nep-mac New Economics Papers
on Macroeconomics
Issue of 2017‒01‒22
116 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Long-term growth and productivity projections in advanced countries. By G. Cette; R. Lecat; C. Ly-Marin
  2. Disaster Risk and Preference Shifts in a New Keynesian Model. By M. Isoré; U. Szczerbowicz
  3. Money supply and inflation in Europe: Is there still a connection? By Diermeier, Matthias; Goecke, Henry
  4. National natural rates of interest and the single monetary policy in the Euro Area. By S. Fries; J.-S. Mésonnier; S. Mouabbi; J.-P. Renne
  5. The Inverted Leading Indicator Property and Redistribution Effect of the Interest Rate. By P. A. Pintu; Y. Wen; X. Xing
  6. Economic Crises and the Eligibility for the Lender of Last Resort: Evidence from 19th century France. By V. Bignon; C. Jobst
  7. Macroeconomic stabilization, monetary-fiscal interactions, and Europe’s monetary union By Corsetti, Giancarlo; Dedola, Luca; Jarociński, Marek; Maćkowiak, Bartosz; Schmidt, Sebastian
  8. Fiscal Activism and Price Volatility: Evidence from Advanced and Emerging Economies By António Afonso; João Tovar Jalles
  9. Economic Policy Uncertainty and Unemployment in the United States: A Nonlinear Approach By Giovanni Caggiano; Efrem Castelnuovo; Juan Manuel Figueres
  10. Quantitative Easing by the Fed and International Capital Flows By Sameer Khatiwada
  11. Fiscal policy coordination in currency unions at the effective lower bound By Hettig, Thomas; Müller, Gernot
  12. U.S. Economic Outlook: Quarterly developments By -
  13. "The Long-run Determinants of Indian Government Bond Yields" By Tanweer Akram; Anupam Das
  14. A Keynesian Dynamic Stochastic Disequilibrium model for business cycle analysis By Christian Schoder
  15. Do Labour Market Reforms Pay Off? Unemployment and Capital Accumulation in Portugal By Bruno Damásio; Diogo Martins
  16. Monetary policy transmission mechanism in Poland.What do we know in 2015? By Mariusz Kapuściński; Andrzej Kocięcki; Halina Kowalczyk; Tomasz Łyziak; Jan Przystupa; Ewa Stanisławska; Anna Sznajderska; Ewa Wróbel
  17. Estimating the Real Effects of Uncertainty Shocks at the Zero Lower Bound By Giovanni Caggiano; Efrem Castelnuovo; Giovanni Pellgrino
  18. Geldmenge und Inflation in Europa: Ist der Zusammenhang verloren? By Diermeier, Matthias; Goecke, Henry
  19. Wage cyclicalities and labor market dynamics at the establishment level: Theory and evidence By Merkl, Christian; Stüber, Heiko
  20. Firm dynamics and business cycle: What doesn't kill you makes you stronger? By Roger M. Gomis; Sameer Khatiwada
  21. Republic of Serbia; Sixth Review Under the Stand-By Arrangement and Modification of the Arrangement Review Schedule-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Serbia By International Monetary Fund.
  22. Synopsis of the Euro Area Financial Crisis By Matthieu Darracq Paries; Pascal Jacquinot; Niki Papadopoulou
  23. Two Steady States and Two Movement Patterns under the Balanced Budget Rule - An Economy with Divisible Labor By Fujio Takata
  24. Secular stagnation: Determinants and consequences for Australia By Grace Taylor; Rod Tyers
  25. Military expenditures and shadow economy in the Baltic States: Is there a link? By Fedotenkov, Igor; Schneider, Friedrich
  26. Risk Taking and Interest Rates : Evidence from Decades in the Global Syndicated Loan Market By Seung Jung Lee; Lucy Qian Liu; Viktors Stebunovs
  27. Self-Employment, Wealth and Start-up Costs: Evidence from a Financial Crisis By Koffi Elitcha; Raquel Fonseca
  28. Mexico; 2016 Article IV Consultation-Press Release; Staff Report; and Informational Annex By International Monetary Fund.
  29. Brazil; 2016 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Brazil By International Monetary Fund.
  30. Exportpotentiale für die österreichische Wirtschaft: Eine Analyse relevanter Angebotsfaktoren By Elisabeth Christen; Harald Oberhofer
  31. Narrative Economics By Robert J. Shiller
  32. The impact of structural reforms of the judicial system: a survey By Ana Gouveia; Sílvia Santos; Corinna Herber
  33. Flexible Prices and Leverage By Franceso D'Acunto; Ryan Liu; Carolin Pflueger; Michael Weber
  34. The risk-adjusted monetary policy rule By Nakata, Taisuke; Schmidt, Sebastian
  35. Loan production and monetary policy By LG Deidda; J.E. Galdon-Sanchez; M. Casares
  36. Sovereign Debt Effects and Composition: Evidence from Time-Varying Estimates By António Afonso; João Tovar Jalles
  37. Oil price shock and economic growth : Experience of CEMAC countries By BESSO, Christophe Raoul; FEUBI PAMEN, Eric Patrick
  38. The Inflation Targeting Debate By Malte Rieth
  39. Labor Market Institutions and Employment Fluctuations in Dynamic General Equilibrium Models By Toyoki Matue
  40. Regional business cycles across europe By Eduardo Bandrés; María Dolores Gadea-Rivas; Ana Gómez-Loscos
  41. Chad; Third and Fourth Reviews Under the Extended Credit Facility Arrangement, and Requests for Waivers of Nonobservance of Performance Criteria, Augmentation of Access, Extension of the Current Arrangement, and Rephasing of Disbursement-Press Release; Staff Report; and Statement by the Executive Director for Chad By International Monetary Fund.
  42. The imperfect-common-knowledge Phillips curve: Calvo versus Rotemberg By Šauer, Radek
  43. Measuring the output gap using stochastic model specification search By Joshua C C Chan; Angelia L Grant
  44. Money growth and aggregate stock returns By Böing, Tobias; Stadtmann, Georg
  45. Modeling the Revolving Revolution: The Debt Collection Channel By Drozd, Lukasz A.; Serrano-Padial, Ricardo
  46. The Role of Gender in Employment Polarization By Fabio Cerina; Alessio Moro; Michelle Petersen Rendall
  47. Liberia; Fifth and Sixth Reviews Under the Extended Credit Facility Arrangement, Request for Waivers of Nonobservance of Performance Criteria, Augmentation of Access, and Extension of the Arrangement-Press Release; Staff Report; and Statement by the Executive Director for Liberia By International Monetary Fund.
  48. The Nexus between Export, Import, Domestic Investment and Economic Growth in Japan By Bakari, Sayef
  49. How effective quantitative easing is in relation to the Gold Standard? A historical approach based on the US experience By Economou, Emmanouel/Marios/Lazaros; Nickos, Kyriazis; Papadamou, Stephanos
  50. Le taux technique en assurance vie (Code des Assurances). By Darpeix P.-E.
  51. Sovereign Credit Rating Mismatches By António Afonso; André Albuquerque
  52. Former Yugoslav Republic of Macedonia; 2016 Article IV Consultation-Press Release; and Staff Report By International Monetary Fund.
  53. Eurozone’s Leader and its Followers: Are their Markets Integrated Enough? By Nikolaos Giannellis; Minoas Koukouritakis
  54. The Comparative Inclusive Human Development of Globalisation in Africa By Asongu, Simplice; Nwachukwu, Jacinta
  55. Jamaica; Request for Stand By Arrangement and Cancellation of the Current Extended Arrangement Under the Extended Fund Facility-Press Release and Staff Report By International Monetary Fund.
  56. Chinese Foreign Exchange Reserves, Policy Choices and the U.S. Economy By Neely, Christopher J.
  57. What drives economic policy uncertainty in the long and short runs? European and U.S. evidence over several decades By Duca, John V.; Saving, Jason L.
  58. Forecast Errors and Uncertainty Shocks By Sylwia Nowak; Pratiti Chatterjee
  59. Debt overhang and the macroeconmics of carry trade By Sweder J.G. van Wijnbergen; Egle Jakucionyte
  60. Guinea-Bissau; First and Second Reviews Under the Extended Credit Facility Arrangement, Request for Rephasing of Disbursements, Modification of Performance Criteria and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Guinea-Bissau By International Monetary Fund.
  61. Child-Related Transfers, Household Labor Supply and Welfare By Nezih Guner; Remzi Kaygusuz; Gustavo Ventura
  62. Capital goods trade, relative prices, and economic development By Mutreja, Piyusha; Ravikumar, B.; Sposi, Michael J.
  63. Thomas Piketty and the Rate of Time Preference By Fischer, Thomas
  64. Is Modern Technology Responsible for Jobless Recoveries? By Georg Graetz; Guy Michaels
  65. Republic of Equatorial Guinea; Selected Issues By International Monetary Fund.
  66. Sweden; 2016 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Sweden By International Monetary Fund.
  67. Minimum Wage as a Wage Policy Tool in Japan By Chie Aoyagi; Giovanni Ganelli; Nour Tawk
  68. Micro Moments Database for Cross-Country Analysis of ICT, Innovation, and Economic Outcomes By Eric Bartelsman; Eva Hagsten; Michael Polder
  69. Child-Related Transfers, Household Labor Supply and Welfare By Guner, Nezih; Kaygusuz, Remzi; Ventura, Gustavo
  70. Endogenous wage indexation and aggregate shocks By Julio A. Carrillo; Gert Peersman; Joris Wauters
  71. Financial Globalization and the Labor Share in Developing Countries: The Type of Capital Matters By Katharina van Treeck; K.M. Wacker
  72. Cote D'Ivoire; Request for an Extended Arrangement Under the Extended Fund Facility and an Arrangement Under the Extended Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Cote D'Ivoire By International Monetary Fund.
  73. An Economic Outlook - Main Line Chamber of Commerce By Harker, Patrick T.
  74. Honduras; 2016 Article IV Consultation, Third and Fourth Reviews under the Stand-By Arrangement and the Arrangement under the Standby Credit Facility-Press Release and Staff Report By International Monetary Fund.
  75. Ambiguous Policy Announcements By Claudio Michelacci; Luigi Paciello
  76. Austerity and gender wage inequality in EU countries By Perugini, Cristiano; Žarković Rakić, Jelena; Vladisavljević, Marko
  77. Profitability and Crisis in the South African Economy By Malikane, Christopher
  78. Parsing Financial Frictions Underlying Bank Lending Fragmentation during the Euro Area Crisis By Matthieu Darracq Paries; Pascal Jacquinot; Niki Papadopoulou
  79. Technology trade with asymmetric tax regimes and heterogeneous labor markets: Implications for macro quantities and asset prices By Curatola, Giuliano; Donadelli, Michael; Grüning, Patrick
  80. Finland; 2016 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Finland By International Monetary Fund.
  81. Mexico; Financial System Stability Assessment By International Monetary Fund.
  82. Measuring the Distributions of Public Inflation Perceptions and Expectations in the UK By Murasawa, Yasutomo
  83. Mexico; Selected Issues By International Monetary Fund.
  84. Democratic Republic of São Tomé and Príncipe; Second Review under the Extended Credit Facility, and Request for Waivers for Nonobservance of Performance Criterion and Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for the Democratic Republic of São Tomé and Príncipe By International Monetary Fund.
  85. Globalization, Market Structure and Inflation Dynamics. By S. Guilloux-Nefussi
  86. Do Youth Employment Programs Improve Labor Market Outcomes? A Systematic Review By Kluve, Jochen; Puerto, Susanna; Robalino, David; Romero, José Manuel; Rother, Friederike; Stöterau, Jonathan; Weidenkaff, Felix; Witte, Marc
  87. Short-term risk premiums and policy rate expectations in the United States By Leo Krippner; Michael Callaghan
  88. Inflation bias in Latin America By Pacheco, André Sanchez; Tenani, Paulo Sérgio
  89. Testing the Q theory of investment in the frequency domain By Kilponen, Juha; Verona, Fabio
  90. Chile; 2016 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Chile By International Monetary Fund.
  91. The Consumption Response to Minimum Wages: Evidence from Chinese Households By Ernest Dautovic; Harald Hau; Yi Huang
  92. Zimbabwe; Zimbabwe: Settlement of Overdue Financial Obligations to the Poverty Reduction and Growth Trust,Lifting of Declaration of Noncooperation, Lifting of Restriction on Fund Technical Assistance, and Restoration of Poverty Reduction and Growth Trust Eligibility-Press Release; and Staff Report By International Monetary Fund.
  93. "Investing in Social Care Infrastructure and Employment Generation: A Distributional Analysis of the Care Economy in Turkey" By Kijong Kim; Ipek Ilkkaracan; Tolga Kaya
  94. Namibia; 2016 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Namibia By International Monetary Fund.
  95. Countercyclical Elasticity of Substitution By Dongya Koh; Raül Santaeulàlia-Llopis
  96. Iraq; First Review of the Three-Year Stand-By Arrangement and Financing Assurances Review, Requests for Waivers of Nonobservance and Applicability of Performance Criteria, Modification of Performance Criteria, and Rephasing of the Arrangement-Press Release; Staff Report; and Statement by the Executive Director for Iraq By International Monetary Fund.
  97. Bulgarians Are On the Way to Modern Barter Exchange System (MBES). An Expert Survey By Toncheva, Rossitsa
  98. Burkina Faso; 2016 Article IV Consultation, Sixth Review Under the Extended Credit Facility, and Request for Modification of a Performance Criterion, Extension of the Arrangement and Augmentation of Access-Press Release; Staff Report; and Statement by the Executive Director for Burkina Faso By International Monetary Fund.
  99. Expected Macroeconomic Effects of a “Hard” Brexit By Sheldon, Ian
  100. Sweden; Financial System Stability Assessment By International Monetary Fund.
  101. Dynamic Prize Linked Savings: Maximizing Savings and Managing Risk By Oisin Connolly
  102. Former Yugoslav Republic of Macedonia; Selected Issues By International Monetary Fund.
  103. Untaxed Social-Media Problem and Potential Solutions By Kaplanhan, Fatih; Korkut, Cem
  104. A Balancing Act; Reform Options for Paraguay’s Fiscal Responsibility Law By Antonio David; Natalija Novta
  105. Fiscal stabilization and the credibility of the U.S. budget sequestration spending austerity By Hu, Ruiyang; Zarazaga, Carlos E.
  106. Exchange rate forecasting and the performance of currency portfolios By Crespo Cuaresma, Jesus; Fortin, Ines; Hlouskova, Jaroslava
  107. Current Account Sustainability in G7 and BRICS: Evidence from a Long Memory Model with Structural Breaks By Christophe André; Tsangyao Chang; Luis A. Gil-Alana; Rangan Gupta
  108. Trade Costs of Sovereign Debt Restructurings; Does a Market-Friendly Approach Improve the Outcome? By Tamon Asonuma; Marcos Chamon; Akira Sasahara
  109. Republic of Armenia; Fourth Review Under the Extended Arrangement and Request for Waiver and Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Armenia By International Monetary Fund.
  110. Policy conditionality, structural adjustment and the domestic policy system. Conceptual framework and research agenda By Calliope Spanou
  111. Is fiscal policy effective in Brazil? An empirical analysis By Mendonça, Diogo de Prince; Marçal, Emerson Fernandes; Holland, Marcio
  112. Eurozone Debt Crisis and Bond Yields Convergence: Evidence from the New EU Countries By Minoas Koukouritakis
  113. Brazil; Selected Issues By International Monetary Fund.
  114. Credit Constraints and Creditless Recoveries: An Unsteady State Approach By Alexis Derviz
  115. Sri Lanka; First Review Under the Extended Arrangement Under the Extended Fund Facility and Request for Modification of Performance Criterion-Press Release; Staff Report; and Statement by the Executive Director for Sri Lanka By International Monetary Fund.
  116. United Kingdom; Fiscal Transparency Evaluation By International Monetary Fund.

  1. By: G. Cette; R. Lecat; C. Ly-Marin
    Abstract: In this period of high uncertainty about future economic growth, we have developed a growth projection tool for 13 advanced countries and the euro area at the 2100 horizon. This high uncertainty is reflected in the debate on the possibility of a ‘secular stagnation’, fuelled by the short-lived Information and Communication Technology (ICT) shock and the current low productivity and GDP growth in advanced countries. Our projection tool allows for the modelling of technology shocks, for different speeds of regulation and education convergence, with endogenous capital growth and TFP convergence processes. We illustrate the benefits of this tool through four growth scenarios, crossing the cases of a new technology shock or secular stagnation with those of regulation and education convergence or of absence of reforms. Over the 2015-2100 period, the secular stagnation scenario assumes yearly TFP growth of 0.6% in the US, leading to a 1.5% GDP growth trend. The technology shock scenario assumes that the third technological revolution will, in the US, provide similar TFP gains to electricity during the second industrial revolution, leading to a 1.4% TFP trend, to which we add a TFP growth wave peaking in 2040, and thus to an average GDP growth rate of 3% in the US. In non-US countries, GDP growth will depend on the implementation of regulation reforms, the increase in education and on the distance to the country-specific convergence target, namely the US, as well. Over the period 2015-2060, for the euro area, Japan and the United Kingdom, benefits from regulation and education convergence would amount to a 0.1 to 0.4 pp yearly growth rate depending on the initial degree both of rigidity and the TFP distance to the US.
