nep-mac New Economics Papers
on Macroeconomics
Issue of 2017‒05‒28
77 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Sharing the Pain? Credit Supply and Real Effects of Bank Bail-ins By Beck, Thorsten; Da-Rocha-Lopes, Samuel; Silva, Andre
  2. Hopf Bifurcation from new-Keynesian Taylor rule to Ramsey Optimal Policy By Chatelain, Jean-Bernard; Ralf, Kirsten
  3. Fiscal Policy News Shocks and the Japanese Macroeconomy By Tuan Khai Vu
  4. Who is John Galt? Un análisis de la crisis financiera de 2008 desde la óptica de la Escuela Austríaca By Diego Rijos
  5. Hopf Bifurcation from new-Keynesian Taylor rule to Ramsey Optimal Policy By Jean-Bernard, Chatelain; Kirsten, Ralf
  6. The Fiscal-Monetary Policy Mix in the Euro Area: Challenges at the Zero Lower Bound By Orphanides, Athanasios
  7. Assessing fiscal policy through the lens of the financial and the commodity price cycles By Enrique Alberola-Ila; Ricardo Sousa
  8. Une perspective macroprudentielle pour la stabilité financière By Pinshi, Christian
  10. Credit conditions and the housing price ratio: evidence from Ireland's bubble and crash By Ronan C Lyons
  11. Government Spending Effectiveness and The Quality of Fiscal Institutions By Aygun Garayeva; Gulzar Tahirova
  12. Coherent financial cycles for G-7 countries: Why extending credit can be an asset By Yves S. Schüler; Paul P. Hiebert; Tuomas A. Peltonen
  13. The impact of macroprudential policies and their interaction with monetary policy: an empirical analysis using credit registry data By Gambacorta, Leonardo; Murcia, Andrés
  14. Policy Uncertainty In Japan By Elif C. Arbatli; Steven J. Davis; Arata Ito; Naoko Miake; Ikuo Saito
  15. Moving Closer or Drifting Apart: Distributional Effects of Monetary Policy By Lucas Hafemann; Paul Rudel; Joerg Schmidt
  16. Policy, Risk and Spillover Analysis in the World Economy; A Panel Dynamic Stochastic General Equilibrium Approach By Francis Vitek
  17. Capital Taxation with Heterogeneous Discounting and Collateralized Borrowing By Nina Biljanovska; Alexandros Vardoulakis
  18. Determinants of Inflation in Azerbaijan By Vugar Rahimov; Shaig Adigozalov; Fuad Mammadov
  19. Permanent and Temporary Oil Price Shocks, Macroeconomic Policy, and Tradable Non-oil Sector: Case of Azerbaijan, Kazakhstan, and Russia By Ramiz Rahmanov
  20. Foreign currency lending in Albania By Shijaku, Gerti
  21. "On the Centrality of Redemption: Linking the State and Credit Theories of Money through a Financial Approach to Money" By Eric Tymoigne
  22. The Effects of Fiscal Consolidations: Theory and Evidence By Alberto Alesina; Omar Barbiero; Carlo Favero; Francesco Giavazzi; Matteo Paradisi
  23. Dampening General Equilibrium: From Micro to Macro By George-Marios Angeletos; Chen Lian
  24. Revisiting Speculative Hyperinflations in Monetary Models By Obstfeld, Maurice; Rogoff, Kenneth
  25. Catallactics misapplication: it impact on Africa’s economy By Tweneboah Senzu, Emmanuel
  26. The role of money as an important pillar for monetary policy: the case of Albania By Shijaku, Gerti
  27. Economic Policy Uncertainty Spillovers in Booms and Busts By Giovanni Caggiano; Efrem Castelnuovo; Juan Manuel Figueres
  28. The Nexus of Monetary Policy and Shadow Banking in China By Kaiji Chen; Jue Ren; Tao Zha
  29. Unemployment, Marginal Attachment and Labor Force Participation in Canada and the United States By Jones, Stephen R. G.; Riddell, W. Craig
  30. Macroeconomic Effects of Medicare By Juan Carlos Conesa; Daniela Costa; Parisa Kamali; Timothy J. Kehoe; Vegard M. Nygard; Gajendran Raveendranathan; Akshar Saxena
  31. Should Unconventional Monetary Policies Become Conventional? By Dominic Quint; Pau Rabanal
  32. Unemployment, Marginal Attachment and Labor Force Participation in Canada and the United States* By Stephen R.G. Jones; W. Craig Riddell
  33. Real Rates and Consumption Smoothing in a Low Interest Rate Environment: The Case of Japan By Lecznar, Jonathan; Lubik, Thomas A.
  34. Saving Alberta's Resource Revenues: Role of Intergenerational and Liquidity Funds By Rick van der Ploeg; Ton S. van den Bremer
  35. External Adjustment in Oil Exporters: The Role of Fiscal Policy and the Exchange Rate By Alberto Behar; Armand Fouejieu
  36. Macroprudential Policy Coordination with International Capital Flows By William Chen; Gregory Phelan
  37. The impact of global uncertainty on the global economy, and large developed and developing economies By Kang, Wensheng; Ratti, Ronald. A.; Vespignani, Joaquin
  38. Asymmetries in Yield Curves: Some Empirical Evidence from Ghana By Njindan Iyke, Bernard
  39. Price Rigidity at Near-Zero Inflation Rates: Evidence from Japan By Kota Watanabe; Tsutomu Watanabe
  40. Stimulus Effects of Investment Tax Incentives: Production versus Purchases By Christopher L. House; Ana-Maria Mocanu; Matthew D. Shapiro
  41. Labor Rigidity and the Dynamics of the Value Premium By Roberto Marfè
  42. Optimal Fiscal and Monetary Policy, Debt Crisis and Management By Cristiano Cantore; Paul L Levine; Giovanni Melina; Joseph G Pearlman
  43. The Fall of the Labor Share and the Rise of Superstar Firms By Autor, David; Dorn, David; Katz, Lawrence; Patterson, Christina; Van Reenen, John
  44. Methodological Approaches to the Construction of a Medium-Term Forecast of the Development of the Financial Sector of the Russian Federation in the Context of Foreign Policy Uncertainty By Andreev, Mikhail; Khromov, Michael; Shchelokova, Dina
  45. Recent Developments in U.S. Monetary Policy: a presentation at Association for Corporate Growth–Monthly Breakfast Meeting, Olin Business School, Washington University in St. Louis, St. Louis, Mo. May 19, 2017. By Bullard, James B.
  46. Further Results on Preference Uncertainty and Monetary Conservatism By Keiichi Morimoto
  47. The Macroeconomics of De-Cashing By Alexei P Kireyev
  48. Monetary Policy, Fisal Federalism, and Capital Intensity By Nadav Ben Zeev; Ohad Raveh
  49. Job Displacement Risk and Severance Pay By Marco Cozzi
  50. Trend TFP Growth in the United States: Forecasts versus Outcomes By Crafts, Nicholas; Mills, Terence C
  51. Overpersistence Bias in Individual Income Expectations and its Aggregate Implications By Rozsypal, Filip; Schlafmann, Kathrin
  52. When Multiple Objectives Meet Multiple Instruments: Identifying Simultaneous Monetary Shocks By Daniel Ordoñez-Callamand; Juan D. Hernandez-Leal; Mauricio Villamizar-Villegas
  53. The Optimum Quantity of Debt for Japan By Tomoyuki Nakajima; Shuhei Takahashi
  54. A small scale forecasting and simulation model for Azerbaijan (FORSAZ) By Salman Huseynov; Fuad Mammadov
  55. Are Stock Returns an Inflation Hedge for the UK? Evidence from a Wavelet Analysis Using Over Three Centuries of Data By Aviral Kumar Tiwari; Juncal Cunado; Rangan Gupta; Mark E. Wohar
  56. Fiscal Crises By Kerstin Gerling; Paulo A Medas; Tigran Poghosyan; Juan Farah-Yacoub; Yizhi Xu
  57. Does Primary Sovereignty Risk Matter for Bank Fragility? Evidence from Albanian Banking System By Shijaku, Gerti
  58. Bargeld quo vadis? By Morscher, Christof; Schlothmann, Daniel; Horsch, Andreas
  59. Disaster recovery and the term structure of dividend strips? By Michael Hasler; Roberto Marfè
  60. Chocs macroéconomiques et intégration d’une union économique et monétaire: cas du Nigéria By Nassirou, Aïchat
  61. Real effects of bank capital regulations: Global evidence By Deli, Yota; Hasan, Iftekhar
  62. The Consumption Response to Minimum Wages: Evidence from Chinese Households By Dautovic, Ernest; Hau, Harald; Huang, Yi
  63. Tributación sobre las utilidades empresariales en Colombia: una comparación de los regímenes impositivos de antes y después de la ley 1819 de 2016 By Javier Ávila Mahecha; Jorge Armando Rodríguez
  64. Macroprudential Policy, Incomplete Information and Inequality; The case of Low-Income and Developing Countries By Margarita Rubio; Filiz D Unsal
  65. The Causes and Costs of Misallocation By Diego Restuccia; Richard Rogerson
  66. Why Is Food Consumption Inequality Underestimated? A Story of Vices and Children By Raül Santaeulàlia-Llopis; Yu Zheng
  67. A Note on the Impact of Unconventional Monetary Policy Shocks in the US on Emerging Market REITs: A Qual VAR Approach By Rangan Gupta; Hardik A. Marfatia
  68. Long-term effects of fiscal policy in Uruguay By Leonel Muinelo-Gallo; Oriol Roca-Sagalés
  69. IW monetary outlook: The contribution of supply and demand factors to low inflation By Hüther, Michael; Demary, Markus
  70. Do we want these two to tango? On zombie firms and stressed banks in Europe By Storz, Manuela; Koetter, Michael; Setzer, Ralph; Westphal, Andreas
  71. The Shifting Natural Wealth of Nations: The Role of Market Orientation By Rick van der Ploeg; Rabah Arezkir; Frederik Toscani
  72. An Efficient Bayesian Approach to Multiple Structural Change in Multivariate Time Series By Maheu, John M; Song, Yong
  73. Fiscal Policy Effectiveness in a Small Open Economy; Estimates of Tax and Spending Multipliers in Paraguay By Antonio David
  74. Does Prolonged Monetary Policy Easing Increase Financial Vulnerability? By Stephen Cecchetti; Tommaso Mancini Griffoli; Machiko Narita
  75. On domestic demand and export performance in the euro area countries: Does export concentration matter? By Paulo Soares Esteves; Elvira Prades
  76. Fiscal Decentralization and Fiscal Policy Performance By Moussé Sow; Ivohasina F Razafimahefa
  77. ECB might overshoot the inflation target By Demary, Markus; Hüther, Michael

  1. By: Beck, Thorsten; Da-Rocha-Lopes, Samuel; Silva, Andre
    Abstract: We analyze the credit supply and real sector effects of bank bail-ins by exploiting the unexpected failure of a major bank in Portugal and its subsequent resolution. Using a unique dataset of matched firm-bank data on credit exposures and interest rates from the Portuguese credit register, we show that while banks more exposed to the bail-in significantly reduced credit supply after the shock, affected firms were able to compensate this credit contraction with other sources of funding, including new lending relationships. Although there was no loss of external funding, we observe a moderate tightening of credit conditions as well as lower investment and employment at firms more exposed to the intervention, particularly SMEs. We explain the latter real effects by higher precautionary cash holdings due to increased uncertainty.
