nep-mac New Economics Papers
on Macroeconomics
Issue of 2017‒02‒12
93 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Large and state-dependent effects of quasi-random monetary experiments By Jordà, Òscar; Schularick, Moritz; Taylor, Alan M.
  2. A Model of Secular Stagnation: Theory and Quantitative Evaluation By Gauti B. Eggertsson; Neil R. Mehrotra; Jacob A. Robbins
  3. Monetary Policy and Inequality when Aggregate Demand depends on Liquidity By Bilbiie, Florin Ovidiu; Ragot, Xavier
  4. Sectoral Composition of Government Spending, Distortionary Income Taxation, and Macroeconomic (In)stabilit By Jang-Ting Guo; Juin-Jen Chang; Jhy-Yuan Shieh; Wei-Neng Wang
  5. The quantification of structural reforms in OECD countries: A new framework By Balázs Égert; Peter Gal
  6. The credit channel during times of financial stress: A time varying VAR analysis By Dany, Geraldine
  7. Understanding Asset Correlations By Henrik Hasseltoft; Dominic Burkhardt
  8. Business Cycles and the Propagation of Shocks in the Input-Output Network By Molnarova, Zuzana; Molnárová, Zuzana; Reiter, Michael
  9. Foreign booms, domestic busts: the global dimension of banking crises By Cesa-Bianchi, Ambrogio; Eguren-Martin, Fernando; Thwaites, Gregory
  10. Liquidity Traps and Monetary Policy: Managing a Credit Crunch: Online Appendix By Buera, Francisco J.; Nicolini, Juan Pablo
  11. Did the FED REact to Asset Price Bubbles? By Dennis Wesselbaum; Marc-Andre Luik
  12. Optimal Fiscal and Monetary Policy, Debt Crisis and Management By Cristiano Cantore; Paul Levine; Giovanni Melina; Joseph Pearlman
  13. Liquidity Traps and Monetary Policy: Managing a Credit Crunch By Buera, Francisco J.; Nicolini, Juan Pablo
  14. Global Booms, Domestic Busts: The Global Dimension of Banking Crise By Ambrogio Cesa-Bianchi; Fernando Eguren Martin; Gregory Thwaites
  15. The political economy of exchange rate stability during the gold standard. The case of Spain, 1874-1914 By Nogues-Marco, Pilar; Martínez-Ruiz, Elena
  16. Intermediation Markups and Monetary Policy Passthrough By Semyon Malamud; Andreas Schrimpf
  17. Effets sectoriels de la politique monétaire et activité économique: cas du Maroc By Moussir, Charaf Eddine
  18. Uncertainty and Monetary Policy in the US: A Journey into Non-Linear Territory By Giovanni Pellegrino
  19. Quantitative easing, changes in global liquidity and financial instability By Esteban Ramon Perez Caldentey
  20. Returning to Surplus: New Zealand's Post-GFC Fiscal Consolidation Experience By Dhritidyuti Bose; Renee Philip; Richard Sullivan
  21. Plurality in Teaching Macroeconomics By Azad, Rohit
  22. Macroprudential policy instruments and procyclicality of loan-loss provisions – cross-country evidence By Malgorzata Olszak; Iwona Kowalska; Sylwia Roszkowska
  23. Jobless Recoveries: The Interaction between Financial and Search Frictions By Dennis Wesselbaum
  24. Zooming the Ins and Outs of the U.S. Unemployment By Pedro Portugal; António Rua
  25. Inflation expectation uncertainty, inflation and the output gap By Fuest, Angela; Schmidt, Torsten
  26. International Spillovers and Local Credit Cycles By Yusuf Soner Baskaya; Julian di Giovanni; Sebnem Kalemli-Özcan; Mehmet Fatih Ulu
  27. External Monetary Shocks to Central and Eastern European Countries By Pierre LESUISSE
  28. Low Long-Term Interest Rates - An alternative View By Stefan Behrendt
  29. Public Policy Against Political Frictions By Grechyna, Daryna
  30. Cheap Talk in a New Keynesian Model By Dennis Wesselbaum
  31. Rise of Services and Female Employment: Strength of the Relationship By Serife Genc Ileri; Gonul Sengul
  32. Debt Sustainability and direction of trade: What does Africa’s shifting engagement with BRIC and OECD tells us? By Megersa, kelbesa; Cassimon, Danny
  33. The cyclical position of housing prices – a VECM approach for Hungary By Tamás Berki; Tibor Szendrei
  34. Policy effectiveness is limited by a flat Phillips curve, stabilization as practiced in Europe and the US By David Kiefer
  35. Yields on sovereign debt, fragmentation and monetary policy transmission in the euro area: A GVAR approach By Victor Echevarria Icaza; Simón Sosvilla-Rivero
  36. US Financial Deregulation: Repeal or Adjust? By Lopez, Claude; Saeidinezhad, Elham
  37. The Macroeconomic Determinants of Stock Market Development: Evidence from South Africa By Ho, Sin-Yu
  38. Les monnaies virtuelles décentralisées sont-elles des outils d’avenir ? By Ariane TICHIT; Pascal LAFOURCADE; Vincent MAZENOD
  39. The impact of global uncertainty on the global economy, and large developed and developing economies By Wensheng Kang; Ronald A. Ratti; Joaquin Vespignani
  40. Intermittent Price Changes in Production Plants: Empirical Evidence using Monthly Data By Nilsen, Øivind A.; Vange, Magne
  41. Delays in Public Goods By Santanu Chatterjee; Olaf Posch; Dennis Wesselbaum
  42. How Does Sovereign Bond Market Integration Relate to Fundamentals and CDS Spreads? By Ines Chaieb; Vihang R. Errunza; Rajna Gibson
  43. The Reaction of Stock Market Returns to Unemployment By Taamouti, Abderrahim; Gonzalo, Jesús
  44. A forecasting performance comparison of dynamic factor models based on static and dynamic methods By F. Della Marra
  45. On the effect of Cournot and Stackelberg competition in the banking sector on the investment cycle By Eleni Dalla
  46. Concentrating on the Fall of the Labor Share By Autor, David; Dorn, David; Katz, Lawrence; Patterson, Christina; Van Reenen, John
  47. Firm Heterogeneity in Consumption Baskets: Evidence from Home and Store Scanner Data By Benjamin Faber; Thibault Fally
  48. Capital Flows and the International Credit Channel By Yusuf Soner Baskaya; Julian di Giovanni; Sebnem Kalemli-Özcan; José-Luis Peydró; Mehmet Fatih Ulu
  49. Government Commitment and Unemployment Insurance Over the Business Cycle By Pei, Yun; Xie, Zoe
  50. Post Keynesian Dynamic Stochastic General Equilibrium Theory By Farmer, Roger E A
  51. Determinants of long-term economic Growth redux: A Measurement Error Model Averaging (MEMA) approach. By Doppelhofer, Gernot; Hansen, Ole-Petter Moe; Weeks, Melvyn
  52. Family Economics Writ Large By Jeremy Greenwood; Nezih Guner; Guillaume Vandenbroucke
  53. How did forecasters respond to the American growth slowdown since the mid-2000s? By Gabriel Mathy; Daniel Kirwin
  54. Slow to Hire, Quick to Fire: Employment Dynamics with Asymmetric Responses to News* By Cosmin Ilut; Matthias Kehrig; Martin Schneider
  55. A note on the identification and transmission of energy demand and supply shocks By Michelle, Gilmartin
  56. UK Financial Reforms: Bank of England 2.0 By Lopez, Claude; Saeidinezhad, Elham
  57. Bank Loan Loss Provisions Research: A Review By Ozili, Peterson K
  58. How Biased Are U.S. Government Forecasts of the Federal Debt? By Neil R. Ericsson
  59. Structure of Income Inequality and Household Leverage: Theory and Cross-Country Evidence By Rémi Bazillier; Jérôme Héricourt; Samuel Ligonnière
  60. Abolishing privately created money would increase GDP. By Musgrave, Ralph S.
  61. The Natural Rate of Interest II: Empirical Overview By Dmitry Chervyakov; Philipp König
  62. Statutory Minimum Wages in the EU: Institutional Settings and Macroeconomic Implications By Arpaia, Alfonso; Cardoso, Pedro; Kiss, Aron; Van Herck, Kristine; Vandeplas, Anneleen
  63. Late-in-Life Risks and the Under-Insurance Puzzle By Ameriks, John; Briggs, Joseph; Caplin, Andrew; Shapiro, Matthew D.; Tonetti, Christopher
  64. Inequality, Redistributive Policies and Multiplier Dynamics in an Agent-Based Model with Credit Rationing By Elisa Palagi; Mauro Napoletano; Andrea Roventini; Jean-Luc Gaffard
  65. Time-Changed Lévy LIBOR Market Model: Pricing and Joint Estimation of the Cap Surface and Swaption Cube By Markus Leippold; Jacob Stromberg
  66. Price Changes - Stickiness and Internal Coordination in Multiproduct Firms. By Letterie, Wilko; Nilsen, Øivind A.
  67. A New Test of Ricardian Equivalence Using the Narrative Record on Tax Changes By Alfred Haug
  68. Cuentas económicas de Galicia: Tercer trimestre de 2016. By González-Laxe, Fernando; Armesto-Pina, José Francisco; Lago-Peñas, Santiago; Sanchez-Fernandez, Patricio
  69. Backtesting European Stress Tests By Camara, Boubacar; Pessarossi, Pierre; Philippon, Thomas
  70. Global-Soziale Marktwirtschaft und die Flüchtlingsfrage By von Weizsäcker, Carl Christian
  71. The Euro and the Battle of Ideas By Brunnermeier, Markus; James, Harold; Landau, Jean-Pierre
  72. Natural and cyclical unemployment: a stochastic frontier decomposition and economic policy implications By Cuéllar-Martín, Jaime; Martín-Román, Ángel L.; Moral, Alfonso
  73. Bank-Specific Shocks and House Price Growth in the U.S. By Franziska Bremus; Thomas Krause; Felix Noth
  74. Old and new formulations of the neoclassical theory of aggregate investment : a critical review By Daniele Girardi
  75. Do Firms Mitigate or Magnify Capital Misallocation? Evidence from Plant-Level Data By Matthias Kehrig; Nicolas Vincent
  76. The Natural Rate of Interest and Secular Stagnation By Guido Baldi; Patrick Harms
  77. Cross-Border Banking and Macroeconomic Determinants By Mary Everett; Vahagn Galstyan
  78. The Economic Effects of Public Financing: Evidence from Municipal Bond Ratings Recalibration By Adelino, Manuel; Cunha, Igor; Ferreira, Miguel
  79. Updating the Long Term Rate in Time: A Possible Approach By Diana Zigraiova; Petr Jakubik
  80. Tax Policy and Economic Growth: Does It Really Matter? By Donatella Baiardi; Paola Profeta; Riccardo Puglisi; Simona Scabrosetti
  81. Wealth and Income Inequalities ← → r > g By Yannick Malevergne; Didier Sornette
  82. BANK-SPECIFIC DETERMINANTS OF SENSITIVITY OF LOAN-LOSS PROVISIONS TO BUSINESS CYCLE By Malgorzata Olszak; Iwona Kowalska; Patrycja Chodnicka-Jaworska; Filip Switala
  83. La Macroeconomi?a dina?mica: un modelo nume?rico dida?ctico By Carlos E. Posada
  84. Prioritization of Public Investment Projects in Vietnam By Glenn P. Jenkins; Mikhail Miklyaev; Shahryar Afra; Majid Hashemi
  85. Efficient Lemons By Uras, Rasim Burak; Wagner, Wolf
  86. Empirical Identification of Time Preferences: Theory and An Illustration Using Convex Time Budgets By Antoine Bommier; Bruno Lanz
  87. Cost-Benefit Analysis of Rwanda’s Poultry Value Chains By Mikhail Miklyaev; Shahryar Afra; Majid Hashemi
  88. Bank Response to Higher Capital Requirements: Evidence from a Quasi-Natural Experiment By Reint Gropp; Thomas C. Mosk; Steven Ongena; Carlo Wix
  89. Cost Benefit Analysis of Senegal’s Rice Value Chains By Mikhail Miklyaev; Majid Hashemi; Melani Schultz
  90. Public Debt, Endogenous Growth Cycles Public Debt, Endogenous Growth Cycles and Indeterminacy By Maxime MENUET; Alexandru MINEA; Patrick VILLIEU
  91. Cost-Benefit Analysis of Liberia’s Rice and Goat Value Chains By Mikhail Miklyaev; Majid Hashemi; Melani Schultz
  92. Should the marginal tax rate be negative? Ragnar Frisch on the socially optimal amount of work. By Sandmo, Agnar
  93. Kicking a Crude Habit: Diversifying Away from Oil and Gas in the 21st Century By Cullen S. Hendrix

  1. By: Jordà, Òscar; Schularick, Moritz; Taylor, Alan M.
    Abstract: Fixing the exchange rate constrains monetary policy. Along with unfettered cross-border capital flows, the trilemma implies that arbitrage, not the central bank, determines how interest rates fluctuate. The annals of international finance thus provide quasi-natural experiments with which to measure how macroeconomic outcomes respond to policy rates. Based on historical data since 1870, we estimate the local average treatment effect (LATE) of monetary policy interventions and examine its implications for the population ATE with a trilemma instrument. Using a novel control function approach we evaluate the robustness of our findings to possible spillovers via alternative channels. Our results prove to be robust. We find that the effects of monetary policy are much larger than previously estimated, and that these effects are state-dependent.