    Keywords: Growth, productivity, long-term projections, structural reforms, innovation, education
    JEL: E21 E22 E32 E44 E63
    Date: 2017
  2. By: M. Isoré; U. Szczerbowicz
    Abstract: In RBC models, “disaster risk shocks” reproduce countercyclical risk premia but generate an increase in consumption along the recession and asset price fall, through their effects on agents’ preferences (Gourio, 2012). This paper offers a solution to this puzzle by developing a New Keynesian model with such a small but time-varying probability of “disaster”. We show that price stickiness, combined with an elasticity of intertemporal substitution smaller than unity, restores procyclical consumption and wages, while preserving countercyclical risk premia, in response to disaster risk shocks. The mechanism then provides a rationale for discount factor first- and second-moment (“uncertainty”) shocks.
    Keywords: disaster risk, rare events, uncertainty, Epstein-Zin-Weil preferences, asset pricing, DSGE models, New Keynesian models, business cycles, risk premium
    JEL: D81 D90 E20 E31 E32 E44 G12 Q54
    Date: 2016
  3. By: Diermeier, Matthias; Goecke, Henry
    Abstract: Since the outbreak of the European financial and economic crisis in 2008, the monetary policy of the European Central Bank (ECB) has been in crisis mode. The central bankers are attempting to get a grasp on the current low inflation rates and inflation expectations by, among other things, introducing a policy of extreme quantitative easing. The expansion of the Eurosystem's balance sheet was problem-free on this occasion, and the ECB also managed to eventually increase the money supply again. However, ensuring that the growth in the money supply transmutes into higher inflation or inflation expectations has been much more difficult. [...]
    JEL: E31 E52 E58
    Date: 2016
  4. By: S. Fries; J.-S. Mésonnier; S. Mouabbi; J.-P. Renne
    Abstract: Using a semi-structural approach, we jointly estimate time-varying national natural real rates of interest for the largest four economies of the Euro area over 1999-2016 and discuss the associated challenges for the single monetary policy. We find evidence of an increased dispersion of real equilibrium rates across major Euro area economies during the Euro area sovereign debt crisis. This dispersion translated into significantly diverging national real interest rate gaps, a synthetic metrics of the perceived monetary policy stance, between core and Southern countries. Real interest rate gaps have nonetheless converged towards zero in all four economies as of 2014, suggesting that it took the acceleration of unconventional policies since mid-2013 to eventually restore the conditions for a really common monetary policy in the Euro area.
    Keywords: Euro area countries, natural rate of interest, common monetary policy, fragmentation
    JEL: C32 E32 E43 E52
    Date: 2016
  5. By: P. A. Pintu; Y. Wen; X. Xing
    Abstract: The interest rate at which US firms borrow funds has two features: (i) it moves in a countercyclical fashion and (ii) it is an inverted leading indicator of real economic activity: low interest rates today forecast future booms in GDP, consumption, investment, and employment. We show that a Kiyotaki-Moore model accounts for both properties when interest-rate movements are driven, in a significant way, by self-fulfilling shocks that redistribute income away from lenders and to borrowers during booms. The credit-based nature of such self-fulfilling equilibria is shown to be essential: the dynamic correlation between current loanable funds rate and future aggregate economic activity depends critically on the property that the interest rate is state-contingent. Bayesian estimation of our benchmark DSGE model on US data shows that the model driven by redistribution shocks results in a better fit to the data than both standard RBC models and Kiyotaki-Moore type models with unique equilibrium.
    Keywords: Endogenous Collateral Constraints, State-Contingent Loan Repayment, Redistribution Shocks, Multiple Equilibria
    JEL: E21 E22 E32 E44 E63
    Date: 2016
  6. By: V. Bignon; C. Jobst
    Abstract: This paper shows that a central bank can more efficiently mitigate economic crises when it broadens eligibility for its discount facility to any safe asset or solvent agent. We use difference-in-differences panel regressions and emulate crises by studying how defaults of banks and non-agricultural firms were affected by the arrival of an agricultural disease. We exploit the specificities of the implementation of the discount window to deal with the endogeneity of the access to the central bank to the arrival of the crisis and local default rates. We find that broad eligibility reduced significantly the increase in the default rate when the shock hit the local economy. A counterfactual exercise shows that defaults would have been 10% to 15% higher if the Bank of France would have implemented the strictest eligibility rule. This effect is identified independently of changes in policy interest rates and the fiscal deficit.
    Keywords: discount window, collateral, Bagehot rule, central bank, default rate
    JEL: E32 E44 E51 E58 N14 N54
    Date: 2017
  7. By: Corsetti, Giancarlo; Dedola, Luca; Jarociński, Marek; Maćkowiak, Bartosz; Schmidt, Sebastian
    Abstract: The euro area has been experiencing a prolonged period of weak economic activity and very low inflation. This paper reviews models of business cycle stabilization with an eye to formulating lessons for policy in the euro area. According to standard models, after a large recessionary shock accommodative monetary and fiscal policy together may be necessary to stabilize economic activity and inflation. The paper describes practical ways for the euro area to be able to implement an effective monetary-fiscal policy mix. JEL Classification: E31, E62, E63
    Keywords: eurobond, government bonds, joint analysis of fiscal and monetary policy, lower bound on nominal interest rates, self-fulfilling sovereign default
    Date: 2016–12
  8. By: António Afonso; João Tovar Jalles
    Abstract: Using a panel of 54 countries between 1980 and 2013, we find empirical support for the view that changes in the fiscal policy stance (year-on-year change in the cyclically adjusted primary balance) have a significant positive correlation with inflation volatility. An increase in the volatility of discretionary fiscal policies by one standard deviation raises inflation volatility between 5 and 6 percent. Moreover, results using alternatively different inflation volatility proxies confirm that an expansionary fiscal stance increases price volatility. Another relevant outcome is that in a context of economic expansions (recessions) the harmful impact of fiscal activism on price volatility is soften (heightened), while the negative impact of fiscal activism on price stability is higher when fiscal policy is expansionary. Finally, fiscal activism fuels inflation volatility much more pronouncedly in emerging market economies vis-a-vis advanced economies. Key Words : volatility, fiscal policy, inflation, GARCH, Consensus Forecasts
    JEL: C23 E31 E62 G01 H62
    Date: 2016–12
  9. By: Giovanni Caggiano (Department of Economics, Monash University; Department of Economics and Management, University of Padova; and Bank of Finland); Efrem Castelnuovo (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne; Department of Economics, The University of Melbourne; and Department of Economics and Management, University of Padova); Juan Manuel Figueres (Department of Economics and Management, University of Padova)
    Abstract: We model U.S. post-WWII monthly data with a Smooth Transition VAR model and study the effects of an unanticipated increase in economic policy uncertainty on unemployment in recessions and expansions. We find the response of unemployment to be statistically and economically larger in recessions. A state-contingent forecast error variance decomposition analysis confirms that the contribution of EPU shocks to the volatility of unemployment at business cycle frequencies is markedly larger in recessions.
    Keywords: Economic policy uncertainty shocks, unemployment dynamics, Smooth Transition Vector AutoRegressions, recessions, expansions
    JEL: C32 E32 E52
    Date: 2017–01
  10. By: Sameer Khatiwada (IHEID, Graduate Institute of International and Development Studies, Geneva and ILO Regional Office Bangkok)
    Abstract: By employing a novel dataset on international capital flows, this paper examines the impact of Fed’s quantitative easing (QE) policies on flows to emerging markets economies (EMEs) and the EU countries. Episodes of QE are examined separately, with the last episode divided between pre- and post-tapering. We find evidence that QE was associated with an increase in capital inflow, while tapering was associated with a period of retrenchment. The magnitude of the impact varied by different episodes of QE and the types of assets (bonds or equities). Our results show that the EU countries behaved differently than the EMEs. We also find support for the importance of “pull factors” and individual country characteristics for capital inflows. However, the paper shows that episodes of QE accounted for most of the variation in capital inflows during 2008-2014. G20 statements during the episodes of QE show that countries are increasingly cognizant of their inability to control flows and have thus called for better monetary policy coordination to avoid excessive volatility and negative spillovers.
    Keywords: Quantitative Easing (QE), spillovers, capital flows, emerging market economies (EMEs)
    JEL: E44 E52 E58 F32 F41 F42
    Date: 2017–01
  11. By: Hettig, Thomas; Müller, Gernot
    Abstract: According to the pre-crises consensus there are separate domains for monetary and fiscal stabilization in a currency union. While the common monetary policy takes care of union-wide fluctuations, fiscal policies should be tailored to meet country-specific conditions. This separation is no longer optimal, however, if monetary policy is constrained by an effective lower bound on interest rates. Specifically, we show that in this case there are benefits from coordinating fiscal policies across countries. By coordinating on a common fiscal stance, policy makers are able to stabilize union-wide activity and inflation while avoiding detrimental movements of a country's terms of trade.
    Keywords: coordination; Currency union; effective lower bound; EMU; Fiscal policy; optimal policy; terms-of-trade externality
    JEL: E61 E62 F41
    Date: 2017–01
  12. By: -
    Abstract: • The incoming U.S. administration will be inheriting a healthy economy. The job market is posting solid gains, home sales and house prices have largely recovered from the bust, and the stock market continues to hit new highs. The current expansion has passed seven years, making it the third longest ever. • The U.S. economy has added private sector jobs for 80 months and in November added another 178,000 jobs, with the unemployment rate falling to 4.6%, its lowest level since 2007. Since its post-crisis nadir in early 2010 the economy has created 15.6 million jobs. • Wage growth is running ahead of inflation and consumer confidence is at its highest levels in nearly a decade. In October, U.S. personal income climbed at the fastest rate since April, highlighting the growing upward pressure on wages form a tighter job market. • The economy expanded in the third quarter at the fastest pace in two years (3.2%). Consumption growth, a key element of U.S. economic output, was revised higher to a 2.8% pace, from the previous reading of 2.1%. • U.S. home prices have climbed back above the record reached more than a decade ago, bringing to a close the worst period for the housing market since the Great Depression. The average home price for September was 0.1% above the July 2006 peak, according to S&P Case-Schiller U.S. National Home Price Index. • The Federal Reserve was confident enough about the underlying strength of the U.S. economy to raise the benchmark interest rate by 25 basis points at its December 13-14 meeting, only the second increase in a tightening cycle that started a year ago. The decision to lift rates was unanimous and policymakers anticipate three rate rises in 2017. However, the outlook for next year could shift significantly based on policy changes – such as tax cuts and higher trade tariffs – that the president-elect has promised.
    Date: 2016–12
  13. By: Tanweer Akram; Anupam Das
    Abstract: This paper investigates the long-term determinants of Indian government bonds' (IGB) nominal yields. It examines whether John Maynard Keynes's supposition that short-term interest rates are the key driver of long-term government bond yields holds over the long-run horizon, after controlling for various key economic factors such as inflationary pressure and measures of economic activity. It also appraises whether the government finance variable--the ratio of government debt to nominal income--has an adverse effect on government bond yields over a long-run horizon. The models estimated here show that in India, short-term interest rates are the key driver of long-term government bond yields over the long run. However, the ratio of government debt and nominal income does not have any discernible adverse effect on yields over a long-run horizon. These findings will help policymakers in India (and elsewhere) to use information on the current trend in short-term interest rates, the federal fiscal balance, and other key macro variables to form their long-term outlook on IGB yields, and to understand the implications of the government's fiscal stance on the government bond market.
    Keywords: Government Bond Yields; Interest Rates; Monetary Policy; India
    JEL: E43 E50 E60 G10 G12 O16
    Date: 2017–01
  14. By: Christian Schoder (Department of Economics, New School for Social Research)
    Abstract: A Dynamic Stochastic Disequilibrium (DSDE) model is proposed for business cycle analysis. Unemployment arises from job rationing due to insucient aggregate spending. The nominal wage is taken as a policy variable subject to a collective Nash bargaining process between workers and rms with the state of the labor market a ecting the relative bargaining power. A precautionary saving motive arising from an uninsurable risk of permanent income loss implies an equilibrium relation between consumption, income and wealth. The DSDE model di ers from the corresponding Dynamic Stochastic General Equilibrium (DSGE) model with labor market clearing in important respects: (i) Output is determined from the demand side and not from the supply side; (ii) The steady-state interest rate cannot be interpreted as a natural rate; (iii) It has to be smaller than the rate of economic growth in order for a steady state to exist; (iv) Determinacy of the solution requires the monetary policy response to in ation to be high (low) at low (high) steady-state interest rates; (v) Fighting in ation is stabilizing in the active monetary policy regime but destabilizing in the passive monetary policy regime; (vi) Macroeconomic responses to monetary policy and productivity shocks are similar to those of the DSGE model but give more weight to quantity adjustment and predict the real wage to increase with productivity.
    Keywords: Dynamic stochastic disequilibrium, labor market disequilibrium, labor rationing, collective wage bargaining, monetary policy
    JEL: B41 E12 J52
    Date: 2017–01
  15. By: Bruno Damásio; Diogo Martins
    Abstract: The aim of this paper is to study the long-run relationship between unemployment, capital accumulation and labour market variables in Portugal for the 1985Q1-2013Q4 period. We use an ARDL-bounds test model to perform the econometric estimation. We nd evidence that capital accumulation has been the main driver of long-run unemployment (NAIRU), whilst labour market variables have played either a negligible or an existent explicative role. It suggests that Portuguese NAIRU is endogenous relative to capital accumulation. Consequently, we conclude that the labour market reforms proposed by Troika were inadequate to the Portuguese case as they were based upon a theoretical framework (exogenous NAIRU model) that was not representative of the Portuguese labour market.
    Keywords: NAIRU, Unemployment, Capital Accumulation, Labour Market Institutions, ARDL, Bounds Test, Post Keynesian Economics
    JEL: E11 E12 E22 E24
    Date: 2017–01
  16. By: Mariusz Kapuściński; Andrzej Kocięcki; Halina Kowalczyk; Tomasz Łyziak; Jan Przystupa; Ewa Stanisławska; Anna Sznajderska; Ewa Wróbel
    Abstract: In this study we present a complex analysis of the monetary policy transmission mechanism in Poland. We find that this mechanism is quite stable, although the relative strength of its channels has been changing. In particular, the decline in the role of the exchange channel over the recent years has been accompanied by the growing role of credit (and the credit channel) and the growing anticipation of economicagents. In connection with the latter, in the assessment of the economic impact of the monetary policy, not only decisions in the scope of short-term interest rates but also central bank communication should be taken into account.
    Keywords: Monetary transmission mechanism, Poland
    JEL: E43 E52
    Date: 2016
  17. By: Giovanni Caggiano (Department of Economics, Monash University; Department of Economics and Management, University of Padova; and Bank of Finland); Efrem Castelnuovo (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne; Department of Economics, The University of Melbourne; and Department of Economics and Management, University of Padova); Giovanni Pellgrino (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne; and Department of Economics, University of Verona)
    Abstract: We employ a parsimonious nonlinear Interacted-VAR to examine whether the real effects of uncertainty shocks are greater when the economy is at the Zero Lower Bound. We find the contractionary effects of uncertainty shocks to be statistically larger when the ZLB is binding, with differences that are economically important. Our results are shown not to be driven by the contemporaneous occurrence of the Great Recession and high financial stress, and to be robust to different ways of modeling unconventional monetary policy. These findings lend support to recent theoretical contributions on the interaction between uncertainty shocks and the stance of monetary policy.
    Keywords: Uncertainty shocks, Nonlinear Structural Vector AutoRegressions, Interacted VAR, Generalized Impulse Response Functions, Zero Lower Bound
    JEL: C32 E32
    Date: 2017–01
  18. By: Diermeier, Matthias; Goecke, Henry
    Abstract: Seit dem Ausbruch der europäischen Finanz- und Wirtschaftskrise im Jahr 2008 befindet sich die Geldpolitik der Europäischen Zentralbank (EZB) im Krisenmodus. Die Übersetzung der wachsenden Geldmenge auf eine höhere Inflation beziehungsweise Inflationserwartung gestaltet sich schwierig. Den aktuell niedrigen Inflationsraten und Inflationserwartungen versuchen die Zentralbanker unter anderem mit einer Geldpolitik extremer quantitativer Lockerung habhaft zu werden. Die Bilanzausweitung des Eurosystems ging hierbei problemlos von statten, und auch die Erhöhung der Geldmenge gelang der EZB zuletzt wieder. Allerdings gestaltet sich die Übersetzung der wachsenden Geldmenge auf eine höhere Inflation beziehungsweise Inflationserwartung als weitaus schwieriger. [...]
