nep-mac New Economics Papers
on Macroeconomics
Issue of 2017‒04‒09
102 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Higher Return for Savers and a Path toward Higher Investment By Xing, Victor
  2. Has the Fed responded to house and stock prices? A time-varying analysis. By Knut Are Aastveit; Francesco Furlanetto; Francesca Loria
  3. The Government Spending Multiplier in a (Mis-)Managed Liquidity Trap By Jordan Roulleau-Pasdeloup
  4. Инвестирование денежных средств в условиях экономического кризиса в 2017 году By Egorova, Yana
  5. Capital controls and foreign currency denomination By Fernando Garcia-Barragan; Guangling Liu
  6. Macroeconomic Imbalances in euro- and non-euro area member states By Bobeva, Daniela; Atanasov, Atanas
  7. The Risk-Taking Channel of Monetary Policy Transmission in the Euro Area By Matthias Neuenkirch; Matthias Nöckel
  8. Financial Cycles with Heterogeneous Intermediaries By Coimbra, Nuno; Rey, Hélène
  9. Intuitive and Reliable Estimates of the Output Gap from a Beveridge-Nelson Filter By Gunes Kamber; James Morley; Benjamin Wong
  10. The impact of growth on unemployment in a low vs. a high inflation environment By Tesfaselassie, Mewael F.; Wolters, Maik H.
  11. Optimal Fiscal Simple Rules for Small and Large Countries of a Monetary Union By Paulo Vieira; Celsa Machado; Ana Paula Ribeiro
  12. Anticipated Technology Shocks: A Re-Evaluation Using Cointegrated Technologies By Joel Wagner
  13. Monetary easing and financial instability By Viral Acharya; Guillaume Plantin
  14. The Costs of Point-of-Sale Payments in Canada By Anneke Kosse; Heng Chen; Marie-Hélène Felt; Valéry Dongmo Jiongo; Kerry Nield; Angelika Welte
  15. Ultra-accommodative Monetary Policy and Unintentional Drags on Consumer Spending By Xing, Victor
  16. Does foreign sector help forecast domestic variables in DSGE models? By Marcin Kolasa; Michal Rubaszek
  17. Sticky Wages, Monetary Policy and Fiscal Policy Multipliers By Dupor, William D.; Li, Rong; Li, Jingchao
  18. Oil price shocks and policy uncertainty: New evidence on the effects of US and non-US oil production By Kang, Wensheng; Ratti, Ronald. A.; Vespignani, Joaquin
  19. Liquidity Premiums on Government Debt and the Fiscal Theory of the Price Level By Berentsen, Aleksander; Waller, Christopher J.
  20. Assessing the Business Outlook Survey Indicator Using Real-Time Data By Lise Pichette; Marie-Noëlle Robitaille
  21. Effects and Risks of Unconventional Monetary Policy By Homburg, Stefan
  22. Investment price rigidity and business cycles By Alban Moura
  23. Impact Evaluation of Scenario with Local Currencies: DSGE Model By Katerina Gawthorpe
  24. Durations at the zero lower bound By Richard Dennis
  25. Interest rate conundrums in the twenty-first century By Hanson, Samuel; Lucca, David O.; Wright, Jonathan H.
  26. Empirical Investigation of the Effect of Bank Long Term Debt on Loans and Output in the Euro-zone By Claire-Océane Chevallier
  27. Negative interest rates, excess liquidity and bank business models: Banks’ reaction to unconventional monetary policy in the euro area By S. Demiralp; J. Eisenschmidt; T. Vlassopoulos
  28. The Right Fit for the Wrong Reasons: Real Business Cycle in an Oil-Dependent Economy By Miguel Angel Santos
  29. News Consumption, Political Preferences, and Accurate Views on Inflation By David-Jan Jansen; Matthias Neuenkirch
  30. The Role of the Inflation Target Adjustment in Stabilization Policy By Eo, Yunjong; Lie,Denny
  31. Financial integration before and after the crisis: Euler equations (re)visit European Union By Tomislav Globan; Petar Sorić
  32. Current Monetary Policy, the New Fiscal Policy and the Fed’s Balance Sheet : a presentation at Economic Club of Memphis, Memphis, Tenn., March 24, 2017 By Bullard, James B.
  33. Fiscal delegation in a monetary union: instrument assignment and stabilization properties By Henrique S. Basso; James Costain
  34. A Vertical Social Accounting Matrix of the U.S. Economy By Nelson H. Barbosa-Filho
  35. Why is Growth better in the United States than in other Industrial Countries By Martin S. Feldstein
  36. Same, but different: Testing monetary policy shock measures By Ettmeier, Stephanie; Kriwoluzky, Alexander
  37. Oil prices in a real-businesscycle model with precautionary demand for oil By Olovsson, Conny
  38. Zinstransmission in der Niedrigzinsphase: Eine empirische Untersuchung des Zinskanals in Deutschland By Hennecke, Peter
  39. Intuitive and Reliable Estimates of the Output Gap from a Beveridge-Nelson Filter By Güneş Kamber; James Morley; Benjamin Wong
  40. The Macroeconomic Consequences of Raising the Minimum Wage: Capital Accumulation, Employment and the Wage Distribution By Alexandre Janiak; Sofía Bauducco
  41. The Risk-Taking Channel in the US: A GVAR Approach By Raslan Alzubi; Mustafa Caglayan; Kostas Mouratidis
  42. The impact of biases in survival beliefs on savings behavior By Groneck, Max; Ludwig, Alexander; Zimper, Alexander
  43. External Monetary Shocks to Central and Eastern European Countries By Pierre Lesuisse
  44. Bank Capital Redux: Solvency, Liquidity, and Crisis By Jorda, Oscar; Richter, Björn; Schularick, Moritz; Taylor, Alan M.
  45. From Inflation Targeting to achieving Economic Growth By César Carrera
  46. Exchange Rate Pass-Through in the Euro Area By Davor Kunovac; Mariarosaria Comunale
  47. The Economics of German Unification after Twenty-Five Years: Lessons for Korea By Michael C. Burda; Mark Weder
  48. Money, inflation, and unemployment in the presence of informality By Mohammed Aït Lahcen
  50. External financing and economic activity in the euro area - why are bank loans special? By Iñaki Aldasoro; Robert Unger
  51. Is All Infrastructure Investment Created Equal? The Case of Portugal By Pereira, Alfredo; Pereira, Rui
  52. Are sovereign credit ratings overrated? By Davor Kunovac; Rafael Ravnik
  53. Can bank capital adequacy changes amplify the business cycle in South Africa? By Foluso Akinsola; Sylvanus Ikhide
  54. Credit Dynamics of Various Entities in Russia: Impact of Oil Prices and Sanctions By Yulia Vymyatnina
  55. Top-down vs.Bottom-up? Reconciling the effects of tax and transfer shocks on output By Sebastian Gechert; Christoph Paetz; Paloma Villanueva
  56. Private and Public Liquidity Provision in Over-the-Counter Markets By David M. Arseneau; David Rappoport; Alexandros Vardoulakis
  57. Do monetary policy announcements affect foreign exchange returns and volatility? Some evidence from high-frequency intra-day South African data. By Cyril May; Greg Farrell; Jannie Rossouw
  58. Estimated Small Multiple Regions Dynamic Stochastic General Equilibrium Model By Bulat Mukhamediyev; Mukhamediyev Bulat
  59. Inflation, real economic growth and unemployment expectations: An empirical analysis based on the ECB Survey of Professional Forecasters By María del Carmen Ramos-Herrera; Simón Sosvilla-Rivero
  60. Efficiency-wage competition: What happens as the number of players increases? By Guerrazzi, Marco
  61. Inside money, investment, and unconventional monetary policy By Lukas Altermatt
  62. Supranational policies for a renewed European Union By Riccardo Fiorentini
  63. Real Anomalies By Jules H. van Binsbergen; Christian C. Opp
  64. Keeping the Recovery Sustainable: The Essential Role of an Independent Fed. Speech to the Santa Cruz Chamber of Commerce, Santa Cruz, California, February 28, 2017. By Williams, John C.
  65. Cross-country fiscal policy spillovers and capital-skill complementarity in currency unions By Davoine, Thomas; Molnar, Matthias
  67. Aggregate Uncertainty and Sectoral Productivity Growth: The Role of Credit Constraints By Sangyup Choi; Davide Furceri; Yi Huang; Prakash Loungani
  68. A contribution to the Quantity Theory of Disaggregated Credit By Clavero, Borja
  69. Macro-financial stability under EMU By Philip R. Lane
  70. Market-preserving fiscal federalism in the European Monetary Union By van Riet, Ad
  71. Trade uncertainty and income inequality By Markus Brueckner; Joaquin Vespignani
  72. Guaranteed Employment and Universal Child Care For a New Social Contract By Jon D. Wisman; Aaron Pacitti
  73. The Making of Hawks and Doves: Inflation Experiences on the FOMC By Ulrike Malmendier; Stefan Nagel; Zhen Yan
  74. Trade uncertainty and income inequality By Brueckner, Markus; Vespignani, Joaquin
  75. Türkiye'de Büyüme ve İşsizlik By Turan, Güngör
  76. Public Expenditures and Debt at the Subnational Level: Evidence of Fiscal Smoothing from Argentina By Martín Besfamille; N. Grosman; D. Jorrat; O. Manzano; P. Sanguinetti
  77. Conditional forecasting with DSGE models - A conditional copula approach By Kenneth Sæterhagen Paulsen
  78. Shock Restricted Structural Vector-Autoregressions By Sydney C. Ludvigson; Sai Ma; Serena Ng
  79. A simple method to study local bifurcations of three and four-dimensional systems: characterizations and economic applications By Stefano Bosi; David Desmarchelier
  80. Inversión y capital: Chile, 1833-2010 By José Díaz; Gert Wagner
  81. Revisiting the Wealth Effect on Consumption in New Zealand By Martin Wong
  82. Inversión y capital: Chile, 1833-2010 By José Dïaz; Gert Wagner
  83. The Investment CAPM By Lu Zhang
  84. Increased energy efficiency in Scottish households: trading-off economic benefits and energy rebound effects? By Gioele Figus; Patrizio Lecca; Karen Turner; Peter McGregor
  85. On The Fisher Effect: A Review By Bosupeng, Mpho
  86. Dynamic Fiscal Impact of The Debt Relief Initiatives on African Highly Indebted Poor Countries (HIPCs) By Danny Cassimon; Marin Ferry; Marc Raffinot; Bjorn Van Campenhout
  87. The Russian Economic Crisis and Falling Remittances in Central Asia By Yun, ChiHyun
  88. Consequences of conflict: the impact of the closure regime on the economy of the West Bank economy By Johanes Agbahey; Khalid Siddig; Harald Grethe
  89. Taxation and housing markets with search frictions By Danilo Liberati; Michele Loberto
  90. Business Cycle Dynamics and Macroprudential Policy Through the Lens of the Aino Model - A Micro-Founded Small Open Economy DSGE Mo By Fabio Verona; Juha Kilponen; Seppo Orjasniemi; Antti Ripatti
  91. Time to Rethink Monetary Policy in Emerging Economies: Touching the Tip of an Iceberg By Lee, Il Houng; Kim, Kyunghun; Kang, Eun Jung
  92. Propagation Mechanisms for Government Spending Shocks: A Bayesian Comparison By Anna Kormilitsina; Sarah Zubairy
  93. Strategic Capacity Investment under Uncertainty with Volume Flexibility By Wen, Xingang
  94. Macroprudential supervision: From theory to policy By Dirk Schoenmaker; Peter Wierts
  95. From Sustained Recovery to Sustainable Growth: What a Difference Four Years Makes. Speech to the Forecasters Club , New York, New York, March 29, 2017 By Williams, John C.
  96. The Decline in Intergenerational Mobility After 1980 By Davis, Jonathan; Mazumder, Bhashkar
  97. Equilibrium in FX Swap Markets: Funding Pressures and the Cross-Currency Basis By Jean-Marc Bottazzi; Jaime Luque; Mario Pascoa
  98. Financial Literacy Externalities By Haliassos, Michael; Jansson, Thomas; Karabulut, Yigitcan
  99. Lower bound beliefs and long-term interest rates By Christian Grisse; Signe Krogstrup; Silvio Schumacher
  100. Globalization and the Labor Share in National Income By Doan, Ha Thi Thanh; Wan, Guanghua
  101. The importance of financial conditions in the conduct of monetary policy: remarks at the University of South Florida Sarasota-Manatee, Sarasota, Florida By Dudley, William
  102. Enforce Tax Compliance, but Cautiously: The Role of Trust in Authorities and Power of Authorities By Tsikas, Stefanos A.

  1. By: Xing, Victor
    Abstract: The rise in personal saving rate following the Great Recession was an unexpected development in light of Federal Reserve’s effort to foster stronger consumer spending via ultra-accommodative monetary policies. From the perspective of some policymakers, higher saving rate exerts downward pressure on the neutral interest rate (short-term real rate r* where monetary policy is neither contractionary nor expansionary) and increases the risk of secular stagnation. Concerned over prolonged low growth and below-target inflation despite years of policy stimulus, recent proposals have advocated aggressive measures to boost demand, such as raising Fed’s inflation objective above 2%, or to discourage saving via fiscal measures. However, there are growing signs that higher saving is not an economic anomaly but a product of the very policies designed to spur growth and inflation – the public’s response to an arduous path toward saving goals with rates near the zero lower bound. From this perspective, future policies should be mindful of low rates’ diminishing returns. Instead of forcing a reluctant public to spend on the premise of substitution effect, a more normal rates regime would likely be effective to induce higher investment by aligning policy with the public’s interest to meet future obligations.
    Keywords: Monetary Policy, Stimulus, Saving, Interest Rates, Quantitative Easing
    JEL: E2 E4 E5 E6 G1 G2
    Date: 2016–09–18
  2. By: Knut Are Aastveit (NORGES BANK); Francesco Furlanetto (NORGES BANK); Francesca Loria (EUROPEAN UNIVERSITY INSTITUTE)
    Abstract: In this paper we use a structural VAR model with time-varying parameters and stochastic volatility to investigate whether the Federal Reserve has responded systematically to asset prices and whether this response has changed over time. To recover the systematic component of monetary policy, we interpret the interest rate equation in the VAR as an extended monetary policy rule responding to inflation, the output gap, house prices and stock prices. We find some time variation in the coefficients for house prices and stock prices but fairly stable coefficients over time for inflation and the output gap. Our results indicate that the systematic component of monetary policy in the US, i) attached a positive weight to real house price growth but lowered it prior to the crisis and eventually raised it again, and ii) only episodically took real stock price growth into account.