    Keywords: Bail-ins; bank failures; credit supply; employment; investment
    JEL: E22 E24 E58 G01 G21 G28 G32
    Date: 2017–05
  2. By: Chatelain, Jean-Bernard; Ralf, Kirsten
    Abstract: This paper shows that a shift from Ramsey optimal policy under short term commitment (based on a negative-feedback mechanism) to a Taylor rule (based on positive-feedback mechanism) in the new-Keynesian model is in fact a Hopf bifurcation, with opposite policy advice. The number of stable eigenvalues corresponds to the number of predetermined variables including the interest rate and its lag as policy instruments for Ramsey optimal policy. With a new-Keynesian Taylor rule, however, these policy instruments are arbitrarily assumed to be forward-looking variables when policy targets (inflation and output gap) are forward-looking variables. For new-Keynesian Taylor rule, this Hopf bifurcation implies a lack of robustness and multiple equilibria if public debt is not set to zero for all observation.
    Keywords: Bifurcation,Taylor rule,new-Keynesian model,Ramsey optimal policy,Finite horizon commitment
    JEL: C61 C62 E43 E47 E52 E58
    Date: 2017
  3. By: Tuan Khai Vu (Meisei University)
    Abstract: Recently it has been increasingly recognized that, when identifying fiscal policy shocks, we should take into account the fact that they are often well anticipated before they actually materialize. Extending the structural VAR of Mountford and Uhlig (2009), this paper uses a new method that is able to identify fiscal policy shocks as both unanticipated and anticipated (or news) shocks. The method is also able to identify multiple news shocks. The method is applied to the data of Japan. We find that there is a clear difference between the effects of an unanticipated government spending shock and those of an anticipated one: in the whole sample period (1968Q1-2010Q1), the former significantly increases GDP, consumption, and employment, while the latter does not. We also find that the effectiveness of government spending policy is very different between the pre- and post-bubble periods: an anticipated government spending policy can stimulate the economy in terms of GDP and consumption in the former period, while in the latter period it cannot do so or it even aggravates the business cycle fluctuations at some horizons.
    Keywords: government spending, Japanese economy, news shock, VAR, sign restriction
    JEL: C32 E32 E62
    Date: 2015–09
  4. By: Diego Rijos (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración.)
    Abstract: The 2008 financial crisis, is perhaps the most significative event in the world’s economy during the XXI century. The present paper tries to explain this phenomena in light of the Austrian Business Cycle Theory (ABCT) developed by the Austrian School of Economics. With that in mind, this paper study the relation between the historical facts that happened during the previous years in the American economy and the stylized facts presented by the theory. In concrete we can observe an expansive monetary police held by the Federal Reserve during the previous years led the Federal Funds Rate below the individual’s intertemporal preference rate, i.e. original interest rate. As consequence of this, we can observe a misallocation of original factors in new ventures that led into a new more roundabout structure of production. Specifically, a conjunction of low interest rates in mortgages contracts and institutional factors led to the formation of a bubble in the real state sector. The growth in subprime lends and new ways to expand the credit via securities led into a financial mess that explodes once the Federal Reserve rises the FFR. As the FFR raised, the credit emitted by banks started to be tightened with less refinancing of default credits, specially affecting the subprime borrowers. As subprime borrowers default their mortgages, the different securities that were backed in them, start to have problems in payments. This affect not only individuals, but also banks, which have strong losses that in some cases led some financial organizations to the bankruptcy. As the securities were bought by agents of foreign economies the crisis spill over the world. As the ABCT predict, in this context the production structure in the expansive phase evolved in a more roundabout structure but as soon as the credit was retracted the structure became less roundabout. From the point of view of the stock market and the original factor’s prices, the behavior of this variables are in concordance with what the theory predict. Giving this, the stylized facts presented by the ABCT seem to be a good theoretical framework to explain this crisis.
    Keywords: 2008 Crisis, Austrian Buisness Cycle Theory, Subprime Crisis, ABCT
    JEL: B25 B53 E32 E44 E43 E51 E52 E58 N12
    Date: 2017–04
  5. By: Jean-Bernard, Chatelain; Kirsten, Ralf
    Abstract: This paper shows that a shift from Ramsey optimal policy under short term commitment (based on a negative-feedback mechanism) to a Taylor rule (based on positive-feedback mechanism) in the new-Keynesian model is in fact a Hopf bifurcation, with opposite policy advice. The number of stable eigenvalues corresponds to the number of predetermined variables including the interest rate and its lag as policy instruments for Ramsey optimal policy. With a new-Keynesian Taylor rule, however, these policy instruments are arbitrarily assumed to be forward-looking variables when policy targets (inflation and output gap) are forward-looking variables. For new-Keynesian Taylor rule, this Hopf bifurcation implies a lack of robustness and multiple equilibria if public debt is not set to zero for all observation.
    Keywords: Bifurcations, Taylor rule, Taylor principle, new-Keynesian model, Ramsey optimal policy, Finite horizon commitment
    JEL: C61 C62 E43 E44 E47 E52 E58
    Date: 2017–05–20
  6. By: Orphanides, Athanasios
    Abstract: This paper explores the reasons for the suboptimal fiscal-monetary policy mix in the euro area in the aftermath of the global financial crisis and ways in which the status quo can be improved. A comparison of fiscal and monetary policies and of economic outcomes in the euro area and the United States suggests that both fiscal and monetary policy in the euro area have been overly tight. Fiscal policy has been hampered by the institutional framework which constrains individual states and lacks instruments to secure an appropriate aggregate stance. ECB monetary policy has been hampered by the distributional effects of balance sheet policies which needed to be adopted at the zero lower bound, and by discretionary decisions taken before the crisis such as the reliance on credit rating agencies for determining collateral eligibility for monetary operations. The compromising of the "safe asset" status of euro area sovereign debt during the crisis complicated fiscal and monetary policy. Changes in the discretionary decisions governing the implementation of monetary policy in the euro area can potentially reduce the distributional effects of policy and improve the fiscal-policy mix and longer-term prospects for the euro area.
    Keywords: collateral eligibility; credit risk.; ECB; Euro crisis; loss sharing; Quantitative easing; redenomination risk; safe assets; Sovereign debt; zero lower bound
    JEL: E52 E58 E61 E62 G01
    Date: 2017–05
  7. By: Enrique Alberola-Ila; Ricardo Sousa
    Abstract: We assess the link between fiscal policy and credit and commodity price booms and busts. We do so by investigating the impact of financial and commodity price cycles on the identification of episodes of fiscal consolidation and stimulus and the size of the fiscal impulse. We find that controlling for the credit cycle has an impact on the magnitude of the change in the cyclically-adjusted budget balance. The impact is lower in the case of the commodity price cycle. In addition, we show that credit booms and busts influence the cyclicality of fiscal policy, but not to the extent of significantly altering the systematic response of fiscal policy to the dynamics of real economic activity. Again, the impact of the commodity price cycle is smaller and limited to some specific cases.
    Keywords: fiscal policy, financial cycles, commodity price cycles, fiscal impulse, fiscal consolidation, fiscal stimulus, cyclicality
    JEL: E32 E62 Q33 E10 E40 E50 E47
    Date: 2017–05
  8. By: Pinshi, Christian
    Abstract: The need to strengthen the macroprudential orientation of financial regulatory and supervisory frameworks stays a priority for financial and real good health. Stability financial is threatened with endogenous and exogenous risks translating crises, hence it has to a healthy regulation for the reduction risks. Macroprudential policy proves to be a best regulation limiting systemic risk. We wonder about adoption a framework macroprudential for stability financial in Democratic Republic of Congo (DRC). The great correlation between countercyclical capital buffer and stability financial justify to make use of framework macroprudential. The causality analysis put in light the effect of policy macroprudential on financial stability. The coefficient of reserve requirements, used like an indicator par excellence, and countercyclical capital buffer cause financial stability. That’s justify an adoption of framework macroprudential in DRC. Then, we showed that credit growth in DRC is below crisis threshold, banks should grant more credit as much as they are below crisis threshold instead of credit crunch. Finally, we suggest a best Framework governance for a macroprudential policy in DRC. The game must be cooperative but flexible with monetary policy, it means, we must create a general management or autonomous institution macroprudential. However monetary policy must have a power supreme or a low of veto on this financial stability general management.
    Keywords: Monetary Policy, financial stability, macroprudential policy
    JEL: E37 E51 E58 G13 G18
    Date: 2017–05–17
  9. By: Bruno Albuquerque (-)
    Abstract: I investigate the extent to which a common US monetary policy affects regional asymmetries through different household debt levels across states. After constructing a novel indicator of consumer prices at the state level, I compute a state-specific monetary policy stance measure as deviations from an aggregate Taylor rule for a panel of 30 states. Using local projection methods over 1999-2015, I find that a common monetary policy contributes to amplifying regional asymmetries. While a looser monetary policy stance stimulates borrowing and growth in states with low household debt, it is only the case in the short term for high debt states: household debt and real GDP decline over the medium to longer run in high debt states.
    Keywords: Monetary policy, Household debt, Regional asymmetries, Local Projections, Taylor rule
    JEL: C33 E32 E52 G21
    Date: 2017–05
  10. By: Ronan C Lyons (Department of Economics, Trinity College Dublin)
    Abstract: The Great Recession starting in 2007 has refocused attention on the importance of understanding housing market dynamics as contributors to macroeconomic fluctuations. While the sale-to-rent ratio of housing prices is generally regarded as a fundamental barometer of housing market health, the study of its determinants remains in its infancy. This paper examines the housing price ratio in Ireland, during an extreme housing market cycle. Using new data on first-time buyer loan-to-value (LTV) ratios, a one-step error correction model of the housing price ratio in Ireland is presented for the first time. Covering the period 2000-2012, it finds clear evidence that, alongside user cost, credit conditions were central in determining equilibrium in the housing market, which saw rapid adjustment in the ratio in response to changes in its determinants. The results imply that an increase in the LTV by 10pp would have associated with a fall in the yield in 2012 from 5.6% to 5.2% in equilibrium. Overall, the results suggest that simplistic models of the housing price ratio, depending solely on user cost, are lacking. The importance of credit conditions is a finding with implications for other markets and for macro-prudential policy.
