nep-mac New Economics Papers
on Macroeconomics
Issue of 2017‒01‒08
87 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Learning, Confidence, and Business Cycles By Cosmin L. Ilut; Hikaru Saijo
  2. Gender and Monetary Policymaking: Trends and Drivers By Donato Masciandaro; Paola Profeta; Davide Romelli
  3. Investigating the Trajectory of Egypt’s Potential Output: Pre and Post the Arab Spring By El-Baz, Osama
  4. G-SIBOs (Global Systemically Important But Overlooked):The Collective of U.S. Households By De Koning, Kees
  5. Top Income Shares and Aggregate Wealth-Income Ratio in a Two-Class Corporate Economy By Soon Ryoo
  6. The bank lending channel of conventional and unconventional monetary policy By Ugo Albertazzi; Andrea Nobili; Federico M. Signoretti
  7. The Optimal Policy Mix to Achieve Public Debt Consolidation By Roberta, Cardani; Lorenzo, Menna; Patrizio, Tirelli;
  8. Learning, robust monetray policy and the merit of precaution By Marine Charlotte André; Meixing Dai
  9. Financial Frictions and Fluctuations in Volatility By Cristina Arellano; Yan Bai; Patrick J. Kehoe
  10. Searching for Wages in an Estimated Labor Matching Model By Chahrour, Ryan; Chugh, Sanjay; Potter, Tristan
  11. Why Does Household Investment Lead Business Investment over the Business Cycle?: Comment By Hashmat U. Khan; Jean-François Rouillard
  12. Understanding Inflation in India By Laurence Ball; Anusha Chari; Prachi Mishra
  13. Business Cycles, Investment Shocks, and the "Barro-King" Curse By Guido Ascari; Louis Phaneuf; Eric Sims
  14. A Behavioral New Keynesian Model By Xavier Gabaix
  15. Fiscal Dominance and US Monetary: 1940–1975 By Humpage, Owen F.
  16. Crecimiento del crédito en Nicaragua, ¿Crecimiento natural o boom crediticio? By Urbina, Jilber
  17. Stepping on a Rake: Replication and Diagnosis By John H. Cochrane
  18. The Degree of Currency Substitution and Exchange Rate Pass-Through By Ülke, Volkan
  19. International Worker Remittances and Economic Growth in a Real Business Cycle Framework By Michael Batu
  20. Cyclical Fluctuations, Co-movement and the Role of External Shocks in Latin America By Pérez Forero, Fernando
  21. The Historical Evolution of the Wealth Distribution: A Quantitative-Theoretic Investigation By Joachim Hubmer; Per Krusell; Anthony A. Smith, Jr.
  22. A Generic Theory of Price Determination By Oulatta, Moon
  23. Modification of the GE-IO model of the Russian economy with dynamic optimization of macroeconomic policy By Gilmundinov, Vadim; Bozo, Natalia; Melnikov, Vladimir; Petrov, Sergei
  24. Improving the Measurement of Earnings Dynamics By Moira Daly; Dmytro Hryshko; Iourii Manovskii
  25. A Historical Retrieval of the Methods and Functions of Monetary Policy By Hassan, Sherif Maher
  26. Family Job Search and Wealth: The Added Worker Effect Revisited By J. Ignacio García-Pérez; Sílvio Rendon
  27. Identifying the Effects of Monetary Policy Shock on Output and Prices in Thailand By Jiranyakul, Komain
  28. Insights on the Greek economy from the 3D macro model By Hiona Balfoussia; Dimitris Papageorgiou
  29. Smets and Wouters model estimated with skewed shocks - empirical study of forecasting properties By Grzegorz Koloch
  30. The "Natural" Interest Rate and Secular Stagnation By Lance Taylor
  31. Doves, Hawks and Pigeons: Behavioral Monetary Policy and Interest Rate Inertia By Federico Favaretto; Donato Masciandaro
  32. Non-performing loans and Financial Development: New Evidence By Ozili, Peterson K
  33. Does Domestic Investment Produce Economic Growth in Canada: Empirical Analysis Based on Correlation, Cointegration and Causality By Bakari, Sayef
  34. Interbank Markets and Credit Policies amid a Sovereign Debt Crisis By Lakdawala, Aeimit; Minetti, Raoul; Olivero, María Pía
  35. Panel Data Estimates of Age-Rent Profiles for Rental Housing By Verbrugge, Randal; Gallin, Joshua H.
  36. The impact of quantitative easing in the Netherlands: A stock-flow consistent approach By Meijers, Huub; Muysken, Joan
  37. Macroprudential Policy Transmission and Interaction with Fiscal and Monetary Policy in an Emerging Economy: a DSGE model for Brazil By Fabia A. de Carvalho; Marcos R. Castro
  38. More than the Human Appendix: Fed Capital and Central Bank Financial Independence By Donato Masciandaro
  39. From Monetary Policy to Macroprudentials: the Aftermath of the Great Recession By Bilin Neyapti
  40. Forecast Combination for Euro Area Inflation - A Cure in Times of Crisis? By Kirstin Hubrich; Frauke Skudelny
  41. Measuring Uncertainty and Its Impact on the Economy By Andrea Carriero; Todd E. Clark; Massimiliano Marcellino
  42. Mending the broken link: heterogeneous bank lending and monetary policy pass-through. By Carlo Altavilla; Fabio Canova; Matteo Ciccarelli
  43. How Destructive is Innovation? By Daniel Garcia-Macia; Chang-Tai Hsieh; Peter J. Klenow
  44. Impact of Recession on the employment in Catalonia from a gender and age perspective By Ma.Jesus Gomez Adillon; M.Angels Cabases Pique; Agnes Pardell Vea
  45. The dynamic response of the Current Account to Commodity Prices shocks in Mining and Non-mining exporting economies By Pérez Forero, Fernando; Serván, Sergio
  46. The currency dimension of the bank lending channel in international monetary transmission By Elod Takats; Judit Temesvary
  47. A theory of economic policy lock-in and lock-out via hysteresis: Rethinking economists' approach to economic policy By Palley, Thomas I.
  48. Monetary Policy Credibility and the Comovement between Stock Returns and Inflation By Eurilton Araújo
  49. Central banking in the XXI century: never say never By Fabio Panetta
  50. Evaluating the Impact of Macroprudential Policies in Colombia's Credit Growth By Esteban Gómez; Angélica Lizarazo; Juan Carlos Mendoza; Andrés Murcia
  51. Innovation and investments in a regional cross-sectoral growth model: A change is needed in European cohesion policies By Riccardo Cappellin
  52. Rules, Imbalances and Growth in the Eurozone By Schilirò, Daniele
  53. Mobility By Carroll, Daniel R.; Young, Eric R.
  54. A quantitative case for leaning against the wind By Andrew Filardo; Phurichai Rungcharoenkitkul
  55. Disaggregating the Matching Function By Peter A. Diamond; Ayşegül Şahin
  56. Austerity and competitiveness in the Eurozone: a misleading linkage By Paternesi Meloni, Walter
  57. Modeling Growth, Distribution, and the Environment in a Stock-Flow Consistent Framework By Naqvi, Syed Ali Asjad
  58. Economics of Regulation: Credit Rationing and Excess Liquidity By cho, hyejin
  59. The Impact of the Employment Protection Legislation Reform on the Labor Market’s Flexicurity in Morocco By Toufik, Said; Arkhis, Mohammed-Amine; Oukhallou, Youssef
  60. Demand Drives Growth All The Way By Lance Taylor; Duncan K Foley; Armon Rezai; Luiza Pires; Ozlem Omer; Ellis Scharfenaker
  61. Planned Revisions of the Tankan By Research and Statistics Department
  62. Euro area imbalances By Mark Mink; Jan Jacobs; Jakob de Haan
  63. Structural transformation and allocation efficiency in China and India By Enrica Di Stefano; Daniela Marconi
  64. Global and Country Poverty Rates, Welfare Rankings of the Regions and Purchasing Power Parities: How Robust Are the Results? By Amita Majumder; Ranjan Ray; Sattwik Santra
  65. The Real Effects of Capital Requirements and Monetary Policy: Evidence from the United Kingdom By Filippo De Marco; Tomasz Wieladek
  66. El motivo precautorio en la demanda de saldos reales: un enfoque ortodoxo By Venegas-Martínez, Francisco; Avendaño-Vargas, Blanca Lilia; García-Meza, Mario Alberto
  67. The Price of Being a Systemically Important Financial Institution (SIFI) By Dacorogna, Michel M; Busse, Marc
  68. Monetary Policy, Trend Inflation and Unemployment Volatility By Sergio A. Lago Alves
  69. Trends in the relation between regional convergence and economic growth in EU By Lucian-Liviu Albu
  70. How much is too much? The fiscal space in emerging market economies By Ganiko, Gustavo; Melgarejo, Karl; Montoro, Carlos
  71. Impacto del mercado de derivados en la política monetaria: un modelo de volatilidad estocástica By Silva-Correa, María de los Ángeles; Martínez-Marca, José Luís; Venegas-Martínez, Francisco
  72. Language and Consumption By Haining Wang; Zhiming Cheng; Russell Smyth
  73. The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem By David Baqaee; Emmanuel Farhi
  74. Firm Dynamics, Misallocation and Targeted Policies By In Hwan Jo; Tatsuro Senga
  75. When Robertson was Keynesian and Keynes Robertsonian: a discussion between D.H.R. and J.M.K. in the early 1930s and the problems with the Monetary Circuit Theory. A note. By Sergio Cesaratto
  76. La transition énergétique est-elle favorable aux branches à fort contenu en emploi ? Une approche input-output pour la France By Quentin Perrier; Philippe Quirion
  77. The modern revival of the Classical surplus approach: implications for the analysis of growth and crises By Sergio Cesaratto
  78. Alternative interpretations of a stateless currency crisis By Sergio Cesaratto
  79. Distributional National Accounts: Methods and Estimates for the United States By Thomas Piketty; Emmanuel Saez; Gabriel Zucman
  80. Informe sociolaboral del Partido de General Pueyrredon. Informe de coyuntura macroeconómica By GrET
  81. Dominant Currency Paradigm By Camila Casas; Federico J. Díez; Gita Gopinath; Pierre-Olivier Gourinchas
  82. Central Bankers as Supervisors: Do Crises Matter? By Donato Masciandaro; Davide Romelli
  83. Longitudinal statistical matching: transferring consumption expenditure from HBS to SILC panel survey By Baris Ucar; Gianni Betti
  84. Commitment vs. Flexibility with Costly Verification By Marina Halac; Pierre Yared
  85. Does partisan conflict impact the cash holdings of firms? A sign restrictions approach By Hankins, William; Cheng, Chak; Chiu, Jeremy; Stone, Anna-Leigh
  86. Internal migration and EU regional policy transfer payments: A panel data analysis for the EU-28 member countries By Peter Schmidt
  87. Unemployment Fluctuations, Match Quality, and the Wage Cyclicality of New Hires By Mark Gertler; Christopher Huckfeldt; Antonella Trigari

  1. By: Cosmin L. Ilut; Hikaru Saijo
    Abstract: We build a tractable heterogeneous-firm business cycle model where firms face Knightian uncertainty about their profitability and learn it through production. The cross-sectional mean of firm-level uncertainty is high in recessions because firms invest and hire less. The higher uncertainty reduces agents' confidence and further discourages economic activity. We characterize this feedback mechanism in linear, workhorse macroeconomic models and find that it endogenously generates empirically desirable cross-equation restrictions such as: amplified and hump-shaped dynamics, co-movement driven by demand shocks and countercyclical correlated wedges in the equilibrium conditions for labor, risk-free and risky assets. In a rich model estimated on US macroeconomic and financial data, the information friction changes inference and significantly reduces the empirical need for standard real and nominal rigidities. Furthermore, endogenous idiosyncratic uncertainty propagates shocks to financial conditions, disciplined by observed spreads, as key drivers of fluctuations, and magnifies the aggregate activity's response to monetary and fiscal policies.
    JEL: C11 D81 E32 E44
    Date: 2016–12
  2. By: Donato Masciandaro; Paola Profeta; Davide Romelli
    Abstract: This paper analyses the gender representation in monetary policy committees, offering three contributions. We propose the first index to evaluate the gender representation in monetary policymaking – i.e. the GMP Index – for a sample of 112 countries as of 2015. Second, we investigate the drivers of gender diversity in monetary policy committees. Our results show that, besides legal (Common Law), religious (Orthodox), historical (French colony) and socio-economic (female labour force) drivers, the gender representation is more likely to be relevant in countries characterized by a well-defined central bank governance, i.e. more independent central banks and less involved in supervision. Finally, we test whether gender diversity in central bank boards affects the conduct of monetary policy and hence macroeconomic outcomes. We find that gender diversity is inversely associated with inflation rates and money growth. The presence of women in central bank boards seems to be associated with a more hawkish approach to monetary policy making.