    Keywords: Bayesian VAR, time-varying parameters, monetary policy, house prices, stock market.
    JEL: C32 E44 E52 E58
    Date: 2017–04
  3. By: Jordan Roulleau-Pasdeloup
    Abstract: I study the impact of a government spending shock in a New Keynesian model when monetary policy is set optimally. In this framework, the economy is at the Zero Lower Bound but expectations are well managed by the Central Bank. As such, the multiplier effect of government spending increases on expected inflation is close to zero while the one on output can be larger than one. This is consistent with recent empirical evidence on the effects of the 2009 American Recovery and Reinvestment Act.
    Keywords: Zero lower bound, New Keynesian, Government spending multiplier
    JEL: E31 E32 E52 E62
    Date: 2017–03
  4. By: Egorova, Yana
    Abstract: In the conditions of the economic crisis, one of the most urgent aspects is the investment of funds. The choice of the most optimal directions for investing is rather complicated, since there are many alternative options. The purpose of this study is to determine the most profitable directions for investing money in 2017.
    Keywords: Investment, economic crisis, bank deposit, real estate, MFO, mutual fund, currency, securities, precious metals, Р2Р, internet projects, binary options.
    JEL: A10 A19 E00 E20 E21 E22 E27 E29 E4 E40 E49 E50 G00 G10 G17 G20 P00
    Date: 2017–03–19
  5. By: Fernando Garcia-Barragan; Guangling Liu
    Abstract: This paper studies the effectiveness of capital controls with foreign currency denomination and its welfare implications. To do this, we develop a general equilibrium model with financial frictions and banking, in which assets and liabilities are denominated in both domestic and foreign currencies. We propose a non-pecuniary capital-control policy that limits the gap between foreign-currency denominated loans and deposits to the amount of foreign funds that bankers can borrow from the international credit market. We show that capital controls have a critical impact on the dynamics of assets and liabilities that are denominated in foreign currency. This critical impact works through the capital control constraint on quantitative nancial variables directly, not through the spreads. The non-pecuniary capital controls help to stabilize the nancial sector and, hence, reduces the negative spillovers to the real economy. A more restrictive capital-control policy signicantly attenuates the welfare effect of the foreign monetary policy and exchange rate shocks.
    Keywords: Capital control, Foreign currency denomination, Open economy macroeconomics, Financial friction, Welfare analysis, DSGE
    JEL: E32 E44 E58 F38 F41
    Date: 2017–02
  6. By: Bobeva, Daniela; Atanasov, Atanas
    Abstract: Abstract The recent reforms in the European economic governance framework add to the Stability and Growth pact requirements for establishing a new macroeconomic surveillance mechanism for both euro area and non-euro area countries. The early identification and the prevention of imbalances are of vital importance in a monetary union due to the limitations they impose on the tools available to economic policymaking. This paper examines the macroeconomic imbalances in the euro area countries in comparison with the non-euro area countries based on the set of indicators in the Scoreboard that is part of the Macroeconomic Imbalance Procedure (MIP), introduced in 2011. While the aim of the new alert mechanism is to identify potential risks this study goes further in measuring the level of risks by the scope of the deviation from the established thresholds. For this purpose an Integral Macroeconomic Imbalance Indicator (IMII) is constructed. It serves for comparing the level of imbalances between the countries in pre- and post-crisis period. The composed IMII indicates a tangible reduction in the scale of imbalances as compared to the pre-crisis period but the divergence between the countries enlarges. The results undermine the assumptions that the euro area countries will exhibit fewer imbalances as compared to the countries outside of the monetary union. Based on the dynamics of IMII it could be assumed that maintaining the macroeconomic framework within the thresholds is necessary but not sufficient to prevent future crisis. The results further question the ability of the alert mechanism to identify the sources of a future crisis.
    Keywords: Macroeconomic Imbalances, Macroeconomic Imbalances Procedure scoreboard, EU integration, EU convergence
    JEL: E10 E52 E6 E60 E61 E62 F40 F43 F45 F47
    Date: 2016–03–06
  7. By: Matthias Neuenkirch; Matthias Nöckel
    Abstract: In this paper, we provide evidence for a risk-taking channel of monetary policy transmission in the euro area. Our dataset covers the period 2003Q1-2016Q2 and includes, in addition to the standard variables for real GDP growth, inflation, and the main refinancing rate, indicators of bank lending standards and bank lending margins. Based on vector autoregressive models with (i) recursive identification and (ii) sign restrictions, we show that banks react quickly and aggressively to an expansionary monetary policy shock by decreasing their lending standards. The banks' efforts to keep their lending margins stable are successful, as we find only an insignificant decrease in the margins over the medium-run.
    Keywords: European Central Bank, Macroprudential Policy, Monetary Policy Transmission, Risk-Taking Channel, Vector Autoregression
    JEL: E44 E51 E52 E58 G28
    Date: 2017
  8. By: Coimbra, Nuno; Rey, Hélène
    Abstract: This paper develops a dynamic macroeconomic model with heterogeneous financial intermediaries and endogenous entry. It features time-varying endogenous macroeconomic risk that arises from the risk-shifting behaviour of financial intermediaries combined with entry and exit. We show that when interest rates are high, a decrease in interest rates stimulates investment and increases financial stability. In contrast, when interest rates are low, further stimulus can increase systemic risk and induce a fall in the risk premium through increased risk-shifting. In this case, the monetary authority faces a trade-off between stimulating the economy and financial stability.
    Keywords: banks; cycle; leverage; risk-shifting; systemic risk
    JEL: E44 E58 G21
    Date: 2017–03
  9. By: Gunes Kamber (Bank for International Settlements); James Morley (University of New South Wales); Benjamin Wong (Reserve Bank of New Zealand)
    Abstract: The Beveridge-Nelson (BN) trend-cycle decomposition based on autoregressive forecasting models of U.S. quarterly real GDP growth produces estimates of the output gap that are strongly at odds with widely-held beliefs about the amplitude, persistence, and even sign of transitory movements in economic activity. These antithetical attributes are related to the autoregressive coefficient estimates implying a very high signal-to-noise ratio in terms of the variance of trend shocks as a fraction of the overall quarterly forecast error variance. When we impose a lower signal-to-noise ratio, the resulting BN decomposition, which we label the “BN filter”, produces a more intuitive estimate of the output gap that is large in amplitude, highly persistent, and typically increases in expansions and decreases in recessions. Real-time estimates from the BN filter are also reliable in the sense that they are subject to smaller revisions and predict future output growth and inflation better than estimates from other methods of trend-cycle decomposition that also impose a low signal-to-noise ratio, including deterministic detrending, the Hodrick-Prescott filter, and the bandpass filter.
    Keywords: Beveridge-Nelson decomposition, output gap, signal-to-noise ratio
    JEL: C18 E17 E32
    Date: 2017–01
  10. By: Tesfaselassie, Mewael F.; Wolters, Maik H.
    Abstract: The standard search model of unemployment predicts, under realistic assumptions about household preferences, that disembodied technological progress leads to higher steady-state unemployment. This prediction is at odds with the 1970s experience of slow productivity growth and high unemployment in industrial countries. We show that introducing nominal price rigidity helps in reconciling the model's prediction with experience. Faster growth is shown to lead to lower unemployment when inflation is relatively high, as was the case in the 1970s. In general, the sign of the effect of growth on unemployment is shown to depend on the level of steady-state inflation. There is a threshold level of inflation below (above) which faster growth leads to higher (lower) unemployment. The prediction of the model is supported by an empirical analysis based on US and European data.
    Keywords: growth,trend inflation,unemployment
    JEL: E24 E31
    Date: 2017
  11. By: Paulo Vieira; Celsa Machado; Ana Paula Ribeiro
    Abstract: The recent financial crisis revived the role for debt-stabilizing fiscal policy together with its systematic use in response to business cycle fluctuations. This is of crucial interest for the particular case of a very small country-member of a monetary union, for which domestic shocks produce substantial welfare costs. Extending a standard New Keynesian open-economy model to a heterogeneous country-size monetary union, where very small economies coexist with a large country, this work provides (i) optimal countercyclicality and debt feedback degrees for fiscal policy and (ii) provides insights on how rules should differ in low- and high-debt scenarios, for different-size countries within a monetary union.We conclude that the common interest rate should not significantly react to the union’s aggregate debt, whereas the reaction of fiscal instruments to inflation is also negligible. Instead, public consumption (tax rate) should react negatively (positively) to the level of public debt, while both instruments should react negatively to output gap. In small countries, fiscal policy debt feedback should be stronger than that for a big country under high-debt, but the reverse should occur in a low-debt scenario. Moreover, the reaction of a big (small) country’s fiscal policy to debt should weaken (increase) in high-debt scenarios. High-debt scenarios also optimally require higher (lower)government spending (taxes) feedback on output gap, particularly for small countries. Derivation of optimal simple rules (OSR) for large and very small economies. We take linear feedback rules for the fiscal instruments of each country, as well as for the common nominal interest rate. Feedback parameters on selected variables are optimized such as to maximize the union-wide welfare function (cooperative scenario), yielding OSRs. Policy rules are derived through assuming a cooperative scenario where all agents seek to maximize the union-wide social welfare. Rule parameters are optimized by minimizing the union-wide welfare costs resulting from asymmetric shocks.We adapt Söderlind (1999) and Giordani and SÖderlind (2004) matlab codes to perform simple rules optimization. Results confirm that the stabilization costs for the union as a whole are higher under a high-debt scenario. Moreover, though the performance of OSR is worse than full-optimal policies under commitment, they perform better relative to discretion. In particular, our results point to an active monetary policy and a passive fiscal policy. The interest rate gap responds to both structural variables (output and inflation), and mostly to the union’s average inflation, and fiscal instruments (government spending and the revenue tax rate) react to output gap differences and national public debt. We conclude that the common interest rate should not significantly react to the union’s aggregate debt, whereas the reaction of fiscal instruments to inflation is also negligible. Instead, public consumption (tax rate) should react negatively (positively) to the level of public debt, while both instruments should react negatively to output gap. In small countries, fiscal policy debt feedback should be stronger than that for a big country under high-debt, but the reverse should occur in a low-debt scenario. Moreover, the reaction of a big (small) country’s fiscal policy to debt should weaken (increase) in high-debt scenarios. High-debt scenarios also optimally require higher (lower) government spending (taxes) feedback on output gap, particularly for small countries. Moreover, as cost-push shocks gain relative importance, country-specific fiscal instruments should react slightly and positively to output gap, whereas the tax rate (government spending) should be more (less) reactive towards debt. Under higher nominal rigidity, government expenditures (tax rate) should be slightly more (less) reactive towards output gap and debt. In turn, lower labor supply elasticity requires more union-wide inflation stabilization and a larger output stabilization burden on both country-specific fiscal instruments. Foreign-domestic goods complementarity relative to substitutability also requires larger reactions of fiscal instruments to output gap and larger debt stabilization from taxes.
    Keywords: Monetary Union, Optimization models, Monetary issues
    Date: 2016–07–04
  12. By: Joel Wagner
    Abstract: Two approaches have been taken in the literature to evaluate the relative importance of news shocks as a source of business cycle volatility. The first is an empirical approach that performs a structural vector autoregression to assess the relative importance of news shocks, while the second is a structural-model-based approach. The first approach suggests that anticipated technology shocks are an important source of business cycle volatility; the second finds anticipated technology shocks are incapable of generating any business cycle volatility. This paper challenges the latter conclusion by presenting a structural news shock model adapted to reproduce the cointegrating relationship between total factor productivity and the relative price of investment. With cointegrated neutral and investment-specific technology, anticipated shocks to the common stochastic trend explain approximately 22%, 32%, 34% and 20% of the variance of output, investment, hours and consumption in the United States, respectively, reconciling the discrepancy between theory and data.
    Keywords: Business fluctuations and cycles, Productivity
    JEL: E32
    Date: 2017
  13. By: Viral Acharya; Guillaume Plantin
    Abstract: We study optimal monetary policy in the presence of financial stability concerns. We build a model in which monetary easing can lower the cost of capital for firms and restore the natural level of investment, but does also subsidize inefficient maturity transformation by financial intermediaries in the form of “carry trades" that borrow cheap at the short-term against illiquid long-term assets. Carry trades not only lead to financial instability in the form of rollover risk, but also crowd out real investment since intermediaries equate the marginal return on lending to firms to that on carry trades. Optimal monetary policy trades off any stimulative gains against these costs of carry trades. The model provides a framework to understand the puzzling phenomenon that the unprecedented post-2008 monetary easing has been associated with below-trend real investment, even while returns to real and financial capital have been historically high.
    Keywords: Monetary policy; quantitative easing; financial stability; financial fragility; shadow banking; maturity transformation; carry trades
    JEL: E52 E58 G00 G21 G23 G28
    Date: 2017–01
  14. By: Anneke Kosse; Heng Chen; Marie-Hélène Felt; Valéry Dongmo Jiongo; Kerry Nield; Angelika Welte
    Abstract: This study provides insight into the costs of cash, debit card and credit card payments made at the point of sale in Canada in 2014. For each payment method, it examines the total resource costs, which capture the overall use of resources by society as a whole. Using extensive survey data from retailers, financial institutions and cash transportation companies as well as internal and external data sources, the results show that the resource costs of payments in Canada are non-negligible (0.78 per cent of GDP). Credit cards are most costly in terms of resource costs per transaction, while cash carries the highest resource costs per dollar transacted. Debit cards are the least costly, both in terms of costs per transaction and costs per dollar in sales. The study also demonstrates how the costs vary with transaction sizes. Considering the variable resource costs only, cash is found to be cheapest for transactions up to $6, while debit cards are the least costly for transactions larger than $6. The study also looks into the total private costs, which are the costs incurred by each stakeholder, thereby providing insight into how costs are affecting the use and acceptance of payment methods.
    Keywords: Bank notes, Financial Institutions, Payment clearing and settlement systemsing
    JEL: D12 D23 D24 E41 E42 G21 L2
    Date: 2017
  15. By: Xing, Victor
    Abstract: New York Fed President Dudley recently commented that “real consumer spending growth appears to have moderated somewhat from the relatively robust pace of the second half of 2015” (Dudley, 2016). While this may suggest headwinds from cyclical economic conditions, there are emerging signs that ultra-accommodative policy also acts as a constraint on consumer spending via income effects. Instead of inducing savers to spend and borrow, rapid asset price appreciation as a result of monetary easing have outpaced wage growth, and pass-through services inflation subsequently reduced discretionary income and forced already-levered consumers to save instead of spend. This unintended consequence worked against accommodative policy’s desired substitution effects and suggests further easing would likely yield diminishing results if asset price appreciation continues to outpace real income growth.