    Keywords: fixed exchange rates; instru- mental variables; interest rates; local average treatment effect; local projections; monetary experiments; trilemma
    JEL: E01 E30 E32 E44 E47 E51 F33 F42 F44
    Date: 2017–01
  2. By: Gauti B. Eggertsson; Neil R. Mehrotra; Jacob A. Robbins
    Abstract: This paper formalizes and quantifies the secular stagnation hypothesis, defined as a persistently low or negative natural rate of interest leading to a chronically binding zero lower bound (ZLB). Output-inflation dynamics and policy prescriptions are fundamentally different than in the standard New Keynesian framework. Using a 56-period quantitative lifecycle model, a standard calibration to US data delivers a natural rate ranging from -1% to -2%, implying an elevated risk of ZLB episodes for the foreseeable future. We decompose the contribution of demographic and technological factors to the decline in interest rates since 1970 and quantify changes required to restore higher rates.
    JEL: E31 E32 E5 E52 E58 E6 E62
    Date: 2017–01
  3. By: Bilbiie, Florin Ovidiu; Ragot, Xavier
    Abstract: Monetary policy design changes a great deal when inequality matters. In our New Keynesian model, aggregate demand depends on liquidity as heterogeneous consumers hold money in face of uninsurable risk and participate infrequently in financial markets. Endogenous fluctuations in precautionary liquidity challenge central bank's aggregate demand management: the Taylor coefficients required for determinacy are in the double digits, for moderate market incompleteness. Responding to inequality or liquidity can restore conventional wisdom. A novel tradeoff for Ramsey-optimal monetary policy arises between inequality and standard---inflation and output---stabilization objectives. Price stability has significant welfare costs that are inequality-related: inflation volatility hinders volatility of constrained agents' consumption.
    Keywords: determinacy; heterogenous agents; incomplete markets; inequality; interest rate rules; limited participation; liquidity constraints; money; optimal (Ramsey) monetary policy; Taylor principle
    JEL: D14 D31 E21 E3 E4 E5
    Date: 2017–01
  4. By: Jang-Ting Guo (Department of Economics, University of California Riverside); Juin-Jen Chang (Academia Sinica); Jhy-Yuan Shieh (Soochow University); Wei-Neng Wang (Academia Sinica)
    Abstract: This paper quantitatively examines the interrelations between sectoral composition of government spending and macroeconomic (in)stability in a two-sector real business cycle model with positive productive externalities in investment and distortionary income taxation through a stylized balanced-budget fiscal policy rule. We find that under endogenous public expenditures, the benchmark model always exhibits indeterminacy and sunspots provided the constant tax rate does not exceed a critical value. When the tax rate is raised to a higher level, a sufficiently high public-consumption share can destabilize the macroeconomy by generating belief-driven cyclical fluctuations. We also find that under the baseline parameterization with fixed government spending, the low-tax steady state is an indeterminate sink and the high-tax steady state is a saddle point, regardless of how public expenditures are divided between consumption and investment goods.
    Keywords: Government Spending; Distortionary Income Taxation; Equilibrium (In)determinacy.
    JEL: E32 E62 O41
    Date: 2017–02
  5. By: Balázs Égert; Peter Gal
    Abstract: This document describes and discusses a new supply side framework that quantifies the impact of structural reforms on per capita income in OECD countries. It presents the overall macroeconomic impacts of reforms by aggregating over the effects on physical capital, employment and productivity through a production function. On the basis of reforms defined as observed changes in policies, the paper finds that product market regulation has the largest overall single policy impact five years after the reforms. But the combined impact of all labour market policies is considerably larger than that of product market regulation. The paper also shows that policy impacts can differ at different horizons. The overall long-term effects on GDP per capita of policies transiting through capital deepening can be considerably larger than the 5- to 10-year impacts. By contrast, the long-term impact of policies coming only via the employment rate channel materialises at shorter horizon. La quantification des réformes structurelles dans les pays de l’OCDE : Un nouveau cadre analytique Ce document décrit et discute un nouveau cadre analytique pour quantifier l'impact des réformes structurelles sur le revenu par habitant dans les pays de l'OCDE. Il présente les effets macroéconomiques des réformes en agrégeant les effets sur le capital physique, l'emploi et la productivité via une fonction de production. Sur la base des réformes définies comme des changements observés dans les politiques, le document trouve de manière générale que la réglementation des marchés de produits a le plus grand impact cinq ans après les réformes. Toutefois, l'impact conjugué de réformes touchant l’ensemble des politiques du marché du travail est considérablement plus élevé par rapport à celui découlant de la réforme de la règlementation des marchés de produits. Le document montre également que les impacts des politiques peuvent différer selon les horizons. Les effets à long terme sur le PIB par habitant des politiques passant par une hausse du capital peuvent être considérablement plus importants que les impacts observés après 5 à 10 ans. En revanche, l'impact à long terme des réformes de politiques passant par le canal de l'emploi se concrétise à un horizon plus court.
    Keywords: per capita impact, simulation, structural reforms
    JEL: D24 E17 E22 E24 J08
    Date: 2017–02–07
  6. By: Dany, Geraldine
    Abstract: This paper investigates in the contribution of financial stress to gdp and price developments as well as in the strength of the credit channel, as part of the monetary policy transmission mechanism, especially in times of high financial stress. Therefore, a TVP VAR with stochastic volatility is estimated and a structural financial stress shock, a monetary policy shock and a productivity shock are identified by using sign restrictions. Moreover, the imposed identification relies on a monetary DSGE model with financial frictions in the form of moral hazard with bankers running away with a faction of the assets they manage. As the estimation sample spans from 1984Q1 to 2012Q4 the implied impulse responses of the model are verified by re-simulating the model over a wide range of parameter calibrations as to account for a decline of inflation persistence and changing monetary policy as well as changes in the risk-adjusted premium and leverage ratio of the financial intermediaries over time. It is shown that structural financial stress as well as monetary policy shock are drivers of real economic activity and prices. Especially during the recent financial crisis and also in the course of the dot-com crisis financial stress has had negative impacts on gdp and prices whereas monetary policy was able to counteract declines of gdp but was not able to offset deflationary developments. The contributions to the risk-adjusted financing premium show that the credit channel in deed has been of increased importance during times of high financial stress. Thus, the paper provides evidence for the implications of recently developed DSGE models with financial frictions in the banking sector.
    JEL: E44 E52 C11
    Date: 2016
  7. By: Henrik Hasseltoft (Lynx Asset Management; Stockholm School of Economics); Dominic Burkhardt (University of Zurich and Swiss Finance Institute)
    Abstract: We document an inverse relation between stock-bond correlations and correlations of growth and inflation. We find that rising inflation uncertainty lowers stock prices but can either lower or raise nominal bond prices depending on whether inflation is counter- or procyclical. We show that the time-varying comovement of growth and inflation has important implications for how inflation impacts asset prices. We explain our findings in a long-run risk model with non-neutral inflation shocks and regime shifts, allowing for countercyclical and procyclical inflation regimes. The model can produce an upward-sloping real yield curve and rationally explains the so-called Fed-model. Finally, inflation and monetary policy shocks were important drivers of stock-bond correlations during the countercyclical period 1965-2000 while output shocks dominated during the procyclical period 2000-2011.
    Keywords: cyclicality, fed-model, inflation, long-run risks, money illusion, regime-switching, stock-bond correlation
    JEL: E43 E44 G12
  8. By: Molnarova, Zuzana; Molnárová, Zuzana; Reiter, Michael
    Abstract: This paper studies the relative importance of aggregate and industry-specific shocks in generating business cycle fluctuations. We assess the role of demand and supply side shocks at the aggregate and the industry level. We build a highly disaggregated multi-industry DSGE model with an input-output network structure. In the model, fluctuations in measured total factor productivity can arise as an endogenous response to demand shocks. The model is estimated by the simulated method of moments using U.S. industry data from 1960 to 2005. We show that aggregate technology shocks play a small role in explaining business cycles. Instead, aggregate demand shocks together with industry-specific technology shocks are important drivers of fluctuations of output and productivity. Demand shocks explain 60% of the variance of GDP and more than 10% of measured aggregate productivity. Industry-specific technology shocks are transmitted via input-output linkages and affect output and measured productivity in connected industries. They alone explain 50% of the variance of aggregate productivity and more than 20% of the variance in GDP. The presence of the input-output network is crucial for the results. The linkages between industries decrease the share of aggregate fluctuations explained by aggregate technology shock by 40 percentage points.
    JEL: E32 E37 D24
    Date: 2016
  9. By: Cesa-Bianchi, Ambrogio (Bank of England); Eguren-Martin, Fernando (Bank of England); Thwaites, Gregory (Bank of England)
    Abstract: This paper provides novel empirical evidence showing that foreign financial developments are a powerful predictor of domestic banking crises. Using a new data set for 38 advanced and emerging economies over 1970–2011, we show that credit growth in the rest of the world has a large positive effect on the probability of banking crises taking place at home, even when controlling for domestic credit growth. Our results suggest that this effect is larger for financially open economies, and is consistent with transmission via cross-border capital flows and market sentiment. Direct contagion from foreign crises plays an important role, but does not account for the whole effect.
    Keywords: Financial crises; global credit cycle; banking; financial stability; sentiment
    JEL: E32 E44 E52 G01
    Date: 2017–02–03
  10. By: Buera, Francisco J. (Federal Reserve Bank of Chicago); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis)
    Keywords: Liquidity trap; Credit crunch; Collateral constraints; Monetary policy; Ricardian equivalence
    JEL: E44 E52 E58 E63
    Date: 2017–02–02
  11. By: Dennis Wesselbaum (Department of Economics, University of Otago, New Zealand); Marc-Andre Luik (Helmut-Schmidt University)
    Abstract: This paper investigates whether the U. S. Federal Reserve responds to asset price bubbles or not. We estimate a DSGE model featuring a financial accelerator and a process for asset price bubbles. We find evidence for a fairly strong reaction to bubbles. However, a counterfactual analysis shows that output is lower if the central banks reacts to the asset price bubble. Finally, we estimate an asymmetric version in which the central bank only reacts to positive price deviations. This version generates the best statistical fit. Including the bubble reduces the negative effects of the recent financial crisis but the symmetric response would have generated an earlier and stronger recovery.
    Keywords: Bayesian Methods, Bubbles, Monetary Policy.
    JEL: C11 E32 E44 E62
    Date: 2016–02
  12. By: Cristiano Cantore (University of Surrey); Paul Levine (University of Surrey); Giovanni Melina (City Univeristy and IMF); Joseph Pearlman (City University)
    Abstract: The initial government debt-to-GDP ratio and the government’s commitment play a pivotal role in determining the welfare-optimal speed of fiscal consolidation in the management of a debt crisis. Under commitment, for low or moderate initial government debt-to-GPD ratios, the optimal consolidation is very slow. A faster pace is optimal when the economy starts from a high level of public debt implying high sovereign risk premia, unless these are suppressed via a bailout by official creditors. Under discretion, the cost of not being able to commit is reflected into a quick consolidation of government debt. Simple monetary-fiscal rules with passive fiscal policy, designed for an environment with “normal shocks”, perform reasonably well in mimicking the Ramsey-optimal response to one-off government debt shocks. When the government can issue also long-term bonds – under commitment – the optimal debt consolidation pace is slower than in the case of short-term bonds only, and entails an increase in the ratio between long and short-term bonds.
