nep-mac New Economics Papers
on Macroeconomics
Issue of 2017‒04‒16
ninety-six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Uncertain forward guidance By Haberis, Alex; Harrison, Richard; Waldron, Matthew
  2. Catallactics misapplication: It’s crucial role in Africa’s underdeveloped Economy- Revised Edition Vol. 1 By Tweneboah Senzu, Emmanuel
  3. Learning to Believe in Secular Stagnation By Christopher G. Gibbs
  4. Is Business Cycle Asymmetry Intrinsic in Industrialized Economies? By James Morley; Irina B Panovska
  5. The Fallacy of the Fiscal Theory of the Price Level - Once More By Buiter, Willem H.
  6. The role of the inflation target adjustment in stabilization policy By Yunjong Eo; Denny Lie
  7. Instability, imprecision and inconsistent use of equilibrium real interest rate estimates By Beyer, Robert; Wieland, Volker
  8. Should a Government Fiscally Intervene in a Recession and, If So, How? By Harashima, Taiji
  9. Abstract: This paper employs a Structural Vector Autoregression approach à la Blanchard and Perotti (2002) to investigate the impact of discretionary fiscal policy shocks on key macroeconomic variables in Malta. In order to gauge the quantitative impact of fiscal policy over the period 1995 to 2012, impact and cumulative multipliers are calculated. The response of GDP to government expenditure shocks and its components is low on impact but larger than one cumulatively. Moreover, private consumption responds positively to shocks in government spending, while private investment declines after a positive innovation to government expenditure. By Ian Borg
  10. Fiscal Surprises at the FOMC By Dean Croushore; Simon van Norden
  11. SVAR Approach for Extracting Inflation Expectations Given Severe Monetary Shocks: Evidence from Belarus By Dzmitry Kruk
  12. Term Structure of Interest Rates: Macro-Finance Approach By Zbynek Stork
  13. Explaining the Recent Behavior of Inflation in the United States By Robert Murphy
  14. How the central banks' reaction function in SOE evolved during the crisis By Aleksandra Halka
  15. Estimating DSGE models with Zero Interest Rate Policy By Mariano Kulish; James Morley; Tim Robinson
  16. Uncertainty shocks, asset supply and pricing over the business cycle By Bianchi, Francesco; Ilut, Cosmin; Schneider, Martin
  17. Risk Premium Shifts and Monetary Policy: A Coordination Approach By Stephen Morris; Hyun Song Shin
  18. Boucle rétroactive entre la volatilité des flux de capitaux et la stabilité financière : résultat pour la République démocratique du Congo By Pinshi Paula, Christian
  19. The role of fractional-reserve banking in amplifying credit booms: evidence from panel data By Maciej Albinowski
  20. Deflating Inflation Expectations: The Implications of Inflation's Simple Dynamics By Cecchetti, Stephen G; Feroli, Michael; Hooper, Peter; Kashyap, Anil K; Schoenholtz, Kermit
  21. Determination of the Dynamic Interaction between of Macro-Prudential and Monetary Policy Mix in Nigeria: A Structural Analysis By Abidemi Abdulsalam; Moses K. Tule; Eunice N. Egbuna; Joseph Tawose
  22. The Effects of Productivity and Benefits on Unemployment: Breaking the Link By Brown, Alessio J. G.; Kohlbrecher, Britta; Merkl, Christian; Snower, Dennis J.
  23. Bond Yield Spillovers from Major Advanced Economies to Emerging Asia By Ulrich Volz; Ansgar Belke; Irina Dubova
  24. Bond Yield Spillovers from Major Advanced Economies to Emerging Asia By Ansgar Belke; Irina Dubova; Ulrich Volz
  25. From Fiscal Austerity towards Growth-Enhancing Fiscal Policy in Ukraine By Tetiana Bogdan; Vladimir Gligorov; Peter Havlik; Michael Landesmann
  26. The effects of income distribution and fiscal policy on growth, investment and budget balance: the case of Europe By Thomas Obst; Özlem Onaran; Maria Nikolaidi
  27. The Household Expenditure Response to a Consumption Tax Rate Increase By David B. Cashin
  28. Measuring Debt Burden By Sofya Donets; Alexey Ponomarenko
  29. Long-term Interest Rate Spillovers from Major Advanced Economies to Emerging Asia By Ansgar Belke; Irina Dubova; Ulrich Volz
  30. On the Exposure of the BRIC Countries to Global Economic Shocks By Belke, Ansgar H.; Dreger, Christian; Dubova, Irina
  31. Nowcasting of the Russian GDP Using the Current Statistics: Approach Modification By Yury Achkasov
  32. Monetary transmission under competing corporate finance regimes = Transmisión monetaria bajo regímenes alternativos de finanzas corporativas By Paul de Grauwe; Eddie Gerba
  33. Comparison of Various Business Cycle Models for Pakistan By M. Ali Choudhary; Sajawal Khan; Farooq Pasha
  34. Post-2008 Brazilian Fiscal Policy: an Interpretation through the Analysis of Fiscal Multipliers By Alejandro C. Garcia-Cintado; Celso Jose Costa Junior (; Armando Vaz Sampaio (
  35. Financial frictions and the real economy By Mario Pietrunti
  36. Bank Capital Redux: Solvency, Liquidity, and Crisis By Jordà, Òscar; Richter, Björn; Schularick, Moritz; Taylor, Alan M.
  37. Business cycles in an oil economy By Drago Bergholt; Vegard H Larsen; Martin Seneca
  38. Real-time determination of credit cycle phases in emerging markets By Elena Deryugina; Alexey Ponomarenko
  39. The Effect of Central Bank Liquidity Injections on Bank Credit Supply By Luisa Carpinelli; Matteo Crosignani
  40. Trade-off between Inflation, Interest and Unemployment Rate of Pakistan: Revisited By Arshad, Sumera; Ali, Amjad
  41. Can Italy grow out of its NPL overhang? A panel threshold analysis By Kamiar Mohaddes; Mehdi Raissi; Anke Weber
  42. How does monetary policy pass-through affect mortgage default? Evidence from the Irish mortgage market By Byrne, David; Kelly, Robert; O'Toole, Conor
  43. Determinants of stock-bond market comovement in the Eurozone under model uncertainty By Skintzi, Vasiliki
  44. Fully Modified HP Filter By Muhammad Nadim Hanif; Javed Iqbal; M. Ali Choudhary
  45. Welfare: Savings not Taxation By Douglas, Roger; MacCulloch, Robert
  46. Euler Equations, Subjective Expectations and Income Shocks. By Attanasio, Orazio; Kovacs, Agnes; Molnar, Krisztina
  47. Sectoral Labor Mobility and Optimal Monetary Policy By Alessandro Cantelmo; Giovanni Melina
  48. The Employment Effects of Countercyclical Infrastructure Investments By Buchheim, Lukas; Watzinger, Martin
  49. Asymmetric consumption effects of transitory income shocks By Dimitris Christelis; Dimitris Georgarakos; Tullio Jappelli; Luigi Pistaferri; Maarten van Rooij
  50. Моделирование реального курса рубля в условиях изменения режима денежно-кредитной политики By Polbin, Andrey
  51. Understanding Inflation in Malawi; A Quantitative Investigation By Dong Frank Wu
  52. The Economics of German Unification after Twenty-five Years: Lessons for Korea By Michael C. Burda; Mark Weder
  53. Impact of Government Borrowing on Financial Development (A case study of Pakistan) By Ali, Amjad; Ahmad, Farooq; Ur- Rahman, Fazal
  54. Central Bank Design in a Non-optimal Currency Union A Lender of Last Resort for Government Debt? By Peter Spahn
  55. The Limits of Political Compromise: Debt Ceilings and Political Turnover By Cunha, Alexandre B.; Ornelas, Emanuel
  56. End of 9-Endings, Price Recall, and Price Perceptions By Snir, Avichai; Levy, Daniel; Chen, Haipeng (Allan)
  57. An Empirical Economic Assessment of the Costs and Benefits of Bank Capital in the US By Simon Firestone; Amy Lorenc; Benjamin Ranish
  58. Deposit dollarization in emerging markets: modelling the hysteresis effect By Anna Krupkina; Alexey Ponomarenko
  59. The risks of exit from the EMU and the EU (in Italian) By Giuseppe Marotta
  60. The Effects of Chinese Interest Rates and Inflation: A Decomposition of The Fisher Effect By Bosupeng, Mpho
  61. Performance Comparison of Modified HP Filter, Wavelet Analysis and Empirical Mode Decomposition for Smoothing Macroeconomic Time Series By Javed Iqbal; Muhammad Nadim Hanif
  62. 企業別R&D投資の計測とMultiple q ―日本の上場企業に関する資本財別投資行動の分析― By 外木, 暁幸; 外木, 好美
  63. The Great Irish (De)Leveraging 2005-14 By Lydon, Reamonn; McIndoe-Calder, Tara
  64. Nowcasting and Short-Term Forecasting of Russian GDP with a Dynamic Factor Model By Alexey Porshakov; Elena Deryugina; Alexey Ponomarenko; Andrey Sinyakov
  65. The nonlinear nature of country risk. By Jacek Kotłowski; Michał Brzoza-Brzezina
  66. Shadow banking out of the shadows: non-bank intermediation and the Italian regulatory framework By Carlo Gola; Marco Burroni; Francesco Columba; Antonio Ilari; Giorgio Nuzzo; Onofrio Panzarino
  67. Deposit Insurance and Reinsurance: A General Equilibrium Perspective By Gersbach, Hans; Haller, Hans; Volker, Britz
  68. Globalization and Inclusive Human Development in Africa By Asongu, Simplice; Nwachukwu, Jacinta
  69. Flight to liquidity and systemic bank runs By Roberto Robatto
  70. A note on money creation in emerg-ing market economies By Alexey Ponomarenko
  71. Effects of the Entry and Exit of Products on Price Indexes By Abe, Naohito; Inakura, Noriko; Tonogi, Akiyuki
  72. Crises: Equilibrium Shifts and Large Shocks By Stephen Morris; Muhamet Yildiz
  73. Competitive Tax Reforms in a Monetary Union with Endogenous Entry and Tradability By Stéphane Auray; Aurélien Eyquem; Xiaofei Ma
  74. Food Price Shocks and Government Expenditure Composition: Evidence from African Countries By Carine Meyimdjui
  75. Investigating the presence of long memory in debt series and its relation with growth By Joao Sousa Andrade; Irina Syssoyeva-Masson
  76. Policy Distortions and Aggregate Productivity with Endogenous Establishment-Level Productivity By Jose-Maria Da-Rocha; Marina Mendes Tavares; Diego Restuccia
  77. Egalitarian Policies and Effective Demand: Considering Balance of Payments By Taro Abe
  78. Debt Problem and Secular Stagnation (Japanese) By KOBAYASHI Keiichiro
  79. Pulling up the Tarnished Anchor: The End of Silver as a Global Unit of Account By Fernholz, Ricardo; Mitchener, Kris James; Weidenmier, Marc
  80. What drives the labour wedge? A comparison between CEE countries and the Euro Area By Malgorzata Skibinska
  81. An Automatic Leading Indicator Based Growth Forecast For 2016-17 and The Outlook Beyond. By Chakravartti, Parma; Mundle, Sudipto
  82. Estimating Liquidity Created by Banks in Pakistan By Sabahat
  83. Dynamic CGE model of the Chinese Economy for Policy Analysis By Keshab Raj Bhattarai
  84. Das Rätsel der Niedrigzinsphase By Homburg, Stefan; Knolle, Julia
  85. Reguler la liquidité des actifs risqués By Anne-Marie Rieu-Foucault
  86. Non-performing loans and the supply of bank credit: evidence from Italy By Matteo Accornero; Piergiorgio Alessandri; Luisa Carpinelli; Alberto Maria Sorrentino
  87. Policy Responses of the ECB in Managing the Euro Crisis and its Evolutionary Role By Kang , Yoo-Duk
  88. Markups and markdowns By Mauro Caselli; Stefano Schiavo; Lionel Nesta
  89. 우크라이나 위기 발발 이후 러시아 경제상황 변화와 정책 시사점 (A Study on Changes in the Russian Economy Following the Outbreak of the Ukrainian Crisis and Its Implications ) By Park , Joungho; Sung , Weon-Yong; Kang , Boogyun
  90. Oil, equities, and the zero lower bound By Deepa Datta; Benjamin K Johannsen; Hannah Kwon; Robert J Vigfusson
  91. Causes and Features of Economic Downturn in Belarus: the Role of Structural Factors By Dzmitry Kruk
  92. The spread of branch banking and the demand for cash in post-war Germany By Malte Krüger
  93. Economic vulnerabilities in Italy: A network analysis using similarities in sectoral employment By Castagna, Alina; Chentouf, Leila; Ernst, Ekkehard
  94. Formalization of Chilean banking activity in the second half of the 19th century By Ross, Cesar
  95. Econometric evaluation of the dependence of factors influencing oil prices By Yadulla Hasanli; Adalat Muradovd; Yadulla Hasanli; Nazim Hajiyev
  96. Global health financing towards 2030 and beyond By Trygve Ottersen; David B. Evans; Elias Mossialos; John-Arne Røttingen

  1. By: Haberis, Alex (Bank of England); Harrison, Richard (Bank of England); Waldron, Matthew (Bank of England)
    Abstract: We explore the effects of forward guidance at the zero lower bound when there is uncertainty over the lift-off date arising from: (i) the imperfect credibility of time- inconsistent forward-guidance promises; (ii) incomplete communication. We use a simple New Keynesian model to demonstrate that a forward guidance announcement to delay lift-off may be no more powerful in a more interest rate sensitive economy. We also demonstrate that attempts to delay lift-off further may fail to generate additional stimulus if the temptation to renege on the announcement is sufficiently great. In an empirical application, we consider counterfactual policy experiments based on the Federal Open Market Committee’s ‘threshold-based’ forward guidance, in which we link the probability of lift-off to the amount by which the announced unemployment threshold is breached. We show that a more precise articulation of the lift-off conditions requires a lower unemployment threshold in order to deliver the same amount of stimulus as a less precise one.
    Keywords: Forward guidance; uncertainty; zero lower bound
    JEL: E12 E17 E20 E30 E42 E52
    Date: 2017–03–31
  2. By: Tweneboah Senzu, Emmanuel
    Abstract: The paper seeks to solve the macroeconomic error. The error that has over the years emerged from the dispensing of the monetary policy by African Central Banks. These monetary policies have refused to address the desired economic growth expected by individual developing and underdeveloped countries. The paper conclusively present a new mathematical model to determine the exact health status of an economy in developing and underdeveloped countries in Africa.
    Keywords: Monetary Economics, Monetary Policy, Fiscal Policy, Macroeconomics, Developmental Economics
    JEL: E2 E24 E26 E27 E5 E52 E58
    Date: 2016–10–31
  3. By: Christopher G. Gibbs (School of Economics, UNSW Business School, UNSW)
    Abstract: This paper shows that a secular stagnation equilibrium as proposed by Eggertsson and Mehrotra (2014) is E-stable. This is in contrast to the often studied liquidity trap equilibrium that exists in representative agent New Keynesian models at the zero lower bound when there is active monetary policy following a Taylor rule. This result reconciles the observed stable low growth and low inflation outcomes since the end of the Global Financial Crisis with the instability predicted by the New Keynesian model using a standard modeling framework. The stability of the secular stagnation equilibrium is due to the assumption of downwardly rigid nominal wages and overlapping generations. At the zero lower bound, the wage friction determines the price level and makes inflation a predetermined variable, while overlapping generations weakens the negative relationship between expected output and the real interest rate.