    Keywords: Quantitative Easing, Malinvestment, Consumer Spending, Involuntary Renter, Asset Price Inflation, Financial Conditions, Wage Growth
    JEL: E2 E5 G11 G12
    Date: 2016–04–23
  16. By: Marcin Kolasa; Michal Rubaszek
    Abstract: Estimated dynamic stochastic general equilibrium (DSGE) models are now used around the world for policy analysis. They have become particularly popular in central banks, some of which successfully applied them to generate macroeconomic forecasts. Arguably, one of the key drivers behind this trend was growing evidence that DSGE model-based forecasts can be competitive with those obtained with flexible time series models such as vector autoregressions (VAR), and also with expert judgement.See e.g. Smets and Wouters (2007), Edge et al. (2010), Kolasa et al. (2012) and Del Negro and Schorfheide (2012). The vast majority of these studies focus on the US economy as it allows to evaluate the forecast quality over a relatively large number of periods, and also makes the convenient closed economy assumption acceptable. The open economy applications that use the New Open Macroeconomics (NOEM) framework originating from Obstfeld and Rogoff (1995) and extended by Devereux and Engel (2003) and Gali and Monacelli (2005) do exist, but usually base their conclusions on a rather short evaluation sample. The earliest contribution to this literature is Bergin (2003) who tests small open economy DSGE models for Australia, Canada and the United Kingdom, and Bergin (2006) where a two-country model for the US and G7 is considered. However, only in-sample forecasts are evaluated in these papers. The literature testing open economy DSGE model-base forecasts out of sample include: Adolfson et al. (2007) and Christoffel et al. (2010) for the euro area, Adolfson et al. (2008) for Sweden, Matheson (2010) for Australia, Canada and New Zealand, Gupta et al. (2010) and Alpanda et al. (2011) for South Africa, Marcellino et al. (2014) for Luxemburg within the euro area. Following the literature working with closed economy models, the common practice is to evaluate forecasts generated with a NOEM framework relative to those obtained with some variants of Bayesian VARs. The overall finding is that open economy DSGE models are quite competitive, even though the conclusions differ by variables and countries. However, none of these studies tells us how much we actually gain by accounting for a foreign block in DSGE models. Since this question is essentially about the empirical validity of the key NOEM ingredients, i.e. those theoretical additions over the standard quantitative business cycle framework that are related to an open economy dimension, we argue that not having an aswer to it can be considered an important gap. Actually, there are reasons to be sceptical about the empirical success of the NOEM framework. In an influential paper Justiniano and Preston (2010) demonstrate that estimated small open economy DSGE models fail to account for the substantial influence of foreign shocks identified in many reduced-form studies. They show that capturing the observed comovement between domestic and foreign variables generates counterfactual implications for other variables, especially for the real exchange rate and terms of trade. It is also well-known that NOEM models have difficulties in explaining swings in the exchange rates and current account balances (Engel, 2014; Gourinchas and Rey, 2014). On the bright sight, Ca'Zorzi et al. (2016) show that real exchange rate forecasts from small open economy DSGE models beat the random walk at medium and long horizons and are very competitive with tougher benchmarks. In this paper we evaluate the forecasting performance of a state-of-the-art small open economy NOEM model developed by Justiniano and Preston (2010) relative to its associated New Keynesian (NK) closed economy benchmark. We focus on the forecast accuracy for three standard macrovariables showing up in both models: output, inflation and the short-term interest rate. Several variants of the NOEM model are considered that differ in the set of foreign sector variables used in estimation, which include the real exchange rate, terms of trade, current account balance, as well as foreign output, inflation and interest rates. Our conclusions are based on evidence from three economies, i.e. Australia, Canada and the United Kingdom, for which we can collect data that date back far enough to make our evaluation sample large when compared to the previous studies. Our findings are mainly negative. When we consider the full NOEM model, its point and density forecasts for domestic variables are statistically indistinguishable from, and in most cases even significantly less accurate than, those produced by the standard NK benchmark. Alternative model variants that leave either terms of trade or both terms of trade and foreign variables unobservable do not fare much better, and also do not offer much improvement relative to the closed economy variant. We show that these results are consistent with evidence from BVARs as expanding their dimension with the foreign sector variables also does not usually lead to improvement in their forecasting performance. However, this feature of BVARs is not surprising in light of the earlier literature stressing that small-scale VARs can forecast much better than large-scale VARs (Gurkaynak et al., 2013) as the number of estimated parameters grows very fast with the number of variables included in this class of models. In contrast, the open economy DSGE model considered in this paper is still very scarcely parameterized, hence its lack of competitiveness relative to the closed economy benchmark points at important misspecification of the underlying theoretical structure. We provide support for this claim by showing that even the richly specified NOEM model generates several counterfactual predictions about the comovement between domestic and foreign sector variables.
    Keywords: Australia, Canada, United Kingdom, Forecasting and projection methods, General equilibrium modeling
    Date: 2016–07–04
  17. By: Dupor, William D. (Federal Reserve Bank of St. Louis); Li, Rong (Renmin University of China); Li, Jingchao (East China University of Science and Technology)
    Abstract: This paper demonstrates how adding nominal wage rigidity to a standard sticky price model can create a mechanism by which increases in government spending cause increases in consumption. The increase in output arising from government purchases puts upward pressure on the price level. At a fixed short-run nominal wage, this bids down the real wage, which leads producers to increase labor demand. Increased labor demand allows households to both finance the tax bill associated with the government spending as well as increase their own consumption. Our approach does not rely upon existing ingredients for generating large fiscal multipliers, such as the zero lower bound, borrowing constrained households or an interaction between consumption and government purchases in the utility function.
    Keywords: government spending; multipliers; sticky wages
    JEL: E52 E62
    Date: 2017–03–27
  18. By: Kang, Wensheng (Kent State University); Ratti, Ronald. A. (Economics, Finance and Property, Western Sydney University); Vespignani, Joaquin (Tasmanian School of Business & Economics, University of Tasmania)
    Abstract: Important interaction has been established for US economic policy uncertainty with a number of economic and financial variables including oil prices. This paper examines the dynamic effects of US and non-US oil production shocks on economic policy uncertainty using a structural VAR model. Such an examination is motivated by the substantial increases in US oil production in recent years with implications for US political and economic security. Positive innovations in US oil production are associated with decreases in US economic policy uncertainty. The economic forecast interquartile ranges about the US CPI and about federal/state/local government expenditures are particularly sensitive to innovations in US oil supply shocks. Shocks to US oil supply disruption causes rises in the CPI forecast uncertainty and accounts for 21% of the overall variation of the CPI forecaster disagreement. Dis-aggregation of oil production shocks into US and non-US oil production yield novel results. Oil supply shocks identified by US and non-US origins explain as much of the variation in economic policy uncertainty as structural shocks on the demand side of the oil market.
    Keywords: US oil production, economic policy uncertainty, CPI forecast uncertainty, structural VAR
    JEL: E44 G12 Q43
    Date: 2017–02
  19. By: Berentsen, Aleksander (University of Basel); Waller, Christopher J. (Federal Reserve Bank of St. Louis)
    Abstract: We construct a dynamic general equilibrium model where agents use nominal government bonds as collateral in secured lending arrangements. If the collateral constraint binds, agents price in a liquidity premium on bonds that lowers the real rate on bonds. In equilibrium, the price level is determined according to the fiscal theory of the price level. However, the market value of government debt exceeds its fundamental value. We then examine the dynamic properties of the model and show that the market value of the government debt can fluctuate even though there are no changes to current or future taxes or spending. The price dynamics are driven solely by the liquidity premium on the debt.
    Keywords: Price level; Fiscal Policy; Liquidity
    JEL: E31 E62
    Date: 2017–03–29
  20. By: Lise Pichette; Marie-Noëlle Robitaille
    Abstract: Every quarter, the Bank of Canada conducts quarterly consultations with businesses across Canada, referred to as the Business Outlook Survey (BOS). A principal-component analysis conducted by Pichette and Rennison (2011) led to the development of the BOS indicator, which summarizes survey results and is used by the Bank as a gauge of overall business sentiment. In this paper, we examine whether data vintages matter when assessing the predictive content of the BOS indicator and individual BOS questions and whether the BOS is a better indicator of revised or unrevised macroeconomic data. As an indicator of business sentiment in the context of monetary policy, the reliability of the BOS is essential, and it is crucial to understand whether the signals it sends are best interpreted for early-released or revised data. For this purpose, we use different methods of forecasting that take into account the real-time perspective of the data. Results from the different methods show that the BOS content is informative regardless of data revisions. However, in real time, the BOS indicator and individual BOS questions are found to produce better nowcasts of first-released data or partially revised data than of latest-available data. This is particularly important in the case of growth in real business investment. In fact, because revisions to real business investment are more volatile than revisions to real gross domestic product (GDP), the choice of data vintages when assessing the ability of the BOS to forecast growth appears to be more important for real business investment than for real GDP.
    Keywords: Business fluctuations and cycles, Regional economic developments
    JEL: C53 C82 E37
    Date: 2017
  21. By: Homburg, Stefan
    Abstract: During and after the Great Recession, the European Central Bank adopted unconventional monetary policies that are more or less uncontroversial in the literature. By contrast, its quanti-tative easing (QE) program that started in 2015 is highly dis-puted. The article evaluates the pros and cons of such a policy.
    Keywords: Quantitative easing; European Central Bank; excess reserves; money multiplier
    JEL: E51 E52 E58
    Date: 2017–03
  22. By: Alban Moura
    Abstract: This paper incorporates sticky investment prices in a two-sector monetary model of business cycles. Fit to quarterly U.S. time series, the model suggests that price rigidity in the investment sector is the single most empirically relevant friction to match the data. Sticky investment prices are also important to understand the dynamic effects of technology shocks and their pass-through to the relative price of investment goods.
    Keywords: investment price rigidity, relative price of investment, multisector DSGE model.
    JEL: C32 E32
    Date: 2017–03
  23. By: Katerina Gawthorpe
    Abstract: This paper presents a dynamic stochastic general equilibrium model developed to conduct a monetary analysis of a scenario with local currencies. The popularity of the alternative currency initiatives has remarkably increased during the last three decades. Despite their widespread proliferation with thousands of them currently circulating, there is a lack of quantitative analysis. This absence worsens the ability of central banks to choose the most appropriate position towards such movement. Presented study proposes an impact evaluation of these initiatives with a unique New Keynesian version of DSGE model extended for capital and labor market along with comparison of different monetary policies from a side of the local currencies. Co-existence of multiple currencies enters the model in the form of a Dixit-Stiglitz index. Simulation of the model suggests a positive effect of the alternative currencies in terms of increase of income but also inflation rate in absolute terms. This outcome appears to be highly sensitive to monetary policy from the side of issuers of the local currencies. The aim of this study is to construct a New Keynesian version of a DSGE model for impact evaluation of local currencies. This model simulates a local economy within the United States with an assumption of price and wage stickiness. Monopolistic competition between firms as well as on the labor market allows a derivation of the traditional New Keynesian Phillips curve. The appearance of the model assimilates the classical New Keynesian DSGE model of Galí (2008) enhanced for a capital variable. In contrast to this traditional textbook model, a local currency variable enters the utility function of the model in a form of a Dixit-Stiglitz aggregate famously applied for consumption bundle. Wage and price setting behaviors are in turn affected by the existence of multiple currencies. In the end, two potential monetary policies of issuing institutions for local currencies allow a comparison these policies might have on the circulation of the local currency as well as on the local economy itself. This model may additionally serve as a tool for a researcher to answer inquiries about the macro impact of these currencies on an economy. he dynamic stochastic general equilibrium model stands for the applied method to model a local currency movement simulated in the program Dynare. The influential book of Galí (2008) inspires the construction of this version of New Keynesian model with price and wage stickiness along with the existence of monopolistic competition between firms and on labor market. The model is further modified to incorporate features characteristic for local currency systems next to circulation of a legal tender. The introduction of local currencies into the model takes a form of a Dixit-Stiglitz index. A representative agent opts between a continuum of various complementary currencies for trading purposes while representative firm makes a decision over currency for price and wage denomination taking into consideration behavior on labor as well as capital market. Classical New Keynesian Phillips curve allows a simple simulation and comparison of the result to the original model of Galí (2008) without the co-existence of national currency aside local currencies. Next, I introduce adjustment costs in association with using new local currency, network externality variable and social capital. The intuition behind incorporating social capital stands behind the idea of local currencies to improve social network within a community. For this reason, local currencies enter an agent’s utility function being a function of social capital. Two different common monetary policies have been selected for the issuing institutions of local currencies. An issuer is assumed to either maximize profit or to allow money demand to react to money supply without her intervention. Central bank issuing the national currency is assumed to follow the famous Taylor rule. Concerning selected monetary policies profit maximization has a destabilizing effect on the economy. Monetary policy of elastic money demand in reaction to money supply changes provides more reasonable results. In this scenario, an increase in demand for a local currency in presence of adjustment costs drop results in a raise of the output variable along with higher inflation rate. In response, wages tend to decrease. The growth of demand for a local currency allows producers to request higher prices for their products. At the same time, employees are willing to work for relatively lower wages. Inflation rate of the local currency increases as well as inflation rate of the legal tender. In response, upward movement of interest rates stabilizes the economy and results in a continuous return of other variables to their previous steady-state levels. In conclusion, a local currency movement seems to favor the aggregate output of a local economy. This result could be of an interest to policy-makers whether to support a local-currency movement in their community.
    Keywords: United States, General equilibrium modeling, Monetary issues
    Date: 2016–07–04
  24. By: Richard Dennis
    Abstract: Many central banks in developed countries have had very low policy rates for quite some time. A growing number are experimenting with official rates that are negative. We develop a New Keynesian model in which the zero lower bound (ZLB) on nominal interest rates is imposed as an occasionally binding constraint and use this model to examine the duration of ZLB episodes. In addition, we show that capital accumulation and capital adjustment costs can raise significantly the length of time an economy spends at the ZLB, as can the conduct of monetary policy. We identify anticipation effects that make the ZLB more likely to bind and we show that allowing negative nominal interest rates shortens average durations, but only by about one quarter.
