nep-mac New Economics Papers
on Macroeconomics
Issue of 2017‒03‒05
ninety-six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Using the payment system data to forecast the Italian GDP By Valentina Aprigliano; Guerino Ardizzi; Libero Monteforte
  2. How the U.S. financial crisis could have been averted By De Koning, Kees
  3. Did Monetary Policy Matter? Narrative Evidence from the Classical Gold Standard By Lennard, Jason
  4. Central bank sentiment and policy expectations By Hubert, Paul; Labondance, Fabien
  5. Asymmetric Macro-Financial Spillovers By Bluwstein, Kristina
  6. A Quantitative Model of Bubble-Driven Business Cycles By Larin, Benjamin
  7. Mind the output gap: the disconnect of growth and inflation during recessions and convex Phillips curves in the euro area By Gross, Marco; Semmler, Willi
  8. Financial frictions and robust monetary policy in the models of New Keynesian framework By Ekaterina Pirozhkova
  9. Uncertainty-driven business cycles: assessing the markup channel By Born, Benjamin; Pfeifer, Johannes
  10. The impact of constrained monetary policy on fiscal multipliers on output and inflation By Bletzinger, Tilman; Lalik, Magdalena
  11. Inflation Anchoring in the Euro Area By Speck, Christian
  12. Gauging the Uncertainty of the Economic Outlook Using Historical Forecasting Errors : The Federal Reserve's Approach By David L. Reifschneider; Peter Tulip
  13. Gauging the Uncertainty of the Economic Outlook Using Historical Forecasting Errors: The Federal Reserve's Approach By David Reifschneider; Peter Tulip
  14. Unconventional Monetary Policy, Fiscal Side Effects and Euro Area (Im)balances By Hachula, Michael; Rieth, Malte; Piffer, Michele
  15. Low inflation and monetary policy in the euro area By Conti, Antonio M.; Neri, Stefano; Nobili, Andrea
  16. Inefficient Liquidity Provision By John Geanakoplos; Kieran James Walsh
  17. Gradualism and Liquidity Traps By Schmidt, Sebastian; Nakata, Taisuke
  18. Unconventional monetary policy and the anchoring of inflation expectations By Ciccarelli, Matteo; García, Juan Angel; Montes-Galdón, Carlos
  19. Borrower heterogeneity within a risky mortgage-lending market By Maria Teresa Punzi; Katrin Rabitsch
  20. An indicator of inflation expectations anchoring By Filippo Natoli; Laura Sigalotti
  21. Budget-neutral fiscal rules targeting inflation differentials By Brede, Maren
  22. On Quality and Variety Bias in Aggregate Prices By Francesco Zanetti; Masashige Hamano
  23. The long-term distribution of expected inflation in the euro area: what has changed since the great recession? By Dovern, Jonas; Kenny, Geoff
  24. The London Monetary and Economic Conference of 1933 and the End of The Great Depression: A “Change of Regime” Analysis By Sebastian Edwards
  25. Trust, but verify. De-anchoring of inflation expectations under learning and heterogeneity By Busetti, Fabio; Delle Monache, Davide; Gerali, Andrea; Locarno, Alberto
  26. Monetary policy surprises over time By Marcello Pericoli; Giovanni Veronese
  27. The International REIT's Time-Varying Response to the U.S. Monetary Policy and Macroeconomic Surprises By Hardik A. Marfatia; Rangan Gupta; Esin Cakan
  28. Labour Market Transitions, Shocks and Institutions during the Great Recession: A Cross-Country Analysis By Felder, Rahel; Bachmann, Ronald
  29. Forecasting Inflation in Vietnam with Univariate and Vector Autoregressive Models By Tran Thanh Hoa
  30. How Do Average Hours Worked Vary with Development? Cross-Country Evidence and Implications By Fuchs-Schündeln, Nicola; Bick, Alexander; Lagakos, David
  31. Man-cessions, Fiscal Policy, and the Gender Composition of Employment By Jüßen, Falko; Bredemeier, Christian; Winkler, Roland
  32. Inflation anchoring in the euro area By Speck, Christian
  33. Forecasting euro area inflation using targeted predictors: is money coming back? By Falagiarda, Matteo; Sousa, João
  34. Sovereign Stress, Banking Stress, and Corporate Financing Costs in the Euro Area By Holtemöller, Oliver
  35. Exit strategies for monetary policy By Aleksander Berentsen; Sébastien Kraenzlin; Benjamin Müller
  36. Forecast Performance, Disagreement, and Heterogeneous Signal-to-Noise Ratios By Hartmann, Matthias; Dovern, Jonas
  37. Global Collateral: How Financial Innovation Drives Capital Flows and Increases Financial Instability By Ana Fostel; John Geanakoplos; Gregory Phelan
  38. The role of US based FDI flows for global output dynamics By Florian Huber; Manfred M. Fischer; Philipp Piribauer
  39. Interactions between fiscal multipliers and sovereign risk premium during fiscal consolidation: model based assessment for the euro area By Lalik, Magdalena
  40. Will US inflation awake from the dead? The role of slack and non-linearities in the Phillips curve By Albuquerque, Bruno; Baumann, Ursel
  41. The Burden of Unanticipated Fiscal Policy By Scharrer, Christian; Heer, Burkhard
  42. Comparer les mesures non conventionnelles de la FED et de la BCE : ce que disent les bilans des banques centrales. By Anne-Marie Rieu-Foucault
  43. Generalized Matching Functions and Resource Utilization Indices for the Labor Market By Hornstein, Andreas; Kudlyak, Marianna
  44. Output gap similarities in Europe: Detecting country groups By Ahlborn, Markus; Wortmann, Marcus
  45. A Power Booster Factor for Out-of-Sample Tests of Predictability By Pincheira, Pablo
  46. Missing disinflation and missing inflation: the puzzles that aren't By Bobeica, Elena; Jarociński, Marek
  47. Determinants of Eurosystems Central Banks Provisions By Klose, Jens
  48. Forward Guidance Contracts By Liu, Yulin; Gersbach, Hans; Hahn, Volker
  49. Forecasting travelers in Spain with Google queries By Maximo Camacho; Matias Pacce
  50. On the Cyclicality of R&D Activities By Mand, Matthias
  51. Inequality and the Size of Government By Weijie Luo; Andrew Pickering; Paulo Santos Monteiro
  52. The Exchange Rate Pass-Through to CPI and its components in Oil-Exporting CIS Countries By Vugar Rahimov; Nigar Jafarova; Fuad Ganbarov
  53. Family Economics Writ Large By Jeremy Greenwood; Nezih Guner; Guillaume Vandenbroucke
  54. Financial Stress, Regime Switching and Spillover Effects: Evidence from a Multi-Regime Global VAR Model By Pu Chen; Willi Semmler
  55. Un modelo semi estructural de proyecciones macroeconómicas para el Uruguay By Patricia Carballo; José Ignacio González; Margarita Güenaga; José Mourelle; Gabriela Romaniello
  56. Buffer-stock saving and households' response to income shocks By Giulio Fella; Seraín Frache; Winfried Koeniger
  57. Bank loan components, uncertainty and monetary transmission mechanism By Ekaterina Pirozhkova
  58. Optimal Unemployment Insurance and International Risk Sharing By Stähler, Nikolai; Moyen, Stephane; Winkler, Fabian
  59. A Serenity Prayer for Monetary Policymakers: Loretta J. Mester, President and Chief Executive Officer, Federal Reserve Bank of Cleveland - The Global Interdependence Center, Central Banking Series, Singapore - February 20, 2017 By Mester, Loretta J.
  60. Bank lending in uncertain times By Piergiorgio Alessandri; Margherita Bottero
  61. Macroeconomic policy, employment and decent work in India By Chandrasekhar, C. P.
  62. Value Added in Motion: Macroeconomic Implications of Energy Price Trajectories By Lionel Fontagné; Jean Fouré; Gianluca Santoni
  63. Capital Accumulation and Dynamic Gains from Trade By Ravikumar, B.; Santacreu, Ana Maria; Sposi, Michael J.
  64. Child-Related Transfers, Household Labor Supply and Welfare By Nezih Guner; Remzi Kaygusuz; Gustavo Ventura
  65. A new indicator of inflation expectations anchoring By Natoli, Filippo; Sigalotti, Laura
  66. Optimal Fiscal Substitutes For The Exchange Rate In A Monetary Union By Kaufmann, Christoph
  67. Specific Human Capital and Wait Unemployment By Herz, Benedikt
  68. Declining Dynamism, Allocative Efficiency, and the Productivity Slowdown By Ryan Decker; John Haltiwanger; Ron S. Jarmin; Javier Miranda
  69. Anti-Poverty Income Transfers in the US - A Framework for the Evaluation of Policy Reforms By Siassi, Nawid; Ortigueira, Salvador
  70. Overseas unspanned factors and domestic bond returns By Meldrum, Andrew; Raczko, Marek; Spencer, Peter
  71. The Inherent Benefit of Monetary Unions By Groll, Dominik; Monacelli, Tommaso
  72. Factor Income Distribution and Endogenous Economic Growth - When Piketty meets Romer - By Irmen, Andreas; Tabakovic, Amer
  73. "Low-For-Long" Interest Rates and Banks' Interest Margins and Profitability : Cross-Country Evidence By Stijn Claessens; Nicholas Coleman; Michael S. Donnelly
  74. Sraffa, Keynes, Rendite e Sistema Fiscale By Giuseppe Vitaletti
  75. International Trade and Intertemporal Substitution By Leibovici, Fernando; Waugh, Michael E.
  76. Heterogeneity and business cycle fluctuations By Punzi, Maria Teresa; Rabitsch, Katrin
  77. Efectos de variaciones del precio del petróleo en un escenario de incertidumbre sobre el crecimiento económico de Colombia: 2001-2016 By Daniel Felipe Cuervo; Camilo Ernesto Gómez; Miguel Antonio Melo; José Gregorio Ojeda
  78. Understanding the size of the government spending multiplier: It's in the sign By Régis Barnichon; Christian Matthes
  79. China's Gradualistic Economic Approach and Financial Markets By Markus K. Brunnermeier; Michael Sockin; Wei Xiong
  80. Informal loans, liquidity constraints and local credit supply: evidence from Italy By Michele Benvenuti; Luca Casolaro; Emanuele Ciani
  81. Firm Entry and Exit and Aggregate Growth By Jose Asturias; Sewon Hur; Timothy J. Kehoe; Kim J. Ruhl
  82. Firm Entry and Exit and Aggregate Growth By Asturias, Jose; Hur, Sewon; Kehoe, Timothy J.; Ruhl, Kim J.
  83. Envisioning Tax Policy for Accelerated Development in India. By Rao, M. Govinda; Kumar, Sudhanshu
  84. Tail co-movement in inflation expectations as an indicator of anchoring By Natoli, Filippo; Sigalotti, Laura
  85. Rigid relations: External adjustment under the Gold Standard (1880-1913) By Ward, Felix; Chen, Yao
  86. The role of monetary and fiscal policies in promoting more and better jobs in China : issues, evidence and policy options By Cai, Fang.; Yang, Du.; Meiyan, Wang.
  87. The rational inattention filter By Maćkowiak, Bartosz; Matějka, Filip; Wiederholt, Mirko
  88. Fiscal Unions Redux By Kehoe, Patrick J.; Pastorino, Elena
  89. Global Value Chains in Low and Middle Income Countries By Victor Kummritz; Bastiaan Quast
  90. A critique to the expansionary austerity (part III): empirical counter facts beyond theoretical weaknesses By Botta, Alberto; Tori, Daniele
  91. Innovation and Firm Growth over the Business Cycle By Andrin Spescha; Martin Wörter
  92. Openness and Growth: Is the Relationship Non-Linear? By Rangan Gupta; Lardo Stander; Andrea Vaona
  93. Firm Credit Experience and Perceptions of Lending Policy: Business Survey Evidence from Austria By Hainz, Christa; Fidrmuc, Jarko; Hölzl, Werner
  94. Value Added in Motion: Modelling World Trade Patterns at the 2035 Horizon By Lionel Fontagné; Jean Fouré
  95. An exchange market pressure measure for cross-country analysis. By Patnaik, Ila; Felman, Joshua; Shah, Ajay
  96. Complex Factors Behind Misguided Policies in Socioeconomics: From Mass Migration and Persistent Alienation to Rampant Crime and Economic Malaise By Kim, Steven

  1. By: Valentina Aprigliano (Bank of Italy); Guerino Ardizzi (Bank of Italy); Libero Monteforte (Bank of Italy)
    Abstract: Payment systems track economic transactions and therefore could be considered important indicators of economic activity. This paper describes the available monthly data on the retail settlement system for Italy and selects some of them for short-term forecasting. Using a mixed frequency factor model to predict Italian GDP, we find that payment system flows stand out when compared to other standard business cycle indicators.