    Keywords: Secular stagnation, Expectations, Adaptive learning, Zero lower bound
    JEL: E31 E32 E52 D83 D84
    Date: 2017–02
  4. By: James Morley (University of New South Wales); Irina B Panovska (Lehigh University)
    Abstract: We consider a model-averaged forecast-based estimate of the output gap to measure economic slack for ten industrialized economies. Our measure takes changes in the long-run growth rate into account and, by accounting for model uncertainty using equal weights on different forecast-based estimates, is robust to different assumptions about the underlying structure of the economy. For each country, we find that the estimated output gap is highly asymmetric, with much larger negative movements during recessions than positive movements in expansions, suggesting that this particular form of business cycle asymmetry is an intrinsic characteristic of industrialized economies. Furthermore, the estimated output gap is strongly negatively correlated with future output growth and unemployment and positively correlated with capacity utilization in each case. It also implies a convex Phillips Curve in many cases.
    Keywords: output gap; model averaging; business cycle asymmetry; convex Phillips Curve
    JEL: E32 E37
    Date: 2017–01
  5. By: Buiter, Willem H.
    Abstract: Necessary conditions for valid dynamic general equilibrium analysis include: (1) the number of equations equals the number of unknowns; (2) the number of state variables equals the number of boundary conditions; (3) if (1) and (2) hold, the resulting solution(s) make sense. The fiscal theory of the price level fails on all three counts, both away from and at the ELB. The underlying fallacy is the confusion of the intertemporal budget constraint of the State with a misspecified government bond pricing equilibrium equation. This means overdetermined systems unless (a) the price level is flexible, (b) the interest rate is the monetary policy instrument and (c) there is a non-zero stock of nominal government bonds. Thus, a sticky price level or a nominal money stock rule imply inconsistency. When all three conditions are satisfied, unacceptable anomalies occur: negative price levels; the FTPL can price money when money does not exist; the logic of the FTPL applies equally to the intertemporal budget constraint of any household; when the bond pricing equation is specified correctly, there is no FTPL. The FTPL has nothing to do with monetary vs. fiscal dominance or active v. passive fiscal policy. The FTPL implies government debt is never a problem; the price level takes care of it, and not through unanticipated inflation or financial repression. If acted upon by fiscal authorities, the consequences could be severe. There is a correct fiscal theory of seigniorage. The issuance of return-dominated and/or irredeemable central bank money creates fiscal space and ensures that a combined monetary-fiscal stimulus always boosts nominal aggregate demand.
    Keywords: equilibrium bond pricing equation; fiscal dominance.; Fiscal theory of the price level; intertemporal budget constraint; monetary and fiscal policy coordination
    JEL: E31 E40 E50 E58 E62 H62 H63
    Date: 2017–03
  6. By: Yunjong Eo; Denny Lie
    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 findings can be summarized as follows. First, we find that the welfare cost of a standard Taylor rule is non-trivial, even with optimized policy coefficients. 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 significantly 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
    JEL: E12 E32 E58 E61
    Date: 2017–04
  7. By: Beyer, Robert; Wieland, Volker
    Abstract: The current debate on monetary and fiscal policy is heavily influenced by estimates of the equilibrium real interest rate. In particular, this concerns estimates derived from a simple aggregate demand and Phillips curve model with time-varying components as proposed by Laubach and Williams (2003). For example, Summers (2014a) refers to these estimates as important evidence for a secular stagnation and the need for fiscal stimulus. Yellen (2015, 2017) has made use of such estimates in order to explain and justify why the Federal Reserve has held interest rates so low for so long. First, we re-estimate the U.S. equilibrium rate with the methodology of Laubach and Williams (2003). Then, we build on their approach and the modifications proposed in Mésonnier and Renne (2007) and Garnier and Wilhelmsen (2009) to provide new estimates for the United States, the euro area and Germany. Third, we subject these estimates to a battery of sensitivity tests. Due to the great uncertainty and sensitivity that accompany these equilibrium rate estimates, the observed decline in the estimates is not a reliable indicator of a need for expansionary monetary and fiscal policy. Yet, if these estimates are employed to determine the appropriate monetary policy stance, such estimates are better used together with the consistent estimate of the level of potential output.
    Keywords: equlibrium real interest rate; estimation; monetary policy
    JEL: E40 E43 E52
    Date: 2017–03
  8. By: Harashima, Taiji
    Abstract: The validity of discretionary fiscal policy in a recession will differ according to the cause and mechanism of recession. In this paper, discretionary fiscal policy in a recession caused by a fundamental shock that changes the steady state downwards is examined. In such a recession, households need to discontinuously increase consumption to a point on the saddle path to maintain Pareto efficiency. However, they will not “jump” consumption in this manner and instead will choose a “Nash equilibrium of a Pareto inefficient path” because they dislike unsmooth and discontinuous consumption and behave strategically. The paper concludes that increasing government consumption until demand meets the present level of production and maintaining this fiscal policy for a long period is the best option. Consequent government debts can be sustainable even if they become extremely large.
    Keywords: Discretionary Fiscal policy; Recession; Government consumption; Government debts; Pareto inefficiency; Time preference
    JEL: E20 E32 E62 H20 H30 H63
    Date: 2017–04–02
  9. By: Ian Borg (Central Bank of Malta Fiscal multipliers in Malta)
    JEL: E32 E62 H20 H50
  10. By: Dean Croushore; Simon van Norden
    Abstract: This paper provides an detailed examination of a new set of fiscal forecasts for the U.S. assembled by Croushore and van Norden (2017) from FOMC briefing books. The data are of particular interest as (1) they afford a look at fiscal forecasts over six complete business cycles and several fiscal policy regimes, covering both peacetime and several wars, (2) the forecasts were precisely those presented to monetary policymakers, (3) they include frequently-updated estimates of both actual and cyclically-adjusted deficits, (4) unlike most other US fiscal forecasts, they were neither partisan nor constrained by unrealistic assumptions about future fiscal policy, and (5) forecasts for other variables (GDP growth, inflation) from the same forecasters are known to compare favorably to most other available forecasts. We detail the performance of forecast federal expenditures, revenues, surpluses and structural surpluses in terms of accuracy, bias and efficiency. We find that (1) fiscal forecast errors can be economically large, even at relatively short forecast horizons, (2) while the accuracy of unemployment rate forecast errors improved after 1990, that of most fiscal variables deteriorated considerably, (3) there is limited evidence of forecast bias, and most of this evidence is confined to the period before 1993, (4) the forecasts appear to be efficient with respect to both the Fed Funds rate and CBO projections, and (5) cyclically-adjusted deficit forecasts appear to be over-optimistic around both business cycle peaks and troughs.
    Keywords: fiscal policy, deficits, forecasting, FOMC, Greenbook,
    JEL: E62 H68
    Date: 2017–04–05
  11. By: Dzmitry Kruk
    Abstract: Inflation expectations play a crucial role for macroeconomic dynamics and more specifically for monetary environment. However, inflation expectations is an unobservable variable. So, the quality of the correspondent measure in a great extent predetermines its feasibility for macroeconomic analysis. Today, survey-based measures of inflation expectations prevail in macroeconomic analysis. However, the drawbacks and/or unavailability of such measures give a rise to other identification strategies. Extracting inflation expectations from the actual data (e.g. series of interest rate and actual inflation) basing on SVAR identification approach has become a valuable alternative/supplement for measuring inflation expectations. In this paper I show that the existing strategy of inflation expectations identification through SVAR approach is very sensitive to the state of monetary environment. When a monetary environment is unstable (e.g. high and volatile inflation), the assumptions of the baseline approach are not hold, and it produces biased estimations. I emphasize two sources of this bias in estimations and suggest procedure for obtaining unbiased estimates. My identification strategy includes a number of steps. I suggest applying Markov regimeswitching framework for extracting an unbiased mean for ex ante real interest rate. Further, I use two-stage SVAR identification strategy. First, I identify an unexpected shock to actual inflation, which is crucial for obtaining a proper measure of inflation expectations. Further, I net the series of ex post interest rate from this ?noise?. Second, I run a baseline SVAR procedure, for which I use the data adjusted at the first step. Finally I obtain an unbiased and informatively rich series of inflation expectations.
    Keywords: inflation expectations, monetary shock, SVAR identification, Markov regime-switching model, Belarus
    JEL: C22 C32 C82 E43 E47
    Date: 2016–12
  12. By: Zbynek Stork
    Abstract: Paper focuses on macro-finance models that try to analyze and explain yield curve and its dynamics using macroeconomic variables as underlying factors. These models represent a growing part of financial economics having implications for both, macro and financial models. This work is an update of my monography on this topic (STORK, Zbynek. Term Structure of Interest Rates: Macro-Finance Approach. 2014). The aim of the paper is in twofold. First, it shows the possibility to come up with a consistent derivation of financial model, including yield curve using Dynamic Stochastic General Equilibrium Approach. Second, using this approach, the structural macro-finance model is able to fit real yield curve data. The paper also demonstrates that analysis of macroeconomic shocks to yield term structure should be of importance mainly for economic policy authorities that are already using DSGE models for their macro analysis. Although these institutions already work with various financial analytical tools, results of such a complex model would be consistent with macro forecasts and could serve as a benchmark. Macro-finance modelling that tries to connect these two spheres has been growing quite quickly. Attempts to derive dynamics of the yield curve usually employ Vector-Autoregression (VAR), which unfortunately do not tell much about an economic structure. In this sense, structural models are more useful and allow for better interpretability of results. The study introduces rather simple, four-equation DSGE model including blocks of households, firms, government and central bank. Solution of the macro part serves as an input to financial model. Mutual consistency is fulfilled in derivation of pricing kernel equation, which is a central point for deriving yield term structure. In this approach, it is done using macroeconomic variables and structural parameters only. Therefore, it is not necessary to rely on latent factors, as in case of VAR, that are difficult to interpret directly. Having derived such a model, it allows to estimate effects of basic macroeconomic variables such as the private and the government consumption, the short term interest rate and the inflation rate on the term structure of interest rates. Derived structural macro-finance model is able to fit an average yield curve observed in the data. Further, in case of Central Bank, simple analysis can give a notion to what extent will an economic situation have impact on different parts of yield curve and how long are these influences likely to persist. Since monetary policy is able to have an effect rather on a short end of the yield curve, it can indicate whether to respond to a particular shock or not. And possibly how costly it might be. The case of fiscal authority is for the purpose of illustration very simplified, so it is more an academic example. However, it shows an essence of the issue, i.e. that for debt management it is crucial to understand the relationship between real economy and yield term structure, since it is important for maturity distribution of the debt. Very simple calculations show how costs of debt are affected when certain economic shocks take place.
    Keywords: USA, General equilibrium modeling, Finance
    Date: 2016–07–04
  13. By: Robert Murphy
    Abstract: Standard models relating price inflation to measures of slack in the economy suggest that the United States should have experienced an episode of deflation (falling prices) during the Great recession and the subsequent sluggish recovery. But although inflation reached very low levels, prices continued to rise rather than fall. More recently, these standard models suggest inflation should have increased as the unemployment rate declined and labor markets tightened, but inflation has remained well below the Federal Reserve’s policy target. These modern Phillips curve models, which incorporate expectations about future inflation, have in the past performed reasonably well in forecasting inflation. The failure of these models during the last several years presents a troubling finding both for economists’ understanding of inflation and for policymakers’ ability to ensure steady growth and low (but positive) inflation. My paper uses econometric methods to estimate modified versions of the modern Phillips curve model of inflation. The paper assesses three hypotheses as potential explanations for why traditional Phillips curve models have performed poorly in recent years. One hypothesis argues that the flexibility of prices varies with the level and variability of inflation, so a stable, low-inflation environment may cause inflation to be less responsive to slack in the economy. A second hypothesis points to the public’s expectations becoming anchored at a positive level of inflation because of confidence in the Federal Reserve’s ability to keep inflation above zero. A third hypothesis emphasizes increased regional synchronization of the business cycle as a factor reducing the responsiveness of inflation to slack. The paper considers the extent to which each of these hypotheses may be important for explaining the recent behavior of inflation. My preliminary results indicate that core inflation has become less responsive to measures of slack in the economy due primarily to increased synchronization of regional business cycles. This represents a possible reason why traditional Phillips curve forecasts showing core inflation rising to the Fed's target have been incorrect over the past few years even as the labor market tightened. I explore explanations for why the increased synchronization of regional business cycles might cause the slope of the Phillips curve to vary over time, focusing on implications of the sticky-price and sticky-information approaches to price adjustment. These implications suggest that the inflation environment and uncertainty about regional economic conditions should influence the slope of the Phillips curve. I introduce proxies to account for these effects and find that a Phillips curve modified to allow its slope to vary with uncertainty about regional economic conditions can best explain the recent path of inflation.
    Keywords: United States, Macroeconometric modeling, Monetary issues
    Date: 2016–07–04
  14. By: Aleksandra Halka
    Abstract: The outbreak of the global financial crisis made the central banks to admit that keeping inflation within the target is not sufficient to stabilize the economy. Apart from price stability they should also care about financial and macroeconomic stability. To achieve this central banks should look not only at inflation but also at other variables. Economists agree broadly that inflation targeting framework should be realized in more flexible way in terms of both: paying more attention to output growth and allowing inflation to return to the target in longer horizon. The central bankers admitted that in some cases stabilizing the economy, may require inflation to deviate from the target for an extended period of time. This more flexible approach may be reflected in the modification of the way monetary policy is conducted and hence in the central banks' reaction function. The aim of this paper is to check empirically whether selected European central banks in small open economies outside the euro area, conducting autonomous monetary policy changed the way the monetary policy is conducted - whether central banks enhanced the flexibility of their inflation targeting strategy during the crisis. I investigate the reaction functions of the selected central banks using the ordered logit model to account for the unconventional monetary measures introduced by the central banks. The explanatory variables are the CPI and GDP growth forecasts published by four central banks in European small open economies which conduct autonomous monetary policy and are inflation targeters. The dependent variable is the change of the monetary policy stance reflected in changes of the policy rate and/or unconventional monetary policy measures. The results indicate that all analyzed banks have changed their way of setting interest rates, however in each case the change is different. The Czech central bank (CNB) extended the CPI forecast horizon which it takes into consideration when setting the interest rate. Additionally the its monetary stance became more accommodative. The Hungarian central bank (MNB) increased the weight put on the GDP growth after the outbreak of the global financial crisis. Similarly to the CNB, the MNB started to conduct more accommodative monetary policy. Although in the case of the Polish central bank (NBP) we do not observe changes of the forecast horizon, this bank also started to put more weight on the GDP growth forecast as compared to CPI forecast. Besides, the NBP's monetary policy has become more accommodative. In the case of the Swedish central bank, we do not observe an increase of the importance of the GDP growth, however there is an extension of the CPI forecast horizon which it takes into consideration when setting the interest rate. The results show that all the banks are ready to accept an extended period or larger deviations of inflation from the target in order to maintain the stability of the whole economy and become more flexible inflation targeters
    Keywords: The Czech Republic, Hungary, Poland, Sweden, Monetary issues, Macroeconometric modeling
    Date: 2016–07–04
  15. By: Mariano Kulish (School of Economics, Australian School of Business, the University of New South Wales); James Morley (School of Economics, Australian School of Business, the University of New South Wales); Tim Robinson (Melbourne Institute of Applied Economics and Social Research, University of Melbourne)
    Abstract: We propose an approach to estimating structural models in which the central bank holds the policy rate fixed for an extended period of the estimation sample. Embedding this policy in a version of the Smets and Wouters (2007) model that incorporates information from the yield curve to help with identification at the zero lower bound, we jointly estimate the structural parameters for the period of 1983-2014 and the expected duration of the zero interest rate policy in each quarter since 2009. This allows us to assess the effects of the zero lower bound, in particular, how private agents' beliefs about its duration influence output, inflation and interest rates at longer maturities. We find considerable variation in the expected duration over time, with a large increase in 2011 when the Federal Reserve moved to calendar-based forward guidance and a similar decrease in 2013 with the so-called `Taper tantrum'. We also measure the severity of the zero lower bound as a constraint and quantify the associated output losses. Conditional forecasts from the model suggest that a longer expected duration corresponds to higher output growth in the near term, with offsetting lower growth at the time of expected liftoff. Impulse response analysis confirms that an exogenous change in the expected duration has significant effects on the real economy.