    JEL: E31 E52 E58
    Date: 2016
  19. By: Merkl, Christian; Stüber, Heiko
    Abstract: This paper analyzes the effects of different wage cyclicalities on labor market flow dynamics at the establishment level. We derive a model that allows for heterogeneous wage cyclicalities across firms over the business cycle and confront the theoretical results with the new AWFP dataset, which comprises the entire universe of German establishments. In line with theory, establishments with more procyclical wage movements over the business cycle have a more countercyclical hires rate and employment behavior. This result is robust when we look at certain sectors and states. Wage cyclicalities do not only have the expected qualitative impact on stocks and flows, but the quantitative responses are also in line with the proposed model. More generally, our empirical results provide support for theories that lead to an effect of wage rigidities on labor market flow dynamics.
    Keywords: Labor Market Flows,Wages,Administrative Data,Establishment,Matches
    JEL: E24 E32 J64
    Date: 2016
  20. By: Roger M. Gomis (Universitat Pompeu Fabra); Sameer Khatiwada (IHEID, Graduate Institute of International and Development Studies, Geneva and ILO Regional Office Bangkok)
    Abstract: This paper analyses the impact of recessions and booms on firm performance. We look at 70,000 firms in over 100 countries between 1986 and 2014 and document the trends in firm entry over the business cycle. Our paper confirms some standard facts about firm dynamics: employment growth is decreasing with size and age; entry rate is pro-cyclical while the exit rate is countercyclical. For example, in case of advanced economies, 97 per cent of employment creation is by firms between the ages of 0 and 5 years, while for developing and emerging economies, it is 86 per cent of all employment. Our main results are: first, we do see selection effects of recessions, particularly when we look at employment, sales and capital. Specifically, when a firm enters the market during good times, they tend to have lower employment and capital than firms that enter the market during bad times. Second, when we look at total factor productivity (TFP), we don’t see a clear “cleansing effect” of recessions – more productive firms entering the market while less productive leaving. Third, the effects of entering during a boom or a recession tend to persist for a long time, over 15 years. Fourth, we find notable differences between income groups – while recessions tend to create stronger firms in the advanced economies, booms tend to create stronger ones in case of the emerging economies. Lastly, the effects of recessions on firms tend to vary by sector.
    Keywords: business cycles, entry and exit, firm performance, total factor productivity
    JEL: D22 E32 L25 O4
    Date: 2017–01
  21. By: International Monetary Fund.
    Abstract: The program remains on track and the economy continues to strengthen. Significant fiscal over-performance and renewed efforts to address structural weaknesses have helped boost confidence. This, along with a healthy credit recovery on the back of substantial monetary policy easing, has helped restore robust growth, while persistently low inflation has reinforced recovery in real incomes. Public debt has started to decline.
    Date: 2016–12–21
  22. By: Matthieu Darracq Paries (European Central Bank); Pascal Jacquinot (European Central Bank); Niki Papadopoulou (Central Bank of Cyprus)
    Abstract: The paper is putting forward a structural narrative for the euro area financial crisis and its asymmetric consequences through the monetary union. We conjecture three originating factors to the euro area financial fragmentation and discuss the role of specific financial frictions in transmitting and amplifying them: (i) the macroeconomic spillovers of sovereign market tensions through risky banks, (ii) the adverse real-financial feedback loop from rising corporate default to weak banks and credit supply constraints, (iii) bank deleveraging process at times of unprecedented regulatory overhaul. We develop global DSGE model featuring a sovereign-bank nexus, a granular set of relevant financial frictions. The model is calibrated for 6 regions in order to reflect the financial heterogeneity across the largest countries of the euro area. The counterfactual scenarios show that the interplay between sovereign, bank and corporate solvency risks generated sizeable procyclicality in some jurisdictions of the euro area during the crisis and severely impaired the transmission of the single monetary policy.
    Keywords: DSGE models, banking, nancial regulation, cross-country spillovers, bank lending rates
    JEL: E4 E5 F4
    Date: 2016–12
  23. By: Fujio Takata (Graduate School of Economics, Kobe University)
    Keywords: Two movement patterns, Balanced budget rule, Laborincome taxation, Divisible labor
    JEL: C61 C62 E20 E32
    Date: 2017–01
  24. By: Grace Taylor; Rod Tyers
    Abstract: Larry Summers’ re-use of the phrase appears justified in the present global economic climate since many factors contribute to comparatively poor OECD economic performance and weakening macroeconomic policy instruments. Some are measurement issues and others might be seen as the downsides of globalisation, which has integrated financial markets and redirected growth from the advanced toward the emerging economies. Yet measurable rates of return on investment do appear to be impaired by rises in perceived investment risks, institutionalised risk aversion, increased ageing and dependency, declining shares of government spending in public investment and R&D with rising shares of these directed to health, the retention of trade distortions, new concentration in industrial structure and a slower rate of human capital accumulation, not to mention an unexpected global abundance of fossil fuels and a slower Chinese economy. The information and literature supporting these concerns is reviewed and implications for global and Australian policy are inferred.
    Keywords: Global stagnation, Technical change, Returns and risk, Public investment, Ageing
    JEL: E43 E44 E63 F44 H87
    Date: 2017–01
  25. By: Fedotenkov, Igor; Schneider, Friedrich
    Abstract: The main goal of our paper is to determine the existence of a link between government (military) expenditures and the shadow economy in the Baltic States. The empirical investigation is done over the years 2003-2014 for Estonia, Latvia and Lithuania. We showed that there is a highly statistically significant positive dependence between the size of the shadow economy and military expenditures in the Baltic States. Our conclusion is that higher military expenditures indeed lead to a higher shadow economy and this result is robust to different model specifications. In order to demonstrate the importance of our highly statistically significant results we undertook a simulation where we calculated how much the size of the shadow economy would increase if the size of military expenditure as a percentage of GDP doubled: In Estonia such an expansion would have led to an increase in the size of the shadow economy from 27.1% to 30.1%, in Latvia from 24.7% to 26.1% and in Lithuania from 27.1% to 28.4% in 2014.
    Keywords: Shadow economy, military expenditures, Baltic States
    JEL: E26 E62 H26 H50 H56 O17
    Date: 2017–01–02
  26. By: Seung Jung Lee; Lucy Qian Liu; Viktors Stebunovs
    Abstract: We study how low interest rates in the United States affect risk taking in the market for cross-border corporate loans. Because banks tend to originate these loans with intent to sell to nonbank investors, we examine risk taking by the broad financial system. To the extent that actions of the Federal Reserve affect U.S. interest rates, our analysis provides evidence of cross-border spillover effects of U.S. monetary policy and highlights the global lending and risk-taking channels. We find that movements in the U.S. interest rates have an important effect on ex-ante credit risk of cross-border corporate loans, though the channels are different in the pre- and post-crisis periods. Before the crisis, banks made ex-ante riskier loans to non-U.S. borrowers in response to a decline in U.S. short-term interest rates, and, after it, banks and nonbanks originated such loans in response to a decline in U.S. longer- term interest rates. Economic uncertainty, risk appetite, and the U.S. dollar exchange rate appear to play a limited role in explaining ex-ante credit risk. Our results highlight the potential policy challenges faced by central banks in affecting credit risk cycles in their own jurisdictions.
    Keywords: Syndicated loans ; Risk taking ; Monetary policy ; International spillovers
    JEL: E44 E52 F30 F42 G15 G20
    Date: 2017–01
  27. By: Koffi Elitcha; Raquel Fonseca
    Abstract: Financial constraints affect individuals’ decision to become self-employed, suggesting a positive relationship between the propensity to become entrepreneur and personal wealth. Recent evidence confirms this hypothesis, and shows that the importance of the entrepreneurship—wealth relationship increases with the extent of liquidity constraints and flattens with the magnitude of start-up costs. Using individual-level data from 3 European and U.S. surveys as well as the World Bank, we investigate the impact of start-up costs on the self-employment—wealth relationship. Results confirm the strong positive relationship between entrepreneurial choice and wealth, as well as the negative effect stemming from an increase in start-up costs. Although there is no strong evidence that wealth in itself played a bigger role during the last global financial crisis, the negative impact of higher start-up costs on wealth proved significant.
    Keywords: Self-Employment, Occupational Choice, Wealth, Liquidity Constraints, Start-up Costs, Financial Crisis
    JEL: E02 E21 J21 J24
    Date: 2016
  28. By: International Monetary Fund.
    Abstract: This 2016 Article IV Consultation highlights that Mexico has navigated successfully a complex external environment, characterized by heightened global financial-market volatility. The economy continues to grow at a moderate pace, and inflation is close to the target. The flexible exchange rate is playing a central role in helping the economy adjust to external shocks. Macroeconomic policies remain focused on maintaining strong fundamentals. Continued implementation of the structural reforms agenda should help lift potential growth over the medium term. The economy is projected to grow by 2.1 percent in 2016.
    Keywords: Article IV consultation reports;Economic growth;Public debt;Fiscal policy;Labor markets;Women;Monetary policy;Financial sector;Financial stability;Debt sustainability analysis;External Sector Report;Staff Reports;Press releases;Mexico;
    Date: 2016–11–22
  29. By: International Monetary Fund.
    Abstract: This paper describes South Africa’s economic development and challenges. South Africa has made considerable economic and social progress over the past two decades, but faces substantial challenges. Global transitions—China’s slowdown and rebalancing, weak commodity prices, and U.S. monetary policy normalization—are taking a heavy toll on South Africa. Growth and employment, which were already low, are faltering and continue to underperform peer countries. Vulnerabilities remain elevated and have increased in the real and fiscal sectors. Boosting growth and job creation, thus reducing extremely high unemployment and inequality, and promoting social transformation remain South Africa’s key challenges.
    Keywords: Article IV consultation reports;Economic recession;Economic recovery;Fiscal policy;Fiscal reforms;Monetary policy;Banking sector;Economic indicators;Balance of payments statistics;External Sector Report;Debt sustainability analysis;Staff Reports;Press releases;Brazil;
    Date: 2016–11–15
  30. By: Elisabeth Christen; Harald Oberhofer
    Abstract: Im vorliegenden Beitrag werden wirtschaftspolitisch beeinflussbare Angebotsfaktoren untersucht, die erfolgreiche Exportländer kennzeichnen und maßgeblich zur Verbesserung der Wettbewerbsfähigkeit von Volkswirtschaften beitragen können. Im Zentrum der Untersuchung stehen Maßnahmen zur Steigerung der F&E Intensität, der (öffentlichen) Ausgaben im tertiären Bildungsbereich sowie die Umsetzung einer nachhaltigen Energiepolitik. Unter der Annahme, dass Österreich den konstanten Aufwärtstrend fortsetzt und in diesen drei Wettbewerbsindikatoren zu den skandinavischen Ländern (Dänemark, Finnland und Schweden) aufschließen könnte, lassen sich mögliche Exportpotentiale dieser unterschiedlichen Politikmaßnahmen für den österreichischen Waren- und Dienstleistungshandel quanti-fizieren. Die empirischen Ergebnisse legen nahe, dass eine Erhöhung der Ausgaben für F&E sowie für tertiäre Bildung positive Exportimpulse induzieren können. Darüber hinaus deuten unsere Ergebnisse darauf hin, dass eine allfällige Forcierung einer nachhaltigen Energiepolitik im Sinne einer Steigerung des Anteils erneuerbarer Energien am gesamten Energiekonsum nicht im Widerspruch zu einer erfolg-reichen Exportperformance stehen muss.
    Keywords: Arbeitsproduktivität, Totale Faktorproduktivität, Österreich
    JEL: E24 O47
    Date: 2016–12
  31. By: Robert J. Shiller (Cowles Foundation, Yale University)
    Abstract: This address considers the epidemiology of narratives relevant to economic fluctuations. The human brain has always been highly tuned towards narratives, whether factual or not, to justify ongoing actions, even such basic actions as spending and investing. Stories motivate and connect activities to deeply felt values and needs. Narratives “go viral” and spread far, even worldwide, with economic impact. The 1920-21 Depression, the Great Depression of the 1930s, the so-called “Great Recession” of 2007-9 and the contentious political-economic situation of today, are considered as the results of the popular narratives of their respective times. Though these narratives are deeply human phenomena that are difficult to study in a scientific manner, quantitative analysis may help us gain a better understanding of these epidemics in the future.
    Keywords: Economic fluctuations, Business cycles, Story, Meme, Epidemic, SIR model, Kermack and McKendrick, Multipliers, Bubbles, Depression of 1920, Profiteer, Great Depression, Stock market crash, 2008 financial crisis, Post-truth
    JEL: E00 E03 E30 G02 N1
    Date: 2017–01
  32. By: Ana Gouveia (GPEARI - Research and Economic Policy Division); Sílvia Santos; Corinna Herber
    Abstract: This paper surveys the literature on the impact of structural reforms of the judicial system. We focus on two key types of reforms: those enhancing the overall efficiency of the system, in terms of quantitative outcomes; and those aiming at enhancing the bankruptcy regime. In the first branch, and given the way the existing literature is organized, we proceed in two steps. We first provide an overview of the studies linking judicial reforms with sectoral performance. We then elaborate on the effects of this improved performance on economic outcomes. In the second branch, we directly present the impact on economic outcomes, in particular concerning access to finance and investment. In a nutshell, reforms that increase courts’ size, increase spending on information and communication technologies (ICT), improve governance or foster education and training have a positive impact on judicial efficiency, which, in turn, promotes investment, ensures better credit and allows firms to thrive. Concerning bankruptcy regimes, there is evidence that a more efficient system is related with a lower cost of funding and a higher amount and length of credit in the economy and consequently with more investment, innovation and entrepreneurship. These empirical results highlight the relevance of promoting judicial system reforms, as a way to ensure sustained economic growth.
    Keywords: Structural reforms; judicial system; bankruptcy regimes, economic growth
    JEL: C22 E24 E31 J64
    Date: 2017–01
  33. By: Franceso D'Acunto (University of California Berkeley Haas); Ryan Liu (Haas School of Business, University of California at Berkeley); Carolin Pflueger (University of British Columbia); Michael Weber (University of Chicago Booth School of Business)
    Keywords: capital structure, nominal rigidities, bank deregulation, industrial organization and finance, price setting, bankruptcy
    JEL: E12 E44 G28 G32 G33
    Date: 2017
  34. By: Nakata, Taisuke; Schmidt, Sebastian
    Abstract: Macroeconomists are increasingly using nonlinear models to account for the effects of risk in the analysis of business cycles. In the monetary business cycle models widely used at central banks, an explicit recognition of risk generates a wedge between the inflation-target parameter in the monetary policy rule and the risky steady state (RSS) of inflation - the rate to which inflation will eventually converge - which can be undesirable in some practical applications. We propose a simple modification to the standard monetary policy rule to eliminate the wedge. In the proposed risk-adjusted policy rule, the intercept of the rule is modified so that the RSS of inflation equals the inflation-target parameter in the policy rule. JEL Classification: E32, E52
    Keywords: effective lower bound, inflation targeting, monetary policy rule, risk, risky steady state
    Date: 2016–11
  35. By: LG Deidda; J.E. Galdon-Sanchez; M. Casares
    Abstract: We examine optimal monetary policy in a New Keynesian model with unemployment and financial frictions where banks produce loans using equity as collateral. Firms and households demand loans to finance externally a fraction of their flows of expenditures. Our findings show amplifying business-cycle effects of a more rigid loan production technology. In the monetary policy analysis, the optimal rule clearly outperforms Taylor (1993) rule. The optimized interest-rate response to the external finance premium turns significantly negative when either banking rigidities are high or when financial shocks are the only source of business cycle fluctuations.
    Keywords: external finance,optimal monetary policy,business cycles
    Date: 2016
  36. By: António Afonso; João Tovar Jalles
    Abstract: We compute time-varying responses of the sovereign debt ratio to primary budget balances for 13 advanced economies between 1980 and 2012, and assess how fiscal sustainability reacts to different characteristics of government debt. We find that the fiscal sustainability time-varying coefficient increases the higher the share of public debt denominated in foreign currency. Moreover, the countries become more sustainable if they contract a higher share of long-term public debt, if it is held by the central bank or if it is easily marketable. Key Words : sovereign debt, fiscal sustainability, time-varying coefficients, debt composition
    JEL: C23 E62 F34 H63
    Date: 2016–12
  37. By: BESSO, Christophe Raoul; FEUBI PAMEN, Eric Patrick
    Abstract: The objective of this paper is to evaluate the impact of oil shocks on the growth rate of Growth Domestic Product (GDP) in CEMAC countries. We use a panel VAR model approach to the variation of the real GDP growth rate, oil price inflation rate and money supply between 2000 and 2015. Our main results show that CEMAC countries mostly depend on oil pension. Consequently, the analysis of impulsion response functions and the decomposition of variance show that, the shock on oil price negatively affects the growth rate of the GDP. We then suggest CEMAC countries to diversify their production, the destination of their exports and the sources of budgetary income or takings.