    Keywords: short term forecasting, LASSO, mixed frequency models, Kalman smoothing, payment systems, TARGET2
    JEL: C53 E17 E27 E32 E37 E42
    Date: 2017–02
  2. By: De Koning, Kees
    Abstract: In the U.S., the 2007-2008 financial crisis was caused by a lack of understanding of the implications of households committing to use future incomes for a purchase of a home. Committing future income flows to acquire goods and services in the current period requires households to make a judgment about future interest rates, about the household’s ability to earn an income in future years, about a possible future state of health and about growth in income levels and changes in future inflation levels: a near impossible task! On top of this, households have absolutely no control over the amounts other households borrow, notwithstanding that such collective borrowings can have a major impact on the shift from an income based financing to borrowing against the values of the assets: the homes. The choice –demand- for goods and services is infinitely simpler when current income is being used to buy such items. If only current income is being used, the choices of what to buy are limited by the level of income and savings. Economic theories and economic models have given too little weight to the difference between committing current or future incomes. It is not just individual households who have to struggle with such a choice; also governments have to make such judgments in their spending behavior. This paper will focus on the mortgage borrowing levels in the United States over the period 1996-2016. The paper will examine the factors that drive the supply of funds as the supply side totally determines the outcome of the mortgage borrowing levels. Households are for 100% dependent on the willingness of lenders to commit funds. The major drawback of this dependency is that lenders not only find their security in future households’ income levels, but also in the values of the assets: the homes being financed. As this paper will demonstrate, the volume of funds lend can and often does affect the price developments of all homes and it is thereby a factor which can cause a major deviation from the only factor which matters: the ability of households to repay such mortgage borrowings out of future income levels. As the statistics will show, the financial crisis for U.S. individual households already happened in 2003, long before the banking crisis of 2007-2008.
    Keywords: U.S. financial crisis, asset based and income based mortgage funding, Federal Reserve policies: interest rate setting and quantitative easing, gap management, house prices, income growth
    JEL: E32 E4 E41 E44 E5 E58
    Date: 2017–02–22
  3. By: Lennard, Jason (Department of Economic History, Lund University)
    Abstract: This paper investigates the causal effect of monetary policy on economic activity in the United Kingdom between 1890 and 1913. Based on the Romer and Romer (2004) narrative identification approach, I find that following a one percentage point monetary tightening, unemployment rose by 0.8 percentage points, while inflation fell by 2.7 percentage points. In addition, monetary policy shocks accounted for more than a quarter of macroeconomic volatility.
    Keywords: business cycles; gold standard; monetary policy; narrative identification
    JEL: E31 E32 E52 E58 N13
    Date: 2017–02–28
  4. By: Hubert, Paul (OFCE - SCiences Po.); Labondance, Fabien (Université de Bourgogne Franche-Comté — CRESE, OFCE — Sciences Po)
    Abstract: We explore empirically the theoretical prediction that optimism or pessimism have aggregate effects, in the context of monetary policy. First, we quantify the tone conveyed by FOMC policymakers in their statements using computational linguistics. Second, we identify sentiment as the unpredictable component of tone, orthogonal to fundamentals, expectations, monetary shocks and investors’ sentiment. Third, we estimate the impact of FOMC sentiment on the term structure of private interest rate expectations using a high-frequency methodology and an ARCH model. Optimistic FOMC sentiment increases policy expectations primarily at the one-year maturity. We also find that sentiment affects inflation and industrial production beyond monetary shocks.
    Keywords: Animal spirits; optimism; confidence; FOMC; interest rate expectations; central bank communication; ECB; aggregate effects
    JEL: E43 E52 E58
    Date: 2017–02–17
  5. By: Bluwstein, Kristina (European University Institute)
    Abstract: The 2008 financial crisis has shown that financial busts can influence the real economy. However, there is less evidence to suggest that the same holds for financial booms. Using a Markov-Switching vector autoregressive model and euro area data, I show that financial booms tend to be less procyclical than financial busts. To identify the sources of asymmetry, I estimate a non-linear DSGE model with a heterogeneous banking sector and an occasionally binding borrowing constraint. The model matches the key features of the data and shows that the borrowers’ balance sheet channel accounts for the asymmetry in the macro-financial linkages. The muted macro-financial transmission during financial booms can be exploited for macroprudential policies. By comparing capital buffer rules with monetary policy ‘leaningagainst- the-wind’ rules, I find that countercyclical capital buffers improve welfare.
    Keywords: Macro-financial linkages; non-linearities; Markov-Switching VAR; credit channel; occasionally binding constraints; DSGE; macroprudential policy; leaning-against-the-wind policy
    JEL: E44 E52 E58
    Date: 2017–02–01
  6. By: Larin, Benjamin
    Abstract: The 2007-2008 financial crisis highlighted that a turmoil in the financial sector including bursting asset price bubbles can cause pronounced and persistent fluctuations in real economic activity. This justifies the consideration of evolving and bursting asset price bubbles as another source of fluctuations in business cycle models. Business cycle models should therefore include asset price bubble as another source for fluctuations. In this paper rational asset price bubbles are incorporated into a life-cycle RBC model as first developed by Ríos (1996). The calibration of the model to the post-war US economy and the numerical solution show that the model is able to depict plausible bubble-driven business cycles. In particular, the model generates i) a higher and empirically more plausible volatility of consumption at the cost of ii) a lower and empirically less plausible contemporaneous correlation of consumption with output than the life-cycle RBC model without bubbles.
    JEL: D58 E32 E44
    Date: 2016
  7. By: Gross, Marco; Semmler, Willi
    Abstract: We develop a theoretical model that features a business cycle-dependent relation between out- put, price inflation and inflation expectations, augmenting the model by Svensson (1997) with a nonlinear Phillips curve that reflects the rationale underlying the capacity constraint theory (Macklem (1997)). The theoretical model motivates our empirical assessment for the euro area, based on a regime-switching Phillips curve and a regime-switching monetary structural VAR, employing different filter-based, semi-structural model-based and Bayesian factor model-implied output gaps. The analysis confirms the presence of a pronounced convex relationship between inflation and the output gap, meaning that the coefficient in the Phillips curve on the output gap recurringly increases during times of expansion and abates during recessions. The regime switching VAR reveals the business cycle dependence of macroeconomic responses to monetary policy shocks: Expansionary monetary policy induces less pressure on inflation at times of weak as opposed to strong growth; thereby rationalizing relatively stronger expansionary policy, including unconventional volume-based policy such as the Expanded Asset Purchase Programme (EAPP) of the ECB, during times of deep recession. JEL Classification: E31, E42, E52, E58
    Keywords: euro area, inflation targeting, monetary policy, monetary VAR, nonlinearity, Phillips curve
    Date: 2017–01
  8. By: Ekaterina Pirozhkova (Birkbeck, University of London)
    Abstract: In this paper I study how financial frictions affect robustness of monetary policy in DSGE models in the case of model uncertainty. The types of frictions I consider are financial accelerator and collateral constraints. Modeling monetary policy in terms of optimal interest rate rules, I find that welfare-maximizing policies for the models with financial frictions are robust to model uncertainty. Policy rule optimal for the basic New Keynesian model is not robust. Thereby I show that when there is uncertainty about what type of frictions is at work, a policymaker exposes economy to risks of significant welfare losses by using a reference model without frictions as economy representation. Using fault tolerance approach I find that modified policy rule optimal for the basic New Keynesian model is robust when it allows to respond to fluctuations in output.
    Keywords: optimal monetary policy rules, financial frictions, DSGE models, robustness.
    JEL: E32 E37 E44 E52
    Date: 2017–02
  9. By: Born, Benjamin; Pfeifer, Johannes
    Abstract: A growing recent literature relies on a precautionary pricing motive embedded in representative agent DSGE models with sticky prices and wages to generate negative output effects of uncertainty shocks. We assess whether this model channel is consistent with the data. We build a New Keynesian DSGE model with time-varying wage and price markups and document the predicted conditional comovement of output and markups following demand and supply uncertainty shocks. Using the model as a business cycle accounting device, we also construct aggregate markup series from the data. Time-series techniques are used to identify uncertainty shocks in the data and to study whether the conditional comovement between markups and output is consistent with the one implied by the model. The response to uncertainty shocks is found to be consistent with precautionary wage setting, but not price setting, putting the role of sticky wages into the focus.
    JEL: E32 E01 E24
    Date: 2016
  10. By: Bletzinger, Tilman; Lalik, Magdalena
    Abstract: This paper uses two established DSGE models (QUEST III and Smets-Wouters) to assess the impact of fiscal spending cuts on output and, in particular, also on inflation in the euro area under alternative settings for monetary policy. We compare four different settings of constrained monetary policy, taking into account alternative agents’ expectations about future monetary policy. We illustrate that those expectations are even more important for the size of the fiscal multipliers than the difference between exogenously versus endogenously modelled constraints. We confirm the well-known finding that fiscal multipliers exhibit an over-proportional reaction when monetary policy is constrained. The novelty of our results is that this over-proportionality is stronger for the fiscal multiplier on inflation than on output. We relate this finding to the structural parameters of the models by means of a Global Sensitivity Analysis. JEL Classification: E31, E43, E52, E62, E63
    Keywords: constrained monetary policy, fiscal multipliers, zero lower bound
    Date: 2017–02
  11. By: Speck, Christian
    Abstract: Did the decline in inflation rates from 2012 to 2015 and the low levels of market-based inflation expectations lead to de-anchored inflation dynamics in the euro area? This paper is the first time-varying event study to investigate the reaction of inflation-linked swap (ILS) rates - a market-based measure of inflation expectations - to macroeconomic surprises in the euro area. Compared to the pre-crisis period, surprises have a much stronger effect on spot ILS rates during the crisis. Medium-term forward ILS rates remain insensitive to news most of the time, which implies inflation anchoring. Only short periods of sensitivity on the part of medium-term forward ILS rates are identified at times of low inflation or recession. The sensitivity is lower over more distant forecast horizons such that medium-term sensitivity represents an inflation adjustment process and provides no evidence for a de-anchoring of inflation expectations or a loss of credibility for the Eurosystem's policy target.
    JEL: E44 E31 G14
    Date: 2016
  12. By: David L. Reifschneider; Peter Tulip
    Abstract: Since November 2007, the Federal Open Market Committee (FOMC) of the U.S. Federal Reserve has regularly published participants’ qualitative assessments of the uncertainty attending their individual forecasts of real activity and inflation, expressed relative to that seen on average in the past. The benchmarks used for these historical comparisons are the average root mean squared forecast errors (RMSEs) made by various private and government forecasters over the past twenty years. This paper documents how these benchmarks are constructed and discusses some of their properties. We draw several conclusions. First, if past performance is a reasonable guide to future accuracy, considerable uncertainty surrounds all macroeconomic projections, including those of FOMC participants. Second, different forecasters have similar accuracy. Third, estimates of uncertainty about future real activity and interest rates are now considerably greater than prior to the financial crisis; in contrast, estimates of inflation accuracy have changed little. Finally, fan charts-constructed as plus-or-minus one RMSE intervals about the median FOMC forecast, under the expectation that future projection errors will be unbiased and symmetrically distributed, and that the intervals cover about 70 percent of possible outcomes-provide a reasonable approximation to future uncertainty, especially when viewed in conjunction with the FOMC's qualitative assessments. That said, an assumption of symmetry about the interest rate outlook is problematic if the expected path of the federal funds rate is expected to remain low.