    Keywords: zero lower bound, forward guidance, Bayesian estimation.
    JEL: E52 E58
    Date: 2016–10
  16. By: Bianchi, Francesco; Ilut, Cosmin; Schneider, Martin
    Abstract: This paper estimates a business cycle model with endogenous financial asset supply and ambiguity averse investors. Firms' shareholders choose not only production and investment, but also capital structure and payout policy subject to financial frictions. An increase in uncertainty about profits lowers stock prices and leads firms to substitute away from debt as well as reduce shareholder payout. This mechanism parsimoniously accounts for postwar comovement in investment, stock prices, leverage and payout, at both business cycle and medium term cycle frequencies. Ambiguity aversion permits a Markov-Switching VAR representation of the model, while preserving the effect of uncertainty shocks on the time variation in the equity premium.
    Keywords: Asset Pricing; Business cycle; DSGE; Markov-switching
    JEL: C32 E32 G12
    Date: 2017–04
  17. By: Stephen Morris (Princeton University); Hyun Song Shin (Bank for International Settlements)
    Abstract: We explore a global game model of the impact of monetary policy shocks. Risk-neutral asset managers interact with risk-averse households in a market with a risky bond and a floating rate money market fund. Asset managers are averse to coming last in the ranking of short-term performance. This friction injects a coordination element in asset managers’ portfolio choice that leads to large jumps in risk premiums in response to small future anticipated changes in central bank policy rates. The size of the asset management sector is the key parameter determining the extent of market disruption to monetary policy shocks.
    Keywords: market liquidity, risk-taking channel, runs
    JEL: E43 E52 E58
    Date: 2015–12
  18. By: Pinshi Paula, Christian
    Abstract: Financial system being the place of metting capital flows (equality between saving and investment), a volatility of capital flows can destroy the robustness and good working of financial system, it means subvert financial stability. The same a weak financial system, few regulated and bad manage can exacerbate volatility of capital flows and finely undermine financial stability. The present study provides evidence on feedback effect between volatility of capital flows and financial stability in Democratic republic of Congo (DRC), and estimate the contributions of macroeconomic and macroprudential policies in the attenuation volatility of capital flows effects on financial stability and in the prevention of instability financial. Assessment dynamic regression model a la Feldstein-Horioka we showed that financial system is widely supplied and financed by internationals capital flows. This implicate Congolese economy is financially mobile, that can be dangerous for financial stability. The study dynamic econometric of financial system’s absolute size, we stipulate financial system has a systemic weight on real economy. Hence a shock of financial system could have devastating effects on Congolese economy. We estimate a vector autoregressive (VAR) model for prove the bilateral causality and impacts of macroeconomic and macroprudential policies. With regard to results, it proved on the one there is a feedback effect between volatility of capital flows and financial stability, on the other hand macroeconomic and macroprudential policies can’t attenuate volatility of capital flows and prevent instability financial. It prove macroprudential approach is given a better result than monetary policy. The implementation of framework macroprudential by Central Bank of Congo will be beneficial in the realization of financial stability and attenuation volatility of capital flows.
    Keywords: Volatility of capital flows, financial stability, macroeconomic and macroprudential policies
    JEL: E58 F32 G18
    Date: 2016–10–29
  19. By: Maciej Albinowski
    Abstract: I use panel data on 20 countries to analyze the links between savings (defined as time deposits and savings accounts) and credit extended by banks. Credit growth is not related to prior changes in savings, at least not in the short run. This result indicates that the intuition behind the loanable funds theory does not work well in explaining macroeconomic dynamics. I also find that the share of savings in total deposits is positively affected by cyclical upswings in the GDP, which is consistent with the permanent income hypothesis. Most interestingly, however, the share of savings decreases during credit booms. The existence of such an effect is predicted by the Austrian theory of the business cycle. Based on the above results, I infer that an important disadvantage of fractional-reserve banking is a tendency for the market interest rate to diverge from the natural interest rate. In this paper I also propose a new method of credit boom identification that captures the timing of booms more adequately than the procedures commonly used in the literature.
    Keywords: loanable funds, deposits, credit booms, fractional-reserve banking
    JEL: E51 E32 E41
    Date: 2017–03
  20. By: Cecchetti, Stephen G; Feroli, Michael; Hooper, Peter; Kashyap, Anil K; Schoenholtz, Kermit
    Abstract: This report examines the behavior of inflation in the United States since 1984 (updating Cecchetti et al. (2007)). Over this period, the change in inflation is negatively serially correlated, and the change in inflation is best predicted by a statistical model that includes only information from the two most recent quarters. We find that the level of inflation fluctuates around a slowly changing trend that we call the local mean of inflation. Few variables add extra explanatory power for inflation once the local mean is taken into account. This local mean is itself well characterized by a random walk. Labor market slack has a statistically significant, but quantitatively small, effect on the local mean and inflation expectations have no effect. Some financial conditions that are influenced by monetary policy have larger effects on the local mean. Concretely, this means that one-off moves in labor market slack or inflation expectations that are not mirrored in broader indicators of inflation pressures are unlikely to be predictive of changes in trend inflation.
    Keywords: Federal Open Market Committee; FOMC; inflation dynamics; Inflation expectations; inflation target; inflation trend; monetary policy; Philip Curve; price stability; US Monetary Policy Forum
    JEL: E31 E52
    Date: 2017–03
  21. By: Abidemi Abdulsalam; Moses K. Tule; Eunice N. Egbuna; Joseph Tawose
    Abstract: This study develops and estimates a structural open economy model using Bayesian technique to examine the outcomes of monetary policy, financial policy and the interaction between financial and monetary policy instruments on key macroeconomic variable in Nigeria. The study utilizes quarterly data covering the period of 2007Q1 - 2015Q4. The results indicate that shocks to oil price, cash reserve ratio, macro-prudential index (capital adequacy ratio, liquidity ratio and loan-to-deposit ratio), monetary policy rate and fiscal deficit impacted on output growth, inflation, external reserves, exchange rate and credit conditions in Nigeria. It therefore implies that a positive shock to the policy rate and cash reserves ratio in Nigerian will cause a temporary appreciation in the exchange rate, increase external reserves and inflation, while output growth and credit would decline in the short run. Our findings reveal that oil price shocks tend to heighten economic agents' sensitivity to exchange rate and drive the motivation for excessive fiscal spending. Similarly, external reserves and output growth tend to worsen as a result of downward oil price shocks. A structural open economy model using Bayesian technique. The result indicates that shocks to monetary policy rate, exchange rate, macro prudential index, oil price and fiscal deficit impacted on output growth, exchange rate and credit conditions in Nigeria. It therefore implies that a positive shock to policy rate and cash reserves ratio in Nigerian economy will cause temporary appreciation of exchange rate, increase in external reserve and inflation, while output growth and credits decline in the short run. Our findings also reveal that oil price shocks tend to heighten economic agents’ sensitivity to exchange rate and drive the motivation for excessive fiscal spending. Similarly, external reserve and output growth tend to worsen as a result of oil price shock. The study recommends economic diversification from oil, enforcement of monetary and prudential policy instrument appears to check instability in macroeconomic variables.
    Keywords: Nigeria, Monetary issues, Macroeconometric modeling
    Date: 2016–07–04
  22. By: Brown, Alessio J. G.; Kohlbrecher, Britta; Merkl, Christian; Snower, Dennis J.
    Abstract: In the standard macroeconomic search and matching model of the labor market, there is a tight link between the quantitative effects of (i) aggregate productivity shocks on unemployment and (ii) unemployment benefits on unemployment. This tight link is at odds with the empirical literature. We show that a two-sided model of labor market search where the household and firm decisions are decomposed into job offers, job acceptances, firing, and quits can break this link. In such a model, unemployment benefits affect households’ behavior directly, without having to run via the bargained wage. A calibration of the model based on U.S. JOLTS data generates both a solid amplification of productivity shocks and a moderate effect of benefits on unemployment. Our analysis shows the importance of investigating the effects of policies on the households’ work incentives and the firms’ employment incentives within the search process.
    Keywords: Unemployment benefits,search and matching,aggregate shocks,macro models of the labor market
    JEL: E24 E32 J63 J64
    Date: 2017
  23. By: Ulrich Volz; Ansgar Belke; Irina Dubova (Department of Economics, SOAS, University of London, UK)
    Abstract: This paper explores the extent to which changes to long-term interest rates in major advanced economies have influenced long-term government bond yields in Emerging Asia. To gauge long-term interest spillover effects, the paper uses VAR variance decompositions with high frequency data. Our results reveal that sovereign bond yields in Emerging Asia responded significantly to changes to US and Eurozone bond yields, although the magnitudes were heterogeneous across countries. The size of spillovers varied over time. The pattern of these variations can partially be explained by the implementation of different unconventional monetary policy measures in advanced countries.
    Keywords: Long-term interest rates, bond yields, monetary policy spillovers, Emerging Asia
    JEL: E52 E58 F42
    Date: 2017–03
  24. By: Ansgar Belke; Irina Dubova; Ulrich Volz
    Abstract: This paper explores the extent to which changes to long-term interest rates in major advanced economies have influenced long-term government bond yields in Emerging Asia. To gauge long-term interest spillover effects, the paper uses VAR variance decompositions with high frequency data. Our results reveal that sovereign bond yields in Emerging Asia responded significantly to changes to US and Eurozone bond yields, although the magnitudes were heterogeneous across countries. The size of spillovers varied over time. The pattern of these variations can partially be explained by the implementation of different unconventional monetary policy measures in advanced countries.
    Keywords: Long-term interest rates, bond yields, monetary policy spillovers, Emerging Asia
    JEL: E52 E58 F42
    Date: 2017–02
  25. By: Tetiana Bogdan; Vladimir Gligorov (The Vienna Institute for International Economic Studies, wiiw); Peter Havlik (The Vienna Institute for International Economic Studies, wiiw); Michael Landesmann (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Abstract The study analyses the dynamics and the structure of Ukraine’s public finances. It assesses the medium-term impact of fiscal austerity 2014-2016, examines fiscal sustainability and estimates further fiscal adjustment efforts. It evaluates the economic and social implications of current fiscal policies especially on education, health and other social indicators. It examines the benefits and costs of the medium-term budget for 2017‑2019 with an emphasis on evolving challenges and puts forward policy recommendations aimed at a successful implementation of growth-enhancing economic reforms.
    Keywords: Ukraine, fiscal policy, impact on growth, human capital, health, poverty and inequality, fiscal multipliers, sustainability of fiscal policy measures, Ukraine’s economic reforms
    JEL: E62 E60 E65 H12 H30 H50 H62 H63 H68 P52
    Date: 2017–04
  26. By: Thomas Obst; Özlem Onaran (University of Greenwich); Maria Nikolaidi
    Abstract: This paper develops a multi-country post-Kaleckian demand-led growth model that incorporates the role of the government. One novelty of this paper is to integrate cross-country effects of both changes in income distribution and fiscal policy. The model is used to estimate econometrically the effects of income distribution and fiscal policy on the components of aggregate demand in EU15 countries. The results show that a policy mix that combines the simultaneous implementation of a pro-labour wage policy, an expansionary fiscal policy and a progressive tax policy in all EU countries leads to a significant rise in the EU15 GDP. The impact of wage policies is positive but small; the overall stimulus becomes much stronger with fiscal expansion. This policy mix leads to an improvement in the budget balance in all the EU15 countries, suggesting that expansionary fiscal policy is sustainable when it is combined with wage and progressive tax policy.
    JEL: E12 E25 E62
    Date: 2017–04
  27. By: David B. Cashin
    Abstract: This study measures the effect of an increase in Japan's Value Added Tax rate on the timing of household expenditures and consumption, which do not necessarily coincide. The analysis finds that durable and storable expenditures surged in the month prior to the tax rate increase, fell sharply upon implementation, but quickly returned to their previous long-run levels. Non-storable non-durable expenditures increased slightly in the month prior to the tax rate increase, but were otherwise unresponsive. A dynamic structural model of household consumption reveals that the observed expenditure responses were driven by stockpiling behavior, the insensitivity of durable and non-durable consumption to a change in the real interest rate, and strong complementarities between durables and non-durables. The results suggest that salient intertemporal price variation may have a large, though highly transitory impact on household expenditures.
    Keywords: Consumption ; Fiscal policy ; Intertemporal substitution ; VAT
    JEL: D12 E21 E62 E65 H24 H31
    Date: 2017–03–28
  28. By: Sofya Donets (Bank of Russia, Russian Federation); Alexey Ponomarenko (Bank of Russia, Russian Federation)
    Abstract: We analyse two debt burden measures - credit-to-GDP and debt service ratio. For that purpose we calculate equilibrium debt ratios on the basis of fundamental macroeconomic indicators and compare them with international data. We conclude that the current value of this ratio in Russia is likely to be close to the equilibrium or exceed it.
    Keywords: debt burden; equilibrium credit-to-GDP ratio; debt service ratio (DSR); Russia
    JEL: E44 E51 G01
    Date: 2015–06
  29. By: Ansgar Belke; Irina Dubova; Ulrich Volz
    Abstract: This paper explores the extent to which changes to long-term interest rates in major advanced economies have influenced long-term government bond yields in Emerging Asia. To gauge long-term interest spillover effects, the paper uses VAR variance decompositions with high frequency data. Our results reveal that sovereign bond yields in Emerging Asia responded significantly to changes to US and Eurozone bond yields, although the magnitudes were heterogeneous across countries. The magnitude of spillovers varied over time. The pattern of these variations can partially be explained by the implementation of different unconventional monetary policy measures in advanced countries.