    Keywords: Monetary policy, zero lower bound, new Keynesian
    JEL: E3 E4 E5
    Date: 2017–03
  25. By: Hanson, Samuel (Harvard Business School); Lucca, David O. (Federal Reserve Bank of New York); Wright, Jonathan H. (Johns Hopkins University)
    Abstract: A large literature argues that long-term interest rates appear to react far more to high-frequency (for example, daily or monthly) movements in short-term interest rates than is predicted by the standard expectations hypothesis. We find that, since 2000, such high-frequency “excess sensitivity” remains evident in U.S. data and has, if anything, grown stronger. By contrast, the positive association between low-frequency changes (such as those seen at a six- or twelve-month horizon) in short- and long-term interest rates, which was quite strong before 2000, has weakened substantially in recent years. As a result, “conundrums”— defined as six- or twelve-month periods in which short rates and long rates move in opposite directions—have become far more common since 2000. We argue that the puzzling combination of high-frequency excess sensitivity and low-frequency decoupling between short- and long-term rates can be understood using a model in which (i) shocks to short-term interest rates lead to a rise in term premia on long-term bonds and (ii) arbitrage capital moves slowly over time. We discuss the implications of our findings for interest rate predictability, the transmission of monetary policy, and the validity of high-frequency event study approaches for assessing the impact of monetary policy.
    Keywords: interest rates; conundrum; monetary policy transmission
    JEL: E43 E52 G12
    Date: 2017–03–01
  26. By: Claire-Océane Chevallier (CREA, Université du Luxembourg)
    Abstract: The objective of this study is to empirically test whether bank loan supply affects output in the Euro-zone from 1999Q1 to 2014Q4. It uses shocks to bank deposits and shocks to bank wholesale debt issuance as instruments in a linear two stage least square specification to evaluate the role of loan supply in affecting output. The findings show that banks' changed preferences for wholesale debt funding are important determinants of loan supply, in particular during the crisis. I also find evidence that loan supply affects output significantly and positively. The validity of the model is also tested by verifying the linearity assumption using non-parametric estimation techniques.
    Keywords: Bank lending channel; Bank funding; Bond issuance; Credit; Euro-area
    JEL: E41 E44 E51 G21
    Date: 2017
  27. By: S. Demiralp (Koc University); J. Eisenschmidt (ECB); T. Vlassopoulos (ECB)
    Abstract: In June 2014 the ECB became the first major central bank to lower one of its key policy rates to negative territory. The theoretical and empirical literature is silent on whether banks’ reaction would be different when the policy rate is lowered to negative levels compared to a standard reaction to a rate cut. In this paper we examine this question empirically by using individual bank data for the euro area to identify possible adjustments by banks triggered by the introduction of negative interest rates through three channels: government bond holdings, bank lending, and wholesale funding. We find evidence of a significant adjustment of banks’ balance sheets during the negative interest rate period. Banks tend to extend more loans, hold more non-domestic government bonds and rely less on wholesale funding. The nature and scope of the adjustment depends on banks’ business models.
    Keywords: negative rates, bank balance sheets, monetary transmission mechanism.
    JEL: E43 E52 G11 G21
    Date: 2017–03
  28. By: Miguel Angel Santos (Center for International Development at Harvard University)
    Abstract: Venezuela is an oil-dependent economy subject to large exogenous shocks, with a rigid labor market. These features go straight at the heart of two weaknesses of real business cycle (RBC) theory widely reported in the literature: Neither shocks are volatile enough nor real salaries are sufficiently flexible as required by the RBC framework to replicate the behavior of the economy. We calibrate a basic RBC model and compare a set of relevant statistics from RBC-simulated time series with actual data for Venezuela and the benchmark case of the United States (1950-2008). In spite of Venezuela being one of the most heavily intervened economies in the world, RBC-simulated series provide a surprisingly good fit when it comes to the non-oil sector of the economy, and in particular for labor markets. Large restrictions on dismissal and widespread minimum (nominal) wage put all the burden of adjustment on prices; which translate into highly volatile real wages.
    Keywords: Macroeconomics, RBC, oil shocks, labor markets, Venezuela
    JEL: E10 E32 O47 O54 Q32
    Date: 2015–09
  29. By: David-Jan Jansen; Matthias Neuenkirch
    Abstract: Using three waves of a customised survey among Dutch households, this paper studies the variation in people’s views on inflation. Based on a range of panel regressions, we find that accurate perceptions of recent price changes are an important determinant of the accuracy of next-year inflation expectations. The realism of inflation perceptions is, in turn, related to the intensity of newspaper consumption and also affected by the broadness of a person’s political preferences. However, more frequent newspaper usage does not necessarily reduce errors in inflation perceptions.
    Keywords: Inflation expectations, inflation perceptions, newspaper readership, political preferences, household survey data
    JEL: D12 D83 D84 E31 E58
    Date: 2017
  30. By: Eo, Yunjong; Lie,Denny
    Abstract: We study optimal monetary policy in a New Keynesian model in which the monetary authority faces a trade-off between inflation and output-gap stabilization due to cost-push shocks. In particular, we highlight the role of the inflation target adjustment in stabilization policy by showing that it can mitigate this policy trade-off and considerably improve welfare. The main fi ndings can be summarized as follows. First, we find that the welfare cost of a standard Taylor rule is non-trivial, even with optimized policy cofficients. Second, we propose an additional policy tool of a medium-run inflation target (MRIT) rule. When combined with the standard Taylor rule, the optimal MRIT signi ficantly reduces fluctuations in inflation originating from the cost-push shocks and results in a similar level of welfare to that associated with the Ramsey optimal policy. Third, the optimal MRIT needs to be adjusted in a persistent manner and in the opposite direction to the realization of a cost-push shock. Fourth, the welfare implication of the MRIT is more pronounced under a flatter Phillips curve. Finally, the main findings are relevant to the current economic environment of low inflation rates under a flat Phillips curve, implying that the monetary authority should increase the inflation target in such an environment..
    Keywords: Cost-push shocks; Monetary policy; Medium-run inflation targeting; Flat Phillips curve; Welfare analysis
    Date: 2017–05
  31. By: Tomislav Globan (Faculty of Economics and Business, University of Zagreb); Petar Sorić (Faculty of Economics and Business, University of Zagreb)
    Abstract: This paper offers one of the rare applications of various types of Euler equation tests to estimate the degree of financial integration of 28 EU countries with the Eurozone. The analysis is done separately for risk-free and risky assets in three types of financial markets (bond, stock and money markets). In order to examine whether the recent crisis impacted the levels of financial integration in EU member states, all models were estimated for the entire period of known quarterly data (1995-2014), as well as for the pre-crisis period only. We construct an Euler integration index (EII) that measures the integration level of countries across financial markets and show that the old member states (OMS) recorded higher integration levels than the new member states (NMS) in the pre-crisis period, while the crisis considerably decreased the gap, resulting even with NMS surpassing the OMS in EII values.
    Keywords: consumption, crisis, Euler equation, European Union, financial integration
    JEL: E21 E44 F15 F36
    Date: 2017–04–03
  32. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: In an address to the Economic Club of Memphis, St. Louis Fed President James Bullard discussed the current “regime” of low real GDP growth and low real interest rates on short-term government debt. Given that this regime is unlikely to change dramatically during 2017, he said that the federal funds rate target can remain relatively low and still keep inflation and unemployment near goal values. He also discussed the possible impact of the new fiscal policy on this regime, noting that the Fed can wait to see how fiscal policy develops. Regarding the Fed’s balance sheet, he said that now may be a good time for the Federal Open Market Committee (FOMC) to consider allowing the balance sheet to normalize by ending reinvestment.
    Date: 2017–03–24
  33. By: Henrique S. Basso (Banco de España); James Costain (Banco de España)
    Abstract: Motivated by the failure of fiscal rules to eliminate deficit bias in the euro area, this paper analyzes an alternative policy regime in which each Member State government delegates at least one fiscal instrument to an independent authority with a mandate to avoid excessive debt. Other fiscal decisions remain in the hands of member governments, including the allocation of spending across different public goods, and the composition of taxation. We study the short-and long-run properties of dynamic games representing different institutional configurations in a monetary union. Delegation of budget balance responsibilities to a national or union-wide fiscal authority implies large long-run welfare gains due to much lower steady-state debt. The presence of the fiscal authority also reduces the welfare cost of fluctuations in the demand for public spending, in spite of the fact that the authority imposes considerable “austerity” when it responds to fi scal shocks.
    Keywords: independent fiscal authority, delegation, decentralization, monetary union, sovereign debt
    JEL: E61 E62 F41 H63
    Date: 2017–03
  34. By: Nelson H. Barbosa-Filho (Schwartz Center for Economic Policy Analysis (SCEPA))
    Abstract: This paper presents an adaptation ofthe square social accounting matrix used in economic planning and programming to the rectangular or vertical transaction matrix used in post-Keynesian monetary economics. The objective is to obtain a simple and intuitive framework to organize macroeconomic data in terms of the main institutional sectors of the economy, showing how production, distribution, demand and financing are inter-related.
    Keywords: Planning, Transaction Matrix, Post-Keynesian, Monetary
    JEL: E1 E5
    Date: 2017–03
  35. By: Martin S. Feldstein
    Abstract: Although the official statistics imply that the rate of growth of real GDP in the United States has declined in recent years, it has still been substantially higher than the real growth rates in Europe and the other industrial countries, leading to higher real per capita incomes. This paper discusses ten reasons for the higher rate of real economic growth.
    JEL: E6 E60
    Date: 2017–03
  36. By: Ettmeier, Stephanie; Kriwoluzky, Alexander
    Abstract: In this study, we test whether three popular measures for monetary policy, that is, Romer and Romer (2004), Barakchian and Crowe (2013), and Gertler and Karadi (2015), constitute suitable proxy variables for monetary policy shocks. To this end, we employ different test statistics used in the literature to detect weak proxy variables. We find that the measure derived by Gertler and Karadi (2015) is the most suitable in this regard.
    Keywords: monetary policy shock measures,Proxy-SVAR,weak proxies,F-test
    JEL: C12 C32 E32 E52
    Date: 2017
  37. By: Olovsson, Conny (Research Department, Central Bank of Sweden)
    Abstract: This paper analyzes the interaction between oil prices and macroeconomic outcomes by incorporating oil as an input in production alongside a precautionary motive for holding oil in a real-business-cycle model. The driving forces are factor-specific technology shocks and supply shocks that can be imprecisely forecasted by noisy news shock. These shocks explain most of the U.S. business cycle as well as the empirical distribution of oil prices. Oil shocks are mainly driven by increasing precautionary/smoothing demand, but supply shocks contribute substantially to both the oil-price volatility and the magnitude of oil shocks mainly through their effect on oil reserves.
    Keywords: Oil price shocks; business cycles
    JEL: E32 Q43
    Date: 2016–11–01
  38. By: Hennecke, Peter
    Abstract: Diese Untersuchung zeigt, dass die Notenbankzinsen, gemessen an verschiedenen Taylorregeln, für Deutschland bereits seit Langem zu niedrig sind. Dies ist ein Risiko für die Finanzsystemstabilität. Wie stark sich dieses in Deutschlands bankbasiertem Finanzsystem materialisiert, hängt auch davon ab, inwieweit die Niedrigzinsen an Bankkunden durchgereicht wurden. Dies wird mithilfe von Fehlerkorrekturmodellen für verschiedene Zinsarten untersucht. Die Ergebnisse deuten darauf hin, dass die gesunkenen Leitzinsen in der Niedrigzinsphase stärker an Bankkunden weitergegeben wurden. Zudem zeigt sich, dass die Aufschläge der Banken auf den Leitzins in der Niedrigzinsphase signifikant zurückgegangen sind; mit negativen Folgen für die Profitabilität deutscher Banken. Für eine strukturelle Veränderung der langfristigen Transmissionsbeziehung gibt es hingegen keine Evidenz. Dies dürfte aus Sicht der Geldpolitik zwar erfreulich sein, die verstärkte kurzfristige Durchleitung der Niedrigzinsen sowie die gesunkenen Zinsmargen geben jedoch Anlass zur Sorge.
    Keywords: Niedrigzinsen,Transmission,Zinskanal
    JEL: E43 E58 E58
    Date: 2017
  39. By: Güneş Kamber; James Morley; Benjamin Wong (Reserve Bank of New Zealand)
    Abstract: The Beveridge-Nelson (BN) trend-cycle decomposition based on autoregressive forecasting models of U.S. quarterly real GDP growth produces estimates of the output gap that are strongly at odds with widely-held beliefs about the amplitude, persistence, and even sign of transitory movements in economic activity. These antithetical attributes are related to the autoregressive coefficient estimates implying a very high signal-to-noise ratio in terms of the variance of trend shocks as a fraction of the overall quarterly forecast error variance. When we impose a lower signal-to-noise ratio, the resulting BN decomposition, which we label the "BN filter", produces a more intuitive estimate of the output gap that is large in amplitude, highly persistent, and typically increases in expansions and decreases in recessions. Real-time estimates from the BN filter are also reliable in the sense that they are subject to smaller revisions and predict future output growth and inflation better than estimates from other methods of trend-cycle decomposition that also impose a low signal-to-noise ratio, including deterministic detrending, the Hodrick-Prescott filter, and the bandpass filter.
    Date: 2017–01
  40. By: Alexandre Janiak; Sofía Bauducco
    Abstract: We study the quantitative impact of a rise in the minimum wage on macroeconomic outcomes such as employment, the stock of capital and the distribution of wages. Our modeling framework is the large-firm search and matching model. Our comparative statics are in line with previous empirical findings: a moderate increase in the minimum wage barely affects employment, while it compresses the wage distribution and generates positive spillovers on higher wages. The model also predicts an increase in the stock of capital. Next, we perform the policy experiment of introducing a 10 dollar minimum wage. Our results suggest large positive effects on capital (4.0%) and output (1.8%), with a decrease in employment by 2.8%. The introduction of a 9 dollar minimum wage would instead produce similar effects on capital accumulation without harming employment.
    JEL: E24 J63 J68 L20
    Date: 2017
  41. By: Raslan Alzubi (Department of Economics, University of Sheffield); Mustafa Caglayan (School of Social Sciences, Heriot-Watt University); Kostas Mouratidis (Department of Economics, University of Sheffield)
    Abstract: Employing data from thirty large banks in the US, we examine banks' risk-taking behaviour in response to monetary policy shocks. Our investigation provides support for the presence of a risk-taking channel: banks' nonperforming loans increase in medium to long run following an expansionary monetary policy shock. We also find that banks' capital structure plays an important role in explaining bank's risk-taking appetite. Impulse response analysis shows that shocks emanating from larger banks spillover to the rest of the sector but no such effect is observed for smaller banks. The results are confirmed for banks' Z-score.
