-Run Debt Ratios with Fiscal Fatigue By Robertson, D.; Tambakis, D.
  47. Growth, distribution, and sectoral heterogeneity: reading the Kaleckians in Latin America By Fernando Rugitsky
  48. What do Latin American inflation targeters care about? A comparative Bayesian estimation of central bank preferences By Stephen McKnight; Alexander Mihailov; Antonio Pompa Rangel
  49. "Change Detection and the Causal Impact of the Yield Curve By Shu-Ping Shi; Stan Hurn; Peter C. B. Phillips
  50. A Contagious Malady? Open Economy Dimensions of Secular Stagnation By Gauti Eggertsson; Neil Mehrotra; Sanjay Singh; Lawrence Summers
  51. Bank response to higher capital requirements: Evidence from a quasi-natural experiment By Gropp, Reint; Mosk, Thomas; Ongena, Steven; Wix, Carlo
  52. The Employment Effect of Reforming a Public Employment Agency By Andrey Launov; Klaus Waelde
  53. Credit, Money, Interest, and Prices By Yuliy Sannikov; Saki Bigio
  54. Measuring fiscal spillovers in EMU and beyond: A global VAR approach By Ansgar Belke; Thomas Osowski
  55. Fiscal Sustainability in EMU contries: A continued Fiscal commitment? By Jordi Paniagua; Juan Sapena; Cecilio Tamarit
  56. The Equilibrium Term Structure of Equity and Interest Rates By Doh, Taeyoung; Wu , Shu
  57. The U.S. economic outlook and the implications for monetary policy: remarks at the ABNY breakfast with William C. Dudley, the Roosevelt Hotel, New York City By Dudley, William
  58. Monetary Policy, Inflation, and Inequality: The Case for Helicopters By Xavier Ragot; Florin O. Bilbiie
  59. Measuring Money Demand Function in Pakistan By Hassan, Shahid; Ali, Umbreen; Dawood, Mamoon
  60. Identifying ambiguity shocks in business cycle models using survey data By Jaroslav Borovicka
  61. Financial Fragility in Monetary Economies By Fernando Martin; Aleksander Berentsen; David Andolfatto
  62. The Continuing Relevance of Keynes's Philosophical Thinking: Reflexivity, Complexity, and Uncertainty By John B. Davis
  63. The Housing Bubble: Is It Back? By Dean Baker; Lara Merling
  64. Does foreign sector help forecast domestic variables in DSGE models? By Marcin Kolasa; Michal Rubaszek
  65. Testing for Symmetry in Weakly Dependent Time Series By Luke Hartigan
  66. Will Abenomics Save Future Generations? By SHIMASAWA Manabu; OGURO Kazumasa
  67. Testing part of a DSGE model by Indirect Inference By Minford, Patrick; Wickens, Michael; Xu, Yongdeng
  68. Are Estimates of Fiscal Multipliers Truly Reliable? Some Observations Starting from the Case of Japan By Venturini, Fiorenza
  69. Money and Pay-As-you-Go Pension By Yasuoka, Masaya
  70. Estimates of Fundamental Equilibrium Exchange Rates, November 2016 By William R. Cline
  71. The growth and human capital structure of new firms over the business cycle By Brixy, Udo; Murmann, Martin
  72. What was the message of Friedman’s Presidential Address to the American Economic Association? By James Forder
  73. Macroeconomic Conditions and Well-being: Do Social Interactions Matter? By Emilio, Colombo; Valentina, Rotondi; Luca, Stanca;
  74. Hiring and Investment Frictions as Inflation Determinants By Leonardo Melosi; Eran Yashiv; Renato Faccini
  75. Policy uncertainty and international financial markets: the case of Brexit By Ansgar Belke; Irina Dubova; Thomas Osowski
  76. Fighting Capital Flight in Africa: Evidence from Bundling and Unbundling Governance By Simplice Asongu; Jacinta Nwachukwu
  77. Macroeconomic Forecasting Using Penalized Regression Methods By Smeekes, Stephan; Wijler, Etiënne
  78. Skewed Business Cycles By Nicholas Bloom; Fatih Guvenen; Sergio Salgado
  79. Too Little, Too Late? Monetary Policymaking Inertia and Psychology: A Behavioral Model By Federico Favaretto; Donato Masciandaro
  80. Trends in Public Finance: Insights from a New Detailed Dataset By Debra Bloch; Jean-Marc Fournier; Álvaro Pina
  81. Revitalizing Indonesia’s manufacturing: the productivity conundrum By Mohammad Zulfan Tadjoeddin; Ilmiawan Auwalin; Anis Chowdhury
  82. Inflation, Debt, and Default By Illenin Kondo; Fabrizio Perri; Sewon Hur
  83. De cartoneros a recicladores urbanos. El rol de las políticas locales en mejorarla sustentabilidad de los recolectores de base By Pablo Navarrete-Hernández
  84. "The political economy of wage and price controls: evidence from the Nixon tapes" By Burton A. Abrams; James L. Butkiewicz
  86. Import penetration and manufacturing employment growth: Evidence from 12 OECD countries By Köllner, Sebastian
  87. Sectoral Reallocation, Employment and Earnings Over the Business Cycle By Ludo Visschers; David Wiczer; Carlos Carrillo-Tudela
  88. Inflation Perceptions and Inflation Expectations By Alan K. Detmeister; David E. Lebow; Ekaterina V. Peneva
  89. An Anatomy of the Business Cycle By Harris Dellas; Fabrice Collard; George-Marios Angeletos
  90. Optimality of Social Choice Systems: Complexity, Wisdom, and Wellbeing Centrality By John C. Boik
  91. Do central banks respond timely to developments in the global economy? By Hilde C. Bjørnland; Leif Anders Thorsrud; Sepideh K. Zahiri
  93. Credit, crisis and contract enforcement: evidence from the Spanish loan market By Juan S. Mora-Sanguinetti; Marta Martínez-Matute; Miguel García-Posada

  1. By: Haldane, Andrew; Roberts-Sklar, Matt; Wieladek, Tomasz; Young, Chris
    Abstract: In the past decade or so, a number of central banks have purchased assets financed by the creation of central bank reserves as a tool for loosening monetary policy - a policy often known as "quantitative easing" or "QE". The first half of the paper reviews the international evidence on the impact on financial markets and economic activity of this policy. It finds that these central bank balance sheet expansions had a discernible and significant impact on financial markets and the economy. The second half of the paper provides new empirical analysis on the macroeconomic impact of central bank balance sheet expansions, across time and countries. It finds three key results. First, it is only when central bank balance sheet expansions are used as a monetary policy tool that they have a significant macro-economic impact. Second, there is evidence for the US that the effectiveness of QE may vary over time, depending on the state of the economy and liquidity of the financial system. And third, QE can have strong spill-over effects cross-border, acting mainly via financial channels. For example, the impact of US QE on UK economic activity may be as large as the impact on US economic activity.
    Keywords: central bank balance sheet.; QE; Quantitative easing; Unconventional Monetary Policy
    JEL: E43 E44 E52 E58 E6
    Date: 2016–12
  2. By: Pintus, Patrick A. (Banque de France); Wen, Yi (Federal Reserve Bank of St. Louis); Xing, Xiaochuan (Yale University)
    Abstract: The interest rate at which US firms borrow funds has two features: (i) it moves in a countercyclical fashion and (ii) it is an inverted leading indicator of real economic activity: low interest rates today forecast future booms in GDP, consumption, investment, and employment. We show that a Kiyotaki-Moore model accounts for both properties when interest-rate movements are driven, in a significant way, by self-fulfilling shocks that redistribute income away from lenders and to borrowers during booms. The credit-based nature of such self-fulfilling equilibria is shown to be essential: the dynamic correlation between current loanable funds rate and future aggregate economic activity depends critically on the property that the interest rate is state-contingent. Bayesian estimation of our benchmark DSGE model on US data shows that the model driven by redistribution shocks results in a better fit to the data than both standard RBC models and Kiyotaki-Moore type models with unique equilibrium.
    Keywords: Endogenous Collateral Constraints; State-Contingent Loan Repayment; Redistribution Shocks; Multiple Equilibria.
    JEL: E21 E22 E32 E44 E63
    Date: 2016–11–30
  3. By: Corsetti, G.; Dedola, L.; Jarociński, M.; Mańkowiak, B.; Schmidt, S.
    Abstract: The euro area has been experiencing a prolonged period of weak economic activity and very low inflation. This paper reviews models of business cycle stabilization with an eye to formulating lessons for policy in the euro area. According to standard models, after a large recessionary shock accommodative monetary and fiscal policy together may be necessary to stabilize economic activity and inflation. The paper describes practical ways for the euro area to be able to implement an effective monetary-fiscal policy mix.
    Keywords: Lower Bound on Nominal Interest Rates; Self-fulfilling Sovereign Default; Eurobond; Government Bonds; Joint Analysis of Fiscal and Monetary Policy
    JEL: E31 E62 E63
    Date: 2016–12–15
  4. By: Joachim Jungherr; Immo Shott
    Abstract: This paper introduces a maturity choice to the standard model of firm financing and investment. Long-term debt renders the optimal firm policy time-inconsistent. Lack of commitment gives rise to debt dilution. This problem becomes more severe during downturns. We show that cyclical debt dilution generates the observed counter-cyclical behavior of default, bond spreads, leverage, and debt maturity. It also generates the pro-cyclical term structure of corporate bond spreads. Debt dilution renders the equilibrium outcome constrained-inefficient: credit spreads are too high and investment is too low. In two policy experiments we find the following: (1) an outright ban of long-term debt improves welfare in our model economy, and (2.) debt dilution accounts for 84% of the credit spread and 25% of the welfare gap with respect to the first best allocation.
    Keywords: firm financing; investment; debt maturity; credit spreads; debt dilution
    JEL: E22 E32 E44 G32
    Date: 2016–11
  5. By: Barsky, Robert (Federal Reserve Bank of Chicago); Boehm, Christoph E. (University of Michigan); House, Christopher L. (University of Michigan); Kimball, Miles (University of Michigan)
    Abstract: We analyze monetary policy in a New Keynesian model with durable and nondurable goods each with a separate degree of price rigidity. The model behavior is governed by two New Keynesian Phillips Curves. If durable goods are sufficiently long-lived we obtain an intriguing variant of the well-known “divine coincidence.” In our model, the output gap depends only on inflation in the durable goods sector. We then analyze the optimal Taylor rule for this economy. If the monetary authority wants to stabilize the aggregate output gap, it places much more emphasis on stabilizing durable goods inflation (relative to its share of value-added in the economy). In contrast, if the monetary authority values stabilizing aggregate inflation, then it is optimal to respond to sectoral inflation in direct proportion to their shares of economic activity. Our results flow from the inherently high interest elasticity of demand for durable goods. We use numerical methods to verify the robustness of our analytical results for a broader class of model parameterizations.
    Keywords: Taylor rule; inflation targeting; economic stabilization
    JEL: E31 E32 E52
    Date: 2016–11–06
  6. By: Ritzen, Jo (IZA and Maastricht University); Haas, Jasmina (Maastricht University)
    Abstract: All explorations of the future of the Euro show serious risks for its survival in the present form. The road map of the Five EU Presidents presented in 2015 is far from sufficient to reduce the risks of the Euro zone falling apart by Brexit type developments or new economic shocks. The EU Presidents rely too much on high international economic growth smoothing the convergence in labor productivity between EU member states, while the more likely low growth scenario shows a serious risk of the Euro‐area falling apart in a chaotic way, through further divergence in labor productivity, through new Banking crises or through the popular vote in response to fiscal and labor market reform. The Presidents argue for strengthening the Banking union with an independent watchdog, with a single resolution mechanism for Bank defaults and for a European credit deposit insurance system. The support for these proposals is overwhelming. They also argue for more transfer of sovereignty on financial policy and for debt mutualisation (sharing of the risks of country debt among all EU countries). This is unlikely to happen, while at the same time the urgency for dealing with the drag imposed by the high debt levels of many EU countries on economic growth is high. We propose that the EU negotiates a New Deal between the highly indebted Euro countries and the other Euro countries. In this deal the trust is built that the richer countries agree on debt mutualization against the assurance of an automatic exit from the Euro area at non‐compliance with the agreed (and simplified) rules.