    JEL: E52 E62 H12 H63
    Date: 2017–02
  13. By: Buera, Francisco J. (Federal Reserve Bank of Chicago); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis)
    Abstract: We study a model with heterogeneous producers that face collateral and cash-in-advance constraints. A tightening of the collateral constraint results in a credit-crunch-generated recession that reproduces several features of the financial crisis that unraveled in 2007 in the United States. The model can be used to study the effects of the credit-crunch on the main macroeconomic variables and the impact of alternative policies. The policy implications regarding forward guidance are in contrast with the prevalent view in most central banks, based on the New Keynesian explanation of the liquidity trap.
    Keywords: Liquidity trap; Credit crunch; Collateral constraints; Monetary policy; Ricardian equivalence
    JEL: E44 E52 E58 E63
    Date: 2017–02–02
  14. By: Ambrogio Cesa-Bianchi (Bank of England; Centre for Macroeconomics (CFM)); Fernando Eguren Martin (Bank of England); Gregory Thwaites (Bank of England; Centre for Macroeconomics (CFM))
    Abstract: This paper provides novel empirical evidence showing that foreign financial developments are a powerful predictor of domestic banking crises. Using a new data set for 38 advanced and emerging economies over 1970-2011, we show that credit growth in the rest of the world has a large positive effect on the probability of banking crises taking place at home, even when controlling for domestic credit growth. Our results suggest that this effect is larger for nancially open economies, and is consistent with transmission via cross-border capital ows and market sentiment. Direct contagion from foreign crises plays an important role, but does not account for the whole effect.
    Keywords: Financial Crises, Global Credit Cycle, Banking, Financial Stability, Sentiment
    JEL: E32 E44 E52 G01
    Date: 2017–01
  15. By: Nogues-Marco, Pilar; Martínez-Ruiz, Elena
    Abstract: This article contributes to the literature on the commitment to gold during the classical period of the gold standard. We use the case of Spain to analyse how national institutional design determined adherence to gold in peripheral countries, and argue that institutional design was the result of negotiation between the government and the central bank. We construct indicators of the relative bargaining power of the two actors to assess their respective influence in determining adherence to gold. Our results show that a powerful government facilitated adherence to the gold standard, but an independent central bank hindered it, especially if confronted by an unstable political authority. Central banks were private institutions whose objective was profit maximization, not monetary stability. Strongly independent private central banks operating in politically very weak countries avoided the responsibility of defending the national currency, even in a stable macroeconomic situation. In peripheral countries, therefore, adherence (or not) to gold was determined by the institutional design in which the monetary system operated.
    Keywords: Gold Standard, Political Economy, Central Bank Independence, Institutional Design, Monetary Stability, Spain
    JEL: E02 E42 E58 F33 N13
    Date: 2017
  16. By: Semyon Malamud (Ecole Polytechnique Fédérale de Lausanne, Swiss Finance Institute, and Centre for Economic Policy Research (CEPR)); Andreas Schrimpf (Bank for International Settlements (BIS))
    Abstract: We introduce intermediation frictions into the classical monetary model with fully flexible prices. Trade in financial assets happens through intermediaries who bargain over a full set of state contingent claims with their customers. Monetary policy is redistributive and affects intermediaries' ability to extract rents; this opens up a new channel for transmission of monetary shocks into rates in the wider economy, which may be labelled the markup channel of monetary policy. Passthrough efficiency depends crucially on the anticipated sensitivity of future monetary policy to future stock market returns (the "Central Bank Put"). The strength of this put determines the room for maneuver of monetary policy: when it is strong, monetary policy is destabilizing and may lead to market tantrums where deteriorating risk premia, illiquidity and markups mutually reinforce each other; when the put is too strong, passthrough becomes fully inefficient and a surprise easing even begets a rise in real rates.
    Keywords: Monetary Policy, Stock Returns, Intermediation, Market Frictions
    JEL: G12 E52 E40 E44
  17. By: Moussir, Charaf Eddine
    Abstract: The effects of monetary policy on economic performance have long attracted the attention of economists and policy makers. The literature identifies different ways of understanding the monetary transmission mechanisms. They vary according to the importance given to interest rates, credits, exchange rates, asset prices and other financial institutions in the transmission mechanism. The purpose of this paper is to shed more light on the existence of significant differences in the reactions of Moroccan sectors to monetary policy shocks. The results of the analysis indicate that at the aggregate level a monetary policy tightening leads to a decrease of the overall GDP and price level. At the disaggregated level, the extraction industry, manufacturing, construction, hotels & restaurants, the financial and insurance activities are among the more sensitive sectors to monetary policy shocks. On the other hand monetary policy innovations do not appear to have an adverse impact on agriculture and fishing sectors
    Keywords: Monetary policy, Sectoral output, vector auto regression (VAR), Impulse response functions, Morocco.
    JEL: E23 E43 E52
    Date: 2017–04
  18. By: Giovanni Pellegrino (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne; and Department of Economics, University of Verona)
    Abstract: This paper estimates a non-linear Interacted VAR model to assess whether the real effects of monetary policy shocks are milder during times of high uncertainty. In a novel way, uncertainty, i.e., the conditioning indicator discriminating “high†and “low†uncertainty states, is modeled endogenously in the VAR and is found to reduce after an expansionary shock. Generalized Impulse Response Functions à la Koop, Pesaran and Potter (1996) suggest that monetary policy shocks are significantly less powerful during uncertain times, with the peak reactions of a battery of real variables being about two-thirds milder than those during tranquil times. Among the theoretical explanations proposed by the literature, real option effects and precautionary savings appear the ones supported by our results.
    Keywords: Monetary policy shocks, Non-Linear Structural Vector Auto-Regressions, Interacted VAR, Generalized Impulse Response Functions, uncertainty
    JEL: C32 E32 E52
    Date: 2017–02
  19. By: Esteban Ramon Perez Caldentey (Universidad de Santiago de Chile (CL))
    Abstract: This paper argues that Quantitative Easing (QE) led to significant changes in the global financial system, which, are not conducive to greater financial stability. Through a policy of reserve accumulation, QE disconnected base money from the money supply and deposits from loans. Jointly with the deleveraging process of global banks, QE contributed to restrain the supply of bank credit growth throughout the world. Also global banks continued to expand their trading on the basis of opaque instruments such as derivatives. Moreover, by altering the relative profitability of investing in different assets, QE exerted a positive effect on the performance of the international bond market. This not only spilled into emerging market economies expanding the debt of both the financial sector and the non-financial corporate sector but also has reinforced the role of the asset management industry in financial markets. Due to its concentration and interconnectedness, illiquidity, and pro-cyclicality the asset management industry poses important risks to financial stability.
    Keywords: Quantitative easing, financial system, global banks, asset management industry
    JEL: E12 E42 E44 E51
    Date: 2017–02
  20. By: Dhritidyuti Bose; Renee Philip; Richard Sullivan (The Treasury)
    Abstract: New Zealand's fiscal outlook deteriorated following the Global Financial Crisis, and in late 2008 fiscal projections showed net government debt in New Zealand increasing from 5% of GDP to around 40% within 10 years, mostly reflecting permanently lower expectations for future tax revenue. These circumstances were compounded by the significant costs associated with the Canterbury earthquakes in 2010 and 2011. The structural deficit peaked at 4% of GDP in 2011. In 2011, the Government set a target to return the Budget to surplus by 2014/15, and stepped up its fiscal consolidation programme. A surplus was achieved in that year, and net debt has now peaked just above 25% of GDP. The surplus was achieved predominantly by slowing the growth rate of nominal spending so that expenses-to-GDP declined. The slowing in expense growth reflected a combination of factors including programme savings, efficiency savings, reprioritisation, and slower public sector wage growth. New Zealand's fiscal management approach - a combination of fixed nominal baselines for most expenditure alongside comprehensive top-down constraints on new spending through the Budget - provided effective tools for controlling expense growth. Nevertheless, the return to surplus is only the first step in fiscal consolidation and challenges remain to ensure these surpluses are sustained, and to rebuild the fiscal buffers that existed prior to 2009.
    Keywords: Balanced Budget; Fiscal policy; Fiscal institutions; Fiscal Management Approach; Fiscal Policy; Fiscal Target; National Budget; Public Finance Act; Surplus
    JEL: E62 E65 H62
    Date: 2016–12
  21. By: Azad, Rohit
    Abstract: The current Great Recession, the worst crisis that capitalism has faced since the Great Depression, has failed, at least so far, to generate a change in the teaching and practice of Macroeconomics. This seems bizarre as if nothing has happened and the economists are just going about doing business as usual. In light of this, the current paper attempts to address how Macroeconomics ought to be taught to students at the advanced intermediate level, which gives them an overall perspective on the subject.
    Keywords: Macroeconomic Teaching, New Keynesian, Post Keynesian, Keynes-Kalecki
    JEL: A2 A22 B4 B50 E3 E4 E5
    Date: 2016–10–01
  22. By: Malgorzata Olszak (Department of Banking and Money Markets, Faculty of Management, University of Warsaw, Poland); Iwona Kowalska (Department of Mathematics and Statistical Methods, Faculty of Management, University of Warsaw, Poland); Sylwia Roszkowska (Faculty of Economic and Social Sciences, University of £ódŸ, National Bank of Poland, Poland)
    Abstract: We analyze the effectiveness of various macroprudential policy instruments in reducing the procyclicality of loan-loss provisions (LLPs) using individual bank information from over 65 countries and applying the two-step GMM Blundell-Bond (1998) approach with robust standard errors. Our research identifies several new facts. Firstly, borrower restrictions are definitely more effective in reducing the procyclicality of loan-loss provisions than other macroprudential policy instruments. This effect is supported in both unconsolidated and consolidated data and is robust to several robustness checks. Secondly, dynamic provisions, large exposure concentration limits and taxes on specific assets are effective in reducing the procyclicality of loan-loss provisions. And finally, we find that both loan-to-value caps and debt-to-income ratios, are especially effective in reducing the procyclicality of LLP of large banks. Off-balance-sheet restrictions, concentration limits and taxes are also effective in reducing the procyclicality of LLP of large banks. Dynamic provisions reduce the procyclicality of LLP independently of bank size.
    Keywords: macroprudential policy, loan-loss provisions, business cycle, procyclicality
    JEL: E32 G21 G28 G32
    Date: 2016–12
  23. By: Dennis Wesselbaum (Department of Economics, University of Otago, New Zealand)
    Abstract: This paper establishes a link between labor market frictions and financial market frictions. We present empirical evidence about the relation between search and financial frictions. Then, we build a stylized DSGE model that features this channel. Simulation excercises show that the model with this channel generates a strong internal propagation mechanism, replicates stylized labor market effects of the Great Recession, and, most importantly, creates a jobless recovery.
    Keywords: DSGE, Jobless Recovery, Labor Market and Financial Frictions
    JEL: C32 E24 E32 J63
    Date: 2016–02
  24. By: Pedro Portugal; António Rua
    Abstract: To better understand unemployment dynamics it is key to assess the role played by job creation and job destruction. Although the U.S. case has been studied extensively, the importance of job nding and employment exit rates to unemployment variability remains unsettled. The aim of this paper is to contribute to this debate by adopting a novel lens, wavelet analysis. We resort to wavelet analysis to unveil time- and frequency-varying features regarding the contribution of the job nding and job separation rates for the U.S. unemployment rate dynamics. Drawing on this approach, we are able to reconcile some apparently contradictory ndings reported in previous literature. We nd that the job nding rate is more inuential for the overall unemployment behavior but the job separation rate also plays a critical role, especially during recessions.
    JEL: C10 E24 E32
    Date: 2017
  25. By: Fuest, Angela; Schmidt, Torsten
    Abstract: Uncertainty about the future path of inflation affects consumption, saving and investment decisions as well as wage negotiations and price setting of firms. These decisions are based on inflation expectations which are a key determinant of inflation in the New Keynesian Phillips Curve. In this paper we therefore explicitly analyse the relationship between inflation expectations, the inflation rate and the output gap and the variance of these variables as uncertainty measures by using a VAR-GARCH-inmean model. Our main finding is that inflation expectation uncertainty is positively related to expected inflation and to the inflation rate.
    Keywords: inflation expectations,inflation uncertainty,VAR-GARCH-M models
    JEL: C22 E31 E32
    Date: 2017
  26. By: Yusuf Soner Baskaya; Julian di Giovanni; Sebnem Kalemli-Özcan; Mehmet Fatih Ulu
    Abstract: We show that capital inflows are important drivers of domestic credit cycles using a firm-bank-loan level dataset for a representative emerging market. Instrumenting inflows by changes in global risk appetite (VIX), we find that a fall in VIX leads to a large decline in real borrowing rates and an expansion in credit supply. Estimates explain 40% of observed cyclical corporate credit growth. The OLS-elasticity of interest rates vis-à-vis capital inflows is smaller than the IV-elasticity. Banks with higher non- core funding offer relatively lower rates to low net worth firms, but do not extend more credit to them given collateral constraints.