    Keywords: oil shock,GDP, Panel VAR
    JEL: C33 E61 F1 F15
    Date: 2016–11–05
  38. By: Malte Rieth
    Abstract: Inflation targeting has become one of the most prominent monetary regimes around the globe. Proponents argue that it reduces the dynamic inconsistency problem of monetary policy and thereby stabilises prices, which in turn promotes growth. Opponents, on the other hand, say that by focusing on price stability inflation targeting neglects other important policy objectives, such as financial stability, and thereby contributed to the built up of the global financial crisis. This roundup summarises the arguments made in the debate. It concludes that no consensus has emerged in the empirical literature about whether inflation targeting improves macroeconomic performance.
    Date: 2017
  39. By: Toyoki Matue (Graduate School of Economics, Kobe University)
    Keywords: employment fluctuations, fixed-term contracts, trade unions, labor market reforms
    JEL: E24 J30 J51 J63
    Date: 2017–01
  40. By: Eduardo Bandrés (UNIVERSITY OF ZARAGOZA AND FUNCAS); María Dolores Gadea-Rivas (UNIVERSITY OF ZARAGOZA); Ana Gómez-Loscos (Banco de España)
    Abstract: Large contractionary shocks such as the Great Recession or the sovereign debt crisis in Europe have rekindled interest in analyzing the overall patterns of business cycles. We study these patterns for Europe both at the national and the regional level. We first examine business cycles’ comovements and then, using Finite Mixture Markov Models, we obtain a dating of the different business cycles and identify clusters among them. We also propose an index to analyze within-country homogeneity. Our main findings are the following: (i) we find evidence of just one cluster amongst the European countries while, at the regional level, there is more heterogeneity and we identify five different groups of European regions; (ii) the groups are characterized as follows: the first contains most of the Greek regions; groups two and three include, in most cases, regions from Germany (plus a couple of regions from southern European countries in group two and some regions of the core countries in group three); group four is populated mainly by regions belonging to northern European countries; and group five is the largest and is composed of the rest of European regions; (iii) we notice that the degree of homogeneity of regional business cycles within countries is quite different; (iv) we also observe that spatial correlation increased during the convergence process towards the introduction of the euro and has taken a big leap with the Great Recession, both at country and regional level. In fact, comovements among regions have mainly increased during the last decade. These results have important implications for policymakers in the design of convergence policies at the European level and also in the design of fiscal policies to reduce regional disparities at the country level.
    Keywords: business cycles, clusters, regions, finite mixtures Markov models
    JEL: C32 E32 R11
    Date: 2017–01
  41. By: International Monetary Fund.
    Abstract: This paper discusses Chad’s Third and Fourth Reviews Under the Extended Credit Facility (ECF) arrangement, and Requests for Waivers of Nonobservance of Performance Criteria (PCs), Augmentation of Access, Extension of the Current Arrangement, and Rephasing of Disbursements. The authorities in Chad have implemented substantial fiscal adjustment to balance the budget and contain the accumulation of arrears. Nonetheless, liquidity conditions remain very tight, and social tensions have risen recently owing to the large cuts in current spending. IMF staff supports the completion of the third and fourth reviews under the ECF arrangement, the waivers of nonobservance of PCs on the nonaccumulation of domestic arrears and nonaccumulation of external arrears.
    Keywords: Extended Credit Facility;External shocks;Fiscal policy;Domestic payments arrears;Fiscal reforms;Commercial banks;Economic indicators;Balance of payments statistics;Letters of Intent;Debt sustainability analysis;Staff Reports;Press releases;Phasing of purchases;Performance criteria waivers;Chad;
    Date: 2016–11–28
  42. By: Šauer, Radek
    Abstract: I derive the imperfect-common-knowledge Phillips curve under the assumption of Rotemberg pricing. The curve differs from the Calvo version in one important aspect. Expectations of future relative prices impact in ation.
    Keywords: Phillips Curve,Rotemberg,Imperfect Knowledge
    JEL: D83 E31
    Date: 2017
  43. By: Joshua C C Chan; Angelia L Grant
    Abstract: It is well known that different specification choices can give starkly different output gap estimates. To account for model uncertainty, we average estimates over a wide variety of popular specifications using stochastic model specification search. In particular, we consider three types of specification choices: sets of variables used in the analysis, output trend specifications and distributional assumptions. Using US data, we find that the unemployment gap is useful in estimating the output gap, but conditional on the unemployment gap, the inflation gap no longer depends on the output gap. Our results show a steady decline in trend output growth throughout the sample, and the estimate at the end of our sample is only about 1%. Moreover, data favor t over Gaussian distributed innovations, suggesting the relatively frequent occurrence of extreme events.
    Keywords: model averaging, trend inflation, potential output, NAIRU, Okun’s law, Phillips curve
    JEL: C11 C52 E32
    Date: 2017–01
  44. By: Böing, Tobias; Stadtmann, Georg
    Abstract: We empirically evaluate the predictive power of money growth measured by M2 for stock returns of the S&P 500 index. We use monthly US data and predict multiperiod returns over 1, 3, and 5 years with long-horizon regressions. In-sample regressions show that money growth is useful for predicting returns. Higher recent money growth has a significantly negative effect on subsequent returns of the S&P 500. An out-of-sample analysis shows that a simple model with money growth as a single predictor performs as goods as the constant expected returns model, while models with several predictor variables perform worse than those simple models.
    Keywords: Money growth,M2,Stock Market,S&P 500,Stock Returns,Out-of-Sample
    JEL: C58 E44 E47 G14 G17
    Date: 2016
  45. By: Drozd, Lukasz A. (Federal Reserve Bank of Philadelphia); Serrano-Padial, Ricardo (Drexel University)
    Abstract: We investigate the role of information technology (IT) in the collection of delinquent consumer debt. We argue that the widespread adoption of IT by the debt collection industry in the 1990s contributed to the observed expansion of unsecured risky lending such as credit cards. Our model stresses the importance of delinquency and private information about borrower solvency. The prevalence of delinquency implies that the costs of debt collection must be borne by lenders to sustain incentives to repay debt. IT mitigates informational asymmetries, allowing lenders to concentrate collection efforts on delinquent borrowers who are more likely to repay.
    Keywords: debt collection; credit cards; consumer credit; unsecured credit; revolving credit; moral hazard; costly state verification; informal bankruptcy; information technology
    JEL: D91 E21 G20
    Date: 2017–01–12
  46. By: Fabio Cerina (University of Cagliari; CRENoS); Alessio Moro (University of Cagliari; Centre for Macroeconomics (CFM)); Michelle Petersen Rendall (University of Zurich)
    Abstract: We document that employment polarization in the 1980-2008 period in the U.S. is largely generated by women. For the latter, employment shares increase both at the bottom and at the top of the skill distribution, generating the typical U-shape polarization graph, while for men employment shares decrease in a similar fashion along the whole skill distribution. We show that a canonical model of skill-biased technological change augmented with a gender dimension, an endogenous market/home labor choice and a multi-sector environment accounts well for gender and overall employment polarization. The model also accounts for the absence of employment polarization during the 1960-1980 period, which is due to the at behavior of changes in women's employment shares along the skill distribution, and can reproduce the different evolution of employment shares across decades during the 1980-2008 period. The faster growth of skill-biased technological change since the 1980s accounts for a substantial part of the employment polarization generated by the model.
    Keywords: Job Polarization, Gender, Skill-biased Technological Change, Home Production
    JEL: E20 E21 J16
    Date: 2016–02
  47. By: International Monetary Fund.
    Abstract: Recovery from the Ebola epidemic is delayed by the persistent impact of the commodity price decline and the United Nations Mission in Liberia (UNMIL) withdrawal. Weak economic activity—particularly in the natural resource sector—is affecting government revenues, while spending is under pressure from the cost of elections and security handover from UNMIL.
    Date: 2016–12–22
  48. By: Bakari, Sayef
    Abstract: This paper investigates the relationship between export, import, domestic investment and economic growth in Japan. In order to achieve this purpose, annual data for the period between 1970 and 2015 was tested by using Correlation analysis and regression analysis. The result of the Correlation analysis shows that all variables are positively correlated. According to the results of the regression analysis estimation, domestic investment and exports are significant in explaining the economic growth, namely an increase in domestic exports and investment leads to an increase in economic growth. On the other hand, import has no effect on gross domestic product. These results provide evidence that exports and domestic investment, thus, are seen as the source of economic growth in Japan.
    Keywords: Domestic Investment, export, import, economic growth, Japan.
    JEL: E2 E22 F1 F14
    Date: 2017–01–03
  49. By: Economou, Emmanouel/Marios/Lazaros; Nickos, Kyriazis; Papadamou, Stephanos
    Abstract: The current paper contributes to the recent discussion in the US which has to do with the level of efficiency of the QE practices being implemented since 2008 and afterwards until today. It also analyses the basic argumentation of the academics and social and political groups who are in favour of the restoration of the Gold Standard. Thus, the analysis offers a critical approach concerning the US monetary practices linked to the implementation of the gold standard regimes as against to the quantitative easing policies. We conclude that although there are both arguments in favour of or against the abandonment of the QE policies in the US, the implementation (through restoration) of the Gold standard doctrines is very difficult to materialize, especially when an economy faces or has already faced the negative and detrimental side-effects of recession.
    Keywords: US monetary policy, Gold Standard, Quantitative Easing
    JEL: E62 F33 G18 N2
    Date: 2017–01–07
  50. By: Darpeix P.-E.
    Abstract: Le taux technique est un paramètre contractuel fondamental d’une police d’assurance. De manière générale, il s’agit surtout d’un élément servant à la tarification des polices. Cependant, dans le cadre plus restreint de l’assurance-vie, il est souvent assimilé à un taux de rendement minimum garanti pour toute la vie du contrat. Les organismes proposant des produits d’assurance-vie peuvent relever de trois régimes distincts (Code des assurances, Code de la mutualité, Code de la Sécurité sociale). Même si les trois Codes sont très proches pour ce qui concerne la règlementation du taux technique, certaines nuances ainsi que des décalages sur l’entrée en vigueur des textes ne permettent pas de les analyser conjointement. Cette étude se limite donc au seul Code des assurances et aux organismes qui y sont assujettis. Les taux techniques sont encadrés par le Code des assurances et une série mensuelle des taux techniques plafonds en vigueur a pu être reconstituée. Depuis 1995, le maximum règlementaire de taux technique est établi en référence au taux moyen des emprunts de l’État français. Dans un deuxième temps, il s’est agi de caractériser le positionnement des assureurs-vie français relativement à cette borne règlementaire. En l’absence d’information précise disponible sur les dates de souscription des contrats, et donc sur leur ancienneté, l’étude s’est appuyée sur les dates de première commercialisation renseignées par les assureurs dans l’enquête annuelle ‘Taux de revalorisation’ de l’ACPR. Ce proxy, bien qu’imparfait, permet de mettre en évidence plusieurs éléments, et d’offrir une première description factuelle de l’évolution des taux techniques : 1) Le niveau moyen des taux techniques par année de première commercialisation constaté à fin 2014 apparaît aujourd’hui très en-deçà du plafond légal en vigueur à ce moment-là. On peut interpréter ce constat de plusieurs manières : certains contrats commercialisés à cette époque étaient déjà assortis de taux techniques très bas, pour d’autres, les assureurs sont parvenus, suite à l’impulsion règlementaire de 1993, à faire baisser les taux techniques moyens associés à ces années de première commercialisation, par avenant notamment pour les contrats à groupe ouvert, ou du fait de la moyenne entre les taux techniques élevés liés aux primes anciennes et aux taux techniques bas sur des primes plus récentes ; 2) Les familles de contrats assorties de taux techniques strictement nuls sont de loin les plus nombreuses, et ce quelles que soient les années de première commercialisation. On observe néanmoins des différences substantielles entre assureurs ; 3) La comparaison de versions successives de l’enquête ‘Taux de revalorisation’ semble mettre en évidence une tendance à la décroissance des taux techniques moyens entre deux dates ; 4) Pour finir, les contrats assortis de taux techniques élevés semblent être associés à une forte décollecte nette ou à des baisses de leurs taux.
    Keywords: assurance-vie, taux technique, évolutions règlementaires.
    JEL: G22 G28 D14 D18 E21
    Date: 2016
  51. By: António Afonso; André Albuquerque
    Abstract: We study the factors behind split ratings in sovereign credit ratings from different agencies, for the period 1980-2015. We employ random effects ordered and simple probit approaches to assess the explanatory power of different macroeconomic, government and financial variables. Our results show that structural balances and the existence of a default in the last ten years were the least significant variables whereas the level of net debt, budget balances, GDP per capita and the existence of a default in the last five years were found to be the most relevant variables explaining rating mismatches across agencies. For speculative-grade ratings, we also find that a default in the last two or five years decreases the rating difference between S&P and Fitch. For the positive rating difference between S&P and Moody’s for investment-grade ratings, an increase in external debt leads to a smaller rating gap between the two agencies
    Keywords: sovereign ratings; split ratings; panel data; random effects ordered probit
    JEL: C23 C25 E44 F34 G15 H63
    Date: 2017–01
  52. By: International Monetary Fund.
    Abstract: This 2016 Article IV Consultation highlights that the economy of the Former Yugoslav Republic of Macedonia has been growing at a solid pace on the back of strong domestic demand and exports. The real GDP is now 16 percent above its precrisis level. In 2015, GDP growth increased to 3.8 percent from 3.6 percent in 2014. The unemployment rate continues to decline. Headline inflation has hovered at zero for the last two years, while core inflation turned positive at the end of 2015. GDP growth is projected to soften in 2016 but pick up in the medium term contingent on the return of political stability.
    Keywords: Article IV consultation reports;Economic growth;Fiscal policy;Fiscal consolidation;Unemployment;Labor markets;Pension reforms;Monetary policy;Bank supervision;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;former Yugoslav Republic of Macedonia (FYR Macedonia);
    Date: 2016–11–21
  53. By: Nikolaos Giannellis (Department of Economics, University of Crete, Greece); Minoas Koukouritakis
    Abstract: The establishment of the European Economic and Monetary Union (EMU) was admittedly a remarkable step in the direction of enhancing economic integration among European countries. The launch of the common currency was expected to lead to price stability, lower transaction costs, stronger intra-euro trade relationships and thus, to higher growth for country-members. This optimistic view is obviously related to McKinnon’s (1963) contribution to the theory of Optimum Currency Areas (OCA). However, a fundamental weakness of the EMU, such as the lack of homogeneity across member-countries, should not be ignored. A number of divergent factors, such as dissimilar national policies (apart from the monetary policy) and different national regulations on goods and labour markets, may increase the possibility of emergence of asymmetric shocks in the Eurozone. On the other hand, this view is related to Mundell’s (1961) original contribution to OCA theory. Having in mind the aforementioned heterogeneity and the resulting asymmetries across countries, academics and policy makers focus on answering the question of whether the EMU achieved its goals. The main reservation in this analysis arises from the presence of asymmetries and the lack of autonomous monetary policy for member-countries. This is because an asymmetric shock could be managed by an exchange rate adjustment. However, in a monetary union, like the EMU, this is not the case. Thus, the main question is whether the common monetary policy (including the exchange rate policy) can achieve higher growth rates and higher economic and financial integration in the Eurozone. De Grauwe (2009) argues that in the first decade of euro’s life and before the debt crisis arises, there is little evidence that the euro caused higher growth rates in the Eurozone. On the other hand, nobody can argue that the euro had negative impacts on growth. However, it is also true that the EMU suffers from significant design weaknesses, which became more evident and stronger during the sovereign debt crisis. What may be indicative of the progress of economic integration among EMU members is that real effective exchange rates deviate among them, thereby implying that their competitive positions have diverged (De Grauwe, 2009, 2010). Northern European countries such as Germany, Austria and the Netherlands, gain in terms of international competitiveness, while competiveness in international trade for Southern European countries, such as Greece, Italy and Spain, has deteriorated. In this context, the present paper aims to find whether economic and financial integration has increased among countries after the creation of the EMU. To be precise, we investigate whether EMU countries as well as selected non-EMU countries are financially integrated with Germany, which is the leading country in the EMU as it has the highest influence on the common monetary policy. We initially expect that the euro has led to integrated commodity and capital markets in the Eurozone because of stronger trade linkages among its member-countries. On the other hand, given the high degree of heterogeneity across countries and the absence of (intra-euro) exchange rate fluctuations, it is doubtful that higher economic integration can be achieved among EMU countries (especially for those that are structurally different from Germany). The existence of economic and financial integration between Germany and the rest of the Eurozone’s countries (and the non-EMU countries) is tested through two well-known international parity relationships, i.e. the Purchasing Power Parity (PPP) and the Uncovered Interest Parity (UIP). The empirical validity of the PPP hypothesis implies that goods markets are integrated, while the validity of the UIP condition implies the existence of capital market integration between countries. A survey on the related empirical literature implies that the introduction of the euro may have failed to increase commodity and financial markets integration among EMU countries. Koedijk et al. (2004) find evidence in favour of the PPP hypothesis within the euro area only when common mean reversion among countries is assumed. Setting Germany as the benchmark country and assuming heterogeneous mean reversion coefficients, their evidence is strengthened only for France, Finland and Spain, while they found no evidence regarding the validity of the PPP between the EMU and major non-EMU countries. Furthermore, Christidou and Panagiotidis (2010) and Wu and Lin (2011) report that the adoption of the euro has weakened the evidence in favor of the PPP. Similarly, Huang and Yang (2015) find that after the launch of the euro, the evidence in favour of the PPP is stronger for non-EMU countries rather than EMU countries. When it comes to capital markets integration (i.e. the UIP hypothesis), Kim et al. (2006) find that the degree of integration among European bond and stock markets has declined after the introduction of the euro. However, the above studies have tested the PPP and UIP hypotheses only as independent parity conditions. This implies that the possibility that deviations from the PPP equilibrium are utilized by investors when forming expectations has been overlooked. Motivated by the seminal papers of Johansen and Juselius (1992) and Juselius (1995), we expect that PPP deviations may interact with UIP deviations. In the present paper, we extend the empirical literature on economic and financial integration in the Eurozone by testing the PPP and the UIP jointly. To the best of our knowledge, we argue that the present paper is the first that tests jointly the PPP and UIP conditions between Germany (as the leading economy of the EMU) and the remaining EMU countries. Another contribution of the paper is that, compared to the majority of the empirical studies in the literature, it uses more accurate price indices. Specifically, we utilise constructed Traded-goods Price Indices (TPI) instead of Consumer Price Indices (CPI) in order to avoid the presence of non-traded goods prices, which biases negatively the empirical validation of the PPP hypothesis. Moreover, we use state-of-the-art time series econometric techniques, which allow the presence of structural breaks in cointegration analysis. Admittedly, the launch of the euro in 1999 and the global financial crisis of 2007 have altered the behaviour of variables under consideration. Hence, these two facts have caused an equal number of structural breaks, which should not be ignored by our analysis. Finally, the use of Germany as a benchmark country allows us to shed more light on Germany’s leading role in the Eurozone. Does the degree of economic integration between Germany and the rest of the Eurozone’s countries allow the characterisation of Germany as the representative EMU country? Given Germany’s domination in the Eurozone, a number of policy-related issues arise for the future of the EMU.