    Keywords: Inflation, Monetary Policy, Central Banks and their Policies, Gender Economics
    JEL: E31 E52 E58 J16
    Date: 2016
  3. By: El-Baz, Osama
    Abstract: The Egyptian economy has witnessed a plunge in its main macroeconomic indicators after the Arab spring as reflected in the estimated Economic Stability Trend Index (ESTI). The main purpose of the paper was to estimate Egypt's potential output and identify the factors that might be responsible for the divergence of actual and potential output from each other. The production function approach was used to derive estimates of both potential output and output gap over the period (1990-2014). The results of the analysis revealed that capital stock was the dominant factor contributing to potential GDP growth in Egypt, while the shares of both labor and total factor productivity in potential GDP growth rate have been fluctuating over time. Intellectual property protection, efficiency of the legal framework in settling disputes, strength of investor protection, and other factors exhibited a strong positive relationship with output gap in Egypt over the period (2010-2014).
    Keywords: Potential Output, Output Gap, Production Function, HP Filter
    JEL: E1 E17 E2 E22 E6
    Date: 2016–11–05
  4. By: De Koning, Kees
    Abstract: In finance, systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any individual entity, group or component of a system, which can be contained therein without harming the whole system. This definition can clearly be applied to the financial crisis of 2007-2008 and to all its constituting parties, be they the banking sector, the mortgage bondholders or the collective of individual mortgagors in the U.S. The systemic risks to the lenders have been well documented, but for the borrowers the same does not apply. For the latter, the fact that, between 2005 and 2014, more than 45% of homeowner-occupiers with a mortgage were confronted with foreclosure proceedings, implies that the funding structure of the total U.S. mortgage portfolio made mortgagors vulnerable to loan default pressures: a serious systemic risk for mortgagors. Such pressures do not arise overnight, but rather over a number of years. How this pressure did grow, will be shown with the help of two indices: one which shows the link between mortgage debt to income by comparing the total U.S. mortgage debt with the nominal GDP levels and the second one the link between the annual mortgage lending volumes and the average new house prices during the same years. The second one is split into one index based on actual average house prices and another one on house prices adjusted for CPI inflation. The paper covers the period from 1997-2015. One cannot solve household’ systemic risk factors as if this is an individual household’s own problem. It was a collective problem caused by systemic factors. Managing such events should have been organized on a collective basis. The sooner it is recognized that the collective of mortgagors can experience systemic risk pressures –just like banks and mortgage bondholders-, the quicker solutions can be found to overcome such pressures. If, by 2003, the priority had been given to solving systemic risks to the U.S. mortgagors, the U.S. and quite a few other countries would have been in a much better place at present.
    Keywords: systemic risk, U.S. mortgagors, foreclosures, mortgage lending ceiling, system deficiencies, interest instrument, quantitative easing, traffic light system, National Mortgage Bank,
    JEL: E32 E4 E44 E6 E61 G2
    Date: 2016–12–19
  5. By: Soon Ryoo (Department of Finance and Economics, Adelphi University)
    Abstract: This paper examines some determinants of top income shares and the aggregate wealth-income ratio in the United States. The paper, first, points out the difficulties in Piketty’s neo-classical version of explanation of US income inequality, which stresses the effect of the rising aggregate wealth-income ratio and high elasticity of factor substitution. Second, the analysis, based on a Cambridge two-class model along the lines of Kaldor (1955/56, 1966) and Pasinetti (1962), highlights the role of financialization in increasing inequality. Third, the analysis suggests that the rise in the aggregate wealth-income ratio from 1980 to 2007 in the US is explained mostly by asset price inflation, not by technical relations. Finally, the analysis examines the effects of the slowdown in capital accumulation on income distribution and wealth-income ratios, which are very different from those in Piketty’s Capital in the twenty first century.
    Keywords: top income share, wealth-income ratio, financialization, top management pay, stock-flow consistency
    JEL: E12 E21 E25 E44
    Date: 2016
  6. By: Ugo Albertazzi (Bank of Italy); Andrea Nobili (Bank of Italy); Federico M. Signoretti (Bank of Italy)
    Abstract: Using a new monthly dataset on bank-level lending rates, we study the transmission of conventional and unconventional monetary policy in the euro area via shifts in the supply of credit. We find that a bank lending channel is operational for both types of measures, though its functioning differs: for standard operations the transmission is weaker for banks with more capital and a more solid funding structure, in line with an important role of asymmetric information. However, in response to non-standard measures lending supply expands by more at banks with stronger capital and funding positions, suggesting a crucial role for regulatory and economic constraints. We also find that the transmission of unconventional measures is attenuated by their negative effect on future bank’s capital position via the net interest income (reverse bank capital channel). Finally, we find that large sovereign exposures mute the response of lending rates to conventional policy, but amplify the transmission of unconventional measures.
    Keywords: unconventional monetary policy, lending rates, bank lending channel, bank capital channel, fragmentation
    JEL: E30 E32 E51
    Date: 2016–12
  7. By: Roberta, Cardani; Lorenzo, Menna; Patrizio, Tirelli;
    Abstract: In this paper we adopt a Ramsey-optimal approach to identify the combination of income taxes, public expenditure and inflation designed to achieve a fiscal consolidation. In contrast with empirical contributions that emphasize the benefits of expenditure based consolidations, the optimal policy calls for increases in taxes and inflation. Strong monetary accommodation is quite beneficial relative to a situation where the Central Bank is only concerned with inflation stability and the inflation target is defined as a ceiling, as in the Eurozone.
    Keywords: Fiscal Consolidation, Limited Asset Market Participation, Ramsey Fiscal Policy
    JEL: E32 E62 E63
    Date: 2016–12–31
  8. By: Marine Charlotte André; Meixing Dai
    Abstract: We study in a New Keynesian framework the consequences of adaptative learning for the design of robust monetary policy. Compared to rational expectations, the fact that private follows adaptative learning gives the central bank an additional intertemporal trade-off between optimal behavior thanks to ability to manipulate future inflation expectations. We show that adaptative learning imposes a more restrictive constraint on monetary policy robustness to ensure the dynamic stability of the equilibrium than under rational expectations and weakens the argument in favor of a more aggressive monetary policy when the central bank takes account of model misspecifications.
    Keywords: robust control, model uncertainty, adaptative learning, optimal monetary policy.
    JEL: C62 D83 D84 E52 E58
    Date: 2016
  9. By: Cristina Arellano; Yan Bai; Patrick J. Kehoe
    Abstract: During the recent U.S. financial crisis, the large decline in aggregate output and labor was accompanied by both a tightening of financial conditions and a large increase in the dispersion of growth rates across firms. The tightened financial conditions manifested themselves as increases in firms' credit spreads and decreases in both equity payouts and debt purchases. These features motivate us to build a model in which increased volatility of firm level productivity shocks generates a downturn and worsened credit conditions. The key idea in the model is that hiring inputs is risky because financial frictions limit firms' ability to insure against shocks. Hence, an increase in idiosyncratic volatility induces firms to reduce their inputs to reduce such risk. We find that our model can generate most of the decline in output and labor in the Great Recession of 2007–2009 and the observed tightening of financial conditions.
    JEL: E32 E44 G32
    Date: 2016–12
  10. By: Chahrour, Ryan (Boston College); Chugh, Sanjay (Ohio State University); Potter, Tristan (Drexel University)
    Abstract: We estimate a real business cycle economy with search frictions in the labor market in which the latent wage follows a non-structural ARMA process. The estimated model does an excellent job matching a broad set of quantity data and wage indicators. Under the estimated process, wages respond immediately to shocks but converge slowly to their long-run levels, inducing substantial variation in labor's share of surplus. These results are not consistent with either a rigid real wage or flexible Nash bargaining. Despite inducing a strong endogenous response of wages, neutral shocks to productivity account for the vast majority of aggregate fluctuations in the economy, including labor market variables.
    Keywords: Search and Matching; Wages; Unemployment; Business Cycles
    JEL: E24 E32
    Date: 2016–12–20
  11. By: Hashmat U. Khan (Department of Economics, Carleton University); Jean-François Rouillard (Département d'économique, Université de Sherbrooke)
    Abstract: We demonstrate that the model in Fisher (2007) produces two counterfactual results when the capital tax rate is calibrated to 35%---a rate consistent with estimates of the effective tax rate in the literature. First, household investment lags business investment. Second, household investment is less volatile than business investment with a relative volatility of .62. We show that increasing the degree of household capital complementarity cannot resolve these problems because the model produces counterfactual factor shares in market production relative to the empirical estimates in Fisher (2007). Accounting for U.S. investment dynamics, therefore, remains a significant challenge for macroeconomists.
    Keywords: household investment, business investment, capital taxation.
    JEL: E22 E32
    Date: 2017–01
  12. By: Laurence Ball; Anusha Chari; Prachi Mishra
    Abstract: This paper examines the behavior of quarterly inflation in India since 1994, both headline inflation and core inflation as measured by the weighted median of price changes across industries. We explain core inflation with a Phillips curve in which the inflation rate depends on a slow-moving average of past inflation and on the deviation of output from trend. Headline inflation is more volatile than core: it fluctuates due to large changes in the relative prices of certain industries, which are largely but not exclusively industries that produce food and energy. There is some evidence that changes in headline inflation feed into expected inflation and future core inflation. Several aspects of India’s inflation process are similar to inflation in advanced economies in the 1970s and 80s.
    JEL: E31 E58 F0
    Date: 2016–12
  13. By: Guido Ascari; Louis Phaneuf; Eric Sims
    Abstract: Recent empirical evidence identifies investment shocks as key driving forces behind business cycle fluctuations. However, existing New Keynesian models emphasizing these shocks counterfactually imply a negative unconditional correlation between consumption growth and investment growth, a weak positive unconditional correlation between consumption growth and output growth and anomalous profiles of cross-correlations involving consumption growth. These anomalies arise because of a short-run contractionary effect a positive investment shock on consumption. Such counterfactual co-movements are typical of the "Barro-King curse" (Barro and King 1984), wherein models with a real business cycle core must rely on technology shocks to account for the observed co-movement among output, consumption, investment, and hours. We show that two realistic additions to an otherwise standard medium scale New Keynesian model – namely, roundabout production and real per capita output growth stemming from trend growth in neutral and investment-specific technologies – can break the Barro-King curse and provide a more accurate account of unconditional business cycle comovements more generally. These two features substantially magnify the effects of neutral technology and investment shocks on aggregate fluctuations and generate a rise of consumption on impact of a positive investment shock.
    JEL: E31 E32
    Date: 2016–12
  14. By: Xavier Gabaix
    Abstract: This paper presents a framework for analyzing how bounded rationality affects monetary and fiscal policy. The model is a tractable and parsimonious enrichment of the widely-used New Keynesian model – with one main new parameter, which quantifies how poorly agents understand future policy and its impact. That myopia parameter, in turn, affects the power of monetary and fiscal policy in a microfounded general equilibrium. A number of consequences emerge. (i) Fiscal stimulus or \helicopter drops of money" are powerful and, indeed, pull the economy out of the zero lower bound. More generally, the model allows for the joint analysis of optimal monetary and fiscal policy. (ii) The Taylor principle is strongly modified: even with passive monetary policy, equilibrium is determinate, whereas the traditional rational model yields multiple equilibria, which reduce its predictive power, and generates indeterminate economies at the zero lower bound (ZLB). (iii) The ZLB is much less costly than in the traditional model. (iv) The model helps solve the “forward guidance puzzle”: the fact that in the rational model, shocks to very distant rates have a very powerful impact on today's consumption and inflation: because agents are partially myopic, this effect is muted. (v) Optimal policy changes qualitatively: the optimal commitment policy with rational agents demands “nominal GDP targeting”; this is not the case with behavioral firms, as the benefits of commitment are less strong with myopic forms. (vi) The model is “neo-Fisherian” in the long run, but Keynesian in the short run: a permanent rise in the interest rate decreases inflation in the short run but increases it in the long run. The non-standard behavioral features of the model seem warranted by the empirical evidence.
    JEL: D03 E03 E5 E6 G02
    Date: 2016–12
  15. By: Humpage, Owen F. (Federal Reserve Bank of Cleveland)
    Abstract: This narrative investigates the frictions that existed between the Federal Reserve’s monetary policies and the US Treasury’s debt-management operations from the onset of the Second World War through the end of the Federal Reserve’s even-keel actions in mid-1975. The analysis suggests that three factors can help explain why the Federal Reserve compromised the attainment of its statutorily mandated monetary-policy objectives for debt-management reasons: 1) the existence of an existential threat, 2) the fear that to do otherwise would create instability in the banking sector, and 3) the vulnerability of Treasury financing operations to monetary-policy actions that existed when the Treasury did not auction its debts.