    Keywords: euro, EMU, debt crisis, stability, fiscal, productivity, financing, banking
    JEL: E02 E24 E32 E44 E62 F15 F21 F36 F44 F45 N24
    Date: 2016–12
  7. By: Ravn, Morten O; Sterk, Vincent
    Abstract: New Keynesian models with unemployment and incomplete markets are rapidly becoming a new workhorse model in macroeconomics. Such models typically require heavy computational methods which may obscure intuition and overlook equilibria. We present a tractable version which can be characterized analytically. Our results highlight that - due to the interaction between incomplete markets, sticky prices and endogenous unemployment risk - productivity shocks may have radically different effects than in traditional NK models, that the Taylor principle may fail, and that pessimistic beliefs may be self-fulfilling and move the economy into temporary episodes of low demand and high unemployment, as well as into a long-lasting "unemployment trap". At the Zero Lower Bound, the presence of endogenous unemployment risk can create inflation and overturn paradoxical properties of the model. We further study financial asset prices and show that non-negligible risk premia emerge.
    Keywords: incomplete asset markets; matching frictions; multiple equilibria; sticky prices
    JEL: E10 E21 E24 E30 E52
    Date: 2016–12
  8. By: Philipp Heimberger (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Zusammenfassung Warum die Volkswirtschaften der Eurozone den USA und Großbritannien seit der Finanzkrise hinterher hinken Zur Rolle von Unterschieden in der Geld- und Fiskalpolitik Diese Studie befasst sich mit dem Auseinanderlaufen der gesamtwirtschaftlichen Entwicklung nach der globalen Finanzkrise im Vergleich von Eurozone, USA und Großbritannien. Die Eurozone erholte sich seit 2010 deutlich schleppender als die US-amerikanische und die britische Wirtschaft. Die Rolle von Unterschieden im wirtschaftspolitischen Kurs der drei Wirtschaftsräume wird in zwei Dimensionen analysiert; zum einen anhand eines Überblicks zur Geldpolitik der EZB nach dem Ausbruch der globalen Finanzkrise im Vergleich mit jener der Fed und der Bank of England; zum anderen durch eine Beschäftigung mit der theoretischen und empirischen Fachliteratur zum Einfluss von Fiskalpolitik auf die wirtschaftliche Entwicklung. Das zentrale Ergebnis ist, dass der restriktivere Mix aus Geld- und Fiskalpolitik in der Eurozone die im Vergleich zu den USA und Großbritannien schwächere wirtschaftliche Entwicklung zu erklären vermag. Vor dem Hintergrund der makroökonomischen und institutionellen Rahmenbedingungen in der Eurozone hatte die Austeritätspolitik ab den Jahren 2010/2011 ausgeprägt negative Effekte auf Wachstum und Beschäftigung, was die Eurozonenwirtschaft im Zusammenspiel mit der über weite Strecken zögerlichen Geldpolitik der EZB in eine Spirale aus hoher Arbeitslosigkeit, niedriger Inflation und steigender realer Schuldenlast trieb. Die USA und Großbritannien verfolgten eine expansivere Mischung aus Geld- und Fiskalpolitik als die Eurozone; und dies führte seit der Finanzkrise zu einer rascheren und umfassenderen Erholung von Wirtschaftswachstum und Beschäftigung. Wirtschaftspolitisch ist in der Eurozone insbesondere ein fiskalpolitischer Kurswechsel sowie eine Reform des EU-Fiskalregelwerks erforderlich; denn die bestehenden institutionellen Regeln und deren restriktive Auslegung haben in den letzten Jahren eine prozyklische, krisenverstärkende Fiskalpolitik befördert. Die EZB ist mit ihrer seit Anfang 2015 betriebenen Geldpolitik des „Quantitative Easing“ auf sich alleine gestellt nicht in der Lage, die anhaltend hohe Arbeitslosigkeit und die zu niedrige Inflation wirkungsvoll zu bekämpfen. Eine koordinierte Ausweitung öffentlicher Investitionen, bei der Leistungsbilanzüberschussländer wie Deutschland und Österreich die Vorreiterrolle einnehmen, würde nicht nur kurzfristig Wachstum und Beschäftigung ankurbeln, sondern auch das angebotsseitige Wachstumspotential der Wirtschaft anheben, den öffentlichen Schuldenabbau mittel- und langfristig durch höhere (zukünftige) Steuerreinnahmen erleichtern, den Deflationskräften entgegenwirken und den Abbau von Leistungsbilanzungleichgewichten vorantreiben. English Summary This study analyses divergences in macroeconomic developments since the global financial crisis of 2008/2009 by comparing the euro area’s economies with the United States of America (USA) and the United Kingdom (UK). Since 2010, the euro area’s recovery from the crisis has been considerably more sluggish than the recovery in the US and in the UK. The role of differences in economic policies in those three economic regions is analysed along two dimensions First, the study compares the ECB’s monetary policy stance with the Fed and the Bank of England. Second, the analysis deals with the theoretical and empirical literature on the impact of fiscal policy on economic developments. The main finding of the study is that the mix of monetary and fiscal policies in the euro area was less expansionary than in the US and in the UK, which explains the weaker recovery. Against the background of the macroeconomic and institutional circumstances in the euro area, fiscal austerity policies that were implemented from 2010/2011 onwards had large negative effects on economic growth and employment. In combination with the hesitant monetary policy approach of the ECB, fiscal consolidation measures triggered a vicious circle of high unemployment, low inflation and increases in the real debt burden. The US and the UK pursued a more expansionary mix of monetary and fiscal policies than the euro area; and this has led to a faster and more complete macroeconomic recovery. In terms of economic policy, the euro area requires a more expansionary fiscal policy stance and a reform of the EU’s fiscal regulation framework, as the existing institutional rules and their restrictive interpretation have promoted pro-cyclical fiscal policies that deepened the crisis. The ECB has been pursuing aggressive Quantitative Easing measures since early 2015; left to its own devices, however, the ECB is incapable of solving the persistent macroeconomic troubles in the euro area, characterised by high unemployment and inflation well below the ECB’s inflation target. A coordinated increase in public investment – in which surplus countries such as Germany and Austria have to lead the way – would not only boost economic growth and employment in the short run, but also increase long-run growth potentials, facilitate the reduction of public debt burdens by generating (future) tax revenues, counteract deflationary forces and contribute to eliminating current account imbalances within the euro area.
    Keywords: Eurozone, USA, Großbritannien, Geldpolitik, Fiskalpolitik, fiskalische Konsolidierung, öffentliche Investitionen, euro area, USA, UK, monetary policy, fiscal policy, fiscal consolidation, public investment
    JEL: E52 E58 E61 E62 E63
    Date: 2016–12
  9. By: Beaudry, Paul; Galizia, Dana; Portier, Franck
    Abstract: This paper begins by re-examining the spectral properties of several cyclically sensitive variables such as hours worked, unemployment and capacity utilization. For each of these series, we document the presence of an important peak in the spectral density at a periodicity of approximately 36-40 quarters. We take this pattern as suggestive of intriguing but little-studied cyclical phenomena at the long end of the business cycle, and we ask how best to explain it. In particular, we explore whether such patterns may reflect slow-moving limit cycle forces, wherein booms sow the seeds of the subsequent busts. To this end, we present a general class of models, featuring local complementarities, that can give rise to unique-equilibrium behavior characterized by stochastic limit cycles. We then use the framework to extend a New Keynesian-type model in a manner aimed at capturing the notion of an accumulation-liquidation cycle. We estimate the model by indirect inference and find that the cyclical properties identified in the data can be well explained by stochastic limit cycles forces, where the exogenous disturbances to the system are very short lived. This contrasts with results from most other macroeconomic models, which typically require very persistent shocks in order to explain macroeconomic fluctuations.
    Keywords: Business Cycle, Limit Cycle
    JEL: E24 E3 E32
    Date: 2016–11
  10. By: Cheng, Chak Hung Jack (George Dean Johnson, Jr. College of Business and Economics, University of South Carolina Upstate); Chiu, Ching-Wai (Jeremy) (Bank of England)
    Abstract: This paper provides robust evidence for the non-linear effects of mortgage spread shocks during recessions and expansions in the United States. Estimating a smooth-transition VAR model, we show that mortgage spread shocks hitting in recessionary regimes create significantly deeper and more protracted decrease in industrial production and prices, as well as a persistent fall in house prices. Evidence also suggests that shock propagation is amplified through the interaction of stock prices. Our empirical results complement the theoretical literature which emphasizes the role of occasionally binding collateral constraints and asset prices in explaining macroeconomic asymmetries.
    Keywords: Mortgage spread shocks; smooth transition vector autoregressions; nonlinearities; financial frictions
    JEL: C32 E32 E44 E52
    Date: 2016–12–09
  11. By: Anna Almosova;
    Abstract: This paper estimates a New Keynesian DSGE model with search frictions and monetary rules augmented with di erent labor market indicators. In accordance with a theoretical literature I nd that a central bank reacts to a labor market tightness, employment or unemployment. Posterior odds tests speak in favor of models with augmented Taylor rules versus a model with a model with a standard rule. The augmented rules were also shown to be more ecient in terms of welfare.
    JEL: E52 E24 C11
    Date: 2016–12
  12. By: Beaudry, Paul; Galizia, Dana; Portier, Franck
    Abstract: In most modern macroeconomic models, the steady state (or balanced growth path) of the system is a local attractor, in the sense that, in the absence of shocks, the economy would converge to the steady state. In this paper, we examine whether the time series behavior of macroeconomic aggregates (especially labor market aggregates) is in fact supportive of this local-stability view of macroeconomic dynamics, or if it instead favors an alternative inter- pretation in which the macroeconomy may be better characterized as being locally unstable, with nonlinear deterministic forces capable of producing endogenous cyclical behavior. To do this, we extend a standard AR representation of the data to allow for smooth nonlinearities. Our main finding is that, even using a procedure that may have low power to detect local instability, the data provide intriguing support for the view that the macroeconomy may be locally unstable and involve limit-cycle forces. An interesting finding is that the degree of nonlinearity we detect in the data is small, but nevertheless enough to alter the description of macroeconomic behavior. We complete the paper with a discussion of the extent to which these two different views about the inherent dynamics of the macroeconomy may matter for policy.
    Keywords: Macroeconomic Fluctuations, Limit Cycle, Unemployment
    JEL: E24 E3 E32
    Date: 2016–11
  13. By: Chao Gu; Han Han (School of Economics, Peking University); Randall Wright (FRB Chicago, FRB Minneapolis, University of Wisconsin and NBER)
    Abstract: We analyze the impact of news (information shocks) in economies where liquidity plays a role. While we also consider news about real factors, like productivity, one motivation is that central bank announcements evidently affect markets, as taken for granted by advocates of forward guidance policy. The dynamic effects can be complicated, with information about monetary policy or real factors affecting markets for goods, equity, housing, credit and foreign exchange. Even news about neutral policy can induce cyclic or boom-bust responses. More generally, we show that central bank announcements can induce rather than reduce volatility, and might increase or decrease welfare.
    Keywords: Announcements, Monetary Policy, News, Dynamics
    JEL: E30 E44 E52 G14 D53 D83
  14. By: Ansgar Belke; Christian Dreger; Irina Dubova
    Abstract: The financial crisis led to a deep recession in many industrial countries. However, the downturn in large emerging markets turned out to be less persistent. Despite the modest recovery in advanced economies, GDP growth declined in emerging markets in the last years. The higher divergence of business cycles is closely linked to the Chinese transformation. During the crisis, the Chinese fiscal stimulus prevented a decline in GDP growth not only in that country, but also in resource-rich economies. The Chinese shift to consumption-driven growth led to a decline in commodity demand, and the environment became more challenging for many emerging markets. This view is supported by Bayesian VARs specified for the BRIC (Brazil, Russia, India, China) countries. The results reveal a strong impact of international variables on GDP growth. In contrast to the other countries, China plays a crucial role in de-termining global trade and oil prices. Hence, the change in the Chinese growth strategy puts additional reform pressure on countries with abundant natural resources.
    Keywords: business cycle divergence, Chinese transformation, Bayesian VARs
    JEL: F44 E32 C32
    Date: 2016–05
  15. By: Salem Abo-Zaid (Texas Tech University, Department of Economics); Anastasia Zervou (Texas A&M University, Department of Economics)
    Abstract: We analyze monetary policy in a heterogenous firms environment where cash con- strained firms finance operations through external financing and cash unconstrained firms operate by using internal funds. We show that firms respond differently to shocks: expansionary monetary policy sharply increases the relative employment of the cash constrained firms while positive productivity shocks induce a rise in the relative employment of the cash unconstrained firms. Our analysis points to a clear role of monetary policy in reallocating resources across sectors that differ in their financing capabilities. Furthermore, the predictions of our model match the empirical evidence implying that financially constrained firms react sharply to monetary policy shocks but are less cyclical than unconstrained firms following productivity shocks.