    Keywords: FOMC ; Fan Charts ; Forecasting ; Uncertainty
    JEL: E58 E37 C53
    Date: 2017–02–24
  13. By: David Reifschneider (Board of Governors of the Federal Reserve System); Peter Tulip (Reserve Bank of Australia)
    Abstract: Since November 2007, the Federal Open Market Committee (FOMC) of the US Federal Reserve has regularly published participants' qualitative assessments of the uncertainty attending their individual forecasts of real activity and inflation, expressed relative to that seen on average in the past. The benchmarks used for these historical comparisons are the average root mean squared forecast errors (RMSEs) made by various private and government forecasters over the past twenty years. This paper documents how these benchmarks are constructed and discusses some of their properties. We draw several conclusions. First, if past performance is a reasonable guide to future accuracy, considerable uncertainty surrounds all macroeconomic projections, including those of FOMC participants. Second, different forecasters have similar accuracy. Third, estimates of uncertainty about future real activity and interest rates are now considerably greater than prior to the financial crisis; in contrast, estimates of inflation accuracy have changed little. Finally, fan charts – constructed as plus-or-minus one RMSE intervals about the median FOMC forecast, under the expectation that future projection errors will be unbiased and symmetrically distributed, and that the intervals cover about 70 percent of possible outcomes – provide a reasonable approximation to future uncertainty, especially when viewed in conjuction with the FOMC's qualitative assessments. That said, an assumption of symmetry about the interest rate outlook is problematic if the expected path of the federal funds rate is expected to remain low.
    Keywords: forecast uncertainty; fan charts; interval estimation
    JEL: C53 E37 E58
    Date: 2017–02
  14. By: Hachula, Michael; Rieth, Malte; Piffer, Michele
    Abstract: We study the effects and transmission channels of non-standard monetary policy in the euro area using structural vector autoregressions, identified with an external instrument. The instrument is the common component of unexpected variations in euro area sovereign yields vis-à-vis Germany for different maturities on policy announcement days. We find that expansionary monetary surprises are effective in stimulating economic activity, prices and inflation expectations. Shock transmission functions through public and private interest rates, asset prices and credit conditions. The policy innovations, however, also lead to a rise in primary public expenditures, a divergence of relative prices within the union and a widening of internal trade balances.
    JEL: E52 E58 E63
    Date: 2016
  15. By: Conti, Antonio M.; Neri, Stefano; Nobili, Andrea
    Abstract: Inflation in the euro area has been falling since mid-2013, turned negative at the end of 2014 and remained below target thereafter. This paper employs a Bayesian VAR to quantify the contribution of a set of structural shocks, identified by means of sign restrictions, to inflation and economic activity. Shocks to oil supply do not tell the full story about the disinflation that started in 2013, as both aggregate demand and monetary policy shocks also played an important role. The lower bound to policy rates turned the European Central Bank (ECB) conventional monetary policy de facto contractionary. A country analysis confirms that the negative effects of oil supply and monetary policy shocks on inflation was widespread, albeit with different intensity across countries. The ECB unconventional measures since 2014 contributed to raising inflation and economic activity in all the countries. All in all, our analysis confirms the appropriateness of the ECB asset purchase programme. JEL Classification: C32, E31, E32, E52
    Keywords: Bayesian methods, inflation, monetary policy, oil supply, VAR models
    Date: 2017–01
  16. By: John Geanakoplos (Cowles Foundation, Yale University); Kieran James Walsh (University of Virginia Darden School of Business)
    Abstract: We prove that in competitive market economies with no insurance for idiosyncratic risks, agents will always overinvest in illiquid long term assets and underinvest in short term liquid assets. We take as our setting the seminal model of Diamond and Dybvig (1983), who Örst posed the question in a tractable model. We reach such a simple conclusion under mild conditions because we stick to the basic competitive market framework, avoiding the banks and intermediaries that Diamond and Dybvig and others introduced.
    Keywords: Liquidity, Constrained inefficiency, Diamond-Dybvig models, Öre sales
    JEL: E44 D5 E43 E6 G18
    Date: 2017–02
  17. By: Schmidt, Sebastian; Nakata, Taisuke
    Abstract: Modifying the mandate of a discretionary central bank to include an interest-rate smoothing objective increases the welfare of an economy where large contractionary shocks occasionally force the central bank to lower the policy rate to its effective lower bound. The central bank with an interest-rate smoothing objective credibly keeps the policy rate low for longer than the discretionary central bank with the standard mandate does, as in optimal commitment policy. Through expectations, the temporary overheating of the economy associated with such low-for-long interest rate policy mitigates the declines in inflation and output when the lower bound constraint is binding. In a calibrated model, we find that the introduction of an interest-rate smoothing objective can reduce the welfare costs associated with the lower bound constraint by more than half.
    JEL: E52 E61 E58
    Date: 2016
  18. By: Ciccarelli, Matteo; García, Juan Angel; Montes-Galdón, Carlos
    Abstract: The effects of the unconventional monetary policy (UMP) measures undertaken by the U.S. Federal Reserve (and other major central banks) remain a crucial topic for research. This paper investigates their effects on the anchoring of long-term inflation expectations, a key dimension of UMP that has been largely overlooked. Our analysis provides two key insights. First, the anchoring of inflation expectations deteriorated significantly since late 2008. Second, the expansion of the Fed’s balance sheet contributed decisively to prevent and gradually reverse that de-anchoring during the Great Recession. Using a SVAR framework extended to incorporate policy news, we show that accounting for the predictable path of the balance sheet following the Fed’s asset purchase announcements is fundamental to properly assess the effects of UMP. JEL Classification: E43, E44, C52, C55
    Keywords: inflation expectations, news shocks, unconventional monetary policy
    Date: 2017–01
  19. By: Maria Teresa Punzi (Department of Economics, Vienna University of Economics and Business); Katrin Rabitsch (Department of Economics, Vienna University of Economics and Business)
    Abstract: We propose a model of a risky mortgage-lending market in which we take explicit account of heterogeneity in household borrowing conditions, by introducing two borrower types: one with a low loan-to-value (LTV) ratio, one with a high LTV ratio, calibrated to U.S. data. We use such framework to study a deleveraging shock, modeled as an increase in housing investment risk, that falls more strongly on, and produces a larger contraction in credit for high-LTV type borrowers, as in the data. We find that this deleveraging experience produces significant aggregate effects on output and consumption, and that the contractionary effects are orders of magnitudes higher in a model version that takes account of borrower heterogeneity, compared to a more standard model version with a representative borrower.
    Keywords: Borrowing Constraints, Loan-to-Value ratio, Heterogeneity, Financial Amplification
    JEL: E23 E32 E44
    Date: 2017–02
  20. By: Filippo Natoli (Bank of Italy); Laura Sigalotti (Bank of Italy)
    Abstract: We compare the degree of anchoring of inflation expectations in the euro area, the United States and the United Kingdom, focusing on the post-crisis period. First of all, we estimate a set of measures of average and tail correlation using inflation swaps and options, as proposed by Natoli and Sigalotti (2016). To quantify the degree of anchoring, we also propose a new indicator based on the results of a logistic regression, obtained by measuring the odds that strong negative shocks to short-term expectations are connected to large declines in long-term expectations. The results reveal an increase in the risk of de-anchoring during the last quarter of 2014 for the euro area. While showing a significant reduction after the peak, our de-anchoring indicator remains high and volatile for 2015 and 2016. Inflation expectations in the US and the UK are instead found to be firmly anchored.
    Keywords: inflation expectations, anchoring, inflation swaps, inflation options, tail comovement, odds ratio
    JEL: C14 C58 E31 E44 G13
    Date: 2017–02
  21. By: Brede, Maren
    Abstract: In light of persistent inflation dispersion and high debt levels in the EMU, this paper investigates the desirability of budget-neutral fiscal policy rules that respond to the domestic inflation differential. The paper employs a two-country DSGE model of a monetary union with traded and non-traded goods. When consumption or labour income taxes respond to the domestic inflation differential while lump-sum taxes balance the budget, a national fiscal authority is able to reduce welfare costs of business cycle fluctuations by 1-4%. When lump-sum taxes are absent, hybrid rules using only distortionary taxes can reduce welfare costs by 6-10% under demand and supply disturbances. Gains in welfare stem from higher mean consumption due to lower price dispersion when the fiscal authority actively compresses the domestic inflation differential and thus domestic inflation.
    JEL: E62 F41 F45
    Date: 2016
  22. By: Francesco Zanetti; Masashige Hamano
    Abstract: Abstract How do product variety and quality affect the aggregate price bias? We develop a general equilibrium model that accounts for the joint interaction of product quality and variety. Our findings show that the aggregate price bias is pro-cyclical and the contribution of product variety is persistent whereas the contribution of product quality becomes counter-cyclical in the medium to long run. We show that accounting for product quality and variety has critical implications on the measure of cyclical fluctuations. Measurements of cyclical fluctuations derived using the consumption deflator, which abstracts from changes in product quality and variety, underestimate the variables' true volatility.
    Keywords: Firm's entry and exit, product quality, product variety
    JEL: D24 E23 E32 L11 L60
    Date: 2017–02–27
  23. By: Dovern, Jonas; Kenny, Geoff
    Abstract: This paper analyses the distribution of long-term inflation expectations in the euro area using individual density forecasts from the ECB Survey of Professional Forecasters. We exploit the panel dimension in this dataset to examine whether this distribution became less stable following the Great Recession, subsequent sovereign debt crisis and period when the lower bound on nominal interest rates became binding. Our results suggest that the distribution did change along several dimensions. We document a small downward shift in mean long-run expectations toward the end of our sample although they remain aligned with the ECB definition of price stability. More notably, however, we identify a trend toward a more uncertain and negatively skewed distribution with higher tail risk. Another main finding is that key features of the distribution are influenced by macroeconomic news, including the ex post historical track record of the central bank. JEL Classification: E31, E58
    Keywords: density forecasts, ECB, euro area, inflation expectations
    Date: 2017–01
  24. By: Sebastian Edwards
    Abstract: In this paper I analyze the London Monetary and Economic Conference of 1933, an almost forgotten episode in U.S. monetary history. I study how the Conference shaped dollar policy during the second half of 1933 and early 1934. I use daily data to investigate the way in which the Conference and related policies associated to the gold standard affected commodity prices, bond prices, and the stock market. My results show that the Conference itself did not impact commodity prices or the stock market. However, it had a small effect on bond prices. I do find that the events associated with the abandonment of the gold standard impacted prices in a significant way, even before the actual monetary and currency channels were at work. These results are consistent with the “change in regime” hypothesis of Sargent (1983).
    JEL: B21 B22 B26 E3 E31 E42 F31 N22
    Date: 2017–02
  25. By: Busetti, Fabio; Delle Monache, Davide; Gerali, Andrea; Locarno, Alberto
    Abstract: The paper studies how a prolonged period of subdued price developments may induce a de-anchoring of inflation expectations from the central bank's objective. This is shown within a framework where agents form expectations using adaptive learning, choosing among a set of alternative forecasting models. The analysis is accompanied by empirical evidence on the properties of inflation expectations in the euro area. Our results also suggest that monetary policy may lose effectiveness if delayed too much, as expectations are allowed to drift away from target for too long. JEL Classification: E31, E37, E58, D83
    Keywords: DSGE, expectations de-anchoring, inflation, learning
    Date: 2017–01
  26. By: Marcello Pericoli (Bank of Italy); Giovanni Veronese (Bank of Italy)
    Abstract: We document how the impact of monetary surprises in the euro area and the US on financial markets has changed since 1999. We use a definition of monetary policy surprises that singles out movements in the long end of the yield curve, rather than those that change nearby futures on the central bank reference rates. By focusing only on this component of monetary policy our results are more comparable over time. We find a hump-shaped response of the yield curve to monetary policy surprises, both in the pre-crisis period and since 2013. During the crisis years, Fed path-surprises, largely through their effect on term premia, account for the impact on interest rates, which is found to be increasing in tenor. In the euro area, the path-surprises reflect shifts in sovereign spreads and have a large impact on the entire constellation of interest rates, exchange rates and equity markets.
    Keywords: monetary policy surprises, unconventional monetary policy
    JEL: E44 E52 F31 G14
    Date: 2017–02
  27. By: Hardik A. Marfatia (Department of Economics, Northeastern Illinois University, USA); Rangan Gupta (Department of Economics, University of Pretoria, South Africa); Esin Cakan (Department of Economics, University of New Haven, USA)
    Abstract: International real estate markets and the ever increasing role of the U.S. economic and policy developments has played a central role both in international portfolio management as well as broader economic policy making. In this paper, we measure the extent of time-varying impact of the U.S. monetary policy and macroeconomic news on the international Real Estate Investment Trusts (REITs) stock returns. Results suggest that there has been significant variation both across countries and across time in the role of U.S. news on the global REIT stocks. Further, the country’s stock market capitalization to GDP ratio has strong connections with the time-varying nature of the impact of the U.S. on the global REIT stock returns.