    Keywords: Federal Reserve; US Treasury; monetary policy; debt management; bills only; even-keel;
    JEL: E02 E5 E6
    Date: 2016–12–21
  16. By: Urbina, Jilber
    Abstract: Credit boom, defined as an excess of lending above its long-run trend, is an important financial phenomenon to be considered when designing a set of early warning systems indicators to detect financial crisis in order either to avoid it or to lessen its impact. This paper presents an analysis of the credit evolution in Nicaragua focusing on detecting the existence of credit boom during 1995-2014. Our results support the hypothesis of no credit boom during the period under study; instead, we find evidence in favor that credit is growing in line with the economic growth, therefore, credit boom may not be consider as an input to be included in the set of early warning indicators for financial crisis detection. El boom de crédito, definido como un exceso de crédito sobre su tendencia de largo plazo, es un fenómeno de importancia para la creación de indicadores de detección temprana de crisis financiera, que permitan evitarla o aminorar su impacto. En esta investigación se presenta un análisis de la evolución del crédito en Nicaragua enfocado en la detección de boom crediticio para el periodo 1995-2014. Los resultados indican que, durante el periodo en estudio no ha habido boom de crédito; en su lugar, el sostenido crecimiento del crédito está en línea con el crecimiento de la economía, de esto se destaca que para diseñar indicadores para la detección temprana de crisis financiera, se deben considerar factores distintos a los posibles excesos de crédito.
    Keywords: Credit boom, trend, cycle, potencial growth. Boom de crédito, tendencia, ciclo, crecimiento potencial.
    JEL: C53 E32 E44 E51
    Date: 2016–10
  17. By: John H. Cochrane
    Abstract: This paper replicates Sims (2011) "stepping on a rake" model. It derives the model, shows how to solve it, offers some extensions, and boils the paper down to its central ingredient. Sims' article is important: it is a simple modern economic model that produces a temporary decline in inflation when the central bank persistently raises interest rates. Inflation then rises. The model's essential feature is long term debt. When interest rates increase, the nominal market value of long-term government debt falls. If fiscal surpluses are unchanged, the price level must fall so that the real value of government debt matches the unchanged real present value of surpluses.
    JEL: E31 E4 E5
    Date: 2016–12
  18. By: Ülke, Volkan
    Abstract: This study investigates the effect of the degree of currency substitution on the exchange rate pass-through (ERPT) to import and domestic prices in Turkey, using monthly data between 1998 and 2013. The recursive interacted vector autoregressive (IVAR) specification of Towbin and Weber (2013) is employed, based on McCarthy’s (1999) distribution chain model. Currency substitution is treated as an interaction term in the IVAR specification. The empirical evidence suggests that high currency substitution increases the effect of ERPT to import and domestic prices.
    Keywords: Exchange rate pass-through; currency substitution; inflation; interacted VAR.
    JEL: C32 E31 E52 F31
    Date: 2015–09–15
  19. By: Michael Batu (Department of Economics, University of Windsor)
    Abstract: In this article I augment the standard open economy Real Business Cycle (RBC) model with stochastic remittance shocks. The model was calibrated to match broad, stylized facts common across a large set of remittance recipient countries. The calibration exercise reveals that output does not respond as much to remittance shocks relative to technology shocks. The model predicts that temporary inflows of worker remittances positively affect GDP per capita while a permanent increase of remittances does not. Cross country econometric evidence is consistent with the theory: there is a significant and positive correlation between the temporary component of remittances and growth; and permanent component of remittances do not affect output growth.
    Keywords: Remittances, business cycles, economic growth
    JEL: F24 O11 E32
    Date: 2017–01
  20. By: Pérez Forero, Fernando (Banco Central de Reserva del Perú)
    Abstract: This paper compares the business cycles across five Latin American economies (Brazil, Chile, Colombia, Mexico and Peru) for the period 1997-2014. We estimate a Multi-Country VAR through Bayesian Methods, where the model takes into account dynamic interdependencies and time-varying parameters (Canova and Ciccarelli, 2009). We present regional and country-specific indicators of real economic activity. We find a significant common regional component, as well as significant country specific indicators, meaning that there exists some synchronization across business cycles, but at the same time there is some heterogeneity across these economies. We find some heterogeneity before the international financial crisis of 2008 and a more significant co-movent after that date. Furthermore, we explore the transmission at different dates of domestic (country specific) and external shocks such as Chinese GDP growth. Overall, we find that the transmission of both domestic and external shocks are somewhat stable after the Inflation Targeting adoption.
    Keywords: Business Cycles, Panel Vector Autoregressions, Latin American economies, Bayesian Methods
    JEL: C11 C33 E32
    Date: 2016–12
  21. By: Joachim Hubmer; Per Krusell; Anthony A. Smith, Jr.
    Abstract: This paper employs the benchmark heterogeneous-agent model used in macroeconomics to examine drivers of the rise in wealth inequality in the U.S. over the last thirty years. Several plausible candidates are formulated, calibrated to data, and examined through the lens of the model. There is one main finding: by far the most important driver is the significant drop in tax progressivity that started in the late 1970s, intensified during the Reagan years, and then subsequently flattened out, with only a minor bounce back. The sharp observed increases in earnings inequality, the falling labor share over the recent decades, and potential mechanisms underlying changes in the gap between the interest rate and the growth rate (Piketty's r-g story) all fall far short of accounting for the data.
    JEL: D14 D31 D33 E21 E25 E62 H31
    Date: 2016–12
  22. By: Oulatta, Moon
    Abstract: For a long time, the general consensus regarding the causes of inflation across Sub-Saharan African countries was that inflation was mainly determined by supply side factors. This study shows that in the case of the West African Economic and Monetary Union, the driving forces of inflation emanate from both supply and demand side factors. On the supply side, rainfall, and international crude oil prices were found to be the most important supply determinants of inflation. On the demand side, the internal prices of cocoa and tobacco, the output gap of the main trading partners, and exogenous changes in the real money supply (M1), and real government spending were found to be the most important demand determinants of domestic inflation. There are 3 relevant policy implications to these findings. (1) In the short run, there is an optimal trade-off between inflation and real output that policy makers could exploit. (2) The members of the WAEMU are extremely vulnerable to supply shocks driven by large swings in commodity prices and weather shocks, the current fixed exchange rate policy does not appear to be completely isolating the countries from adverse terms of trade shocks driven by crude oil price shocks. However, the empirical estimates of the pass through of imported crude oil inflation on domestic inflation seems very slim. (3) The international prices of key cash crops remain a vital source of income for the members WAEMU.
    Keywords: Inflation, Two Stage Least Squares, Monetary policy, BCEAO
    JEL: C36 E31 E52
    Date: 2016–11–20
  23. By: Gilmundinov, Vadim; Bozo, Natalia; Melnikov, Vladimir; Petrov, Sergei
    Abstract: The paper describes recent results connected with extension of the general equilibrium input-output model of Russia with aggregated markets (Gilmundinov et al, 2015). Consideration of economic policy’s influence on a variety of macroeconomic and structural policy goals is an aim of this extension. For this purpose we add into GE-IO model sectoral fixed capital investment’s sub-models and sub-model of dynamic optimization of economic policy. Sectoral sub-models of fixed capital investments are based on the assessments of sectoral production functions with variable degree of capacity use. Sub-model of dynamic optimization of economic policy is based on extension of basic approaches suggested by H. Theil (1954, 1964), J. Tinbergen (1952) and R. Mundell (1962) with dynamic social losses function and accounting of influence of economic policy on sectoral structure of national economy. The suggested modification allows to simulate impact of different variants of economic policy on national economy, aggregated markets and main sectors. That is very helpful for estimation of consequences of various internal and external shocks and development of optimal economic policy and gives more advantages in comparison with standard DSGE or CGE models. The preliminary results of simulations based on suggested model for the Russian economy show considerable dependence of the Russian economy dynamic and structure on economic policy. Optimal economic policy should be hybrid with combining structural policy with sectoral credit policy of Central Bank. According to the basic scenario of simulation with neutral economic policy the Russian GDP in constant prices will decline at 1.8% in 2016 in comparison to 2015 and almost have no changes in 2017 in comparison to 2016. Stimulating economic policy allows to raise growth rates of the Russian economy at 2-3%.
    Keywords: Economic Policy, Optimization, Input-Output, Economy of Russia, Forecasting, General Equilibrium
    JEL: C61 C63 C67 E52
    Date: 2016–05–15
  24. By: Moira Daly; Dmytro Hryshko; Iourii Manovskii
    Abstract: The stochastic process for earnings is the key element of incomplete markets models in modern quantitative macroeconomics. We show that a simple modification of the canonical process used in the literature leads to a dramatic improvement in the measurement of earnings dynamics in administrative and survey data alike. Empirically, earnings at the start or end of earnings spells are lower and more volatile than the observations in the interior of earnings histories, reflecting the effects of working less than the full year as well as deviations of wages due to e.g. tenure effects. Ignoring these properties of earnings, as is standard in the literature, leads to a substantial mismeasurement of the variances of permanent and transitory shocks and induces the large and widely documented divergence in the estimates of these variances based on fitting the earnings moments in levels or growth rates. Accounting for these effects enables more accurate analysis using quantitative models with permanent and transitory earnings risk, and improves empirical estimates of consumption insurance against permanent earnings shocks.
    JEL: D31 D91 E21
    Date: 2016–12
  25. By: Hassan, Sherif Maher
    Abstract: There exists a broad implicit agreement that steering the monetary policy has important consequences for the whole economy (Friedman, 1968). This book uses topic classification to present a historical retrieval of the main theories and applications of the monetary policy within different schools of economic thinking and across history. From Humes’ automatic price-species flow in the 17th century, to the Keynesians, Monetarists and Austrians perspectives of the monetary dynamics in the beginning of the 19th century. The second chapter provides a general overview about how the monetary authority can fine tune monetary indicators in response to business cycle shocks. This part will discuss the monetary transmission mechanisms that represent the different means of interaction between monetary tools together and their impact on the real economy. In this context, the concept of inflation targeting will be elaborated in details while explaining its main institutional and economic prerequisites. The third and final chapter is devoted to giving an overview of the Egyptian monetary policy from 1990 to 2010 prior to the Egyptian revolution. The detailed analysis disaggregates this period into three eras: the first starts from 1991 till 1996 (ERSAP era), the second from 1996 till 2003 (Transitional era), and the third from 2003 till 2010 (towards Inflation Targeting era). This part of the book covers the broad changes occurred in the Egyptian monetary regimes and how well the successive governments used various monetary tools to achieve their policy goals and to mitigate real economic problems like unemployment and inflation.
    Keywords: Monetary policy, Egypt, inflation targeting
    JEL: B2 E4
    Date: 2016
  26. By: J. Ignacio García-Pérez (Department of Economics, Universidad Pablo de Olavide); Sílvio Rendon (Federal Reserve Bank of Philadelphia)
    Abstract: We develop and estimate a model of family job search and wealth accumulation. Individuals' job finding and job separations depend on their partners' job turnover and wages as well as common wealth. We fit this model to data from the Survey of Income and Program Participation (SIPP). This dataset reveals a very asymmetric labor market for household members, who share that their job finding is stimulated by their partners' job separation, particularly during economic downturns. We uncover a job search-theoretic basis for this added worker effect and find that this effect is stronger with more children in the household. We also show that excluding wealth and savings from the analysis and estimation leads to underestimating the interdependency between household members. Our analysis shows that the policy goal of supporting job search by increasing unemployment transfers is partially offset by a partner's lower unemployment and wages.
    Keywords: job search, asset accumulation, household economics, consumption, unemployment, estimation of dynamic structural models.
    JEL: C33 E21 E24 J64
    Date: 2016–12
  27. By: Jiranyakul, Komain
    Abstract: This paper attempts to identify the effects of monetary policy shock on output and price level in Thailand during 2005Q1 and 2016Q2. Recently available policy rate is used as a monetary policy variable. The structural VAR methodology is employed to identify the monetary policy shock. To enhance the precision of the model specification, the short-run restrictions are imposed on the specified structural model of cointegrated variables to allow the levels of variables to interact simultaneously with each other. The results from the analysis of the structural model reveal that a shock to monetary policy drives cycles for both real GDP and the inflation rate.