    Keywords: Long-term interest rates, bond yields, monetary policy spillovers, Emerging Asia
    JEL: E52 E58 F42
    Date: 2016–11
  30. By: Belke, Ansgar H. (University of Duisburg-Essen); Dreger, Christian (DIW Berlin); Dubova, Irina (Ruhr Graduate School in Economics)
    Abstract: The financial crisis led to a deep recession in many industrial countries. While large emerging countries recovered relatively quickly from the financial crisis, their performance deteriorated in the recent years, despite the modest recovery in advanced economies. The higher divergence of business cycles is closely linked to the Chinese transformation. During the crisis, the Chinese fiscal stimulus prevented a decline in GDP growth not only in that country, but also in resource-rich economies. The Chinese shift to consumption-driven growth led to a decline in commodity demand, and the environment became more challenging for many emerging markets. This view is supported by Bayesian VARs specified for the BRIC (Brazil, Russia, India, and China) countries. The results reveal a strong impact of international variables on GDP growth. In contrast to the other countries, China plays a crucial role in determining global trade and oil prices. Hence, the change in the Chinese growth strategy puts additional reform pressure on countries with abundant natural resources.
    Keywords: business cycle divergence, Chinese transformation, Bayesian VARs
    JEL: F44 E32 C32
    Date: 2017–03
  31. By: Yury Achkasov (Bank of Russia, NRU HSE, Russian Federation)
    Abstract: This work presents a modification of the model of GDP short-term estimation based on current macroeconomic statistics initially offered in the paper titled 'Nowcasting and Short-Term Forecasting of Russian GDP with a Dynamic Factor Model' by Alexey Porshakov and co-authors [8]. The model modification presented in this work considers factors separately for each of the three groups of indicators - agents' expectations and their estimate of the current economic situation; financial variables, world market and foreign economic activity indicators; real sector indicators. This model can be used to get GDP estimates for the previous and current quarters, which allows researchers to obtain information on output dynamics in the economy in addition to estimates under other models and expert judgments. Also, the model helps decompose GDP quarterly growth rates into various factors.
    Keywords: GDP short-term estimation, nowcast, dynamic factor models.
    JEL: C38 C53 C82 E27
    Date: 2016–01
  32. By: Paul de Grauwe; Eddie Gerba
    Abstract: The behavioural agent-based framework of De Grauwe and Gerba (2015) is extended to allow for a counterfactual exercise on the role of banks for monetary transmissions. A bank-based corporate financing friction is introduced and the relative contribution of that friction to the effectiveness of monetary policy is evaluated. We find convincing evidence that the monetary transmission channel is stronger in the bank-based system compared to the market-based. Impulse responses to a monetary expansion are around the double of those in the market-based framework. The (asymmetric) effectiveness of monetary policy in counteracting busts is, on the other hand, relatively higher in the market-based model. The statistical fit of the bank-based behavioural model is also improved compared to the benchmark model. Lastly, we find that a market-based (bankbased) financing friction in a general equilibrium produces highly asymmetric (symmetric) distributions and more (less) pronounced business cycles.
    Keywords: monetary policy in EA; monetary transmissions; banks; financial frictions; market based finance
    JEL: E44 E52 G21 G32
    Date: 2017–04
  33. By: M. Ali Choudhary (State Bank of Pakistan); Sajawal Khan (State Bank of Pakistan); Farooq Pasha (State Bank of Pakistan)
    Abstract: In this paper, we compare the performance of different models, on two data frequencies, in terms of matching the business cycle moments of Pakistani economy. Out of the four models, two are simple real business cycle models for Pakistan introduced in Choudhary and Pasha (2013), and the other two are benchmark models [Aguiar and Gopinath (2007) and Garcia-Cicco et al. (2010)] from the literature for explaining the business cycles in emerging and developing economies. This paper calibrate these models for Pakistan and evaluate their performance in terms of matching second order moments from the actual data at both annual and quarterly frequency. We find that even though no single model is able to match all the relevant moments for all the important macroeconomic variables at both frequencies, the augmented RBC model with FDI shock (Choudhary and Pasha, 2013) performs relatively better.
    Keywords: DSGE Model, Emerging Economies, FDI shock, Business Cycles
    JEL: C61 D58 E32
    Date: 2017–04
  34. By: Alejandro C. Garcia-Cintado; Celso Jose Costa Junior (; Armando Vaz Sampaio (
    Abstract: The global crisis that erupted in 2007 led many countries to embark on countercyclical fiscal policies as a way to cushion the blow of a depressed aggregate demand. Advocates of discretionary measures emphasize that fiscal policy can indeed stimulate the economy. The main goal of this work is to assess whether the fiscal policies pursued by the Brazilian government in the aftermath of the 2008 crisis succeeded in bringing the economy back on track in a sustainable fashion. To this end, the fiscal multipliers of five different shocks are studied in a small open-economy New Keynesian framework. Our results point to the government spending and public investment as the most effective fiscal tools for combating the crisis. However, the highest fiscal multiplier turned out to be the one associated with excise tax reductions. Interestingly, contrary to the government’s expectations, this policy of lowering taxes on manufactured durable goods (IPI) was found to be neutral at a longer horizon as it was not applied horizontally to all sectors of the economy. Seeking to understand, analyze and compare the effects of expenditure- and revenue-based fiscal policies on the Brazilian economy over the post-crisis period of 2008, a standard DSGE model (with the main frictions of this methodology) has been developed and estimated. The model features public capital stock as an input, thus allowing for the analysis of the effects of shocks to public investment on the marginal productivity of private inputs and on the GDP. The spending-based measures were the most successful in affecting GDP over the whole period studied, primarily because of PAC2, whose actual goal was to bolster aggregate demand. It is worth mentioning that stimulus program led to a positive result only up until 2013. Actually, the systematic reduction of this multiplier that followed from that year onwards contributed to deterioration of the Brazilian economy. However, these tools were not the only ones the government availed itself of to prop up aggregate demand. It also resorted to tax exemptions from durable goods consumption without much success, as already underscored above. The main reason for this policy to have failed is that this fiscal stimulus was only targeted at the durable-goods sector, which caused the consumption of non-durable goods to decrease. This latter effect ended up offsetting the positive impact of this policy on economic activity. As already laid out before, should this tax-exemption policy be applied in an horizontal way to all sectors of the economy, the result would be the most efficient one among all fiscal measures under study.
    Keywords: Brazil, General equilibrium modeling, Business cycles
    Date: 2016–07–04
  35. By: Mario Pietrunti
    Abstract: This paper investigates in a non-linear setting the impact on the real economy of frictions stemming from the financial sector. We develop a medium scale DSGE model with a banking sector where an occasionally binding constraint on banks’ capital induces a relevant non-linearity. The model - estimated on Italian data from 1999 to 2015 via a likelihood-free method - is able to generate business cycle asymmetries as in actual data that cannot replicated by linear models. Lastly, the role of macroprudential policies in smoothing the cycle is discussed JEL Classification: C15, E32, E44, G01
    Keywords: financial frictions, non-linear DSGE Models, likelihood-free estimation
    Date: 2017–04
  36. By: Jordà, Òscar; Richter, Björn; Schularick, Moritz; Taylor, Alan M.
    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.
    Keywords: bank liabilities; capital ratio; crisis prediction; Financial crises; local projections
    JEL: E44 G01 G21 N20
    Date: 2017–03
  37. By: Drago Bergholt; Vegard H Larsen; Martin Seneca
    Abstract: The recent oil price fall has created concern among policy makers regarding the consequences of terms of trade shocks for resource-rich countries. This concern is not a minor one - the world's commodity exporters combined are responsible for 15-20% of global value added. We develop and estimate a two-country New Keynesian model in order to quantify the importance of oil price shocks for Norway - a large, prototype petroleum exporter. Domestic supply chains link mainland (nonoil) Norway to the off-shore oil industry, while fiscal authorities accumulate income in a sovereign wealth fund. Oil prices and the international business cycle are jointly determined abroad. These features allow us to disentangle the structural sources of oil price fluctuations, and how they affect mainland Norway. The estimated model provides three key results. First, oil price movements represent an important source of macroeconomic volatility in mainland Norway. Second, while no two shocks cause the same dynamics, conventional trade channels make an economically less significant difference for the transmission of global shocks to the oil exporter than to oil importers. Third, the domestic oil industry's supply chain is an important transmission mechanism for oil price movements, while the prevailing fiscal regime provides substantial protection against external shocks.
    Keywords: DSGE, small open economy, oil and macro, Bayesian estimation
    Date: 2017–03
  38. By: Elena Deryugina (Bank of Russia, Russian Federation); Alexey Ponomarenko (Bank of Russia, Russian Federation)
    Abstract: We test the ability of early warning indicators that appear in the literature to predict credit cycle peaks in a cross-section of emerging markets. Our results confirm that the standard credit gap indicator performs satisfactorily. The robustness of real-time credit cycle determination may potentially (and with a risk of overfitting the data) be improved by simultane-ously monitoring GDP growth, banks’ non-core liabilities, the financial sector’s value added and (to a lesser extent) the change in the debt service ratio.
    Keywords: credit cycle, countercyclical capital buffers, early warning indicators, emerging markets.
    JEL: E37 E44 E51
    Date: 2017–01
  39. By: Luisa Carpinelli; Matteo Crosignani
    Abstract: We study the effectiveness of central bank liquidity injections in restoring bank credit supply following a wholesale funding dry-up. We combine borrower-level data from the Italian credit registry with bank security-level holdings and analyze the transmission of the European Central Bank three-year Long Term Refinancing Operation. Exploiting a regulatory change that expands eligible collateral, we show that banks more affected by the dry-up use this facility to restore their credit supply, while less affected banks use it to increase their holdings of high-yield government bonds. Unable to switch from affected banks during the dry-up, firms benefit from the intervention.
    Keywords: Bank Credit Supply ; Bank Wholesale Funding ; Lender of Last Resort ; Unconventional Monetary Policy
    JEL: E50 E58 G21 H63
    Date: 2017–03
  40. By: Arshad, Sumera; Ali, Amjad
    Abstract: This study analyses the interrelationship of unemployment rate, interest rate and inflation rate in Pakistan over the period from 1974 to 2013. Autoregressive Distributed Lag (ARDL) model has been employed to find co-integration among variables of the models. Vector Error-Correction model is utilized for analysing short run dynamics of the models. The results do not provide significance trade-off between unemployment rate and inflation rate. Trade off exists in interest rate analysis over short run with inflation rate and unemployment rate. The empirical results show population growth and exchange rate have negative whereas external debt plays a positive role in determining unemployment rate in Pakistan. Money supply is revealed as major cause of inflation while exchange rate and imports have contributed negatively in inflation. The rate of interest has positive impact on domestic credit to private sector whereas it is negatively related to exchange rate.
    Keywords: Inflation Rate, Unemployment Rate, Interest Rate
    JEL: E31 E40 J6
    Date: 2016
  41. By: Kamiar Mohaddes; Mehdi Raissi; Anke Weber
    Abstract: This paper examines whether a tipping point exists for real GDP growth in Italy above which the ratio of non-performing loans (NPLs) to total loans falls significantly. Estimating a heterogeneous dynamic panel-threshold model with data on 17 Italian regions over the period 1997-2014, we provide evidence for the presence of growth-threshold effects on the NPL ratio in Italy. More specifically, we find that real GDP growth above 1.2 percent, if sustained for a number of years, is associated with a significant decline in the NPLs ratio. Achieving such growth rates requires decisively tackling long standing structural rigidities and improving the quality of fiscal policy. Given the modest potential growth outlook, however, under which banks are likely to struggle to grow out of their NPL overhang, further policy measures are needed to put the NPL ratio on a firm downward path over the medium term.
    Keywords: Italy, non-performing loans, real output growth, panel tests of threshold effects
    JEL: C23 E44 G33
    Date: 2017–04
  42. By: Byrne, David (Central Bank of Ireland); Kelly, Robert (Central Bank of Ireland); O'Toole, Conor (Central Bank of Ireland)
    Abstract: One channel through which monetary policy can affect loan default in the mortgage market is by altering the affordability of borrower repayments. Quantifying the exact impact of this relationship is complex as it depends on both the structure and passthrough of a given mortgage market. This paper uses a quasi-natural experiment to identify the impact of changes in interest rates on mortgage default. Using a panel of loan level administrative data for Ireland, we deal with selection bias that is inherent in identifying the impact of interest rates by exploiting the variation between two types of adjustable rate mortgage that were offered to Irish borrowers for a particular period in the mid-2000s. We map changes in interest rates to default by quantifying the direct effect through changes in borrower installments. Using a pass-through approach, we find a strong and highly statistically significant impact of interest rates on mortgage default, with a 1 per cent reduction in installment associated with a 5.8 per cent decrease in the likelihood of default over the following year. We also find evidence that negative equity offsets the some of the gains arising from lower policy rates indicating an interaction between monetary policy and asset price shocks in the mortgage market.
    Keywords: Monetary Policy, Mortgage Default
    JEL: E52 E58 G01 G21
    Date: 2017–03
  43. By: Skintzi, Vasiliki
    Abstract: This paper examines the dynamic relationship between stock and bond returns in eleven Eurozone countries during the last seventeen years. The literature so far reports heterogeneous results with respect to the important determinants of the stock-bond relationship. To deal with model uncertainty we employ a Bayesian model averaging technique and examine various macroeconomic and financial variables which are likely to influence stock-bond comovement. Bond and stock market uncertainty, interest rate, inflation and state of the economy are important determinants of cross-asset correlations. Divergence in the dynamic patterns of stock-bond comovement as well as on the effect of economic variables on this comovement is reported during crisis periods and between different European regions. Our results are of high relevance for investment strategies as well as for policy decisions in the European context.
    Keywords: stock-bond correlation, Bayesian Model Averaging, financial crisis
    JEL: C11 C58 E44 G15
    Date: 2017–04–13
  44. By: Muhammad Nadim Hanif (State Bank of Pakistan); Javed Iqbal (State Bank of Pakistan); M. Ali Choudhary (State Bank of Pakistan)
    Abstract: Business cycle estimation is core of macroeconomics research. Hodrick-Prescott (1997) filter, (or HP filter), is the most popular tool to extract cycle from a macroeconomic time series. There are certain issues with HP filter including fixed value of ? across the series/countries and end points bias (EPB). Modified HP filter (MHP) of McDermott (1997) attempted to address the first issue. Bloechl (2014) introduced a loss function minimization approach to address the EPB issue but keeping lambda fixed (as in HP filter). In this study we marry the endogenous lambda approach of McDermott (1997) with loss function minimization approach of Bloechl (2014) to analyze EPB in HP filter, while intuitively changing the weighting scheme used in the latter. We contribute by suggesting an endogenous weighting scheme along with endogenous smoothing parameter to resolve EPB issue of HP filter. We call this fully modified HP (FMHP) filter. Our FMHP filter outperforms a variety of conventional filters in a power comparison (simulation) study as well as in observed real data (univariate and multivariate) analytics for a large set of countries.
    Keywords: Business Cycle, Time Series, Fully Modified HP Filter, End Point Bias in HP Filter, Simulation, Cross Country Study.