    Keywords: Heterogeneous Firms, Monetary Policy, Labor Reallocation, Firms’ financing
    JEL: E32 E44 E52
    Date: 2016–10–20
  16. By: Peter Spahn
    Abstract: Post Keynesian stagnation theory argues that slower population growth dampens consumption and investment. A New Keynesian OLG model derives an unemployment equilibrium due to a negative natural rate in a three-generations credit contract framework. Besides deleveraging or rising inequality, also a shrinking population is a triggering factor. In all cases, a saving surplus drives real interest rates down. In other OLG settings however, with bonds as stores of value, slower population growth, on the contrary, causes a lack of saving and thus rising rates. Moreover, the recent fall in market interest rates was brought about by monetary factors.
    Keywords: overlapping generations, zero lower bound, deflation equilibrium, natural versus market interest rates
    JEL: E12 E21 E43 J11
    Date: 2016–03
  17. By: Aleksandar Vasilev (Department of Economics, American University in Bulgaria)
    Abstract: This paper focuses on explaining the economic uctuations in Bulgaria after the introduction of the currency board arrangement in 1997, the period of macroeconomic stability that ensued, the EU accession, and the episode of the recent global financial crisis. This paper follows Chari et al. (2002) and performs business cycle accounting (BCA) for Bulgaria during the period 1999-2014. As in Cavalcanti (2007), who studies the Portuguese business cycles, most of the volatility in output per capita in Bulgaria over the period is due to variations in the eciency and labor wedges.
    Keywords: Business Cycle accounting; Bulgarian economy; eciency and labor wedges
    JEL: E32 E37 O47
    Date: 2016–11
  18. By: Sarantitis, Georgios (Democritus University of Thrace, Department of Economics); Papadimitriou, Theophilos (Democritus University of Thrace, Department of Economics); Gogas, Periklis (Democritus University of Thrace, Department of Economics)
    Abstract: In this paper we model the United Kingdom’s Consumer Price Index as a complex network and we apply clustering and optimization techniques to study the network evolution through time. By doing this, we provide a dynamic, multi-level analysis of the mechanism that drives inflation in the U.K. We find that the CPI-classes’ network exhibits an evolving topology through time which depends substantially on the prevailing economic conditions in the U.K. We identify non-overlapping communities of these U.K. CPI classes and we observe that they do not correspond to the actual categories they belong into; a finding that suggests that diverse forces are driving the inter-relations of the CPI classes which are stronger between categories rather than within them. Finally, we present a reduced version of the U.K. CPI that fulfills the core inflation measure criteria and can possibly be used as an appropriate measure of the underlying inflation in the U.K. Since this new measure makes use of only 14 out of the 85 U.K. CPI classes, it can be used to complement the Bank of England’s arsenal of core inflation measures without the need for further resource allocation.
    Keywords: Network Analysis; Threshold-Minimum Dominating Set; community detection; core inflation; consumer price index
    JEL: C61 E31 E52
    Date: 2015–09–16
  19. By: Germana Giombini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo); Francesco Perugini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo"); Giuseppe Travaglini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo")
    Abstract: With the end of the twentieth century and the beginning of the new millennium in many European countries, and especially those of the Southern Europe, a structural change in the way the economy grows took place. In this essay we use the growth accounting methodology to measure the contribution of different factors to economic growth in some European countries and in the U.S. and to isolate the determinants of the European slowdown during the Great Recession. The focus on Italy suggests that the slowdown of the Italian economy is structural and affects both the non-ICT and ICT sectors.
    Keywords: Institutions, Labour market Policies; Productivity; Competitiveness; Growth Accounting
    JEL: E24 E32 J60 O30
    Date: 2016
  20. By: Ansgar Belke; Clemens Domnick; Daniel Gros
    Abstract: This paper examines business cycle synchronization in the European Monetary Union with a special focus on the core-periphery pattern in the aftermath of the crisis. Using a quarterly index for business cycle synchronization by Cerqueira (2013), our panel data estimates suggest that it is countries belonging to the core that are faced with increased synchronization among themselves after 2007Q4, whereas peripheral countries decreased synchronization with regards to the core, non-EMU countries and among themselves. Correlation coefficients and nonparametric local polynomial regressions corroborate these findings. The usual focus on co-movements and correlations might be misleading, however, since we also find large differences in the amplitude of national cycles. A strong common cycle can thus lead to large differences in cyclical positions even if national cycles are strongly correlated.
    Keywords: business cycles, core-periphery, EMU, local polynomial regressions, synchronicity
    JEL: E32 F15 R23
    Date: 2016–08
  21. By: Nguyen, Luan
    Abstract: This research paper is focused on estimating a set of parameters for a simple monetarypolicy model of New Zealand and calibrate these parameters to compute viability kernels. We found output gap to be persistent across our sample period. There is weak evidence of a downward sloping IS curve and an upward sloping Phillips curve. The estimation results for thereal exchange rate parameter in the IS equation and the uncovered interest rate parity do notconfirm the theoretical predictions. By calibrating the estimated parameters to our viability analysis, we recommend that the Reserve Bank should not worry about the exchange rate, the OCR be lowered further and increasing the scope of fiscal policy in sharing the burden with monetary policy.
    Keywords: Monetary policy; Viability theory; Viability kernels; Central bank; Real exchange rate
    JEL: E52 E58 E61 F41
    Date: 2016–10–17
  22. By: Marcin Kolasa
    Abstract: This paper proposes a novel explanation for why foreign currency denominated loans to households have become so popular in some emerging economies. Our argument is based on what we call the debt limit channel, which arises when multi-period contracts are offered to financially constrained borrowers against collateral that is established on newly acquired assets. Whenever the difference between domestic and foreign interest rates is positive, this channel biases borrowers' choices towards foreign currency, even if the exchange rate is known to depreciate as implied by the interest parity condition. We next use a small open economy DSGE model to analyze how the debt limit channel affects agents' choices under uncertainty. The model implies that, if first-order effects related to the debt limit channel are neutralized by appropriate adjustment in debt contracts, the equilibrium share of foreign currency loans is small.
    Keywords: foreign currency loans, mortgages, portfolio choice, general equilibrium models
    JEL: D58 E32 E44 F41 G11 G21
    Date: 2016–12
  23. By: Dong Lee; Han Shin; René M. Stulz
    Abstract: With functionally efficient capital markets, we expect capital to flow more to the industries with the best growth opportunities. As a result, these industries should invest more and see their assets grow more relative to industries with the worst growth opportunities. We find that industries that receive more funds have a higher industry Tobin’s q until the mid-1990s, but not since then. Since industries with a higher funding rate grow more, there is a negative correlation not only between an industry’s funding rate and industry q but also between capital expenditures and industry q since the mid-1990s. We show that capital no longer flows more to the industries with the best growth opportunities because, since the middle of the 1990s, firms in high q industries increasingly repurchase shares rather than raise more funding from the capital markets.
    JEL: E22 E44 G31 G35 L16
    Date: 2016–12
  24. By: Di Pace, Frederico (Bank of England); Mitra, Kaushik (University of Birmingham); Zhang, Shoujian (Addiko Bank)
    Abstract: The standard search and matching model with rational expectations is well known to be unable to generate amplification in unemployment and vacancies. We document a new feature it is unable to replicate: properties of survey forecasts of unemployment in the near term. We present a parsimonious model with adaptive learning and simple autoregressive forecasting rules which provide a solution to both of these problems. Firms choose vacancies by forecasting wages using simple autoregressive models; they have greater incentive to post vacancies at the time of a positive productivity shock because of overoptimism about the discounted value of expected profits.
    Keywords: Adaptive learning; bounded-rationality; search and matching frictions
    JEL: E24 E32 J64
    Date: 2016–12–09
  25. By: Bhuyan, Biswabhusan; Sethi, Dinabandhu
    Abstract: This paper examined the monetary policy stance in India during the governors’ regime of Jalan- Reddy-Subbarao- Rajan. An Augmented Taylor Rule is employed to estimate monetary policy response for each period using monthly data. The results revealed that the governor regime matters in the monetary policy response. When output gap has been an important concern during Jalan, Subbarao and Rajan’s period, inflation remained a major concern for Reddy and Rajan’s regime. Interestingly, the interest rate is highly responsive to changes in exchange rate during Rajan period. These findings are consistent with the conditions of economy during those periods. In addition, the exchange rate and output gap remained a greater concern for policy maker in post-crisis period. Nevertheless, we find policy inertia during all regimes.
    Keywords: Monetary policy, Taylor’s rule, Inflation, Output gap, Hodrick-Prescott filter
    JEL: C22 E52 E58
    Date: 2016–12–04
  26. By: Annabelle Mourougane; Jarmila Botev; Jean-Marc Fournier; Nigel Pain; Elena Rusticelli
    Abstract: This paper seeks to identify the conditions under which raising public investment can sustainably lift growth without deteriorating public finances. To do so, it relies on a range of simulations using three different macro-structural models. According to the simulations, OECD governments could finance a ½ percentage point of GDP investment-led stimulus for three to four years on average in OECD countries without raising the debt-to-GDP ratio in the medium term, provided projects are sound. After one year, the average output gains for the large advanced economies of such a stimulus amount to 0.4-0.6%. However, the gains are particularly uncertain for Japan. Reprioritising spending in later years would lead to average long-term output gains of between 0.5 to 2% in the large advanced economies. Those gains depend on the assumptions made on the rate of return. Hysteresis reinforces the case for an investment-led stimulus. Output gains will also be higher if the stimulus is combined with structural reforms and if countries act collectively. Une augmentation de l'investissement public peut-elle durablement augmenter la croissance? Ce document de travail cherche à déterminer les conditions dans lesquelles l'augmentation de l'investissement public peut soutenir la croissance durablement sans détériorer les finances publiques. Pour ce faire, il s'appuie sur une série de simulations utilisant trois modèles macro-structurels différents. Selon les simulations, les gouvernements des pays de l'OCDE pourraient financer une augmentation de l'investissement de ½ point de PIB pendant trois à quatre ans en moyenne dans les pays de l'OCDE sans augmenter le ratio dette sur PIB à moyen terme, à condition que les projets soient de bonne qualité. Après un an, les gains moyens de production pour les grandes économies avancées d'un tel stimulus s'élèvent à 0,4-0,6%. Cependant, ces gains sont particulièrement incertains pour le Japon. Une réallocation des dépenses vers celles qui sont les plus productives les années suivantes, se traduirait par des gains moyens à long terme de production entre 0,5 et 2% dans les grandes économies avancées. Ces gains dépendent des hypothèses retenues sur le taux de rendement. Les effets d'hystérésis renforcent l'argument en faveur d'une augmentation de l'investissement public. Les gains de production seront également plus élevés si le stimulus est combiné à des réformes structurelles et si les pays agissent collectivement.
    Keywords: fiscal multiplier, public debt, public investment
    JEL: E6 C3
    Date: 2016–12–15
  27. By: KANO, Takashi
    Abstract: The paper studies exchange rate implications of trend inflation within a two-country New Keynesian (NK) model under incomplete international financial markets. A NK Phillips curve generalized by trend inflation with a positive long-run mean implies an expectational difference equation of inflation with higher-order leads of expected inflation. The resulting two-country inflation differential is smoother, more persistent, and more insensitive to a real exchange rate. General equilibrium then yields (i) a persistent real exchange rate with an autoregressive root close to one, (ii) a hump-shaped impulse response of a real exchange rate with a half-life longer than four years, (iii) a volatile real exchange rate relative to cross-country inflation differential, (iv) an almost perfect co-movement between real and nominal exchange rates. and (v) a sharp rise in the volatility of a real exchange rate from a managed nominal exchange rate regime to a flexible one within an otherwise standard two-country NK model. Trend inflation, therefore, approaches empirical puzzles of exchange rates dynamics.
    Keywords: Real and Nominal Exchange Rates, Trend Inflation, New Keynesian Models
    JEL: E31 E52 F31 F41
    Date: 2016–12
  28. By: Beaudry, Paul; Galizia, Dana; Portier, Franck
    Abstract: Recessions often happen after periods of rapid accumulation of houses, consumer durables and business capital. This observation has led some economists, most notably Friedrich Hayek, to conclude that recessions often reflect periods of needed liquidation resulting from past over-investment. According to the main proponents of this view, government spending or any other form of aggregate demand policy should not be used to mitigate such a liquidation process, as doing so would simply result in a needed adjustment being postponed. In contrast, ever since the work of Keynes, many economists have viewed recessions as periods of deficient demand that should be countered by activist fiscal policy. In this paper we reexamine the liquidation perspective of recessions in a setup where prices are flexible but where not all trades are coordinated by centralized markets. The model illustrates why liquidations likely cause recessions characterized by deficient aggregate demand and accordingly suggests that Keynes' and Hayek's views of recessions may be closely linked. In our framework, interventions aimed at stimulating aggregate demand face a trade-off whereby current stimulus postpones the adjustment process and therefore prolongs the recessions, but where some stimulative policies may nevertheless remain desirable.