    Keywords: Capital flows, VIX, risk premium, bank credit, firm heterogeneity
    JEL: E0 F0 F1
    Date: 2017–02
  27. By: Pierre LESUISSE
    Abstract: Few countries are part of the European Union but on the verge of the Euro-zone. This study aims at identifying the amplitude of the direct ECB monetary policy impact, i.e. the so-called international monetary spillovers, in Central and Eastern European countries (CEECs). The use of a panel-VAR method allows to deal with the small time span and endogeneity. We found that CEECs tend to significantly converge in monetary terms to the ECB standards. The direct impact on real variables remains relatively weak but contrary to the literature, is significant and in line with expectations. A persistent negative adjustment of GDP gives a quick glimpse of a robust reaction against monetary shock when the focus is made on the post-economic crisis period. The exchange rate regime plays a small but significant role in terms of magnitude. This increased interdependence is the result of macroeconomic reforms implemented during the last 25 years.
    Keywords: Monetary integration, External shocks, Panel VAR.
    JEL: F42 E52 C23
    Date: 2017–02
  28. By: Stefan Behrendt (Friedrich Schiller University Jena, School of Economics and Business Administration)
    Abstract: The fall in risk free interest rates since the 1980s has mostly been described as being induced by factors that push down interest rates from the demand side. This paper contributes to the literature by adding a view of the supply side, namely that interest has to be earned first, before it can be distributed. Consequently, interest can only sustainably be distributed from the added value in a given period. But through higher debt ratios today, a smaller amount of added value can be used to fund interest payments than in the past. In such an environment, average interest rates can only be held stable, if the nominal amount of interest paid is rising, which would then lead to lower income for labour and/or a lower reward for entrepreneurs in the form of corporate profits and dividends. But labour and entrepreneurial income did not fall as much as would be needed to compensate for the much higher amount of interest bearing assets since the 1980s. The only logical consequence then is a fall in average interest rates.
    Keywords: Secular stagnation, low interest rates
    JEL: E25 E40 E44 E50 O40
    Date: 2017–02–02
  29. By: Grechyna, Daryna
    Abstract: Recent research has demonstrated that political distortions can increase macroeconomic volatility. The aim of this paper is to analyze a fiscal policy institution capable of reducing the influence of such distortions on politically-driven fluctuations. We introduce the distinction between mandatory and discretionary public spending in the political model of optimal fiscal policy. We show that the different legislative nature of these components of government spending leads to a divergent impact of mandatory and discretionary spending on macroeconomic volatility. Increasing the fraction of mandatory spending in total government spending reduces the politically-driven volatility of income taxes, total government spending, consumption, labor, and output. Increasing the fraction of discretionary spending has the opposite effect. Our findings are supported by empirical evidence.
    Keywords: optimal fiscal policy, mandatory and discretionary public spending, political polarization, political turnover, macroeconomic volatility.
    JEL: E6 H10 H30 H40
    Date: 2017–01
  30. By: Dennis Wesselbaum (Department of Economics, University of Otago, New Zealand)
    Abstract: This paper shows that the stance of fiscal policy does have significant impact on the conduct of monetary policy in the United States. Further, we document that the implied fiscal-monetary policy interactions are subject to regime instability, using a Markov-switching model. Then, we develop a microfoundation of regime switches using a cheap talk game between central bank and government. As a case study, we simulate the effects of regime switches within an otherwise standard New Keynesian model using the cheap talk game in the state-space of our model.
    Keywords: Markov-switching, Monetary and Fiscal Policy Interactions, Policy Coordination Games, Sequential Games
    JEL: C32 C7 E5 E6
    Date: 2016–02
  31. By: Serife Genc Ileri; Gonul Sengul
    Abstract: Recent literature focuses on the relationship between rise of services and female employment, arguing that the former is the driving force behind the rise in the latter in developed economies. In this paper we challenge this link by focusing on a developing country. Turkey stands out among other OECD countries with its unusually low female employment rate accompanied with a quite low service employment share. We investigate whether the female employment rate in Turkey will ascend to the current ranks of developed countries when it catches up with the current service shares of employment of those countries. We address this question in a multi sector structural transformation model with goods, service and home production. Using the calibrated model, we simulate the structural transformation path of the economic activity in Turkey away from other sectors into services. Our results suggest that rise of services by itself is not sufficient to generate the increase in female employment that is comparable to the experiences of developed countries. High comparative advantage of females in service sector is needed to achieve the desired increase, the channel that lacks in the Turkish case. More research is needed to understand the roots of female comparative advantage in service sector and its links to structural transformation.
    Keywords: Female labor supply, Structural transformation, Home production, Sectoral labor allocation
    JEL: E24 J16 J22
    Date: 2017
  32. By: Megersa, kelbesa; Cassimon, Danny
    Abstract: This study assesses the evolution of debt sustainability in the Sub Saharan African (SSA) region. It also examines the respective contributions of OECD and BRIC to debt sustainability in the region. We reveal how the external demand for SSA goods and services from OECD and BRIC helps to lower ‘debt-to-exports’ and ‘debt-service-to-exports’ ratios, two of the main gauges of debt sustainability. Furthermore, using simple growth accounting, we assess how the net exports by SSA to the OECD and BRIC contributes to the region’s GDP growth, and thus indirectly helps to lower the ‘debt-to-GDP’ ratio, which is another important measure of indebtedness. Our study also compares the ‘actual’ debt levels of SSA with ‘hypothetical’ debt levels that simulate the contributions of OECD and BRIC. On the basis of debt sustainability thresholds of the joint IMF-World Bank Debt Sustainability Framework (DSF), we test how the sustainability of SSA debt has evolved overtime and how much the OECD and BRIC contribute to three classes of ‘weak’, ‘medium’ and ‘strong’ debt sustainability targets.
    Keywords: debt sustainability, threshold effects, international trade, Growth Accounting
    JEL: E01 E62 F34 H63 N17 O11 P33
    Date: 2016–05
  33. By: Tamás Berki (Magyar Nemzeti Bank (Central Bank of Hungary)); Tibor Szendrei (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: This paper aims to estimate a long-term equilibrium price level for the Hungarian housing market by identifying key underlying macroeconomic factors. For this, in line with the empirical literature, a vector error correction model is employed. The housing market price level is mapped by the newly established MNB housing price index. The results establish one stable cointegrating relationship between the housing prices and its longterm driving factors: average new housing loans, disposable income and housing stock. Credit channel plays a decisive role in determining equilibrium level of housing prices. Housing prices exhibit overshooting to various shocks potentially due to the protracted supply side adjustment. Due to the short sample size the estimated price gap might be underestimated in magnitude; nevertheless the fairly slow price adjustment coefficient ensures a persistent gap. Therefore, the sign of the estimated price gap is informative for policy makers from a macroprudential perspective.
    Keywords: housing prices, VECM, error correction, housing loans, cyclical position
    JEL: E44 R21 R31
    Date: 2017
  34. By: David Kiefer
    Abstract: A standard model of activist macroeconomic policy derives a monetary reaction rule by assuming that governments have performance objectives, but are constrained by an augmented Phillips curve. In addition to monetary policy, governments apply a variety of instruments to influence inflation and output, including fiscal policy, bailouts and foreign exchange policy, but effectiveness is limited by Phillips curve flatness. Solving the Phillips curve and reaction rule for a reduced form, we study this theory with a panel of countries. A textbook version of the activist model leads to disappointing results; the activist model fits the data only slightly better than a flat-Phillipscurve benchmark. The econometric results are enhanced by accounting for autocorrelated shocks. Although results are mixed, our interpretation favors inertial inflation expectations over rational ones. An extension of this approach suggests that US policy is more effective than that of European governments, finding that the US Phillips curve is more than twice as steep.
    Keywords: stabilization policy, inflation targets, expectations JEL Classification: E61, E63
    Date: 2016
  35. By: Victor Echevarria Icaza (Universidad Complutense de Madrid Departamento de Fundamentos del Análisis Económico II (Economía Cuantitativa)); Simón Sosvilla-Rivero (Department of Quantitative Economics, Universidad Complutense de Madrid)
    Abstract: The divergence in sovereign yields has been presented as a reason for the lack of traction of monetary policy. We use a GVAR framework to assess the transmission of monetary policy in the period 2005-2016. We identify sovereign yield divergence as a key mechanism by which the leverage channel of monetary policy worked. Unconventional monetary policy was successful in mitigating this effect. When exploring the channels through which yields may affect the heterogeneous transmission of monetary policy, we find that the reaction of bank leverage depended substantially on where the sovereign yield originated, thus providing a mechanism that explains this heterogeneity. Second, large spillover effects meant that yield divergence decreased the traction of monetary policy even in anchor countries. Third, the heterogeneity in the transmission mechanism can be in part attributed to contagion from euro area wide sovereign stress. Fiscal credibility, therefore, may be an appropriate tool to enhance the output effect of monetary policy. Given the importance of spillovers, this credibility may be achieved by changes in the institutional make-up and policies in the euro area
    Keywords: monetary policy, spillovers, euro area crisis
    JEL: E52 E63 F45 H63
    Date: 2017–01
  36. By: Lopez, Claude; Saeidinezhad, Elham
    Abstract: While a major overhaul of U.S. financial regulation may be unlikely during the early months of the Trump administration, changes should be expected as his nominees to lead the Treasury Department and financial regulatory agencies are confirmed. This will be the biggest turnover in regulatory leadership since the passage in 2010 of the Dodd-Frank Act, and it may prove to be a test for Basel III, the macroprudential policy framework created by the G20 countries in response to the 2007-2008 financial crisis. This short paper describes what can be expected in the near future due to the changes in leadership in many of the regulatory agency.
    Keywords: Dodd-Frank, US deregulation
    JEL: E6 G1 G2
    Date: 2017
  37. By: Ho, Sin-Yu
    Abstract: This study examines the macroeconomic determinants of stock market development in South Africa during the period 1975-2015. Specifically, it examines the impact of banking sector development, economic growth, inflation rate, real interest rate, and trade openness on the development of South African stock market. Currently, while theoretical and empirical literature presents diverse views on the relationship between each determinant and stock market development, no studies have been conducted with particular reference to the South African stock market. Given the significant role the South African stock market plays in the world, especially in Africa as measured by its market capitalization and market capitalization ratio, there is a need for more understanding of the macroeconomic determinants’ impact on its development. This paper enriches existing literature by investigating the macroeconomic determinants of stock market development in South Africa using the ARDL bounds testing procedure. The results find that banking sector development and economic growth have positive long-run impact, whereas inflation rate and trade openness have negative long-run impact on stock market development. In the short run, the results find that economic growth have positive impact, while inflation rate, real interest rate, and current period of trade openness have negative impact on stock market development. These findings have important policy implications.
    Keywords: Macroeconomic determinants; Stock market development; South Africa; ARDL bounds testing
    JEL: C22 E44 G23
    Date: 2017–01
  38. By: Ariane TICHIT (Centre d'Etudes et de Recherches sur le Développement International(CERDI)); Pascal LAFOURCADE; Vincent MAZENOD (Centre d'Etudes et de Recherches sur le Développement International(CERDI))
    Abstract: In this article, we show that decentralized virtual currencies can be powerful tools for societal transformation. Indeed, the study of the joint and disjoint elements between the first Bitcoin currencies, SELs and local currencies, reveals that these projects are not so far. Then, we present the current evolution of crypto-currencies towards new energy aware, community-based, useful and fundamentally innovative protocols, emphazing their strong potential. Finally, some recent crypto-currencies are close to the values of the Social and Solidarity Economy, and even though they have some technical and theoretical problems, they have the merit of offering new perspectives. Finally, we propose an idea of decentralized money geolocalized melty, which would allow us to meet a certain number of limits that are experienced by traditional local currencies.
    Keywords: Decentralized virtual currencies, Crypto-currencies, LETs, Social currencies, Monetary innovations.
    JEL: G23 E51 E42
    Date: 2017–02
  39. By: Wensheng Kang; Ronald A. Ratti; Joaquin Vespignani
    Abstract: Global uncertainty shocks are associated with a sharp decline in global inflation, global growth and in the global interest rate. Over 1981 to 2014 global financial uncertainty forecasts 18.26% and 14.95% of the variation in global growth and global inflation respectively. Global uncertainty shocks have more protracted, statistically significant and substantial effects on global growth, inflation and interest rate than U.S. uncertainty shocks. U.S. uncertainty lags global uncertainty by one month. When controlling for domestic uncertainty, the decline in output following a rise in global uncertainty is statistically significant in each country, with the exception of the decline for China. The effects for the U.S. and for China are also relatively small. For most economies, a positive shock to global uncertainty has a depressing effect on prices and official interest rates. Exceptions are Brazil, Mexico and Russia, economies with large capital outflows during financial crises. Decomposition of global uncertainty shocks shows that global financial uncertainty shocks are more important than non-financial shocks.