    Keywords: Eurozone,markets integration,PPP,UIP
    JEL: C3 F3 F4
    Date: 2016–09–24
  54. By: Asongu, Simplice; Nwachukwu, Jacinta
    Abstract: This study examines the impact of globalisation on inclusive human development in 51 African countries for the period 1996-2011 with particular emphasis on income levels (low income versus middle income), legal origins (English common law versus French civil law), resource wealth (oil-rich versus oil-poor), landlockedness (landlocked versus unlandlocked), religious domination (Christianity versus Islam) and political stability (stable versus unstable). The empirical evidence is based on instrumental variable panel Fixed effects and Tobit regressions in order to control for the unobserved heteroegeneity and limited range in the dependent variable. Political, economic, social and general globalisation variables are used. Six main hypotheses are investigated. The findings broadly show that middle income, English common law, oil-poor, unlandlocked, Christian-oriented and politically-stable countries are associated with comparatively higher levels of globalisation-driven inclusive human development. Puzzling findings are elucidated and policy implications discussed.
    Keywords: Globalisation; inequality; inclusive development; Africa
    JEL: D60 E60 F40 F59 O55
    Date: 2016–03
  55. By: International Monetary Fund.
    Abstract: This paper discusses Jamaica’s Request for Stand By Arrangement (SBA) and Cancellation of the Current Extended Arrangement Under the Extended Fund Facility (EFF). Fiscal discipline and proactive debt management have helped reduce public debt by more than 25 percent of GDP since the start of the extended arrangement under the EFF. Macroeconomic stability is becoming entrenched as evidenced by low inflation, the buildup of foreign currency reserves, and a decline in the current account deficit. Important reforms are also being undertaken to unlock Jamaica’s growth potential. In view of the country’s recent track record and authorities’ commitment to reforms and maintaining an open dialog with the IMF, the IMF staff supports the request for the precautionary SBA.
    Keywords: Stand-by arrangement requests;Economic growth;Economic conditions;Fiscal policy;Government expenditures;Social safety nets;Fiscal reforms;Monetary policy;Inflation targeting;Economic indicators;Letters of Intent;Debt sustainability analysis;Staff Reports;Press releases;Jamaica;
    Date: 2016–11–15
  56. By: Neely, Christopher J. (Federal Reserve Bank of St. Louis)
    Abstract: China is both a major trading partner of the United States and the largest official holder of U.S. assets in the world. The value of Chinese foreign exchange reserves peaked at just over $4 trillion in June 2014, but has since declined to $3.19 trillion as of August 2016. This very large decline is in foreign exchange reserves is unprecedented and some analysts have speculated that continued sales of these (mostly U.S.) assets might significantly impact the U.S. and global economies. This article explains the reasons for this large decline in official assets, what China’s policy choices are, and how these choices could affect the U.S. economy.
    Keywords: Monetary policy; central banks and their policies; foreign exchange; current account
    JEL: E52 E58 F31 F32
    Date: 2017–01–09
  57. By: Duca, John V. (Federal Reserve Bank of Dallas); Saving, Jason L. (Federal Reserve Bank of Dallas)
    Abstract: Economic policy uncertainty (EPU) has increased markedly in recent years in the U.S. and Europe, and some have posited a link between this phenomenon and subpar economic growth in advanced economies (see Baker, Bloom, and Davis, 2015). But methodological and data concerns have thus far raised doubts about whether EPU contains marginal and exogenous information about other economic phenomena. Our work analyzes the impact on EPU of several possibly endogenous variables, such as inflation and unemployment rates in countries where EPU is measured. We also consider longer-term technological factors, such as media fragmentation, which by undermining political consensus may indirectly elevate EPU. We find that about 40 percent of EPU movements can be explained by long- and short-run movements in these determinants, which is consistent with limited evidence that de-trended movements in EPU may contain marginal information about GDP growth and other macro variables.
    Keywords: economic policy uncertainty; business cycles; political polarization; political economy
    JEL: D72 E61
    Date: 2016–12–12
  58. By: Sylwia Nowak; Pratiti Chatterjee
    Abstract: Macroeconomic forecasts are persistently too optimistic. This paper finds that common factors related to general uncertainty about U.S. macrofinancial prospects and global demand drive this overoptimism. These common factors matter most for advanced economies and G- 20 countries. The results suggest that an increase in uncertainty-driven overoptimism has dampening effects on next-year real GDP growth rates. This implies that incorporating the common structure governing forecast errors across countries can help improve subsequent forecasts.
    Keywords: Economic forecasting;Forecasting models;Vector autoregression;Error analysis;Forecasting, common factors, uncertainty
    Date: 2016–11–17
  59. By: Sweder J.G. van Wijnbergen (University of Amsterdam, The Netherlands); Egle Jakucionyte (University of Amsterdam, The Netherlands)
    Abstract: The depreciation of the Hungarian forint in 2009 left Hungarian borrowers with a skyrocketing value of foreign currency debt. The resulting losses worsened debt overhang in to debt-ridden firms and eroded bank capital. Therefore, although Hungarian banks had partially isolated their balance sheets from exchange rate risk by extending FX-denominated loans, the ensuing debt overhang in borrowing firms exposed the banks to elevated credit risk. Firms, households and banks had run up the open FX-positions hoping to profit from low foreign rates in the run-up to Euro adoption. This example of carry trade in emerging Europe motivates our analysis of currency mismatch losses in different sectors in the economy, and the macroconsequences of reallocating losses from the corporate to the banking sector ex post. We develop a small open economy New Keynesian DSGE model that accounts for the implications of domestic currency depreciation for corporate debt overhang and incorporates an active banking sector with financial frictions. The model, calibrated to the Hungarian economy, shows that, in periods of unanticipated depreciation, allocating currency mismatch losses to the banking sector generates a milder recession than if currency mismatch is placed at credit constrained firms. The government can intervene to reduce aggregate losses even further by recapitalizing banks and thus mitigating the effects of currency mismatch losses on credit supply.
    Keywords: Debt overhang, foreign currency debt, leveraged banks, small open economy, Hungary
    JEL: E44 F41 P2
    Date: 2017–01–13
  60. By: International Monetary Fund.
    Abstract: Economic recovery is under way but remains fragile. Since the approval of the ECF arrangement Guinea-Bissau has endured a deep political crisis with three consecutive Governments. Political tension has eased recently with the adoption of an ECOWAS-brokered six-point roadmap for an inclusive government and constitutional reform. The government declared null and void the expensive bank bailout that derailed the ECF-supported program and held up the reviews. However, the frequent changes in government amidst lingering capacity constraints delayed key structural reform measures and weakened public financial management (PFM).
    Date: 2016–12–28
  61. By: Nezih Guner (Universitat Autònoma de Barcelona); Remzi Kaygusuz; Gustavo Ventura (Arizona State University)
    Abstract: What are the macroeconomic and welfare effects of expanding transfers to households with children in the United States? How do childcare subsidies compare to alternative policies? We answer these questions in a life-cycle equilibrium model with household labor-supply decisions, skill losses of females associated to non participation, and heterogeneity in terms of fertility, childcare expenditures and access to informal care. We consider the expansion of transfers that are contingent on market work - childcare subsidies and Child and Dependent Care Tax Credits (CDCTC) - versus those that are not - Child Tax Credits (CTC). We find that expansions of transfers of the first group have substantial positive effects on female labor supply, that are largest at the bottom of the skill distribution. Universal childcare subsidies at a 75% rate lead to long-run increases in the participation of married females of 8.8%, while an equivalent expansion of the CTC program leads to the opposite - a reduction of about 2.4%. We find that welfare gains of newborn households are substantial and up to 2.3% under the CDCTC expansion. The expansion of none of the existing programs, however, receives majority support at the time of its implementation. Our findings show substantial heterogeneity in welfare effects, with a small fraction of households - young and poorer households with children - who gain significantly while many others lose.
    Keywords: household labor supply, child-related transfers, childcare
    JEL: E62 H24 H31
    Date: 2017–01
  62. By: Mutreja, Piyusha (Syracuse University); Ravikumar, B. (Federal Reserve Bank of St. Louis); Sposi, Michael J. (Federal Reserve Bank of Dallas)
    Abstract: International trade in capital goods has quantitatively important effects on economic development through two channels: capital formation and aggregate TFP. We embed a multi country, multi sector Ricardian model of trade into a neoclassical growth framework. Our model matches several trade and development facts within a unified framework: the world distribution of capital goods production and trade, cross-country differences in investment rate and price of final goods, and cross-country equalization of price of capital goods. Reducing barriers to trade capital goods allows poor countries to access more efficient means of capital goods production abroad, leading to relatively higher capital output ratios. Meanwhile, poor countries can specialize more in their comparative advantage—non-capital goods production—and increase their TFP. The income gap between rich and poor countries declines by 40 percent by eliminating barriers to trade capital goods.
    JEL: E22 F11 O11 O4
    Date: 2016–12–01
  63. By: Fischer, Thomas (Department of Economics, Lund University)
    Abstract: Using a standard model where the individual consumption path is computed solving an optimal control problem, we investigate central claims of Piketty (2014) Rather than r>g (confirmed in the data) r-s>g - with s being the rate of time preference - matters. If this condition holds and the elasticity of substitution in the production function is larger than one, the capital share converges to one in the long run. Nevertheless, this does not have major impact on the distribution of wealth. The latter, however, converges to maximum inequality for heterogeneous time preferences or rates of interest (either persistent or stochastic).
    Keywords: wealth inequality; optimal control path; dynamic efficiency
    JEL: C63 D31 E21
    Date: 2017–01–13
  64. By: Georg Graetz; Guy Michaels
    Abstract: Since the early 1990s, recoveries from recessions in the US have been plagued by weak employment growth. One possible explanation for these "jobless" recoveries is rooted in technological change: middle-skill jobs, often involving routine tasks, are lost during recessions, and the displaced workers take time to transition into other jobs (Jaimovich and Siu, 2014). But technological replacement of middle-skill workers is not unique to the US—it also takes place in other developed countries (Goos, Manning, and Salomons, 2014). So if jobless recoveries in the US are due to technology, we might expect to also see them elsewhere in the developed world. We test this possibility using data on recoveries from 71 recessions in 28 industries and 17 countries from 1970-2011. We find that though GDP recovered more slowly after recent recessions, employment did not. Industries that used more routine tasks, and those more exposed to robotization, did not recently experience slower employment recoveries. Finally, middle-skill employment did not recover more slowly after recent recessions, and this pattern was no different in routine-intensive industries. Taken together, this evidence suggests that technology is not causing jobless recoveries in developed countries outside the US.
    Keywords: job polarization, jobless recoveries, routine-biased technological change, robots
    JEL: E32 J23 O33
    Date: 2017–01
  65. By: International Monetary Fund.
    Abstract: This Selected Issues paper analyzes macrofinancial linkages in Equatorial Guinea. Insufficient fiscal consolidation in response to falling oil prices and production has translated into arrears accumulation, leading to a sharp deterioration in commercial banks’ balance sheets. Although banks’ capital and liquidity ratio appear adequate, profitability has been shrinking, owing to weak economic activity and decelerating credit supply. Moreover, recent stress tests reveal a high sensitivity to negative liquidity and asset quality shocks. Financial development remains lackluster, which hurts economic development and effective structural transformation. Finally, strong macrofinancial linkages compounded by regional subsidiary-parent interlinkages call for increased scrutiny.
    Keywords: Banking sector;Oil sector;Oil prices;Commercial banks;Monetary policy;Financial stability;Financial soundness indicators;Selected Issues Papers;Equatorial Guinea;
    Date: 2016–11–18
  66. By: International Monetary Fund.
    Abstract: This 2016 Article IV Consultation highlights that Sweden is enjoying strong economic performance, with real GDP growth heading for about 3.4 percent in 2016 on the heels of an expansion of just over 4 percent in 2015. Employment has increased by 1.5 percent so far in 2016, pushing unemployment down to about 7 percent. Growth is expected to moderate to a still solid 2.4 percent in 2017. The fiscal deficit is expected to be small in 2016 even as migration-related government spending has almost doubled to about 1.4 percent of GDP owing to the surge in refugee inflows in 2015.
    Keywords: Article IV consultation reports;Economic growth;Monetary policy;Fiscal policy;Fiscal reforms;Housing;Macroprudential Policy;Labor market reforms;Financial sector;Banks;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Sweden;
    Date: 2016–11–17
  67. By: Chie Aoyagi; Giovanni Ganelli; Nour Tawk
    Abstract: Using prefectural data, we study the potential impact on wage dynamics of the planned minimum wage increase policy in Japan. Our main result is that stepping up minimum wage growth from 2 to the planned 3 percent per year could raise wage growth by 0.5 percent annually. Given Japan’s need for income policies to generate vigorous wage-price dynanics, reflecting the 2 percent inflation target, one policy implication of this finding is that, while the minimum wage plan will help boost wages, it should be accompanied by other, more “unorthodox†income policies, such as a “soft target†for private sector wage growth through a “comply -or-explain mechanism†for wage growth and increases in public wages in line with the inflation target.
    Keywords: Minimum wages;Japan;Wage policy;Income distribution;Women;Labor market characteristics;Regression analysis;minimum wage, income policies, Abenomics
    Date: 2016–11–28
  68. By: Eric Bartelsman (VU University Amsterdam and Tinbergen Institute, The Netherlands and IZA Bonn); Eva Hagsten (University of Iceland, Iceland); Michael Polder (Statistics Netherlands, The Netherlands)
    Abstract: This paper provides technical documentation to a database built up from firm-level sources titled Micro moments database(MMD) that is made available for researchers through Eurostat. The MMD is an internationally harmonized research database of statistical moments collected from linked longitudinal firm-level data in a large selection of EU national statistical offices. The underlying sources for the database are business registers, firm-level surveys on production, usage of Information and Communications Technologies (ICT) and innovative activities, as well as recorded information on trade and worker education, all linked at the firm level. The unit of observation in the MMD represents groups of firms within industries and allows research that bridges micro and macro analysis. The paper delineates the type of research questions that uniquely can be addressed with the MMD, and the advantages and disadvantages of using MMD for questions where alternative datasets are available. The paper next presents the methodology underlying construction of the MMD and provides documentation of the rich set of features. Finally, the paper provides descriptive statistics that highlight the unique character of the data and reviews some of the cross-country analytical work already conducted using the MMD.