    Keywords: Monetary Policy, Macroeconomic Surprises, International REITs, Time-Varying Model
    JEL: E44 E52 C32 F42 G14
    Date: 2017–02
  28. By: Felder, Rahel; Bachmann, Ronald
    Abstract: This paper analyses the impact of the Great Recession on labour market dynamics in industrialized countries. Using unique measures of labour market flows constructed from worker-level micro data, we examine to what extent macro shocks were transmitted to national labour markets. Following Blanchard and Wolfers (2000), we focus on the role of the interaction of shocks and institutions for labour market flows - in addition to the unemployment rate - in order to explain cross-country differences in labour market reactions to the Great Recession. Our results show that interactions between shocks and institutions have explanatory power when considering observable macroeconomic shocks; interactions with trade union variables are of particular relevance in this context.
    JEL: J60 E24 J08
    Date: 2016
  29. By: Tran Thanh Hoa (The State Bank of Vietnam)
    Abstract: In this paper, I apply univariate and vector autoregressive (VAR) models to forecast inflation in Vietnam. To investigate the forecasting performance of the models, two naïve benchmark models (one is a variant of a random walk and the other is an autoregressive model) are first built based on Atkeson-Ohanian (2001), Gosselin-Tkacz (2001) and the specific properties of inflation in Vietnam. Then, I compute the pseudo out-of-sample root mean square error (RMSE) as a measure of forecast accuracy for the candidate models and benchmarks, using rolling window and expanding window forecasting evaluation strategies. The process is applied to both monthly and quarterly data from Vietnam for the period from 2000 through the first half of 2015. I also apply the forecast-encompassing Diebold-Mariano test to support choosing statistically better forecasting models from among the different candidates. I find that VAR_m2 is the best monthly model to forecast inflation in Vietnam, whereas AR(6) is the best of the quarterly forecasting models, although it provides a statistically insignificantly better forecast than the benchmark BM2_q.
    Keywords: Inflation, Forecast, Univariate Models, Vector Autoregressive Models, Forecast Accuracy
    JEL: C22 C32 C51 C53 E31 E37
    Date: 2017–02
  30. By: Fuchs-Schündeln, Nicola; Bick, Alexander; Lagakos, David
    Abstract: How do average hours worked vary across the world income distribution? To answer this question, we build a new internationally comparable database of hours worked covering countries of all income levels. We document that average hours worked per adult are substantially higher in low-income countries than in high-income countries. This pattern holds for both men and women, for adults of all ages and education levels, and along both the extensive margin (employment rates) and intensive margin (hours per worker). Our results imply that labor productivity and welfare differences across countries are larger than suggested by differences in consumption per capita.
    JEL: E01 E24 J22
    Date: 2016
  31. By: Jüßen, Falko; Bredemeier, Christian; Winkler, Roland
    Abstract: In recessions, predominantly men lose their jobs, which has been described by the term "mancessions". Against this background, we analyze whether fiscal expansions foster job creation predominantly for men. Yet, we find empirically that fiscal shocks lead to employment growth that is larger for women than for men. We show that the gender-specific employment effects of fiscal policy are driven by disproportionate employment changes in female-dominated occupations, specifically so-called "pink-collar" occupations. We develop a business-cycle model that explains these occupational employment dynamics as a consequence of differences in the substitutability between capital and labor across occupations.
    JEL: J21 E62 J16
    Date: 2016
  32. By: Speck, Christian
    Abstract: Did the decline in inflation rates from 2012 to 2015 and the low levels of market-based inflation expectations lead to de-anchored inflation dynamics in the euro area? This paper is the first time-varying event study to investigate the reaction of inflation-linked swap (ILS) rates – a market-based measure of inflation expectations – to macroeconomic surprises in the euro area. Compared to the pre-crisis period, surprises have a much stronger effect on spot ILS rates during the crisis. Medium-term forward ILS rates remain insensitive to news most of the time, which implies inflation anchoring. Only short periods of sensitivity on the part of medium-term forward ILS rates are identified at times of low inflation or recession. The sensitivity is lower over more distant forecast horizons such that medium-term sensitivity represents an inflation adjustment process and provides no evidence for a de-anchoring of inflation expectations or a loss of credibility for the Eurosystem’s policy target. JEL Classification: E31, E44, G12, G14
    Keywords: central banking, event study, inflation anchoring, inflation expectations, inflation-linked swaps
    Date: 2017–01
  33. By: Falagiarda, Matteo; Sousa, João
    Abstract: This paper sheds new light on the information content of monetary and credit aggregates for future price developments in the euro area. Overall, we find strong variation in the information content of these variables over time. We show that monetary and credit aggregates are very often selected among the top predictors of inflation, with their predictive power relative to other predictors generally improving in the post-2012 period. An out-of-sample forecasting exercise indicates that, when monetary and credit aggregates are loaded directly in the forecasting equation, the additional gains over the benchmark model are generally high and significant across horizons and HICP components only in the most recent period. When the forecasts are computed using factor-augmented regressions based on the best predictors, we confirm the importance of monetary and credit variables in forecasting inflation, even if their information content is diluted in a much broader pool of variables. JEL Classification: C53, E37, E41, E51, E58
    Keywords: diffusion index, forecasting, inflation, money, targeted predictors
    Date: 2017–02
  34. By: Holtemöller, Oliver
    Abstract: In this paper, we employ firm-level data to analyze to what extent financing conditions of non-financial corporations in the Euro Area depend on country-specific factors, in particular the respective country's government bond yield and the share of non-performing loans to the corporate sector. Moreover, we assess whether this relationship has changed during the European debt crisis. It turns out that the increase in corporate financing costs during the year 2011 can partially be explained by increasing government bond yields. However, the further increase of corporate financing costs in stressed Euro area countries during the year 2012 can not be explained by these yields, but by the share of non-performing loans. This finding suggests that the ECB's policy of reducing corporate financing costs in stressed countries via government bond purchases may not be effective.
    JEL: E43 E44 E52
    Date: 2016
  35. By: Aleksander Berentsen; Sébastien Kraenzlin; Benjamin Müller
    Abstract: In response to the financial crisis of 2007/08, all major central banks decreased interest rates to historically low levels and created large excess reserves. Central bankers currently discuss how to raise interest rates in such an environment. The term "exit strategy" refers to the various policies that allow central banks to achieve this objective. Exit instruments such as paying interest on reserves, term deposits, central bank bills and reverse repos are evaluated with respect to the central bank's ability to control the money market interest rate and their impact on money market trading activity, welfare, inflation and taxes. Each instrument is investigated under two polar coordination regimes: monetary dominance and fiscal dominance.
    Keywords: Exit strategies, money market, repo, monetary policy, interest rates
    JEL: E40 E50 D83
    Date: 2016–12
  36. By: Hartmann, Matthias; Dovern, Jonas
    Abstract: We propose an imperfect information model for the expectations of macroeconomic forecasters that explains differences in average disagreement levels across forecasters by means of cross sectional heterogeneity in the variance of private noise signals. We show that the forecaster-specific signal-to-noise ratios determine both the average individual disagreement level and an individuals' forecast performance: forecasters with very noisy signals deviate strongly from the average forecasts and report forecasts with low accuracy. We take the model to the data by empirically testing for this implied correlation. Evidence based on data from the Surveys of Professional Forecasters for the US and for the Euro Area supports the model for short- and medium-run forecasts but rejects it based on its implications for long-run forecasts.
    JEL: E37 D80 C53
    Date: 2016
  37. By: Ana Fostel (Dept. of Economics, George Washington University); John Geanakoplos (Cowles Foundation, Yale University); Gregory Phelan (Department of Economics, Williams College)
    Abstract: We show that cross-border financial flows arise when countries differ in their abilities to use assets as collateral. Financial integration is a way of sharing scarce collateral. The ability of one country to leverage and tranche assets provides attractive financial contracts to investors in the other country, and general equilibrium effects on prices create opportunities for investors in the financially advanced country to invest abroad. Foreign demand for collateral and for collateral-backed financial promises increases the collateral value of domestic assets, and cheap foreign assets provide attractive returns to investors who do not demand collateral to issue promises. Gross global flows respond dynamically to fundamentals, exporting and amplifying financial volatility.
    Keywords: Collateral, Financial innovation, Asset prices, Capital flows, Securitized markets, Asset-backed securities, Global imbalances
    JEL: D52 D53 E32 E44 F34 F36 G01 G11 G12
    Date: 2017–02
  38. By: Florian Huber (Department of Economics, Vienna University of Economics and Business); Manfred M. Fischer (Department of SocioEconomics, Vienna University of Economics and Business); Philipp Piribauer (Oesterreichisches Institut für Wirtschaftsforschung)
    Abstract: This paper uses a global vector autoregressive (GVAR) model to analyze the relationship between FDI inflows and output dynamics in a multi-country context. The GVAR model enables us to make two important contributions: First, to model international linkages among a large number of countries, which is a key asset given the diversity of countries involved, and second, to model foreign direct investment and output dynamics jointly. The country-specific small-dimensional vector autoregressive submodels are estimated utilizing a Bayesian version of the model coupled with stochastic search variable selection priors to account for model uncertainty. Using a sample of 15 emerging and advanced economies over the period 1998:Q1 to 2012:Q4, we find that US outbound FDI exerts a positive long-term effect on output. Asian and Latin American economies tend to react faster and also stronger than Western European countries. Forecast error variance decompositions indicate that FDI plays a prominent role in explaining GDP fluctuations, especially in emerging market economies. Our findings provide evidence for policy makers to design macroeconomic policies to attract FDI inflows in the respective countries.
    Keywords: FDI-output relationship, cross-country spillovers, transmission of external shocks, Bayesian global vectorautoregressive model
    JEL: C30 E52 F41 E32
    Date: 2017–02
  39. By: Lalik, Magdalena
    Abstract: The paper presents a model-based assessment of fiscal multipliers operating in the euro area during the period 2011-2014. The assessment is conditional on two distinct reactions of the sovereign risk premium (either responding endogenously to fiscal shocks or being an exogenous process) and two types of monetary policy (accommodative and non-accommodative). Applying those multipliers to the amount of austerity measures implemented in years 2011-14, the paper evaluates their possible fallouts and shows that the output effects of the recent fiscal consolidations were largely determined by two key factors: financial markets’ sentiments and the composition of adopted measures. Finally, the paper also highlights the importance of modelling of government’s interest payments for predicting the evolution of debt-to-GDP ratios. JEL Classification: E42, E32, F42, F45
    Keywords: debt dynamics, euro area, Fiscal multiplier, macroeconomic models, sovereign risk premium
    Date: 2017–02
  40. By: Albuquerque, Bruno; Baumann, Ursel
    Abstract: The response of US inflation to the high levels of spare capacity during the Great Recession of 2007-09 was rather muted. At the same time, it has been argued that the short-term unemployment gap has a more prominent role in determining inflation, and either the closing of this gap or non-linearities in the Phillips curve could lead to a sudden pick-up in inflation. We revisit these issues by estimating Phillips curves over 1992Q1 to 2015Q1. Our main findings suggest that a Phillips curve model that takes into account inflation persistence, inflation expectations, supply shocks and labour market slack as determinants explains rather well the behaviour of inflation after the Great Recession, with little evidence of a "missing deflation puzzle". More important than the choice of the slack measure is the consideration of time-variation in the slope. In fact, we find that Phillips curve models with time-varying slope coefficients are able to outperform significantly the constant-slope model as well as other non-linear models over 2008Q1-2015Q1. JEL Classification: E31, E37, E58
    Keywords: inflation dynamics, labour market slack, Phillips curve
    Date: 2017–01
  41. By: Scharrer, Christian; Heer, Burkhard
    Abstract: We study the impact of a government spending shock on the distribution of wealth and income between cohorts in a dynamic stochastic overlapping generations model with two types of households, a Ricardian household and a rule-of-thumb consumer. We demonstrate that an unexpected increase in government spending increases income inequality and decreases wealth inequality. In contrast to conventional wisdom that the financing of the additional expenditures by debt rather than taxes especially burdens young on behalf of the old generations, we find that a bond-financed increase in government spending rather harms the Ricardian households during both working age and retirement, while the rule-of-thumb consumers benefit at working age. The crucial element in our analysis is a wealth effect that results from the decline in the price of capital due to higher government debt.
    JEL: E62 E30 E12
    Date: 2016
  42. By: Anne-Marie Rieu-Foucault
    Abstract: In the context of the 2007–2009 financial crisis, central banks have innovated in the form of multiple unconventional measures implemented within the existing operational framework for monetary policy. These innovations raise two issues in 2016: the categorisation of these new measures and the consistency between measures taken by the Fed and those taken by the ECB. This paper shows the existence of two important stylised facts: a structural break in the allocation of liquidity conditions and an apparent convergence of measures that actually conceals the fundamental differences between the operational mode of the Fed and that of the ECB, within the history and institutions. These two observations then lead to question the type and shape of the ECB mandate in line with the orientations of the political economy of European countries.