    Keywords: Risk-taking channel; GVAR; monetary policy shocks; spilloverover effects
    JEL: E44 E52 G01 G19 G29
    Date: 2017–03
  42. By: Groneck, Max; Ludwig, Alexander; Zimper, Alexander
    Abstract: On average young people "undersave" whereas old people "oversave" with respect to the rational expectations model of life-cycle consumption and savings. According to numerous studies on subjective survival beliefs, young people also "underestimate" whereas old people "overestimate" their objective survival chances on average. We take a structural behavioral economics approach to jointly address both empirical phenomena by embedding subjective survival beliefs that are consistent with these biases into a rank-dependent utility (RDU) model over life-cycle consumption. The resulting consumption behavior is dynamically inconsistent. Considering both naive and sophisticated RDU agents we show that within this framework underestimation of young age and overestimation of old age survival probabilities may (but need not) give rise to the joint occurrence of undersaving and oversaving. In contrast to this RDU model, the familiar quasi-hyperbolic discounting (QHD), which is nested as a special case, cannot generate oversaving.
    Keywords: saving puzzles,subjective survival beliefs,behavioral economics,prospect theory,neo-additive probability weighting,dynamic inconsistency,sophisticated versus naive behavior,quasi-hyperbolic discounting
    JEL: D91 D83 E21
    Date: 2017
  43. By: Pierre Lesuisse (CERDI - Centre d'Etudes et de Recherches sur le Développement International - CNRS - Université d'Auvergne)
    Abstract: Few countries are part of the European Union but on the verge of the Euro-zone. This study aims at identifying the amplitude of the direct ECB monetary policy impact, i.e. the so-called international monetary spillovers, in Central and Eastern European countries (CEECs). The use of a panel-VAR method allows to deal with the small time span and endogeneity. We found that CEECs tend to significantly converge in monetary terms to the ECB standards. The direct impact on real variables remains relatively weak but contrary to the literature, is significant and in line with expectations. A persistent negative adjustment of GDP gives a quick glimpse of a robust reaction against monetary shock when the focus is made on the post-economic crisis period. The exchange rate regime plays a small but significant role in terms of magnitude. This increased interdependence is the result of macroeconomic reforms implemented during the last 25 years.
    Keywords: Monetary integration,External shocks,Panel VAR.
    Date: 2017–02–14
  44. By: Jorda, Oscar (Federal Reserve Bank of San Francisco); Richter, Björn (University of Bonn); Schularick, Moritz (University of Bonn); Taylor, Alan M. (University of California, Davis)
    Abstract: Higher capital ratios are unlikely to prevent a financial crisis. This is empirically true both for the entire history of advanced economies between 1870 and 2013 and for the post-WW2 period, and holds both within and between countries. We reach this startling conclusion using newly collected data on the liability side of banks’ balance sheets in 17 countries. A solvency indicator, the capital ratio has no value as a crisis predictor; but we find that liquidity indicators such as the loan-to-deposit ratio and the share of non-deposit funding do signal financial fragility, although they add little predictive power relative to that of credit growth on the asset side of the balance sheet. However, higher capital buffers have social benefits in terms of macro-stability: recoveries from financial crisis recessions are much quicker with higher bank capital.
    JEL: E44 G01 G21 N20
    Date: 2017–03–28
  45. By: César Carrera (Banco Central de Reserva del Perú y Universidad del Pacífico)
    Abstract: Most economists agree that the relationship between long-run economic growth and inflation is negative. It is well documented that countries with inflation target achieve lower levels of inflation. But there is no study that relates inflation target and growth. I focus this study in identifying this relationship. I follow Sala-i-Martin (1997) and sample 45 countries that have an inflation target. This variable is then evaluated by controlling for three variables that are strongly correlated with economic growth and different subsets that belong to a set of variables that the literature agrees in being correlated with long-run economic growth. This strategy allows me to have a distribution of the parameter that captures a link between inflation target and growth. My results suggest that such effect, if any, is slightly negative.
    Keywords: Inflation target, inflation, growth
    JEL: E31 E58 N16
    Date: 2017–04
  46. By: Davor Kunovac (The Croatian National Bank, Croatia); Mariarosaria Comunale (Bank of Lithuania, Lithuania)
    Abstract: In this paper we analyse the exchange rate pass-through (ERPT) in the euro area as a whole and for four euro area members - Germany, France, Italy and Spain. For that purpose we use Bayesian VARs with identification based on a combination of zero and sign restrictions. Our results emphasize that pass-through in the euro area is not constant over time - it may depend on a composition of economic shocks governing the exchange rate. Regarding the relative importance of individual shocks, it seems that pass-through is the strongest when the exchange rate movement is triggered by (relative) monetary policy shocks and the exchange rate shocks. Our shock-dependent measure of ERPT points to a large but volatile pass-through to import prices and overall very small pass-through to consumer inflation in the euro area.
    Keywords: Exchange rate pass-through, import prices, consumer prices, inflation, bayesian vector autoregression
    JEL: E31 F3 F41
    Date: 2017–01
  47. By: Michael C. Burda (Humboldt-Universität zu Berlin, CEPR and IZA); Mark Weder (School of Economics, University of Adelaide)
    Abstract: This paper reviews the performance of the East German economy in the turbulent quarter-century following reunification and draws some conclusions for the reunification of North and South Korea. In this period, the gap in output per capita between East and West Germany declined at a speed not far from empirical estimates of the neoclassical growth model, yet systematic total factor productivity differentials persist despite identical institutional frameworks and significant investment in the eastern regions. At the same time, regional disparities in income, well-being, and health are little different from those found within West Germany, and net migration has ceased. On this human metric, German unification has been an unqualified success. For Korea, an effort of this dimension will be costly. A back-of-the-envelope calculation suggests that Korean unification will cost roughly twice as much as its German counterpart.
    Keywords: East Germany, convergence, total factor productivity, Korean unification.
    JEL: P2 O11 E02
    Date: 2017–04
  48. By: Mohammed Aït Lahcen
    Abstract: This paper studies the impact of informality on the long-run relationship between inflation and unemployment in developing economies. I present a dynamic general equilibrium model with informality in both labor and goods markets and where money and credit coexist. An increase in inflation affects unemployment through two channels: the matching channel and the hiring channel. On one hand, higher inflation reduces the surplus of monetary trades thus lowering firms entry and increasing unemployment. On the other hand, the lower impact of inflation on formal transactions where credit is partially available shifts firms hiring decision from high separation informal jobs to low separation formal jobs thus reducing unemployment. The model is calibrated to match certain long-run statistics of the Brazilian economy. Numerical results indicate that, in the presence of a sizable informal sector, inflation has a small negative effect on unemployment while producing a significant impact on labor allocation between formal and informal jobs. These results point to the importance of accounting for informality when considering the inflation-unemployment trade-off in the conduct of monetary policy.
    Keywords: Informality, Phillips curve, money, labor, search and matching
    JEL: E26 E41 J64 H26 O17
    Date: 2017–03
  49. By: Willem Devriendt; Freddy Heylen (-)
    Abstract: In the absence of behavioural adjustments, demographic change may cut off about 0.4%- point on average from the annual per capita growth rate in the next 25 years. The behavioural responses of households and firms to declining fertility and rising life expectancy may significantly change this outcome, but the sign and the size of this change are unclear. In this paper we construct and parameterize a large-scale OLG model for a small open economy to quantify (the net effect of) these behavioural adjustments. Important endogenous variables in the model are hours worked and (un)employment, investment in human and physical capital, per capita growth and inequality. Individuals differ not only by age, but also by innate ability. We calibrate the model to Belgium and find that it replicates key data since about 1960 remarkably well. Simulating the model, we observe significant (positive) behavioural adjustments by households and firms, but these do not reverse the negative arithmetical effect of projected future demographic change on per capita growth. Many of the adjustments have already taken place in previous decades. Furthermore, ongoing adjustments do not affect future domestic output due to capital outflow in a small open economy. To counter (very) poor per capita growth in the next two decades, policy changes will be necessary.
    Keywords: demographic change, population ageing, economic growth, overlapping generations
    JEL: C68 D91 E17 J11 O40
    Date: 2017–03
  50. By: Iñaki Aldasoro; Robert Unger
    Abstract: Using a Bayesian vector autoregression (BVAR) identified with a mix of sign and zero restrictions, we show that a restrictive bank loan supply shock has a strong and persistent negative impact on real GDP and the GDP deflator. This result comes about even though flows of other sources of financing, such as equity and debt securities, expand strongly and act as a "spare tire" for the reduction in bank loans. We show that this result can be rationalized by a recently revived view of banking, which holds that banks increase the nominal purchasing power of the economy when they create additional deposits in the act of lending. Consequently, our findings indicate that a substitution of bank loans by other sources of financing might have negative macroeconomic repercussions.
    Keywords: bank loans, Bayesian VAR, credit creation, ECB, euro area, external financing, financing structure
    Date: 2017–03
  51. By: Pereira, Alfredo; Pereira, Rui
    Abstract: Using a newly-developed data set, we analyze the effects of infrastructure investment on economic performance in Portugal. A vector-autoregressive approach estimates the elasticity and marginal products of twelve types of infrastructure investment on private investment, employment and output. We find that the largest long-term accumulated effects come from investments in railroads, ports, airports, health, education, and telecommunications. For these infrastructures, the output multipliers suggest that these investments pay for themselves through additional tax revenues. For investments in ports, airports and education infrastructures, the bulk of the effects are short-term demand-side effects, while for railroads, health, and telecommunications, the impact is mostly of a long term and supply side nature. Finally, investments in health and airports exhibit decreasing marginal returns, with railroads, ports, and telecommunications being relatively stable. In terms of the other infrastructure assets, the economic effects of investments in municipal roads, electricity and gas, and refineries are insignificant, while investments in national roads, highways, and waste and waste water have positive economic effects, but too small to improve the public budget. Clearly, from a policy perspective, not all infrastructure investments in Portugal are created equal.
    Keywords: Infrastructure Investment, Multipliers, Budgetary Effects, VAR, Portugal.
    JEL: C32 E22 E62 H54 H60 O47
    Date: 2017–03–14
  52. By: Davor Kunovac (Croatian National Bank, Croatia); Rafael Ravnik (Croatian National Bank, Croatia)
    Abstract: In this paper we examine the relevance of changes in sovereign credit rating for the borrowing cost of EU countries. Our results indicate that discretionary credit rating announcements are only of limited economic importance for the borrowing cost of these countries. It seems that rating agencies do not reveal important new information to financial markets, in addition to that already contained in the underlying fundamentals. Hence, given the sentiment in financial markets, the borrowing cost of a country can only be reduced by improving macroeconomic and fiscal fundamentals.
    Keywords: Sovereign credit ratings, borrowing cost, macroeconomic and fiscal fundamentals
    JEL: G14 G24 H63 E62
    Date: 2017–02
  53. By: Foluso Akinsola; Sylvanus Ikhide
    Abstract: Financial globalisation and financial innovation have increased most banks’ appetite for risk and therefore engendered financial fragility in the financial system. This paper examines the relationship between regulatory bank capital adequacy and the business cycle in South Africa using Vector error correction model (VECM). This paper employed quarterly data from South Africa Reserve Bank (SARB) for the period 1990 to 2013. The Johansen Cointegration approach was used to ascertain whether there is indeed a long-run co-movement between capital adequacy and the business cycle. Results from the tests and VECM model show that there are significant linkages among the variables, especially between capital adequacy and the business cycle. The impulse analysis result shows that the response of the business cycle to one standard deviation shock of capital adequacy is negative and persistent for over 25 quarters before stabilizing. This shows the procyclicality effect of the business cycle. In other words, the imposition of a capital adequacy requirement can amplify the business cycle in South Africa. The result shows that fluctuation in the business cycle can be amplified by the bank capital adequacy requirements in South Africa.
    Keywords: bank capital, Procyclicality, Business Cycle, Basel accord
    JEL: G21 E32 G28
    Date: 2017–02
  54. By: Yulia Vymyatnina
    Abstract: Credit is one of the most important indicators leading boom/bust periods in the economy, therefore studying its dynamics (cycles) allows for early warning of overheating. At the same time credit is important driver of economic growth, and cases of credit constraints for the country as a whole or some of its sectors of companies often become a serious obstacle for growth and development. Sanctions, especially financial, represent one possible way of constraining country's economic prospects. Recent sanctions against Russia might seem relatively mild, but Russian economy was growing at lower and lower rates with oil prices decreasing at the same time. Our aim is to decompose the effects of sanctions and oil prices on the credit dynamics of various entities in Russia. At the first stage we identify credit cycles using threshold method. After the seasonal component is eliminated, we proceed with disaggregating time series we use for our study into long-run trend and cyclical components. For this we apply the Hodrick-Prescott (HP) filter. We favour its use compared to the Baxter-King filter since the latter cuts off some data at the beginning and the end of the times series, and since we have only 64 observations for the longest time series, we opted for HP filter that uses more information. Once the trend is accounted for, thresholds (of statistical nature) can be applied to determine the start and the end dates of the credit boom, denoting cyclical variations higher than average. More precisely, if lit is the deviation of the logarithm of real per capita credit from its long-run trend and if σ(li) is the standard deviation of the cyclical component of real per capita credit, then if on one or more particular sequential dates it is true that lit ≥ φσ(li) (φ is the threshold), we can claim that on this date(s) credit boom was observed. To check for robustness, alternative values of φ were used. At the second stage VECM models were constructed to account for the interaction of endogenous variables. In all cases, however, the coefficients and the share of explained variation due to endogenous variables in the equation for credit indicator were statistically insignificant, which allowed us to use a simple single-equation model for out-of-sample forecasting. The data until the 4th quarter 2013 were used for estimation, and then the data on exogenous variables were used for out-of-sample forecasting (dynamic). The difference until 4th quarter 2014 was used to measure the quality of the forecast and to judge if the quality of the forecast since 4th quarter 2014 could be used as a proxy of the sanctions effect. In order to determine the effect of oil prices, the out-of-sample forecast was also made using the average quarterly oil prices for 2012-2013. Additionally it should be mentioned, that the impulse response analysis in VECM models in most cases demonstrated significant response of GDP gap on changes in the oil prices. In the case of internal credit indicators the internal interest rate also showed response to the GDP gap proxy changes and to the changes in the oil prices. Most of the private sector external credits saw the boom coinciding with the time of the world financial crisis of 2008-2009, while for the government the boom in external borrowing was identified in 2012-2013. The government-affiliated companies and banks had another external credit boom at the end of 2014 – early 2015. It should be stressed that it is visible that financial sanctions have changed the composition of external borrowing from direct investments, bonds and credits to more short-term and less direct external financing. External credit was partly substituted for by internal credit as the boom at the end of the study period suggests. Again, the government has somewhat different timings of credit booms in relation to internal credits. Mostly total internal credit has the same timings of booms as credit in national currency, which is not surprising taking into account the dominant share of credit in national currency in the total outstanding credit, especially after the crisis of 2008-2009 when the banking system became aware of the necessity to deal with the currency mismatch between assets and liabilities. Results of decomposing the effects on external borrowing and domestic credit into effect related to decreasing oil prices and effect due to external (financial) sanctions show that sanctions are felt more compared to decrease in oil prices (in case of external borrowing), and that short-term borrowing decreased less for government companies and banks. Domestic credit market was also influenced by sanctions and decreasing oil prices to varying degrees as external credit was largely substituted by domestic credit where possible.