    JEL: E32 C18
    Date: 2017–04
  45. By: Douglas, Roger (Roger Douglas Associates); MacCulloch, Robert (University of Auckland)
    Abstract: Many nations are seeking to reform their welfare states so that costs to the government can be reduced and the quality of outcomes improved. As a potential way to achieve these aims, there has been a surge of interest in the Singaporean model which features compulsory savings accounts and transparent pricing of health services. It has achieved some of the best health-care outcomes in the world at a cost that is the lowest amongst high income countries. In this paper we show how tax cuts can be designed to help establish compulsory savings accounts so that a publicly funded welfare system can be changed into one that relies more heavily on private funding in a politically feasible way. To our knowledge, showing how both a tax and welfare reform can be jointly designed to enable this transition to occur has not been done before. Our policy reform creates institutions that have features in common with Singaporean ones, especially for health-care. However there are also key differences. We present a new unified approach to the funding of health, retirement and risk-cover (for events like unemployment) through the establishment of a set of compulsory savings accounts. A case study of New Zealand is used as an illustration. The fiscal impact of our proposed reform on the government's current and future budgets is reported, as well as its effect on low, middle and high income individuals.
    Keywords: welfare state reform, compulsory savings, taxation
    JEL: E21 E6 H20 H55 I1 I38 J65
    Date: 2017–03
  46. By: Attanasio, Orazio (UCL); Kovacs, Agnes (University of Oxford); Molnar, Krisztina (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: In this paper, we make three substantive contributions: first, we use elicited subjective income expectations to identify the levels of permanent and transitory income shocks in a life-cycle framework; second, we use these shocks to assess whether households' consumption is insulated from them; third, we use the shock data to estimate an Euler equation for consumption. We find that households are able to smooth transitory shocks, but adjust their consumption in response to permanent shocks, albeit not fully. The estimates of the Euler equation parameters with and without expectational errors are similar, which is consistent with rational expectations. We break new ground by combining data on subjective expectations about future income from the Michigan Survey with micro data on actual Income from the Consumer Expenditure Survey.
    Keywords: life cycle models; estimating Euler Equations; survey expectations
    JEL: C13 D12 D84 D91 E21
    Date: 2017–01–12
  47. By: Alessandro Cantelmo; Giovanni Melina
    Abstract: In an estimated two-sector New-Keynesian model with durable and nondurable goods, an inverse relationship between sectoral labor mobility and the optimal weight the central bank should attach to durables inflation arises. The combination of nominal wage stickiness and limited labor mobility leads to a nonzero optimal weight for durables inflation even if durables prices were fully flexible. These results survive alternative calibrations and interestrate rules and point toward a non-negligible role of sectoral labor mobility for the conduct of monetary policy.
    Keywords: Central banks and their policies;Labor mobility;Optimal monetary policy, durable goods, DSGE, Monetary Policy (Targets, Instruments, and Effects)
    Date: 2017–03–06
  48. By: Buchheim, Lukas; Watzinger, Martin
    Abstract: We estimate the causal impact of a sizable German infrastructure investment program on employment at the county level. The program focused on improving the energy efficiency of school buildings, making it possible to use the number of schools as an instrument for investments. We find that the program was effective, creating one job for one year for each €25’000 of investments. The employment gains reached their peak after nine months and dropped to zero quickly after the program’s completion. The reductions in unemployment amounted to two-thirds of the job creation, and employment grew predominately in the construction and non-tradable industries
    Keywords: Infrastructure Investments; Job Creation; Employment Dynamics; Countercyclical Fiscal Policy
    JEL: E24 E62 H72 J23
    Date: 2017–02
  49. By: Dimitris Christelis; Dimitris Georgarakos; Tullio Jappelli; Luigi Pistaferri; Maarten van Rooij
    Abstract: We use the responses of a representative sample of Dutch households to survey questions that ask how much they would consume of an unexpected, transitory, and positive income change, and by how much they would reduce their consumption in response to an unexpected, transitory, and negative income change. The questionnaire distinguishes between relatively small income changes (a one-month increase or drop in income), and relatively larger ones (equal to three months of income). The results are broadly in line with models of intertemporal choice with precautionary saving, borrowing constraints, and finite horizons.
    Keywords: Transitory Income Shocks; Positive and Negative Income Shocks; Marginal Propensity to Consume
    JEL: D12 D14 E21
    Date: 2017–03
  50. By: Polbin, Andrey
    Abstract: The paper estimates vector error correction model (VECM) for the real ruble exchange rate and the real oil prices. The VECM model takes into account the structural break in short run parameters due to monetary policy regime change in November 2014. Estimates show that the real exchange rate response to oil price shocks has dramatically changed. Before November 2014 it is needed approximately one year to correct 50% of a real exchange rate gap due to oil prices permanent change. From November 2014 the real exchange rate adapts to oil price shocks almost instantly. The estimate of long-run elasticity of the real exchange rate on real oil prices is 0.33.
    Keywords: real ruble exchange rate; oil prices; monetary policy; vector error correction model; VAR; VECM
    JEL: C22 C51 E52 F31 F41
    Date: 2017
  51. By: Dong Frank Wu
    Abstract: This paper focuses on the role of the pass-through of the exchange rate and policydeterminants in driving inflation. Using linear and nonlinear frameworks, the paper finds: (i) after the switch to a floating exchange rate regime in 2012, nonfood prices not only directly influence headline inflation, but also have an significant impact on food inflation via second round effects; (ii) the pass-through of the exchange rate to headline inflation has jumped from zero to 11 percent under the floating regime, after controlling for other factors; (iii) the improved significance of T-bill rates in shaping inflation flags its importance in Malawi’s monetary framework although the monetary transmission mechanism needs further strengthening; (iv) the increased impact of broad money underscores the necessity for fiscal discipline and central bank independence.
    Keywords: Inflation;Malawi;Exchange rate pass-through;Exchange rate regimes;Floating exchange rates;Regression analysis;Econometric models;Inflation, Exchange Rate, Pass-through, Regime Switch
    Date: 2017–03–09
  52. By: Michael C. Burda; Mark Weder
    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 neoclas- sical growth model, yet systematic total factor productivity di¤eren- tials persist despite identical institutional frameworks and significant investment in the eastern regions. At the same time, regional dispar- ities in income, well-being, and health are little di¤erent 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 e¤ort 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 productiv- ity, Korean unification
    JEL: P2 O11 E02
    Date: 2017–04
  53. By: Ali, Amjad; Ahmad, Farooq; Ur- Rahman, Fazal
    Abstract: Private sector of any country plays important role in the economic development of the country. It not only provides employment to the people of the country but also goods and services according to the taste of the people. Private investment depends mainly on private borrowing which proves to be the blood for private sector. Private borrowing or credit to private sector is important part of the financial development which measures the financial depth of it. The aim of this paper therefore, is to investigate the impact of government borrowing from central bank and commercial banks on financial development. In this Paper, government borrowing is used as Public domestic debt while credit to private sector (Private borrowing) is used as financial development. Normally, it is frequently observed that when government borrows more from banks, then less amount left for the private borrowing so in this way volume of private investment declines and this is found in this study. There are some other factors which also affected the private borrowing like, taxes, savings and inflation. This study has been done by using time series data of Pakistan from 1972-2015. ARDL Methodology has been used to investigate the relationship of variables. The data resource has been taken from WDI and the reports of state bank of Pakistan as well as different issues of economic survey of Pakistan.
    Keywords: Government Borrowing, Investment, Domestic Debt, Financial Development
    JEL: E22 G02 H63 H74
    Date: 2016
  54. By: Peter Spahn
    Abstract: We analyze the benefits and costs of a non-euro country opting-in to the banking union. The decision to opt-in depends on the comparison between the assessment of the banking union attractiveness and the robustness of a national safety net. The benefits of opting-in are still only potential and uncertain, while costs are more tangible. Due to treaty constraints, noneuro countries participating in the banking union will not be on equal footing with euro area members. Analysis presented in the paper points out that reducing the weaknesses of the banking union and thus providing incentives for opting-in is not probable in the short term, mainly due to political constraints. Until a fully-fledged banking union with well-capitalized backstops is established it may be optimal for a non-euro country to join the banking union upon the euro adoption. Assessing first experiences with the functioning of the banking union and opt-in countries will be crucial for non-euro countries when deciding whether to opt-in.
    Keywords: currency union, lender of last resort, central bank reserves, central bank budget constraint
    JEL: E5 E6
    Date: 2016–10
  55. By: Cunha, Alexandre B.; Ornelas, Emanuel
    Abstract: We study the desirability of limits on the public debt and of political turnover in an economy where incumbents have an incentive to set public expenditures above the socially optimal level due to rent-seeking motives. Parties alternate in office and cannot commit to future policies, but they can forge a political compromise where each party curbs excessive spending when in office if it expects future governments to do the same. In contrast to the received literature, we find that strict limits on government borrowing can exacerbate political economy distortions by making a political compromise unsustainable. This tends to happen when political turnover is limited. Conversely, a tight limit on the public debt fosters a compromise that yields the efficient outcome if political turnover is vigorous. Our analysis thus suggests that to sustain good economic policies, a society needs to restrict either the extent of political turnover or the ability of governments to issue debt, but not both.
    Keywords: debt limits; political turnover; efficient policies; fiscal rules
    JEL: E61 E62 H30 H63
    Date: 2017–03
  56. By: Snir, Avichai; Levy, Daniel; Chen, Haipeng (Allan)
    Abstract: Prices that end with 9, also known as psychological price points, are common, comprising about 70% of the retail prices. They are also more rigid than other prices. We take advantage of a natural experiment to document an emergence of a new price ending that has the same effects as 9-endings. In January 2014, the Israeli government passed a new regulation prohibiting the use of non 0-ending prices, bringing an end to 9-ending prices. We find that seven months after 9-ending prices have disappeared, 90-ending prices acquired the same status as 9-ending prices had before the new regulation was adopted. Thus, 90-ending prices became the new psychological price points, partially eliminating the regulation’s intended effect.
    Keywords: 9-ending prices; psychological price points; price recall/perception; sticky/rigid prices; level/left-digit effect; image/right-digit effect; integer constraint; price control; price regulation
    JEL: D40 D83 E31 K20 L16 L81 M21 M31
    Date: 2017–04–02
  57. By: Simon Firestone; Amy Lorenc; Benjamin Ranish
    Abstract: We evaluate the economic costs and benefits for bank capital levels in the United States. The framework and analysis is similar to that found in previous studies though we tailor the analysis to the specific features and experience of the U.S. financial system and account for the impact of new financial regulations. The conceptual framework identifies the benefits of bank capital with a lower probability of financial crises, which result in decreased economic output. The costs of bank capital are identified with increases in banks cost of funding, which are passed along to borrowers and result in a lower level of economic output. Optimal capital maximize the difference between benefits and costs or net benefits. Using a range of empirical estimates of net benefits we find that the optimal level of bank capital in the United States ranges from just over 13 percent to over 26 percent.
    Keywords: Banking ; Capital ; Cost benefit
    JEL: E6 G21
    Date: 2017–03–31
  58. By: Anna Krupkina (Bank of Russia, Russian Federation); Alexey Ponomarenko (Bank of Russia, Russian Federation)
    Abstract: We apply empirical modelling set-ups developed to capture the hysteresis effect to the data on deposits dollar-ization in a cross-section of emerging market economies. Namely, we estimate nonlinear relationship that determines two equilibrium levels of deposit dollarization depending on its current dollarization value and the preceding episodes of sharp depreciation of the national currency over the past five years. When exchange rates are stable convergence to-wards higher equilibrium level of dollarization begins when the 45-50% threshold of deposit dollarization is exceeded. We estimate the model for short-run dynamics of dollarization and find that the speed of convergence towards higher equilibrium implies quarterly increase of the foreign currency deposits to total deposits ratio by 1.2-3 percentage points.
    Keywords: dollarization, hysteresis, nonlinear model, emerging markets.
    JEL: C23 E41 F31
    Date: 2015–06
  59. By: Giuseppe Marotta
    Abstract: The recipe of leaving the Euro, and therefore the EU, in order to foster Italian net export through a devaluation of the new Lira, offers hardly credible benefits compared to certain costs of the ensuing triple financial crisis. The costs would be heightened given the economic, legal ad geopolitical constraints of the country.
    Keywords: Italexit, redenomination risk, triple financial crisis, global value chain, EMU trilemma.
    JEL: E40 E61
    Date: 2017–04
  60. By: Bosupeng, Mpho
    Abstract: China’s economic growth as well as global influence has been escalating in the last decades. The purpose of this investigation is to determine the impact of Chinese interest rates and inflation on other economies. The study uses data from 1982 to 2013 and applies the Toda and Yamamoto approach to Granger causality. Using data for nineteen countries, the results show that China has significant influence on interest rates and inflation dynamics of Costa Rica, Kenya and Nigeria. The study further shows that Japan and South Africa induce China’s interest rates as well as inflation. It is projected that as China’s economy continues to grow, her influence in global financial matters and other economies will also intensify.
    Keywords: nominal interest rates, real interest rates, inflation, economic growth
    JEL: E43
    Date: 2016
  61. By: Javed Iqbal (State Bank of Pakistan); Muhammad Nadim Hanif (State Bank of Pakistan)
    Abstract: We compare performance of modified HP filter, wavelet analysis and empirical mode decomposition. Our simulation study results suggest that modified HP filter performs better for an overall time series. However, in the middle (of time series) wavelet analysis performs best. Wavelet analysis based filtering has highest ‘end points bias (EPB)’. However, it performs better when we extrapolate the subject time series to lower the EPB. Study based on observed data of real income, investment and consumption shows that the autoregressive properties and multivariate analytics of cyclical components depend upon filtering technique.
    Keywords: Business Cycle, Smoothing Macro Time Series, Modified HP Filter, Wavelet Analysis, End Point Bias in HP Filter, Simulation, Cross Country Study.
    JEL: E32 C18
    Date: 2017–03
  62. By: 外木, 暁幸; 外木, 好美
    Abstract: 本稿では,日本の上場個別企業のR&D投資とストック系列を作成し,様々な有形固定産と伴に, その投資行動をTobinのq理論に基づいて分析した.資本財の多様性を考慮したMultiple qの投資関数を推計し,R&Dを新たな投資財として加えることで,投資関数の推計のパフォーマンスが改善するのかを検証した.R&Dストックのシェアは約4分の1以上を占めており,理論分析の結果通り, R&D投資を資本財として取り上げることで平均qの上方バイアスが改善された.また,Multiple qの投資関数パフォーマンスも,調整コストのパラメータが正値で有意に推計される資本財の数が増え, さらに決定係数も大きくなり,改善していることがわかった.一方, R&D投資を考慮してもなお,redundantな変数(キャッシュフロー比率と有利子負債)が有意に説明力を持っていた.調整コストのパラメータγの推計値を資本財別に見ると,特にR&D投資がその他無形産蓄積と大きな関わりを持っていることがわかった. 成長会計の国際比較からは,日本経済成には,有形固定資産よりも, 無形資産の蓄積を重視した政策の実行が望ましい.少なくともR&Dに関しては,財務諸 表上で捕捉が可能となっており投資減税等の促進政策を打てる素地がある.R&D投資を 促進する経済政策は,R&Dだけを実行ターゲットとしているが,無形資産全般の蓄積を 重視した政策へとつながっている可能性が示唆された.