    Keywords: Business Cycle, Unemployment, Liquidations
    JEL: E32
    Date: 2016–11
  29. By: Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School)
    Abstract: In this paper we investigate the role of news shocks in aggregate fluctuations by comparing the empirical performance of models with and without the feature of the news shocks. We found a trivial difference between the two models. That is, the model with news shocks explains the variation as well as the alternative. The reason is that the news shocks can only advance the date at which agents know about the changes, but they do not change the stochastic structure of the model.
    Keywords: News shocks; DSGE; VAR; Indirect Inference
    JEL: E2 E3
    Date: 2016–11
  30. By: Suranjit, K
    Abstract: This paper investigates the output composition of the monetary policy transmission mechanism for Bangladesh. Vector Auto-regression (VAR) models are used to analyse the data from 1973 to 2015. Although the central bank’s policy interest rate shock does not significantly affect the major compositions of the output, investment channel still works better than consumption. However, exchange rate shock effects more significantly on the real economy mainly through consumption than investment. This research, on one hand, demonstrates the potential channels of the monetary policy transmission mechanism. On the other hand, methodologically, it proposes a minor modified model that suite for economy of the developing countries like Bangladesh where the net export component of output is negative which creates some complexity in using the standard model used for developed countries like the USA, the EU, Japan and Australia.
    Keywords: Output Decomposition; VAR model; Monetary Policy Transmission Mechanism; Bangladesh
    JEL: E52 E58 O11 O42
    Date: 2016–10–20
  31. By: Huseyin Murat Ozbilgin
    Abstract: This paper studies the welfare impact of a reform that reduces the completion duration of public capital. For a sample of emerging economies, I inspect the welfare gains from shortening the completion time from 10 to 3 years by tailoring a parsimonious general equilibrium model. My analysis reveals sizable gains from the reform. For the mean emerging country in the sample, the reform brings about 1.53 percent benefits in terms of compensating variation in consumption. Rising social demand for public investment under a shorter implementation duration moves the economy towards a higher public capital to output ratio, which leads to higher levels of private investment and consumption, bringing notable welfare gains. Most of the gains accrue within 15 years after the reform. For certain countries, such as Thailand, Romania, Russia, and India, the gains emerge as remarkably large, whereas for another group that includes Serbia, Bulgaria, Phillippines, and Argentina, the gains turn out to be modest.
    Keywords: Public investment, Time-to-Build, Externalities, Welfare
    JEL: E22 E62 H30 H54
    Date: 2016
  32. By: Kozo Ueda; Kota Watanabe; Tsutomu Watanabe
    Abstract: In this study, we evaluate the effects of product turnover on a welfare-based cost-of-living index. We first present several facts about price and quantity changes over the product cycle employing scanner data for Japan for the years 1988-2013, which cover the deflationary period that started in the mid-1990s. We then develop a new method to decompose price changes at the time of product turnover into those due to the quality effect and those due to the fashion effect (i.e., the higher demand for products that are new). Our main findings are as follows: (i) the price and quantity of a new product tend to be higher than those of its predecessor at its exit from the market, implying that Japanese firms use new products as an opportunity to take back the price decline that occurred during the life of its predecessor under deflation; (ii) a considerable fashion effect exists, while the quality effect is slightly declining; and (iii) the discrepancy between the cost-of-living index estimated based on our methodology and the price index constructed only from a matched sample is not large. Our study provides a plausible story to explain why Japan’s deflation during the lost decades was mild.
    Keywords: cost-of-living index, product creation and destruction, fashion effect, substitution, lost decades
    JEL: C43 E31 E32 O31
    Date: 2016–12
  33. By: Jacek Suda (Narodowy Bank Polski); Anastasia Zervou (Texas A&M University, Department of Economics)
    Abstract: We study whether monetary authorities in the G7 countries were changing their responses to inflation in a similar manner during and following the Great Inflation era. We find that the common to the G7 countries inflation pattern during the Great Inflation period could be associated with a common pattern in the monetary policy response to inflation: we find that until the early 1980s monetary authorities in the G7 countries responded mildly to inflation, systematically fought it throughout the 1980s and lessened again their response during the 2000s. The estimated Taylor rule coefficients on inflation are cointegrated, implying the existence of a long run relation- ship in the responses to inflation during and after the Great Inflation period. At the same time, principal component analysis of the residuals of the estimated Taylor rules indicates that the shocks’ structure cannot account enough for the monetary policies’ comovements. We interpret these findings as suggestive of common monetary policy patterns.
    Keywords: International Monetary Policy, International Great Inflation, Time Varying Parameter Model
    JEL: E52 E58 C22
    Date: 2016–05–13
  34. By: Beaudry, Paul; Fève, Patrick; Guay, Alain; Portier, Franck
    Abstract: Identification of structural shocks can be subject to nonfundamentalness, as the econometrician may have an information set smaller than the economic agents´i one. How serious is that problem from a quantitative point of view? In this work we propose a simple diagnosis statistics for the quantitative importance of nonfundamentalness in structural VARs. The diagnosis is of interest as nonfundamentalness is not an either/or question, but is a quantitative issue which can be more or less severe. Using our preferred strategy for identifying news shocks, we find that nonfundamentalness is quantitatively unimportant and that news shocks continue to generate significant business cycle type fluctuations when adjust the estimating procedure to take into account the potential nonfundamentalness issue.
    Keywords: Non-Fundamentalness, Business Cycles, SVARs, News.
    JEL: C32 E32
    Date: 2016–11
  35. By: Pierre-Richard Agénor; Alessandro Flamini
    Abstract: The performance of alternative institutional policy mandates for achieving macroeconomic and financial stability is studied in a model with financial frictions. These mandates involve goal-integrated, goal-distinct, and common-goal mandates for the monetary authority and the financial regulator. In the first case both monetary and macroprudential policies are set optimally, but in the last two cases monetary policy only is set optimally whereas macroprudential policy is implemented through a simple, credit-based reserve requirement rule. The model is parameterized and used to simulate responses to a financial shock. The analysis shows that it is optimal to use both the policy rate and the required reserve ratio only under the goal-integrated mandate. In addition, it is optimal to delegate the financial stability goal solely to the monetary authority when the financial regulator is only equipped with a credit-based reserve rule. The key reason is that only the integrated mandate can fully internalize the policy spillovers which adversely affect economic stability..
    Date: 2016
  36. By: Anastasia Zervou (Texas A&M University)
    Abstract: We study the effect of monetary policy on the equity premium using a segmented stock market model. Optimal monetary policy in our model involves risk-sharing and is countercyclical with respect to dividend shocks; thus, it implies low equity return compared to other policies, including inflation targeting. The optimal policy, however, does not guarantee inflation stability and produces higher nominal bond return compared to inflation targeting. Our calibration exercise finds equity premium of 7% under the inflation targeting policy and 1.5% under the optimal policy. We suggest that suboptimal policies focusing on inflation stability might result in high equity premia.
    Date: 2016
  37. By: Gokhan Sahin Gunes (Koc University-TUSIAD ERF and Koc University); Sumru Oz (Koc University-TUSIAD ERF)
    Abstract: This paper examines the impact of negative interest rate announcements of the ECB on Turkish financial markets. Negative Interest Rate Policies (NIRP) are expected to affect emerging market and developing economies (EMDEs) through an increase in the inflow of capital searching for higher yields. The expectation for an increase in short-term capital inflows to an EMDE might have transmission channels to the whole economy similar to those of expansionary monetary policies, except for a sign change in case of the exchange rate channel. The rest of the transmission channels are portfolio, interest rate, and credit channels. The latter is excluded from the analysis since it takes time to realize. Accordingly, we analyze the impact of negative interest rate announcements of the ECB on EUR/TRY and USD/TRY exchange rates; 1-month and 3-month TRLibor rates; BIST 100 Index, as well as 2-year and 10-year bond returns using GARCH (1,1) model. The results show that the announcements significantly affect both the volatility of Turkey's financial indicators and their returns especially through interest rate and portfolio channels. The robustness of the results on volatility is tested by using an event study.
    Keywords: NIRP, transmission channels, financial indicators, Turkey.
    JEL: E58 F30 G10
    Date: 2016–12
  38. By: John Duffy; Frank Heinemann
    Abstract: We implement a repeated version of the Barro-Gordon monetary policy game in the laboratory and ask whether reputation serves as a substitute for commitment, enabling the central bank to achieve the efficient Ramsey equilibrium and avoid the inefficient, time-inconsistent one-shot Nash equilibrium. We find that reputation is a poor substitute for commitment. We then explore whether central bank cheap talk, policy transparency, both cheap talk and policy transparency or economic transparency yield improvements in the direction of the Ramsey equilibrium under the discretionary policy regime. Our findings suggest that these mechanisms have only small or transitory effects on welfare. Surprisingly, the real effects of supply shocks are better mitigated by a commitment regime than by any discretionary policy. Thus, we find that there is no trade-off between flexibility and credibility.
    JEL: C92 D83 E52 E58
    Date: 2016–12
  39. By: Alberto Botta
    Abstract: This paper provides a critical analysis of expansionary austerity theory (EAT). The focus is on the "theoretical" weaknesses of EAT--the extreme circumstances and fragile assumptions under which expansionary consolidations might actually take place. The paper presents a simple theoretical model that takes inspiration from both the post-Keynesian and evolutionary/institutionalist traditions. First, it demonstrates that well-designed austerity measures hardly trigger short-run economic expansions in the context of expected long-lasting consolidation plans (i.e., when adjustment plans deal with remarkably high debt-to-GDP ratios), when the so-called "financial channel" is not operative (i.e., in the context of monetarily sovereign economies), or when the degree of export responsiveness to internal devaluation is low. Even in the context of non–monetarily sovereign countries (e.g., members of the eurozone), austerity's effectiveness crucially depends on its highly disputable capacity to immediately stabilize fiscal variables. The paper then analyzes some possible long-run economic dynamics, emphasizing the high degree of instability that characterizes austerity-based adjustments plans. Path-dependency and cumulativeness make the short-run impulse effects of fiscal consolidation of paramount importance to (hopefully) obtaining any appreciable medium-to-long-run benefit. Should these effects be contractionary at the onset, the short-run costs of austerity measures can breed an endless spiral of recession and ballooning debt in the long run. If so, in the case of non–monetarily sovereign countries debt forgiveness may emerge as the ultimate solution to restore economic soundness. Alternatively, institutional innovations like those adopted since mid-2012 by the European Central Bank are required to stabilize the economy, even though they are unlikely to restore rapid growth in the absence of more active fiscal stimuli.
    Keywords: Fiscal Policy; Expansionary Austerity Theory; Post-Keynesian Macro Models
    JEL: E12 E61 E62
    Date: 2016–12
  40. By: John Duffy (Department of Economics, University of California-Irvine); Frank Heinemann (Department of Economics, Technische Universitat Berlin)
    Abstract: We implement a repeated version of the Barro-Gordon monetary policy game in the laboratory and ask whether reputation serves as a substitute for commitment, enabling the central bank to achieve the efficient Ramsey equilibrium and avoid the inefficient, time-inconsistent one-shot Nash equilibrium. We find that reputation is a poor substitute for commitment. We then explore whether central bank cheap talk, policy transparency, both cheap talk and policy transparency or economic transparency yield improvements in the direction of the Ramsey equilibrium under the discretionary policy regime. Our findings suggest that these mechanisms have only small or transitory effects on welfare. Surprisingly, the real effects of supply shocks are better mitigated by a commitment regime than by any discretionary policy. Thus, we find that there is no trade-off between flexibility and credibility.