    Keywords: Banques centrales – Mesures non conventionnelles.
    JEL: E52 E58
    Date: 2017
  43. By: Hornstein, Andreas (Federal Reserve Bank of Richmond); Kudlyak, Marianna (Federal Reserve Bank of San Francisco)
    Abstract: In the U.S. labor market unemployed individuals that are actively looking for work are more than three times as likely to become employed as those individuals that are not actively looking for work and are considered to be out of the labor force (OLF). Yet, on average, every month twice as many people make the transition from OLF to employment than do from unemployment. Based on these observations we have argued in Hornstein, Kudlyak, and Lange (2014) for an alternative measure of resource utilization in the labor market, a non-employment index, which is more comprehensive than the standard unemployment rate. In this article we show how the NEI fits into recent extensions of the matching function which is a standard macroeconomic approach to model labor markets with frictions, how it affects estimates of the extent of labor market frictions, and how these frictions have changed in the Great Recession.
    JEL: E24 J63 J64
    Date: 2017–02–15
  44. By: Ahlborn, Markus; Wortmann, Marcus
    Abstract: The literature on business cycle synchronization in Europe frequently presumes an alleged 'core-periphery' pattern without providing empirical verification of the underlying cyclical (dis)similarities or the supposed but unobservable 'European business cycle(s)'. To provide a data-based country group analysis, we apply a fuzzy clustering approach to quarterly output gap series of 27 European countries over the period 1996-2015. Our results confirm the existence of a persistent core cluster as opposed to clusters on the Eastern and Southern European peripheries, highlighting the inadequate composition of the euro area (EA). Moreover, we find that Germany's business cycle is not a suitable substitute for the core. By analyzing the relation between the identified 'European core business cycle' and the peripheral cycles over time, we show diverging patterns for the southern periphery after the financial crisis, casting doubt on the endogeneity properties of the EA.
    Keywords: business cycles,core-periphery,euro area,fuzzy cluster analysis
    JEL: C38 E32 F15 F45
    Date: 2017
  45. By: Pincheira, Pablo
    Abstract: In this paper we introduce a “power booster factor” for out-of-sample tests of predictability. The relevant econometric environment is one in which the econometrician wants to compare the population Mean Squared Prediction Errors (MSPE) of two models: one big nesting model, and another smaller nested model. Although our factor can be used to improve the power of many out-of-sample tests of predictability, in this paper we focus on boosting the power of the widely used test developed by Clark and West (2006, 2007). Our new test multiplies the Clark and West t-statistic by a factor that should be close to one under the null hypothesis that the short nested model is the true model, but that should be greater than one under the alternative hypothesis that the big nesting model is more adequate. We use Monte Carlo simulations to explore the size and power of our approach. Our simulations reveal that the new test is well sized and powerful. In particular, it tends to be less undersized and more powerful than the test by Clark and West (2006, 2007). Although most of the gains in power are associated to size improvements, we also obtain gains in size-adjusted power. Finally we present an empirical application in which more rejections of the null hypothesis are obtained with our new test.
    Keywords: Time-series, forecasting, inference, inflation, exchange rates, random walk, out-of-sample
    JEL: C22 C52 C53 C58 E17 E27 E37 E47 F37
    Date: 2017–02
  46. By: Bobeica, Elena; Jarociński, Marek
    Abstract: In the immediate wake of the Great Recession we didn't see the disinflation that most models predicted and, subsequently, we didn't see the inflation they predicted. We show that these puzzles disappear in a Vector Autoregressive model that properly accounts for domestic and global factors. Such a model reveals, among others, that domestic factors explain much of the inflation dynamics in the 2012-2014 euro area missing inflation episode. Consequently, economists and models that excessively focused on the global nature of inflation were liable to miss the contribution of deflationary domestic shocks during this episode. JEL Classification: E31, E32, F44
    Keywords: Bayesian vector autoregression, conditional forecast, inflation dynamics, international transmission of shocks, Phillips curve, shock identification
    Date: 2017–01
  47. By: Klose, Jens
    Abstract: Central bank provisions may be used as a measure of the perceived risk of the balance sheet composition by a central bank. We identify three possible sources that may change the size of the provisions. These are: The length of the balance sheet, the central bank revenues and measures of fiscal stress. Using data of the eleven founding members of the Eurosystem for the years 1999-2014 we are able to test each of the three determinants. We find that provisions are increased with the size of the balance sheet especially in the recent financial crisis. Moreover, provisions are increased at the cost of lower central bank revenues. While this holds for the pre-crisis period this relationship seems to collapse in the crisis period probably because of the more active collateral policy. Finally, central banks do not tend to lower provisions because of fiscal tensions. This is even more true in the crisis period.
    JEL: E52 E58 C23
    Date: 2016
  48. By: Liu, Yulin; Gersbach, Hans; Hahn, Volker
    Abstract: We examine “Forward Guidance Contracts”, which make central bankers’ utility contingent on the precision of interest-rate forecasts. We integrate those contracts into the New Keynesian Framework and study how they can be used to overcome a liquidity trap. We establish the properties of simple renewable Forward Guidance Contracts and characterize the contracts that the government wants to offer repeatedly. These contracts create favorable tradeoffs between the efficacy of forward guidance at the zero bound and the reduced flexibility in reacting to future events, and dominate long-term contracts for moderate negative natural real interest-rate shocks. We discuss which type of Forward Guidance Contracts can be used when there is uncertainty about natural real interest-rate shocks, a situation which typically calls for moderate incentive intensity. Finally we explore alternative contractual environments.
    JEL: E52 E58 E31
    Date: 2016
  49. By: Maximo Camacho; Matias Pacce
    Abstract: We examine whether web search queries help economic agents with predictions about the checking in and overnight stays of travelers in Spain in real time. We show that the models including queries outperform models that exclude these leading indicators. In this way, we aim to contribute to the literature on the link between the Internet and the tourism market.
    Keywords: Economic Analysis , Spain , Working Paper
    JEL: E32 C22 E27 Z30
    Date: 2016–12
  50. By: Mand, Matthias
    Abstract: While an opportunity cost argument suggests that recessions are ideal times to undergo R&D aimed at enhancing productivity, empirical measures of U.S. R&Dactivity are procyclical. To resolve this discrepancy, I propose a calibrated real business cycle model featuring R&D-based growth through horizontal innovations. The model is used to quantitatively analyze the impact of business cycle shocks under various specifications of the R&D process. I find that the specification of R&D inputs is essential for the cyclicality of R&D activities. First, the popular knowledge-driven specification of R&D has a hard time to generate both procyclical R&D investment and procyclical R&D labor at the same time. Second, the calibrated multi-input specification generates procyclical R&D investment as well as procyclical employment of scientists. In addition, the endogenous growth mechanism gives rise to amplification of business cycle shocks.
    JEL: E32 O31 O33
    Date: 2016
  51. By: Weijie Luo; Andrew Pickering; Paulo Santos Monteiro
    Abstract: The median voter theory of government size predicts that greater inequality leads to greater demand for redistribution and larger government (Meltzer and Richard, 1981). However, this prediction is often rejected empirically. This paper distinguishes between income inequality induced by differences in labor productivity and income inequality induced by differences in capital income. Whilst the standard argument applies to productivity-induced income inequality, greater capital income inequality leads to smaller government if, as often observed, capital income is difficult to tax. Using OECD data, government size and capital income inequality (proxied by the top 1% income share) are found to be negatively related in both fixed effects and instrumental variable regressions. Moreover, controlling for capital income inequality yields a positive and significant relationship between government size and labor income inequality, as originally conjectured.
    JEL: D78 E62 H10
    Date: 2017–02
  52. By: Vugar Rahimov (Central Bank of the Republic of Azerbaijan); Nigar Jafarova (Central Bank of the Republic of Azerbaijan); Fuad Ganbarov (Azerbaijan National Academy of Sciences, Institute of Economics)
    Abstract: In this study, we explore the pass-through of exchange rate fluctuations to domestic CPI and its components for Azerbaijan, Kazakhstan and Russia. Using the data of 2003:Q1-2016:Q2, we estimate a VAR model and find significant but incomplete pass-through in all sample countries. The accumulated pass-through to aggregate CPI within one year is 28 percent for both Azerbaijan and Kazakhstan; however the equivalent figure for Russia is 32 percent. According to our empirical findings the largest pass-through (ERPT) is observed in the non-food CPI in Azerbaijan and Kazakhstan, whereas in Russia the food prices demonstrate the greatest ERPT. Since the ERPT is an essential ingredient of price developments in sample countries, it should be assessed precisely and taken into account in monetary policy decisions and inflation forecasting.
    Keywords: Exchange rate pass-through, VAR model, disaggregated CPI, oil exporting countries
    JEL: F31 E31 E52 C51 C52
    Date: 2017–02
  53. By: Jeremy Greenwood (University of Pennsylvania); Nezih Guner (CEMFI, Centro de Estudios Monetarios y Financieros); Guillaume Vandenbroucke (Federal Reserve Bank of St. Louis)
    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.
    Keywords: Assortative mating, baby boom, baby bust, family economics, female labor supply, fertility, household income inequality, household production, human capital, macroeconomics, marriage and divorce, quality-quantity tradeoff, premarital sex, quantitative theory, single mothers, social change, survey paper, technological progress, women's rights.
    JEL: D58 E1 E13 J1 J2 J12 J13 J22 N30 O3 O11 O15
    Date: 2017–01
  54. By: Pu Chen (Melbourne Institute of Technology, Australia); Willi Semmler (Department of Economics, New School for Social Research)
    Abstract: The globalization process leads to increasing synchronization of business cycle among different countries. As a consequence, many policy makers and Central Banks are afraid of vulnerabilities of their country arising from exter- nal risk drivers. In this paper we develop a multi-regime global VAR model to study the spill-over effects in financial markets, in goods markets and between financial markets and good markets across countries, which are assumed to be in a high financial stress regime or a low financial stress regime. It turns out that in both high and low stress regimes financial shocks to a country, big or small one, can have large and persistent impacts on financial markets of other countries, and only in the high stress regime financial shocks to a country can have some negative output effects on other countries. In high stress regime output shocks of a big country can have larger effects on finan- cial stress than those of a small country, while in a low stress regime output shocks of a country, big or small, have little impact on financial conditions. Further, we study the effects of global and regional shocks, as well as the spillover effects of national monetary policies and internationally coordinated policies on the financial and real sectors.
    Keywords: International contagion, spillover effects, regime dependency, regime switching, Multi-Regime Global VAR
    JEL: F42 F62 F45 E58
    Date: 2017–02
  55. By: Patricia Carballo (Banco Central del Uruguay); José Ignacio González (Banco Central del Uruguay); Margarita Güenaga (Banco Central del Uruguay); José Mourelle (Banco Central del Uruguay); Gabriela Romaniello (Banco Central del Uruguay)
    Abstract: This paper presents the characteristics of Modelo de Proyecciones Macroeconómicas (MPM), which allows both forecasts and simulations of macroeconomic variables. It is a New Keynesian model with price stickiness. Therefore, movements in the nominal sector, and especially in monetary policy, may have effects on real variables in the economy in the short term. We also analyze the relationships among the model variables when a money market is included and the effects of imposing two alternative rules of monetary policy. The first rule is based on an interest rate (Taylor), and the second in monetary aggregates (McCallum)
    Keywords: Semi structural model, monetary aggregates, policy rule, Uruguay; Modelo semi estructural, agregados monetarios, regla de política, Uruguay
    JEL: E23 O47
    Date: 2015–12
  56. By: Giulio Fella (Queen Mary, University of London, CFM and IFS); Seraín Frache (Banco Central del Uruguay, Departamento de Economia FCS-UDELAR); Winfried Koeniger (University of St.Gallen (Swiss Institute for Empirical Economic Research), CESifo, Center for Financial Studies and IZA)
    Abstract: We use the Italian Survey of Household Income and Wealth, a rather unique dataset with a long time dimension of panel information on consumption, income and wealth, to structurally estimate a buffer-stock saving model. We exploit the information contained in the joint dynamics of income, consumption and wealth to quantify the degree of insurance against income risk. The estimated model implies that Italian households can insure between 89 and 95 percent of a transitory and between 7 and 9 percent of a permanent income shock. Compared to existing empirical estimates for the same dataset, our findings suggest that Italian households do not have access to significant insurance beyond self-insurance
    Keywords: Consumption, Wealth, Incomplete markets, Insurance
    JEL: D91 E21
    Date: 2016–01
  57. By: Ekaterina Pirozhkova (Birkbeck, University of London)
    Abstract: We study the dynamic characteristics of bank loan components and seek to resolve the puzzle raised by den Haan et al. (2007) that commercial and industrial loans increase following monetary contraction. By estimating a set of structural vector autoregression models on US data for 1954-2015, we demonstrate that when risk and balance sheet factors are controlled for, business loans decrease after monetary tightening, what is consistent with bank-lending channel of monetary policy transmission mechanism. This result is robust to VAR specification and to the measure of uncertainty employed. We distinguish between volatility measures of uncertainty and measures of uncertainty as vagueness/”unknownness” of economic outlook and show that business loans go down following uncertainty shock only after the latter uncertainty measure is used. We demonstrate that controlling for risk factors is critical for explaining the dynamic properties of business loans, as variance of business loans is driven by innovations to uncertainty and credit risk to the greater extent than by innovations to macroeconomic variables.