    Keywords: Monetary policy shock, structural VAR, impulse response
    JEL: C32 E5 E52
    Date: 2016–12
  28. By: Hiona Balfoussia (Bank of Greece); Dimitris Papageorgiou (Bank of Greece)
    Abstract: This paper examines the macroeconomic and welfare implications of banking capital requirement policies and their interactions with real and financial shocks for the Greek economy. The model employed is that of Clerc et al. (2015), a DSGE model featuring a detailed financial sector, banking capital regulations and bank default in equilibrium. The key model implication is that capital requirements reduce bank leverage and the default risk of banks but their relationship with social welfare is hump-shaped, reflecting a trade-off. The model is calibrated to data on the Greek economy and the dynamic responses to a number of financial and real shocks which may have played a material role in the unfolding of the Greek crisis are explored. The results indicate inter alia that an increase in the depositors’ cost of bank default leads to a substantial increase in the deposit rate, a decline in deposits and bank equity and an increase in bank fragility, while on the real side of the economy the decline in total credit prompts a deterioration of key macro variables. Additionally, the results imply that while recapitalizations increase bank net worth and credit supply and boost economic activity, this potential benefit is severely compromised in a high financial distress scenario, as the positive real and financial implications of a recapitalization become both smaller and more short-lived.
    Keywords: Macroprudential Policy; General Equilibrium; Greece.
    JEL: E3 E44 G01 G21 O52
    Date: 2016–12
  29. By: Grzegorz Koloch
    Abstract: In this paper we estimate a Smets and Wouters (2007) model with shocks following a closed skew normal distribution (csn) introduced in Gonzalez-Farias et al. (2004), which nests a normal distribution as a special case. In the paper we discuss priors for model parameters, including skewness-related parameters of shocks, i.e. location, scale and skewness parameters. Using data ranging from 1991Q1 to 2012Q2 we estimate the model and recursively verify its out-of sample forecasting properties for time period 2007Q1 - 2012Q2, therefore including the recent financial crisis, within a forecasting horizon from 1 up to 8 quarters ahead. Using a RMSE measure we compare the forecasting performance of the model with skewed shocks wit a model estimated using normally distributed shocks. We find that inclusion of skewness can help forecasting some variables (consumption, investment and hours worked), but, on the other hand, results in deterioration in the other ones (output, inflation wages and the short rate).
    Keywords: DSGE, Forecasting, Closed Skew-Normal Distribution
    JEL: C51 C13 E32
    Date: 2016–12
  30. By: Lance Taylor (Schwartz Center for Economic Policy Analysis (SCEPA))
    Abstract: The "natural" interest rate in loanable funds macroeconomic models doesn't always fit the data. New Keynesian models, in which economic performance is determined by loanable funds, are inconsistent with macroeconomic data.
    Keywords: Demand, Growth, Keynes, Interest Rates, Loanable Funds
    JEL: E40 E12 E5
    Date: 2016–06
  31. By: Federico Favaretto; Donato Masciandaro
    Abstract: Behavioral bias – loss aversion – can explain monetary policy inertia in setting interest rates. Economic literature has tended to explain inertia in monetary policymaking in terms of frictions and delays, or has stressed the role of governance rules. We introduce a new driver of inertia, independent from frictions and central bank governance settings: a Monetary Policy Committee (MPC) that takes decisions on interest rates by voting according to a majority rule, in an economy with nominal price rigidities and rational expectations. Central bankers are senior officials, high-ranking bureaucrats who care about their careers and can be divided into three groups, depending on their level of inflation conservatism: doves, pigeons, and hawks. While a conservative stance doesn’t necessarily produce monetary inertia, we show that introducing loss aversion in individual behavior influences the stance of monetary policy under three different but convergent perspectives. First of all, a Moderation Effect can emerge, i.e. the number of pigeons increases. At the same time also a Hysteresis Effect can become relevant, whereby both doves and hawks soften their attitudes. Finally a Smoothing Effect tends to stabilize the number of pigeons. Together, the three effects consistently cause higher monetary policy inertia.
    Keywords: Monetary Policy, Behavioral Economics
    JEL: E5
    Date: 2016
  32. By: Ozili, Peterson K
    Abstract: This paper examine the relationship between non-performing loans (NPLs) and financial (sector) development. The study is motivated by the scant knowledge on how financial development structures impact non-performing loans across banking sectors around the world. In the pooled full country empirical analysis, we find that (i) private credit to GDP ratio is positively associated with non-performing loans, (ii) NPLs are inversely associated with bank efficiency, loan loss coverage, banking competition and banking system stability, and (iii) NPL is positively associated with foreign bank presence, banking crises and bank concentration. We also find that efficient and stable banking sectors experience higher non-performing loans. In the regional empirical analysis, NPLs are negatively associated with regulatory capital ratio and bank liquidity while the graphical analysis show that NPLs are inversely related to financial development and profitability in several regions.
    Keywords: Non-performing loans; credit risk; financial development; banking crisis; foreign banks; financial intermediation; banking sector development; efficiency; liquidity; asset quality; bank concentration, banking stability; Sub-saharan Africa; MENA; Europe; Asia-Pacific; Latin America
    JEL: E3 E32 E6 G1 G2 G21
    Date: 2017–01–02
  33. By: Bakari, Sayef
    Abstract: This paper investigates the relationship between domestic investment and economic growth in Canada. In order to achieve this purpose, annual data for the periods between 1990 and 2015 was tested by using Correlation analysis, Johansen co-integration analysis of Vector Error Correction Model and the Granger-Causality tests. According to the result of the analysis, it was determined that there is no relationship between the four variables in the long run term, however, there is a weak relationship between domestic investment and economic growth in the short run term. On the other hand, the results of the Granger Causality test show that there is no causal relationship between domestic investment and economic growth. The result provide that domestic investment affects economic growth on the short run term, however the domestic investment does not cause economic growth in Canada.
    Keywords: Domestic Investment, Economic Growth, Canada, Correlation, Cointegration, VECM and Causality.
    JEL: C13 E0 E2 E22
    Date: 2016–12–08
  34. By: Lakdawala, Aeimit (Michigan State University); Minetti, Raoul (Michigan State University); Olivero, María Pía (Drexel University)
    Abstract: Interbank markets have been at the core of the international transmission of recent financial crises, including the European sovereign debt crisis. We study the transmission of shocks in a two-country DSGE model where banks pledge government bonds as collateral in interbank markets. A standard “bank net worth channel” amplifies negative shocks to the returns of private loans. However, an “interbank collateral channel” can partially contrast the bank net worth channel. The stabilizing interbank collateral channel works through banks' portfolio switch towards government bonds, which helps sustain the value of banks' bond holdings and partially relax collateral constraints in the interbank market. Unconventional credit policies raise banks' liquidity but, if financed through government debt issuance, can undermine the stabilizing effect of the interbank collateral channel. The analysis yields insights for the optimal design of credit policies during sovereign debt crises.
    Keywords: Sovereign debt; credit crunch; interbank markets; international contagion
    JEL: E32 E44 F44
    Date: 2017–01–01
  35. By: Verbrugge, Randal (Federal Reserve Bank of Cleveland); Gallin, Joshua H. (Board of Governors, Federal Reserve System)
    Abstract: This paper provides estimates of the net depreciation rate for rental housing using a unique confidential data set from the Bureau of Labor Statistics that covers over 30,000 rental units from 1998 to 2009. Our data and econometric approach allow us to add to the literature in three main ways. First, we can control for unobserved quality (including cohort effects) by allowing for unit-specific fixed effects. Our results suggest that estimates of the depreciation rate for rental housing that ignore unobserved heterogeneity suffer from omitted-variable bias and potentially from selection bias, and that these biases can be large. Second, we use a dummy-variable approach to estimate aging effects, thereby avoiding ad hoc assumptions about functional form. We find that rent for a typical housing unit at first falls rapidly with age, flattens, and then begins to rise with age for older units. This nonmonotonic pattern is a feature of many other studies of both age–rent and age–price profiles for housing, and it seems likely that the upward-sloped portion of such profiles is the result of unobserved improvements and changes in style. We show that the upward slopes of our estimated profiles are only partially eliminated when we attempt to control for major improvements by excluding housing units that see very large jumps in rent. Third, we present estimates of age–rent profiles separately for different types of structures and for different regions of the country.
    Keywords: housing depreciation; rental housing; housing economics;
    JEL: E21 E31 R31
    Date: 2016–12–15
  36. By: Meijers, Huub (UNU-MERIT, and SBE, Maastricht University); Muysken, Joan (UNU-MERIT, CofFEE-Europe and SBE, Maastricht University)
    Abstract: The Netherlands is a prosperous, small open economy with a large financial sector and a trade balance surplus. Current observations suggest that the quantitative easing (QE) initiated by the ECB has a strong impact on the financial sector and international capital flows, while the impact on economic growth is relatively weak in the Netherlands. We analyse these stylised facts using the stock-flow consistent (SFC) approach which builds on earlier work. We develop an open economy SFC model for the Netherlands with an elaborated financial sector, including pension funds which invest to a large extent abroad, and recognise that firms invest a considerable part of their financial assets abroad. This enables us to explain that the direct effects of QE are relatively small due to substantial foreign selling of Dutch government bonds and recapitalisations of the financial sector. The indirect effects of QE are much stronger. They influence the economy through low interest rates and exchange rate appreciation, but have unintended consequences through increased housing prices and asset prices - the latter two are endogenous in our model. We calibrate the model to mimic the observed stylised facts for the Netherlands and perform some policy experiments
    Keywords: stock-flow consistent modelling, quantitative easing, current account surplus
    JEL: E44 B5 E6 F45 G21 G32 O16
    Date: 2016–12–07
  37. By: Fabia A. de Carvalho; Marcos R. Castro
    Abstract: We use a DSGE model with heterogeneous financial frictions and foreign capital flows estimated with Bayesian techniques for Brazil to investigate optimal combinations of simple macroprudential, fiscal and monetary policy rules that can react to the business and/or the financial cycle. We find that the gains from implementing a cyclical fiscal policy are only significant if macroprudential policy countercyclically reacts to the financial cycle. Optimal fiscal policy is countercyclical in the business cycle and slightly procyclical in the financial cycle
    Date: 2016–12
  38. By: Donato Masciandaro
    Abstract: In 2002 in reviewing the role of the Federal Reserve System (FED) the United States General Accounting Office declared that” We found no widely accepted, analytically based criteria to show whether a central bank needs capital as a cushion against losses or how the level of such an account should be determined”; the FED capital has become somewhat like the human appendix, an organ whose function is no longer understood (Stella 2009). Is it still true? These short notes address the issue, using a Q&A exposition and taking the occasion the fact that the U.S. Government Accountability Office (GAO), has been asked by members of the Congress to study the implications of a recent dividend rate change for Federal Reserve Bank stock and the implications of modifying or eliminating the existing requirement that all member banks purchase stock issued by their respective Federal Reserve Bank.
    Keywords: Federal Reserve System, Central Bank Independence, Central Bank Capital, Global Crisis
    JEL: E42 E58 E61
    Date: 2016
  39. By: Bilin Neyapti
    Abstract: Monetary policy is about the determination of money stock and interest rates to affect economic activity in the short-, medium- and the long-term. Besides helping to eliminate recessionary or inflationary business cycles, controlling interest rates and value of money have important impact on economic prospects by way of affecting domestic and international transaction costs. From a normative perspective, the ultimate goal of monetary policy is to increase allocative and distributional efficiency that are, in theory, consistent with the price stability focus of the modern central banking practice. Low level and variability of inflation rates is necessary for investment and sustainable growth; provided that the benefits of growth are distributed equitably, it also contributes economic development.
    Date: 2016
  40. By: Kirstin Hubrich; Frauke Skudelny
    Abstract: The period of extraordinary volatility in euro area headline inflation starting in 2007 raised the question whether forecast combination methods can be used to hedge against bad forecast performance of single models during such periods and provide more robust forecasts. We investigate this issue for forecasts from a range of short-term forecasting models. Our analysis shows that there is considerable variation of the relative performance of the different models over time. To take that into account we suggest employing performance-based forecast combination methods, in particular one with more weight on the recent forecast performance. We compare such an approach with equal forecast combination that has been found to outperform more sophisticated forecast combination methods in the past, and investigate whether it can improve forecast accuracy over the single best model. The time-varying weights assign weights to the economic interpretations of the forecast stemming from different models. The combination methods are evaluated for HICP headline inflation and HICP excluding food and energy. We investigate how forecast accuracy of the combination methods differs between pre-crisis times, the period after the global financial crisis and the full evaluation period including the global financial crisis with its extraordinary volatility in inflation. Overall, we find that, first, forecast combination helps hedge against bad forecast performance and, second, that performance-based weighting tends to outperform simple averaging.