    Keywords: Russia, Macroeconometric modeling, Business cycles
    Date: 2016–07–04
  55. By: Sebastian Gechert (Macroeconomic Policy Institute (IMK)); Christoph Paetz (Macroeconomic Policy Institute (IMK)); Paloma Villanueva (Banco de España)
    Abstract: Using the bottom-up approach of Romer and Romer (2010), we construct a narrative dataset of net-revenue shocks for Germany by extending the tax shock series of Hayo and Uhl (2014) and coding a shock series for social security contributions, benefits and transfers. We estimate the multiplier effects of shocks to net revenues, taxes, social security contributions, benefits and transfers in a proxy SVAR framework [Mertens and Ravn (2013)] and compare them with the top-down identification [Blanchard and Perotti (2002)]. We find multiplier effects of net-revenue components between 0 and 1 for both approaches. These estimates are comparably low and we investigate the differences.
    Keywords: fiscal shock identification, fiscal multipliers, revenue elasticities
    JEL: E62 H20 H30
    Date: 2017–03
  56. By: David M. Arseneau; David Rappoport; Alexandros Vardoulakis
    Abstract: We show that trade frictions in OTC markets result in inefficient private liquidity provision. We develop a dynamic model of market-based financial intermediation with a two-way interaction between primary credit markets and secondary OTC markets. Private allocations are generically inefficient because investors and firms fail to internalize how their actions affect liquidity in secondary markets. This inefficiency can lead to liquidity that is suboptimally low or high compared to the second best. Our analysis provides a rationale for the regulation and public provision of liquidity and the effect of quantitative easing or tightening on capital markets and investment.
    Keywords: Liquidity provision ; Market liquidity ; Over-the-counter markets ; OTC ; Quantitative easing ; Quantitative tightening ; Monetary policy normalization
    JEL: E44 G18 G30
    Date: 2017–03–29
  57. By: Cyril May; Greg Farrell; Jannie Rossouw
    Abstract: This paper examines the temporal effect of domestic monetary policy surprises on both the levels and volatility of the South African rand/United States dollar exchange rate. The analysis in this ‘event study’ proceeds using intra-day minute-by-minute exchange rate data, repo rate data from the South African Reserve Bank’s scheduled monetary policy announcements, and Bloomberg market consensus repo rate forecasts. We find statistically and economically significant responses in intra-day high-frequency exchange rate returns and volatility to domestic interest rate surprises, but anticipated changes have no bearing on the rand. Our results suggest that monetary policy news is an important determinant of the exchange rate for approximately 5 to 40 minutes after the estimated time of the pronouncement – suggesting a relatively high degree of market ‘efficiency’ in its mechanical sense (and not ‘efficient’ market in the deeper economic-informational sense) in processing this information.
    Keywords: Exchange rate, expectations, monetary policy surprises, repo rate, returns, volatility
    JEL: C22 E52 E58 F31 F41 G14 G15
    Date: 2017–03
  58. By: Bulat Mukhamediyev; Mukhamediyev Bulat
    Abstract: Small open economy is vulnerable to various macroeconomic shocks arising in large economies. It must take into account their possible consequences in own economic policy. In paper a small dynamic stochastic general equilibrium model for several counties/regions is presented. It develops an Obstfeld & Rogoff (2001) approach and its subsequent variants for model of the two countries, taking into account the nominal price rigidity. In each country domestic and foreign goods are consumed.The model is estimated on the data of Kazakhstan, Russia, China and the European Union. The results of the model simulation are discussed from the viewpoint of the influence of external and internal shocks to the small open economy of Kazakhstan.
    Keywords: Kazakhstan, Russia, China and the European Union, Impact and scenario analysis, General equilibrium modeling
    Date: 2015–07–01
  59. By: María del Carmen Ramos-Herrera (Department of Quantitative Economics, Universidad Complutense de Madrid); Simón Sosvilla-Rivero (Department of Quantitative Economics, Universidad Complutense de Madrid)
    Abstract: Expectations are at the centre of modern macroeconomic theory and policymakers. In this paper, we examine the predictive ability and the consistency properties of macroeconomic expectations using data of the European Central Bank (ECB) Survey of Professional Forecasters (SPF).
    Keywords: inflation, real economic growth, unemployment, expectations, euro area
    JEL: F31 E31 D84
    Date: 2017–02
  60. By: Guerrazzi, Marco
    Abstract: In this paper, I explore the consequences of extending the number of firms in an efficiency-wage competition framework. In this setting, I show that the effort function shape is crucial in determining key features of the model economy. Specifically, with a concave (sigmoid) effort function, the wage and the employment levels prevailing in a symmetric Nash equilibrium are, respectively, lower (higher) and higher (lower), the higher the number of competing firms. Moreover, assuming that firms adjust their wages on the basis of lagged wage bids, the adoption of a concave (sigmoid) effort function reveals that the symmetric Nash equilibrium is unstable (stable) and the speed of divergence (convergence) is an increasing function of the number of firms. Furthermore, with a concave (sigmoid) effort function the full employment equilibrium is characterized by a monopsonistic exploitation of labour that increases (decreases) with the number of productive units required to sustain that allocation. Those findings have intriguing implications for the existence of involuntary unemployment as well as for policies aimed at increasing employment.
    Keywords: Efficiency-wage competition; Number of competitors; Effort function; Nash equilibrium; Monopsonistic exploitation
    JEL: C72 E12 E24 J41
    Date: 2017–03–27
  61. By: Lukas Altermatt
    Abstract: In this paper I build a new monetarist model that includes inside money and investment to analyze why an economy can fall into a liquidity trap, and what the effects of unconventional monetary policy measures like helicopter money and negative interest rates are under these circumstances. I find that the liquidity trap can be caused by a scarcity of savings instruments, by insufficient investment opportunities, by too much supply of bank deposits or by a combination of any of these reasons. I also find that unconventional monetary policies can get an economy out of a liquidity trap, but at a welfare cost, while issuing more government debt can do the same and also improve welfare.
    Keywords: New monetarism, liquidity trap, helicopter money, negative interest rates, government debt, Ricardian equivalence, banking
    JEL: E4 E5 G2
    Date: 2017–03
  62. By: Riccardo Fiorentini (Department of Economics (University of Verona))
    Keywords: supranational policies, reform, European union
    JEL: E62 F15 F55
    Date: 2016–06
  63. By: Jules H. van Binsbergen; Christian C. Opp
    Abstract: We examine the importance of asset pricing anomalies (alphas) for the real economy. We develop a novel quantitative model with lumpy investment that features such informational inefficiencies and yields closed-form solutions for cross-sectional distributions of firm dynamics. Our findings indicate that anomalies can cause material real inefficiencies, raising the possibility that agents that help eliminate them can provide significant value added to the economy. The framework reveals that alphas alone are poor indicators of real distortions, and that efficiency losses depend on the persistence of alphas, the amount of mispriced capital, and the Tobin's q of firms affected.
    JEL: D22 D24 D53 D92 E22 G2 G30
    Date: 2017–03
  64. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Presentation to the Santa Cruz Chamber of Commerce in Santa Cruz, California, by John C. Williams, President and CEO, Federal Reserve Bank of San Francisco, February 28, 2017.
    Date: 2017–03–29
  65. By: Davoine, Thomas (Institute for Advanced Studies (IHS) Vienna, Austria); Molnar, Matthias (Institute for Advanced Studies (IHS) Vienna, Austria)
    Abstract: We investigate cross-country fiscal policy spillovers through the integration of capital markets in a currency union and allow capital use in production to differ across countries. Following empirical evidence, we assume that production exhibits capital-skill complementarity. Using a multi-country overlapping-generations model calibrated for 14 European Union countries, we find that output spillovers are small with standard tax reforms but can be sizeable with large government spending increases financed by taxes: long run output losses in shock-free countries can amount to a quarter of the losses in countries hit by the spending shock. Conditional and temporary relaxing of the EU debt ceiling rule could benefit the Union as a whole.
    Keywords: Spillovers, Fiscal policy, Capital-skill complementarity, Multi-country modeling, Computable general equilibrium
    JEL: C68 E62 F21 F45
    Date: 2017–03
  66. By: Gerdie Everaert; Stijn Jansen (-)
    Abstract: This paper investigates whether ?scal fatigue is a robust characteristic of the ?scal reaction function in a panel of OECD countries or merely an artifact of ignoring important aspects of the panel dimension of the data. More speci?cally, we test whether the quadratic and cubic debt-toGDP terms remain signi?cant once heterogeneous slopes are allowed for.
    Keywords: Fiscal reaction function, ?scal fatigue, panel data, heterogeneity
    JEL: E62 H62 H63 H68
    Date: 2017–01
  67. By: Sangyup Choi (International Monetary Fund); Davide Furceri (International Monetary Fund); Yi Huang (IHEID, Graduate Institute of International and Development Studies, Geneva); Prakash Loungani (International Monetary Fund)
    Abstract: We show that an increase in aggregate uncertainty—measured by stock market volatility—reduces productivity growth more in industries that depend heavily on external finance. The mechanism at play is that during periods of high uncertainty, firms that are credit constrained switch the composition of investment by reducing productivity-enhancing investment—such as on ICT capital—which is more subject to liquidity risks (Aghion et al., 2010). The effect is larger during recessions, when financing constraints are more likely to be binding, than during expansions. Our statistical method—a difference-in-difference approach using productivity growth of 25 industries from 18 advanced economies over the period 1985-2010—mitigates concerns with omitted variable bias and reverse causality. The results are robust to the inclusion of other sources of interaction effects, instrumental variable approaches, and different datasets. The results also hold if economic policy uncertainty (Baker et al., 2016) is used instead of stock market volatility as a measure of aggregate uncertainty.
    Keywords: productivity growth; financial dependence; uncertainty; information and communication technology investment.
    JEL: E22 F43 O30 O47
    Date: 2017–03
  68. By: Clavero, Borja
    Abstract: In my view, Richard Werner is sitting on a pot of gold. In Werner (2014), he has shown the tremendous potential his ‘Quantity Theory of Credit’ has to reorient public policy and stimulate nominal GDP. Yet, his ideas do not seem to take root. In this paper my aim is to refine his theory and provide some improvements by constructing new empirical proxies of ‘bank credit for GDP transactions’—a quite arduous and open-ended task. I conclude that the theory is very promising, but it is still in a stage of maturation.
    Keywords: bank credit, Quantity Theory of Credit, credit-growth nexus, banking and the economy, disaggregation of credit, credit creation, flow of funds, national accounts
    JEL: E50 G21
    Date: 2017–02–07
  69. By: Philip R. Lane
    Abstract: This paper examines the cyclical behaviour of country-level macro-financial variables under EMU. Monetary union strengthened the covariation pattern between the output cycle and the financial cycle, while macro-financial policies at national and area-wide levels were insufficiently counter-cyclical during the 2003-2007 boom period. We critically examine the policy reform agenda required to improve macro-financial stability. JEL Classification: E52, E65, G28
    Keywords: macroeconomic stabilisation, financial stability, international capital flows, inflation, exchange rate
    Date: 2016–02
  70. By: van Riet, Ad
    Abstract: Responding to the euro crisis, European leaders have put in place an enhanced economic and financial governance framework for the euro area, including the main pillars of a banking union, while they have initiated work on a capital markets union. This should more effectively secure sound national macroeconomic and fiscal policies, a healthy financial sector and the stability of the euro. This paper poses the question whether the status quo of half-way political integration is sufficient to safeguard the cohesion and integrity of the euro area. National governments still have considerable leeway to circumvent the “hard” budget constraint and the strong market competition implied by the euro area’s “holy trinity” (one market, one currency and one monetary policy). For example, they might target captive sovereign debt markets or take protectionist measures. This economic nationalism would entrench the crisis-related fragmentation of the single market and frustrate the efficient functioning of the monetary union. A higher level of market-preserving fiscal federalism could prevent member countries from encroaching on markets and foster sustainable economic convergence towards an optimal currency area.
    Keywords: European Monetary Union, monetary policy trilemma, protectionism, market fragmentation, fiscal federalism
    JEL: E6 F33 F4 H7
    Date: 2015–10–30
  71. By: Markus Brueckner; Joaquin Vespignani
    Abstract: This paper examines the relationship between trade uncertainty and income inequality. In countries where only a small share of the population is educated, an increase in trade uncertainty is associated with a significant increase in income inequality. As education of the population increases the correlation between trade uncertainty and income inequality becomes smaller. Trade uncertainty has no significant effect on income inequality in countries that are world leaders in education.
    Keywords: Trade Uncertainty, Inequality, Education
    JEL: F1 E2
    Date: 2017–03
  72. By: Jon D. Wisman; Aaron Pacitti
    Abstract: The United States is falling behind many other rich nations on a broad spectrum of measures of the quality of life. These include social mobility, inequality, education, crime, health and longevity. Polls suggest that many Americans have not only lost their optimism concerning the future, but have become angry as well. This article sets forth the elements of a new social contract, one that would deliver substantial results almost overnight and which conforms to the traditional American values of the importance of work, that everyone should have a fair opportunity for upwards mobility, and the central importance of the family. This proposal is composed of two parts: The first is guaranteed employment, and where necessary, the retraining required to enable workers to successfully enter the regular workforce. The second is universal child care to give all parents the possibility of participating in the labor force. The article discusses in depth how these measures would reverse the relative decline in quality of life in America. It also reveals how, although these measure would be costly, their payoff for the economy would far offset the costs.
    Keywords: Guaranteed employment, retraining, social costs of unemployment, child care
    JEL: E24 J83 H10 I24
    Date: 2017
  73. By: Ulrike Malmendier; Stefan Nagel; Zhen Yan
    Abstract: We show that personal experiences of inflation strongly influence the hawkish or dovish leanings of central bankers. For all members of the Federal Open Market Committee (FOMC) since 1951, we estimate an adaptive learning rule based on their lifetime inflation data. The resulting experience-based forecasts have significant predictive power for members' FOMC voting decisions, the hawkishness of the tone of their speeches, as well as the heterogeneity in their semi-annual inflation projections. Averaging over all FOMC members present at a meeting, inflation experiences also help to explain the federal funds target rate, over and above conventional Taylor rule components.