    Keywords: Monetary policy; Repeated games; Central banking; Commitment; Discretion; Cheap talk; Transparency; Experimental economics
    JEL: C92 D83 E52 E58
    Date: 2016–12
  41. By: Davide Delle Monache (Bank of Italy); Ivan Petrella (WBS; CEPR)
    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: 2016–11
  42. By: Stephen McKnight (El Colegio de Mexico); Laura Povoledo (El Colegio de Mexico)
    Abstract: We introduce equilibrium indeterminacy into a two-country incomplete asset model with imperfect competition and analyze whether self-fulfilling, belief-driven fluctuations (i.e., sunspot shocks) can help resolve the major puzzles of international business cycles. In contrast to the one-good models of the existing literature, we show that sunspot shocks alone cannot replicate the data. Next, we consider a combination of sunspot shocks and technology shocks, and find that the indeterminacy model can now account for the counter-cyclical behavior observed for the terms of trade and real net exports, while simultaneously increasing their volatilities relative to output. The empirical success of the model is due to an unconventional transmission mechanism, whereby the terms of trade appreciates, rather than depreciates, in response to a positive technology shock. This unconventional feature, when combined with sunspot shocks, helps to reconcile the model with the data. However, the major failure of the model is its inability to resolve the Backus-Smith puzzle without a strongly negative cross-country correlation for productivity shocks.
    Keywords: indeterminacy, sunspots, international business cycles, net exports, terms of trade, Backus-Smith puzzle.
    JEL: E32 F41 F44
    Date: 2016–09
  43. By: Susana Párraga Rodríguez (University College London)
    Abstract: This paper estimates the aggregate effect of government income transfer shocks for a sample of EU countries. The new measure of transfer shocks builds on a dataset by public fi nance experts of the European System of Central Banks (ESCB). The identifi cation strategy consists of a narrative analysis of the old-age pension-related policy actions reported in the ESCB dataset. Increases in old-age pensions are found to have a positive impact on aggregate expenditure components and employment consistent with a multiplier effect of between 0 and 1.
    Keywords: transfer payments, public pensions
    JEL: E2 E62 H55 I38
    Date: 2016–12
  44. By: Jasmien De Winne; Gert Peersman (-)
    Abstract: We use two approaches to examine the macroeconomic consequences of disruptions in global food commodity markets. First, we embed a novel quarterly composite global production index for the four basic staples (corn, wheat, rice and soybeans) in a stan- dard vector autoregression (VAR) model, and we estimate the dynamic effects of global food commodity supply shocks on the US economy. As an alternative, we also estimate the consequences of thirteen narratively identified global food commodity price shocks. Both approaches deliver similar conclusions. Specifically, an unfavorable food commodity market shock raises food commodity prices, and leads to a rise in food, energy and core inflation, and to a persistent fall in real GDP and consumer expenditures. A closer inspec- tion of the pass-through reveals that households do not only reduce food consumption. In fact, there is a much greater decline in durable consumption and investment. Overall, the macroeconomic effects turn out to be a multiple of the maximum impact implied by the share of food commodities in the consumer price index and household consumption.
    Date: 2016–11
  45. By: Fabrizio Perri (Federal Reserve Bank of Minneapolis); Jonathan Heathcote (Federal Reserve Bank of Minneapolis)
    Abstract: When capital flows were liberalized within the European Union in the 1980s capital flowed into Southern Europe. But rather than stimulating investment and labor productivity, these capital flows were associated with rapid growth of the non-tradable sector, rising prices of non-tradable goods, a perceived loss of competitiveness in the tradable sector, and rising unemployment. We develop a model to interpret these trends, and to investigate their welfare consequences. A key departure from standard theory is that output is produced in two sectors: a tradable sector, and a non-tradable sector. Both sectors use two non-reproducible factors, one whose price is fully flexible (land) and another (unionized labor) whose price is downwardly rigid. The tradable sector is relatively intensive in the fixed-price factor. A relaxation of constraints on international borrowing leads to an increase in consumption of tradable goods. As a result, demand for non-traded goods also rises, and factors of production migrate to the non-traded sector. This bids up the price of the flex price factor – there is a real estate boom. Domestic firms cannot raise the price of traded output, and their workers will not accept lower wages. They are therefore forced to shrink in scale, and aggregate unemployment rises.
    Date: 2016
  46. By: Robertson, D.; Tambakis, D.
    Abstract: We investigate the implications of fiscal fatigue – governments’ declining ability to increase primary fiscal balances with rising public debt - utilising the cubic policy rule estimated by Ghosh et al. (2013). We characterize its equilibrium debt-output ratios and fiscal space, and analyze its dynamic stability in the deterministic (long-run) case. There may be up to three equilibria, of which the intermediate one will typically require a stability criterion stricter than fiscal solvency. We illustrate numerically for six developed economies.
    Keywords: Debt sustainability, Debt-output ratio, Fiscal policy rules.
    JEL: E6 H0 H6
    Date: 2016–12–09
  47. By: Fernando Rugitsky
    Abstract: The aim of this paper is to explore a parallelism between two episodes in the history of economic thought in order to suggest that the interaction between them can contribute to the research on Kaleckian growth and distribution models. First, a brief summary of the theoretical development from Steindl’s stagnationist claims to the debate about demand regimes is offered. Then, a more detailed account is provided of the Latin American debate that began with Furtado’s stagnationist claims and resulted in the formulation of models of social articulation and disarticulation. Finally, an analytical classification of Kaleckian and Latin American growth and distribution models is provided, indicating the way in which sectoral heterogeneity and demand composition can act as a plausible link between growth and distribution.
    Keywords: income distribution; demand regimes; sectoral heterogeneity; demand composition; distributive schedule.
    JEL: E11 E20 O11
    Date: 2016–10–26
  48. By: Stephen McKnight (El Colegio de Mexico); Alexander Mihailov (University of Reading); Antonio Pompa Rangel (Banco de México)
    Abstract: This paper uses Bayesian estimation techniques to uncover the central bank preferences of the big five Latin American inflation targeting countries: Brazil, Chile, Colombia, Mexico, and Peru. The target weights of each central bank.s loss function are estimated using a medium-scale small open economy New Keynesian model with incomplete international asset markets and imperfect exchange-rate pass-through. Our results suggest that all central banks in the region place a high priority on stabilizing in.ation and interest rate smoothing. While stabilizing the real exchange rate is a concern for all countries except Brazil, only Mexico is found to assign considerable weight to reducing real exchange rate .uctuations. Overall, Brazil, Colombia, and Peru show evidence of implementing a strict inflation targeting policy, whereas Chile and Mexico follow a more flexible policy by placing a sizeable weight to output gap stabilization. Finally, the posterior distributions for the central bank preference parameters are found to be strikingly di¤erent under complete asset markets. This highlights the sensitivity of Bayesian estimation, particularly when uncovering central bank preferences, to alternative international asset market structures.
    Keywords: Bayesian estimation, central bank preferences, inflation targeting, Latin Amer- ica, small open economies, incomplete asset markets, monetary policy
    JEL: C51 E52 F41
    Date: 2016–11
  49. By: Shu-Ping Shi (Macquarie University); Stan Hurn (Queensland University of Technology - School of Economics and Finance); Peter C. B. Phillips (Cowles Foundation, Yale University)
    Abstract: This paper re-examines changes in the causal link between money and income in the United States for over the past half century (1959 - 2014). Three methods for the data-driven discovery of change points in causal relationships are proposed, all of which can be implemented without prior detrending of the data. These methods are a forward recursive algorithm, a recursive rolling algorithm and the rolling window algorithm all of which utilize subsample tests of Granger causality within a lag-augmented vector autoregressive framework. The limit distributions for these subsample Wald tests are provided. The results from a suite of simulation experiments suggest that the rolling window algorithm provides the most reliable results, followed by the recursive rolling method. The forward expanding window procedure is shown to have worst performance. All three approaches find evidence of money-income causality during the Volcker period in the 1980s. The rolling and recursive rolling algorithms detect two additional causality episodes: the turbulent period of late 1960s and the starting period of the subprime mortgage crisis in 2007.
    Keywords: Time-varying Granger causality, subsample Wald tests, Money-Income
    JEL: C12 C15 C32 E47
    Date: 2016–12
  50. By: Gauti Eggertsson (Brown University); Neil Mehrotra (Brown University); Sanjay Singh (Brown University); Lawrence Summers (Harvard University)
    Abstract: We propose an open economy model of secular stagnation and show how it can be transmitted from one country to another via current account imbalances. While current account surpluses normally lower interest rates in the recipient country, in a secular stagnation, surpluses transmit recessions due to the zero lower bound on nominal interest rates. In general monetary policies and those directed at competitiveness have negative externalities on trading partners in these circumstances, while fiscal policies and those directed at stimulating domestic demand have positive externalities. This, in a positive sense, explains why the world has relied so much on monetary policies relative to fiscal policies in the wake of the financial crisis and in a normative sense points towards the desirability of fiscal policies. Fiscal policies in response to a secular stagnation are self-financing as in De Long and Summers (2012) in our numerical experiments and a one shot increase in debt will raise demand and is fiscally sustainable. While expansionary monetary policy only provides for a possibility of a better outcome without ex- cluding the possibility of continuing secular stagnation appropriate fiscal policy eliminates secular stagnation by directly raising the natural rate of interest as in Eggertsson-Mehrotra (2014).
    Date: 2016
  51. By: Gropp, Reint; Mosk, Thomas; Ongena, Steven; Wix, Carlo
    Abstract: We study the impact of higher capital requirements on banks' balance sheets and its transmission to the real economy. The 2011 EBA capital exercise provides an almost ideal quasi-natural experiment, which allows us to identify the effect of higher capital requirements using a difference-in-differences matching estimator. We find that treated banks increase their capital ratios not by raising their levels of equity, but by reducing their credit supply. We also show that this reduction in credit supply results in lower firm-, investment-, and sales growth for firms which obtain a larger share of their bank credit from the treated banks.
    Keywords: banking,regulation,real effects of finance
    JEL: E22 E44 G21
    Date: 2016
  52. By: Andrey Launov (Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany; Department of Economics (IRES), Universite catholique de Louvain; CESifo, Center for Economic Studies); Klaus Waelde (Department of Economics, Johannes Gutenberg-Universitaet Mainz; Department of Economics (IRES), Universite catholique de Louvain; CESifo, Center for Economic Studies)
    Abstract: By how much does an increase in operating effectiveness of a public employment agency (PEA) and a reduction of unemployment benefits reduce unemployment? Using a recent labour market reform in Germany as background, we find that an enhanced effectiveness of the PEA explains about 20% of the observed post- reform unemployment decline. The role of unemployment benefit reduction ex- plains just about 5% of the observed decline. Due to disincentive effects resulting from the reform, the reform of the PEA could have had an even higher impact on unemployment reduction if there had been less focus on long-term unemployed workers.
    Keywords: Employment agencies, unemployment benefits, labour market reform, unemployment, structural model
    JEL: E24 J65 J68
    Date: 2015–08–18
  53. By: Yuliy Sannikov (Princeton University); Saki Bigio (UCLA)
    Abstract: We develop a monetary theory where monetary policy operates exclusively through the bank-lending channel. Credit demand and deposit creation are dynamically linked. Policy tools affect lending through the provision of reserves and their influence on interbank market rates. A credit crunch causes debt-deflation episode that sends agents to their borrowing constraints. Unemployment increases because firms reduce utilization to avoid the risk of violating borrowing limits. Standard monetary policy has power only if credit is extended. We study the cross-section and aggregate dynamics of credit, monetary aggregates, nominal interest, and prices after several policy experiments.
    Date: 2016
  54. By: Ansgar Belke; Thomas Osowski
    Abstract: This paper identifies and measures fiscal spillovers in the EU countries empirically, using a structurally stable global vector autoregression (GVAR) model. For our purposes, the individual EU countries, as well as the most important international trading partners, are modelled with a special focus on the effects of either single-country or coordinated fiscal shocks such as increases in fiscal spending. Our aim is to look at the sign and the absolute values of fiscal spillovers in a country-wise perspective and at the time profile (impulse response) of the impacts of fiscal shocks. For this purpose, we differentiate between the spillovers of fiscal shocks in specific EMU member countries and the spillovers of “regional” shocks, i.e. area-wide shocks to fiscal policy. Fiscal policy is measured by government expenditure, government revenues or the government budget balance, all as percentages of GDP. Special attention is paid to the question of whether or not spillovers are stronger within the EMU group than within the “Rest of Europe” due to tighter financial or trade links.