    Keywords: Forecasting ; Euro area inflation ; Forecast combinations ; Forecast evaluation
    JEL: C32 C52 C53 E31 E37
    Date: 2016–08
  41. By: Andrea Carriero; Todd E. Clark; Massimiliano Marcellino
    Abstract: We propose a new framework for measuring uncertainty and its effects on the economy, based on a large VAR model with errors whose stochastic volatility is driven by two common unobservable factors, representing aggregate macroeconomic and financial uncertainty. The uncertainty measures can also influence the levels of the variables so that, contrary to most existing measures, ours reflect changes in both the conditional mean and volatility of the variables, and their impact on the economy can be assessed within the same framework. Moreover, identification of the uncertainty shocks is simplified with respect to standard VAR-based analysis, in line with the FAVAR approach and with heteroskedasticity-based identification. Finally, the model, which is also applicable in other contexts, is estimated with a new Bayesian algorithm, which is computationally efficient and allows for jointly modeling many variables, while previous VAR models with stochastic volatility could only handle a handful of variables. Empirically, we apply the method to estimate uncertainty and its effects using US data, finding that there is indeed substantial commonality in uncertainty, sizable effects of uncertainty on key macroeconomic and financial variables with responses in line with economic theory.
    Keywords: Bayesian VARs, stochastic volatility, large datasets
    JEL: E44 C11 C13 C33 C55
    Date: 2016
  42. By: Carlo Altavilla; Fabio Canova; Matteo Ciccarelli
    Abstract: We analyze the pass-through of monetary policy measures to lending rates to Örms and households in the euro area using a novel bank-level dataset. Banksí characteristics such as the capital ratio, the exposure to sovereign debt, and the percentage of non-performing loans are responsible for the heterogeneity in pass-through of conventional monetary policy changes. The location of a bank is irrelevant. Non-standard measures normalized the capacity of banks to grant loans. Banks with high level of non-performing loans and low capital ratio were most a§ected. Banksílending margins fell considerably. Macroeconomic implications are discussed.
    Keywords: Monetary policy pass-through, european banks, heterogeneity, VARs.
    Date: 2016–10
  43. By: Daniel Garcia-Macia; Chang-Tai Hsieh; Peter J. Klenow
    Abstract: Entrants and incumbents can create new products and displace the products of competitors. Incumbents can also improve their existing products. How much of aggregate productivity growth occurs through each of these channels? Using data from the U.S. Longitudinal Business Database on all non-farm private businesses from 1976–1986 and 2003–2013, we arrive at three main conclusions: First, most growth appears to come from incumbents. We infer this from the modest employment share of entering firms (defined as those less than 5 years old). Second, most growth seems to occur through improvements of existing varieties rather than creation of brand new varieties. Third, own-product improvements by incumbents appear to be more important than creative destruction. We infer this because the distribution of job creation and destruction has thinner tails than implied by a model with a dominant role for creative destruction.
    JEL: E24 O3 O4 O5
    Date: 2016–12
  44. By: Ma.Jesus Gomez Adillon; M.Angels Cabases Pique; Agnes Pardell Vea
    Abstract: In Catalonia, between 2008 and 2014, the rate of youth unemployment has exponentially increased and it has turned into a structural problem: when the fourth quarter of 2014 ended, among the people under the age of 30, the number of unemployed people was 1,495,600, 645,000 more than in the first quarter of 2008. In addition, with the data provided by the Spanish Tax Agency, the average wage of wage earners over 25 years in 2014 is 3.4 times superior to the young people and the reduction of the average wage of these is 2.8 times bigger. Moreover, during this period, the annual income of women has shortened the distance in relation to men, mainly the employed group, from a ratio of 1.40 to 1.30, but in contrast, the number of women receiving minimal resources (MW and MP) has worsened: in relation to employees, 31.7% of the total number within this subgroup. In order to highlight the uneven impact of recession on the labor market in Catalonia, this study examines the evolution of its main variables in the period 2008-2014 from a gender and age perspectives delving into the structure wages and analyzing the distribution of inter-group and intra-group inequality between men and women.
    Keywords: : labor market; wages; youth; gender inequality
    JEL: E24 J21 J31 E3
    Date: 2016–12
  45. By: Pérez Forero, Fernando (Banco Central de Reserva del Perú); Serván, Sergio (Banco Central de Reserva del Perú)
    Abstract: The boom and bust of Commodity Prices have had a signi cant macroeconomic impact on commodity-exporter economies. This paper assesses the dynamic impact of Commodity Prices on the Current Account surplus for several commodity-exporter economies. Because these economies share several economic features, and since they are subject to the same external shocks, it is necessary to estimate their behavior simultaneously. Moreover, the impact of these shocks might be di erent along the sample of analysis. Thus, we estimate a Panel VAR model with dynamic inter-dependencies and time varying parameters. Within this framework, we have computed an average current account indicator and studied the responses of individual current account balances to shocks in fuel and metal prices. We have found that our common indicator for the current account follows closely the dynamic pattern of the commodity price index i.e. surpluses (de cit) are usually associated with increases (decreases) in commodity prices, and this indicator is statistically signi cant across the sample of analysis. At the country level, by comparing the impulse response functions, we found that commodity price shocks have a similar e ect across countries, although their magnitude di er. In general, our results suggest that the impact on the current account balances have increased since 2002. In the case of a fuel shock, we do not found signi cant current account responses. However, the evidence for a metal shock is more robust, with higher responses in the case of the metal-exporting countries.
    Keywords: Commodity Prices, Current Account, Panel Vector Autoregressions, Bayesian Methods
    JEL: C11 C33 E32 F42
    Date: 2016–12
  46. By: Elod Takats; Judit Temesvary
    Abstract: We investigate how the use of a currency transmits monetary policy shocks in the global banking system. We use newly available unique data on the bilateral crossborder lending flows of 27 BIS-reporting lending banking systems to over 50 borrowing countries, broken down by currency denomination (USD, EUR and JPY). We have three main findings. First, monetary shocks in a currency significantly affect cross-border lending flows in that currency, even when neither the lending banking system nor the borrowing country uses that currency as their own. Second, this transmission works mainly through lending to non-banks. Third, this currency dimension of the bank lending channel works similarly across the three currencies suggesting that the cross-border bank lending channel of liquidity shock transmission may not be unique to lending in USD.
    Keywords: Cross-border bank lending, bank lending channel, monetary transmission, currency denomination
    Date: 2016–12
  47. By: Palley, Thomas I.
    Abstract: This paper explores lock-in and lock-out via economic policy. It argues policy decisions may near-irrevocably change the economy's structure, thereby changing its performance. That causes changed economic outcomes concerning distribution of wealth, income and power, which in turn induces locked-in changes in political outcomes. That is a different way of thinking about policy compared to conventional macroeconomic stabilization theory. The latter treats policy as a dial which is dialed up or down, depending on the economy's state. Lock-in policy is illustrated by the euro, globalization, and the neoliberal policy experiment.
    Keywords: economic policy,lock-in,hysteresis,globalization,euro,neoliberalism
    JEL: D7 E6 F5 H3 L5
    Date: 2016
  48. By: Eurilton Araújo
    Abstract: Empirical evidence suggests that the magnitude of the negative comovement between real stock returns and inflation declined during the Great Moderation in the U.S. To understand the role of monetary policy credibility in this change, I study optimal monetary policy under loose commitment in a macroeconomic model in which stock price movements have direct implications for business cycles. In line with the data, a calibration of the model featuring a significant degree of credibility can replicate the weakening of the negative relationship between real stock returns and inflation in the Great Moderation era
    Date: 2016–12
  49. By: Fabio Panetta
    Abstract: At first glance, today’s global economic outlook gives plenty of ammunition to the critics of central banks. Take the euro area – though its problems are by no means unique – where notwithstanding a strongly expansionary monetary stance, inflation is persistently low, growth is weak, and the recovery far more fragile than one would hope. It is unsurprising that in this environment we have got caught in a crossfire of questions on the nature of monetary policy. Is the ECB pursuing the right objectives? Is it doing so effectively? Zero or negative rates and intrusive asset purchase programmes could cause all sorts of distortions, including financial bubbles or inequalities? Is the ECB fully aware of this? And if so, does it care?
    Date: 2016
  50. By: Esteban Gómez (Banco de la República de Colombia); Angélica Lizarazo (Banco de la República de Colombia); Juan Carlos Mendoza (Banco de la República de Colombia); Andrés Murcia (Banco de la República de Colombia)
    Abstract: Macroprudential tools have been used around the world as a mechanism to control potential risks and imbalances in the financial sector. Colombia is a good example of a country that has employed different regulatory measures to manage systemic risks in the economy. The purpose of this paper is to evaluate the effectiveness of two policies employed in said country to increase the resilience of the system and to moderate exuberance in credit supply. The first measure, the countercyclical reserve requirement, was implemented in 2007 to control excessive credit growth. The second tool corresponds to the dynamic provisioning scheme for commercial loans, whose objective was to consolidate a countercyclical buffer through loan loss provision requirements. To perform this analysis a rich data set based on loan-by-loan information for Colombian banks during the period between 2006 and 2009 is used. A fixed effects panel model is estimated using debtors', banks' and macroeconomic characteristics as control variables. In addition, a difference in differences estimation is performed to evaluate the impact of the aforementioned policies. Findings suggest that dynamic provisions and the countercyclical reserve requirement had a negative effect on credit growth, and that said effect differs conditioned on bank-specific characteristics. Results also suggest that the aggregate macroprudential policy stance in Colombia has worked as an effective stabilizer of credit cycles, with some preliminary evidence also pointing towards significant effects in reducing bank risk-taking. Moreover, evidence is found that macroprudential policies have worked as a complement of monetary policy, accompanying the stabilizing effects of changes in interest rates on credit growth. Classification JEL: E58, G28, C23
    Keywords: Macroprudential policies, Reserve requirements, Credit growth, Dynamic provisioning, Credit registry data.
    Date: 2017–01
  51. By: Riccardo Cappellin
    Abstract: This paper aims to indicate that an economic recovery of the European economy can be pulled by an increase of the aggregate demand and by the adoption of a new European cohesion policy having an industrial and a territorial dimension. The paper illustrates a theoretical model: the model of the ?cross-sectoral demand? and the ?cross-sectoral supply?, where growth is based on the interdependent changes of the sectoral structure of the supply and the demand. A crucial role is attributed to the flows of new knowledge, innovation and investment, as factors which affect both the aggregate supply and the aggregate demand. The paper illustrates the characteristics of the equilibrium and the pattern of growth in the model of the ?cross-sectoral demand? and the ?cross-sectoral supply? and it compares this model with the traditional macroeconomic ?AD-AS model?. Then, it indicates that industrial and regional policies are complementary to the monetary and fiscal policies, as they may promote the creation of new productions and determine an increase of GDP and employment at the regional and national level, also in a short-medium term perspective and not only for long term development.
    Keywords: .
    JEL: E14 L52 O14 O18 O33
    Date: 2016–12
  52. By: Schilirò, Daniele
    Abstract: This paper highlights the rules and institutions that have characterized the European Monetary Union during its prolonged crisis and discusses the policies implemented in the Eurozone, stressing the limits of the strategy pursued by the European authorities. It also examines the issues of current account imbalances, economic growth and the problem of debt, and their interconnections. The main purpose of the paper is to indicate some economic solutions and political arrangements in order to complete the institutional system of the EMU. This requires appropriate reforms of its institutional architecture, where a key point is fiscal union. But such reforms require changes in the treaties in order to make the Eurosystem more consistent and endowed of democratic legitimacy, so to have the tools, resources and policies necessary to contribute to the development, stability and cohesion of the Eurozone countries.
    Keywords: rules; institutions; current account balance; sovereign debt; growth; Eurozone
    JEL: E60 F32 F53 F55 H63 O43
    Date: 2016–11
  53. By: Carroll, Daniel R. (Federal Reserve Bank of Cleveland); Young, Eric R. (Federal Reserve Bank of Cleveland)
    Abstract: This paper studies short-run wealth mobility in a heterogeneous agents, incomplete-markets model. Wealth mobility has a “hump-shaped” relationship with the persistence of the stochastic process governing labor income: low when shocks are close to i.i.d. or close to a random walk, and higher in between. The standard incomplete markets framework features less wealth mobility than found in the PSID wealth supplements. We include features commonly used in the literature to capture wealth inequality and find that they do little to improve the model’s performance for wealth mobility. Finally, we introduce state-contingent assets, which allow households to partially span the space of labor productivity. Moving toward a more “complete” market lowers wealth mobility unless the labor income process is very persistent.