    JEL: D84 E03 E50
    Date: 2017–03
  74. By: Brueckner, Markus (College of Business and Economics, Australian National University); Vespignani, Joaquin (Tasmanian School of Business & Economics, University of Tasmania)
    Abstract: This paper examines the relationship between trade uncertainty and income inequality. In countries where only a small share of the population is educated, an increase in trade uncertainty is associated with a significant increase in income inequality. As education of the population increases the relationship between trade uncertainty and income inequality becomes more muted. Trade uncertainty has no significant effect on income inequality in countries that are world leaders in education. Developing countries that want to reduce income inequality arising from trade uncertainty should therefore consider further improving their education system.
    Keywords: trade uncertainty, inequality, education
    JEL: F1 E2
    Date: 2017
  75. By: Turan, Güngör
    Abstract: In this empirical paper, the long-run relations between growth and unemployment in Turkey has been tested. ARDL bound test which is a long-term co-integration test has been used based on Turkish real gross domestic product and the number of unemployed time series in 1962-2014. The results of bound test conclude that there is no evidence of a long-run relationship between growth and unemployment in Turkey. This empirical study to some extent supports the availability of "jobless" growth notion which has been debated in Turkey.
    Keywords: Unemployment, growth, bounds test, Turkey
    JEL: C10 E0 E00 J6 J60
    Date: 2015–06
  76. By: Martín Besfamille; N. Grosman; D. Jorrat; O. Manzano; P. Sanguinetti
    Abstract: This paper uses the particular features of the tax-sharing regime Coparticipación Federal de Impuestos and the fact that some provinces earn hydrocarbon royalties to investigate public expenditures and debt at the subnational level in Argentina. We obtain that facing a one peso increase in intergovernmental transfers, provinces spend on average 36 cents in public expenditures with no changes in public debt. On the other hand, when royalties increase one peso, 59 cents are used to pay back public debt while public expenditures are not affected. These results, which are robust to many different specifications of the basic regressions, suggest a non-negligeable expenditure/debt smoothing behavior of Argentine provinces.
    JEL: C3 E62 H72 H77
    Date: 2017
  77. By: Kenneth Sæterhagen Paulsen (Norges Bank (Central Bank of Norway))
    Abstract: DSGE models may be misspecified in many dimensions, which can affect their forecasting performance. To correct for these misspecifications we can apply conditional information from other models or judgment. Conditional information is not accurate, and can be provided as a probability distribution over different outcomes. These probability distributions are often provided by a set of marginal distributions. To be able to condition on this information in a structural model we must construct the multivariate distribution of the conditional information, i.e. we need to draw multivariate paths from this distribution. One way to do this is to draw from the marginal distributions given a correlation structure between the different marginal distributions. In this paper we use the theoretical correlation structure of the model and a copula to solve this problem. The copula approach makes it possible to take into account more flexible assumption on the conditional information, such as skewness and/or fat tails in the marginal density functions. This method may not only improve density forecasts from the DSGE model, but can also be used to interpret the conditional information in terms of structural shocks/innovations.
    Keywords: DSGE model, conditional forecast, copula
    JEL: C53 E37 E47 E52
    Date: 2017–04–07
  78. By: Sydney C. Ludvigson; Sai Ma; Serena Ng
    Abstract: Identifying assumptions need to be imposed on autoregressive models before they can be used to analyze the dynamic effects of economically interesting shocks. Often, the assumptions are only rich enough to identify a set of solutions. This paper considers two types of restrictions on the structural shocks that can help reduce the number of plausible solutions. The first is imposed on the sign and magnitude of the shocks during unusual episodes in history. The second restricts the correlation between the shocks and components of variables external to the autoregressive model. These non-linear inequality constraints can be used in conjunction with zero and sign restrictions that are already widely used in the literature. The effectiveness of our constraints are illustrated using two applications of the oil market and Monte Carlo experiments calibrated to study the role of uncertainty shocks in economic fluctuations.
    JEL: C01 C5 C51 E17
    Date: 2017–03
  79. By: Stefano Bosi; David Desmarchelier
    Abstract: We provide necessary and sufficient conditions to detect local bifur- cations of three and four-dimensional dynamical systems in continuous time. We characterize not only the bifurcations of codimension one but also those of codimension two. The added value of this methodology rests on its tractability. To illustrate the simplicity of our approach, we provide two analytical applications of dimension three and four to environmental economics, complemented with numerical simulations.
    Keywords: local bifurcations, codimensions one and two, pollution, natural capital.
    JEL: C61 E32 O44
    Date: 2017
  80. By: José Díaz; Gert Wagner
    Abstract: This paper reports sources and methods utilized when estimating Chilean gross investment and net capital stock of fixed assets between 1833 and 2010.Two types of assets are identified: (i)machinery and equipment and (ii)construction (total). The main source for machinery investments is imports and a price for such goods based on Chilean import structure and export data of providing countries. In the case of construction, we rely on public expenditure on infrastructure and indirect measures for private activity. From 1940 onwards all data is obtained from national accounts. Capital is generated applying the perpetual inventory method. Main findings are: (i)Chile starts from a quite low capital output ratio around 1830, (ii)in the second half of the 19th Century, and specially due to the expansion of construction, the economy reaches capital output ratios comparable with other countries, (iii)the relative importance of machinery and equipment in total investment starts at practically zero increasing along the 170 years, (iv)capital per laborer expands systematically but slowly.
    JEL: E22 N16 O16
    Date: 2016
  81. By: Martin Wong (Reserve Bank of New Zealand)
    Abstract: Understanding the link between changes in wealth and household consumption is crucial to the Reserve Bank’s assessment of business cycle dynamics. In the Reserve Bank’s pursuit of price stability, changes in the policy rate influence household spending in part via their impact on asset prices and wealth. Recent trends have prompted a reassessment of the relationship between household spending and wealth. Since the global financial crisis (GFC), per capita consumption growth in New Zealand has been modest even as housing wealth has been rising rapidly. The modest growth in per capita consumption has coincided with an increase in the household saving rate, a slowing in credit growth, and a positive injection of equity into the housing sector by households. This Analytical Note estimates the response of household consumption (its elasticity) with respect to housing and financial wealth, and income between 1982 and 2016. To examine the stability of the relationship, the model is also re-estimated across a split sample. The results suggest that there has been a change in the relationship between household consumption and wealth. It finds: -On a dollar for dollar basis, consumption appears to respond more to changes in financial wealth than fluctuations in housing wealth over the full sample; -The response of consumption to wealth has fallen in the sample after 2005, particularly the response with respect to housing wealth. The change in the response of household consumption to wealth could reflect a reassessment of expected future capital gains from each form of wealth following the GFC, particularly given heightened uncertainty in the housing market. It may also reflect a desire by highly indebted households to pay down debt, along with the influence of low interest rates, indicating a prolonged but transitory period of deleveraging and higher savings. Disentangling the aforementioned factors is beyond the scope of this note but could usefully be addressed with cross-sectional data at the household level.
    Date: 2017–03
  82. By: José Dïaz; Gert Wagner
    Abstract: This paper reports sources and methods utilized when estimating Chilean gross investment and net capital stock of fixed assets between 1833 and 2010.Two types of assets are identified: (i)machinery and equipment and (ii)construction (total). The main source for machinery investments is imports and a price for such goods based on Chilean import structure and export data of providing countries. In the case of construction, we rely on public expenditure on infrastructure and indirect measures for private activity. From 1940 onwards all data is obtained from national accounts. Capital is generated applying the perpetual inventory method. Main findings are: (i)Chile starts from a quite low capital output ratio around 1830, (ii)in the second half of the 19th Century, and specially due to the expansion of construction, the economy reaches capital output ratios comparable with other countries, (iii)the relative importance of machinery and equipment in total investment starts at practically zero increasing along the 170 years, (iv)capital per laborer expands systematically but slowly.
    JEL: E22 N16 O16
    Date: 2016
  83. By: Lu Zhang
    Abstract: A new class of Capital Asset Pricing Models (CAPM) arises from the first principle of real investment for individual firms. Conceptually as "causal"' as the consumption CAPM, yet empirically more tractable, the investment CAPM emerges as a leading asset pricing paradigm. Firms do a good job in aligning investment policies with costs of capital, and this alignment drives many empirical patterns that are anomalous in the consumption CAPM. Most important, integrating the anomalies literature in finance and accounting with neoclassical economics, the investment CAPM succeeds in mounting an efficient markets counterrevolution to behavioral finance in the past 15 years.
    JEL: E13 E22 G12 G14 G31
    Date: 2017–03
  84. By: Gioele Figus; Patrizio Lecca; Karen Turner; Peter McGregor
    Abstract: Energy rebound effect from increased energy efficiency has been generally considered as an undesired consequence of increasing energy efficiency policies that needs to be accounted when assessing the ability of such policies to decrease the demand for energy. However, recent studies have associated the energy rebound effect to a wider range of economic benefits coming from the higher energy efficiency. In computable general equilibrium (CGE) setting Lecca et al. 2014 show that a more efficient use of energy could lead to a reallocation of household’s expenditure towards non-energy sectors, which could stimulate the economy through a shift in the aggregate demand. However this would crowd out export due to an increased pressure on domestic consumption price. Here we use a regional (CGE) model for the Scottish economy to analyse the economic response of household - and of the wider economy - to an increase in household energy efficiency. We follow the approach of Lecca et al. 2014 but we focus on the regional case of Scotland. This allows us to understand some of the implications of moving from a national to a regional CGE modelling framework in the analysis of the impacts household energy efficiency improvements in the whole economy. The macroeconomic impacts of improving household energy efficiency are analysed using a CGE model for Scotland called AMOS-ENVI. This is a dynamic CGE model with forward-looking investment and consumption decisions, designed to analyse environmental and energy disturbances in a regional setting. The model accounts for 20 different productive sectors, including 4 supply chain energy industries, and includes information about fScottish households, the Scottish Government and imports and exports to the rest of the UK (RUK) and to the rest of the World (ROW). Wages are determined within the region in an imperfectly competition setting, using a wage curve where the real wage is negatively related to unemployment rate. The labour force is initially assumed fixed. We than release this assumption to allow for free workers interregional migration across UK, occurring in response to the difference between national and regional real wage and unemployment rates. We consider an energy efficiency improvement as being any technological change which allows households to consume the same bundle goods as before but using less physical energy in doing this. The rebound effect is measured as being the ratio between potential energy savings (PES) and actual energy savings (AES). The PES correspond to the pure engineering effect, for example improving efficiency by 10% and saving 10% of energy. The AES are calculated as the proportionate change in a specific energy use, for which efficiency has improved, as the result of the full general equilibrium adjustments. Results from simulations show that increasing household energy efficiency stimulates the Scottish economy through an increase and change in patterns in the domestic aggregate demand. In the long-run central case scenario the regional GDP increases by 0.11%, unemployment rate drops by 0.45% and households consumption increases by 0.4%. The consumption of energy decreases both in household and in production, although the calculated general equilibrium rebound effect is 50%, so that only 50% of the potential energy savings are achieved. By introducing free migrations of workers, we find that in an open region characterised by an integrated labour market, interregional migration of workers may give additional momentum to the economic expansion from the increased household energy efficiency. In fact the net in-migration relieves pressure on the real wage and the cpi, which return to their baseline values in the long-run restoring the lost competitiveness observed in the national case (Lecca et al., 2014). By considering different simulation scenarios we show that there is a friction between the economic expansion from increased household energy efficiency and the rebound effects. Moreover, we show that the economic stimulus from increased energy efficiency in household would be different depending on the precise specification of the impact itself.
    Keywords: Scotland, General equilibrium modeling, Energy and environmental policy
    Date: 2016–07–04
  85. By: Bosupeng, Mpho
    Abstract: The Fisher effect proposes that in the long run, nominal interest rates trend positively with inflation. In numerous studies the long run Fisher effect has been proved several times as compared to the short run Fisher effect phenomenon. The reason is in the long run, interest rates exhibit minimum volatility therefore resulting in the long run association. Even though the literature has been impressive in terms of validating the hypothesis, many central banks and policy makers have been lost in the lurch regarding the overall standpoint of the Fisher parity. This paper reviews the Fisher effect and examines factors that impinge on the hypothesis namely: inflation targeting, data set range and the regulation of the financial system.
    Keywords: Fisher effect; interest rates; inflation
    JEL: E43
    Date: 2016
  86. By: Danny Cassimon (Institute of Development Policy and Management - UA - University of Antwerp); Marin Ferry (LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine); Marc Raffinot (LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine); Bjorn Van Campenhout (Development Strategy and Governance Division - International Food Policy Research Institute)
    Abstract: After two debt relief initiatives launched in 1996 (the Heavily Indebted Poor Countries, HIPC Initiative) and in 1999 (The enhanced HIPC initiative), the G7 decided to go further by cancelling the remaining multilateral debt for these HIPC countries through the Multilateral Debt Relief Initiative (MDRI, 2005). A few papers tried to assess the desired fiscal response effects of those initiatives. This paper uses an extended dataset and alternative econometric techniques in order to tackle methodological issues as endogeneity and fixed effects. We found that debt relief and especially the enhanced HIPC initiative have had a positive impact on the total domestic revenue and the public investment (as percentages of the GDP). Thanks to our large observation span, we also observed that the MDRI led to a significant additional improvement of the level of public investment and domestic revenues ratio, although these effects are smaller than the HIPCs ones.
    Abstract: Après deux initiatives de réduction de dette (PPTE I fin 1996 et PPTE II en 1999), le G7 décida d’annuler la totalité de la dette multilatérale (Initiative d’Annulation de la Dette Multilatérale, IADM en 2005). Quelques travaux ont essayé d’évaluer l’impact de ces mesures sur les finances publiques des pays bénéficiaires. Ce travail utilise une base de données plus étendue et des méthodes économétriques alternatives pour tenir compte de l’endogénéïté et des effets fixes. Nous trouvons que les réductions de dette (en particulier l’initiative PPTE II) ont eu un impact positif sur la pression fiscale et sur les investissements publics (en pourcentage du PIB). Grâce à l’extension de la période d’étude, nous observons également que l’IADM a un effet similaire, quoique moins persistent.