    Keywords: Housing markets; housing bubbles; price-rent ratio; credit conditions; Ireland.
    JEL: E32 E44 E51 G12 G21 R21 R31
    Date: 2017–03
  11. By: Aygun Garayeva (Central Bank of Azerbaijan Republic); Gulzar Tahirova (Central Bank of Azerbaijan Republic)
    Abstract: This paper examines the impact of the quality of fiscal institutions on the effectiveness of government expenditures. The cyclical behavior of government spending and output is used as a proxy for the effectiveness of public spending, and fiscal policy is considered to be effective, if it is countercyclical. Empirical estimation is conducted using panel data fixed effects method, for the yearly time period of 1996-2013, in the sample of 45 countries. Countries are divided between 3 groups of countries – Western European, Eastern European and CIS countries – with each one of these groups representing a different development stage, to find out whether the determinants of public spending efficiency differ between countries in different development stages. The main result of the empirical research is that in developed countries the main determinants of government spending effectiveness are found to be the quality of economic institutions, but access to financial markets is more pronounced in developing countries.
    Keywords: Fiscal policy, Procyclicality, Institutional quality, Panel data
    JEL: E62 E32 E02 D73
    Date: 2016–07–07
  12. By: Yves S. Schüler; Paul P. Hiebert; Tuomas A. Peltonen
    Abstract: Failing to account for joint dynamics of credit and asset prices can be hazardous for countercyclical macroprudential policy. We show that composite financial cycles, emphasising expansions and contractions common to credit and asset prices, powerfully predict systemic banking crises. Further, the joint consideration yields a more robust view on financial cycle characteristics, reconciling an empirical puzzle concerning cycle properties when using two popular alternative methodologies: frequency decompositions and standard turning point analysis. Using a novel spectral approach, we establish the following facts for G-7 countries (1970Q1-2013Q4): Relative to business cycles, financial cycles differ in amplitude and persistence – albeit with heterogeneity across countries. Average financial cycle length is around 15 years, compared with 9 years (6.7 excluding Japan) for business cycles. Still, country-level business and financial cycles relate occasionally. Across countries, financial cycle synchronisation is strong for most countries; but not for all. In contrast, business cycles relate homogeneously. JEL Classification: C54, E32, E44, E58, G01
    Keywords: Financial cycle, Spectral analysis, Macroprudential policy
    Date: 2017–05
  13. By: Gambacorta, Leonardo; Murcia, Andrés
    Abstract: This paper summarises the results of a joint research project by eight central banks in the Americas region to evaluate the effectiveness of macroprudential tools and their interaction with monetary policy. In particular, using meta-analysis techniques, we summarise the results for five Latin American countries (Argentina, Brazil, Colombia, Mexico and Peru) that use confidential bank-loan data. The use of granular credit registry data helps us to disentangle loan demand from loan supply effects without making strong assumptions. Results from another three countries (Canada, Chile and the United States) corroborate the analysis using data for credit origination and borrower characteristics. The main conclusions are that (i) macroprudential policies have been quite effective in stabilising credit cycles. The propagation of the effects to credit growth is more rapid (they materialise after one quarter) for policies aimed at curbing the cycle than for policies aimed at fostering resilience (which take effect within a year); and (ii) macroprudential tools have a greater effect on credit growth when reinforced by the use of monetary policy to push in the same direction.
    Keywords: bank lending; credit registry data; macroprudential policies; meta-analysis
    JEL: E43 E58 G18 G28
    Date: 2017–05
  14. By: Elif C. Arbatli; Steven J. Davis; Arata Ito; Naoko Miake; Ikuo Saito
    Abstract: We develop new economic policy uncertainty (EPU) indices for Japan from January 1987 onwards building on the approach of Baker, Bloom and Davis (2016). Each index reflects the frequency of newspaper articles that contain certain terms pertaining to the economy, policy matters and uncertainty. Our overall EPU index co-varies positively with implied volatilities for Japanese equities, exchange rates and interest rates and with a survey-based measure of political uncertainty. The EPU index rises around contested national elections and major leadership transitions in Japan, during the Asian Financial Crisis and in reaction to the Lehman Brothers failure, U.S. debt downgrade in 2011, Brexit referendum, and Japan’s recent decision to defer a consumption tax hike. Our uncertainty indices for fiscal, monetary, trade and exchange rate policy co-vary positively but also display distinct dynamics. VAR models imply that upward EPU innovations foreshadow deteriorations in Japan’s macroeconomic performance, as reflected by impulse response functions for investment, employment and output. Our study adds to evidence that credible policy plans and strong policy frameworks can favorably influence macroeconomic performance by, in part, reducing policy uncertainty.
    JEL: D80 E2 E52 E62 F13
    Date: 2017–05
  15. By: Lucas Hafemann (Justus-Liebig-University Giessen); Paul Rudel (Justus-Liebig-University Giessen); Joerg Schmidt (Justus-Liebig-University Giessen)
    Abstract: Our paper picks up the current controversial debate about increasing (income) inequality due to recent monetary policy measures in major advanced economies. We use a VAR framework identified with sign restrictions to figure out how income inequality related measures react to monetary policy shocks in three different advanced economies with an independent monetary policy regime. We choose the U.S., Canada and Norway. While all economies experience an increase in Gini coecients of market income in the presence of an expansionary monetary policy shock, only the U.S. and Canada show a significant response in the Gini coefficient of disposable income when facing such shocks. To figure out how the transmission of monetary policy to overall income inequality works we pick up two major channels dominant in literature: The employment channel and the income composition channel. The latter is analyzed by data from national accounts concerning two different kinds of income households receive: Labor related income and capital payments, both net. We find that while in the U.S. as well as in Canada capital income recipients profit disproportionately from expansionary monetary policy, in Norway both types of (net) income benefit similarly from expansionary monetary policy shocks. We conclude that fiscal policy makers can successfully address and mitigate harmful effects of increased market income inequality.
    Keywords: Income Inequality, Factor Income Distribution, Monetary Policy, VAR, Sign-Restrictions
    JEL: D31 D33 E24 E25 E52 E64
    Date: 2017
  16. By: Francis Vitek
    Abstract: This paper develops a structural macroeconometric model of the world economy, disaggregated into forty national economies, to facilitate multilaterally consistent macrofinancial policy, risk and spillover analysis. This panel dynamic stochastic general equilibrium model features a range of nominal and real rigidities, extensive macrofinancial linkages, and diverse spillover transmission channels. These macrofinancial linkages encompass bank and capital market based financial intermediation, with financial accelerator mechanisms linked to the values of the housing and physical capital stocks. A variety of monetary policy analysis, fiscal policy analysis, macroprudential policy analysis, spillover analysis, and forecasting applications of the estimated model are demonstrated. These include quantifying the monetary, fiscal and macroprudential transmission mechanisms, accounting for business cycle fluctuations, and generating relatively accurate forecasts of inflation and output growth.
    Date: 2017–04–04
  17. By: Nina Biljanovska; Alexandros Vardoulakis
    Abstract: We study optimal long-run capital taxation in a closed economy with heterogeneity in agents' time-discount factors where borrowing is allowed but restricted by a collateral constraint. Financial frictions distort intertemporal optimization margins and the tax system serves a dual role: first, it is used to finance government consumption; second, it serves to alleviate the distortions arising from the binding collateral constraint. The discrepancy between the private and the social discount factors pushes for a subsidy on capital, while the discrepancy introduced by the collateral constraint pushes for a tax in the long-run. When consumption smoothing motives are muted, the two effects counter-balance each other and the tax is zero. With finite elasticity of intertemporal substitution, the second discrepancy dominates and the tax on capital income is positive in the long-run.
    Keywords: Ramsey taxation ; Collateral constraint ; Heterogeneous discount factors ; Tax on capital
    JEL: E60 E61 E62 H21
    Date: 2017–05–05
  18. By: Vugar Rahimov (Central Bank of Azerbaijan Republic); Shaig Adigozalov (Central Bank of Azerbaijan Republic); Fuad Mammadov (Central Bank of Azerbaijan Republic)
    Abstract: This paper assesses the main determinants of inflation in Azerbaijan during 2003-2015 years. Using quarterly data on CPI, trade partner’s CPI, nominal effective exchange rate (NEER), money supply (M2), real non-oil gross domestic product (NGDP) and credits we employ vector auto regression (VAR) analysis in order to conduct our study. Impulse response and variance decomposition analysis suggest that inflation is mostly explained by foreign inflation, fiscal policy, exchange rate and own shocks. Whereas monetary policy and supply shocks do not play any essential role in explaining inflation. Among these variables inflation expectations, foreign inflation and monetary policy (credit variable) have quick effect on domestic headline inflation, whereas the effect of fiscal variable is relatively slower: it takes two quarters to fully reflect on prices. We also find that appreciation of exchange rate has deflationary effect on domestic inflation.
    Keywords: consumer price index, inflation, determinants of inflation, historical decomposition, developing country, structural vector autoregression
    JEL: E31 E50
    Date: 2016–10–12
  19. By: Ramiz Rahmanov (Central Bank of Azerbaijan Republic)
    Abstract: This paper examines the economic effects of permanent and temporary oil price shocks in three oil exporting countries (Azerbaijan, Kazakhstan, and Russia) using the five variable (real short-term interest rate, real effective exchange rate, real budget expenditure, real imports, and real tradable non-oil production) VARX model with two exogenous variables which represent the corresponding shocks. The impulse response analysis conducted over the quarterly data from 2003:I to 2015:IV shows that in Azerbaijan, a permanent oil price shock produces a significantly positive effect on all variables but interest rate, while a temporary oil price shock has a significant and positive effect only on imports and exchange rate. For Kazakhstan, the impulse response functions show that a permanent oil price shock significantly and positively affects interest rate, imports, and budget expenditure; a temporary oil price shock has a significantly positive influence on all variables except budget expenditure. In Russia, a permanent oil price shock produces a significantly positive effect on all variables; a temporary oil price shock exerts a significantly positive effect on all variables but interest rate. Contrary to the permanent income hypothesis, the budget expenditure in Russia responds both to the permanent and temporary oil price shocks. Such divergence from the hypothesis can be explained by the specifics of the policy on the oil revenue spending. As regards the presence of the symptoms of the Dutch disease, the results indicate only on one symptom. Thus oil price shocks ultimately lead to appreciation of national currencies but not to a decline in tradable non-oil production.