    Keywords: Global, Uncertainty Shocks, Monetary Policy, FAVAR
    JEL: D80 E44 E66 F62 G10
    Date: 2017–01
  40. By: Nilsen, Øivind A. (Dept. of Economics, Norwegian School of Economics and Business Administration); Vange, Magne (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: The price-setting behaviour of manufacturing plants is examined using a large panel of monthly surveyed plant- and product-specific prices. The sample shows a high frequency of zero changes, relatively small price changes, and a strong seasonal price change pattern. The intermittent feature of price changes is modelled with thresholds which are lower in January, and a quadratic loss–function associated with the distance from target price. The findings show statistically significant pricing thresholds, which are only two thirds in January, and partial adjustment parameters implying that 60% of the deviation between the target price and current price is closed each month.
    Keywords: Price Setting; Micro Data; Simulated Method of Moments
    JEL: E30 E31 E37
    Date: 2016–12–23
  41. By: Santanu Chatterjee (Department of Economics, University of Georgia, USA); Olaf Posch (Department of Economics, Universitat Hamburg, Germany); Dennis Wesselbaum (Department of Economics, University of Otago, New Zealand)
    Abstract: In this paper, we analyze the consequences of delays and cost overruns typically associated with the provision of public infrastructure in the context of a growing economy. Our results indicate that uncertainty about the arrival of public capital can more than offset its positive spillovers for private-sector productivity. In a decentralized economy, unanticipated delays in the provision of public capital generate too much consumption and too little private investment relative to the first-best optimum. The characterization of the first-best optimum is also affected: facing delays in the arrival of public goods, a social planner allocates more resources to private investment and less to consumption relative to the first-best outcome in the canonical model (without delays). The presence of delays also lowers equilibrium growth, and leads to a diverging growth path relative to that implied by the canonical model. This suggests that delays in public capital provision may be a potential determinant of cross-country differences in income and economic growth.
    Keywords: Public goods, delays, time overrun, cost overrun, implementation lags, fiscal policy, economic growth
    JEL: C61 E62 H41 O41
    Date: 2017–02
  42. By: Ines Chaieb (University of Geneva and Swiss Finance Institute); Vihang R. Errunza (McGill University); Rajna Gibson (University of Geneva and Swiss Finance Institute)
    Abstract: We observe significant heterogeneity across countries and maturities in the degree and dynamics of sovereign bond market integration. We analyze the role of credit quality, political and inflation risks, liquidity and investor sentiment in integrating developed and emerging bond markets and show that political risk and credit quality are the dominant factors. Bond market integration is significantly negatively related to sovereign CDS spreads. A one percent increase in integration corresponds to an average decrease in the cost of funding of about 3% of the average observed 5-year CDS spreads across all developed bond markets.
    Keywords: credit quality, CDS spreads, funding cost, liquidity, macroeconomic risk, market integration, political risk, sovereign bond markets
    JEL: G15 G12 E44 F31 C5
  43. By: Taamouti, Abderrahim; Gonzalo, Jesús
    Abstract: We empirically investigate the short-run impact of anticipated and unanticipated unemployment rates on stock prices. We particularly examine the nonlinearity in the stock market's reaction to the unemployment rate and study the effect at each individual point (quantile) of the stock return distribution. Using nonparametric Granger causality and quantile regression-based tests, we find that only anticipated unemployment rate has a strong impact on stock prices. Quantile regression analysis shows that the causal effects of anticipated unemployment rate on stock returns are usually heterogeneous across quantiles. For the quantile range (0.35, 0.80), an increase in the anticipated unemployment rate leads to an increase in stock market prices. For other quantiles, the impact is generally statistically insignificant. Thus, an increase in the anticipated unemployment rate is, in general, good news for stock prices. Finally, we offer a reasonable explanation for the reason, and manner in which, the unemployment rate affects stock market prices. Using the Fisher and Phillips curve equations, we show that a high unemployment rate is followed by monetary policy action of the Federal Reserve (Fed). When the unemployment rate is high, the Fed decreases the interest rate, which in turn increases the stock market prices.
    Keywords: Federal funds rate; monetary policy; local bootstrap; Granger causality in quantiles; Granger causality in distribution; conditional independence; nonparametric tests; unanticipated unemployment; anticipated unemployment; Stock market returns
    JEL: G12 E44 C58 C14
    Date: 2017–01
  44. By: F. Della Marra
    Abstract: We present a comparison of the forecasting performances of three Dynamic Factor Models on a large monthly data panel of macroeconomic and financial time series for the UE economy. The first model relies on static principal-component and was introduced by Stock and Watson in [1], [2]. The second is based on generalized principal components and it was introduced by Forni, Hallin, Lippi and Reichlin in [3], [4]. The last model has been recently proposed by Forni, Hallin, Lippi and Zaffaroni in [5], [6]. The data panel is split into two parts: the calibration sample, from February 1986 to December 2000, is used to select the most performing specification for each class of models in a in-sample environment, and the proper sample, from January 2001 to November 2015, is used to compare the performances of the selected models in an out-of-sample environment. The metholodogical approach is analogous to [7], but also the size of the rolling window is empirically estimated in the calibration process to achieve more robustness. We find that, on the proper sample, the last model is the most performing for the Inflation. However, mixed evidencies appear over the proper sample for the Industrial Production.
    Keywords: Macroeconomic Forecasting, Dynamic Factor Models, Time-domain methods, Frequency-domain methods
    JEL: C0 C01 E01
    Date: 2017
  45. By: Eleni Dalla (Department of Economics, University of Macedonia)
    Abstract: Following the industrial organization approach to banking, we investigate the effects of banking conduct on the investment cycle. To achieve this, we extend the second order accelerator (SOA) model in discrete time, introducing the interest rate on loans. To the extent that the banking sector is concerned, we consider two different types of banking conduct: a Cournot game where the banks make their decision on the quantities of loans and deposits simultaneously, and a Stackelberg game in which they decide over these amounts sequentially. In addition, we follow a simulation process to confirm the dynamic properties of our theoretical findings and examine the effects of monetary policy on capital over time..
    Keywords: Cournot game, Stackelberg game, investment cycle, second order accelerator, monetary policy.
    JEL: G21 L13 D92 E32 E52
    Date: 2017–12
  46. By: Autor, David; Dorn, David; Katz, Lawrence; Patterson, Christina; Van Reenen, John
    Abstract: The recent fall of labor's share of GDP in numerous countries is well-documented, but its causes are poorly understood. We sketch a 'superstar firm' model where industries are increasingly characerized by 'winner take most' competition, leading a small number of highly profitable (and low labor share) firms to command growing market share. Building on Autor et al. (2017), we evaluate and confirm two core claims of the superstar firm hypothesis: the concentration of sales among firms within industries has risen across much of the private sector; and industries with larger increases in concentration exhibit a larger decline in labor's share.
    Keywords: Labor Share; Sales Concentration
    JEL: E24 J31 L11
    Date: 2017–01
  47. By: Benjamin Faber; Thibault Fally
    Abstract: A growing literature has emphasized the role of firm heterogeneity within sectors in accounting for nominal income inequality. This paper explores the implications for household price indices across the income distribution. Using detailed matched US home and store scanner microdata, we present evidence that rich and poor households source their consumption from different parts of the firm size distribution within disaggregated product groups. We use the microdata to examine alternative explanations, write down a quantitative model featuring two-sided heterogeneity across producers and consumers that rationalizes the observed moments, and calibrate it to explore general equilibrium counterfactuals. We find that larger, more productive firms endogenously sort into catering to the taste of wealthier households, and that this gives rise to asymmetric effects on household price indices. These effects amplify observed changes in nominal income inequality over time, and lead to a more regressive distribution of the gains from international trade.
    JEL: E31 F61 O51
    Date: 2017–01
  48. By: Yusuf Soner Baskaya; Julian di Giovanni; Sebnem Kalemli-Özcan; José-Luis Peydró; Mehmet Fatih Ulu
    Abstract: We examine the role of the international credit channel in Turkey over 2005–2013. We show that larger, more capitalised banks with higher non-core liabilities increase credit supply when capital inflows are higher. This result is stronger for domestic banks relative to foreign banks and survives during the crisis period of post 2008, when foreign banks in general stop lending in emerging markets and retreat to their home countries. By decomposing capital inflows into bank and non-bank flows, we show the importance of domestic banks’ external borrowing for domestic credit growth.
    Keywords: Capital flows, bank-lending channel, bank heterogeneity
    JEL: E0 F0 F1
    Date: 2017–01
  49. By: Pei, Yun; Xie, Zoe
    Abstract: We investigate the role of government commitment to future policies in shaping unemployment insurance (UI) policy in a stochastic general equilibrium model of labor search and matching. Compared with the optimal(Ramsey)policy of a government with commitment, the policy under no commitment characterized by a Markov-perfect equilibrium has higher benefits and leads to higher unemployment rates in the steady state. We also find starkly different policy responses to a productivity shock or changes in unemployment. The differences arise because the Ramsey government can use an ex-ante committed policy to stimulate job search.
    Keywords: Unemployment insurance, Commitment, Markov-perfect equilibrium, Business cycle
    JEL: E61 H21 J64 J65
    Date: 2016–11–03
  50. By: Farmer, Roger E A
    Abstract: This paper explains the connection between ideas developed in my recent books and papers and those of economists who self-identify as Post Keynesians. My own work is both neoclassical and "old Keynesian". Much of my published work assumes that people have rational expectations and that "animal spirits" should be modeled as a new fundamental. I adopt a general equilibrium framework to model the macroeconomy. But although I write from a neo-classical tradition the themes I explore in my published writing have much in common with heterodox economics. This paper explains the common elements between these seemingly disparate traditions. I make the case for unity between Post-Keynesian and General Equilibrium Theory under the banner of Post-Keynesian Dynamic Stochastic General Equilibrium Theory.
    Keywords: Dynamic Stochastic General Equilibrium Theory; Post Keynesian Economics
    JEL: E12 E20
    Date: 2017–01
  51. By: Doppelhofer, Gernot (Dept. of Economics, Norwegian School of Economics and Business Administration); Hansen, Ole-Petter Moe (Dept. of Economics, Norwegian School of Economics and Business Administration); Weeks, Melvyn (University of Cambridge)
    Abstract: This paper estimates determinants of long-run growth rates of GDP per capita in a cross section of countries. We propose a novel Measurement Error Model Averaging (MEMA) approach that accounts for measurement error in international income data as well as model uncertainty. Estimating the model using eight vintages of the Penn World Tables (PWT) together with other proposed growth determinants, we identify 18 variables related to economic growth. The results are robust to allowing for outliers in the form of heteroscedastic model errors.
    Keywords: growth regression; robust growth determinants; measurement error; Bayesian modelling
    JEL: C11 C82 E01 O47
    Date: 2016–12–21
  52. By: Jeremy Greenwood; Nezih Guner; Guillaume Vandenbroucke
    Abstract: Powerful currents have reshaped the structure of families over the last century. There has been (i) a dramatic drop in fertility and greater parental investment in children; (ii) a rise in married female labor-force participation; (iii) a significant decline in marriage and a rise in divorce; (iv) a higher degree of positive assortative mating; (v) more children living with a single mother; (vi) shifts in social norms governing premarital sex and married women's roles in the workplace. Macroeconomic models explaining these aggregate trends are surveyed. The relentless flow of technological progress and its role in shaping family life are stressed.
    JEL: D58 E1 E13 J1 J12 J13 J2 J22 N30 O11 O15 O3
    Date: 2017–01
  53. By: Gabriel Mathy; Daniel Kirwin
    Abstract: Byrne et al. (2016) found that worldwide growth slowed down in the mid-2000s. This paper both confirms this result for the United States and looks at how forecasters responded to this slowdown in GDP growth. GDP is unambiguously and consistently below its forecasted level and so forecasts errors are persistently positive, consistent with a growth slowdown that is not forecasted in advance. In response to this slowdown, IMF and CBO forecasters adjusted their forecasts downwards while the Survey of Professional Forecasters made overoptimistic forecasts. We discuss the recent recession and its potential contribution to the current secular stagnation.