    Keywords: Fiscal response,Fiscal revenue,Public investment,HIPC,MDRI,Debt relief,investissement public,PPTE,IADM,Réductions de dette,recettes publiques
    Date: 2017–03–14
  87. By: Yun, ChiHyun (Korea Institute for International Economic Policy)
    Abstract: Long since before the Russian economic crisis, remittances from Russia have been a major source of foreign currency income in Central Asia. In 2013, Tajikistan received remittances of $4,219 million, or 49.6%, as a proportion of GDP. In the same year, remittances accounted for 31.1% and 11.1% of GDP in the Kyrgyz Republic and Uzbekistan, respectively. By that time, approximately 60-80% of labor migrants of these three remittance-dependent Central Asian countries, a population of roughly 4.3 million, were assumed to be residing in Russia. Remittances from Russia amounted to $14 billion, which accounted for more than 90% of total remittance inflows. However, Western economic sanctions against Russia over the Ukraine Crisis in mid-2014, and the collapse of the Russian ruble coinciding with persisting lower oil prices, have negatively affected the remittance-dependent countries over the last two years. Remittance inflows slashed in half, the unemployment rate jumped as a large number of migrant workers lost their jobs, and the inflation rate rose due to extreme currency depreciation. In this context, this article aims to understand the current economic status of the three remittance-dependent countries in Central Asia - Kyrgyz Republic, Tajikistan and Uzbekistan - and suggest countermeasures for sustainable socio-economic development in terms of labor migration and remittances.
    Keywords: Remittances; Labor Migrant; Migration; Central Asia; Kyrgyz Republic; Tajikistan; Uzbekistan; Russia
    Date: 2016–11–30
  88. By: Johanes Agbahey; Khalid Siddig; Harald Grethe
    Abstract: The Palestinian-Israeli conflict witnessed a new development in the mid-90s with the introduction of the closure policy. This policy consisting in roadblocks, and fixed and mobile checkpoints restricts the movement of goods and labor between the Palestinian territories and Israel, between the West Bank and the Gaza Strip, and inside the West Bank. As a result of this policy the economic space of the West Bank is divided into small pieces and trade with the rest of the world is distorted. The impact of the closure policy on the West Bank's economy is largely understudied. Taking advantage of this unique context, this study addresses the economy-wide effects of removing the closures. The study uses a SAM developed for the West Bank for the year 2011 with explicit representation of trade and transport margins. A variant of the STAGE suite of CGE models is used and extended to conform the unique feature of the West Bank economy. In this paper the removal of the closures is simulated through the reduction of the trade and transport margins by 30%, and the increase in efficiency in the transportation sector by 30%. The results suggest that removing the closure policy will induce a substantial growth of the West Bank's economy by 2 to 7% and will have distributional effects among the household groups Model and data The model used in this study belongs to the STAGE suite of CGE models. STAGE-2 uses a combination of linear and non-linear relationships governing the behavior of the model’s agents (Mc-Donald and Thierfelder, 2013). The model explicitly accounts for transport and trade margins and allows to capture the transactions costs associated with the closure regime that is investigated in this study. The model is calibrated to a West Bank SAM for 2011 (Agbahey et al., forthcoming). The full SAM comprises 325 accounts, of which 83 are commodities and 49 are activities. This detailed disaggregation allows assessing the impact of the closure regime on trade for specific commodity groups and the multiplier effects on the production sectors. The SAM also includes three margin accounts, namely wholesale trade, retail trade and transport margins. The depiction of the margins in the SAM is essential to study the effects of the closure regime as the restrictions basically increase the transaction costs. The SAM encompasses 59 production factor accounts and 111 household groups, allowing the assessment of the multiplier effects on factor markets and households’ welfare. Finally, the SAM singles out Israel from the rest of the world allowing to capture explicitly the transactions between Israel and the West Bank. Simulations The closure regime has two major effects on trade in the West Bank. First, it raises transaction costs. Passage at checkpoints and uncertainty of closures generate delays and add to the costs of doing business. The second major impact is on productivity in the transportation sector. The back-to-back system in place requires trucks upon arrival at a checkpoint to be unloaded and then reloaded on to another truck. This system causes additional labour and fuel costs and a decline in the factor productivity in the transportation sector. Three simulations are run in this study. The first simulates a reduction in the transaction costs associated with the closures. Akkaya et al. (2008) estimated the closure-induced increase in transaction costs at about 33%. In this first simulation, a pre-closure situation is reproduced by removing 33% of the transport and trade margins. In the second simulation factor productivity in the transportation sector is increased. In the absence of a documented estimation of the decline in productivity in the transportation sector, a 33% increase is assumed. Finally, the third simulation combines the first two. Sensitivity analysis is conducted to assess the extent to which the results are robust to differences in the magnitude of the imposed shock. Reduced transaction costs and increased productivity in the transportation sector would potentially have strong effects on the West Bank economy. Total domestic production is expected to increase, as the economy benefits from better access to import markets for intermediate inputs and higher export revenues. The effects between sectors, however, may differ strongly and some sectors may suffer from stronger import competition and changes in factor prices. Higher production would on average have positive multiplier effects on labour income and ultimately on household income. Effects on different household groups will differ according to their composition of income as well as consumption expenditure. However, for the economy as a whole, welfare gains are expected to largely offset losses.
    Keywords: West Bank (Palestine), General equilibrium modeling, Impact and scenario analysis
    Date: 2016–07–04
  89. By: Danilo Liberati (Bank of Italy); Michele Loberto (Bank of Italy)
    Abstract: Housing taxation is an important policy instrument that shapes households’ choices about homeownership and renting as well as the evolution of the housing market. We study the effects of housing taxation in a model with search and matching frictions in the property market and a competitive rental market. We show a new transmission channel for a housing tax reform that works through a ‘shifting’ effect from landlords to tenants. We calibrate the model in order to estimate the long-run effects of the recent Italian housing market taxation reforms and the extent of property tax capitalization on house prices. We show that property taxation on owner-occupied dwellings has a negative effect on property and rental prices, whereas taxes on second homes have opposite qualitative effects. The simultaneous increase in both these instruments may mitigate the dynamics of prices and rents as well as the change in the ratio between the share of owners and renters, leading to a partial capitalization taxation on prices.
    Keywords: housing market, matching, property taxation
    JEL: R21 R31 E62
    Date: 2017–03
  90. By: Fabio Verona; Juha Kilponen; Seppo Orjasniemi; Antti Ripatti
    Abstract: We specify a DSGE model for the small open economy of Finland and incorporate a monopolistic competitive banking sector in the spirit of Gerali, Neri, Sessa, and Signoretti (2010) for the purpose of analyzing various macroprudential issues within general equilibrium setup. We incorporate a monopolistic competitive banking sector in the spirit of Gerali, Neri, Sessa, and Signoretti (2010) in a small open economy setting similar to that in Christoffel, Coenen, and Warne (2008) and Adolfson, Laseen, Linde, and Villani (2005, 2007, 2008). We estimate it using Bayesian methods. //
    Keywords: Finland, Business cycles, Modeling: new developments
    Date: 2015–07–01
  91. By: Lee, Il Houng (Korea Institute for International Economic Policy); Kim, Kyunghun (Korea Institute for International Economic Policy); Kang, Eun Jung (Korea Institute for International Economic Policy)
    Abstract: Emerging economies are struggling to keep their growth momentum alive in the face of waning global demand. Yet, they are partly handicapped by the loss of monetary policy independence and greater exposure to potential capital reversal. Against this background, a comprehensive review of all their policy options are in order, including both macro policy instruments, micro measures, and global safety net aimed at attaining the best possible solution to escaping global recession.
    Keywords: Monetary Policy; Emerging Economies
    Date: 2016–03–08
  92. By: Anna Kormilitsina; Sarah Zubairy
    Abstract: The inability of a simple real business cycle model to predict a rise in consumption in response to increased government expenditures observed in many empirical studies, has stimulated the development of alternative theories of government spending shocks. Our objective is to evaluate these models in terms of how they fit the data.We use Bayesian approach to estimate and compare macroeconomic models of government spending.We find that neither of the considered transmission mechanisms for government spending helps improve the fit of the baseline model. Moreover, all estimated models fail to predict a rise in consumption in response to increased government spending.
    Keywords: USA, Macroeconometric modeling, Business cycles
    Date: 2015–07–01
  93. By: Wen, Xingang (Tilburg University, Center For Economic Research)
    Abstract: This article considers investment decisions in an uncertain and competitive framework, with a first investor, the leader, always producing up to full capacity and a second investor, the follower, capable of adjusting output levels within the constraint of installed capacity. Both firms need to decide on the investment timing and the investment capacity levels. The main findings are as follows. Compared to a situation where the follower always produces up to full capacity, the leader has a larger incentive to accommodate a flexible follower. This is because the leader also benefits from the follower's volume flexibility. Due to the first mover advantage, the leader's value is higher than the follower's value, despite the follower's technological advantage in flexibility.
    Keywords: Investment under Uncertainty; volume flexibility; entry deterrence/accommodation; Capacity Choice; Duopoly
    JEL: E22 C73 D81
    Date: 2017
  94. By: Dirk Schoenmaker; Peter Wierts
    Abstract: Financial supervision focuses on the aggregate (macroprudential) in addition to the individual (microprudential). But an agreed framework for measuring and addressing financial imbalances is lacking. We propose a holistic approach for the financial system as a whole, beyond banking. Building on our model of financial amplification, the financial cycle is the key variable for measuring financial imbalances. The cycle can be curbed by leverage restrictions that might vary across countries. We make concrete policy proposals for the design of macroprudential instruments to simplify the current framework and make it more consistent. JEL Classification: E44, G01, G28
    Keywords: financial cycle, macroprudential policy, financial supervision, leverage ratio
    Date: 2016–02
  95. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Remarks to the Forecasters Club , New York, New York, by John C. Williams, President and CEO, Federal Reserve Bank of San Francisco , March 29, 2017
    Date: 2017–03–30
  96. By: Davis, Jonathan (University of Chicago); Mazumder, Bhashkar (Federal Reserve Bank of Chicago)
    Abstract: We demonstrate that intergenerational mobility declined sharply for cohorts born between 1957 and 1964 compared to those born between 1942 and 1953. The former entered the labor market largely after the large rise in inequality that occurred around 1980 while the latter entered the labor market before this inflection point. We show that the rank-rank slope rose from 0.27 to 0.4 and the IGE rose from 0.35 to 0.51. The share of children whose income exceeds that of their parents fell by about 3 percentage points. These findings suggest that relative mobility fell by substantially more than absolute mobility.
    Keywords: Intergenerational mobility; income; labor market
    JEL: E2 J61 J62
    Date: 2017–03–16
  97. By: Jean-Marc Bottazzi (Capula and Paris School of Economics); Jaime Luque (University of Wisconsin - Madison); Mario Pascoa (University of Surrey)
    Abstract: To understand this normality requires turning the CIP logic on its head. We look at the Foreign Exchange (FX) swap market as the very market where scarce funding capacities are exchanged; the basis becomes an equilibrium outcome that compensates one of the parties for the temporary loss in the possession of one of the currencies. Ultimately, the counterparty’s funding pressure in that currency determines the willingness to pay for such endogenous possession value. In our model, banks compete for funding in two currencies. Unsecured, secured and FX positions are bounded by leverage ratio constraints tying banks’ equity. Currency-specific funding pressures are apparent in banks’ secured funding constraints, governing how securities denominated in different currencies can be pledged (and short-sold). The latter, not the former, is what drives the basis; this explains why bases also arise with no crisis in sight. A basis occurs when secured funding becomes more binding in one currency than in the other; leverage constraints can only have an accessory effect through this channel. Equivalently, the basis depends on how different across currencies are the spreads between actual (bank specific) unsecured borrowing rates and the secured rates. To illustrate, we look at central banks’ actions targeting international funding pressures, in particular FX swaps lines and collateral policies.
    JEL: D5 E5 G15 G18
    Date: 2017–03
  98. By: Haliassos, Michael (Goethe University Frankfurt); Jansson, Thomas (Research Department, Central Bank of Sweden); Karabulut, Yigitcan (Rotterdam School of Management, Erasmus University)
    Abstract: This paper uses unique administrative data and a quasi-field experiment of exogenous refugee allocation in Sweden to estimate effects of exposure to financially literate neighbors. It contributes evidence of causal impact of financial literacy and points to a social multiplier of financial education. Exposure promotes saving for retirement in the medium run and stockholding in the longer run, especially when neighbors have economics or business education, but only for educated or male-headed households. Findings point to knowledge transfer rather than mere imitation. We do not find significant effects on income or employment prospects, except for employment in the financial sector.
    Keywords: Household finance; financial literacy; social interactions; refugees
    JEL: D14 E21 F22 G11 I28
    Date: 2017–03–01
  99. By: Christian Grisse; Signe Krogstrup; Silvio Schumacher
    Abstract: We study the transmission of changes in the believed location of the lower bound to longterm interest rates since the introduction of negative interest rate policies. The expectations hypothesis of the term structure combined with a lower bound on policy rates suggests that the transmission of policy rate changes to long-term interest rates is reduced when policy rates approach this lower bound. We show that if market participants revise downward the believed location of the lower bound, this may reduce long-term yields and increase transmission. A cross-country event study suggests that such effects have been empirically relevant during the recent negative interest rate episode.
    Keywords: monetary policy, negative interest rates, lower bound, yield curve, term structure
    JEL: E43 E52
    Date: 2017
  100. By: Doan, Ha Thi Thanh (Asian Development Bank Institute); Wan, Guanghua (Asian Development Bank Institute)
    Abstract: Contradicting the conventional wisdom of constant factor shares, the portion of national income accruing to labor has been trending downward in the last three decades. This decline must have contributed to rising inequality as labor income is more evenly distributed than capital income. This study contributes to the literature on income inequality by exploring the role of globalization in driving the labor share. In particular, we focus on the impacts of trade openness and foreign direct investments (FDI) on the labor share. Using country-level panel data for 1980–2010, the study finds that trade is a significant and robust determinant of labor share. Generally speaking, export depresses while import increases the labor share. The impact of FDI, however, is insignificant. These results are similar for both developed and developing countries.
    Keywords: labor share; wage share; globalization; imports; exports; FDI
    JEL: D63 E25 F62
    Date: 2017–01–17
  101. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks at the University of South Florida Sarasota-Manatee, Sarasota, Florida.
    Keywords: short-term Treasury rates; long-term Treasury rates; credit spreads; foreign exchange value of the dollar; equity prices; prescriptive monetary policy; monetary policy rule; reinvestment; normalization
    Date: 2017–03–31
  102. By: Tsikas, Stefanos A.
    Abstract: The "Slippery Slope Framework" hypothesizes that (an individual's) tax compliance is determined by both the tax authority's powerfulness and its trustworthiness, and that the two dimensions moderate each other. By employing a within-country fixed effects analysis for 25 European countries, this paper tests the conjecture that a slippery slope exists also on the aggregate level. Results show that both trust and power are positively correlated with higher tax compliance. Trust and power also moderate each other: the lower trust, the greater the compliance-increasing impact of power. However, the positive effect decreases with increasing coercion. Strong deterrence policies may eventually damage tax compliance.
    Keywords: Tax compliance; Slippery Slope Framework; trust; power; institutions
    JEL: E62 H26 H30
    Date: 2017–03

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