    Keywords: permanent oil price shock, temporary oil price shock, macroeconomic policy, non-oil economy, Permanent income hypothesis, Dutch disease, VARX, Azerbaijan, Kazakhstan, Russia
    JEL: C54 E32 E37 E63 Q32
    Date: 2016–12–10
  20. By: Shijaku, Gerti
    Abstract: The growth of lending in foreign currency in many Central, Eastern and South Eastern European (CESEE) countries has driven to the expansion of analyses and researches in this regard. In Albania, similar to the other regional countries, the study of main determinants of foreign currency-lending is rather important. FCL accounts for 65% of lending to private sector. This paper examines the determinants of FCL to the private sector by means of the bound test approach to Autoregressive Distributed Lag approach, based on demand and supply indicators. The results provide evidence that foreign currency lending is mainly driven by the availability of bank foreign funding deposits and minimum variance portfolio share. Foreign currency lending is more preferred under higher interest rate differentials, inflation volatility and lower exchange rate volatility. The study identifies a long-run cointegrated and stable relationship.
    Keywords: Foreign currency lending, dollarization, minimum variance portfolio, ARDL approach
    JEL: C32 C51 E44 E51 F31 G11 G21
    Date: 2016
  21. By: Eric Tymoigne
    Abstract: The paper presents a financial approach to monetary analysis that links the credit and state theories of money. A premise of the functional approach to money is that "money is what money does." In this approach, monetary and mercantile mechanics are conflated, which leads to the conclusion that unconvertible monetary instruments are worthless. The financial approach to money strictly separates the two mechanics and argues that major monetary disruptions occurred when the two were conflated. Monetary instruments have always been promissory notes. As such, their financial characteristics are central to their value and liquidity. One of the main financial requirements of any monetary instrument is that it be redeemable at any time. As long as this is the case, the fair value of an unconvertible monetary instrument is its face value. While the functional approach does not recognize the centrality of redemption, the paper shows that redemption plays a critical role in the state and credit views of money. Payments due to issuer and/or convertibility on demand are central to the possibility of par circulation. The paper shows that this has major implications for monetary analysis, both in terms of understanding monetary history and in terms of performing monetary analysis.
    Keywords: Credit Theory of Money; State Theory of Money; Net Present Value; Monetary Systems
    JEL: E31 E42 G12
    Date: 2017–05
  22. By: Alberto Alesina; Omar Barbiero; Carlo Favero; Francesco Giavazzi; Matteo Paradisi
    Abstract: We investigate the macroeconomic effects of fiscal consolidations based upon government spending cuts, transfers cuts and tax hikes. We extend a narrative dataset of fiscal consolidations, finding details on over 3500 measures. Government spending and transfer cuts reduce output by less than tax hikes. Standard New Keynesian models match our results when fiscal shocks are persistent. Wealth effects on aggregate demand mitigates the impact of a persistent spending cut. Static distortions caused by persistent tax hikes cause larger shifts in aggregate supply under sticky prices. This channel explains different sizes of multipliers found in fiscal stimuli compared to consolidation plans.
    JEL: E62 H60
    Date: 2017–05
  23. By: George-Marios Angeletos; Chen Lian
    Abstract: We argue that standard modeling practice overstates the potency of general-equilibrium (GE) mechanisms. We formalize the notion that GE adjustment is weak, or that it takes time, by modifying an elementary Walrasian economy in two alternative manners. In one, we replace Rational-Expectations Equilibrium with cognitive processes that mimic, inter alia, Tâtonnement dynamics or Level-k Thinking. In the other, we maintain rational expectations but remove common knowledge of aggregate shocks. This permits us, not only to illustrate the broader plausibility of the sought after notion of GE attenuation, but also to elaborate on the sense in which our preferred approach—removing common knowledge—can be seen as a disciplined substitute to certain kinds of bounded rationality. We discuss possible applications, including how our results may help reduce the gap between the macroeconomic effects of interest and the micro or local elasticities that a growing empirical literature estimates in the cross section.
    JEL: B41 D50 D80 E03 E13 E60
    Date: 2017–05
  24. By: Obstfeld, Maurice; Rogoff, Kenneth
    Abstract: This paper revisits the debate on ruling out speculative hyperinflations in monetary models. Obstfeld and Rogoff (1983, 1986) argue that in pure fiat money models, where the government gives no backing whatsoever to currency, there is in fact no reasonable way to rule out speculative hyperinflations where the value of money goes to zero, even if the money supply itself is exogenous and constant. Such perverse equilibria are ruled out, however, if the government provides even a very small real backing to the currency, indeed the backing does not have to be certain. Cochrane (2011), however, argues that this result is wrong, and that fractional currency backing is a Maginot line that is insufficient to rule out hyperinflation. He goes on to claim that the fiscal theory of the price level provides a much better model of the price-level determination that avoids the multiplicity of problems that plague standard monetary models. We show here why, in fact, Cochrane's analysis is incorrect, and that the equilibrium he considers fails. Our baseline analysis uses a canonical money-in-the-utility-function setup building on Brock (1974, 1975); but following Wallace (1981), we show the same results go through in the overlapping-generations model of money. We go on to discuss why we believe that the fiscal theory of the price level simply sidesteps the problem of monetary determinacy but in no way resolves it.
    Keywords: Asset bubbles; Fiscal theory of the price level; Hyperinflation; money demand
    JEL: E31 E41 E52 E63
    Date: 2017–05
  25. By: Tweneboah Senzu, Emmanuel
    Abstract: The paper seeks to solve the macroeconomic error that emerged from the dispensing of the monetary policy by the Central Banks of Africa. These monetary policies have refused to address the desired economic growth expected by individual developing and underdeveloped countries. It 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: E5 E52 E58
    Date: 2015–07–20
  26. By: Shijaku, Gerti
    Abstract: The main focus of this paper is to appraise the money demand function and the velocity of broad money, M3, in the medium and long-term, given its role as a second pivotal pillar for the monetary policy of the Bank of Albania, in accordance with its primary objective, that of price stability. The results show that the demand for money is stable, even in the aftermath of global financial crisis, as well as its performance contains important information for the inflation trend.
    Keywords: Monetary policy, quantitative theory, Phillips curve, reference value, VECM, P-STAR approach
    JEL: C32 C51 C52 E31 E41
    Date: 2016
  27. By: Giovanni Caggiano (Department of Economics, Monash University; and Department of Economics and Management, University of Padova); Efrem Castelnuovo (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne; Department of Economics, The University of Melbourne; Department of Economics and Management, University of Padova); Juan Manuel Figueres (Department of Economics and Management, University of Padova)
    Abstract: We estimate a nonlinear VAR to quantify the impact of economic policy uncertainty shocks originating in the US on the Canadian unemployment rate in booms and busts. We find strong evidence in favor of asymmetric spillover effects. Unemployment in Canada is shown to react to uncertainty shocks in economic busts only. Such shocks explain about 13% of the variance of the 2-year ahead forecast error of the Canadian unemployment rate in periods of slack vs. just 2% during economic booms. Counterfactual simulations lead to the identification of a novel “economic policy uncertainty spillovers channel”. According to this channel, jumps in US uncertainty foster economic policy uncertainty in Canada in first place and, because of the latter, lead to a temporary increase in the Canadian unemployment rate. Evidence of asymmetric spillover effects due to US EPU shocks are also found for the UK economy. This evidence, which refers to a large economy having a low trade intensity with the US, supports our view that a channel other than trade could be behind our empirical results.
    Keywords: Economic policy uncertainty shocks, spillover effects, unemployment dynamics, Smooth Transition Vector AutoRegressions, recessions
    JEL: C32 E32 E52
    Date: 2017–05
  28. By: Kaiji Chen; Jue Ren; Tao Zha
    Abstract: We estimate the quantity-based monetary policy system in China. We argue that China's rising shadow banking was inextricably linked to banks' balance-sheet risk and hampered the effectiveness of monetary policy on the banking system during the 2009-2015 period of monetary policy contractions. By constructing two micro datasets at the individual bank level, we substantiate this argument with three empirical findings: (1) in response to monetary policy tightening, nonstate banks actively engaged in intermediating shadow banking products; (2) these banks, in sharp contrast to state banks, brought shadow banking products onto the balance sheet via risky investments; (3) bank loans and risky investment assets in the banking system respond in opposite directions to monetary policy tightening, which makes monetary policy less effective. We build a theoretical framework to derive the above testable hypotheses and explore implications of the interaction between monetary and regulatory policies.
    JEL: E02 E5 G11 G12 G28
    Date: 2017–05
  29. By: Jones, Stephen R. G. (McMaster University); Riddell, W. Craig (University of British Columbia, Vancouver)
    Abstract: We analyze changes in unemployment, marginal labor force attachment and participation in Canada and the U.S.. Using two complementary decompositions, we show the importance for the comparative evolution of aggregate unemployment of changes in the fraction of the non-employed who are unemployed and in the fraction of the unemployed who 'want work'. Using microdata we study labor market transition behavior at these margins, finding remarkably consistent results in the two countries, with the marginally attached displaying behavior lying between unemployment and non-attachment. The three non-employment states are distinct from one another in both Canada and the U.S.
    Keywords: unemployment, labor force participation, non-employment, marginal attachment, labor force transitions, heterogeneity
    JEL: E24 E32 J63 J64
    Date: 2017–05
  30. By: Juan Carlos Conesa; Daniela Costa; Parisa Kamali; Timothy J. Kehoe; Vegard M. Nygard; Gajendran Raveendranathan; Akshar Saxena
    Abstract: This paper develops an overlapping generations model to study the macroeconomic effects of an unexpected elimination of Medicare. We find that a large share of the elderly respond by substituting Medicaid for Medicare. Consequently, the government saves only 46 cents for every dollar cut in Medicare spending. We argue that a comparison of steady states is insufficient to evaluate the welfare effects of the reform. In particular, we find lower ex-ante welfare gains from eliminating Medicare when we account for the costs of transition. Lastly, we find that a majority of the current population benefits from the reform but that aggregate welfare, measured as the dollar value of the sum of wealth equivalent variations, is higher with Medicare.
    JEL: E21 E62 H51 I13
    Date: 2017–05
  31. By: Dominic Quint; Pau Rabanal
    Abstract: The large recession that followed the Global Financial Crisis of 2008-09 triggered unprecedented monetary policy easing around the world. Most central banks in advanced economies deployed new instruments to affect credit conditions and to provide liquidity at a large scale after shortterm policy rates reached their effective lower bound. In this paper, we study if this new set of tools, commonly labeled as unconventional monetary policies (UMP), should still be used when economic conditions and interest rates normalize. In particular, we study the optimality of asset purchase programs by using an estimated non-linear DSGE model with a banking sector and long-term private and public debt for the United States. We find that the benefits of using such UMP in normal times are substantial, equivalent to 1.45 percent of consumption. However, the benefits from using UMP are shock-dependent and mostly arise when the economy is hit by financial shocks. When more traditional business cycle shocks (such as supply and demand shocks) hit the economy, the benefits of using UMP are negligible or zero.