    Keywords: Forecast errors, growth slowdown, secular stagnation, hysteresis
    JEL: E17 E37 O47
    Date: 2017
  54. By: Cosmin Ilut; Matthias Kehrig; Martin Schneider
    Abstract: Concave hiring rules imply that firms respond more to bad shocks than to good shocks. They provide a united explanation for several seemingly unrelated facts about employment growth in macro and micro data. In particular, they generate countercyclical movement in both aggregate conditional “macro” volatility and cross-sectional “micro” volatility as well as negative skewness in the cross section and in the time series at different level of aggregation. Concave establishment level responses of employment growth to TFP shocks estimated from Census data induce significant skewness, movements in volatility and ampli cation of bad aggregate shocks.
    Keywords: business cycles, time varying volatility, asymmetric adjustment, skewness
    JEL: D2 D8 E2 J2
    Date: 2017–01
  55. By: Michelle, Gilmartin
    Abstract: This paper proposes and implements a novel structural VAR approach for identifying oil demand and supply shocks. In this approach we search for two shocks in the context of a VAR model, which explain the majority of the k-step ahead prediction error variances of oil prices. Finally, we compare our approach with alternative identification schemes based on sign restrictions, and we show that the proposed methods is a useful tool for decomposing oil shocks.
    Keywords: oil price shocks; demand and supply; Bayesian VAR; MCMC
    JEL: B4 E32 N10 Q43
    Date: 2016–01–09
  56. By: Lopez, Claude; Saeidinezhad, Elham
    Abstract: A few months ago, we produced a timetable for the implementation of U.S. financial reform under the Dodd-Frank Act.1 One of the main observations was that the legislation did little to consolidate regulation outside of banking. In contrast, the analogous UK reform legislation, the Financial Services Act, made the Bank of England (BoE) the center of UK financial and monetary stability. A 2016 amendment confirmed and strengthened the bank’s role. This paper establishes a timeline summarizing the status of financial regulatory reform in the UK. It then identifies some of the forthcoming difficulties, including Brexit and the recent evolution of macroprudential policies among developed countries
    Keywords: UK financial regulation, macroprudential policy, systemic risk
    JEL: E6 F5 G1
    Date: 2016
  57. By: Ozili, Peterson K
    Abstract: We review several observations in the bank loan loss provisioning literature to identify and discuss several advances in the literature and to suggest possible directions for future research in the literature. We address several issues including the ethical dimensions of income smoothing, motivations and constrains to income smoothing, methodological issues in the bank loan loss provisions literature and the dynamic loan loss provisioning experiment. We identify some challenges in the literature and proffer directions for future research.
    Keywords: banks, dynamic provisioning, loan loss provisions, income smoothing, procyclicality, capital management, signalling, accounting discretion
    JEL: E6 G2 G21 G28 G32 M21 M41 M48
    Date: 2017–01
  58. By: Neil R. Ericsson
    Abstract: Government debt and forecasts thereof attracted considerable attention during the recent financial crisis. The current paper analyzes potential biases in different U.S. government agencies’ one-year-ahead forecasts of U.S. gross federal debt over 1984-2012. Standard tests typically fail to detect biases in these forecasts. However, impulse indicator saturation (IIS) detects economically large and highly significant time-varying biases, particularly at turning points in the business cycle. These biases do not appear to be politically related. IIS defines a generic procedure for examining forecast properties; it explains why standard tests fail to detect bias; and it provides a mechanism for potentially improving forecasts.
    Keywords: Autometrics ; Bias ; Debt ; Federal government ; Forecasts ; Impulse indicator saturation ; Heteroscedasticity ; Projections ; United States
    JEL: H68 C53
    Date: 2017–01–06
  59. By: Rémi Bazillier; Jérôme Héricourt; Samuel Ligonnière
    Abstract: How do income inequality and its structure affect the volume of credit? We extend the theoretical framework by Kumhof et al. (2015) to distinguish between upper, middle and low-income classes, and show that most of the positive impact of inequality on credit predicted by Kumhof et al. (2015) should be driven by the share of total output owned by middle classes. These theoretical predictions are empirically confirmed by a study based on a 44 countries dataset over the period 1970-2012. Exogenous variations of inequality are identified with a new instrument variable, the total number of International Labor Organization conventions signed at the country-level. Using various indicators of inequality, we support a positive impact of inequality concentrated on household leverage, and investigate how this average impact is distorted along income distribution. Consistently with the theoretical setting, our results tend to show that most of the impact is driven by middle classes, rather than low-income households. Consistently, our results hold mostly for developed countries.
    Keywords: Credit;Finance;Income Inequality;Inequality structure
    JEL: D31 E25 E44 G01
    Date: 2017–02
  60. By: Musgrave, Ralph S.
    Abstract: In an economy where privately created money is banned, i.e. where the only form of money is state issued money, there is no obvious reason why interest rates would not settle down to some sort of genuine free market level. On the assumption normally made in economics, namely that GDP is maximised where market forces prevail unless market failure can be demonstrated, and given that there is no obvious reason to suspect market failure under the latter ban, that means that GDP is maximised where privately issued money is banned. One reason for thinking a state money only system (SMO) is more of a genuine free market than the existing system is that in free markets, producers normally bear the full costs of production and pass those costs on to customers. However, under the existing bank system, private banks can obtain money for free (administration costs apart) because those banks can effectively print money. Other corporations do not have that privilege. I.e. under SMO, banks and non-bank corporations are on an equal footing. It might seem odd to claim that SMO is closer to a free market than the alternatives, given that free markets are normally associated with scenarios where the private sector dominates, or (same thing), associated with the state playing little or no role. However the latter generalisation does not apply to money. A hint as to why is contained in the well-known phrase “money is a creature of the state”. That is, governments inevitably play an important role when it comes to a country’s currency, thus the only question is: what should that role be? While interest rates are higher and debts are lower under SMO, any deflationary effect of those higher rates is easily countered by creating and spending more base money and/or cutting taxes. If SMO in fact maximises GDP, and that system is implemented, states (or more specifically central banks’) ability to adjust interest rates is curtailed. Given that it is widely accepted that interest rate adjustments are a good way of adjusting demand, that might appear to be a weakness in the argument here. In fact there are glaring flaws in artificial interest rate adjustments. Thus the latter apparent weakness is not a weakness at all.
    Keywords: Money; banks; full reserve; free market; base money.
    JEL: E4 E41 E5 H62
    Date: 2017–02–05
  61. By: Dmitry Chervyakov; Philipp König
    Abstract: The concept of the natural rate of interest (NRI) dates back to Wicksell (1898) and has since then been highly debated in the economic literature. In practice, estimates of the NRI can be employed as a versatile tool for macroeconomic analysis and are a core element within the popular neo-Wicksellian (or New-Keynesian) framework. The real rate gap, i.e. the difference between the actual interest rate and the NRI, provides valuable information about the state of the economy and can help policy makers to adjust the monetary policy stance. However, the NRI cannot be directly observed and has to be calculated from other economic data. While the empirical literature provides various estimation approaches, all of them are subject to serious measurement problems and yield fairly uncertain estimates. This Roundup reviews the advantages and shortcomings of the most popular measurement methods and presents an estimation of the NRI and the real rate gap based on the Laubach and Williams (2003) model.
    Date: 2017
  62. By: Arpaia, Alfonso (European Commission); Cardoso, Pedro (European Commission, Directorate Employment, Social Affairs and Inclusion); Kiss, Aron (European Commission); Van Herck, Kristine (European Commission, Directorate Employment, Social Affairs and Inclusion); Vandeplas, Anneleen (European Commission, Directorate Employment, Social Affairs and Inclusion)
    Abstract: This paper analyses some macroeconomic implications of the statutory minimum wage in the member states of the European Union and assesses how its institutional design influences these outcomes. First, the paper looks at the institutional dimensions of statutory minimum wage setting. On the basis of this information, an indicator of institutional stringency is built to characterise the degree of predictability of minimum wage setting. Second, it explores the impact of minimum wage changes on employment, prices, consumption, and poverty.
    Keywords: minimum wage, statutory minimum wage, composite indicator, poverty, in-work poverty, European Union
    JEL: J38 J52 E24 I32
    Date: 2017–02
  63. By: Ameriks, John (Vanguard Group, Inc); Briggs, Joseph (Federal Reserve Board); Caplin, Andrew (NYU); Shapiro, Matthew D. (University of MI); Tonetti, Christopher (University of Stanford)
    Abstract: Individuals face significant late-in-life risks, including needing long-term care (LTC). Yet, they hold little long-term care insurance (LTCI). Using both "strategic survey questions," which identify preferences, and stated demand questions, this paper investigates the degree to which a fundamental lack of interest and poor product features determine low LTCI holdings. It estimates a rich set of individual-level preferences and uses a life-cycle model to predict insurance demand, finding that better insurance would be far more widely held than are products in the market. Comparing stated and model-predicted demand shows that flaws in existing products provide a significant, but partial, explanation for this under-insurance puzzle.
    JEL: D14 D91 E21 G22 H31 I13 J14
    Date: 2016–09
  64. By: Elisa Palagi; Mauro Napoletano; Andrea Roventini; Jean-Luc Gaffard
    Abstract: We build an agent-based model populated by households with heterogenous and time-varying financial conditions in order to study how different inequality shocks affect income dynamics and the effects of different types of fiscal policy responses. We show that inequality shocks generate persistent falls in aggregate income by increasing the fraction of credit-constrained households and by lowering aggregate consumption. Furthermore, we experiment with different types of fiscal policies to counter the effects of inequality-generated recessions, namely deficit-spending direct government consumption and redistributive subsidies financed by different types of taxes. We find that subsidies are in general associated with higher fiscal multipliers than direct government expenditure, as they appear to be better suited to sustain consumption of lower income households after the shock. In addition, we show that the effectiveness of redistributive subsidies increases if they are financed by taxing financial incomes or savings. Downloads
    Keywords: income inequality, scal multipliers, redistributive policies, credit-rationing, agent-based models
    Date: 2017–06–02
  65. By: Markus Leippold (University of Zurich, Ecole Polytechnique Fédérale de Lausanne, and Swiss Finance Institute); Jacob Stromberg (Swiss Finance Institute)
    Abstract: We propose a novel time-changed Lévy LIBOR market model for the joint pricing of caps and swaptions. The time changes are split into three components. The first component allows us to match the volatility term structure, the second generates stochastic volatility, and the third one accommodates for stochastic skew. The model is parsimonious, yet flexible enough to accommodate the behavior of both caps and swaptions well. For the joint estimation we use a comprehensive dataset spanning the recent financial crisis. We find that, even during the recent financial crisis, neither market is as fragmented as suggested by the previous literature.
    Keywords: LIBOR market models, time-changed Lévy process, caps volatilities, swaption cube, unscented Kalman filter
    JEL: C51 E43 G13
  66. By: Letterie, Wilko (Maastricht University); Nilsen, Øivind A. (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: We assess empirically the micro-foundations of producers’ sticky pricing behaviour. We account for various functional forms of menu costs. The focus is on the analysis of multiproduct plants, and the menu costs therefore also allow for economies of scope. The structural model developed is tested using monthly product- and plant-specific producer prices for Norwegian plants. We find evidence of linear and fixed menu costs that account for inaction of price adjustment. Convex menu costs are statistically significant but of moderate importance. Finally, our estimates suggest economies of scope in adjusting prices resulting in (incomplete) synchronization of price changes.
    Keywords: Price Setting; Micro Data; Multiproduct Firms
    JEL: E30 E31
    Date: 2016–12–23
  67. By: Alfred Haug (University of Otago)
    Abstract: This paper empirically tests the Ricardian equivalence hypothesis with a narrative measure of tax shocks. The present value, at the time of legislation, for tax increases motivated solely by concerns for improving the scal health of the government is used for the tests. These tax news represent a switch from debt to tax nancing that should have no eects on the economy if Ricardian equivalence holds as a good approximation. Such a tax increase seems to have positive eects on real GDP in the post-1980:IV period. However, this is due to scal anticipation as many of the tax increases are implemented with substantial delays and distortionary taxes increase economic activity before taxes go up, which is caused by intertemporal substitution. Therefore, Ricardian equivalence is rejected.
    Keywords: Ricardian equivalence hypothesis; narrative record; exogenous tax changes; government budget decits.
    JEL: E62 C51
    Date: 2016–07
  68. By: González-Laxe, Fernando; Armesto-Pina, José Francisco; Lago-Peñas, Santiago; Sanchez-Fernandez, Patricio
    Abstract: The Galician economy continues with its positive path in the third quarter of the year taking into account the evolution of real GDP, employment and unemployment. On the one hand, the dynamism of the productive activity, with increasingly high positive interannual variation rates, translates into an increase one tenth higher than the Spanish average.