    Keywords: wealth mobility; inequality; incomplete markets;
    JEL: D31 D52 E21
    Date: 2016–12–23
  54. By: Andrew Filardo; Phurichai Rungcharoenkitkul
    Abstract: Should a monetary authority lean against the build-up of financial imbalances? We study this policy question in an environment in which there are recurring cycles of financial imbalances that develop over time and eventually collapse in a costly manner. The optimal policy reflects the trade-off between the short-run macroeconomic costs of leaning against the wind and the longer-run benefits of stabilising the financial cycle. We model the financial cycle as a nonlinear Markov regime-switching process, calibrate the model to US data and characterise the optimal monetary policy. Leaning systematically over the whole financial cycle is found to outperform policies of "benign neglect" and "late-in-the-cycle" discretionary interventions. This conclusion is robust to a wide range of alternative assumptions and supports an orientation shift in monetary policy frameworks away from narrow price stability to a joint consideration of price and financial stability.
    Keywords: monetary policy, financial stability, leaning against the wind, financial cycle, time-varying transition probability Markov regime-switching model
    Date: 2016–12
  55. By: Peter A. Diamond; Ayşegül Şahin
    Abstract: The aggregate matching (hiring) function relates gross hires to labor market tightness. Decompositions of aggregate hires show how the hiring process differs across different groups of workers and of firms. Decompositions include employment status in the previous month, age, gender and education. Another separates hiring between part-time and full-time jobs, which show different patterns in the current recovery. Shift-share analyses are done based on industry, firm size and occupation to show what part of the residual of the aggregate hiring function can be explained by the composition of vacancies. The hiring process appears to shift as a recovery starts, coinciding with shifts in the Beveridge curve. The paper also discusses some issues in the modeling of the labor market.
    JEL: E24 J60
    Date: 2016–12
  56. By: Paternesi Meloni, Walter
    Abstract: After a preliminary focus on increasing government debts, the debate on the “Eurozone crisis” switched over persistent external imbalances - both trade and net foreign assets - among European Monetary Union country members. Endorsing a pure neoclassical view, current account differentials were almost exclusively ascribed to weak price competitiveness of deficit countries (the so called Euro Area periphery), neglecting both demand-side factors and the structural productive asymmetries of the EMU. As a consequence, policy makers decided to impose austerity measures to peripheral countries in order to foster their competitiveness, and consequently to correct external imbalances by means of increasing export - while current accounts realignment mainly occurred due to decreasing import. In this paper, we identify this view as competitive austerity, in parallel with the debated expansionary austerity. According to their proponents, these policies would have a direct impact on trade balances and expansionary effects on real output and employment. By contrast, from an alternative standpoint fiscal restraints can be generally considered as counterproductive. In this perspective, following Keynesian arguments the aim of this paper is to critically assess the austerity-competitiveness linkage from a theoretical perspective. Moreover, some macroeconomic evidences are suggested to evaluate both effectiveness on external positions and real side-effects of austerity policies.
    Keywords: austerity, competitiveness, European imbalances, current account, fiscal policy, aggregate demand
    JEL: E63 F32 F45
    Date: 2016–12–01
  57. By: Naqvi, Syed Ali Asjad
    Abstract: Economic policy in the EU faces a trilemma of solving three challenges simultaneously - growth, distribution, and the environment. In order to assess policies that address these issues simultaneously, economic models need to account for both sector-sector and sector-environment feedbacks within a single framework.This paper presents a multi-sectoral stock-flow consistent (SFC) macro model where a demand-driven economy consisting of multiple institutional sectors - firms, energy, households, government, and financial - interacts with the environment. The model is calibrated for the EU region and five policy scenarios are evaluated; low consumption, a capital stock damage function, carbon taxes, higher share of renewable energy, and technological shocks to productivity. Policy outcomes are tracked on overall output, unemployment, income and income distributions, energy, and emission levels. Results show that investment in mitigation technologies allows for absolute decoupling and ensures that the above three issues can be solved simultaneously. (author's abstract)
    Keywords: ecological macroeconomics; stock-grow consistent; growth; distribution; environment; European Union
    Date: 2015–02–06
  58. By: cho, hyejin
    Abstract: : In examining the global imbalance by the excess liquidity level, the argument is whether commercial banks want to hold excess reserves for the precautionary aim or expect to get better return through risky decision. By pictorial representations, risk preference in the Machina’s triangle (1982, 1987) encapsulates motivation to hold excess liquidity. This paper introduces an endogenous liquidity model for the financial sector where the imbalance argument comes from credit rationing extended from outside liquidity (Holmstrom and Tirole, 2011). We also conduct a stylistic analysis of excess liquidity in Jordan and Lebanon from 1993 to 2015. As such, the proposed model exemplifies the combination of credit, liquidity and regulation.
    Keywords: credit rationing, excess liquidity, inside liquidity, risk preference, machina triangle
    JEL: D51 E58 L51
    Date: 2016
  59. By: Toufik, Said; Arkhis, Mohammed-Amine; Oukhallou, Youssef
    Abstract: This paper uses the OECD’s methodology to build an Employment Protection Legislation index (EPL) for the Moroccan economy. In this framework, the main objective is to assess the impact of the new Labor Code’s provisions on the degree of flexicurity in the labor market. The paper also investigates the approximate influence of the EPL changes as regards to some employment-related variables. Our results show that after the 2004 Labor Code reform, the labor market’s flexibility level went down from 75 percent to 44 percent, as EPL became significantly stricter. Furthermore, our analysis suggests that the new legislation, although it brought relatively strict restrictions on hiring and firing, generated a significant increase in dismissals during the three first years of its implementation. And unlike the buckle of conventional literature and several empirical findings, the unemployment rate actually dropped, allegedly backed-up by a solid GDP growth during the 2000’s.
    Keywords: Labor Market, Flexicurity, Employment Protection Legislation, EPL Index
    JEL: E24 J81 K31
    Date: 2016–12–17
  60. By: Lance Taylor; Duncan K Foley; Armon Rezai; Luiza Pires; Ozlem Omer; Ellis Scharfenaker (Schwartz Center for Economic Policy Analysis (SCEPA))
    Abstract: This paper makes three contributions to the existing literature on economic growth: first, we provide a demand-driven alternative to the conventional supply side Solow-Swan growth model. The model’s medium run is built around MarxGoodwin cycles of demand and distribution. Second, we introduce wage income of “capitalist” households. The Samuelson-Modigliani steady state “dual” to Pasinetti’s cannot be stable when capitalists have positive wages. Finally, we speak to the discussion triggered by Piketty on the stability of wealth concentration and its relation to the profitability of capital. Our demand-driven model of the long run satisfies Kaldor’s stylized facts (the gold standard of growth theory) and generates sustained economic growth with the capitalists’ share of wealth stabilizing between zero and one. Complications arising from “excess” capital gains and how well the model fits the data are briefly considered.
    Keywords: Demand, Growth, Keynes
    JEL: B51 E12
    Date: 2016–04
  61. By: Research and Statistics Department (Bank of Japan)
    Abstract: The Tankan (Short-Term Economic Survey of Enterprises in Japan) is a nationwide business survey conducted by the Bank of Japan, with the aim of providing an accurate picture of business trends of enterprises in Japan, thereby contributing to the appropriate implementation of monetary policy. The Tankan asks various questions, such as those regarding business conditions, financial statements, and inflation. It is carried out on a quarterly basis and provides survey results in a timely manner. Moreover, the Tankan has a long history since its predecessor, the Principal Enterprises Tankan, started in 1957, and maintains its extremely high response rate. On the back of these strengths, the Tankan is one of the important information sources for the Bank's assessment on economic conditions; it also provides benefits for a wide range of users. Our basic policy for conducting the Tankan survey is to improve the convenience of users as well as to reduce the burden on survey respondents to the greatest extent possible. On this basis, while the Bank has added survey items necessary to grasp actual economic conditions accurately in response to structural economic and financial changes, it has abolished items that draw relatively little attention from users and overlap with those of other statistics. Based on our survey policy stated above, this time we intend to implement the following five revisions: (1) an addition of research and development (hereafter R&D) investment to survey items; (2) an enhancement of the survey on exchange rates; (3) an introduction of a new survey category regarding overseas business activities; (4) an abolition of some survey items -- operating profits and half-year figures of investment-related items; and (5) a more efficient sample design and a decrease in the number of sample enterprises. In June 2016, the Bank proposed its revision draft of the Tankan and launched a public consultation to gather public views. We are deeply grateful for the 35 invaluable contributions received from a wide range of business groups, economists, and academics. Reflecting these contributions, the Bank will proceed with the implementation of the revisions presented in this paper. R&D investment will be added from the March 2017 survey, and the other revisions are to be implemented until around 2020. Once decided, we will announce a more detailed schedule and a new release format. Going forward, the Bank will continue its efforts to further improve the Tankan, considering a balance between an improvement in the convenience of users and a reduction in the burden on respondents.
    Date: 2016–12–27
  62. By: Mark Mink; Jan Jacobs; Jakob de Haan
    Abstract: We argue that if currency union member states have different potential output per capita, output growth rates, or trade balances, the common monetary policy may not be optimal for all of them. Euro area imbalances for potential output and for trade balances are quite large, while output growth imbalances are more modest. Member states with larger imbalances of one type also have larger imbalances of both other types, but a decline of one imbalance need not coincide with a decline of the others. We also show that imbalances are fairly persistent, and are larger in poorer and smaller member states.
    Keywords: euro area macroeconomic imbalances; common monetary policy; economic convergence; business cycle synchronization; euro crisis
    JEL: E30 F45 O47
    Date: 2016–12
  63. By: Enrica Di Stefano (Bank of Italy); Daniela Marconi (Bank of Italy)
    Abstract: Market frictions prevent the efficient allocation of factors of production, slow down structural transformation and lead to costs in terms of lower output and aggregate total factor productivity (TFP). We use a theoretical framework developed by Aoki (2012) featuring sector-specific frictions on capital and labor à la Chari, Kehoe and McGrattan (2007), and compute capital and labor misallocations in China and India using data for 26 sectors over the period 1980-2010. Our findings show that large factor misallocations exist in the two countries. We estimate the potential gains in terms of aggregate TFP stemming from an efficient allocation of factors to range from 25% to 35% in China and from 35% to 40% in India. Finally, we discuss the implications for structural transformation and the relationship between the observed allocation inefficiencies and the evolution of the business environment in the two countries.
    Keywords: structural transformation, frictions, resource allocation, productivity, China, India
    JEL: E23 O11 O41 O47 O53 O57
    Date: 2016–12
  64. By: Amita Majumder; Ranjan Ray; Sattwik Santra
    Abstract: This four-part study examines the sensitivity of poverty estimates, regional composition of the ‘extremely poor’ population, and regional rankings to the Purchasing Power Parities (PPPs) used. The first part compares PPPs that use the price information collected by the ICP but follow a different methodology and, also, from a procedure that avoids the need for price information altogether. The second part examines sensitivity of poverty rates and poverty trends to PPPs. The results establish non-robustness of both. In the third part, the study finds that PPPs and inequality, both, have a positive effect on poverty. Finally, the paper proposes a methodology that uses the price and expenditure information and a welfare criterion due to Sen (1976) to rank regions, and examines the sensitivity of the rankings, and their temporal changes, to PPP. The results point to the need for high quality, item wise price and expenditure information across countries, improved PPP methodologies, explicit incorporation of inequality in the welfare measure, and more sensitivity analyses in cross country welfare comparisons with respect to PPP.
    Keywords: Poverty Rates, Purchasing Power Parity, Penn Effect, Price Indices
    JEL: D12 D63 E31 I31 I32
    Date: 2016–03
  65. By: Filippo De Marco; Tomasz Wieladek
    Abstract: We study the effects of bank-specific capital requirements on Small and Medium Enterprises (SMEs) in the UK from 1998 to 2006. Following a 1% increase in capital requirements, SMEs’ asset growth contracts by 6.9% in the first year of a new bankfirm relationship, but the effect declines over time. We also compare the effects of capital requirements to those of monetary policy. Monetary policy only affects firms with higher credit risk and those borrowing from small banks, whereas capital requirements affect both. Capital requirement changes, instead, do not affect firms with alternative sources of finance, but monetary policy shocks do.