    Keywords: United States;Banking;Western Hemisphere;Unconventional Monetary Policy, Optimal Rules, Time-Series Models, Monetary Policy (Targets, Instruments, and Effects)
    Date: 2017–03–31
  32. By: Stephen R.G. Jones; W. Craig Riddell
    Abstract: We analyze changes in unemployment, marginal labor force attachment and participation in Canada and the U.S. Using two complementary decompositions, we show the importance for the comparative evolution of aggregate unemployment of changes in the fraction of the non-employed who are unemployed and in the fraction of the unemployed who ‘want work’. Using microdata we study labor market transition behavior at these margins, finding remarkably consistent results in the two countries, with the marginally attached displaying behavior lying between unemployment and non-attachment. The three non-employment states are distinct from one another in both Canada and the U.S.
    JEL: E24 E32 J63 J64
    Date: 2017–04
  33. By: Lecznar, Jonathan (Boston University); Lubik, Thomas A. (Federal Reserve Bank of Richmond)
    Abstract: We study the dynamics of consumption, the real interest rate, and measures of labor input in Japan over the period from 1985-2014. We identify structural breaks in macroeconomic aggregates during the 1990s and associate them with the zero interest rate policy pursued by the Bank of Japan and the surprise increase in the consumption tax rate in April 1997. Formal estimation using the Generalized Methods of Moments shows that the mid-1990s are characterized by breaks in the structural parameters governing household consumption and labor supply decisions. Specifically, following the tax hike and during the low nominal rate period, Japanese households became less risk averse and exhibited a higher degree of habit formation.
    Keywords: Euler equation; GMM; nominal interest rate; labor supply
    JEL: C26 E21 E43
    Date: 2017–05–18
  34. By: Rick van der Ploeg; Ton S. van den Bremer
    Abstract: We use a welfare-based intertemporal stochastic optimization model and historical data to estimate the size of the optimal intergenerational and liquidity funds and the corresponding resource dividend available to the government of the Canadian province Alberta. To first-order of approximation, this dividend should be a constant fraction of total above- and below-ground wealth, complemented by additional precautionary savings at initial times to build up a small liquidity fund to cope with oil price volatility. The ongoing dividend equals approximately 30 per cent of government revenue and requires building assets of approximately 40 per cent of GDP in 2030, 100 per cent of GDP in 2050 and 165 per cent in 2100. Finally, the effect of the recent plunge in oil prices on our estimates is examined. Our recommendations are in stark contrast with historical and current government policy.
    Keywords: oil price valatility, precautionary saving, resource wealth, fiscal policy
    JEL: E21 E22 D91 Q32
    Date: 2016
  35. By: Alberto Behar; Armand Fouejieu
    Abstract: After the decline in oil prices, many oil exporters face the need to improve their external balances. Special characteristics of oil exporters make the exchange rate an ineffective instrument for this purpose and give fiscal policy a sizeable role. These conclusions are supported by regression analysis of the determinants of the current account balance and of the trade balance. The results show little or no relationship with the exchange rate and, especially for the less diversified oil exporters, a strong relationship with the fiscal balance or government spending.
    Keywords: Oil exporters; current account; trade balance; fiscal policy; exchange rates; trade volume elasticities; Marshall Lerner conditions
    JEL: F32 F13 F41 E62
    Date: 2017
  36. By: William Chen (Williams College); Gregory Phelan (Williams College)
    Abstract: We theoretically illustrate how macroprudential policy spillovers through international cap- ital flows can lead to uncoordinated policy choices that are tighter than would occur with coor- dination. We consider a symmetric two-country macro model in which countries have limited ability to issue state-contingent contracts in international markets. Accordingly, output en- dogenously depends on the relative share of wealth held by each country. Because markets are incomplete, welfare can be improved by regulating countries’ borrowing positions. Tighter macroprudential policy in country A (limiting leverage or capital inflows) stabilizes country A and endogenously increases the frequency with which A is relatively more wealthy than coun- try B. Thus, tight policy in A provides incentives for B to choose tight policy as well so that B is not poor on average relative to A. We numerically solve for the coordinated and uncoordinated equilibria when countries choose among countercyclical macroprudential policies.
    Keywords: International Capital Flows, Capital Controls, Macroeconomic Instability, Macroprudential Regulation, Policy Coordination, Spillovers, Financial Crises
    JEL: E44 F36 F38 F42 G15
    Date: 2017–05
  37. By: Kang, Wensheng (Kent State University); Ratti, Ronald. A. (Economics, Finance and Property, Western Sydney University); Vespignani, Joaquin (Tasmanian School of Business & Economics, University of Tasmania)
    Abstract: Global uncertainty shocks are associated with a sharp decline in global inflation, global growth and in the global interest rate. Over 1981 to 2014 global financial uncertainty forecasts 18.26% and 14.95% of the variation in global growth and global inflation respectively. Global uncertainty shocks have more protracted, statistically significant and substantial effects on global growth, inflation and interest rate than U.S. uncertainty shocks. U.S. uncertainty lags global uncertainty by one month. When controlling for domestic uncertainty, the decline in output following a rise in global uncertainty is statistically significant in each country, with the exception of the decline for China. The effects for the U.S. and for China are also relatively small. For most economies, a positive shock to global uncertainty has a depressing effect on prices and official interest rates. Exceptions are Brazil, Mexico and Russia, economies with large capital outflows during financial crises. Decomposition of global uncertainty shocks shows that global financial uncertainty shocks are more important than non-financial shocks.
    Keywords: global, uncertainty shocks, monetary policy, FAVAR
    JEL: D80 E44 E66 F62 G10
    Date: 2017
  38. By: Njindan Iyke, Bernard
    Abstract: We analyze the co-movements of the monetary policy rates (MPR) and the treasury bill rates (TBR) in Ghana over the period January 2007 to July 2016, using three nonlinear econometric techniques. We find the MPR and the TBR to be cointegrated with threshold adjustments. Positive deviations from the long-term equilibrium due to increases in the MPR or decreases in the TBR are corrected at 0.3% monthly. Negative deviations from the long-term equilibrium due to decreases in the MPR or increases in TBR are corrected at 8.8% monthly. Our results show bidirectional causal flow between MPR and TBR. In addition, we find positive deviations in the TBR to be corrected at 0.34% monthly, while negative deviations are corrected at 8.6% monthly, in the short term. Thus, the TBR responds faster to negative than positive deviations. These findings are broadly consistent with the inflation-targeting framework of the Bank of Ghana.
    Keywords: Asymmetric Adjustments, Threshold Cointegration, Nonlinear Causality, Yield Curves, Ghana
    JEL: E43
    Date: 2017–01
  39. By: Kota Watanabe (Canon Institute for Global Studies(CIGS) and University of Tokyo); Tsutomu Watanabe (Graduate School of Economics, University of Tokyo)
    Abstract: A notable characteristic of Japan’s deflation since the mid-1990s is the mild pace of price decline, with the CPI falling at an annual rate of only around 1 percent. Moreover, even though unemployment increased, prices hardly reacted, giving rise to a flattening of the Phillips curve. In this paper, we address why deflation was so mild and why the Phillips curve flattened, focusing on changes in price stickiness. Our first finding is that, for the majority of the 588 items constituting the CPI, making up about 50 percent of the CPI in terms of weight, the year-on-year rate of price change was near-zero, indicating the presence of very high price stickiness. This situation started during the onset of deflation in the second half of the 1990s and continued even after the CPI inflation rate turned positive in spring 2013. Second, we find that there is a negative correlation between trend inflation and the share of items whose rate of price change is near zero, which is consistent with Ball and Mankiw’s (1994) argument based on the menu cost model that the opportunity cost of leaving prices unchanged decreases as trend inflation approaches zero. This result suggests that the price stickiness observed over the last two decades arose endogenously as a result of the decline in inflation. Third and finally, a cross-country comparison of the price change distribution reveals that Japan differs significantly from other countries in that the mode of the distribution is very close to zero for Japan, while it is near 2 percent for other countries including the United States. Japan continues to be an “outlier” even if we look at the mode of the distribution conditional on the rate of inflation. This suggests that whereas in the United States and other countries the “default” is for firms to raise prices by about 2 percent each year, in Japan the default is that, as a result of prolonged deflation, firms keep prices unchanged.
    Keywords: deflation; price stickiness; Phillips curve; inflation expectations;menu cost models; sectoral price data
    Date: 2017–03
  40. By: Christopher L. House; Ana-Maria Mocanu; Matthew D. Shapiro
    Abstract: The distinction between production and purchases of investment goods is essential for quantifying the response to changes in investment tax incentives. If investment goods are tradeable, a large fraction of the demand from changes in tax subsidies will be met from abroad. This difference between production and purchases implies that investment tax incentives will lead to more capital accumulation, but less stimulus to economic activity relative to a no-trade counterfactual. Domestic capacity to produce investment goods is less than perfectly elastic because of quasi-fixed factors of production, adjustment costs, and specialization of labor. This paper builds these features into a DGSE model where key parameters are estimated to match the reduced-form response of investment production and purchases to tax incentives. Typical investment tax policies result in equipment purchases that are split roughly half between domestic and foreign production of equipment.
    JEL: E22 E62 H25
    Date: 2017–05
  41. By: Roberto Marfè
    Abstract: This paper documents that (i) the labor-share is a strong predictor of both the value and duration premia, (ii) these premia are highly correlated, and (iii) the labor-share does not forecast the component of the value premium orthogonal to the duration premium. A simple equilibrium model with labor rigidity and heterogeneity in cash- flow durations rationalizes these stylized facts. The economic channel is a term-structure effect: labor rigidity boosts short-run dividend risk because wages are more responsive to permanent than transitory shocks. This leads to downward-sloping equity risk and to a cross-sectional duration premium. In turn, value firms earn a compensation over growth firms which is predicted by labor-share variation.
    JEL: D51 E21
    Date: 2016
  42. By: Cristiano Cantore; Paul L Levine; Giovanni Melina; Joseph G Pearlman
    Abstract: The initial government debt-to-GDP ratio and the government’s commitment play a pivotal role in determining the welfare-optimal speed of fiscal consolidation in the management of a debt crisis. Under commitment, for low or moderate initial government debt-to-GPD ratios, the optimal consolidation is very slow. A faster pace is optimal when the economy starts from a high level of public debt implying high sovereign risk premia, unless these are suppressed via a bailout by official creditors. Under discretion, the cost of not being able to commit is reflected into a quick consolidation of government debt. Simple monetary-fiscal rules with passive fiscal policy, designed for an environment with “normal shocks†, perform reasonably well in mimicking the Ramsey-optimal response to one-off government debt shocks. When the government can issue also long-term bonds–under commitment–the optimal debt consolidation pace is slower than in the case of short-term bonds only, and entails an increase in the ratio between long and short-term bonds.