    Keywords: GDP, Labour Market, Galicia, España
    JEL: E01 H83 P48 R11
    Date: 2016–12–01
  69. By: Camara, Boubacar; Pessarossi, Pierre; Philippon, Thomas
    Abstract: We provide a first evaluation of the quality of banking stress tests in the European Union. We use stress tests scenarios and banks' estimated losses to recover bank level exposures to macroeconomic factors. Once macro outcomes are realized, we predict banks' losses and compare them to actual losses. We find that stress tests are informative and unbiased on average. Model-based losses are good predictors of realized losses and of banks' equity returns around announcements of macroeconomic news. When we perform our tests for the Union as a whole, we do not detect biases in the construction of the scenarios, or in the estimated losses across banks of different sizes and ownership structures. There is, however, some evidence that exposures are underestimated in countries with ex-ante weaker banking systems. Our results have implications for the modeling of credit losses, quality controls of supervision, and the political economy of financial regulation.
    JEL: E2 G2 N2
    Date: 2017–01
  70. By: von Weizsäcker, Carl Christian
    Abstract: Auslöser meiner Überlegungen ist die akute Flüchtlingskrise. Es spricht manches dafür, dass sich diese Krise nicht einfach mit einigen administrativen Maßnahmen der Zuwanderungsbeschränkung in kurzer Frist in Luft auflösen wird. Vermutlich ist sie Symptom für eine neue Welle der weltweiten Angleichung von Lebensbedingungen, die sich unter anderem in großen Wanderungen niederschlägt. Es ist dann im Interesse des „Nordens“ diesen Angleichungsprozess zu beschleunigen, um so den Anreiz des Wanderns aus dem „Süden“ in den „Norden“ zu dämpfen. Eine zentrale Komponente des nördlichen Erfolgsmodells, die „Soziale Marktwirtschaft“, sollte daher möglichst rasch globalisiert werden. Diesem Ziel einer möglichst zügigen Verwirklichung einer „Global-Sozialen Marktwirtschaft“ dient am besten ein Kulturwandel im Süden in Richtung auf das das nördliche Erfolgsmodell. Dieser Kulturwandel kann vor allem angestoßen werden durch Exporterfolge des Südens in den Norden. Hierzu eignet sich eine Außenwirtschaftspolitik des Nordens, die einen Exportüberschuss des Südens hervorbringt und auf diese Weise im Süden möglichst viele produktive Arbeitsplätze schafft. Der Norden würde von einer solchen Politik nicht nur deshalb gewinnen, weil auf diese Weise der Süd-Nord-Wanderungsdruck gemildert wird. Darüber hinaus kann der Norden auch durch eine verbesserte internationale Arbeitsteilung gewinnen. Allerdings ist es für den Erfolg einer solchen Politik auch erforderlich, dass sich der Norden auf die damit verbundenen institutionellen Veränderungen einlässt. Insbesondere muss akzeptiert werden, dass sich die komparativen Vorteile in der Güterproduktion verschieben und dass auch Institutionen wie zum Beispiel die staatliche Schuldenbremse modifiziert, grundlegend geändert oder ganz abgeschafft werden.
    JEL: F22 F43 E43
    Date: 2016
  71. By: Brunnermeier, Markus; James, Harold; Landau, Jean-Pierre
    Abstract: Book description: Why is Europe’s great monetary endeavor, the Euro, in trouble? A string of economic difficulties in Greece, Ireland, Spain, Italy, and other Eurozone nations has left observers wondering whether the currency union can survive. In this book, Markus Brunnermeier, Harold James, and Jean-Pierre Landau argue that the core problem with the Euro lies in the philosophical differences between the founding countries of the Eurozone, particularly Germany and France. But the authors also show how these seemingly incompatible differences can be reconciled to ensure Europe’s survival. As the authors demonstrate, Germany, a federal state with strong regional governments, saw the Maastricht Treaty, the framework for the Euro, as a set of rules. France, on the other hand, with a more centralized system of government, saw the framework as flexible, to be overseen by governments. The authors discuss how the troubles faced by the Euro have led its member states to focus on national, as opposed to collective, responses, a reaction explained by the resurgence of the battle of economic ideas: rules vs. discretion, liability vs. solidarity, solvency vs. liquidity, austerity vs. stimulus. Weaving together economic analysis and historical reflection, The Euro and the Battle of Ideas provides a forensic investigation and a roadmap for Europe’s future.
    JEL: B26 E58 N14
    Date: 2016
  72. By: Cuéllar-Martín, Jaime; Martín-Román, Ángel L.; Moral, Alfonso
    Abstract: The main goal of the present work is to split effective unemployment into two components, one dealing with the natural rate of unemployment, and another with cyclical unemployment. With this purpose in mind, an estimation of stochastic cost frontiers is performed where natural unemployment is identified as a lower limit and cyclical unemployment as the deviation of effective unemployment with regard to that limit. To achieve this purpose, information is used from the 17 autonomous communities in Spain over the period spanning 1982 to 2013. Results evidence a greater importance of the natural component as the principal determinant of effective unemployment at a regional scale. The latter part of the work compares stochastic frontier estimations to those obtained when applying univariate filters, which are in widespread use in economic literature. The main conclusion to emerge is that the proposed decomposition modifies the weight distribution amongst the various types of unemployment, increasing the importance of cyclical unemployment. This finding has significant implications for economic policy, such as the existence of a greater margin for aggregate demand policies in order to reduce cyclical unemployment, particularly during growth periods.
    Keywords: Natural Unemployment, Cyclical Unemployment, Labor Market, Stochastic Frontiers, Policy Modeling
    JEL: E24 J08 J64 R23
    Date: 2017–02–03
  73. By: Franziska Bremus; Thomas Krause; Felix Noth
    Abstract: This paper investigates the link between mortgage supply shocks at the banklevel and regional house price growth in the U.S. using micro-level data on mortgage markets from the Home Mortgage Disclosure Act for the 1990-2014 period. Our results suggest that bank-specific mortgage supply shocks indeed affect house price growth at the regional level. The larger the idiosyncratic shocks to newly issued mortgages, the stronger is house price growth. We show that the positive link between idiosyncratic mortgage shocks and regional house price growth is very robust and economically meaningful, however not very persistent since it fades out after two years.
    Keywords: House Prices, Idiosyncratic Shocks, Granularity, Credit Supply
    JEL: E44 G21 R20
    Date: 2017
  74. By: Daniele Girardi (Department of Economics, University of Massachusetts, Amherst)
    Abstract: This paper surveys the neoclassical theory of aggregate investment and its criticisms. We distinguish four main formulations of this theory: the traditional Wicksellian investment function; the Fisherian array-of-opportunities approach (as Witte Jr. called it); the Jorgensonian model; the now prevailing adjustment-costs models. With respect to other papers criticizing the neoclassical theory of investment, we do not appeal to market imperfections. We instead argue that all four formulations present serious theoretical difficulties, even conceding free competition.
    Keywords: investment, neoclassical theory, Wicksell, Jorgenson, Fisher, adjustment-costs
    JEL: B22 E22 B13
    Date: 2017
  75. By: Matthias Kehrig; Nicolas Vincent
    Abstract: Almost two thirds of the cross-plant dispersion in marginal revenue products of capital occurs across plants within the same firm rather than between firms. Even though firms allocate investment very differently across their plants, they do not equalize marginal revenue products across their plants. We reconcile these findings in a model of multi-plant firms, physical adjustment costs and credit constraints. Credit constrained multi-plant firms can utilize internal capital markets by concentrating internal funds on investment projects in only a few of their plants in a given period and rotating funds to another set of plants in the future. The resulting increase in within-firm dispersion of marginal revenue products of capital is hence not a symptom of misallocation within the firm, but rather actions taken by the firm to mitigate external credit constraints and adjustment costs of capital. Economies with multi-plant firms produce more aggregate output despite higher dispersion in marginal revenue products of capital compared to economies with single-plant firms. Because emerging economies are predominantly populated by single-plant firms, the gains from reducing their distortions to the level of developed are larger than previously thought.
    Keywords: Misallocation, Productivity Dispersion, Multi-Plants Firms, Internal Capital Markets.
    JEL: E2 G3
    Date: 2017–01
  76. By: Guido Baldi; Patrick Harms
    Abstract: In many advanced economies, there has been a declining trend in interest rates over the past thirty years. Since the financial crisis, interest rates have remained particularly low. Though a decrease in inflation explains part of the fall in nominal interest rates, there is also a clear downtrend in real interest rates. Against this backdrop, a debate has emerged over the factors that might have contributed to this decline. Potential persistent factors discussed under the heading of “secular stagnation” include a decline in profitable investment opportunities and high global savings rates. It is often argued that, due to these factors, the so-called natural interest rate, which is the level of interest rate consistent with stable, non-inflationary growth, has decreased. However, there are also arguments that the low interest rates are transitory and are due to factors such as post-crisis private debt deleveraging, a temporary “savings glut”, or higher regulatory burdens for firms and households. This report summarizes the discussion on the underlying causes of the low interest rate environment and the potential for a period of secular stagnation.
    Date: 2017
  77. By: Mary Everett (Central Bank of Ireland); Vahagn Galstyan (Trinity College Dublin)
    Abstract: This paper studies the bilateral determinants of the international asset positions of banks, and subsequent bilateral adjustment during the global financial crisis and ensuing recovery phase. We find empirical support for traditional gravity-type variables. Exploiting a comprehensive dataset of bilateral bank assets, combined with a cross-country database on capital controls and macroeconomic policies, empirical evidence is provided for the effects of macroeconomic tools on the portfolio reallocation of internationally active banks. Specifically, higher current account balances in recipient countries are associated with higher inflows in debt assets, while restrictions on asset inflows and higher central bank reserves are related to lower cross-border flows of bank investment during the crisis and post-crisis periods, with heterogeneous effects across asset type. Finally, stronger institutions in recipient countries are positively associated with the international investment of banks, with inflows to debt assets being the most sensitive asset category across the financial cycle.
    Keywords: Cross-Border Banking, Loans, International Portfolio Securities, Capital Controls, Institutional Quality
    JEL: F30 F41 G15 G21
    Date: 2017–02
  78. By: Adelino, Manuel; Cunha, Igor; Ferreira, Miguel
    Abstract: We show that municipalities' financial constraints can have a significant impact on local employment and growth. We identify these effects by exploiting exogenous upgrades in U.S. municipal bond ratings caused by Moody's recalibration of its ratings scale in 2010. We find that local governments increase expenditures because their debt capacity expands following a rating upgrade. These expenditures have an estimated local income multiplier of 1.9 and a cost per job of $20,000 per year. Our findings suggest that debt-financed increases in government spending can improve economic conditions during recessions.
    Keywords: Credit ratings; Government Employment; Income; Local Economy; Municipal Bonds; Private Employment; Public Finance
    JEL: E24 G24 G28 H74
    Date: 2017–01
  79. By: Diana Zigraiova (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank); Petr Jakubik (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: This study proposes the potential methodological approach to be utilized by regulators when setting up a Long-Term Rate (LTR) for the evaluation of insurers’ liabilities beyond the last liquid point observable in the market. Our approach is based on the optimization of two contradictory aspects – stability and accuracy implied by economic fundamentals. We use U.S. Treasury term structure data over the period 1985-2015 to calibrate an algorithm that dynamically revises LTR based on the distance between the value implied by long-term growth of economic fundamentals in a given year and the regulatory value of LTR valid in a year prior. We employ both Nelson-Siegel and Svensson models to extrapolate yields over maturities of 21-30 years employing the selected value of the LTR and compare them to the observed yields using mean square error statistic. Furthermore, we optimise the parameter of the proposed LTR formula by minimising the defined loss function capturing both mentioned factors.
    Keywords: Long term rate, Nelson-Siegel, Svensson, Term structure of interest rates, Extrapolation
    JEL: E43 G22 L51 M21
    Date: 2017–03
  80. By: Donatella Baiardi (Università di Parma); Paola Profeta (Università Bocconi); Riccardo Puglisi (Università di Pavia); Simona Scabrosetti (Università di Pavia)
    Abstract: We challenge the "OECD view" (Arnold et al. 2011) according to which a shift from direct to indirect taxation is associated with higher long-run economic growth. We study the relationships between per capita GDP, overall tax revenue and tax composition (in particular direct vs. indirect taxation). We can replicate the findings in Arnold et al. when focusing on the same sample of countries and time period, but not when adopting more cautious estimates of the standard errors. The results are not robust to adding countries and/or extending the time period under consideration. They also differ in the short- and long-run.