    Keywords: Innovation, ICT, Productivity, Intangible Investment, linked firm-level datasets
    JEL: D2 E2 F1 J2 L2 O3
    Date: 2017–01–13
  69. By: Guner, Nezih; Kaygusuz, Remzi; Ventura, Gustavo
    Abstract: What are the macroeconomic and welfare effects of expanding transfers to households with children in the United States? How do childcare subsidies compare to alternative policies? We answer these questions in a life-cycle equilibrium model with household labor-supply decisions, skill losses of females associated to non participation, and heterogeneity in terms of fertility, childcare expenditures and access to informal care. We consider the expansion of transfers that are contingent on market work -- childcare subsidies and Child and Dependent Care Tax Credits (CDCTC) -- versus those that are not -- Child Tax Credits (CTC). We find that expansions of transfers of the first group have substantial positive effects on female labor supply, that are largest at the bottom of the skill distribution. Universal childcare subsidies at a 75% rate lead to long-run increases in the participation of married females of 8.8%, while an equivalent expansion of the CTC program leads to the opposite -- a reduction of about 2.4%.We find that welfare gains of newborn households are substantial and up to 2.3% under the CDCTC expansion. The expansion of none of the existing programs, however, receives majority support at the time of its implementation. Our findings show substantial heterogeneity in welfare effects, with a small fraction of households —young and poorer households with children — who gain significantly while many others lose.
    Keywords: Child-Related Transfers; childcare; Household Labor Supply
    JEL: E62 H24 H31
    Date: 2017–01
  70. By: Julio A. Carrillo; Gert Peersman; Joris Wauters
    Abstract: Empirical and institutional evidence finds considerable time variation in the degree of wage indexation to past inflation, a finding that is at odds with the assumption of constant indexation parameters in most New-Keynesian DSGE models. We build a DSGE model with endogenous wage indexation in which utility maximizing workers select a wage indexation rule in response to aggregate shocks and monetary policy. We show that workers index wages to past inflation when output fluctuations are driven by technology and permanent inflation-target shocks, whereas they index to trend inflation when aggregate demand shocks dominate output fluctuations. The model's equilibrium wage setting can explain the time variation in wage indexation found in post-WWII U.S. data.
    Keywords: Wage indexation, Welfare costs, Nominal rigidities
    Date: 2017–01
  71. By: Katharina van Treeck (Georg-August University Göttingen); K.M. Wacker (University of Mainz)
    Abstract: In this paper, we investigate how de facto financial globalization has influenced the labor share in developing countries. Our main argument is the need to distinguish between different types of capital in this context, as different forms of foreign investment have different fixed costs and impacts on the host countries' production process and vary concerning their bargaining power vis-à-vis labor. Assuming an aggregate elasticity of substitution between capital and labor would thus be misleading. Our econometric analysis of the impact of foreign direct vs. portfolio investment in a sample of about 40 developing and transition countries after 1992 supports this claim. Using different panel data techniques to address potential endogeneity problems, we find that FDI has a positive effect on the labor share in developing countries, while the impact of portfolio investment is significantly smaller, and potentially negative. Our results also highlight that de facto foreign investment cannot explain the decline of the labor share in developing countries over the investigated period.
    Keywords: Labor Share; Globalization; Income Distribution; International Capital Flows; FDI; Wage Bargaining
    JEL: C23 E25 F21 O15
    Date: 2017–01–12
  72. By: International Monetary Fund.
    Abstract: Côte d’Ivoire has experienced an impressive turnaround since 2012, with growth averaging 9 percent during 2012–15, accompanied by prudent fiscal policies and debt management, improved access to capital markets, and the return of foreign direct investment. However, per capita GDP remains below its 1978 peak, poverty continues to be relatively high, and human development indicators have been slow to improve. The authorities’ 2016–20 National Development Plan (NDP) aims to consolidate the conditions for strong and inclusive growth and poverty reduction through investment in infrastructure and social sectors, as well as the structural transformation of the economy by the private sector.
    Keywords: Extended Fund Facility;Economic growth;Economic conditions;Fiscal policy;Fiscal reforms;Financial management;Banking sector;Economic indicators;Balance of payments statistics;Debt sustainability analysis;Letters of Intent;Staff Reports;Press releases;Extended arrangement requests;
    Date: 2016–12–19
  73. By: Harker, Patrick T. (Federal Reserve Bank of Philadelphia)
    Abstract: Inflation, GDP growth, and the labor market are “displaying considerable strength” and indicate a robust American economy, Federal Reserve Bank of Philadelphia President Patrick T. Harker said today in remarks to the Main Line Chamber of Commerce.
    Keywords: Inflation; GDP; labor markets; economic outlook
    Date: 2017–01–12
  74. By: International Monetary Fund.
    Abstract: This 2016 Article IV Consultation highlights that the real output of Honduras in 2015 grew at 3.6 percent, slightly higher than projected. From the demand side, growth was supported by the recovery in private consumption—which responded positively to a reduction in gasoline prices and strong remittances inflows—and a boost in investment. On the supply side, the recovery in manufacturing and agriculture supported greater activity. The outlook for 2016 remains favorable. Real GDP through the second quarter of 2016 grew by 4.1 percent (year over year) broadly consistent with IMF staff projection of 3.6 percent for 2016. This projected growth performance is supported by scaled up public infrastructure investment and a supportive monetary policy stance.
    Keywords: Article IV consultation reports;Economic growth;Fiscal policy;Monetary policy;Flexible exchange rate policy;Economic indicators;Multiple currency practices;Millennium Development Goals;Letters of Intent;Stand-by arrangement reviews;Standby Credit Facility;Staff Reports;Press releases;Honduras;
    Date: 2016–11–22
  75. By: Claudio Michelacci (EIEF and CEPR); Luigi Paciello (EIEF and CEPR)
    Abstract: We study the effects of monetary policy announcements in a New Keynesian model, where ambiguity-averse households with heterogeneous net financial wealth use a worst-case criterion to assess the credibility of announcements. The announcement of a future loosening of monetary policy leads to the rebalancing of financial asset positions, it can cause credit crunches, and it may prove to be contractionary in the interim before implementation. This is because the households with positive net financial wealth (creditors) are those that are most likely to believe the announcement, due to the potential loss of wealth from the prospective policy easing. And when creditors believe the announcement more than debtors, their expected wealth losses are larger than the wealth gains that debtors expect. So aggregate net wealth is perceived to fall, and the economy can contract owing to lack of aggregate demand, which is more likely when the inequality in wealth is more pronounced. We evaluate the importance of this mechanism, focusing on the start of the ECB's practice of offering forward guidance in July 2013. The infl ation expectations of households have responded in accordance with the theory. After matching the entire distribution of European households' net financial wealth, we find that the ECB's announcement is contractionary in our model. In general, redistributing expected wealth may have perverse effects when agents are ambiguity-averse.
    Date: 2017
  76. By: Perugini, Cristiano; Žarković Rakić, Jelena; Vladisavljević, Marko
    Abstract: The great recession, and the countercyclical responses by European governments that followed, triggered an extensive wave of fiscal adjustments. The implementation of these austerity measures, although underpinned by a widespread consensus, underwent severe criticism. While their effects on output and employment have been extensively investigated, their impacts on wage inequality have received relatively less attention. In this paper we focus on the consequences of austerity measures on gender wage inequalities. After having described the literature-based conceptual framework of our analysis, we provide empirical evidence on the effects of austerity measures on: (i) the adjusted gender wage gap; and (ii) the patterns of gender horizontal segregation. The analysis covers the group of EU-28 countries in the years from 2010 to 2013. Results show that austerity measures (both tax-based and expenditure-based) impacted significantly on various sides of gender wage inequality, putting at risk the relatively little progress achieved in Europe so far.
    Keywords: austerity, gender wage inequality, gender segregation, EU-28
    JEL: E62 J16 J31 O52
    Date: 2016–12–23
  77. By: Malikane, Christopher
    Abstract: Based on new quarterly estimates of the general rate of profit over 1960-2016, this paper shows that the South African economy experienced two phase changes in the pace and rhythm of capital accumulation. The rate of profit exhibits a cyclical tendency to fall, mainly driven by the tendency of capital intensity to rise. The economy experienced a crisis of absolute overproduction of capital in the mid-1980s. This crisis was not only characterised by stagnation in the mass of profits, it was also characterised by a halt in capital accumulation. Thereafter, the rate of profit recovered primarily because of the fall in the capital-output ratio but it failed to reach the levels seen in the 1970's. We estimate that in 2012, the South African economy entered a new and on-going crisis of overproduction of capital characterised by stagnant profits and prolonged overaccumulation, which makes it impossible for economic growth to recover.
    Keywords: falling rate of profit, capital intensity, overproduction of capital, overaccumulation
    JEL: B5 E11 O5
    Date: 2017–01–03
  78. By: Matthieu Darracq Paries (European Central Bank); Pascal Jacquinot (European Central Bank); Niki Papadopoulou (Central Bank of Cyprus)
    Abstract: The euro area experience during the financial crisis highlighted the importance of financial and sovereign risk factors in macroeconomic propagation, as well as the constraints that bank lending fragmentation would pose for monetary policy conduct in a currency union. Focusing specifically on the credit intermediation process, we claim that sources of impairments in the monetary policy transmission mechanism can arise from five distinct segments, related both to the demand and the supply of credit, namely: (i) deposit spread, (ii) market-funding cost spread, (iii) bank capital charges, (iv) compensation for expected losses and (v) competitive wedge. These intermediation wedges constitute specific types of financial frictions which may independently be the epicenter of financial disturbances. Against this background we design a DSGE model spanning the relevant "financial wedges" at play during the crisis, together with its cross-country heterogeneity within the euro area, focusing on Germany, France, Italy, Spain, and rest-of-euro area. Our main results are the following. First, we show that the cross-country heterogeneity of micro-structure of financial frictions are relevant to explain the divergence in lending rates. Second, sovereign risk, bank risk and corporate risk have been the most relevant channels to explain the financial heterogeneity observed during the banking crisis (bank capital shock). Third, the corporate risk channel has been the main source of impairment of the monetary policy transmission across euro area countries. Fourth, a 10 pp increase in the annual debt-to-GDP ratio triggers a surge in sovereign yields by than 300 bps and 200 bps for Italy and Spain respectively. Fifth, cross-border financial linkages are more important for Italy and Germany and affect for both countries the transmission of bank capital shocks.
    Keywords: DSGE models, banking, financial regulation, cross-country spillovers, bank lending rates
    JEL: E4 E5 F4
    Date: 2016–12
  79. By: Curatola, Giuliano; Donadelli, Michael; Grüning, Patrick
    Abstract: The international diffusion of technology plays a key role in stimulating global growth and explaining co-movements of international equity returns. Existing empirical evidence suggests that countries are heterogeneous in their attitude toward innovation: Some countries rely more on technology adoption while other countries rely more on internal technology production. European countries that rely more on adoption are also typically characterized by lower fiscal policy exibility and higher labor market rigidity. We develop a two-country model - where both countries rely on R&D and adoption - to study the short-run and long-run effects of aggregate technology and adoption probability shocks on economic growth in the presence of the aforementioned asymmetries. Our framework suggests that an increase in the ability to adopt technology from abroad stimulates economic growth in the country that benefits from higher adoption rates but the beneficial effects also spread to the foreign country. Moreover, it helps explaining the differences in macro quantities and equity returns observed in the international data.
    Keywords: technology adoption,R&D investment,asymmetric tax regimes,asset prices
    JEL: E3 F3 F4 G12
    Date: 2017
  80. By: International Monetary Fund.
    Abstract: Following a deep recession, growth has turned positive again. However, a large output gap remains and the structural decline of key high-productivity sectors (Nokia and paper) weigh on medium-term prospects. As a member of the euro area and with the fiscal deficit and debt close to or above European limits, macroeconomic policy space is limited. The FSAP found that the banking system is well capitalized and profitable, but also highly concentrated and dependent on wholesale funding.
    Keywords: Article IV consultation reports;Economic recession;Economic recovery;Fiscal policy;Fiscal reforms;Financial sector;Banks;Bank supervision;Monetary policy;Economic indicators;Balance of payments statistics;Debt sustainability analysis;Staff Reports;Press releases;Finland;
    Date: 2016–12–07
  81. By: International Monetary Fund.
    Abstract: This paper discusses the findings and recommendations made in the Financial System Stability Assessment for Mexico. Mexico’s economic fundamentals are strong. The medium-term outlook for the Mexican economy foresees steady growth underpinned by strong macroeconomic policies, broad reform initiatives, and relatively strong balance sheets. Key risks are external and include a U.S. growth slowdown, lower oil prices, and volatility in global financial markets. The financial system is broadly resilient, notwithstanding some weaknesses under certain adverse shocks. The solvency and liquidity stress tests of the banking system indicate that it can withstand severe adverse macro-financial shocks despite large capital losses in some cases.
    Keywords: Financial system stability assessment;Financial sector;Banks;Nonbank financial sector;Financial institutions;Bank supervision;Financial safety nets;Deposit insurance;Stress testing;Economic indicators;Financial soundness indicators;Mexico;
    Date: 2016–11–22
  82. By: Murasawa, Yasutomo
    Abstract: The Bank of England/GfK NOP Inflation Attitudes Survey asks individuals about their inflation perceptions and expectations in eight ordered categories with known boundaries except for an indifference limen. With enough categories for identification, one can fit a mixture distribution to such data, which can be multi-modal. Thus Bayesian analysis of a normal mixture model for interval data with an indifference limen is of interest. This paper applies the No-U-Turn Sampler (NUTS) for Bayesian computation, and estimates the distributions of public inflation perceptions and expectations in the UK during 2001Q1--2015Q4. The estimated means are useful for measuring information rigidity.
    Keywords: Bayesian, Indifference limen, Information rigidity, Interval data, Normal mixture, No-U-turn sampler
    JEL: C11 C25 C46 C82 E31
    Date: 2017–01–16
  83. By: International Monetary Fund.
    Abstract: This Selected Issues paper analyzes transmission of monetary policy rates to lending and deposit rates in Mexico. The results show that transmission of the policy rate to market rates is statistically significant in all cases, except for mortgage rates. For sight deposits, pass-through is low, with a 1 percentage point increase in the policy rate leading to a 0.2 percentage point rise in the deposit rate. For term deposits the pass-through is stronger, but remains below unity at 0.7. The pass-through to both lending and deposit rates is very rapid. The dynamic specifications show that pass-through is significant in either the current or the following month, and the long-term impact is achieved during the second month.
    Keywords: Economic conditions;Capital flows;Bonds;Monetary policy;Interest rates on loans;Interest rates on deposits;Monetary transmission mechanism;Welfare;Selected Issues Papers;Mexico;
    Date: 2016–11–22
  84. By: International Monetary Fund.
    Abstract: Growth in the first half of the year was subdued, as the stronger stimulus expected from a timely execution of public investment projects failed to materialize because of the delayed disbursements of external financing. There was also a large fiscal slippage in the first half of the year ahead of the presidential elections. Two end-June program performance criteria and a structural benchmark (SB) were missed, but the targets for the year remain attainable.
    Keywords: Extended Credit Facility;Economic conditions;Economic growth;Banking sector;Excess liquidity;Liquidity management;Budgets;Fiscal reforms;Economic indicators;Letters of Intent;Staff Reports;Press releases;Performance criteria waivers;S?o Tom? and Pr?ncipe;
    Date: 2016–12–20
  85. By: S. Guilloux-Nefussi
    Abstract: The sensitivity of inflation to domestic slack has declined in developed countries since the mid-1980s. This article shows why this might result from globalization favoring concentration. To do so, I add three ingredients to an otherwise standard general equilibrium two-country new-Keynesian model. (1) Strategic interactions generate a time-varying desired markup; (2) endogenous entry and (3) heterogeneous productivity engender a self-selection of the most productive firms (which are also the largest ones) in international trade. Hence, the weight of large firms in domestic production increases in response to a fall in international trade costs. These large firms transmit less marginal cost fluctuations to price adjustments, rather absorbing them into their desired markup to protect their market share. At the aggregate level, this leads to domestic inflation reacting less to real activity fluctuations.