    Keywords: uncertainty, bank loans, vector autoregression.
    JEL: E40
    Date: 2017–02
  58. By: Stähler, Nikolai; Moyen, Stephane; Winkler, Fabian
    Abstract: In this paper, we discuss how cross-country unemployment insurance can be used to improve international risk sharing. We use a two-country business cycle model ugmented by a search labour market and incomplete financial markets and let the unemployment insurance scheme operate across both countries. We find that cross-country insurance through the unemployment insurance system can in principle be achieved without distorting national labour markets, and that international risk-sharing introduces a countercyclical element to the unemployment insurance tradeoff. When we calibrate our model to the Euro area, the optimal supranational policy makes replacement rates countercyclical, while they would be procyclical in the absence of cross-country transfers. Recent Eurozone policy proposals, by contrast, seem to have only limited effects.
    JEL: H20 J64 E62
    Date: 2016
  59. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Abstract: Rather than provide a standard economic outlook talk, I’d like to speak about a challenge that monetary policymakers face in the aftermath of the financial crisis and Great Recession. That challenge is managing expectations. When we think about expectations in the context of monetary policy, we usually mean expectations about inflation or expectations about the future path of policy. But today, what I mean is managing expectations about the role monetary policy can play in promoting a healthy economy. While I’ll focus on the Federal Reserve, I believe a similar challenge applies to central bankers around the world. Of course, the remarks I’ll provide are my own views and not necessarily those of the Federal Reserve System or my colleagues on the Federal Open Market Committee.
    Keywords: Monetary Policy; Guidance; economic growth;
    Date: 2017–02–20
  60. By: Piergiorgio Alessandri (Banca d'Italia); Margherita Bottero (Banca d'Italia)
    Abstract: We study the impact of economic uncertainty on the supply of bank credit using a monthly dataset that includes all loan applications submitted by a sample of 650,000 Italian firms between 2003 and 2012. We find that an increase in aggregate uncertainty has three effects. First, it reduces banks' likelihood to accept new credit applications. Second, it lengthens the time firms have to wait for their loans to be released. Third, it makes banks less responsive to fluctuations in short-term interest rates, weakening the bank lending channel of monetary policy. The influence of uncertainty is relatively stronger for poorly capitalized lenders and geographically distant borrowers.
    Keywords: uncertainty, credit supply, bank lending channel, loan applications.
    JEL: E51 G21
    Date: 2017–02
  61. By: Chandrasekhar, C. P.
    Abstract: This paper examines the recent evolution of fiscal and monetary policy in India since the 1991 economic reforms, along with their impact on employment and decent work outcomes. To achieve macroeconomic stability objectives and attract foreign direct investment (FDI), the Government of India committed itself to reducing the fiscal deficit to 3 per cent of GDP through the Fiscal Responsibility and Budget Management (FRBM) Act, while the Reserve Bank of India (RBI) adopted an inflation-targeting framework with a target of 3 per cent.
    Keywords: economic policy, macroeconomics, decent work, fiscal policy, monetary policy, India
    Date: 2016
  62. By: Lionel Fontagné (PSE (Paris 1) and CEPII); Jean Fouré (CEPII); Gianluca Santoni (CEPII)
    Abstract: Taking a 2035 horizon, we examine how world energy consumption and emission patterns will be shaped by the changing demand and technological capabilities of different regions. We combine a convergence model fitting three production factors (capital, labour and energy) and two factor-specific productivities, along with a dynamic CGE model of the world economy. We consider three possible “worlds†with very different energy scarcity, and how Copenhagen pledges change economic agents’ calculus in each of these three situations. We find that the most dramatic changes in terms of location of value added are to be expected from the intrinsic differences among the three considered “worlds†, not so much in terms of economic impact of environmental pledges.
    Keywords: Growth, Macroeconomic Projections, long run, global economy
    JEL: E23 E27 F02 F47
    Date: 2017–02–24
  63. By: Ravikumar, B. (Federal Reserve Bank of St. Louis); Santacreu, Ana Maria (Federal Reserve Bank of St. Louis); Sposi, Michael J. (Federal Reserve Bank of Dallas)
    Abstract: We compute welfare gains from trade in a dynamic, multicountry model with capital accumulation. We examine transition paths for 93 countries following a permanent, uniform, unanticipated trade liberalization. Both the relative price of investment and the investment rate respond to changes in trade frictions. Relative to a static model, the dynamic welfare gains in a model with balanced trade are three times as large. The gains including transition are 60 percent of those computed by comparing only steady states. Trade imbalances have negligible effects on the cross-country distribution of dynamic gains. However, relative to the balanced-trade model, small, less-developed countries accrue the gains faster in a model with trade imbalances by running trade deficits in the short run but have lower consumption in the long-run. In both models, most of the dynamic gains are driven by capital accumulation.
    Keywords: Welfare gains from trade; Dynamic gains; Capital accumulation; Trade imbalances
    JEL: E22 F11 O11
    Date: 2017–02–27
  64. By: Nezih Guner (CEMFI, Centro de Estudios Monetarios y Financieros); Remzi Kaygusuz (Tilburg University); Gustavo Ventura (Arizona State University)
    Abstract: What are the macroeconomic and welfare effects of expanding transfers to households with children in the United States? How do childcare subsidies compare to alternative policies? We answer these questions in a life-cycle equilibrium model with household labor-supply decisions, skill losses of females associated to non participation, and heterogeneity in terms of fertility, childcare expenditures and access to informal care. We consider the expansion of transfers that are contingent on market work - childcare subsidies and Child and Dependent Care Tax Credits (CDCTC) - versus those that are not - Child Tax Credits (CTC). We find that expansions of transfers of the first group have substantial positive effects on female labor supply, that are largest at the bottom of the skill distribution. Universal childcare subsidies at a 75% rate lead to long-run increases in the participation of married females of 8.8%, while an equivalent expansion of the CTC program leads to the opposite - a reduction of about 2.4%. We find that welfare gains of newborn households are substantial and up to 2.3% under the CDCTC expansion. The expansion of none of the existing programs, however, receives majority support at the time of its implementation. Our findings show substantial heterogeneity in welfare effects, with a small fraction of households - young and poorer households with children - who gain significantly while many others lose.
    Keywords: Household labor supply, child-related transfers, childcare.
    JEL: E62 H24 H31
    Date: 2016–12
  65. By: Natoli, Filippo; Sigalotti, Laura
    Abstract: We compare the degree of anchoring of inflation expectations in the euro area, the United States and the United Kingdom, focusing on the post-crisis period. First of all, we estimate a set of measures of average and tail correlation using inflation swaps and options, following Natoli and Sigalotti (2016). To quantify the degree of anchoring, we also propose a new indicator based on the results of a logistic regression, measuring the odds that strong negative shocks to short-term expectations are channelled to large declines in long-term expectations. The results reveal, for the euro area, an increase in the de-anchoring risk during the last quarter of 2014; while showing a significant reduction after the peak, our de-anchoring indicator remains high and volatile in 2015 and 2016. Expectations in the US and UK are instead found to be firmly anchored. JEL Classification: C14, C58, E31, E44, G13
    Keywords: anchoring, inflation expectations, inflation options, inflation swaps, option-implied density, tail co-movement
    Date: 2017–01
  66. By: Kaufmann, Christoph
    Abstract: This paper studies Ramsey-optimal monetary and fiscal policy in a New Keynesian 2-country open economy framework, which is used to assess how far fiscal policy can substitute for the role of nominal exchange rates within a monetary union. Giving up exchange rate flexibility can result in high welfare costs, which depend significantly on whether firms set prices in producer or in local currency. By using only one tax instrument per country and robust to changes in the calibration, the welfare costs can be reduced by 86% in case of producer currency pricing and by 68% in case of local currency pricing. Optimal policy in a monetary union can be described as a fiscal devaluation: if a nominal devaluation of the domestic currency is optimal under flexible exchange rates, optimal fiscal policy in a monetary union is a relative increase of the domestic VAT.
    JEL: F41 F45 E63
    Date: 2016
  67. By: Herz, Benedikt
    Abstract: A displaced worker might rationally prefer to wait through a long spell of unemployment instead of seeking employment at a lower wage in a job he is not trained for. I evaluate this trade-off using micro-data on displaced workers. To achieve identification, I exploit that the more a worker invested in occupation-specific human capital the more costly it is for him to switch occupations and the higher is therefore his incentive to wait. I find that between 9% and 18% of total unemployment in the United States can be attributed to wait unemployment.
    Keywords: wait unemployment, rest unemployment, specific human capital, worker mobility, mismatch, displaced workers
    JEL: E24 J61 J62
    Date: 2017–02
  68. By: Ryan Decker; John Haltiwanger; Ron S. Jarmin; Javier Miranda
    Abstract: A large literature documents declining measures of business dynamism including high-growth young firm activity and job reallocation. A distinct literature describes a slowdown in the pace of aggregate labor productivity growth. We relate these patterns by studying changes in productivity growth from the late 1990s to the mid 2000s using firm-level data. We find that diminished allocative efficiency gains can account for the productivity slowdown in a manner that interacts with the within-firm productivity growth distribution. The evidence suggests that the decline in dynamism is reason for concern and sheds light on debates about the causes of slowing productivity growth.
    Keywords: Job reallocation ; Labor supply and demand ; Productivity
    JEL: O47 L11 E24 J63
    Date: 2017–02–07
  69. By: Siassi, Nawid; Ortigueira, Salvador
    Abstract: In this paper, we present a dynamic model of labor supply, consumption, savings and marital decisions where we embed the income tax schedule and the four main anti-poverty income transfer programs in the U.S. The model is calibrated to match moments from a sample of non-college-educated workers with children in the 2014 Annual Social and Economic Supplement of the Current Population Survey. We then use the model to assess the effects of three recent proposals to reform the U.S. tax-transfer system, and especially to ameliorate the disincentives introduced by the current EITC schedule to married mothers' labor force participation. The categorical and economic conditions for eligibility and benefits of the transfer programs, along with the income and payroll tax system, yield complex budget constraints and introduce a web of interactions whose effects we aim to understand and quantify.
    JEL: E21 H24 H31
    Date: 2016
  70. By: Meldrum, Andrew (Bank of England); Raczko, Marek (Bank of England); Spencer, Peter (University of York)
    Abstract: Using data on government bond yields in Germany and the United States, we show that overseas unspanned factors — constructed from the components of overseas yields that are uncorrelated with domestic yields — have significant explanatory power for subsequent domestic bond returns. This result is remarkably robust, holding for different sample periods, as well as out of sample. Shocks to overseas unspanned factors have large and persistent effects on domestic yield curves. Dynamic term structure models that omit information about foreign bond yields are therefore likely to be misspecified.
    Keywords: Return-forecasting regressions; dynamic term structure models
    JEL: E43 G12
    Date: 2016–09–30
  71. By: Groll, Dominik; Monacelli, Tommaso
    Abstract: The desirability of flexible exchange rates is a central tenet in international macroeconomics. We show that, with forward-looking staggered pricing, this result crucially depends on the monetary authority's ability to commit. Under full commitment, flexible exchange rates generally dominate a monetary union (or fixed exchange rate) regime. Under discretion, this result is overturned: a monetary union dominates flexible exchange rates. By fixing the nominal exchange rate, a benevolent monetary authority finds it welfare improving to tradeoff efficiency in the adjustment of the terms of trade in order to improve on its ability to manage private sector's expectations. Thus, fixed exchange rate-induced inertia in the terms of trade is a cost under commitment, whereas it is a benefit under discretion, for it acts like a commitment device.