    Keywords: economic growth, taxation, tax mix, OECD countries
    JEL: E62 H20 P50
  81. By: Yannick Malevergne (Université Paris); Didier Sornette (ETH Zurich and Swiss Finance Institute)
    Abstract: Piketty’s Capital in the Twenty-First Century posits the return r on capital to be larger than the economic growth rate g as a main driver of inequalities. This article points out the circumstances under which the reverse inference holds. We show that increasing inequality promotes increasing gap r-g, and vice-versa, because capital is a cumulative quantity that claims a finite fraction of the total output in the presence of fractional consumption of the return on capital. However economies do exist for which large inequalities tend to curb r-g, thus proving that r > g does not always lead to an endless inequality spiral.
    Keywords: inequality, return on capital, growth rate, labor, national output, demographics
    JEL: D63 E22 E00 P10
  82. By: Malgorzata Olszak (Department of Banking and Money Markets, Faculty of Management, University of Warsaw, Poland); Iwona Kowalska (Department of Mathematics and Statistical Methods, Faculty of Management, University of Warsaw, Poland); Patrycja Chodnicka-Jaworska (Department of Banking and Money Markets, Faculty of Management, University of Warsaw, Poland); Filip Switala (Chair of Market Economy, Faculty of Management, University of Warsaw)
    Abstract: In this paper we explore several new factors which may affect the procyclicality of loan-loss provisions. In particular, we test whether there are visible differences in sensitivity of loan-loss provisions to the business cycle between commercial and cooperative banks as well as between large, medium and small banks. We also aim to find out whether the level of bank capital ratio and the application of discretionary income-smoothing affect procyclicality of loan-loss provisions. Our results show that loan-loss provisions of banks are procyclical. This procyclicality is particularly visible and stronger in the sample of commercial banks. We also find that loan-loss provisions of large banks are more negatively affected by the business cycle than those of medium or small banks. We show that banks with low capital ratios exhibit increased procyclicality of loan-loss provisions. And finally, we also find empirical evidence that banks with a greater degree of discretionary income-smoothi
    Keywords: loan-loss provisions, procyclicality, bank size, capital ratio, discretionary income-smoothing
    JEL: G21 G28 G32 M41
    Date: 2016–11
  83. By: Carlos E. Posada
    Abstract: Es usual que la ensen?anza de la Macroeconomi?a dina?mica en los cursos universitarios de pregrado se apoye exclusivamente en exposiciones en prosa supuestamente intuitivas y en gra?ficos que representan comportamientos de estados estables de los principales mercados de la economi?a. Pero cuando se discuten los casos de agentes que “miran hacia adelante”, las intuiciones a priori y sus representaciones gra?ficas ofrecidas a los estudiantes pueden generar conclusiones confusas o carentes de respaldo lo?gico. Esto sucede incluso si el profesor y sus estudiantes recurren al capi?tulo de Macroeconomi?a dina?mica de uno de los textos ma?s dida?cticos y ordenados: el de Williamson (2014). En este documento intento demostrar esto.
    Keywords: ensen?anza de macroeconomi?a; cursos de pregrado; modelos dina?micos; conclusiones ilo?gicas; modelos nume?ricos
    JEL: A22 C30 E17
    Date: 2017–01–25
  84. By: Glenn P. Jenkins (Queen's University, Canada and Eastern Mediterranean University, North Cyprus); Mikhail Miklyaev (JDINT’L Executive Programs Department of Economics, Queen’s University, Canada and Cambridge Resources International Inc.); Shahryar Afra (Cambridge Resources International Inc.); Majid Hashemi (Cambridge Resources International Inc.)
    Abstract: Recently enforced Public Investment Law (PIL) provides a strong basis for the enhancement of the PIM system’s efficiency, however, the implementation of the PIL is progressing slowly. Quang Ninh province has been selected for an analysis of the practical difficulties authorities face in complying with PIL requirements, particularly in the preparation of investment intention reports. Discussions with provincial authorities revealed two major constraints: 1. lack of an investment intention report template and guidelines; 2. absence of methodologies and guidelines on the preliminary assessment of the socio-economic effectiveness of PIPs. The efficiency of the PIM system in Vietnam can only be improved if the investment intention reports prepared by project promoters are to form the basis for technical analysis of PIPs. The major component of technical analysis is an evaluation of PIP socio-economic returns. This evaluation should be done using CBA methodologies formulated from basic principles of applied welfare economics. The results of technical analysis must drive the project approval (or rejection) process, in sharp contrast to the current practice of approving projects to be included in regional development master plans before due diligence has been carried out.
    Keywords: Public Investment Law, Cost benefit analysis, Vietnam
    JEL: E22 G11 H54 G3
    Date: 2017–08
  85. By: Uras, Rasim Burak; Wagner, Wolf
    Abstract: We show that asset opacity can improve the efficiency of investment in the economy. We consider a model where underinvestment arises from speculative cash-hoardings aiming to benefit from fire-sale prices. Whereas opacity provides no benefit to asset originators in the case of isolated liquidations, this is not the case when collective liquidations lead to fire-sale prices ("cash-in-the market" pricing). As cash-in-the-market prices are set to reflect shortages of liquidity and not expected asset quality, originators can sell low quality assets opportunistically. This raises the ex-ante benefit from asset origination and reduces liquidity hoarding. The model suggests that a "seemingly undesirable" feature at the asset level can improve economic efficiency, due to a general equilibrium effect.
    Keywords: Adverse Selection; cash-in-the-market pricing; opacity; underinvestment
    JEL: E44 G2 O16 O47
    Date: 2017–01
  86. By: Antoine Bommier (ETH Zurich, Chair for Integrative Risk Management and Economics, Switzerland.); Bruno Lanz (University of Neuchâtel, Department of Economics and Business, Switzerland.)
    Abstract: We develop a simple theoretical framework that identifies time preferences without relying on a particular utility function. Our empirical strategy requires observations about intertemporal consumption allocation decisions made under varying relative prices, and seeks to approximate the marginal rate of substitution of consumption at different dates along a constant consumption path. Doing so, we emphasize the importance of measuring the curvature of the intertemporal utility function (or willingness to substitute consumption across time). We illustrate our approach with data derived from the convex time budget procedure of Andreoni and Sprenger (AER, 2012).
    Keywords: Intertemporal choice; Discounting behavior; Intertemporal substitution; Discounted utility model; Convex budgets
    JEL: D03 D12 D91 E61
    Date: 2017–02
  87. By: Mikhail Miklyaev (JDINT’L Executive Programs Department of Economics, Queen’s University, Canada and Cambridge Resources International Inc.); Shahryar Afra (Cambridge Resources International Inc.); Majid Hashemi (Cambridge Resources International Inc.)
    Abstract: Over the last five years, the government of Rwanda (GoR) has developed a number of successful policies and regulations to address key challenges facing the poultry subsector. As outlined in its poultry subsector strategy for 2012-17, the government aims to establish poultry as the flagship of Rwanda’s livestock industry, with a particular focus on improving production and marketing. The financial and economic analysis of poultry farming activities as well as feed production has revealed that investments into poultry value chain are financially and economically feasible. Financial rate of return ranges from 19 to 53 percent, while economic rate of returns ranges from 30 to 73 percent.
    Keywords: cost-benefit analysis, investment appraisal, stakeholder analysis, Poultry value chain, marketing, Rwanda
    JEL: D13 D31 D61 D62 E23 H42
    Date: 2017–05
  88. By: Reint Gropp (Halle Institute for Economic Research); Thomas C. Mosk (Goethe University Frankfurt); Steven Ongena (University of Zurich and Swiss Finance Institute); Carlo Wix (Goethe University Frankfurt)
    Abstract: We study the impact of higher capital requirements on banks' balance sheets and its transmission to the real economy. The 2011 EBA capital exercise provides an almost ideal quasi-natural experiment, which allows us to identify the effect of higher capital requirements using a difference-in-differences matching estimator. We find that treated banks increase their capital ratios not by raising their levels of equity, but by reducing their credit supply. We also show that this reduction in credit supply results in lower firm-, investment-, and sales growth for firms which obtain a larger share of their bank credit from the treated banks.
    Keywords: bank capital requirements, bank lending, real economy
    JEL: E51 E58 G21 G28
  89. By: Mikhail Miklyaev (JDINT’L Executive Programs Department of Economics, Queen’s University, Canada and Cambridge Resources International Inc.); Majid Hashemi (Cambridge Resources International Inc.); Melani Schultz (International Development Group)
    Abstract: This paper presents the findings of the CBA of Senegal’s rice value chains (looking at rain-fed and irrigated rice specifically). The analysis looks at evaluating the recent Feed the Future (FtF) activities implemented under the PCE (Projet de Croissance Economique) in Senegal. Overall, the analysis points to two important conclusions: 1. The GoS, other donor partners, and the PCE project significantly improved the productivity of the irrigated rice VC over the last five years. From an economic point of view, the benefits of domestic rice production currently outweigh the costs, even with GoS subsidies and donor support. 2. The ERR is only one percent above the discount rate of 12%, emphasizing the importance of a well-defined exit strategy for both the GoS and international donors. The removal of subsidies or the inability of the budget to sustain such significant fiscal outflows may result in adverse effects throughout the VC.
    Keywords: : cost-benefit analysis, investment appraisal, stakeholder analysis, dairy value chain, marketing, Senegal.
    JEL: D13 D31 D61 D62 E23 H42
    Date: 2017–04
  90. By: Maxime MENUET; Alexandru MINEA; Patrick VILLIEU
    Date: 2017
  91. By: Mikhail Miklyaev (JDINT’L Executive Programs Department of Economics, Queen’s University, Canada and Cambridge Resources International Inc.); Majid Hashemi (Cambridge Resources International Inc.); Melani Schultz (International Development Group)
    Abstract: This paper presents the findings of the CBA of Liberia’s work with rice and goat value chains (VCs), specifically evaluating the recent Feed the Future (FtF) activities implemented under the Food and Enterprise Development program (FED). The Integrated Investment Appraisal (IIA) methodology is used to evaluate both the financial and the socio-economic effectiveness of FED interventions and assess their impacts from various perspectives. In conclusion, the ENPV of FED project once the USAID cost is included is a negative US$10.19 million, indicating that the benefits of the interventions do not outweigh the costs. The ERR is only 7.6 percent, which is 4.4 percent lower than the threshold of 12 percent set by USAID. The recent Ebola outbreak and other factors including the high logistical costs in Liberia contributed to the negative returns of FED interventions.
    Keywords: cost-benefit analysis, investment appraisal, stakeholder analysis, rice and goat value chain, Liberia
    JEL: D13 D31 D61 D62 E23 H42
    Date: 2017–01
  92. By: Sandmo, Agnar (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: In the late 1940s, Ragnar Frisch published two articles in Norwegian that constitute a pioneering attempt to apply welfare economics to a problem of economic policy. The main contention of the articles is that there exists a fundamental externality in the labour market because the marginal productivity of labour depends both on input in the individual unit and on total labour use in the economy. While inspired by the problems of postwar reconstruction, Frisch came to regard it as a general problem in a decentralized economy, and he explores its consequences for wage and tax policy. While Frisch attached great importance to the analysis, it has received little attention in the subsequent literature.
    Keywords: Economic policy; wage; tax policy
    JEL: E20
    Date: 2017–01–23
  93. By: Cullen S. Hendrix (Peterson Institute for International Economics)
    Abstract: This paper investigates the correlates of diversification away from oil and natural gas dependence in the context of the 21st century resource boom (and bust). In a sample of 40 oil- and gas-dependent economies, the majority showed significant sectoral diversification of GDP, but exports remained highly concentrated in fuel exports. Regression analysis indicates that countries that began the boom with higher levels of oil and gas dependence, poorer countries, and those with significantly larger- or smaller-than-average populations were more successful in diversifying their GDP during the commodities boom. Governance clearly matters--more effective, capable bureaucratic structures are associated with greater GDP diversification away from oil and gas--though the effects are not uniformly positive. For any given level of government effectiveness, stronger rule of law is associated with less GDP diversification. Education appears to affect GDP and export diversification differentially. Consistent with endogenous growth theory, countries with more educated populations saw greater growth in their nonresource sectors than countries with less educated populations, though education is associated with greater export concentration. Market proximity does not affect diversification. Internal economic diversification in the 21st century has been less a matter of correct policy formation and implementation and more a matter of factors that shape the policymaking environment, with the findings suggesting a difficult road to economic diversification for the Gulf Cooperation Council economies.
    Keywords: petroleum, diversification, education, rule of law, institutions, Gulf Cooperation Council
    JEL: E02 O10 O13 Q02 Q40
    Date: 2017–02

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