    Keywords: Crisis management;Debt consolidation;Optimal fiscal-monetary policy, long-term debt, fiscal limits, Monetary Policy (Targets, Instruments, and Effects)
    Date: 2017–03–30
  43. By: Autor, David (MIT); Dorn, David (University of Zurich); Katz, Lawrence (Harvard University); Patterson, Christina (Massachusetts Institute of Technology); Van Reenen, John (MIT Sloan School of Management)
    Abstract: The fall of labor's share of GDP in the United States and many other countries in recent decades is well documented but its causes remain uncertain. Existing empirical assessments of trends in labor's share typically have relied on industry or macro data, obscuring heterogeneity among firms. In this paper, we analyze micro panel data from the U.S. Economic Census since 1982 and international sources and document empirical patterns to assess a new interpretation of the fall in the labor share based on the rise of "superstar firms." If globalization or technological changes advantage the most productive firms in each industry, product market concentration will rise as industries become increasingly dominated by superstar firms with high profits and a low share of labor in firm value-added and sales. As the importance of superstar firms increases, the aggregate labor share will tend to fall. Our hypothesis offers several testable predictions: industry sales will increasingly concentrate in a small number of firms; industries where concentration rises most will have the largest declines in the labor share; the fall in the labor share will be driven largely by between-firm reallocation rather than (primarily) a fall in the unweighted mean labor share within firms; the between-firm reallocation component of the fall in the labor share will be greatest in the sectors with the largest increases in market concentration; and finally, such patterns will be observed not only in U.S. firms, but also internationally. We find support for all of these predictions.
    Keywords: labor share, sales concentration, firms
    JEL: E24 J31 L11
    Date: 2017–05
  44. By: Andreev, Mikhail (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Khromov, Michael (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Shchelokova, Dina (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: The object of the study is the Russian financial market: the banking system, APFs, insurance companies, management companies, money market, debt market, foreign exchange market. The goal of the work is to develop a methodology for building a medium-term forecast of the financial market and in developing the forecast itself. As a result of the conducted research the following methodology of construction of the forecast is offered. The medium-term forecast for the development of Russia's financial sector is built in the form of a dynamic quarterly model. In this model, the Russian economy is described as the interaction of several types of economic agents: Population, Producers, Banks, Central Bank, Ministry of Finance (budget). Dynamics of variables of various agents within the forecast is subject to several types of relationships: Financial balances of individual agents (producers, banks, the Central Bank), The balance of financial flows of all agents, the institutional constraints of the production function for producers, the demand for loans from producers, the demand function for real household consumption, the demand for new household loans, the supply of household loans, the demand for settlement accounts in the Central Bank from commercial banks, Etc.), Equilibrium in certain markets (macroeconomic balance, balance of payments). Based on the results of the development of the methodology, scenarios for the development of the financial sector for 2016-2018 in the coming years were compiled and analyzed. The defining factors in 2016-2018 for the development of the financial sector will be 1) the growth in demand for credit resources from enterprises, which is partially met by the resources of non-residents, 2) the budget deficit and the means of its financing. Depending on the external forecast of key indicators of the real sector development, the forecast (model) is completing the indicators of the financial sector. The monetary and fiscal policy of the state is chosen in the forecast such that the external forecast of the real sector is realized.
    Date: 2017–05
  45. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: St. Louis Fed President James Bullard said in St. Louis that U.S. macroeconomic data have been relatively weak, on balance, since the Federal Open Market Committee (FOMC) met in March and raised the fed funds rate. Economic growth is unlikely “to move meaningfully” this year from the current trend of about 2 percent. Inflation and inflation expectations “have surprised to the downside.” He noted that financial market readings since the March decision have been opposite of expectations. “This may suggest that the FOMC’s contemplated policy rate path is overly aggressive relative to actual incoming data,” Bullard said. He also discussed the relationship between unemployment and inflation and said that, even if U.S. unemployment declines substantially further, the effects on inflation are likely to be small.
    Date: 2017–05–23
  46. By: Keiichi Morimoto (Meisei University)
    Abstract: This study re-examines the optimal delegation problem of monetary policy under preference uncertainty of the central banker. Liberal central bankers are desirable when uncertainty is strong, which is emphasized when the slope of the Phillips curve is flatter, as some empirical works report. However, appointing conservative central bankers is optimal with standard parameter values when monetary policies are conducted by committees, as in most actual economies.
    Keywords: monetary policy, delegation, uncertain preferences, committee
    JEL: E58
    Date: 2017–01
  47. By: Alexei P Kireyev
    Abstract: The paper presents a simple framework for the analysis of the macroeconomic implications of de-cashing. Defined as replacing paper currency with convertible deposits, de-cashing would affect all key macroeconomic sectors. The overall macreconomic impact of de-cashing would depend on the balance of growth-enhancing and growth-constraining factors. Starting from a traditional saving-investment balance, the paper develops a four-sector macroeconomic framework. It is purely illustrative and is designed to provide a roadmap for a systematic evaluation of de-cashing. The framework is disaggregated into the real, fiscal, monetary, and external sectors and potential implications of de-cashing are then identified in each sector. Finally, the paper draws a balance on possible positive and negative macroeconomic implications of de-cashing, and proposes policies capable of augmenting its economic and social benefits, while reducing potential costs.
    Date: 2017–03–27
  48. By: Nadav Ben Zeev; Ohad Raveh
    Abstract: Does monetary policy play a role in scal federalism? This paper presents a novel implication of monetary policy shocks by studying their heterogeneous e ects across federal-states and their consequent connection to scal equalization. A two-region monetary union DSGE model with a federal equalization mechanism shows that capital intensive states experience a relatively larger contraction following a positive monetary policy shock, due to the greater share that capital takes in their production process. This, in turn, brings them greater in ows of federal grants. We show that state-heterogeneity in capital intensity is explained by levels of natural resource abundance over large periods, and hence by pre-determined geographical characteristics. Based on this identi cation strategy, we test the model's predictions using a panel of U.S. states over the period 1969-2007 and nd that following a one standard deviation monetary policy shock, output growth (output share of federal transfers) in capital intensive states contemporaneously decreases (increases) by 1% relative to their counterparts, on average. In addition, we nd no di erential e ects on other state-level economic indicators, consistent with the model.
    Keywords: natural monetary policy, fiscal federalism, capital intensity
    JEL: E52 H77
    Date: 2017
  49. By: Marco Cozzi (Department of Economics, University of Victoria)
    Abstract: This paper is a quantitative, equilibrium study of the insurance role of severance pay when workers face displacement risk and markets are incomplete. A key feature of our model is that,in line with an established empirical literature, job displacement entails a persistent fall in earnings upon re-employment due to the loss of tenure. The model is solved umerically and calibrated to the US economy.In contrast to previous studies that have analyzed severance payments in the absence of persistent earning losses, we find that the welfare gains from the insurance against job displacement afforded by severance pay are sizable.
    Keywords: Severance Payments, Incomplete Markets, Welfare
    JEL: E24 D52 D58 J65
    Date: 2016–03–29
  50. By: Crafts, Nicholas; Mills, Terence C
    Abstract: We analyze TFP growth in the U.S. business sector using a basic unobserved component model where trend growth follows a random walk and the noise is a first-order auto-regression. This is fitted using a Kalman-filter methodology. We find that trend TFP growth has declined steadily from 1.5 per cent to 1.0 per cent per year over the last 50 years. Nevertheless, recent trends are not a good guide to actual medium-term TFP growth. This exhibits substantial variations and is quite unpredictable. Techno-optimists should not give best to secular stagnationists simple because recent TFP growth has been weak.
    Keywords: productivity slowdown; secular stagnation; TFP growth
    JEL: E32 N12 O47
    Date: 2017–05
  51. By: Rozsypal, Filip; Schlafmann, Kathrin
    Abstract: We study the role of household income expectations for consumption decisions. Using micro level data, we first document an systematic, income-related component in household income forecast errors. These systematic errors can be explained by a modest deviation from rational expectations, where agents overestimate the persistence of their income process. We then study the implications of this bias in a quantitative model. Low income households who overestimate the persistence of their income are too pessimistic about their future income. This has two effects. First, these households are unwilling to borrow to smooth their consumption even though their borrowing constraint is not binding, thereby allowing the quantitative model to match the distribution of liquid assets across the income distribution. Second, they have lower marginal propensities to consume than their fully rational counterparts. Disregarding the bias in income expectations thus leads standard models to overpredict the effectiveness of government stimulus payments.
    Keywords: durable consumption; household income expectations; Savings
    JEL: D14 D84 D91 E21 G02 H31
    Date: 2017–05
  52. By: Daniel Ordoñez-Callamand (Banco de la República de Colombia); Juan D. Hernandez-Leal (Banco de la República de Colombia); Mauricio Villamizar-Villegas (Banco de la República de Colombia)
    Abstract: Central banks generally target multiple objectives while having at least the same number of monetary instruments. However, some instruments can be inadvertently collinear, leading to indeterminacy and identification failures. Paradoxically, most empirical studies have shied away from this dependence. In this paper we propose a novel method of identifying simultaneous monetary shocks by introducing a Tobit model within a VAR. An advantage of our method is that it can be easily estimated using only least squares and a maximum likelihood function. Also, the impulse-response analysis can be carried out as in the traditional time-series setting and can be applied in a structural framework. Hence, we model a dual process consisting of a censored foreign exchange intervention policy along with a linear interest rate intervention policy. In simulation exercises we show that our method outperforms a benchmark case of estimating policy functions separately. In fact, as the covariance between shocks increases, so does the performance of our method. In our empirical approach, we estimate the policy covariance for the case of Colombia and Turkey and find significant differences when compared to the benchmark case. Classification JEL: C34, E52, E58
    Keywords: Simultaneous policies, Instrumental VAR; Tobit-VAR; Central bank intervention; Monetary trilemma
    Date: 2017–05
  53. By: Tomoyuki Nakajima (Institute of Economic Research, Kyoto University); Shuhei Takahashi (Institute of Economic Research, Kyoto University)
    Abstract: Japan's net government debt reached 130% of GDP in 2013. The present paper analyzes the welfare implications of the large debt for Japan. We use an Aiyagari (1994)-style heterogeneous-agent, incomplete-market model with idiosyncratic wage risk and endogenous labor supply. We find that under the utilitarian welfare measure, the optimal government debt for Japan is -50% of GDP and the current level of debt incurs the welfare cost that is 0.22% of consumption. Decomposing the welfare cost by the Floden (2001) method reveals substantial welfare effects arising from changes in the level, inequality, and uncertainty. The level and inequality costs are 0.38% and 0.52% respectively, whereas the uncertainty benefit is 0.68%. Adjusting consumption taxes instead of the factor income taxes to balance the government budget substantially reduces the overall welfare cost.
    Keywords: Government debt; welfare; incomplete markets; Japanese economy.