    JEL: F33 F41 E52
    Date: 2016
  72. By: Irmen, Andreas; Tabakovic, Amer
    Abstract: We scrutinize Thomas Piketty’s (2014) theory concerning the relationship between an economy’s long-run growth rate, its capital-income ratio, and its factor income distribution put forth in his recent book Capital in the Twenty-First Century. We find that a smaller long-run growth rate may be associated with a smaller capital-income ratio. Hence, Piketty’s Second Fundamental Law of Capitalism does not hold. However, in line with Piketty’s theory a smaller long-run growth rate goes together with a greater capital share. These findings obtain in variants of Romer’s (1990) seminal model of endogenous technological change. Here, both the economy’s savings rate and its growth rate are endogenous variables whereas in Piketty’s theory they are both exogenous parameters.
    JEL: E10 O33 E25
    Date: 2016
  73. By: Stijn Claessens; Nicholas Coleman; Michael S. Donnelly
    Abstract: Interest rates in many advanced economies have been low for almost a decade now and are often expected to remain so. This creates challenges for banks. Using a sample of 3,385 banks from 47 countries from 2005 to 2013, we find that a one percentage point interest rate drop implies an 8 basis points lower net interest margin, with this effect greater (20 basis points) at low rates. Low rates also adversely affect bank profitability, but with more variation. And for each additional year of "low for long", margins and profitability fall by another 9 and 6 basis points, respectively.
    Keywords: Interest rates ; Bank profitability ; Net interest margin ; Low-for-long
    JEL: G21 E43
    Date: 2017–02
  74. By: Giuseppe Vitaletti (Università Tuscia)
    Abstract: In the first and second paragraphs the following four important conclusions are reached: a) the price system revolves around an average, with prices depending on technology and the ratio between interest and wages; b) the GDP tends to grow, with fluctuations: this is mostly due to the influence of industry; c) when Investment overtakes Saving, the rate of interest is high; when, on the contrary, Saving overtakes Investment, the rate of interest tends to zero. This happens even if Investment is high; d) the situation of full employment tends to be preserved in any case, because the difference between Saving and Investment is filled up by money, which is one of the commodities of the system. Mathematics has been used to reach such conclusions. In the third and fourth paragraphs no mathematical instrument is used. Five propositions emerge: e) the Keynesian situation, and specifically unemployment, depends on the fact that money is paper-money, and it is no longer one of the commodities of the economic system; f) the only remedy is public debt. When debt becomes high, the rate of interest grows into a sort of rent: an international agreement is needed, to make the rate of interest converge structurally to zero, with regulated exceptions. The control of interest can be of the fiscal type; g) the rents due to decreasing returns are increasingly high. Agriculture, extraction of raw materials, real estate are the principal sectors of generation of such rents; h) an important source of rents, which is stressed in this paper, lies in increasing returns: these ones are due in the first place to markets in which it is normally impossible to enter, and in which there are firms with different quantities: the greater quantities imply rents. Other rents are attached to this situation. All together rents reach around 40% of national GDPs; i) the only way to treat the phenomenon of rents is a fiscal system, which, instead of the present ones, is inspired by De Viti’s and Einaudi’s main ideas. The basis is the benefit principle, and the reporting of the fiscal sovereignty to the nation. The context is a system of soft international regulation, with agreements on public deficit, on the basic rates of taxation, on levies on imports. These arrangements are among the big areas of the world, which agree to the balance in the foreign exchange among them. Only with such organization is it possible to restore the equilibrium between the State and the market.
    Keywords: Sraffa, Keynes, rate of interest, rents, De Viti de Marco, Einaudi, fiscal system
    JEL: D2 D3 E1 H2 H5 H6
  75. By: Leibovici, Fernando (Federal Reserve Bank of St. Louis); Waugh, Michael E. (New York University and NBER)
    Abstract: This paper studies the role of international trade delivery lags and variation in the intertemporal marginal rate of substitution in accounting for puzzling features of cyclical fluctuations of international trade volumes. Our insight is that, because international trade is time-intensive, variation in the rate at which agents are willing to substitute across time affects how trade volumes respond to changes in output and prices. We calibrate our model to match key features of U.S. data and discipline the variation in the intertemporal marginal rate of substitution using asset price data. We find that our model is quantitatively consistent with U.S. cyclical import fluctuations.
    JEL: E3 F1 F41
    Date: 2016–06–01
  76. By: Punzi, Maria Teresa; Rabitsch, Katrin
    Abstract: [Introduction] Boom-bust cycles in asset prices and economic activity are a central issue in policy and academic debates. An increasing rate of default on mortgage loans in the U.S. precipitated the financial crisis of 2007. A large stock of debt and high asset prices have been both a cause and a consequence of the crisis because more borrowers had access to bigger loans at lower rates of interest. The prolonged recession and difficult recovery highlight the fact that financial frictions are a key driver of business cycle fluctuations. During normal times imbalances emerge and the financial sector can mitigate financial frictions. Yet, during periods of crisis wealth can be destroyed and the financial sector adds fragility and instability to the whole economy. [...]
    Date: 2016
  77. By: Daniel Felipe Cuervo; Camilo Ernesto Gómez; Miguel Antonio Melo; José Gregorio Ojeda
    Abstract: Un gran auge del sector minero energético, especialmente del petróleo y sus derivados, seguido de una fuerte desaceleración, ha provocado toda una serie de consecuencias en el comportamiento económico del país. Este trabajo presenta una revisión literaria de los estudios que se han hecho para Colombia sobre los efectos directos de variaciones en los precios del petróleo sobre el crecimiento de la economía colombiana, posteriormente se presenta una estimación de estos efectos por medio de un modelo VAR-GARCH, el cual permite que la volatilidad del precio del petróleo afecte el crecimiento económico. Se encuentra la existencia de una relación contemporánea entre el crecimiento de la economía colombiana y el crecimiento del petróleo internacional WTI, así mismo, se encuentra una relación negativa entre el crecimiento de la economía colombiana y la volatilidad del precio internacional del petróleo
    Keywords: Modelo VAR-GARCH, relación contemporánea, crecimiento económico, precio del petróleo, boom de commodities.
    JEL: C32 C53 E32 G31
    Date: 2017–02–23
  78. By: Régis Barnichon; Christian Matthes
    Abstract: Despite intense scrutiny, estimates of the government spending multiplier remain highly uncertain, with values ranging from 0.5 to 2. While an increase in government spending is generally assumed to have the same (mirror-image) effect as a decrease in government spending, we show that relaxing this assumption is important to understand the effects of fiscal policy. Regardless of whether we identify government spending shocks from (i) a narrative approach, or (ii) a timing restriction, we find that the contractionary multiplier -the multiplier associated with a negative shock to government spending- is above 1, while the expansionary multiplier -the multiplier associated with a positive shock- is substantially below 1. The multiplier is largest in recessions, as found in previous studies, but only because the contractionary multiplier is largest in recessions. The expansionary multiplier is always below 1 and not larger in recessions. We argue that our results help understand the wide range of multiplier estimates found in the literature.
    JEL: C32 E62
    Date: 2016–05
  79. By: Markus K. Brunnermeier; Michael Sockin; Wei Xiong
    Abstract: China’s gradualistic approach allowed the government to learn how the economy reacts to small policy changes, and to adjust its reforms before implementing them in full. With fully developed financial markets, however, private actors’ may front-run future policy changes making it impossible for the implement policies gradually. With financial markets the government faces a time-inconsistency problem. The government would like to commit to a gradualistic approach, but after it observes the economy’s quick reaction, it has no incentive to implement its policies in small steps.
    JEL: E5 G10
    Date: 2017–02
  80. By: Michele Benvenuti (Bank of Italy); Luca Casolaro (Bank of Italy); Emanuele Ciani (Bank of Italy)
    Abstract: Using data from the Italian Survey on Household Income and Wealth from 1995 to 2014, we study the relation between informal credit (loans from relatives and friends) and a household's access to bank credit. While most of the literature has focused on the substitutability channel, we highlight that even households with full access to the formal credit market are more likely to be indebted to relatives or friends when compared to those not interested in formal loans. This complementarity is stronger for households who have problems paying back their loans, suggesting the presence of a caretaker effect on the part of relatives and friends towards distressed families. Finally, we estimate the overall impact of an expansion of local credit supply on the diffusion of informal loans, using an IV approach. The results suggest that the complementarity effect prevails, but the positive effect on informal loans is economically very small.
    Keywords: informal credit, local credit markets, inter vivos transfers
    JEL: D14 E21
    Date: 2017–02
  81. By: Jose Asturias; Sewon Hur; Timothy J. Kehoe; Kim J. Ruhl
    Abstract: Using data from Chile and Korea, we find that a larger fraction of aggregate productivity growth is due to firm entry and exit during fast-growth episodes compared to slow-growth episodes. Studies of other countries confirm this empirical relationship. We develop a model of endogenous firm entry and exit based on Hopenhayn (1992). Firms enter with efficiencies drawn from a distribution whose mean grows over time. After entering, a firm’s efficiency grows with age. In the calibrated model, reducing entry costs or barriers to technology adoption generates the pattern we document in the data. Firm turnover is crucial for rapid productivity growth.
    JEL: E22 O10 O38 O47
    Date: 2017–02
  82. By: Asturias, Jose (Georgetown University Qatar); Hur, Sewon (University of Pittsburgh); Kehoe, Timothy J. (Federal Reserve Bank of Minneapolis); Ruhl, Kim J. (Pennsylvania State University)
    Abstract: Using data from Chile and Korea, we find that a larger fraction of aggregate productivity growth is due to firm entry and exit during fast-growth episodes compared to slow-growth episodes. Studies of other countries confirm this empirical relationship. We develop a model of endogenous firm entry and exit based on Hopenhayn (1992). Firms enter with efficiencies drawn from a distribution whose mean grows over time. After entering, a firm’s efficiency grows with age. In the calibrated model, reducing entry costs or barriers to technology adoption generates the pattern we document in the data. Firm turnover is crucial for rapid productivity growth.
    Keywords: Entry; Exit; Productivity; Entry barriers; Barriers to technology adoption
    JEL: E22 O10 O38 O47
    Date: 2017–02–21
  83. By: Rao, M. Govinda (National Institute of Public Finance and Policy); Kumar, Sudhanshu (National Institute of Public Finance and Policy)
    Abstract: The objective of the paper is to highlight the reforms needed in the tax system to improve the revenue productivity of the tax system to conform to the vision of accelerating economic growth and development in India. Based on the cross-country analysis of tax-GDP ratios in 98 countries, the paper estimates the extent of under-taxation in India. Assuming 8 per cent growth in GDP, the paper estimates the increase in tax-GDP ratios needed to be raised and this additional effort would provide fiscal space for much needed investments in physical infrastructure and human development. The paper goes on to identify the reforms needed to raise the revenue productivity of the tax system keeping in view the best practice approach to tax reform in India.
    Keywords: Tax Policy ; Tax System ; Revenue Productivity ; India
    JEL: E62 H2
    Date: 2017–02
  84. By: Natoli, Filippo; Sigalotti, Laura
    Abstract: We analyze the degree of anchoring of inflation expectations in the euro area during the post-crisis period, with a focus on the time span from 2014 onwards when long-term beliefs have substantially drifted away from the policy target. Using a new estimation technique, we look at tail co-movements between short- and long-term distributions of inflation expectations, estimated from daily quotes of inflation derivatives. We find that, during 2014, average correlations between short- and long-term inflation expectations rose sharply; moreover, negative tail events impacting short-term beliefs have been increasingly channeled to long-term views, triggering both downward revisions in expectations and upward changes in uncertainty. Overall, our results signal a risk of downside de-anchoring of long-term inflation expectations. JEL Classification: C14, C58, E31, E44, G13
    Keywords: anchoring, inflation expectations, inflation swaps, inflations options, option-implied density, tail co-movement
    Date: 2017–01
  85. By: Ward, Felix; Chen, Yao
    Abstract: External adjustments during the classical gold standard – a fixed exchange rate regime – were associated with few, if any, output costs. This paper analyzes the relative importance of flexible prices, migration and mildly countercyclical monetary policy for this relatively smooth adjustment experience. For this purpose we build and estimate a structural model of the classical gold standard. We find that the sustainability of the gold standard as a fixed exchange rate regime was primarily a consequence of flexible prices. Pre-1914 price flexibility is furthermore largely explicable by large pre-1914 primary sector shares. The paper proceeds in a historical comparative fashion by relating the gold standard experience to that of another fixed-exchange rate regime – today’s eurozone.