    Keywords: Capital requirements, SME real effects, relationship lending, microprudential and monetary policy
    JEL: G21 G28 E51
    Date: 2016
  66. By: Venegas-Martínez, Francisco; Avendaño-Vargas, Blanca Lilia; García-Meza, Mario Alberto
    Abstract: Resumen En la presente investigación analizamos la demanda de dinero por motivo precautorio como una decisión de un consumidor racional. Siguiendo a Whalen (1966), un consumidor demanda dinero para enfrentar gastos inesperados debido a que no se realizan los ingresos esperados. Dado que el patrón de ingresos y gastos no se conoce con certeza, es posible que los gastos excedan a los ingresos por una cantidad impredecible, durante un periodo determinado. En este caso, es necesario que el consumidor retenga cierta cantidad (óptima) de dinero en efectivo. La incorporación de este tipo de demanda de dinero en el proceso de maximización de utilidad de un consumidor racional implica que la demanda de dinero no sólo depende de la tasa de interés real sino también un parámetro que expresa la ansiedad del consumidor ante la eventualidad de enfrentar gastos inesperados. Abstract This paper analyzes the demand for money for precautionary reasons as a decision from a rational consumer. Following Whalen (1966), a consumer demands money to face unexpected expenses because the expected income is not realized. Since the pattern of income and expenditure is not known with certainty, it is possible that the expenses exceed the income by an unpredictable amount, during a certain period. In this case, it is necessary for the consumer to retain some (optimal) amount of cash. The incorporation of this type of money demand in the process of the utility maximization of a rational consumer implies that the demand for money depends not only on the real interest rate but also on a parameter that expresses consumer anxiety in the event of facing unexpected expenses.
    Keywords: Demanda de dinero, motivo precautorio, consumidor racional/Money demand, precautionary motive, rational consumer
    JEL: E21 E41
    Date: 2016–12–23
  67. By: Dacorogna, Michel M; Busse, Marc
    Abstract: After reviewing the notion of Systemically Important Financial Institution (SIFI), we propose a first principles way to compute the price of the implicit put option that the State gives to such an institution. Our method is based on important results from Extreme Value Theory (EVT), one for the aggregation of heavy tailed distributions and the other one for the tail behavior of the Value-at-Risk (VaR) versus the Tail-Value-at-Risk (TVaR). We show how to value in practice is proportional to the VaR of the institution and thus would provide the wrong incentive to the banks even if not explicitly granted. We conclude with a proposal to make the institution pay the price of this option to a fund, whose task would be to guarantee the orderly bankruptcy of such an institution. This fund would function like an insurance selling a cover to clients.
    Keywords: Systemic Risk; "Too Big to Fail"; Risk Measure; Value-at-Risk and Tail Value-at- Risk; Option Price; Risk Neutral Distribution; Heavy tail; Pareto; Insurance
    JEL: C10 E58 E61
    Date: 2016–06–27
  68. By: Sergio A. Lago Alves
    Abstract: The literature has long agreed that the canonical DMP model with search and matching frictions in the labor market can deliver large volatilities in labor market quantities, consistent with US data during the Great Moderation period (1985-2005), only if there is at least some wage stickiness. I show that the canonical model can deliver nontrivial volatility in unemployment without wage stickiness. By keeping average US inflation at a small but positive rate, monetary policy may be accountable for the standard deviations of labor market variables to have achieved those large empirical levels. Solving the Shimer (2005) puzzle, the role of long-run inflation holds even for an economy with flexible wages, as long as it has staggered price setting and search and matching frictions in the labor market
    Date: 2016–12
  69. By: Lucian-Liviu Albu
    Abstract: The purpose of this study is to investigate the relation between regional convergence inside of countries in EU and overall economic growth, and, based on it, to establish some relevant behavioural regimes. As data sources we are using the available dataset NUTS 2 from EUROSAT for the period 2000-2013. Thus, a number of 272 regions grouped in 28 countries we used as primary database. Then, because six countries (Cyprus, Estonia, Latvia, Lithuania, Luxembourg, and Malta) are not divided in regions in NUTS 2 database, we made few aggregations, finally resulting 24 countries or groups of countries. In order to study the correlation between the convergence process and economic growth we focused, as it is usually used in specialised literature to analyse the real convergence, on the dynamics of GDP per capita expressed in case of EU by PPS (Purchasing Power Standard). On the one hand, as a method to estimate of a trend of convergence/divergence among regions within a country or group of countries we used the dynamics of the coefficient of variation. On the other hand, within EU, we used for each country or group of countries the dynamics of the ratio between the individual level of GDP per capita and the average EU GDP per capita. Thus we evaluate how the position of a country it was changed relative to the average level in EU of GDP per capita. Moreover, the correlation between the regional convergence (within a country) and the changes in its position in EU (in matter of GDP per capita) was estimated. Based on such methodology, we succeeded to elaborate a general typology that permitted us to classify countries of EU in four major groups: 1) countries that improved their position in EU (as GDP per capita), but only by scarifying the regional convergence; 2) countries in which it was registered a regional convergence, but only by scarifying their position in EU; 3) countries for which both their position in EU was decreasing and a regional divergence it was registered (the most unfavourable dynamics); 4) countries for which both their position in EU was increasing and a regional convergence was registered (the most favourable dynamics). Moreover, by using the above results and by applying linear regression models we estimated four discrete regimes, depending on the level of GDP per capita, in which countries evolved in the analysed period (corresponding to the four groups of countries) and three transitional regimes. Finally, we propose a nonlinear model (estimated by using real registered data) that permits us to simulate a smooth trajectory of convergence as a continuous function of development level (expressed by GDP per capita) and could offer to policy makers a large menu of sub-regimes.
    Keywords: economic growth; convergence; nonlinear model; GDP per capita; behavioural regimes
    JEL: C31 E17 O11 O15 O47 O52
    Date: 2016–12
  70. By: Ganiko, Gustavo (Consejo Fiscal de Perú); Melgarejo, Karl (Consejo Fiscal de Perú); Montoro, Carlos (Consejo Fiscal de Perú; Banco Central de Reserva del Perú)
    Abstract: How much fiscal space do emerging market economies have to maintain expansive fiscal policies? This is a key question given the observed increase in public debt since 2007. To answer this question we estimate a debt limit for emerging market economies, from which the public debt to GDP ratio would have an explosive trajectory, in the spirit of Ghosh, Kim, Mendoza, Ostry and Qureshi (2013). For this, we estimate the determinants of the public debt ratio dynamics, the primary balance and the effective cost of debt, for 26 emerging market economies during the 2000-2015 period. We propose an alternative measure, the stochastic debt limit, which takes into account the uncertainty and sensitivity of the debt limit to macroeconomic and financial conditions. The main results are: i) There is evidence of “fiscal fatigue”, namely the loss of control of the debt growth via fiscal adjustments as the debt ratio increases; ii) the debt ratio is an important determinant of the effective cost of public debt; and iii) the debt limit as traditional measured (deterministic) is between 68-97 percentage points of GDP, and between 5-89 percentage points for the stochastic case, which gives evidence of limited fiscal space for the majority of the economies analyzed.
    Keywords: fiscal policy, fiscal sustainability, fiscal space
    JEL: E62 H63 H62
    Date: 2016–12
  71. By: Silva-Correa, María de los Ángeles; Martínez-Marca, José Luís; Venegas-Martínez, Francisco
    Abstract: This paper examines, through a stochastic volatility model, the relationship between the derivatives market and the inflation rate. It is supposed an economy I which a representative agent allocates his/her wealth in an asset, a derivative, a risk-free bond, and he consumes the rest. The equation of the evolution of real wealth is determined to state the problem of utility maximization that the representative agent faces. In the equilibrium of the economy the inflation rate and the value of the other concerning variables (consumption and real monetary balances) are determined. Subsequently, the Hamilton-Jacobi-Bellman equation (HJB) is solved to determine the optimal decisions of the representative agent. Finally, the impact of the derivatives market on the inflation rate is assessed. / Resumen: En este trabajo se examina, mediante un modelo de volatilidad estocástica, la relación que existe entre el mercado de derivados y la tasa de inflación. Se supone una economía en la que un agente representativo destina su riqueza a la tenencia de un activo, un producto derivado, un bono libre de riesgo, y el resto lo consume. Se determina la ecuación de la evolución de la riqueza real para plantear el problema de maximización de utilidad que enfrenta el agente representativo. En el equilibrio de la economía se determina la tasa de inflación y el valor de las demás variables de interés (consumo y saldos monetarios reales). Posteriormente se resuelve la ecuación Hamilton-Jacobi-Bellman (HJB) para determinar las decisiones óptimas del agente representativo. Por último se evalúa el impacto del mercado de derivados en la tasa de inflación.
    Keywords: stochastic volatility, derivatives market, monetary policy, stochastic dynamic optimization.
    JEL: E52 G13
    Date: 2016–12–20
  72. By: Haining Wang; Zhiming Cheng; Russell Smyth
    Abstract: We examine the relationship between proficiency in Mandarin and consumption in China. We find that proficiency in Mandarin has a positive effect on an individual’s total consumption expenditure as well as most categories of consumption expenditure. We also find considerable heterogeneity in the effects of Mandarin proficiency on consumption across subsamples. In addition, we find that proficiency in Mandarin has a positive effect on relative consumption, irrespective of the manner in which the reference group is defined. Our results have important policy implications for debates on the promotion of a national language and, in particular, recent debate about the promotion of speaking Mandarin in China.
    Keywords: Mandarin proficiency; consumption; human capital; China
    JEL: D12 E21 I26 I28
    Date: 2016–01
  73. By: David Baqaee; Emmanuel Farhi
    Abstract: We provide a nonlinear characterization of the macroeconomic impact of microeconomic TFP shocks in terms of reduced-form non-parametric elasticities for efficient economies. We also provide the mapping from structural parameters to these reduced-form elasticities, under general equilibrium. In this sense, the paper extends the foundational theorem of \cite{hulten1978growth} beyond first-order terms to capture nonlinearities. We find that these higher-order terms are large and economically interesting. For empirically plausible calibrations, they magnify negative shocks and attenuate positive shocks, resulting in an output distribution that is asymmetric (negative skewness) and fat-tailed (excess kurtosis). Key features, ignored by first-order approximations, that play a crucial role are: structural elasticities of substitution, network linkages, structural returns to scale, and the degree to which factors can be reallocated. Our results explain how small microeconomic shocks to critical sectors can have a large macroeconomic impact, and give a precise characterization of the deep underlying sectoral characteristics leading to criticality. Although this is not our focus, our results are also useful to analyze cross-country TFP differences and suggest that productivity differences in critical sectors can have outsized consequences.
    Date: 2017–01
  74. By: In Hwan Jo (National University of Singapore); Tatsuro Senga (Queen Mary University of London)
    Abstract: Access to external finance is a major obstacle for small and young firms; thus, providing subsidized credit to small and young firms is a widely-used policy option across countries. We study the impact of such targeted policies on aggregate output and productivity and highlight indirect general equilibrium effects. To do so, we build a model of heterogeneous firms with endogenous entry and exit, wherein each firm may be subject to forward-looking collateral constraints for their external borrowing. Subsidized credit alleviates credit constraints small and young firms face, which helps them to achieve the efficient and larger scale of production. This direct effect is, however, either reinforced or offset by indirect general equilibrium effects. Factor prices increase as subsidized firm demand more capital and labor. As a result, higher production costs induce more unproductive incumbents to exit, while replacing them selectively with productive entrants. This cleansing effect reinforces the direct effect by enhancing the aggregate productivity. However, the number of firms in operation decreases in equilibrium, and this, in turn, depresses the aggregate productivity.
    Keywords: Firm dynamics, Misallocation, Financial frictions, Firm size and age
    JEL: E22 G32 O16
    Date: 2016–12
  75. By: Sergio Cesaratto
    Abstract: Supporters of the Monetary Circuit Theory argue that workers’ or households’ savings may be used to fix firms’ losses and avoid crises. The question is reminiscent of a discussion that took place between Dennis Robertson (DHR) and Keynes on the Treatise (1930) about Keynes’s idea that workers’ savings might cover firms’ losses. In this discussion, DHR denied that savings could correspond to firms’ losses, arguing that savings do not exist independently of investment. Circuitists like Graziani seem to reiterate the Treatise’s mistake of maintaining that part of savings corresponds to firm’s losses and are lent to firms to fix those losses, while neglecting the effects of those losses on output as DHR pointed out in the early 1930s.
    Keywords: Monetary circuit, Robertson, Keynes, Graziani, Treatise
    JEL: B22 B50 E12
    Date: 2016–04
  76. By: Quentin Perrier (CIRED, Engie); Philippe Quirion (CIRED, CNRS)
    Abstract: In the public debate on energy transition in France, employment figures prominently. We calculate, for the French economy in 2010, the employment content and greenhouse gas intensities in different branches, that is to say the number of jobs and tonne-CO2 equivalent per million euro of final demand. For this we use the input-output table at the most disaggregated level available (64 branches). We develop and then apply a unique methodology to decompose the differences in job content between industries in five factors: the rate of imports of final products, the rate of imports of intermediate goods, the rates of taxes and subsidies, the levels of wages and the share of labor compensation in value added. Finally, we study some intersectoral substitutions that would result from an energy transition to reduce emissions of greenhouse gases.