    JEL: E62 H63
    Date: 2017–03
  54. By: Salman Huseynov (Central Bank of Azerbaijan Republic); Fuad Mammadov (Central Bank of Azerbaijan Republic)
    Abstract: In our study, we model both steady state and short-run dynamics of the important aspects of the national economy using quarterly data for the period 1999Q1-2016Q2. We explicitly model government, money market and external sector, but omit household sector, labor market, wage dynamics and volume of the physical capital specifications due to serious data quality issues. Using Fully Modified OLS (FMOLS) co-integration methodology we explore co-integration relations among the variables. Coefficient estimates of short-run dynamics are in compliance with our ex-ante expectations. Stability tests indicate that the system seems to exhibit stability around its steady state values and model variables converges to their steady state values approximately within 140 periods (2016Q3-2050Q4). Impulse-response analysis also show stable convergence of the model and predict economically consistent results. The results of in-sample and out-of-sample simulation exercises for the inflation, the government consumption and the imports are satisfactory. However, it seems that the model cannot adequately capture ex-post dynamics of NFA and reserve money. In general the results indicate that model can be used for the specific policy analysis and forecasting of main macroeconomic variables of Azerbaijan.
    Keywords: general equilibrium; co-integration analysis; forecast evaluation
    JEL: C32 C51 C52 E17
    Date: 2016–11–30
  55. By: Aviral Kumar Tiwari (Center for Energy and Sustainable Development (CESD), Montpellier Business School, Montpellier, France); Juncal Cunado (University of Navarra, School of Economics, Edificio Amigos, Spain); Rangan Gupta (University of Pretoria, Department of Economics, Pretoria, South Africa); Mark E. Wohar (College of Business Administration, University of Nebraska at Omaha, Omaha, USA and School of Business and Economics, Loughborough University, Leicestershire, UK)
    Abstract: This paper analyzes the relationship between stock returns and the inflation rates for the UK over a long time period (February 1790 to February 2017) and at different frequencies, by employing a wavelet analysis. We also compare the results for the UK economy with those for the US and two developing countries (India and South Africa). Overall, our results tend to suggest that, while the relationship between stock returns and inflation rates varies across frequencies and time periods, there is no evidence of stock returns acting as an inflation hedge, irrespective of whether we look at the two developed or the two developing markets in our sample.
    Keywords: nominal and real stock returns, inflation, frequency-domain, wavelet analysis
    JEL: C49 E31 G12
    Date: 2017–05
  56. By: Kerstin Gerling; Paulo A Medas; Tigran Poghosyan; Juan Farah-Yacoub; Yizhi Xu
    Abstract: A key objective of fiscal policy is to maintain the sustainability of public finances and avoid crises. Remarkably, there is very limited analysis on fiscal crises. This paper presents a new database of fiscal crises covering different country groups, including low-income developing countries (LIDCs) that have been mostly ignored in the past. Countries faced on average two crises since 1970, with the highest frequency in LIDCs and lowest in advanced economies. The data sheds some light on policies and economic dynamics around crises. LIDCs, which are usually seen as more vulnerable to shocks, appear to suffer the least in crisis periods. Surprisingly, advanced economies face greater turbulence (growth declines sharply in the first two years of the crisis), with half of them experiencing economic contractions. Fiscal policy is usually procyclical as countries curtail expenditure growth when economic activity weakens. We also find that the decline in economic growth is magnified if accompanied by a financial crisis.
    Keywords: Economic growth;Financial crises;fiscal crisis, sovereign debt default, twin crises, Deficit, Studies of Particular Policy Episodes, General Outlook and Conditions
    Date: 2017–04–03
  57. By: Shijaku, Gerti
    Abstract: The paper studies the pass-through effect of primary sovereignty risk on bank stability. For this reason, we followed a new approach using on-site bank balance sheet information to construct our proxy that represent each bank stability condition and use a variety of internal and external factors to estimate a balance panel dynamic two-step General Method of Moments (GMM) approach for the period 2008 Q3 – 2015 Q03. We found no supportive evidence that pass-through effect of primary sovereignty risk does affected bank stability. Rather improving macroeconomic and financial market condition are found to be important components through which banks are more immune. The rest of results imply that other bank-specific indicators, namely the extent of intermediation, off-balance sheet active, excessive capital, credit risk and profitability do not have a significant affect.
    Keywords: Bank Fragility, Primary Sovereignty Risk, Panel Data, Dynamic GMM
    JEL: C26 C33 C8 E43 G21 H63
    Date: 2016–05–28
  58. By: Morscher, Christof; Schlothmann, Daniel; Horsch, Andreas
    Abstract: Nachdem eine Bargeldabschaffung schon vor längerem u.a. von Wissenschaftsvertretern wie Rogoff, Summers und Bofinger diskutiert und im Ergebnis befürwortet wurde, scheint das Thema aufgrund aktueller Entwicklungen sowie bereits vollzogener Maßnahmen verstärkt in Wissenschaft und Praxis angekommen zu sein, wo es kontrovers diskutiert wird. Dabei werden sowohl für als auch gegen Abschaffung bzw. Beschränkung des Bargeldes gewichtige Gründe ins Feld geführt. Aufgrund der großen Aktualität und Relevanz der Thematik wird sie zuerst aus theoretischer Sicht beleuchtet, bevor empirische Entwicklungen aufgezeigt, sowie die gegensätzlichen Argumentationslinien der Befürworter und Gegner einer Abschaffung bzw. Beschränkung des Bargeldes sowie bereits veränderte institutionelle Rahmenbedingungen dargestellt und bewertet werden.
    Keywords: Bargeld,Geldfunktionen,Geldmengenabgrenzungen,Geldtheorie,Negativzinsen,Zahlungsgewohnheiten,cash,functions of money,money aggregates,money theory,negative interest rates,payment methods
    JEL: D11 D61 E41 E42 G21 O33 O52
    Date: 2017
  59. By: Michael Hasler; Roberto Marfè
    Abstract: Recent empirical findings document downward-sloping term structures of equity return volatility and risk premia. An equilibrium model with rare disasters followed by recoveries helps recon- cile theory with empirical observations. Indeed, recoveries outweigh the upward-sloping effect of time-varying disaster intensity and expected growth, generating downward-sloping term structures of dividend growth risk, equity return volatility, and equity risk premia. In addition, the term structure of interest rates is upward-sloping when accounting for recoveries and downward-sloping otherwise. The model quantitatively reconciles high risk premia and a low risk-free rate with the shape of the term structures, which are at odds in other models.
    Keywords: Recovery; Rare disasters; Term structures of equity; Dividend strips; Asset pricing puzzles
    JEL: D53 D51 E21 G12 G13
    Date: 2016
  60. By: Nassirou, Aïchat
    Abstract: This study analyzes the choice of the optimal exchange rate regime for a small open economy, Nigeria. On the basis of structural VAR modeling, we introduced the pass-through question in order to respond to the choice of the optimal exchange rate regime for Nigeria, based on the anchoring of the future currency of the Ecowas area that will be chosen. The results show that the Nigerian economy is very vulnerable to real shocks, particularly those related to the exchange rate and the price of oil. Nigeria could only join the union if the anchoring of the new common currency is flexible in relation to an international currency. Otherwise, he has no interest in joining the union. Hence the idea that exchange rate flexibility is an optimal solution for Nigeria because its entry into the union will be a source of gains and not penalized by losses in terms of economic policies. It is then necessary for Nigeria to define the floating amplitude of the exchange rate within this floating regime. In other words, Nigeria should reduce the volatility of its exchange rate vis-à-vis the price of oil in order to be able to cope with external shocks.
    Keywords: Union économique et monétaire, méthode pass-through, flexibilité optimale du taux de change, chocs macroéconomiques, Nigeria.
    JEL: C32 E52 F33 F41
    Date: 2017–01–03
  61. By: Deli, Yota; Hasan, Iftekhar
    Abstract: We examine the effect of the full set of bank capital regulations (capital stringency) on loan growth, using bank-level data for a maximum of 125 countries over the period 1998-2011. Contrary to standard theoretical considerations, we find that overall capital stringency only has a weak negative effect on loan growth. In fact, this effect is completely offset if banks hold moderately high levels of capital. Interestingly, the components of capital stringency that have the strongest negative effect on loan growth are those related to the prevention of banks to use as capital borrowed funds and assets other than cash or government securities. In contrast, compliance with Basel guidelines in using Basel- and credit-risk weights has a much less potent effect on loan growth.
    Keywords: capital regulation, loan growth, bank capital
    JEL: E60 G0 G2 O40
    Date: 2017
  62. By: Dautovic, Ernest; Hau, Harald; Huang, Yi
    Abstract: This paper evaluates the Chinese minimum wage policy for the period 2002-2009 in terms of its impact on low income household consumption. Using a representative household panel, we find support for the permanent income hypothesis, whereby unanticipated and persistent income increases due to minimum wage policy change are fully spent. The impact is driven by households with at least one child. We infer significant positive welfare effects for low income households based on expenditure increases concentrated in health care and education, whereas a negative employment effect of higher minimum wage cannot be confirmed.
    Keywords: Household consumption; Labor income; minimum wage; Permanent income hypothesis
    JEL: C26 E24 J38
    Date: 2017–05
  63. By: Javier Ávila Mahecha; Jorge Armando Rodríguez
    Abstract: Este ensayo examina los principales cambios en la tributación empresarial en Colombia derivados de la Ley 1819 de 2016. La carga tributaria sobre las utilidades de las sociedades y sobre los dividendos recibidos por sus dueños se estima utilizando un enfoque de tarifas potenciales marginales, que permite valorar el efecto global de la reforma impositiva y los efectos de medidas individuales contenidas en ella, en comparación con lo que presumiblemente habría ocurrido si el régimen tributario precedente se hubiera mantenido vigente. En contra de la interpretación predominante en la teoría económica neoclásica, esas tarifas se describen como potenciales y no como efectivas debido a que no incorporan los efectos de la evasión y la traslación impositivas y a que están sujetas a las contingencias propias de los negocios. Los resultados indican que la carga tributaria potencial empresarial se reducirá de manera notoria en el período 2016-2022 como consecuencia de la reforma, anticipando la reducción que también se habría presentado bajo la legislación anterior.