    JEL: N10 F20 E50
    Date: 2016
  86. By: Cai, Fang.; Yang, Du.; Meiyan, Wang.
    Abstract: This paper outlines the evolution of fiscal and monetary policies in China in conjunction with of labour market developments. It examines employment trends in China since the 1978 Economic Reforms – or “Reform and Opening Up” policies – along with the reorientation of macroeconomic policies in line with the transition from a planned to market economy. The authors argue that the increasing openness of China’s economy has resulted in a shift away from solely focusing on macroeconomic stability to supporting employment objectives as well.
    Keywords: promotion of employment, economic policy, monetary policy, macroeconomics, economic recession, trend, China
    Date: 2016
  87. By: Maćkowiak, Bartosz; Matějka, Filip; Wiederholt, Mirko
    Abstract: Dynamic rational inattention problems used to be difficult to solve. This paper provides simple, analytical results for dynamic rational inattention problems. We start from the benchmark rational inattention problem. An agent tracks a variable of interest that follows a Gaussian process. The agent chooses how to pay attention to this variable. The agent aims to minimize, say, the mean squared error subject to a constraint on information flow, as in Sims (2003). We prove that if the variable of interest follows an ARMA(p,q) process, the optimal signal is about a linear combination of { X t ,…,X t-p+1 } and { ε t ,…, ε t-q+1 }, where X t denotes the variable of interest and ε t denotes its period t innovation. The optimal signal weights can be computed from a simple extension of the Kalman filter: the usual Kalman filter equations in combination with first-order conditions for the optimal signal weights. We provide several analytical results regarding those signal weights. We also prove the equivalence of several different formulations of the information flow constraint. We conclude with general equilibrium applications from Macroeconomics. JEL Classification: D83, E32
    Keywords: Kalman filter, macroeconomics, rational inattention
    Date: 2017–01
  88. By: Kehoe, Patrick J. (Federal Reserve Bank of Minneapolis); Pastorino, Elena (Federal Reserve Bank of Minneapolis)
    Abstract: Before the advent of sophisticated international financial markets, a widely accepted belief was that within a monetary union, a union-wide authority orchestrating fiscal transfers between countries is necessary to provide adequate insurance against country-specific economic fluctuations. A natural question is then: Do sophisticated international financial markets obviate the need for such an active union-wide authority? We argue that they do. Specifically, we show that in a benchmark economy with no international financial markets, an activist union-wide authority is necessary to achieve desirable outcomes. With sophisticated financial markets, however, such an authority is unnecessary if its only goal is to provide cross-country insurance. Since restricting the set of policy instruments available to member countries does not create a fiscal externality across them, this result holds in a wide variety of settings. Finally, we establish that an activist union-wide authority concerned just with providing insurance across member countries is optimal only when individual countries are either unable or unwilling to pursue desirable policies.
    Keywords: Cross-country externalities; Cross-country insurance; Cross-country transfers; Fiscal externalities; International financial markets; International transfers; Optimal currency area
    JEL: E60 E61 F33 F35 F38 F42 G15 G28 G33
    Date: 2017–02–21
  89. By: Victor Kummritz (IHEID, The Graduate Institute of International and Development Studies, Geneva); Bastiaan Quast (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: Global Value Chains (GVCs) can provide new means for developing economies to industrialise. To fully seize these opportunities, it is necessary to comprehensively measure both the intensity and type of countries’ GVC integration patterns to better understand the relationship between GVCs and development. In this paper, we apply the new R package decompr to recent OECD input-output data with extended country coverage to analyse the integration patterns of developing economies in a more detailed way. We provide evidence that trends in GVCs are increasingly driven by developing countries. In addition, we show that while per capita GDP does not predict the intensity of GVC integration well, it determines the type of integration. High-income countries mainly export intermediates into GVCs and serve as markets of final demand. In contrast, developing economies join GVCs mostly in the assembly stage. However, there is evidence that developing countries have begun to shift their participation from the production of final to intermediate goods, moving upstream in GVCs and out of assembly.
    Keywords: Global Value Chains, Trade in Value Added, Export Decomposition
    JEL: E01 F13 F14 F23 L14
    Date: 2016–01–12
  90. By: Botta, Alberto; Tori, Daniele
    Abstract: In two previous contributions published in this working paper series, we pointed out the theoretical fragilities of the expansionary austerity theory (EAT). In this paper, we develop our critique even further by integrating the above theoretical investigation with an econometric model testing for the effectiveness of the mechanisms at the basis of the EAT. We consider a sample of developed economies composed by both monetarily sovereign and non-monetarily sovereign countries. Our time spell runs from 2007 to 2016 since that we are interested to assess the solidity of the EAT postulates in the post-crisis period. Our findings reinforce the validity of our original critique, and are fully consistent with out theoretical model. Since 2007, the core mechanisms of the expansionary austerity theory were not at work, to say the least. Austerity measures did not provide any expansionary impulse to economic activity since that the “expectation”, “financial” and “external” channels were inactive at best, or they acted in the opposite direction with respect to what EAT advocates would have suggested. Further, austerity per se did not restore any sense of credibility about public finance solidity on financial markets. Rather, it exacerbated financial turbulences and speculation on the market for sovereign bonds. Interestingly, austerity measures delivered perverse results precisely in those non-monetarily sovereign countries where they were thought to be mostly effective.
    Keywords: fiscal policy; expansionary austerity theory; post-Keynesian macro models; panel data;
    JEL: E12 E61 E62
    Date: 2017–02–26
  91. By: Andrin Spescha (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Martin Wörter (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This paper investigates how the macroeconomic business cycle impacts the empirical relation between firms’ innovations and their sales growth rates. Based on firm-level panel data over the time period 1995-2014, the paper finds no visible sales growth differentials between firms in booming economic environments. In the economically difficult times of recessions, by contrast, innovative firms show significantly higher sales growth rates than non-innovative firms. This finding is in line with Schumpeter’s (1939) business cycle theory, where recessions play an important role in the adaptation of the economy towards innovative products and processes. Moreover, the paper shows that small innovative firms, profiting from their higher organizational flexibility and stronger entrepreneurial commitment, are the main beneficiaries in this adaption process.
    Keywords: Innovation, Firm growth, Business cycle, Firm size
    Date: 2016–10
  92. By: Rangan Gupta (Department of Economics, University of Pretoria, South Africa); Lardo Stander (Department of Economics, University of Pretoria, South Africa); Andrea Vaona (Department of Economics, University of Verona, Italy and Kiel Institute for the World Economy, Germany)
    Abstract: Using a novel, augmented two–sector endogenous growth model appropriate for a small, open economy characterised by human capital accumulation and productive government expenditure, we analyse the nature of the relationship between openness and economic growth. In the augmented form, external openness enters the human capital accumulation function directly. Productive government expenditure also affects human capital accumulation, but relies on seigniorage revenue to finance the productive expenditure where seigniorage revenue is itself dependent on the level of openness. Specifically, the findings indicate two, opposing effects of openness on growth – a direct effect of openness on growth through the knowledge spillovers that affect human capital accumulation, and an indirect effect of decreasing seigniorage revenue on growth through decreasing productive government expenditure on human capital. We discuss conditions under which the resultant openness–growth curve can be concave or convex, but do not specify theoretical functional forms or values to unknown parameters in the model to provide a concise theoretical result. Rather, drawing samples of exact model–match countries over a sample period of 1980–2011, we rely on a semi–parametric, data–driven empirical approach augmented with a restricted cubic spline regression function to provide empirical impetus to the theoretical outcomes reported. We show that the relationship between openness and growth is non–linear and specifically, inverted U–shaped. The result suggests that openness can only have a positive impact on the growth-rate until a certain threshold–level, beyond which, the effect is negative.
    Keywords: Openness, seigniorage, knowledge spillovers, semi–parametric estimation, spline regression
    JEL: C14 C61 E21 O42
    Date: 2017–01
  93. By: Hainz, Christa; Fidrmuc, Jarko; Hölzl, Werner
    Abstract: Bank lending has been a major concern since the financial crisis. We study the effect of a firm’s own credit market experience on its perceived bank lending policy using the Austrian Business Climate Survey between 2011 and 2014 and. Our results show that firms’ perceptions of aggregate lending policy depend on their individual credit market experience. Only if they get the loan at the expected terms, firms are more likely to perceive the banks’ lending policy positively. Moreover, firms are more likely to update their perceptions during the period in which they need a loan. Our results are in line with theories on sticky information, rational inattention and pessimism bias when forming perceptions.
    JEL: G21 E51 D03
    Date: 2016
  94. By: Lionel Fontagné (PSE (Paris 1) and CEPII); Jean Fouré (CEPII)
    Abstract: We address in this paper the future geography of production, migration and energy at the world level, and the consequences for the largest European countries. We take scant account of the wide range of possible evolutions of the world economy in terms of technological progress and diffusion, education, demography including migrations and finally energy price and efficiency. Taking a 2035 horizon, we examine how world trade patterns will be shaped by the changing comparative advantages, demand, and capabilities of different regions, and what will be the implications in terms of location of value added at the sector and country level. We combine a convergence model fitting three production factors (capital, labour and energy) and two factor-specific productivities, alongside a dynamic CGE model of the world economy calibrated to reproduce observed elasticity of trade to income. Each scenario involves three steps. First, we project growth at country level based on factor accumulation, demography and migration, educational attainment and efficiency gains, and discuss uncertainties related to our main drivers. Second, we impose this framework on the CGE baseline. Third, we implement trade policy scenarios (tariffs as well as non-tariff measures in goods and services), in order to get factor allocation across sectors from the model as well as demand and trade patterns.
    Keywords: Growth, Macroeconomic Projections, Dynamic Baselines
    JEL: E23 E27 F02 F17 F47
    Date: 2017–02–24
  95. By: Patnaik, Ila (National Institute of Public Finance and Policy); Felman, Joshua (IMF); Shah, Ajay (National Institute of Public Finance and Policy)
    Abstract: EMP measures in the existing literature are oriented towards applications in crisis dating and prediction. We propose a modified EMP measure where cross-country comparisons are possible. This is the sum of the observed change in the exchange rate with an estimated counterfactual of the magnitude of the change in the exchange rate associated with the observed currency intervention. We construct a multi-country dataset for EMP in each month. This opens up many new research possibilities.
    Keywords: Exchange rate regime ; capital flows ; currency wars ; monetary policy ; Exchange market pressure ; Statistical system
    JEL: E52 F31 F32
    Date: 2017–02
  96. By: Kim, Steven
    Abstract: In a complex and chaotic world, people often gloss over the facts and jump to conclusions. Unfortunately, the hasty approach usually yields deficient and even harmful results. The domains affected range from migration and poverty to alienation and crime. According to the Myth of Boon, for instance, immigrants always benefit the host society. In this light, many people envisage the great migrations of the 19th century from Europe to America. However, the United States at that stage was itself a developing country; moreover the Civil War showed that clashing cultures cannot co-exist. Meanwhile the Myth of Multiculturalism asserts that a mashup of mores is always desirable; but the reality is otherwise. When immigrants in their millions pour into sparsely populated districts, they end up replicating the cultures that caused them to flee their homelands in the first place. The upshot is disruptive and distressing for all parties be they newcomers or incumbents. In addition, the Myth of Virtue declares that migrants of all backgrounds are equally upright. Yet comprehensive studies in Sweden have shown that violent crimes can be traced to immigrants at rates which are at least four times those for natives. From another angle, a drove of migrants is a godsend for criminals. For instance, a terrorist ring struck in France in 2015 and again in Belgium the following year. The perpetrators – who grew up in Belgium, France and Sweden – displayed immigrant backgrounds and included part of the cohort that traveled to the Mideast to receive training from militants then returned to Europe by posing as refugees. Since socioeconomic problems are intertwined rather than independent, a piecemeal approach will not fill the bill. Instead, a coherent grasp of the issues and their tie-ups is a prerequisite for devising a wholesome solution.
    Keywords: Socioeconomics, Policy, Migration, Poverty, Alienation, Crime, Society, Culture, Multiculturalism
    JEL: A14 D10 E10 E66 F5 H1 I3 J1 K42 N3 N4 O1
    Date: 2016–09

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