    Keywords: 設備投資, Tobin の q 理論, 資本財の多様性 ・異質性, Multiple q, R&D投資, 無形資産, 凸型の調整費用関数
    JEL: E22 D21 D24 D92 O32
    Date: 2017–02
  63. By: Lydon, Reamonn (Central Bank of Ireland); McIndoe-Calder, Tara (Central Bank of Ireland)
    Abstract: Drawing on the 2013 Household Finance and Consumption Survey (HFCS) and complementary administrative data sources, we simulate household balance sheets at the micro level for the 2005-14 period. We use this dataset to tell the story of household leveraging and deleveraging over a tumultuous period for the Irish economy. We show that deleveraging has proceeded at a signficantly faster pace for older households, when compared with younger age groups. In contrast, we find that a higher-incidence of tracker mortgages amongst younger borrowers – which passed through the historically low ECB policy rates since 2009 – relative to older borrowers has played a major role in easing the debt repayment burden in the presence of large income shocks. Notwithstanding historically low interest rates, we show that income shocks are the main factor contributing to mortgage repayment problems. However, there is also a role for equity factors.
    Keywords: Households, Debt, Assets, Income, Deleveraging.
    JEL: D12 D31 E21
    Date: 2017–03
  64. By: Alexey Porshakov (Bank of Russia, Russian Federation); Elena Deryugina (Bank of Russia, Russian Federation); Alexey Ponomarenko (Bank of Russia, Russian Federation); Andrey Sinyakov (Bank of Russia, Russian Federation)
    Abstract: Real-time assessment of quarterly GDP growth rates is crucial for evaluating an economy's current prospects given that the relevant data are normally subject to substantial delays in publication by the national statistical agencies. Large information sets of real-time indicators which could be used to approximate GDP growth rates in the quarter of interest are characterized by unbalanced data, mixed frequencies, systematic data revisions, as well as a more general curse of dimensionality problem. The latter issues could, however, be practically resolved by means of dynamic factor model-ing, which has recently been recognized as a useful tool to evaluate current economic conditions by means of higher frequency indicators. Our main results show that the performance of dynamic factor models in predicting Russian GDP dynamics appears to be superior to other common alternative specifications. At the same time, we empirically show that the arrival of new data seems to consistently improve DFM’s predictive accuracy throughout sequential nowcast vintages. We also intro-duce an analysis of nowcast evolution resulting from the gradual expansion of the dataset of explanatory variables, as well as the framework for estimating contributions of different blocks of predictors into nowcasts of Russian GDP.
    Keywords: GDP nowcast, dynamic factor models, principal components, Kalman filter, nowcast evolution
    JEL: C53 C82 E17
  65. By: Jacek Kotłowski; Michał Brzoza-Brzezina
    Abstract: In this paper we focus on the nonlinear relationship between the risk premium and the NFA position of a country. We see two important contributions, one for policy and one for modeling. Both are not offered by linear models. First, from the policy perspective our estimates help to determine the regions where an economy risks falling into a self fulfilling debt trap. From the modeling perspective, we offer a ready-to-use calibration of the risk premium - NFA relationship that can be applied in DSGE models. We show that adjusting the usually applied calibration to the one offered in our paper has the potential to substantially affect the model dynamics. From this perspective our results could also be considered as motivation to provide a structural derivation of this link in the DSGE literature. Our results could then serve as a check whether the derived link is in line with empirics. We collect annual data for 40 advanced and emerging economies. Our panel extends from 1990 to 2014, is however unbalanced due to limited availability of data on long-term interest rates. Our dependent variable is defined as the difference between a country's long-term ineterest rate and the rate for United States and in most cases represents the yield on 10-year government bonds. For a few countries, where 10-year bonds were missing we approximate the spread using 5-year bonds. As the control variables we use several macroeconomic variables, which may potentially affect the risk premium: the general government debt, inflation differential, the ratio of foreign exchange reserves to GDP and exchange rate volatility and cyclical position of the economy. We estimate the parameters of a dynamic panel with instrumental variables to account for potential endogeneity. First we test the general non-linearity as proposed by Gonzales, Terasvirta and van Dijk (2005). While the linear relationship between risk premium and NFA position has been strongly rejected we estimate the non-linear smooth transition regression (STR) model with the exponential transition function, as preferred by the data. We found the non-linear relationship between NFA position and county’s risk premium. We identify the level at which strongest nonlinearities kick in at approximately -40% NFA/GDP ratio. At this level of foreign debt risk premia begin to increase very rapidly - the semi-elaticity of spreads with respect to NFA increases almost fourfold. However while the exponential transition function has been selected as the proper one, the semi-elasticity starts to decrease as the NFA position approaches very high negative levels. Thus it remains statistically significant. We also found that the risk premia is negatively affected by the level of the government debt and positively by exchange rate volatility. It depends also on inflation differential and GDP per capita. The results are robust to the choice of the estimation method and the dynamic specification of the panel.
    Keywords: Panel of 40 advanced and emerging countries, Macroeconometric modeling, Finance
    Date: 2016–07–04
  66. By: Carlo Gola (Bank of Italy); Marco Burroni (Bank of Italy); Francesco Columba (Bank of Italy); Antonio Ilari (Bank of Italy); Giorgio Nuzzo (Bank of Italy); Onofrio Panzarino (Bank of Italy)
    Abstract: Shadow banking is the creation or transfer – by banks and non-bank intermediaries – of bank-like risks outside the banking system. In Italy the shadow banking system is fully regulated, mostly following the principle of same business-same rules or ‘bank-equivalent regulation’. After an overview of the topic, we describe the Italian shadow banking system and the related regulatory and supervisory framework in place before the financial crisis and the subsequent enhancements. A quantitative representation of Italian shadow banking is also provided. The paper argues that through a wide and consistent regulatory perimeter, based on the principle of ‘bank-equivalent regulation’, it is possible to setup a well-balanced prudential framework, where both bank and non-bank regulation contribute to reducing systemic risks and regulatory arbitrage.
    Keywords: shadow banking system, financial stability, macro-prudential regulation, non-bank financial intermediaries, market-based finance
    JEL: E44 E58 G00 G01 G21 G23 G28
    Date: 2017–02
  67. By: Gersbach, Hans; Haller, Hans; Volker, Britz
    Abstract: We study the consequences and optimal design of bank deposit insurance and reinsurance in a general equilibrium setting. The model involves two production sectors. One sector is financed by issuing bonds to risk-averse households. Firms in the other sector are monitored and financed by banks. Households fund banks through deposits and equity. Deposits are explicitly insured by a deposit insurance fund. Any remaining shortfall is implicitly guaranteed by the government. The deposit insurance fund charges banks a premium per unit of deposits whereas the government finances any necessary bail-outs by lump-sum taxation of households. When the deposit insurance premium is actuarially fair or higher than actuarially fair, two types of equilibria emerge: One type of equilibria supports the Pareto optimal allocation, and the other type does not. In the latter case, bank lending is too large relative to equity and the probability that the banking system collapses is positive. Next, we show that a judicious combination of deposit insurance and reinsurance eliminates all non-optimal equilibrium allocations. Our paper provides a benchmark result for policy proposals that advocate deposit insurance cum reinsurance.
    Keywords: Capital Structure; deposit insurance; Financial Intermediation; General Equilibrium; reinsurance
    JEL: D53 E44 G2
    Date: 2017–03
  68. By: Asongu, Simplice; Nwachukwu, Jacinta
    Abstract: This study extents the literature on responses to a recent World Bank report on the African poverty tragedy by assessing the effect of globalisation on inclusive human development in 51 African countries for the period 1996-2011. Political, economic, social and general globalisation variables are used. The empirical evidence is based on Generalised Method of Moments (GMM) and Instrumental Quantile Regressions (IQR). While estimated coefficients are not significant in GMM results, for IQR, globalisation positively affects inclusive human development and the beneficial effect is higher in countries with high initial levels of inclusive development. The main economic implication is that in the post-2015 development agenda, countries would benefit more from globalisation by increasing their levels of inclusive development.
    Keywords: Globalisation; inequality; inclusive development; Africa
    JEL: D60 E60 F40 F59 O55
    Date: 2016–11
  69. By: Roberto Robatto
    Abstract: This paper presents a general equilibrium, monetary model of bank runs to study monetary injections during financial crises. When the probability of runs is positive, depositors increase money demand and reduce deposits; at the economy-wide level, the velocity of money drops and deflation arises. Two quantitative examples show that the model accounts for a large fraction of (i) the drop in deposits in the Great Depression, and (ii) the $400 billion run on money market mutual funds in September 2008. In some circumstances, monetary injections have no effects on prices but reduce money velocity and deposits. Counterfactual policy analyses show that, if the Federal Reserve had not intervened in September 2008, the run on money market mutual funds would have been much smaller. JEL Classification: E44, E51, G20
    Keywords: Monetary Injections, Flight to Liquidity, Bank Runs, Endogenous Money Velocity, Great Depression, Great Recession, Money Market Mutual Funds
    Date: 2017–03
  70. By: Alexey Ponomarenko (Bank of Russia, Russian Federation)
    Abstract: This paper discusses the money creation mechanisms in emerging markets with special focus on external transactions. We argue that one should not rule out the possibility that fluctuations in the loans-to-deposits and non-core liabilities ratios are driven by the banks. We also argue that, under a flexible exchange rate regime in which the central bank is not trying to accumulate foreign reserves, external transactions are unlikely to contribute significantly to money growth. To make our argument, we analyze a historical episode of these flows in Korea and Russia and conduct a canonical correlation analysis for a cross-section of emerging market economies.
    Keywords: Money supply, non-core liabilities, loans-to-deposits ratio, emerging markets
    JEL: E51 F30 G21
    Date: 2016–05
  71. By: Abe, Naohito; Inakura, Noriko; Tonogi, Akiyuki
    Abstract: This study analyzes the effects of product turnover for price measurements. In addition to variety effects, we consider the effects of the price differentials between new and incumbent products. The decomposition of a unit value price index (UVPI) into price change effects, substitution effects, and turnover/new product effects reveals the magnitude and sources of differences between the UVPI and the Cost of Living Indexes with variety effects. Using a large-scale scanner data, we find that the product turnover effects that reflect the price gap between new and old goods are quantitatively important when constructing a general price level index.
    Keywords: Price Index, Cost of Living Index, Unit Value Price, POS Data
    JEL: C43 D12 E31
    Date: 2017–03
  72. By: Stephen Morris (Princeton University); Muhamet Yildiz (Massachusetts Institute of T echnology)
    Abstract: A coordination game with incomplete information is played through time. In each period, payoffs depend on a fundamental state and an additional idiosyncratic shock. Fundamentals evolve according to a random walk where the changes in fundamentals (namely common shocks) have a fat tailed distribution. We show that majority play shifts either if fundamentals reach a critical threshold or if there are large common shocks, even before the threshold is reached. The fat tails assumption matters because it implies that large shocks make players more unsure about whether their payoffs are higher than others. This feature is necessary for large shocks to matter
    JEL: E32 G01
    Date: 2016–11
  73. By: Stéphane Auray (CREST - Centre de Recherche en Économie et Statistique - INSEE - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique); Aurélien Eyquem (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - UJM - Université Jean Monnet [Saint-Etienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Xiaofei Ma (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - UJM - Université Jean Monnet [Saint-Etienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique, UEVE - Université d'Évry-Val-d'Essonne, UL2 - Université Lumière - Lyon 2)
    Abstract: We quantify the effects of competitive tax reforms within a two-country monetary union model with endogenous entry and endogenous tradability. As expected, their effects on output , consumption, hours worked and the terms of trade are positive. Extensive margins provide additional transmission mechanisms that turn the response of foreign output from negative to positive and yields larger aggregate welfare gains compared to alternative models. These positive spillovers are due to the positive effect of the reform on variety creation in both countries and change our vision of this type of reform from beggar-thy-neighbor to prosper-thy-neighbor.
    Keywords: Competitive tax reforms, endogenous tradability, endogenous varieties, monetary union, taxes, fiscal,devaluations
    Date: 2017
  74. By: Carine Meyimdjui (CERDI - Centre d'études et de recherches sur le developpement international - UdA - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The delicacy of socio-political consequences during the recent commodities’ prices spikes has given rise to stabilising measures that might have had repercussions on public policy alternatives. This effect may be worrying for developing countries, which because of the importance of the share of imports in their households’ basket, have observed a remarkable increase of their food import bills. This paper attempts to evaluate the effect of food price shocks on public expenditure in level and composition on 47 African countries between 1980 and 2011. After solving for endogeneity issues, our results show that food price shocks positively and significantly affect total government expenditure and the share of current government consumption in the total government expenditure. More precisely, an additional one standard deviation of the food price shock increase is associated to an increase of 0.06 standard deviation of the percentage of current government consumption in the total government expenditure. Interestingly, this effect highly depends on the vulnerability level. Future studies will use more disaggregated data of fiscal variables, including those on revenue, to better assess food security policies.
    Keywords: Vulnerability,Expenditure composition,Price shock,Africa.
    Date: 2017–02–06
  75. By: Joao Sousa Andrade; Irina Syssoyeva-Masson
    Abstract: The relationship between public debt (d) and economic growth (g) has been and continue to be the subject of much empirical and theoretical attention in the literature as witnessing by the number of a growing empirical literature and very recent contributions. The policy recommendations of these studies have a great importance for governments and voters.However, the preliminary statistical data analyses are quite often absent from these studies what may in fact invalidate the empirical results. Therefore, the main purpose of this paper is to investigate the statistical properties of d (Debt-to- GDP) series to reveal the existence of long memory in d series besides the fact that this variable is not stationary and to shed light on importance of preliminary statistical data investigations. To do so we apply several statistical methods to the new data set on Gross Government Debt-to- GDP ratios for 87 countries over long period from the historical public debt database (HPDD) built by the International Monetary Fund (IMF). The main conclusions of this study are that d series has a long memory and should not be considered as a short-run phenomena, instead, its behavior should be analyzed in a long-term context; and its non-stationarity doesn't allow researchers to apply stationary econometrics methods to model its behavior. Thess finding implies that the relation between economic growth (g) and national debt (d), g = F (d), that has been characterizing the literature on the subject has not solid econometric foundations. After the review of the literature we propose to analyse the public debt ratio long memory and by the study of its stationary characteristics to reject the presence of cointegration between it and growth. The appropriate tests are employed. Absence of cointegration and rejection of the already traditional threshold effect of public debt on growth. The type of relation must respect econometric principles to avoid spurious relations.