    Keywords: reforma tributaria, tributación empresarial, carga tributaria nacional, tributación corporativa, tarifas impositivas marginales
    JEL: E62 H25 H32 K34 M2
    Date: 2017–05–16
  64. By: Margarita Rubio; Filiz D Unsal
    Abstract: In this paper, we use a DSGE model to study the passive and time-varying implementation of macroprudential policy when policymakers have noisy and lagged data, as commonly observed in lowincome and developing countries (LIDCs). The model features an economy with two agents; households and entrepreneurs. Entrepreneurs are the borrowers in this economy and need capital as collateral to obtain loans. The macroprudential regulator uses the collateral requirement as the policy instrument. In this set-up, we compare policy performances of permanently increasing the collateral requirement (passive policy) versus a time-varying (active) policy which responds to credit developments. Results show that with perfect and timely information, an active approach is welfare superior, since it is more effective in providing financial stability with no long-run output cost. If the policymaker is not able to observe the economic conditions perfectly or observe with a lag, a cautious (less aggressive) policy or even a passive approach may be preferred. However, the latter comes at the expense of increasing inequality and a long-run output cost. The results therefore point to the need for a more careful consideration toward the passive policy, which is usually advocated for LIDCs.
    Keywords: Credit;Low-income developing countries;Macroprudential Policy;incomplete information, collateral requirements, inequality, Financial Markets and the Macroeconomy, Government Policy and Regulation
    Date: 2017–03–22
  65. By: Diego Restuccia; Richard Rogerson
    Abstract: Why do living standards differ so much across countries? A consensus in the development literature is that differences in productivity are a dominant source of these differences. But what accounts for productivity differences across countries? One explanation is that frontier technologies and best practice methods are slow to diffuse to low income countries. The recent literature on misallocation offers a distinct but complementary explanation: low income countries are not as effective in allocating their factors of production to their most efficient use. We provide our perspective on three key questions. First, how important is misallocation? Second, what are the causes of misallocation? And third, beyond the direct cost of lower contemporaneous output, are there additional costs associated with misallocation? A summary of our answers is as follows. Misallocation appears to be a substantial channel in accounting for productivity differences across countries, but the measured magnitude of the effects depends on the approach and context. Researchers have not yet found a dominant source of misallocation; instead, many specific factors seem to contribute a small part of the overall effect. Beyond the static cost of misallocation, we believe that the dynamic effects of misallocation on productivity growth are significant and deserve much more attention going forward.
    JEL: E0 E1 O0 O1 O4 O5
    Date: 2017–05
  66. By: Raül Santaeulàlia-Llopis; Yu Zheng
    Abstract: Without data on individual consumption, inequality is invariably inferred by applying adult equivalence scales to household-level consumption data. To assess the e effectiveness of these household-based measures of inequality, we exploit a rare opportunity in which individual food consumption data for each and all household members are available in China. We find that standard adult-equivalent measures understate cross-sectional individual inequality by 40%. The discrepancy is driven by the dispersion of "vices" consumption among adults -alcohol, tobacco, coffee and tea- and food among young children, which doubles that of adults. Our results suggest caution in the use of adult-equivalent scales to measure inequality.
    Keywords: food, consumption, Inequality, individual data, vices, children
    JEL: D12 E21
    Date: 2017–05
  67. By: Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Hardik A. Marfatia (Department of Economics, Northeastern Illinois University, Chicago, USA)
    Abstract: In this paper, we estimate a Qualitative Vector Autoregressive (Qual VAR) model, which combines binary information of Quantitative Easing (QE) announcements with an otherwise standard VAR model that includes US and emerging market Real Estate Investment Trusts (REITs) returns. The Qual VAR uncovers the Federal Reserve’s latent, unobservable propensity for QE and generates impulse responses for the emerging market REITs returns. The results show that QE has (strong) positively significant, but short-lived, effects on the returns of emerging market REITs.
    Keywords: Qual VAR, Unconventional Monetary Policy, Emerging Markets, REITs
    JEL: C32 E52 R33
    Date: 2017–05
  68. By: Leonel Muinelo-Gallo (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Oriol Roca-Sagalés (Universitat Autònoma de Barcelona (Spain). Departamentd’Economia Aplicada)
    Abstract: Despite being one of the countries with lower levels of inequality in Latin America, Uruguay is characterized by persistent high inequality levels in relation to that upper-middle or high income countries with similar relative size of the public sector. This paper investigates to what extent these two features are interconnected and whether economic growth affects and is affected by this relationship. Empirical results from Vector Autoregression (VAR) models reveal the existence of important long-run Keynesian effects associated to public expenditure, and that the country’s expenditure structure is, in part, responsible for increasing disposable household’s income inequality, being the public investment the only fiscal policy that breaks this tendency.
    Keywords: fiscal policy, economic growth, income inequality, VAR models, Uruguay
    JEL: C5 E6 H3
    Date: 2017–02
  69. By: Hüther, Michael; Demary, Markus
    Abstract: Eurozone inflation underperforms since the beginning of 2013 and monetary policy struggles to stabilize it since then. The items of the aggregate inflation rate indicate that low inflation is due to both supply and demand factors and weak demand is caused by indebtness and unemployment. Additional monetary policy measures are not required in the current situation because monetary policy has long lags when economies are indebted and it already helped to reduce cyclical unemployment.
    Date: 2016
  70. By: Storz, Manuela; Koetter, Michael; Setzer, Ralph; Westphal, Andreas
    Abstract: We show that the speed and type of corporate deleveraging depends on the interaction between corporate and financial sector health. Based on granular bank-firm data pertaining to small and medium-sized enterprises (SME) from five stressed and two non-stressed euro area economies, we show that 'zombie' firms generally continued to lever up during the 2010-2014 period. Whereas relationships with stressed banks reduce SME leverage on average, we also show that zombie firms that are tied to weak banks in euro area periphery countries increase their indebtedness even further. Sustainable economic recovery therefore requires both: deleveraging of banks and firms.
    Keywords: zombie lending,debt overhang,bank stress
    JEL: E44 G21 G32
    Date: 2017
  71. By: Rick van der Ploeg; Rabah Arezkir; Frederik Toscani
    Abstract: This paper explores the effect of market orientation on (known) natural wealth using a novel dataset of world-wide major hydrocarbon and mineral discoveries. Consistent with the predictions of a two-region model, our empirical estimates based on a large panel of countries show that increased market orientation causes a significant increase in discoveries. In a thought experiment whereby economies in Latin America and sub-Saharan Africa remained closed, they would have only achieved one quarter of the actual increase in discoveries they have experienced since the early 1990s. Our results call into question the commonly held view that resource endowment is exogenous.
    Keywords: natural resources, discoveries, market orientation, liberalization, institutions, endogenous reserves
    JEL: E00 F3 F4
    Date: 2017
  72. By: Maheu, John M; Song, Yong
    Abstract: This paper provides a feasible approach to estimation and forecasting of multiple structural breaks for vector autoregressions and other multivariate models. Due to conjugate prior assumptions we obtain a very efficient sampler for the regime allocation variable. A new hierarchical prior is introduced to allow for learning over different structural breaks. The model is extended to independent breaks in regression coefficients and the volatility parameters.Two empirical applications show the improvements the model has over benchmarks. In a macro application with 7 variables we empirically demonstrate the benefits from moving from a multivariate structural break model to a set of univariate structural break models to account for heterogeneous break patterns across data series.
    Keywords: multivariate hierarchical prior, change point, forecasting
    JEL: C1 C11 C32 C53 E32
    Date: 2017–05
  73. By: Antonio David
    Abstract: This paper presents estimates of fiscal multipliers in Paraguay following different econometric techniques and identification approaches. The results point to multipliers for capital expenditure that are substantially higher than multipliers for current expenditure. In addition, the evidence suggests that tax multipliers are close to zero when using conventional identification approaches, but estimates can be much larger when considering the “narrative†approach. One implication of the results is that the balanced budget multiplier for Paraguay i.e. the effect of on output of an increase in expenditures (in particular capital expenditure) financed by taxes is likely to be positive.
    Keywords: Paraguay;Fiscal policy;Western Hemisphere;Fiscal Multipliers, Local Projection Method, General, Macroeconomic Analyses of Economic Development
    Date: 2017–03–22
  74. By: Stephen Cecchetti; Tommaso Mancini Griffoli; Machiko Narita
    Abstract: Using firm-level data for approximately 1,000 bank and nonbank financial institutions in 22 countries over the past 15 years we study the impact of prolonged monetary policy easing on risk-taking behavior. We find that the leverage ratio, as well as other measures of firm-level vulnerability, increases for banks and nonbanks as domestic monetary policy easing persists. Cross-border effects are also notable. We find effects of roughly similar magnitude on foreign financial sector firms when the U.S. eases policy. Results appear robust to a variety of specifications, and to be non-linear, with risk-taking behavior rising most quickly at the onset of monetary policy easing.
    Keywords: Spillovers;Banks;Financial stability;nonbank financial institutions, prolonged monetary policy easing, financial vulnerability, risk-taking behavior, Financial Markets and the Macroeconomy, Monetary Policy (Targets, Instruments, and Effects)
    Date: 2017–03–24
  75. By: Paulo Soares Esteves (Banco de portugal); Elvira Prades (Banco de España)
    Abstract: During economic downturns, weak domestic demand developments seem to be an additional driver of exports, as firms increase their efforts to serve markets abroad to compensate the fall in domestic sales. This may constitute an additional mechanism adjustment for the euro area countries where real exchange rate variations are limited by the common currency itself and the present low inflation environment. However, this substitution effect between domestic and foreign sales could be different across euro area members. This paper uses panel data techniques to assess the role of the export structure in explaining these differences. Building a novel indicator for product concentration, the results suggest that domestic demand developments are more relevant to explain exports in countries with a lower product concentration index (that is, more diversified exports). This contributes to explain why euro area countries under stress registered different economic performance during the most recent years.
    Keywords: exports, domestic demand pressures, external adjustment
    JEL: C22 E03 F10
    Date: 2017–05
  76. By: Moussé Sow; Ivohasina F Razafimahefa
    Abstract: This paper explores the impact of fiscal decentralization on fiscal policy performance in a large sample of advanced and developing economies. The findings suggest that a larger share of decentralized expenditure is associated with a stronger fiscal balance; however, fiscal decentralization can lead to more pro-cyclical fiscal policy. Thus, the design and pace of fiscal decentralization need to be tailored to the specificities of the economy. Countries that have already established strong accountablity and budget management capacity at the local level can benefit from fiscal decentralization. In contrast, in economies prone to large volatility from internal and external shocks, the central government may need to retain a sufficient share of expenditure and revenue to conduct counter-cyclical policies. Finally, the pace of expenditure and revenue decentralization should be aligned.
    Keywords: Fiscal balance;Fiscal decentralization;policy cyclicality, Intergovernmental Relations, Deficit
    Date: 2017–03–24
  77. By: Demary, Markus; Hüther, Michael
    Abstract: The European Central Bank (ECB) has prolonged its large-scale asset purchase programs for public and private bonds in December 2016 until the end of 2017. Otherwise the programs would have expired in March 2017. Due to its strong focus on the inflation target of below, but close to 2 percent, the extension of the asset purchasing programs was expected in case of weak inflation dynamics. Inflation, however, recovered at the end of last year due to normalizing oil prices.
    Date: 2017

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