    Keywords: EMU versus “Rest of Europe”, fiscal policy coordination, fiscal spillovers, GVAR analysis, regional shocks, impulse response analysis, trade weights
    JEL: C50 E61 F15 F42 H60
    Date: 2016–06
  55. By: Jordi Paniagua (Catholic University of Valencia, Faculty of Economics and Business. 34 Calle Corona, Valencia, Spain); Juan Sapena (Catholic University of Valencia, Faculty of Economics and Business. 34 Calle Corona, Valencia, Spain); Cecilio Tamarit (University of Valencia, INTECO Joint Research Unit. Department of Applied Economics II. PO Box 22.006 - E-46071 Valencia, Spain)
    Abstract: The aim of this paper is to study the sustainability of public finances in the Eurozone particularly after the 2007 financial crisis. This paper goes beyond the standard analysis of the univariate properties of the fiscal variables with multiple structural breaks by estimating a time-varying scal reaction function on a 11-country panel for a period spanning from 1970 to 2014. Even if panel unit root or stationary tests can provid a rough first insight on the sustainability of the public finances, they fail to highlight the adjusting mechanisms to debt overhang in recent years. The main advantage of our empirical approach is that it clearly captures governments' dynamic response to debt accumulation, which signals its commitment to readjust public debt towards a sustainable path. Time-varying estimates of the fiscal reaction function sheds new light on this respect and reveal certain heterogeneity among EMU countries on the way they manage their public finances. This paper helps ascertain whether the public resources destined to bail out troubled countries triggered efective fiscal responses.
    Keywords: Fiscal sustainability, panel unit root tests, multiple structural breaks, fiscal reaction function, Kalman filter, time-varying parameters
    JEL: C23 E62 H62 H63
    Date: 2016–12
  56. By: Doh, Taeyoung (Federal Reserve Bank of Kansas City); Wu , Shu
    Abstract: Doh and Wu incorporate a time-varying market price of risk into an equilibrium asset-pricing model based on long-run consumption risks that generates the term structure of bond and equity risk premia consistent with U.S. data.
    Keywords: Long-run consumption risks; Term structure; Interest rates; Equity risk premia
    JEL: E43 G12
    Date: 2016–11–30
  57. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks at the ABNY breakfast with William C. Dudley, the Roosevelt Hotel, New York City.
    Keywords: fiscal capacity; macroeconomic stability; productivity growth; low-rate environment; automatic fiscal actions; fiscal stabilizers; slowdown; public policy
    Date: 2016–12–05
  58. By: Xavier Ragot (Paris School of Economics); Florin O. Bilbiie (Paris School of Economics)
    Abstract: We put together a model where heterogenous households hold money because they particpate infrequently in financial markets, while firms face nominal frictions, as in the New Keynesian literature. We build a tractable framework whereby we characterize analytically the effect of money injections on inflation, economic activity, and inequality. Our framework gives rise, inter alia, to endogenous persistence in response to transitory shocks. Monetary policy is intimately linked to inequality as the nominal interest rate is a relevant price for holding money for self-insurance reasons.
    Date: 2016
  59. By: Hassan, Shahid; Ali, Umbreen; Dawood, Mamoon
    Abstract: This study investigates the factors such as interest rate, GDP per capita, exchange rate, fiscal deficit, urban and rural population to determine money demand function for Pakistan over the period from 1972-2013. We use ARDL Bound Testing approach in order to test long run relation between money demand and its factors whereas both long and short run coefficients will be found using similar approach. The results show that real interest rate exerts significant and negative effect upon money demand in both long and short run in Pakistan. The results also disclose that exchange rate and rural population are leaving significant but negative effect on the demand for money. These findings are robust to different diagnostic tests.
    Keywords: Money Markets
    JEL: E52
    Date: 2016–12–09
  60. By: Jaroslav Borovicka (New York University)
    Abstract: We develop a macroeconomic framework with agents facing time-varying concerns for model misspecification. These concerns lead agents to interpret the economy through the lens of a pessimistically biased `worst-case' model. We use survey data to identify exogenous fluctuations in the worst-case model. In an estimated New-Keynesian business cycle model with frictional labor markets, these ambiguity shocks explain a substantial portion of the variation in labor market quantities.
    Date: 2016
  61. By: Fernando Martin (Federal Reserve Bank of St. Louis); Aleksander Berentsen (University of Basel); David Andolfatto (Federal Reserve Bank of St. Louis)
    Abstract: We integrate the Diamond and Dybvig (1983) theory of financial fragility with the Lagos and Wright (2005) model of monetary exchange. Non-bank monetary economies with well-functioning secondary markets for capital can allocate risk reasonably well, but are never efficient. When secondary markets are subject to ``market freeze'' events, risk-sharing deteriorates accordingly. A fractional-reserve bank can dominate a monetary economy because: (i) it provides superior risk-sharing even when market freeze events are absent; and (ii) it bypasses the need for a secondary capital market to begin with. Indeed, fractional reserve banks can implement the optimal allocation when monetary policy follows the Friedman rule. However, the desirability of fractional reserve banking is diminished if the structure is subject to ``bank runs''. In the event of a run, an open secondary market allows banks to liquidate capital at a price that permits honoring all deposit obligations. If bank runs are expected to occur with a sufficiently high probability, then a narrow banking structure may be preferred. Narrow banks are more stable, but offer less risk-sharing. We find that high inflation economies penalize narrow banking systems relatively more than fractional reserve systems. Special interests are not generally aligned over the choice of bank regime.
    Date: 2016
  62. By: John B. Davis (Marquette University; University of Amsterdam)
    Abstract: This paper explains the continuing relevance of Keynes’s philosophical thinking in terms of his anticipation of complexity thinking in economics. It argues that that reflexivity is a central feature of the philosophical foundations of complexity theory, and shows that Keynes employed an understanding of reflexivity in both his philosophical and economic thinking. This argument is first developed in terms of his moral science conception of economics and General Theory beauty contest analysis. The paper advances a causal model that distinguishes direct causal relationships and reflexive feedback channels, uses this to distinguish Say’s Law economics and Keynes's economics, and explains the economy as non-ergodic in these terms. Keynes’s policy activism is explained as a complexity view of economic policy that works like self-fulfilling and self-defeating prophecies. The paper closes with a discussion of the ontological foundations of uncertainty in Keynes's thinking, and comments briefly on what a complexity-reflexivity framework implies regarding his thinking about time.
    Keywords: Keynes, complexity, reflexivity, non-ergodic, policy activism, uncertainty, time
    JEL: E12 B41
    Date: 2016–12
  63. By: Dean Baker; Lara Merling
    Abstract: In the last decade, there was an unprecedented run-up in house prices in most parts of the country. It was easy to recognize this run-up as a bubble since there was no remotely corresponding increase in rents, which for the most part just tracked inflation during this period. There was also no evidence of a shortage of housing supply. Housing starts were at near record highs from 2002 to 2005. In addition, the vacancy rate as reported by the Commerce Department was at near record highs through most of this period. With weak job and wage growth throughout most of this period, it was possible to recognize the run-up as a bubble even without knowing anything about the proliferation of bad loans in the mortgage market. The run-up in real house prices in the bubble years was almost completely reversed in the subsequent crash. While the first-time homebuyers’ tax credit temporarily stopped and reversed the decline, house prices continued to fall until the spring of 2012. Since then, the market has recovered much of the lost ground. While it is still 20.1 percent below the bubble peaks of 2006 in real terms, inflation-adjusted house prices are now 37.7 percent above their level in 1996, before the beginnings of the bubble. While these prices may seem somewhat high, there is little basis for concern that the national market has again entered a bubble.
    JEL: E E3 E39 R R2 R21
    Date: 2016–11
  64. By: Marcin Kolasa; Michal Rubaszek
    Abstract: This paper evaluates the forecasting performance of several small open economy DSGE models relative to a closed economy benchmark using a long span of data for Australia, Canada and the United Kingdom. We find that opening the economy does not improve, and even deteriorates the quality of point and density forecasts for key domestic variables. We show that this result can be to a large extent attributed to an increase in forecast error due to a more sophisticated structure of the extended setup. This claim is based on a Monte Carlo experiment, in which an open economy model fails to consistently beat its closed economy benchmark even if it is the true data generating process.
    Keywords: Forecasting, DSGE models, New Open Economy Macroeconomics, Bayesian estimation
    JEL: D58 E17 F41 F47
    Date: 2016–11
  65. By: Luke Hartigan (School of Economics, UNSW Business School, UNSW)
    Abstract: I propose a test of symmetry for a stationary time series based on the difference between the dispersion above the central tendency of the series with that below it. The test has many attractive features: it is applicable to dependent processes, it has a familiar form, it can be implemented using regression, and it has a standard Gaussian limiting distribution under the null of symmetry. The finite sample properties of the test are examined via Monte Carlo simulation and suggest that it is more powerful than competing tests in the literature for the DGPs considered. I apply the test to investigate business cycle asymmetry in sectoral data and confirm previous findings that asymmetry is more often detected in goods-producing sectors than service-related sectors.
    Keywords: Symmetry; Weak dependence; Hypothesis testing; Monte Carlo simulation; Business cycle asymmetry
    JEL: C12 C15 C22 C52 E32
    Date: 2016–11
  66. By: SHIMASAWA Manabu; OGURO Kazumasa
    Abstract: We estimated the lifetime net burden ratio by explicitly considering the burden of inflation tax in order to quantitatively assess the impact of inflation or deflation on the intergenerational imbalances. As a result, the following points were elucidated: 1) The previous studies which do not take inflation tax revenue into consideration underestimate the burden of the currently living generations during an inflationary period and that of the future generations in a deflationary period; 2) Abenomics aiming to trigger a shift from deflation to inflation is desirable from the aspect of filling the intergenerational imbalances; and 3) Although the economic growth promotion measures will reduce the lifetime net burden ratio of all generations, such measures alone will not help to eliminate the intergenerational imbalances in Japan; a concurrent implementation of public finance and social security system reform is necessary.
    Date: 2016–12
  67. By: Minford, Patrick (Cardiff Business School); Wickens, Michael (Cardiff Business School); Xu, Yongdeng (Cardiff Business School)
    Abstract: We propose a new type of test. Its aim is to test subsets of the structural equations of a DSGE model. The test draws on the statistical inference for limited information models and the use of indirect inference to test DSGE models. Using Monte Carlo experiments on two subsets of equations of the Smets-Wouters model we show that the model has accurate size and good power in small samples. In a test of the Smets-Wouters model on US Great Moderation data we reject the speci…cation of the wage-price but not the expenditure sector, pointing to the …first as the source of overall model rejection.
    Keywords: sub sectors of models, limited information, indirect inference, testing DSGE models equations, Monte Carlo, power, test size
    JEL: C12 C32 C52 E1
    Date: 2016–12
  68. By: Venturini, Fiorenza (Università degli Studi di Roma "La Sapienza" (La Sapienza University of Rome))
    Abstract: The aim of this paper is to discuss the reliability of the estimates of fiscal multipliers to be found in the empirical literature by studying the case of the Japanese lost decade. We start from the literature considering Japan as proof of the general ineffectiveness of public spending. We identify the critical aspects that the estimates of fiscal multipliers present due to the theoretical assumptions that lie behind the obtained values. We then highlight the importance of the institutional context in which fiscal policies are pursued and the relevance of the quality of ex-penditure. We conclude that the results of the estimates may be strongly influenced by the reference theoretical framework and that they neglect relevant aspects, such as the composition of expenditure and the multiplicative effect of each policy measure. They cannot therefore constitute the sole basis to appraise the effectiveness of fiscal policy.
    Keywords: Japan’s lost decade; fiscal multipliers; fiscal policy
    JEL: E62
    Date: 2016–12
  69. By: Yasuoka, Masaya
    Abstract: In an aging society with fewer children, a pay-as-you-go pension system presents severe difficulties. A decrease in the share of working people among the population raises the burden for pensions per capita to maintain a constant replacement ratio of pensions. This burden reduces capital accumulation. Therefore, income growth is prevented. The analyses in this paper demonstrate that if the replacement rate of pension is high, a decrease in population growth reduces the income growth rate even if a decrease in population growth can raise the income growth rate per capita because the capital stock that the workers can use increases. However, by setting an appropriate monetary policy for decreasing population growth, the income growth is not prevented by an increase in the burdens for pensions. The negative effect of the burden for pensions on income growth can be eliminated by the change of the money supply rate in the long run.