    Keywords: For the larger sample: 87 countries., Finance, Growth
    Date: 2016–07–04
  76. By: Jose-Maria Da-Rocha; Marina Mendes Tavares; Diego Restuccia
    Abstract: What accounts for differences in output per capita and total factor productivity (TFP) across countries? Empirical evidence points to resource misallocation across heterogeneous production units as an important factor. We study resource misallocation in a model where establishment-level productivity is endogenous and responds to the same policy distortions that create misallocation. In this framework, policy distortions not only misallocate resources across a given set of productive units (static effect), but also create disincentives for productivity improvement (dynamic effect) thereby affecting the productivity distribution and further contributing to lower aggregate output and productivity. The dynamic effect is substantial quantitatively. Reducing the dispersion in revenue productivity in the model by 25 percentage points to the level of the U.S. benchmark implies an increase in aggregate output and TFP by a factor of 2.9-fold. Improved resource allocation accounts for 42 percent of the gain, whereas the change in the productivity distribution accounts for the remaining 58 percent.
    Keywords: distortions, misallocation, investment, endogenous productivity, establishments.
    JEL: O1 O4 E0 E1
    Date: 2017–04–08
  77. By: Taro Abe
    Abstract: This study examines the effectiveness of redistribution policies considering balance of payments. Unlike Bowles (2012) and Abe (2016, 2015), we assume that capital movement is sluggish to consider the short-run effects. Results indicate that conventional egalitarian policies such as increasing unemployment compensation and strengthening dismissal regulations can be effective, whereas an asset-based redistribution such as a decrease in the ratio of monitoring labor cannot be. These results contradict Bowles (2012). We need to reevaluate conventional egalitarian policies if the effects of effective demand and adjustment of capital continue in the long run.
    Keywords: Egalitarian Policies, Redistribution, Effective Demand, Globalization, Balance of Payments
    JEL: E12 F60 J80 J88
    Date: 2017–04
  78. By: KOBAYASHI Keiichiro
    Abstract: We review the experience of the Japanese economy in the aftermath of the collapse of the asset-price bubble, and analyze the hypothesis that excessive debt may cause persistent stagnation. Our simple model shows that overly accumulated debt hinders the economic activity of the borrower. Moreover, if debt exceeds a threshold level, the borrowers' inefficiency continues indefinitely and leads the economy into a persistent stagnation. In this case, the lenders do not have an incentive to reduce debt, and thus government intervention may be necessary to restore economic growth. It is indicated that relief from excessive debt by policy measures such as debt-for-equity swaps, accelerated disposal of nonperforming loans, and bankruptcy procedures can eradicate the direct cause of secular stagnation and restore efficiency, whereas standard macroeconomic policies, i.e., fiscal and monetary policies, merely mitigate the recession indirectly.
    Date: 2017–03
  79. By: Fernholz, Ricardo; Mitchener, Kris James; Weidenmier, Marc
    Abstract: We use the demise of silver-based standards in the 19th century to explore price dynamics when a commodity-based money ceases to function as a global unit of account. We develop a general equilibrium model of the global economy with gold and silver money. Calibration of the model shows that silver ceased functioning as a global price anchor in the mid-1890s - the price of silver is positively correlated with agricultural commodities through the mid-1890s, but not thereafter. In contrast to Fisher (1911) and Friedman (1990), both of whom predict greater price stability under bimetallism, our model suggests that a global bimetallic system in which the gold price of silver fluctuates has higher price volatility than a global monometallic system. We confirm this result using agricultural commodity price data for 1870-1913.
    Keywords: bimetallism; classical gold standard; fixed exchange rates; silver; unit of account
    JEL: E42 F33 N10 N20
    Date: 2017–04
  80. By: Malgorzata Skibinska
    Abstract: The standard frictionless real business cycle model assumes that the wage should be equal to the firms’ marginal product of labour and the households’ marginal rate of substitution . However, the data indicates that this relationship does not hold and that the labour wedge, defined as a gap between these two objects, is characterized by large cyclical variations. This paper aims to identify the factors which might contribute to the differences in the volatilities of the labour wedge across CEE region and the EA. We look at the labour wedge through the lens of a small open economy real business cycle model with search and matching frictions on the labour market. The constructed model is estimated with Bayesian methods separately for Poland, the Czech Republic and the Euro Area and used to decompose variance of the labour wedge and perform some counterfactual simulations. Firstly, we show that the forces driving the labour wedge volatility differ across the analysed economies. While the dynamics of the gap between MRS and MPL in Poland can be attributed mainly to labour market disturbances, the consumption preference shock is the main force behind the wedge variability in the Euro Area and the Czech Republic. The bigger role of the labour market disturbances in Poland may suggest that the labour market in this country functions less smoothly, with negative consequences for welfare. Secondly, our results indicate that the differences in volatilities of the labour wedge in the analysed economies result primarily from the distinct characteristics of stochastic disturbances. However, in Poland the labour market structure also plays some role in explaining the differences vis-à-vis the EA. More precisely, lower, as compared to the Eurozone, elasticity of the matching function with respect to unemployment and higher workers’ bargaining power raise the volatility of the labour wedge in this country. The impact of heterogeneity in these parameters between the EA and the Czech Republic is rather marginal. All in all, we find heterogeneity in the labour wedge fluctuations within the CEE region. The Czech Republic seems to resemble more the EA in terms of both wedge volatility and its driving forces. Our results suggest that the labour market frictions in Poland are relatively more severe and generate fluctuations that are more harmful for social welfare.
    Keywords: Poland, Czech Republic, Euro Area, Labor market issues, Business cycles
    Date: 2016–07–04
  81. By: Chakravartti, Parma (National Institute of Public Finance and Policy); Mundle, Sudipto (National Institute of Public Finance and Policy)
    Abstract: Building on the early work of Mitchell and Burns (1938,1946), the automatic leading indica-tor (ALI) approach has been developed over the last few decades by Geweke (1977), Sargent and Sims (1977), Stock and Watson (1988), Camba-Mendez et al. (1999) , Mongardini and Sedik (2003), Duo-Qin et al. (2006), Grenouilleau (2006) and others. It has come to be widely accepted as one of the most effective methods for macroeconomic forecasting. This paper uses the ALI approach to forecast aggregate and sectoral GDP growth for 2016-17. The approach uses a dy-namic factor model (DFM) in the form of state space representation to extract factors from a pool of variables and then the factors are incorporated into a VAR model to generate the forecast series. Three alternate models have been tried: demand side, supply side and combined model. The model with the lowest RMSE is selected for the forecast. Real GDP growth is forecast at 6.7% for 2016-17 without factoring in the impact of demonetisation. Incorporating that impact reduces the forecast to 6.1%.
    Keywords: Growth Rate ; Forecasting ; Automatic Leading Indicator ; Dynamic Factor Model ; Agriculture ; Industry ; Services ; GDP ; Demonetization
    JEL: C32 C5 O4
    Date: 2017–03
  82. By: Sabahat (State Bank of Pakistan)
    Abstract: The saving-investment facilitation, the core function of the banking system results in liquidity creation. The on-balance sheet and off-balance sheet activities of banks play a vital role in liquidity provision: banks create liquidity while actively managing their portfolios of assets and liabilities of different maturities. This study attempts to measure the liquidity created by Pakistan’s banking system using methods employed by Berger and Bouwman (2009). Four measures LIC-C1, LIC-C2, LIC-T1 and LIC-T2 have been constructed for banks. We also group banks according to their size. Analyses of these measures indicate that, compared to other measures, the LIC-C1 measure records the highest amount of liquidity created during Sep07-Jun16. In absolute terms, liquidity of Rs 2.55 trillion was created at the end of Jun 2016, equal to 16.5 percent of the total assets of the banking industry. Further, a disaggregated analysis shows that most of the participation has come from large banks; medium sized banks’ ability remained subdued, whereas the group of small banks performed well in liquidity provision.
    Keywords: Liquidity Creation, Banking System, Balance Sheet
    JEL: G10 G21 E50 E58
    Date: 2017–03
  83. By: Keshab Raj Bhattarai
    Abstract: China is predicted to be the largest economy in the world by 2020 according to the IMF forecasts. Annual growth rate of output that remained around 9.3 percent on average during 1980 to so15 period was made possible by the accumulation capital with steady flows of investment on average around 49.5 percent of GDP, increase in the human capital index from 1.8 to 2.6 in the country that has the largest population among all countries. Current account surplus stood around 3.4 percent of GDP. Macroeconomic stability mad such growth rate possible. • Market friendly growth strategy however has led to a sharp increase in the income and consumption inequality. Inequality is deeper in the rural areas than in the urban areas. A representative household in the richest quintile earns eight times more than an average household in poorest quintile. This is five times more in urban areas. The Gini coefficient is recently estimated to be around 0.48. By this measure China has become the most unequal economy in the world. Similar disparities remain across provinces of China; per capita income of Tianjin was 99,600 Yuan compared to 22,921 Yuan of Guizhou. The DCGE model constructed in the Hull University Business School has more than 20,800 variables to represent output, investment, capital accumulation, employment, relative prices, exports, imports, tax payments as well as to compute the level of welfare of households in the economy. This model is solved balancing demand and supply with continuous adjustment in the relative prices, investment and capital accumulation. The major parameters of the model include the elasticities of substitution in production, consumption and trade. It contains flexibility of markets in goods and services or over pricing or mark up behaviour of firms. This is truly a micro-founded macro model of the Chinese economy designed to explain growth and redistribution simultaneously. Cost of tax and transfer distortions across firms and households can be measured by simulating the model. Current version of model analysis is based on changes on taxes on capital and labour inputs. This model precisely measures the economy wide impacts of policy choices of the government (see results in excel files or power point slides). This model precisely measures the economy wide impacts of policy choices of the government (see results in excel files or power point slides). Model will be extended to analyse issues of pensions or social security and the aging society; consequences of debt accumulation in the public and private sectors; to explain the consequences of public policy choices of the central and local governments.
    Keywords: China, General equilibrium modeling, Tax policy
    Date: 2016–07–04
  84. By: Homburg, Stefan; Knolle, Julia
    Abstract: Der Artikel untersucht, ob die in Deutschland seit der Großen Rezession herrschenden niedrigen Zinsen eine niedrige Kapitalproduktivität indizieren. Misst man die Grenzproduktivität des Kapitals anhand der gewogenen Eigen- und Fremdkapitalkosten (WACC), ist dies im Ergebnis zu verneinen. Anhand proprietärer Daten von Bloomberg zeigt der Artikel, dass die Kapitalkosten in Deutschland keineswegs auf Null gefallen sind. Im Durchschnitt lagen sie bei 10 Prozent und niemals tiefer als 6 Prozent.
    Keywords: WACC, Kapitalkosten, Zinsen, Säkulare Stagnation
    JEL: E43 H25
    Date: 2017–04
  85. By: Anne-Marie Rieu-Foucault
    Abstract: L’existence du risque des créances titrisées sur les bilans bancaires a été l’une des spécificités de la crise de 2007-2009. Les marchés d’actifs se sont gelés, dans le sillage de la crise de confiance liée au contexte d’asymétries d’information entre les banques, vendeurs de ces créances titrisées et les fonds d’investissement, leurs acheteurs. Dans ce contexte, ce papier propose un équilibre séquentiel dans lequel la banque centrale peut intervenir pour ranimer le marché d’actifs. Toutefois, ce rôle du banquier central est celui d’un preneur de risque en dernier ressort, qui a un coût budgétaire. Le papier montre alors que la mission de fourniture des liquidités doit être complétée par une politique macroprudentielle sur les risques extrêmes des actifs. Enfin, une comparaison est faite entre le modèle de l’économie normative et la gestion pratique de la crise par les banques centrales.
    Keywords: Banques centrales – Liquidité – Conception de mécanisme.
    JEL: D82 E58 H12
    Date: 2017
  86. By: Matteo Accornero (Bank of Italy); Piergiorgio Alessandri (Bank of Italy); Luisa Carpinelli (Bank of Italy); Alberto Maria Sorrentino (Bank of Italy)
    Abstract: We use an extensive loan-level dataset to study the influence of non-performing loans (NPLs) on the supply of bank credit to nonfinancial firms in Italy between 2008 and 2015. We use time-varying firm fixed effects to control for shifts in demand and changes in borrower characteristics, and we also resort to the supervisory interventions associated to the 2014 Asset Quality Review to identify exogenous variations in the banks’ NPL ratios. We find that banks’ lending behavior is not causally affected by the level of NPL ratios: the negative correlation between NPL ratios and credit growth in our data is mostly generated by changes in firms’ conditions and a contraction in their demand for credit. However, the exogenous emergence of NPLs and the associated increase in provisions can cause a negative adjustment in credit supply.
    Keywords: credit register, credit risk, credit supply, non-performing loans
    JEL: E51 E58 G00 G21
    Date: 2017–03
  87. By: Kang , Yoo-Duk (Korea Institute for International Economic Policy)
    Abstract: This study aims to review the policy responses of the European Central Bank (ECB) during the global economic crisis and subsequent Euro crisis, and sheds light on the logic and backgrounds related to these responses. The ECB used increasingly non-conventional measures, such as the purchase of sovereign bonds, which was unexpected before the crisis. In this context, the study raises the following question: is the increasing use of non-conventional measures temporary one in response to an unprecedent crisis or is it a sign of structural change in ECB's role? The ECB has features in common with most central banks of advanced countries, but it differs from them in three aspects. First, the ECB has a mandate only with respect to price stability. it has a very high level of institutional and political independence. Third, the ECB and the national central banks of the Eurosystem are forbidden to finance governments (monetization). These salient features of the ECB are very similar to those of the German Bundesbank. Given the role of Deutsche Mark and the Bundesbank in the European monetary integration, it seems that the ECB would include features that are legacies of the Bundesbank. As the Euro crisis spread over the entire eurozone starting from the European peripheries, responses by the ECB have been increasingly active. In order to keep financial markets stable, it has intervened with non-conventional measures. For the first time, it made large-scale purchase of sovereign bonds from the secondary market and provided long term liquidity to financial institutions with low interest rates. In addition, its Governing Council declared the outright monetary transaction (OMT), which means that the ECB will purchase unlimited quantity of sovereign bonds in case of a crisis. Its willingness and determination toward market intervention played an important role in mitigating the crisis. However, these measures, particularly the purchases or plans to purchase sovereign bonds, caused a dispute between different actors and principles. They were conceived and implemented amidst tension between member states, particularly Germany and France and between ECB's mandate (price stability) and financial stability (response to the euro crisis). During the crisis, the ECB made it clear that its priority and mandate are in maintaining price stability and emphasized that non-conventional measures were implemented to secure a 'transmission channel' of monetary policy. Eventually its measures contributed to mitigation of tensions in the sovereign market, but it emphasized repeatedly that these measures were conducted as a part of its monetary policy. Besides, its president underlined that the ECB excluded completely all political influences in its policy consideration. Regarding the future change in ECB's role, it is necessary to note and consider three aspects. First, the Euro crisis provided occasions for reflecting upon the role of the central bank as the 'lender of last resort'. As the crisis deepened, the role of ECB has been up for discussion. This means that all debates regarding its role during the crisis could become a starting point for its institutional change, albeit small. Second, the role of the ECB will be impacted significantly by the level of economic integration in the EU. Considering that the EU does not have any authority to impose taxes and conduct fiscal policy, it is hardly expected that the ECB provides credit to any European institutions and governments. Third, the ECB has now a supervisory authority over the commercial banks in Eurozone under the ongoing banking union. This means that the ECB has to follow two simultaneous objectives, price stability and financial stability. While the ECB declared that two objectives will be treated individually according to the 'principle of separation', the political and economic dynamics that the ECB has to encounter will be more complicated than before.