    Keywords: Inflation, Impact of Globalization, Strategic Interactions, Market Structure, Phillips Curve
    JEL: E31 F41 F62
    Date: 2016
  86. By: Kluve, Jochen; Puerto, Susanna; Robalino, David; Romero, José Manuel; Rother, Friederike; Stöterau, Jonathan; Weidenkaff, Felix; Witte, Marc
    Abstract: This study reviews the evidence on the labor market impact of youth employment programs. We analyze the effectiveness of interventions, and factors that influence program performance including country context, target beneficiaries, program design, implementation, and evaluation type. We identify 113 impact evaluations covering a wide range of methodologies, interventions, and countries. The meta-analysis synthesizes the evidence based on 2,259 effect sizes (Standardized Mean Differences) and the statistical significance of 3,105 impact estimates (Positive and Statistically Significant). Just more than one-third of youth employment program evaluations worldwide show a significant positive impact on labor market outcomes - either employment rates or earnings. In general, programs have been more successful in middle- and low-income countries; this may be because programs' investments are especially helpful for the most vulnerable population groups that they target. We conjecture that recent programs might have benefited from innovations in design and implementation. In middle-low income countries, skills training and entrepreneurship programs have had a higher impact. In high-income countries, the role of intervention type is less decisive - much depends on context and how services are chosen and delivered, a result that holds across country types. We find evidence that programs integrating multiple interventions more likely succeed because they respond better to different needs of beneficiaries. Results also point to the importance of profiling and follow-up systems in determining program performance, as well as to incentive systems for services providers.
    Keywords: youth employment,active labor market policy,systematic review,meta-analysis
    JEL: J21 J48 E24
    Date: 2016
  87. By: Leo Krippner; Michael Callaghan (Reserve Bank of New Zealand)
    Abstract: In recent years, Federal Funds Futures rates in the United States have been persistently lower than the Federal Reserve’s projections and analysts’ surveyed expectations of the Federal Funds rate. We present a case for the difference based on risk premiums, the compensation that holders of securities demand for bearing risk, or return they are prepared to forego to avoid risk. In particular, it may be that market participants are at present willing to pay an insurance value to own high-quality interest rate securities (i.e. accept a negative risk premium) because such securities would outperform in the event of an unexpected economic downturn. Financial market factors, such as the expanded Federal Reserve balance sheet from quantitative easing, may also be contributing to negative risk premiums. We estimate risk premiums from a term structure model and find they are of a sign and magnitude that would readily account for the differences mentioned in the first paragraph, and are plausible economically. Besides providing a rational reconciliation for the differences, a further implication from our negative risk premium estimates is that the expected path of the Federal Funds rate in the United States may currently be materially higher than might be inferred directly from the prevailing rates on the current series of Federal Funds Futures contracts.
    Date: 2016–09
  88. By: Pacheco, André Sanchez; Tenani, Paulo Sérgio
    Abstract: This paper accesses the presence of inflation bias in major Latin American Economies over the past decade. Using a small-scale New Keynesian DSGE model and Bayesian Techniques, the time-varying neutral rate of interest is estimated for major Latin American economies. Then the deviations in the policy rate from the neutral rate are overlapped with deviations in current inflation from target. This simple procedure allows the identification of three different regimes of monetary policy – too easy, too restrictive and appropriate. The main result is that Latin American Central Banks often set monetary policy too easy. Analogously, the same conclusion is found if one compares the policy rate with a Taylor Rule-based interest rate aimed at the center of the inflation target range. Such analysis provides evidence of inflation bias in the region, with the exception of Chile.
    Date: 2016–08–25
  89. By: Kilponen, Juha; Verona, Fabio
    Abstract: We revisit the empirical performance of the Q theory of investment, explicitly taking into account the frequency dependence of investment, Tobin’s Q, and cash flow. The time series are decomposed into orthogonal components of different frequencies using wavelet multiresolution analysis. We find that the Q theory fits the data much better than might be expected (both in-sample and out-of-sample) when the frequency relationship between the variables is taken into account. Merging the wavelet approach and proxies for Q recently suggested in the investment literature also significantly improves the quality of short-term forecasts.
    JEL: C49 E22 G31
    Date: 2016–12–20
  90. By: International Monetary Fund.
    Abstract: Chile’s fundamentals and policy framework remain strong. However, economic prospects are being shaped by lower dynamism in key trading partners, permanently lower copper prices, slower trend growth, and mounting social demands for inclusive growth. Important reforms are underway to lift growth and reduce inequality, but they inevitably generate transition costs. Against this background, staff’s recommendations aim to balance trade-offs between growth, stability, and social objectives, while assessing the macroeconomic policy mix during this challenging transition.
    Keywords: Article IV consultation reports;Economic growth;Fiscal policy;Corporate sector;Fiscal reforms;Pension reforms;Monetary policy;Floating exchange rates;Bank supervision;Economic indicators;Debt sustainability analysis;External Sector Report;Staff Reports;Press releases;Chile;
    Date: 2016–12–09
  91. By: Ernest Dautovic (University of Lausanne); Harald Hau (University of Geneva and Swiss Finance Institute); Yi Huang (The Graduate Institute of International and Development Studies)
    Abstract: This paper evaluates the Chinese minimum wage policy for the period 2002-2009 in terms of its impact on low income household consumption. Using a representative household panel, we find support for the permanent income hypothesis, whereby unanticipated and persistent income increases due to minimum wage policy change are fully spent. The impact is driven by households with at least one child. We infer significant positive welfare effects for low income households based on expenditure increases concentrated in health care and education, whereas a negative employment effect of higher minimum wage cannot be confirmed.
    Keywords: Minimum wages; Labor income; Household consumption; Permanent income hypothesis
    JEL: E24 J38 C26
    Date: 2017–01
  92. By: International Monetary Fund.
    Abstract: On October 20, 2016, Zimbabwe fully settled its overdue financial obligations to the Poverty Reduction and Growth Trust (PRGT) using its SDR holdings.1 Zimbabwe had been in continuous arrears to the PRGT since February 2001. The authorities had been making regular monthly payments of US$0.15 million each since 2013, and four more such payments have been made since the last review of overdue financial obligations on May 2, 2016.2 As of the day of repayment, Zimbabwe’s arrears to the PRGT amounted to SDR 78.3 million, which comprised overdue PRGT principal of SDR 61.7 million, and total interest obligations of SDR 16.6 million, (covering overdue interest and interest accrued through October 20, 2016 on overdue principal and interest amounts). The repayment of SDR 78.3 million has been applied towards the PRGT’s Reserve Account.
    Keywords: Settlement of overdue obligations;Poverty Reduction and Growth Trust;Payments arrears;Overdue obligations;Noncooperation with Fund;Technical Assistance;Staff Reports;Press releases;Zimbabwe;
    Date: 2016–12–19
  93. By: Kijong Kim; Ipek Ilkkaracan; Tolga Kaya
    Abstract: This paper examines the aggregate and gender employment impact of expanding the early childhood care and preschool education (ECCPE) sector in Turkey and compares it to the expansion of the construction sector. The authors' methodology combines input-output analysis with a statistical microsimulation approach. Their findings suggest that the expansion of the ECCPE sector creates more jobs and does so in a more gender-equitable way than an expansion of the construction sector. In particular, it narrows the gender employment and earnings gaps, generates more decent jobs, and achieves greater short-run fiscal sustainability.
    Keywords: Early Childhood Care and Preschool Education; Employment; Gender Equality; Macroeconomic Impact; Microsimulation; Input-Output Analysis
    JEL: I25 E17 R15 O23
    Date: 2017–01
  94. By: International Monetary Fund.
    Abstract: Namibia has experienced strong growth and economic stability, but faces significant challenges and structural issues. Public debt is rising and reserve coverage is below safe levels. Banks’ balance sheets appear robust, but rising housing prices and household indebtedness pose macro-financial concerns. Deep-rooted structural problems have kept unemployment and income inequality unacceptably high.
    Keywords: Article IV consultation reports;Economic growth;Current account deficits;Fiscal policy;Fiscal consolidation;Fiscal reforms;Nonbank financial sector;Housing prices;Economic indicators;Balance of payments statistics;Debt sustainability analysis;Staff Reports;Press releases;Namibia;
    Date: 2016–12–08
  95. By: Dongya Koh; Raül Santaeulàlia-Llopis
    Abstract: We empirically show that the short-run elasticity of substitution between capital and labor (?t) is countercyclical. In recessions, capital and labor are more substitutable than in expansions. We explore the effects of the countercyclicality of ?t on aggregate fluctuations in the context of an otherwise standard competitive-markets business cycle model. The countercyclical ?t contributes to resolve four main labor-market puzzles: Dunlop-Tarshis phenomenon, labor-productivity puzzle, hours-productivity puzzle, and labor share puzzle.
    Date: 2017–01
  96. By: International Monetary Fund.
    Abstract: Iraq is adjusting to a double shock arising from the ISIS attacks and the sharp drop in global oil prices. The conflict has hurt the economy through displacement and impoverishment of millions of people, and destruction of infrastructure and assets. The oil price decline has resulted in a massive reduction in budget revenue, pushing the fiscal deficit to an unsustainable level. The authorities are responding to the crisis with a mix of necessary fiscal adjustment and financing, maintaining their commitment to the exchange rate peg. The peg provides a key nominal anchor in a highly uncertain environment with policy capacity weakened by the war against ISIS.
    Keywords: Stand-by arrangement reviews;Balance of payments deficits;Fiscal policy;Fiscal consolidation;Fiscal reforms;Financial management;Public enterprises;Bank restructuring;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Phasing of purchases;Performance criteria waivers;Iraq;
    Date: 2016–12–13
  97. By: Toncheva, Rossitsa
    Abstract: This paper presents the results from an expert survey on the possibility of a modern barter exchange system (MBES) to be implemented in Bulgaria. MBES is an abstract theoretical construction which helps uncover the reasons why such schemes are successful in a number of countries with different social and cultural characteristics, while in Bulgaria this phenomenon is not popular. Sadly, the results show that there is no readiness for participation in MBES. It is seen mainly as a social structure but the expectations are that it would work as a business entity. The research has found that the idea behind MBES is inapplicable under certain conditions, such as those in Bulgaria with its typical characteristics of today. Even though the MBES models are usually successful in other countries, this is probably due to the fact that those are mostly socially mature (homogenous) societies in countries with a well-developed economic infrastructure.
    Keywords: modern exchance barter system, social currency design, Bulgaria
    JEL: D71 D85 E40 E42 O35
    Date: 2015–10–10
  98. By: International Monetary Fund.
    Abstract: Growth is projected at 5.4 percent for 2016 and 6.1 percent for 2017, owing to higher gold production and a rebound in agriculture and services. The authorities have published their National Economic and Social Development Plan (PNDES), which envisages an ambitious scaling up of investment over the next 5 years. Given limited financing and absorption capacity, staff recommends a more gradual approach, consistent with medium-term debt sustainability.
    Date: 2016–12–22
  99. By: Sheldon, Ian
    Keywords: Agricultural and Food Policy, International Relations/Trade,
    Date: 2016–12
  100. By: International Monetary Fund.
    Abstract: This paper discusses the findings of the Financial System Stability Assessment for Sweden. The Swedish financial system is large and highly interconnected, putting a premium on the accompanying policy framework. Relative to the size of the domestic economy, the financial system is among Europe’s largest. It features complex domestic and international linkages, reflecting Sweden’s role as a regional financial hub. However, the macrofinancial risks have grown since 2011, for example the rising share of highly indebted households. Stress tests also suggest that banks and nonbanks are largely resilient to solvency shocks, but concerns persist about the ability of bank models to capture unexpected losses.
    Keywords: Financial system stability assessment;Financial sector;Banks;Bank supervision;Bank resolution;Insurance supervision;Securities regulations;International cooperation;Financial stability;Reports on the Observance of Standards and Codes;Sweden;
    Date: 2016–11–17
  101. By: Oisin Connolly
    Abstract: Prize linked savings accounts provide a return in the form of randomly chosen accounts receiving large cash prizes, in lieu of a guaranteed and uniform interest rate. This model became legal for American national banks upon bipartisan passage of the American Savings Promotion Act in December 2014, and many states have deregulated this option for state chartered banks and credit unions in recent years. Prize linked savings programs have unique appeal and proven societal benefits, but the product is still not available to the vast majority of Americans. There is demonstrated interest in these products, but the supply side may be the bottleneck, because the prevailing consensus is that prize linked savings primarily appeal to low income consumers. This paper examines a less common, dynamic prize, model of prize linked savings and shows why it might result in a larger average account size. The paper proposes three methods of managing risk under this model, and tests two of them using a Monte Carlo simulation. We conclude that both tested methods are effective at mitigating the most severe risks.
    Date: 2017–01
  102. By: International Monetary Fund.
    Abstract: This Selected Issues paper quantifies the short- and medium-term growth effects of major ongoing highway and railway projects in the Former Yugoslav Republic of Macedonia. A standard neoclassical growth model is augmented with public capital to capture both demand and supply-side effects of public infrastructure investments. The calibrated model suggests that the four ongoing highway and railway investments of 2–3 percent of GDP annually for 2014–18 are likely to raise the growth rate of real GDP by 0.5 percentage points on average for each year in 2014–20. Enhancing public investment efficiency can increase growth effects up to 0.8 percentage points.
    Keywords: Public investment;Infrastructure;Foreign direct investment;Economic growth;Employment;Labor market reforms;Spillovers;Selected Issues Papers;former Yugoslav Republic of Macedonia (FYR Macedonia);
    Date: 2016–11–21
  103. By: Kaplanhan, Fatih; Korkut, Cem
    Abstract: Advancement of internet innovation brings both pros and cons by changing the rules and dynamics of fields as trade, public service, education, entertainment, intelligence, and defense. The developments in web technology provided a lot of conveniences. On the other hand, this situation brought many problems because of lack of laws and rules in this field. One example of these challenges is those websites do not have branches in every country are not subject to taxation. This situation is directly related to the sovereign rights of the countries. Major international internet companies are only subject to tax in the countries where their headquarters are located and do not pay taxes in other nations where they earn money. Particularly in the developing countries, the tax loss reaches serious dimensions. This study will focus on the problem of social media taxation. Also, solution proposals will be presented especially for developing countries.
    Keywords: untaxed income, social media, taxation, internet taxation
    JEL: E62 K29 K34 M48
    Date: 2016–12–20
  104. By: Antonio David; Natalija Novta
    Abstract: Paraguay faces a trade-off between building fiscal credibility and amending the existing fiscal rule to accommodate infrastructure investment and provide space for countercyclical policies. In this paper, we discuss several alternative fiscal rules for Paraguay and present simulations of debt trajectories in each case, assuming a baseline and three deterministic shock scenarios. We provide a supplementary Excel file to replicate debt simulations under different fiscal rules. The results suggest that potential modifications to make the fiscal rules more flexible in Paraguay should be accompanied by a number of safeguards that enhance credibility of the fiscal anchor and preserve sustainability.
    Keywords: Fiscal responsibility law;Paraguay;Fiscal rules;Fiscal policy;Fiscal Rules; Fiscal Governance; Paraguay
    Date: 2016–11–16
  105. By: Hu, Ruiyang (Southern Methodist University); Zarazaga, Carlos E. (Federal Reserve Bank of Dallas)
    Abstract: Fiscal imbalances predating the Great Recession but aggravated by it prompted the U.S. Congress to enact in 2011 legislation that, in the absence of other measures, would trigger two years later a so-called “budget sequestration” procedure that implied reducing government discretionary spending to unprecedented low levels over the following decade. For that reason, economic agents may not have expected this “fiscal stabilization measure of last resort” to be sustainable when it was put into effect in 2013 as scheduled. This is exactly the issue this paper set out to explore, on the grounds that sizing up the expectations that economic agents had about the budget sequestration can provide powerful insights on how fiscal stabilization is likely to proceed in the U.S., going forward. The paper makes inferences about the credibility enjoyed by the budget sequestration with an adapted version of the Business Cycle Accounting approach, originally developed for other purposes. The main finding is that the evidence favors a scenario in which spending cuts are half the size of those actually implied by the sequester. The paper takes this result as an indication that the U.S. is unlikely to address its unresolved fiscal imbalances with just spending austerity, an interpretation consistent with existing literature that traces the seemingly anomalous behavior of economic variables during the Great Recession and its aftermath to alternative fiscal stabilization mechanisms.
    Date: 2016–12–01
  106. By: Crespo Cuaresma, Jesus (Vienna University of Economics and Business (WU), Austria Wittgenstein Centre for Demography and Global Human Capital (WIC), International Institute for Applied Systems Analysis (IIASA), Austrian Institute of Economic Research (WIFO)); Fortin, Ines (Research Group Financial Markets and Econometrics, Institute for Advanced Studies); Hlouskova, Jaroslava (Research Group Financial Markets and Econometrics, Institute for Advanced Studies and Thompson Rivers University, Canada)
    Abstract: We examine the potential gains of using exchange rate forecast models and forecast combination methods in the management of currency portfolios for three exchange rates, the euro (EUR) versus the US dollar (USD), the British pound (GBP) and the Japanese yen (JPY). We use a battery of econometric specifications to evaluate whether optimal currency portfolios implied by trading strategies based on exchange rate forecasts outperform single-currency and the equally weighted portfolio. We assess the differences in profitability of optimal currency portfolios for different types of investor preferences, different trading strategies, different composite forecasts and different forecast horizons. Our results indicate that the benefits of integrating exchange rate forecasts from state-of-the-art econometric models in currency portfolios are sensitive to the trading strategy under consideration and vary strongly across prediction horizons.