    Keywords: Income growth, Pay-as-you-go pension, Monetary policy, Fewer children
    JEL: E52 H55 J11 O42
    Date: 2016–12–14
  70. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: As of mid-November, the US dollar has become overvalued by about 11 percent. The prospect of fiscal stimulus and associated interest rate increases under the new US administration risks still further increases in the dollar. An even stronger dollar would widen the path of growing trade deficits already in the pipeline. As President-elect Donald Trump has attributed trade deficits largely to past trade agreement “disasters,” there is a corresponding risk of escalating trade policy conflict, in a perverse dynamic reminiscent of the initial years of Reaganomics. In October 2016, the base month of this new set of fundamental equilibrium exchange rate (FEER) estimates, the US dollar was overvalued by 8 percent, about the same amount as identified in the three previous issues in this series. The real effective exchange rate (REER) of the dollar in October was 17 percent above its level in mid-2014. Given the two-year lag from the exchange rate signal to the trade outcome, the US current account deficit is on track to widen from 2.7 percent of GDP this year to nearly 4 percent by 2021. The new estimates, all based on October exchange rates, again find a modest undervaluation of the yen (by 3 percent) but no misalignment of the euro and Chinese renminbi. The Korean won is undervalued by 6 percent. Cases of significant overvaluation besides that of the United States include Argentina (by about 7 percent), Turkey (by about 9 percent), Australia (by about 6 percent), and New Zealand (by about 4 percent). A familiar list of smaller economies with significantly undervalued currencies once again shows undervaluation in Singapore and Taiwan (by 26 to 27 percent), and Sweden and Switzerland (by 5 to 7 percent).
    Date: 2016–11
  71. By: Brixy, Udo; Murmann, Martin
    Abstract: Recent research suggests that employment in young firms is more negatively impacted during economic downturns than employment in incumbent firms. This questions the effectiveness of policies that promote entrepreneurship to fight crises. We complement prior research that is mostly based on aggregate data by analyzing cyclical effects at the firm level. Using new linked employer-employee data on German start-ups we show that under constant human capital of the firms' founders, employment growth in less than 11=2-year-old start-ups reacts countercyclically and employment growth in older start-ups reacts procyclically. The young start-ups realize their countercyclical growth by hiring qualified labor market entrants who might be unable to find employment in incumbent firms during crises. This mechanism is highly important in economic and management terms and has not been revealed by prior research.
    Keywords: Firm growth,Entrepreneurship,Business cycle,Crisis
    JEL: E32 J23 L26 M13 L25 L11 D22
    Date: 2016
  72. By: James Forder
    Abstract: Abstract It is widely accepted that the importance of Friedman’s Presidential Address to the American Economic Association lies in its criticism of policy based on the Phillips curve. It is argued that a reading of the text does not support such a view, and this and other considerations suggest that any such aim was far from Friedman’s mind in 1968. His objective was the quite different one of making a case for policy ‘rules’ rather than discretion.
    Keywords: Milton Friedman; rules and discretion; expectations; Phillips curve
    JEL: B22 B31 E58
    Date: 2016–12–13
  73. By: Emilio, Colombo; Valentina, Rotondi; Luca, Stanca;
    Abstract: This paper investigates the role played by social interactions in explaining the effects of macroeconomic conditions on well-being. Using survey data for a representative sample of Italian individuals, we find that social interactions play a dual role as both moderators and mediators of the effects of macroeconomic conditions. On the one hand, the well-being of people who spend more time with their friends or go out more often is less sensitive to the effects of macroeconomic fluctuations. On the other hand, social interactions are negatively affected by worsening macroeconomic conditions, thus playing a relevant role in the transmission of macroeconomic shocks to subjective well-being. More specifically, the negative impact of macroeconomic downturns on frequency of going out and active participation in associations contributes to explain the adverse effects of recessions on satisfaction with life and with individual life domains.
    Keywords: macroeconomic fluctuations, unemployment, subjective well-being
    JEL: E32 I31 I38
    Date: 2016–12–13
  74. By: Leonardo Melosi (Federal Reserve Bank of Chicago); Eran Yashiv (Tel Aviv University); Renato Faccini (Queen Mary, University of London)
    Abstract: We embed convex hiring and investment frictions in a New Keynesian DSGE model with intra-firm wage bargaining. We show that these frictions have crucial implications for the response of marginal costs, and consequently inflation; and for the co-movement of inflation with real variables. We elucidate how the presence of hiring and investment frictions affects the transmission mechanism of monetary and technological shocks by means of impulse responses. We find that hiring frictions are a key determinant of current period marginal costs; investment frictions also matter, by affecting expectations of future marginal costs. Estimating the model with private-sector US data shows that both hiring frictions and investment frictions help explain inflation dynamics. Smoothed estimates of marginal costs are radically different in models with and without hiring frictions. Our results indicate that hiring frictions explain around 50% of the variation in marginal costs, the real wage component explains around 35% while the remain 15% is accounted for by an intrafirm bargaining component. These estimates rely only on moderate levels of the relevant frictions.
    Date: 2016
  75. By: Ansgar Belke; Irina Dubova; Thomas Osowski
    Abstract: This study assesses the impact of Brexit uncertainty on the UK and also on international financial markets, for the first and the second statistical moments. As financial markets are highly linked in general and several countries apart from the UK might be negatively affected, one may expect that the (uncertainty about) Brexit does not only have an impact on financial markets in Britain. By analyzing the impact of Brexit on financial markets, we might also get some insights about market’s expectations about the magnitude of the economic impact beyond the UK and which country beyond the UK may be mostly affected. For this purpose, we firstly use the Diebold and Yilmaz (2012) and the Hafner and Herwartz (2008) method to estimate the time-varying interactions between UK policy uncertainty, which to a large extent is attributed to Brexit uncertainty, and UK financial market volatilities (second statistical moment) and try to identify the direction of causality among them. Secondly, we use two other measures of the perceived probability of a Brexit, namely daily data released by Betfair as well as results of polls published by Bloomberg. Based on these datasets and using both panel as well as single-country SUR estimation methods, we analyse the Brexit effect on the levels of stock returns, sovereign CDS, ten-year interest rates of 19 different countries predominantly from Europe as well as of the British pound and of the euro (first statistical moment). We show that Brexit-caused policy uncertainty will continuously cause instability in key financial markets and has the potential to do damage to the UK’s and other European countries’ real economy, even in the medium run. The main losers outside of the UK are the GIIPS economies.
    Keywords: Brexit, causality tests, financial instability, Pound sterling, uncertainty, spillovers
    JEL: C58 D81 E44 F36 G15
    Date: 2016–07
  76. By: Simplice Asongu (Yaoundé/Cameroun); Jacinta Nwachukwu (Coventry University, UK)
    Abstract: This study investigates the effect of governance on capital flight by bundling and unbundling governance. The empirical evidence is based on 37 African countries for the period 1996-2010 and the Generalised Method of Moments. Governance is bundled by principal component analysis, namely: (i) political governance from political stability and ‘voice and accountability’; (ii) economic governance from government effectiveness and regulation quality and (iii) institutional governance from corruption-control and the rule of law. The following findings are established. (i) Political stability and ‘voice and accountability’ reduce capital flight while the collective effect of political governance is not significant. (ii) Economic governance increases capital flight whereas the individual effects of regulation quality and government effectiveness are not significant. (iii) Corruption-control and institutional governance negatively affect capital flight whereas the impact of the rule of law is not significant. (iv) Taken together, Corruption-control is the most effective governance weapon in the fight against capital flight. (v) Priority in the Washington Consensus is more effective at fighting capital flight compared to the Beijing Model. Policy implications are discussed.
    Keywords: Econometric modelling; Capital flight; Governance; Africa
    JEL: C50 E62 F34 O55 P37
    Date: 2016–04
  77. By: Smeekes, Stephan (QE / Econometrics); Wijler, Etiënne (QE / Econometrics)
    Abstract: We study the suitability of lasso-type penalized regression techniques when applied to macroeconomic forecasting with high-dimensional datasets. We consider performance of the lasso-type methods when the true DGP is a factor model, contradicting the sparsity assumption underlying penalized regression methods. We also investigate how the methods handle unit roots and cointegration in the data. In an extensive simulation study we find that penalized regression methods are morerobust to mis-specification than factor models estimated by principal components, even if the underlying DGP is a factor model. Furthermore, the penalized regression methods are demonstrated to deliver forecast improvements over traditional approaches when applied to non-stationary data containing cointegrated variables, despite a deterioration of the selective capabilities. Finally, we also consider an empirical application to a large macroeconomic U.S. dataset and demonstrate that, in line with our simulations, penalized regression methods attain the best forecast accuracy most frequently.
    Keywords: Forecasting, Lasso, Factor Models, High-Dimensional Data, Cointegration
    JEL: C22 C53 E17
    Date: 2016
  78. By: Nicholas Bloom (Stanford University); Fatih Guvenen (University of Minnesota); Sergio Salgado (University of Minnesota)
    Abstract: This paper studies how the distribution of the growth rate of firm-level variables (sales, profit, inventories, and employment) changes over the business cycle. Using a panel of Compustat firms from 1964 to 2013 we find that, in addition to the well-documented counter cyclicality in dispersion, the third moment---skewness---is strongly pro cyclical. This happens because the distribution of negative growth rates expands during recessions while the distribution of positive growth rates changes little. In fact, this pattern---of lower tail greatly expanding during recessions---is also the main driver behind the counter cyclicality of dispersion. These results are robust to different selection criteria, across firm size categories, and across industries. We also analyze the distribution of macroeconomic outcomes such as GDP growth and stock returns using a panel of developed and developing countries. Here we also find evidence of declining skewness during periods of low economic activity.
    Date: 2016
  79. By: Federico Favaretto; Donato Masciandaro
    Abstract: Can the inertia in the monetary policymaking be attributed to psychological drivers? Our model shows two results. First, our baseline model with individual loss aversion explains inertia in a monetary policy committee (MPC) where holds a de jure majority rule. Second, our second model shows that introducing a specication of loss aversion for all members in a MPC leads to inertial decisions when status-quo ination is below the ination target. Conversely when status-quo ination is above the target rate, inertial policy does not occur until the level of ination discounts the loss aversion mechanism. In the framework of a hawk-dove dimension we conclude that loss aversion favors inertial monetary policy.
    Keywords: Monetary Policy, Behavioral Economics
    JEL: D7 E5
    Date: 2016
  80. By: Debra Bloch; Jean-Marc Fournier; Álvaro Pina
    Abstract: To investigate how public finances could best be designed to promote long-run growth and address inequality, it is essential to have comprehensive, cross-country comparable data on government spending and revenues, along with structural and policy indicators. By identifying key variables of public finance across as many OECD countries as possible, and with a time series element to allow for longitudinal analysis, the OECD Public Finance Dataset provides a detailed data set to contribute to an evidence-based debate on shaping growth-enhancing and equality-promoting fiscal policies. Characteristics of both country groupings and individual country public finance profiles are highlighted as examples of the potential of these data to provide policy insights. Tendances des finances publiques à la lumière d’une nouvelle base de données Pour étudier la façon dont les finances publiques pourraient être mieux conçues pour promouvoir la croissance à long terme et remédier aux inégalités, il est essentiel d'avoir des données complètes et comparables entre les pays sur les dépenses et les recettes publiques, ainsi que des indicateurs structurels et politiques. En identifiant les variables clés des finances publiques parmi autant de pays de l'OCDE que possible, et avec une dimension temporelle pour permettre une analyse longitudinale, la base de données de finances publiques de l’OCDE fournit des données détaillées pour contribuer à un débat fondé sur les faits au sujet des politiques budgétaires favorisant la croissance et de l'égalité. Les caractéristiques de groupes de pays et de profils de finances publiques par pays sont mises en avant comme des exemples du potentiel de ces données pour fournir un éclairage sur les politiques budgétaires.
    Keywords: COFOG, inclusive growth, public finance, public spending, taxes
    JEL: H2 H5 E62
    Date: 2016–12–15
  81. By: Mohammad Zulfan Tadjoeddin; Ilmiawan Auwalin; Anis Chowdhury
    Abstract: In light of continuing importance of the manufacturing sector, but declining dynamism, this paper investigates trends in productivity at firm levels. It finds that labour productivity has been either stagnant or falling in labour intensive manufacturing. The paper uses firm level cross-sectional and time series data and employs GMM techniques to estimate determinants of productivity. It finds that real wage is the most important variable that influences firm level productivity, followed by capital intensity. Contrary to the common perception, foreign ownership and export-orientation are not found to have statistically significant influence on firm level productivity. This finding is consistent for firms of all sizes – large, medium, small and micro. This implies that Indonesia can use wages policy, as Singapore did during the late 1970s-mid 1980s, to upgrade its manufacturing to higher value added activities.