    Keywords: Emploi, Transition énergétique, Emissions de gaz à effet de serre, Substitutions intersectorielles, Input-output
    JEL: E2 Q5 O13
    Date: 2016–02
  77. By: Sergio Cesaratto
    Abstract: The paper reviews the main elements of Modern Classical Theory in view of the analysis of contemporary societies and in particular: the recovery of the Classical and Marxist “surplus approach” as a solid foundation for the analysis of social conflict; a demand-led theory of the level and growth of output based on the rejection of Say’s Law and the recovery of the notion of “external markets” put forward by Rosa Luxembourg and Kalecki, as the framework for the investigation of growth and crises in different historical phases of capitalism; the dismantling of the analytical core of Marginalism and of its laissez-faire policy prescriptions; and finally, the rejection of methodological individualism and of subjectivism in economic analysis and the preservation of the analytical methods of the Classical economists and Marx. In this regard, the paper underlines some differences with other heterodox schools, but also convergence with endogenous money theory and with systemic views of technical change.
    Keywords: Classical economists, Sraffa, Kalecki, Keynes, Surplus approach, heterodox economics
    JEL: B12 B24 B51 E11
    Date: 2016–08
  78. By: Sergio Cesaratto
    Abstract: A number of economists warned that a political union was a prerequisite for a viable currency union. This paper disputes the feasibility of such a political union. A fully-fledged federal union, that would likely please peripheral Europe, is impracticable since it implies a degree of fiscal solidarity that just does not exist. A Hayekian minimal federal state, that would appeal to core-Europe, would be refused by peripheral members, since residual fiscal sovereignty would be surrendered without any clear positive economic and social return. Even an intermediate solution based on coordinated Keynesian policies would be unfeasible, since it would be at odds with German ‘monetary mercantilism’. The euro area is thus trapped between equally unfeasible political perspectives. In this bleak context, austerity policies are mainly explained by the necessity of readdressing the euro area BoP crisis. This crisis presents striking similarities to traditional financial crises in emerging economies associated with fixed exchange regimes. Therefore, the ECB's delayed response to the sovereign debt crisis cannot be seen as the culprit of the euro area crisis. The ECB’s monetary refinancing mechanisms, Target 2 and the ECB's belated OMT intervention impeded a blow-up of the currency union, but could not solve its deep causes. The current combination of austerity policies and moderate ECB intervention aims to rebalance intra-eurozone foreign accounts and to force competitive deflation strategy.
    Keywords: European crisis, political and currency unions, ECB, balance of payments crisis, mercantilism
    JEL: E11 F33 N14
    Date: 2016–08
  79. By: Thomas Piketty; Emmanuel Saez; Gabriel Zucman
    Abstract: This paper combines tax, survey, and national accounts data to estimate the distribution of national income in the United States since 1913. Our distributional national accounts capture 100% of national income, allowing us to compute growth rates for each quantile of the income distribution consistent with macroeconomic growth. We estimate the distribution of both pre-tax and post-tax income, making it possible to provide a comprehensive view of how government redistribution affects inequality. Average pre-tax national income per adult has increased 60% since 1980, but we find that it has stagnated for the bottom 50% of the distribution at about $16,000 a year. The pre-tax income of the middle class—adults between the median and the 90th percentile—has grown 40% since 1980, faster than what tax and survey data suggest, due in particular to the rise of tax-exempt fringe benefits. Income has boomed at the top: in 1980, top 1% adults earned on average 27 times more than bottom 50% adults, while they earn 81 times more today. The upsurge of top incomes was first a labor income phenomenon but has mostly been a capital income phenomenon since 2000. The government has offset only a small fraction of the increase in inequality. The reduction of the gender gap in earnings has mitigated the increase in inequality among adults. The share of women, however, falls steeply as one moves up the labor income distribution, and is only 11% in the top 0.1% today.
    JEL: E01 H2 H5 J3
    Date: 2016–12
  80. By: GrET
    Abstract: En esta edición especial del Informe Sociolaboral del Partido de General Pueyrredon se analiza la coyuntura macroeconómica tras el primer año de gestión del actual gobierno. En tal sentido, la nueva administración ha implementado políticas que, en muchos aspectos, difieren marcadamente de lo actuado por la gestión anterior y han alterado la evolución de las principales variables económicas. Entre las principales medidas adoptadas a partir del 10 de diciembre de 2015 se destacan la eliminación de las restricciones a la compra de divisas, la desregulación de los movimientos de capitales financieros, la liberalización de las tasas de interés, la quita y/o reducción de las retenciones a las exportaciones y una brusca devaluación nominal. Hasta ahora los resultados de dichas políticas han sido la consolidación de una situación recesiva, con caídas en el producto, el consumo y la inversión; la profundización del déficit fiscal como consecuencia de la pérdida de ingresos tributarios; la agudización de los problemas en el frente externo, debido principalmente a una acelerada fuga de capitales y; el aumento de la inflación, lo que ha impactado significativamente sobre los salarios reales. Estos desequilibrios tienen como contrapartida un creciente endeudamiento público, tanto en moneda extranjera como en pesos, lo cual pone en duda la sustentabilidad a mediano plazo del actual esquema macroeconómico.
    Keywords: Coyuntura Económica; Análisis de Coyuntura; Argentina;
    Date: 2016–12
  81. By: Camila Casas; Federico J. Díez; Gita Gopinath; Pierre-Olivier Gourinchas
    Abstract: Most trade is invoiced in very few currencies. Despite this, the Mundell-Fleming benchmark and its variants focus on pricing in the producer's currency or in local currency. We model instead a ‘dominant currency paradigm’ for small open economies characterized by three features: pricing in a dominant currency; pricing complementarities, and imported input use in production. Under this paradigm: (a) terms of trade are stable; (b) dominant currency exchange rate pass-through into export and import prices is high regardless of destination or origin of goods; (c) exchange rate pass-through of non-dominant currencies is small; (d) expenditure switching occurs mostly via imports and export expansions following depreciations are weak. Using merged firm level and customs data from Colombia we document strong support for the dominant currency paradigm and reject the alternatives of producer currency and local currency pricing.
    JEL: E0 F0
    Date: 2016–12
  82. By: Donato Masciandaro; Davide Romelli
    Abstract: Following the 2007-09 Global Financial Crisis many countries have changed their financial supervisory architecture by increasing the involvement of central banks in supervision. This has led many scholars to argue that financial crises are an important driver in explaining the evolution of the role of central banks as supervisors. In this paper, we formally test whether there is any link between supervisory reforms and the occurrence of financial crises. We study the evolution of financial sector supervision by constructing a new database that captures the full set of supervisory reforms implemented during the period 1996-2013 in a large sample of countries. Our findings support the view that systemic banking crises are important drivers of reforms in supervisory structure. However, we also highlight an equally important “bandwagon” effect, namely a tendency of countries to reform their financial supervisory architecture when others do so as well. Our finding can explain how it is possible to identify a political driver in reforming the supervisory settings notwithstanding the economic theory does not indicate an optimal institutional setting. We construct several measures of spatial spillover effects and show that they can explain institutional similarities among countries and impact the probability of reforming the role of the central bank in financial sector supervision. We also stress the importance of the degree of central bank independence in the choice to concentrate financial supervision in the hands of the central bank. Our results support the view that the traditional theory of central banking has to be integrated with political economy considerations.
    Keywords: Financial Supervision, Central Banking, Central Bank Independence, Political Economy, Banking Supervision
    JEL: E58 E63 G18
    Date: 2015
  83. By: Baris Ucar; Gianni Betti
    Abstract: The aim of this study is to look for an appropriate procedure to conduct statistical matching for longitudinal data sets. To our knowledge, among the studies, which are associated to statistical matching with longitudinal data, no such issue has been specifically covered or identified in literature. The longitudinal data set, which is used in this study, involves a longitudinal weight at individual level, which requires further procedures before the matching application. The study will discuss and propose ways to deal with the statistical matching issue for such data sets. In the process, a four-year longitudinal data set is used and data from each year is matched with a cross-sectional data set for the corresponding year. The matching procedure is comprised of two steps, respectively the Renssen (1998) method followed by nearest neighbor distance hot deck matching, proposed by D’Orazio (2016) and Donatiello et al. (2015). The application is undertaken on Turkish data to impute consumption expenditure variable from Household Budget Survey (HBS) to Statistics on Income, and Living Conditions (SILC) Survey. A synthetic longitudinal data set is created by using these two survey data sets. The two data sets have many variables in common including income variable, which enables Conditional Independence Assumption (CIA) to be more likely. The study also carries out validation analyses to determine the quality of the matching procedures and the findings achieved with the proposed itinerary, indicate that the distribution of consumption expenditure estimate in synthetic data set is well preserved with all estimates. The poverty indicators in general and at household level is also looked for and the results indicate a good quality match
    Keywords: Statistical matching, Consumption Expenditure, SILC, Household Budget Survey
    JEL: C19 C83 E21
    Date: 2016–11
  84. By: Marina Halac; Pierre Yared
    Abstract: We introduce costly verification into a general delegation framework. A principal faces an agent who is better informed about the efficient action but biased towards higher actions. An audit verifies the agent’s information, but is costly. The principal chooses a permissible action set as a function of the audit decision and result. We show that if the audit cost is small enough, a threshold with an escape clause (TEC) is optimal: the agent can select any action up to a threshold, or request audit and the efficient action if the threshold is sufficiently binding. For higher audit costs, the principal may instead prefer auditing only intermediate actions. However, if the principal cannot commit to inefficient allocations following the audit decision and result, TEC is always optimal. Our results provide a theoretical foundation for the use of TEC in practice, including in capital budgeting in organizations, fiscal policy, and consumption-savings problems.
    JEL: D02 D82 D86 E02
    Date: 2016–12
  85. By: Hankins, William (University of Alabama); Cheng, Chak (University of South Carolina); Chiu, Jeremy (Bank of England); Stone, Anna-Leigh (Samford University)
    Abstract: This paper explores how US partisan conflict impacts the cash management decisions of US firms. Using a sign restrictions approach to identify structural shocks to partisan conflict, we find that an exogenous 10% rise in the Partisan Conflict Index above trend is associated with a 0.4 percentage point increase in average cash-to-total assets above trend. These baseline results hold for both the mean and median ratio of cash-to-total assets for all firms in our sample, across the total assets distribution, as well as for different classifications of firms. Additionally, we conduct a series of robustness checks, including a firm-level regression analysis, all of which uphold these results. Our findings reinforce the signalling effect that political dysfunction can have on corporate managers.
    Keywords: Partisan conflict; cash holdings; economic policy uncertainty; VAR; sign restrictions
    JEL: E32 G30 G32
    Date: 2016–12–29
  86. By: Peter Schmidt
    Abstract: This paper analyses the effects of EU regional policy transfer payments on net migration flows among the EU-28 countries. The hypothesis is tested that EU transfer payments do hamper internal migration across the EU. On the one hand, this is done by reestimating the results found by Egger, Eggert and Larch (2014): "Structural Operations and Net Migration Across European Union Member Countries", Review of International Economics, 22(2), pp. 352-378 for a longer time period, who basically tested a NEG model where they derived the above hypothesis from. On the other hand, a more neoclassical model of the migration-regional policy-nexus is tested. Like in Egger et al. (2014) a significant effect of EU regional policy expenditures on net bilateral migration among the EU-28 member countries is identified. However, contrary to Egger et al. (2014), the effect is not negative but positive. On average, a one percentage point increase of structural funds expenditures in percent of GDP leads to an increase in the measure of net bilateral migration by about 0.2-0.6%. Hence, EU regional policy transfer payments spur instead of hamper internal migration across EU member countries.
    Keywords: EU regional policy; structural funds; internal migration; convergence; European integration
    JEL: E62 F15 F22 H53 I38 R58
    Date: 2016–12
  87. By: Mark Gertler; Christopher Huckfeldt; Antonella Trigari
    Abstract: Macroeconomic models often incorporate some form of wage stickiness to help account for employment fluctuations. However, a recent literature calls in to question this approach, citing evidence of new hire wage cyclicality from panel data studies as evidence for contractual wage flexibility for new hires, which is the relevant margin for employment volatility. We analyze data from the SIPP and find that the wages for new hires coming from unemployment are no more cyclical than those of existing workers, suggesting wages are sticky at the relevant margin. The new hire wage cyclicality found in earlier studies instead appears to reflect cyclical average wage gains of workers making job-to-job transitions, which we interpret as evidence of procyclical match quality for new hires from employment. We then develop a quantitative general equilibrium model with sticky wages via staggered contracting, on-the-job search, and variable match quality, and show that it can account for both the panel data evidence and aggregate labor market regularities. An additional implication of the model is that a sullying effect of recessions emerges, along the lines originally suggested by Barlevy (2002).
    Date: 2016

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