    Keywords: currency portfolios, exchange rate forecasting, trading strategies, profitability
    JEL: G02 G11 E20
    Date: 2017–01
  107. By: Christophe André (Economics Department, Organisation for Economic Co-operation and Development (OECD), France); Tsangyao Chang (Department of Finance, College of Finance, Feng Chia University, Taichung, Taiwan); Luis A. Gil-Alana (University of Navarra, Faculty of Economics and ICS (NCID), Spain); Rangan Gupta (Department of Economics, University of Pretoria, South Africa)
    Abstract: In this paper, we extend the existing literature on the sustainability of current account deficits by examining the relevance of long memory and structural breaks in modelling the dynamics of current account to GDP ratios. Unlike standard unit root tests, which can only indicate whether a series is stationary or not by looking at 0 or 1 for the orders of integration and which have low power, especially in cases where the series is characterized by a fractional process, the long memory approach provides an exact measure of the degree of persistence. However, long memory models are known to overestimate the degree of persistence of the series in the presence of structural breaks, which are very likely in quarterly macroeconomic data covering a long period. Indeed, we show that regime changes do exist in both the mean and trend of the current account to GDP ratios. Thus, we test persistence allowing for both smooth and sharp breaks. Our methodology also allows us to include any number of sharp breaks, whereas standard unit root tests only permit either one or two breaks. Hence, our approach is more general and more robust to misspecifications caused by the omission of breaks than standard methods. To the best of our knowledge, this is the first paper testing for the sustainability of current account balances in the seven major advanced economies (G7) and the BRICS group of countries using long-memory models incorporating both smooth and sharp breaks.
    Keywords: Current account, sustainability, long-memory, smooth and sharp breaks, G7, BRICS
    JEL: C22 F32
    Date: 2017–01
  108. By: Tamon Asonuma; Marcos Chamon; Akira Sasahara
    Abstract: Sovereign debt restructurings have been shown to influence the dynamics of imports and exports. This paper shows that the impact can vary substantially depending on whether the restructuring takes place preemptively without missing payments to creditors, or whether it takes place after a default has occurred. We document that countries with post-default restructurings experience on average: (i) a more severe and protracted decline in imports, (ii) a larger fall in exports, and (iii) a sharper and more prolonged decline in both GDP, investment and real exchange rate than preemptive cases. These stylized facts are confirmed by panel regressions and local projection estimates, and a range of robustness checks including for the endogeneity of the restructuring strategy. Our findings suggest that a country’s choice of how to go about restructuring its debt can have major implications for the costs it incurs from restructuring.
    Keywords: Sovereign debt defaults;Sovereign debt restructuring;External debt;Trade;Econometric models;Sovereign Debt; Sovereign Defaults; Sovereign Debt Restructurings; Trade; Panel Regression; Local Projections;
    Date: 2016–11–15
  109. By: International Monetary Fund.
    Abstract: External developments–notably relating to remittances and copper prices–have remained adverse, contributing to subdued domestic demand and deflationary conditions, but export performance has continued to be relatively strong. As a result, the current account deficit has narrowed further while pressures on the fiscal accounts have intensified. Cumulative tax revenues through September declined by ½ percent vis-à -vis the same period of last year, and show an even higher shortfall with respect to projections in the budget. On the positive side, the National Assembly approved the new Tax Code, which is expected to improve the tax environment considerably and boost medium-term revenues. Monetary conditions have stabilized, and the Central Bank of Armenia (CBA) has continued to unwind past tightening measures. Conditions in the banking sector remain challenging, with relatively high NPLs and low credit growth, but the sector remains well capitalized, and the CBA’s policy of increasing minimum capital requirements has led to an orderly consolidation process. A new Cabinet with a technocratic profile was appointed in September with the objective of strengthening economic management. New parliamentary elections are expected to take place in April/May 2017, as Armenia continues its transition from a presidential to a parliamentary system.
    Keywords: Extended arrangement reviews;Economic conditions;Export growth;Fiscal policy;Banking sector;Monetary policy;Exchange rate assessments;Macroprudential Policy;Economic indicators;Letters of Intent;Debt sustainability analysis;Staff Reports;Press releases;Performance criteria modifications;Armenia;
    Date: 2016–12–13
  110. By: Calliope Spanou
    Abstract: Policy conditionality has been a frequently used tool in the context of the Euro zone crisis management. By linking the disbursement of loan instalments to specific policy requirements the macro-economic adjustment programmes used conditionality as leverage to promote structural reforms.How does conditionality induce policy change? This central question is examined by considering conditionality as a ‘mega’ policy instrument that seeks to guide the domestic policy system and define its reform trajectory. Policy conditionality thus determines the areas of reform and prescribes their direction while also defining the means and timeframe within which they have to be implemented. Conditionality impacts on domestic governance and transforms the policy making system into a compliance and implementation mechanism. The paper argues that the reform potential of conditionality relies on its interaction with the domestic political system and policy process. A public policy lens can help to better understand the dynamics inherent in this process as well as highlight the strengths and limitations of conditionality. Following the conventional stages of public policy, the contribution focuses on the political challenges involved and sketches out a prospective empirical research agenda.
    Keywords: Policy conditionality, structural reform, domestic governance, euro crisis management, Policy instrument
    Date: 2016–11
  111. By: Mendonça, Diogo de Prince; Marçal, Emerson Fernandes; Holland, Marcio
    Abstract: The main goal of this paper is to determine the effectiveness of fiscal policy in Brazil. With a sample from 1997 to 2014, we are not able to obtain the relevant impact of fiscal stimuli on output, even when altering both the methodology and the model specifications. Our more robust estimate of the government spending fiscal multiplier is approximately 0.5. Higher multipliers are reported using TVAR and other approaches and specifications, although they are biased for outliers and lack of robustness. We were not able to find any statistically significant response of the output to tax changes, but changes in output appear to generate tax revenue. Finally, we discuss plausible explanations for such ineffectiveness of fiscal policy. Among several factors highlighted by the economic literature, we suggest that the level of the government spending undermines the importance of fiscal shocks. That would explain the type of fiscal conundrum manifested in Brazil.
    Date: 2016–11–22
  112. By: Minoas Koukouritakis
    Abstract: Long-term bond yields’ convergence between each new EU country and the Eurozone is examined in the present paper, in the framework of the current debt crisis in the Eurozone. As the German dominance was established during the crisis, convergence implies that the long-term bond yield of each new EU country must converge to that of Germany. As shown in this paper, under the conditions of uncovered interest rate parity (UIP) and ex-ante relative purchasing power parity (PPP) long-term bond yield spreads are equal to expected inflation differentials. Thus, evidence of yields’ convergence between a new EU country and Germany can be interpreted as monetary policy convergence of this country to Germany. However, lack of yields’ convergence does not necessarily imply monetary policy divergence with Germany. There is the possibility that a new EU country has achieved monetary policy convergence to Germany, but its yields to diverge with those of Germany. The reason is that the recent debt crisis in the Eurozone might increase the sovereign default risk of this country and thus, led to large and persistent risk premium. Of course, such information has practical implications regarding the evaluation of each new EU country in order to join the Eurozone.1 Hence, a proper evaluation of bond yield linkages or, in other words, monetary policy convergence should take the above arguments into account, especially in the period of the debt crisis. Otherwise, invalid conclusions may be drawn. The empirical literature on interest rate convergence within the EU is extensive, and convergence has been linked to the concepts of unit roots and cointegration in most studies. Among others, Karfakis and Moschos (1990) investigated interest rate linkages between Germany and each of Belgium, France, Ireland, Italy and the Netherlands. Using short rates from the late 1970s to the late 1980s, they found no evidence of long-run interest rates convergence. Evidence against the German leadership hypothesis within the European Monetary System (EMS) for the same period, was also found by Katsimbris and Miller (1993). By including the USA to their sample, they showed that both the US and the German rates have important causal influences on the interest rates of the EMS members. Hafer and Kutan (1994) examined long-run co-movements of short rates and money supplies in a group of five EMS countries from the late 1970s to the early 1990s, and found evidence that implies partial monetary policy convergence. Similar evidence was provided by Kirchgässner and Wolters (1995), who used money market rates from mid-1970s to mid-1990s, and showed that Germany has a strong long-run influence within the EMS. Haug et al. (2000) tried to determine which of the twelve original EU countries would form a successful monetary union based on the nominal convergence criteria of the Treaty on European Union (TEU). Using data from 1979 to 1995, they found that the formation of a successful monetary union would require significant adjustments in fiscal and monetary policies by several of these countries. Camarero et al. (2002) investigated convergence of long-term interest rate differentials for the EU countries in relation to the TEU criterion, using 10-year bond yields from 1980 to mid-1990s. Departing from the literature, they adopted the definitions of long-run convergence of per capital output and catching-up convergence (Bernard and Durlauf, 1995, 1996),2 and accounted for structural breaks in the data using the one-break unit root test of Perron (1997). They showed that six countries satisfied the criterion of long-run convergence, seven countries satisfied the conditions of catching-up convergence, and only Italy did not converge in either sense. Holtemöller (2005) studied the degree of monetary integration to the Eurozone for Greece and the Central and Eastern European EU countries, based on interest rate spreads and ex-post deviations from the UIP. Using interbank rates from mid-1990s to the early 2000s, his evidence implied high degree of monetary integration for Estonia and Lithuania, medium degree of monetary integration for Greece and Slovakia, and low degree of monetary integration for the Czech Republic, Hungary, Latvia, Poland and Slovenia. Jenkins and Madzharova (2008) investigated real interest rate convergence for the original EU countries, using 10-year bond yields from the late 1990s to mid-2000s. Their evidence implied failure of the real interest rate parity, mainly due to inflation rate differences. Gabrisch and Orlowski (2010) departed from cointegration analysis and applied GARCH methodology in order to investigate interest rate convergence for the Czech Republic, Hungary, Poland, Slovakia and Slovenia in relation to the Eurozone yields. They focused on 10-year bond yields from the early to the late 2000s and found evidence of stronger convergence for the Czech Republic, Slovenia, and Poland, in which the macroeconomic fundamentals are solid and the financial markets are stable, and weaker convergence for Hungary and Slovakia. Frömmel and Kruse (2015) studied interest rate convergence by implementing a changing persistence model for Belgium, France, Italy and The Netherlands in relation to Germany as the reference country. Using 3-month treasury bill rates from the early 1980s to the late 2000s, they found evidence of very different convergence periods for the sample countries, and showed that fiscal and monetary policy coordination were the main factors that led to interest rate convergence. Several limitations of the existing studies can be pointed out, which may have affected the reported results. Firstly, most of the aforementioned studies, with the exception of Camarero et al. (2002), did not account for structural shifts in the data. Secondly, the existing studies have not distinguished in a systematic way between stochastic and deterministic trends in the structure of interest rates. This is an important issue because evidence of cointegration between, for example, two interest rates implies the presence of a single common stochastic trend that ties them in the long run. On the other hand, deterministic trends depend on the underlying process that generates the stochastic variables under study. Thus, for two interest rates it is not enough to cointegrate with cointegrating vector (1.-1); it is also required that they are cotrended, so that the deterministic trends cancel out in the differential of the two series. Thirdly, in most of the existing studies, interest rate convergence has been examined without an explicit formal definition of convergence or a data generation process (DGP) for the interest rates. The above omissions make the interpretation of the empirical results less transparent and informative. The present study attempts to deal with these considerations. Firstly, consistent with the Eurozone’s nominal convergence criteria, this study focuses on nominal 10-year bond yields’ convergence between each new EU country and Germany, in the framework of an explicit DGP for bond yields and a new definition of convergence that allows for a constant non-negative deviation in each pair of bond yields. The inclusion of these elements leads to explicit testable cointegration and cotrending restrictions that makes the interpretation of the econometric results more informative and meaningful. Furthermore, under the UIP and PPP conditions, deviations from yields’ parity are equal to expected inflation differentials. Such deviations can be eliminated in the long run, if monetary authorities (or market forces) in each new EU country contribute in establishing common deterministic and stochastic trends with Germany, regarding the long-term yields or expected inflation rates. This case can be interpreted as strong convergence with Germany, which more than satisfies the TEU criterion for yields’ convergence. On the other hand, if the UIP and PPP conditions do not hold due to time-varying stationary risk premia, different tax rates (Mark, 1985) or transactions costs (Goodwin and Grennes, 1994) across countries, yields convergence can be defined broader as weak convergence, in which yields converge to a non-negative constant. If this constant is less than 2%, the TEU criterion is also satisfied. Hence, the empirical results are interpreted in terms of strong or weak monetary policy convergence between each new EU country and Germany. Secondly, I employ the cointegration test developed by Lütkepohl, Saikkonen and Trenkler in several papers noted below, in order to capture possible structural shifts in the data. The omission of such shifts in the data when they actually exist can distort substantially standard inference procedures for cointegration. In this analysis, such shifts cannot be omitted as the current debt crisis in the Eurozone has probably altered the deterministic components of the new EU countries’ yields. In addition, as the deterministic components of yields are assumed to be independent of the stochastic components, the Gonzalo and Granger (1995) methodology for estimating and testing for the common stochastic trend in each pair of yields has been implemented.
    Keywords: debt crisis, yields convergence, structural shifts, cointegration, common trends, cotrending
    JEL: E43 F15 F42
    Date: 2016–09–22
  113. By: International Monetary Fund.
    Abstract: This paper estimates the impact of China’s growth slowdown and the recent large decline in commodity prices on South Africa. It seeks to identify the key channels through which shocks to China’s economy are transmitted to South Africa, as well as the propagation of these shocks within the economy. The paper also discusses key macro-financial linkages and related risks in the South African economy, focusing on downside scenarios that are not part of the baseline. South Africa’s high reliance on external financing, with banks intermediating a larger share of capital flows in recent years, exposes it to the risk of capital flow shocks.
    Keywords: Aging;Population;Pensions;Health care;Intervention;Monetary policy;Inflation targeting;Public finance;Banking sector;Business cycles;Consumption;Selected Issues Papers;Brazil;
    Date: 2016–11–15
  114. By: Alexis Derviz
    Abstract: The paper investigates the behavior of credit demand and output arising from differences in productive capital sources in economies recovering from an adverse real shock. Beside physical capital, another form of capital - human capital - is available during the catch-up phase. Since a part of new physical capital must be debt-financed, whereas production is risky due to uncertain future total factor productivity, defaults happen with positive probability. The latter can be reduced by partially substituting physical capital for human, at a disutility cost. We ask whether a shift away from risky borrowed physical capital to human capital is able to generate a reduction in aggregate credit losses without too big a loss in output, thereby warranting a specific prudential policy. This question is addressed by means of a dynamic stochastic model with feedback decision rules, for which we develop a full-distribution numerical solution method. The long-term stationary limit distribution of the solution generalizes the steady state notion of deterministic models. Agents that start from relatively "poor" initial states are found to benefit from limits on unsecured borrowing at a very moderate cost in output terms, whereas for "rich" initial states, such limits prove to be largely redundant.
    Keywords: Credit, dynamic stochastic equilibrium, human capital, prudential policy, recovery
    JEL: E22 G33 G38 C61 D92
    Date: 2016–12
  115. By: International Monetary Fund.
    Abstract: Since the start of the three-year Extended Arrangement in June 2016, the economy has begun to stabilize, supported by appropriate monetary and fiscal policies. Progress was made in structural reforms aimed at revenue mobilization and expenditure management, albeit with some delays. The completion of the first review will make available the second purchase equivalent to SDR 119.894 million.
    Keywords: Extended Fund Facility;Fiscal policy;Tax policy;Fiscal reforms;Monetary policy;Economic indicators;Debt sustainability analysis;Letters of Intent;Staff Reports;Extended arrangement reviews;Press releases;Performance criteria modifications;Sri Lanka;
    Date: 2016–12–09
  116. By: International Monetary Fund.
    Abstract: This report assesses fiscal transparency practices in the United Kingdom in relation to the requirements of the IMF’s new Fiscal Transparency Code (FTC). Across all pillars evaluated in the code, the United Kingdom scores very highly when compared with other countries that have undergone an assessment. Of the 48 principles in the FTC, the United Kingdom meets 9 principles at the basic level, 10 principles at the good level, and 23 principles at the advanced level. Fiscal transparency practices are strongest in the area of fiscal reporting and resource revenue management. In four principles, the United Kingdom’s transparency practices do not currently meet basic practice.
    Keywords: Fiscal transparency;Fiscal risk;Risk management;Budgets;Budgeting;Economic forecasting;Reports on the Observance of Standards and Codes;United Kingdom;
    Date: 2016–11–16

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