    Keywords: manufacturing, productivity, firm-size, real wage, GMM
    JEL: E24 J24 J38 O14 O53
    Date: 2016
  82. By: Illenin Kondo (Federal Reserve Board); Fabrizio Perri (Federal Reserve Bank of Minneapolis); Sewon Hur (University of Pittsburgh)
    Abstract: We show that the co-movement of inflation and domestic consumption growth affects both the pricing and the dynamics of nominal domestic debt. In particular a positive co-movement of inflation and consumption makes returns on government bonds negatively correlated with domestic consumption: this lowers risk premia on nominal domestic debt as seen in the data. However, as this co-movement increases, the debt becomes more risky for the government and reduces its incentives to accumulate debt. We find that debt accumulation is overall stronger the higher the co-movement of inflation and consumption. To assess these joint equilibrium properties of debt and interest rates, we calibrate a simple model of domestic default and nominal debt in the presence of exogenous inflation risk and domestic risk averse agents. Consistent with the data, the model also reveals that increased co-movement of inflation and consumption leads to more volatile interest rates.
    Date: 2016
  83. By: Pablo Navarrete-Hernández
    Abstract: Las políticas locales enfocadas a la economía informal, en general, ya los recolectores, en particular, están basadas en cuatro aproximaciones: (1)Dua-lista, de represión en contra de la actividad, producto de la preservación de la po-breza y de la reducción del crecimiento económico; (2)Estructuralista, enfocadasen reforzar las organizaciones y mejorar la negociación de precios; (3)Neoliberal,dirigida a promover la actividad a través de la legalización y el libre mercado,y (4)Co-producción, que considera un fuerte apoyo de las políticas locales paramejorar la productividad de la actividad. Son escasos los estudios -cualitativos y/ocuantitativos- que comparen estas políticas urbanas. Este estudio evalúa la vera-cidad de la caracterización de la economía informal y el impacto de las políticaslocales que estas teorías recomiendan aplicar. Los resultados obtenidos del estudiomuestran una asociación positiva entre el apoyo local y el incremento de la sosteni-bilidad de los recicladores de base en cuanto a su crecimiento económico, equidadsocial, protección medioambiental y reducción de las externalidades negativas.
    Keywords: desarrollo local; economía informal; reciclaje local; recicladores.
    JEL: E26 J48 O17 Q01
    Date: 2016
  84. By: Burton A. Abrams (Department of Economics, University of Delaware); James L. Butkiewicz (Department of Economics, University of Delaware)
    Abstract: In late July, 1971, Nixon reiterated his adamant opposition to wage and price controls calling them a scheme to socialize America. Yet, less than a month later, in a stunning reversal, he imposed the first and only peacetime wage and price controls in U.S. history. The Nixon tapes, personal tape recordings made during the presidency of Richard Nixon, provide a unique body of evidence to investigate the motivations for Nixon’s stunning reversal. We uncover and report in this paper evidence that Nixon manipulated his New Economic Policy to help secure his reelection victory in 1972. He became convinced that wage and price controls were necessary to grab the headlines away from the defeatist abandonment of the Breton Woods Agreement and the closing of the U.S. gold window. Nixon understood the impact of his wage and price controls, but chose to trade off longer-term economic costs to the economy for his own short-term political gain.
    Keywords: Wage and Price Controls; Political Business Cycle; Macroeconomic Policy
    Date: 2016
  85. By: Jasmien De Winne; Gert Peersman (-)
    Abstract: Online appendix to “Macroeconomic Effects of Disruptions in Global Food Commodity Markets: Evidence for the United States” This appendix documents the construction of a narrative series of exogenous global food commodity market shocks. More specifically, we rely on historical documents to identify episodes of changes in food commodity prices that were unrelated to the state of the economy, i.e. movements where the proximate causes were disturbances in food commodity markets. The series is constructed by reading FAO reports, newspaper articles (e.g. the Financial Times archive), disaster databases (e.g. EMDAT) and several other online sources (e.g.Google). The task is daunting given the global level of the analysis. There are continuously, many times even conflicting, events affecting food commodity markets somewhere in the world. We therefore only select episodes that fulfill the following criteria: 1. There has to be an event that is important enough to affect food commodity markets at the global level, such as weather shocks in a major food production region, or unantici- pated news on the volume of global food production (e.g. a sizable revision of expected agricultural production by the USDA). 2. The event should have an unambiguous significant effect on global food commodity prices. A shift in commodity prices is considered to be significant if either the quarterly change in food commodity prices or accumulated change over two subsequent quarters is at least one standard deviation different from the sample mean. 3. There should be no developments in the macroeconomy, alternative events or macroe- conomic news that may also have a recognizable impact on food commodity prices. For example, we exclude admissible food market events if there is simultaneously a signif- icant shift in crude oil prices (one standard deviation different from its sample mean), or in economic activity (e.g. a global or US recession). Put differently, we eliminate or minimize possible endogenous movements in food commodity prices to current or future fluctuations in the business cycle, i.e. the event in food commodity markets has to be the proximate cause of the price shift. All ambiguous cases are not selected as an episode. By applying these criteria to the historical records, we were able to identify 13 episodes that could reasonably be interpreted as major exogenous food commodity market disturbances that are unrelated to the state of the economy. 6 of these episodes are unfavorable food market disruptions, whereas we have detected 7 favorable shocks to food commodity markets. The remainder of this appendix motivates the selection of each episode. We also provide excerpts of articles and reports on which we based our motivation. Relevant quotes are marked in bold. Unless otherwise mentioned, changes in real food commodity prices are calculated as the change in the food commodity price index from the International Monetary Fund (IMF), deflated by US CPI. The real oil price series is the refiner acquisition cost of imported crude oil, deflated by US CPI. Cereal production is the global (annual) production of corn, wheat, rice and soybeans downloaded from FAOSTAT, aggregated on a caloric-weighted basis as described in the paper.
    Date: 2016–11
  86. By: Köllner, Sebastian
    Abstract: This paper investigates the relationship between growing import penetration and manufacturing employment growth in 12 OECD countries between 1995 and 2011, accounting for various model specifications, different measures of import penetration and alternate estimation strategies. The application of the latest version of the World Input-Output Database (WIOD) that has become available only recently allows to measure the effect of increasing imported intermediates according to their country of origin. The findings emphasize a weak positive overall impact of growing trade on manufacturing employment. However, intermediate inputs from China and the new EU members are substitutes to manufacturing employment in highly developed countries while imports from the EU-27 act as complements to domestic manufacturing production. A three-level mixed model implies that the hierarchical structure of the data only plays a minor role, while controlling for endogeneity leaves the results unchanged.
    Keywords: Import Penetration,Manufacturing,Labor Markets,Hierarchical Mixed Model
    JEL: E24 F16 J23 L60
    Date: 2016
  87. By: Ludo Visschers (The University of Edinburgh/Universidad); David Wiczer (FRB St. Louis); Carlos Carrillo-Tudela (Essex)
    Abstract: Recessions change job flows, increasing unemployment risk, reducing job-finding rates, and occupational switching rates among those still changing jobs. This article connects these cyclical differences in job flows to differences in the earnings change distribution across the cycle. The connection is natural because earnings change much larger when a worker experiences a job change and even larger when switching occupation. First, we present a statistical analysis of the contribution from (a) the change in the incidence of occupation and job change and (b) the change in the ``return'' to these changes. Then, because job and occupation switching is endogenous we look through the lens of a business cycle model with on-the-job search and occupational mobility.
    Date: 2016
  88. By: Alan K. Detmeister; David E. Lebow; Ekaterina V. Peneva
    Abstract: In this note, we discuss new data on consumers' perceptions of recent inflation from the University of Michigan Surveys of Consumers (MSC). Our preliminary results show that survey responses indicate inflation perceptions differ widely across individuals (with a slightly wider distribution than for inflation expectations) but the bulk of responses are between zero and five percent.
    Date: 2016–12–05
  89. By: Harris Dellas (University of Bern); Fabrice Collard (University of Bern); George-Marios Angeletos (M.I.T.)
    Abstract: We develop a new method for dissecting the comovements of macroeconomic variables over the business cycle. We use this to show that the data is consistent with models in which the forces (i.e., shocks and propagation mechanisms) that drive the fluctuations in output, investment, hours, and unemployment are strongly connected with one another, while also being relatively disconnected from those that drive the fluctuations in productivity, inflation, and interest rates. We document a similar disconnect between inflation and the labor share. We explain why these findings are at odds with existing macroeconomic models of either the RBC or the NK variety, and discuss how they provide guidance for future theoretical research.
    Date: 2016
  90. By: John C. Boik (Principled Societies Project)
    Abstract: Since circa 1900, civilization has experienced radical changes including changes in the size and distribution of populations, the power of technologies, the magnitude of energy and materials use, and the depth of scientific knowledge. With these have come increasingly complex challenges and elevated risks, and thus a heightened need for wise decision making. Accordingly, the need has grown for efficient and functional decision-making systems, also called social choice systems. I use these terms to refer to economic, governance, and legal systems. The seeming inability of societies, both individually and collectively, to effectively mitigate excessive climate change, poverty, income inequality, pollution, habitat loss, and other major problems suggests that underlying social choice systems are sub-optimal relative to need. I raise two overarching questions: (1) What characteristics would more optimal social choice systems exhibit? (2) How could research and development of more optimal systems best proceed? The answers I explore in this paper are based on the premise that the relative optimality of a social choice system is a measure of its relative capacity to help groups solve problems and organize activities such that collective wellbeing is elevated. The characteristics of complex adaptive systems, successful problem-solving systems found in nature, are explored in order to suggest useful design motifs and monitoring indicators. I emphasize the need for research and development of new social choice system designs, and argue that field testing of these can best occur at the local (e.g., community, city, or county) level. Efforts in this direction by the science and technology sectors and academic community are still nascent. The work described here suggests a new multidisciplinary program that I term wellbeing centrality: the design, testing, promotion, and operation of social choice systems that place wellbeing measurement, evaluation, forecasting, and deliberation at the center of decision-making activities.
    Keywords: LEDDA, sustainability, complexity, wellbeing centrality, wellbeing, simulation, local currency, community currency, complementary currency, digital currency, democracy, economic democracy, economic direct democracy
    JEL: B59 C63 E51 I31 J31 O10 P40 Q50 P50
    Date: 2016–12
  91. By: Hilde C. Bjørnland; Leif Anders Thorsrud; Sepideh K. Zahiri
    Abstract: Our analysis suggests; they do not! To arrive at this conclusion we construct a real-time data set of interest rate projections from central banks in three small open economies; New Zealand, Norway, and Sweden, and analyze if revisions to these projections (i.e., forward guidance) can be predicted by timely information. Doing so, we find a systematic role for forward looking international indicators in predicting the revisions to the interest rate projections in all countries. In contrast, using similar indexes for the domestic economy yields largely insignificant results. Furthermore, we find that revisions to forward guidance matter. Using a VAR identified with external instruments based on forecast errors from the predictive regressions, we show that the responses to output, inflation, the exchange rate and asset returns resemble those one typically associates with a conventional monetary policy shock.
    Keywords: Monetary policy, interest rate path, forecast revisions and global indicators
    Date: 2016–11
  92. By: Kanbur, Ravi
    Keywords: Agricultural and Food Policy, Public Economics,
    Date: 2016–04
  93. By: Juan S. Mora-Sanguinetti (Banco de España); Marta Martínez-Matute (Banco de España); Miguel García-Posada (Banco de España)
    Abstract: A number of theoretical and empirical studies have shown that the development of credit markets is affected by the efficacy of enforcement institutions. A less explored question is how these institutions interact with turns in the economic cycle and the impact of different types of legal procedures on credit market performance. This paper fills these gaps by analysing how differences in the availability of credit and in non-performing loans ratios may be partially explained by regional variations in the quality of loan contract enforcement during recent periods of sustained growth (2001-2007) and recession (since 2008) in the Spanish economy. This research concludes that a rise in the clearance rate of executions (i.e. when a judge enforces the repayment of a debt) increases the ratio of total credit to GDP. However, the declaratory stage of proceedings (i.e. when a debt is fi rst verifi ed by a judge) does not seem to be statistically significant. A possible explanation of this fi nding is that, throughout the economic cycle, a significant proportion of the defaults declared are strategic (i.e. defaults by a solvent debtor). Furthermore, it is observed that, in regions where declaratory procedures are more efficient, less credit is declared as non-performing. The latter effect, however, is only observed after the onset of the «Great Recession» in 2008. This may be related to the increase in non-strategic defaults during a downturn.
    Keywords: enforcement institutions, legal procedures, credit availability, non-performing loans ratio.
    JEL: K41 E51 G2
    Date: 2016–12

This nep-mac issue is ©2016 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.