    Keywords: Euro Crisis; European Central Bank; Price Stability; Non Conventional Measures
    Date: 2015–07–03
  88. By: Mauro Caselli (University of Trento); Stefano Schiavo (Department of Economic Geography); Lionel Nesta (Observatoire français des conjonctures économiques)
    Abstract: This paper studies the high yet undocumented incidence of firms displaying markups lower than unity, i.e., prices lower than marginal costs, for protracted periods of time. Using a large sample of French manufacturing firms for the period 1990-2007, the paper estimates markups at the firm level and documents the extent to which firms exhibit negative price cost margins. The paper is able to provide an explanation for this phenomenon using the option value approach to investment decisions. The results suggest that firms facing higher investment irreversibility tend to continue operating even when prices fall below marginal costs as they wait for market conditions to improve. This effect is magnified in the presence of uncertainty.
    Keywords: Markups; Irreversibility; Uncertainty; Negative price; Costs margine; French manufacturing data
    JEL: D2 D24 D81 E22 L11
    Date: 2017–04
  89. By: Park , Joungho (Korea Institute for International Economic Policy); Sung , Weon-Yong (Incheon National University); Kang , Boogyun (Korea Institute for International Economic Policy)
    Abstract: Korean Abstract: 현재 러시아의 경제상황은 급속도로 악화된 상태이다. 우크라이나 위기 이후 대외경제 환경의 변화가 러시아 경제 전반에 엄청난 충격을 가했기 때문이다. 그 결과 2015년 러시아는 -3.7%라는 경제성장률을 기록하는 등 2009년 이후 최악의 경제상황에 직면해 있다. 본 연구의 목적은 서방의 대러시아 경제제재와 저유가라는 두 가지 핵심 요인을 통해 우크라이나 위기 발발 이후 러시아 경제상황의 변화를 분석하는 데 있다. 우크라이나 위기는 유라시아 국제관계의 성격을 근본적으로 변화시켰다. 러시아와 우크라이나 관계가 소연방 해체 이후 최악의 상태에 머물러 있음은 물론이고, 러시아와 서방 관계 역시 첨예한 갈등상태를 유지하고 있다. 특히 러시아와 서방 세계 간에 경제제재 전쟁이 여전히 진행 중인 상황인데, 서방의 대러 경제제재의 주요한 특징은 다음과 같다. 먼저, 유럽연합과 미국은 전면적인 무역 엠바고나 외환거래 차단이 아닌 러시아 경제의 핵심 분야를 대상으로 하는 표적 제재를 추구하고 있다는 점이다. 둘째, 유럽연합의 경우 경제제재 조치의 세부 범위가 미국보다는 상대적으로 협소하다는 점이다. 한편 2014년 8월 7일 러시아 정부는 대러 경제제재에 참여한 서방 국가들을 대상으로 지정품목에 대해 수입금지 및 제한 조치를 취했다. 러시아의 대서방 경제제재의 핵심 특징은 제재 대상을 주로 대러시아 수입품에만 한정하고 있다는 점이다. 이는 서방의 경제제재와 저유가 상황 속에서 수입대체를 통해 국내 산업을 육성하려는 전략방안이었다. 서방의 경제제재와 저유가는 러시아 경제에 부정적 파급효과를 끼쳤다. 전자는 대외교역의 위축, 금융부문의 불안정성 증대, 러시아 시장에 대한 불확실성 고조뿐 아니라, 러시아에 대한 서방의 군용 및 전략 물자의 수출 금지, 에너지설비 및 첨단기술의 수출 제한 등을 포함하고 있었다. 따라서 제재 대상 기업들의 자본유입 감소, 환율 리스크 증대, 기업활동의 위축뿐 아니라, 러시아 시장의 신뢰 하락에 따른 자본 유출과 투자 감소 등이 초래되고 있다. 후자는 러시아 경제상황 변화에 가장 큰 영향을 미쳤다. 러시아의 수출은 GDP의 약 30%에 해당되는데, 그중에서 원자재 수출은 전체 수출의 90%에 달하며, 이 중에서 3분의 2는 석유와 천연가스 수출이다. 러시아의 산업구조 및 수출품목의 특성상 저유가는 에너지 자원 수출의 감소, 경제성장률 하락, 재정수지 악화, 루블화 가치 폭락, 주가지수 급락, 투자 감소, 산업생산 감소, 내수 부진 등을 초래하면서 러시아의 경기침체 현상을 부추기고 있다. 결국 우크라이나 위기 발발 이후 촉발된 국제경제 환경의 주요한 변화 요인들, 즉 서방의 경제제재와 국제유가의 하락은 러시아 경제상황 악화에 핵심 동인으로 작용했다. 저유가 기조가 러시아 경제 전반에 가장 큰 악영향을 미쳤으며, 서방의 경제제재 요인은 상대적으로 제한된 파급효과를 나타냈다고 정의해볼 수 있겠다.(후략) English Abstract: The Russian economy has recently taken a sharp turn for the worse because of the shift in the global economy following the crisis in Ukraine and its critical impact on the Russian economy in general. As a result, Russia is facing the worst economic condition since 2009, recording a negative 3.7% growth in 2015. The purpose of the following research is to analyze the change in the Russian economy following the outbreak of the Ukrainian crisis in terms of two core causes: Western economic sanctions against Russia and the decline in oil prices. The crisis in Ukraine has fundamentally altered the international relations within Eurasia. Not only that, Russia and Ukraine are sitting in their worst disunion since the dissolution of Soviet Union, but the Russian-Western relation also remains to be sharply discordant. Most notably, the economic sanction war is still in progress between the Russian and the Western world, and the following are the key elements of Western sanctions against Russia. First, the European Union and the United States are pursuing target sanctions upon the core areas of the Russian economy, rather than the trade embargos or the block in currency exchange. Secondly, in the case of the European Union, the specific range of economic sanction is comparatively narrower than that of the United States. On the other hand, the Russian government has imposed an import embargo and restrictions on select items upon the Western nations that are participating in the economic sanction. The core characteristic of the Russian economic sanction against the West is that the embargo is only restricted to items imported by Russia; this was a strategical plan aimed to promote the national industry amidst the Western economic sanctions and dropped oil prices through import substitution. The Western economic sanctions and the decline in oil prices had negative effects on the Russian economy. The former of the two including the prohibition of the Western sale of military or strategic resources to Russia and the restriction of sale on energy facilities and advanced technology-discouraged foreign trade, led to financial instability and built uncertainty regarding the Russian market. Accordingly, a decreased inflow of the capital for businesses affected by the sanction, increase in currency exchange risk, discouraged business activity, capital outflow caused by lowered Russian market confidence, and decrease in investment have followed. The latter of the two had the greater impact on the shift in Russian economy. Approximately 30% of Russia’s GDP relies on exportation, and raw material export constitutes 90% of the entire exportation activity, wherein two-thirds are oil and natural gas. Due to the nature of the Russian industry structure and export items, the decline in oil prices is reinforcing an economic recession in Russia by inevitably contributing to the decrease in energy resource export, decline in economic growth, worsening of financial expenditure over revenue, devastation in value for Russian Ruble, sharp decline in stocks, reduced investments, diminished productivity in industries, and weakened domestic market. Ultimately, it was the key shifting points in the post-Ukrainian crisis international economy (viz. Western economic sanctions and decline in oil prices) that worked as the core cause of the deterioration of Russia’s economy. It can be asserted that the basic conditions of lower oil prices had the worst effect on Russian economy as a whole, while the Western economic sanctions relatively had limited effects. (The rest omitted).
    Keywords: Economic Outlook; Economic Cooperation; Russia; Ukraine
    Date: 2016–09–28
  90. By: Deepa Datta; Benjamin K Johannsen; Hannah Kwon; Robert J Vigfusson
    Abstract: Since 2008, oil and equity returns have moved together much more than they did previously. In addition, we show that both oil and equity returns have become more responsive to macroeconomic news. Before 2008, there is little evidence that oil returns were responsive to macroeconomic news. We argue that these results are consistent with a new-Keynesian model that includes oil and incorporates the zero lower bound on nominal interest rates. Our empirical findings lend support the model's implication that different rules apply at the zero lower bound.
    Keywords: macroeconomic announcements, news, monetary policy, zero lower bound, fiscal policy, fiscal multiplier
    Date: 2017–03
  91. By: Dzmitry Kruk
    Abstract: This work is devoted to the analysis of output downturn in Belarus in 2015. It is shown that economic downturn is not the consequence of only cyclical hesitations, but also of structural compression. Moreover, the structural component of recession in 2016 began to dominate. Downturn became the natural continuation of the long-run tendency of growth attenuation as the result of decrease in productivity. Furthermore, key cause of productivity decrease is endogenous mechanisms of "efficient production repression". External exogenous shocks in 2014-2015 only increased the tendency of productivity decrease speeding up and deepening inevitable structural downturn. In 2015-2016 economic adaptation to productivity decrease was only partial. Broader set of adaptational responses may take place in the future pointing out the protracted nature and the aggravation of the downturn. From economic policy perspective the structural nature of the recession means that "automatic" exit from crisis due to business cycle phase will not happen. In addition, standard tools of economic policy can not effect structural component of the downturn. Thus, measures for stimulating of long-run growth should become the priority of economic policy. The lack of such measures and/or postponing of this measures can lead not only to losses in long-run growth, but will generate losses in the short run.
    Date: 2016–12
  92. By: Malte Krüger
    Abstract: The period from the 1950s to the late 1970s saw an almost uniform decline of cash-to-GDP ratios in industrial countries. A closer look at the German payment system suggests that the factor causing such a change has been the shift towards cashless wage payments. In this period, in Germany, the branch network of the banks expanded significantly and at the end of the period almost all economically active persons had a current account. This change was triggered by rising wages and incomes. Rising wages increased the burden of weekly wage payments in cash, and rising incomes made the average earner more interesting for banks. Moreover, regulation and de-regulation, triggering both, price and non-price competition, may also have played a role. Technological change has not been an independent driver. The introduction of cashless wage payments has not only affected the payment behavior but also the savings behaviour of households. These changes were evolutionary rather than revolutionary, however. So, even though the cash-to-GDP ratio declined in this period, absolute amounts of real cash per capita were still rising.
    Keywords: retail payments, demand for cash, innovation
    JEL: E41 G29 L89 O33
    Date: 2016–09
  93. By: Castagna, Alina; Chentouf, Leila; Ernst, Ekkehard
    Abstract: This article presents an original spatial methodology based on a network analysis approach in order to identify and to track spatial similarities among economic activities as well as to analyse their interdependence. Traditionally, such interdependence is analysed using input-output matrices (IO) that track economic flows across sectors. However, models based on IO do not allow to analyse spatial interdependence. In our approach, instead, we make use of local employment patterns. In particular, using sectoral employment of 8091 Italian municipalities across 18 economic activities, our approach allows to identify spatial inter-linkages in terms of employment patterns. By comparing such local employment patterns, our methodology shows inter-linkages among activities, which are important for understanding the transmission of exogenous shocks. Our analysis highlights similarities among economic activities, and allows to identify central activities (hubs) and their relationship with each other. Moreover, simulating the spread of an exogenous shock through the economic structure allows us to identify important activities not only in economic terms but also in terms of centrality and connectivity.
    Keywords: Network analysis,local employment patterns,business cycles,financial sector,spatial economic analysis
    JEL: C19 C67 E32 R12 R15
    Date: 2017
  94. By: Ross, Cesar
    Abstract: This article analyzes the formalization of Chilean banking activity in the second half of the 19th century. It also considers the consequences of the legalization of banknote issuance as legal currency on the Chilean economy. The main hypothesis is that the formalization of banking activity had two main effects: on the one hand, it helped to develop the money market. On the other hand, it increased market concentration while there was no control of money issuing activity. This article is based on an archival research, contemporary magazines, newspapers and other secondary sources.
    Keywords: issuing banks, means of payment, bank notes, Chile
    JEL: E51 L53 N2 N86
    Date: 2016–08–08
  95. By: Yadulla Hasanli; Adalat Muradovd; Yadulla Hasanli; Nazim Hajiyev
    Abstract: It is for a long time oil since an energy source has got crucial role for the development of the countries. Economy of the all countries create demand to oil and oil products. It has been already extracting oil in more than hundred countries. Oil volume and its prices is always in the limelight of the consumers and producers. Changing of the oil prices affects production indicators in all areas of the economy as well as the level of the prices.Political issues also affect oil prices taking into account the reason of the neccesity of oil and oil prices in the vital fields of the economy.Therefore prediction of the oil prices is always in the limelight of the oil producer and consumer countries as well as the politicians. From this point of view prognosis of the oil prices is in the agenda as a urgent problem. Oil prices also have got impact on the formalization of the prices of the alternativ energy products. Exact prediction of the oil prices is very complex. Prediction of the well-known international institutions about the oil prices has been considerably deviation from the real facts. Nevertheless investigations is continuning in this direction. Complexity of the prognosis of the oil prices is related the impact of political issues to oil prices as well as economic factors. More deviation of the prognosis of the oil prices is observing in the crises and the political ambitions. For main purpose it is necessary to fulfill the following problems: • To decompose and learn the factors which influence oil prices; • Analysis of the prognosis with ARIMA,TREND and HOLT methods; • To collect data and fulfill descriptive analysis; • To establish an econometric model for dependence of oil price on factors, including non-qualitative factors those influence as well and defining the significant factors through proper tests. Dynamics of the oil prices are influenced by some factors those may be decomposed as follows: • Economic(World GDP growth, economic growth of USA, China and India, oil production volume etc); • Natural climate; • Military-political (intergovemental conflicts etc.). Recently economic growth factor of high demographicly developed China and India will increase its importance in forecasting of the oil prices. In the research linear-logarithm trend model of the dependence of the daily oil prices on the influencing factors was econometrically evaluated and defined that in spite of increase propensity of the daily oil prices between 0.022 % and 0.025%, some new factors has changed this positive increase to negative. These factors include liquidatation of the prohibition of oil exports of the USA and Iranian oil exports to world markets.
    Keywords: Azerbaijan and world, Macroeconometric modeling, Macroeconometric modeling
    Date: 2016–07–04
  96. By: Trygve Ottersen; David B. Evans; Elias Mossialos; John-Arne Røttingen
    Abstract: Universal health coverage and healthy lives for all are now widely shared goals and central to the 2030 Agenda for Sustainable Development. Despite significant progress over the last decades, the world is still far from reaching these goals. Billions of people lack basic coverage of health services, live with unnecessary pain and disability, or have their lives cut short by avoidable or treatable conditions (Jamison et al., 2013; Murray et al., 2015; World Health Organization, World Bank, 2015). At the same time, millions are pushed into poverty simply because they need to use health services and must pay for them out-of-pocket. Fundamental to this situation is the way health interventions and the health system are financed. Numerous countries spend less than is required to ensure even the most essential health services, scarce funds are wasted, out-of-pocket payments remain high and disadvantaged groups get the least public resources despite having the greatest needs
    JEL: E6
    Date: 2017–04

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