nep-mac New Economics Papers
on Macroeconomics
Issue of 2017‒06‒25
102 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Bailouts, Moral Hazard and Banks’ Home Bias for Sovereign Debt By Gaetano Gaballo; Ariel Zetlin-Jones
  2. Impulse on the Aggregate Demand in Bolivia through the coordination of the Monetary and Fiscal Policy in crisis time By Valdivia Coria, Joab Dan; Valdivia Coria, Daney
  3. Stagnation policy in the Eurozone and economic policy alternatives By Eckhard Hein
  4. Russia’s Monetary Policy in 2016 By Bozhechkova Alexandra; Trunin Pavel; Knobel Alexander; Kiyutsevskaya Anna
  5. House prices and monetary policy in the euro area: evidence from structural VARs By Nocera, Andrea; Roma, Moreno
  6. An Econometric Analysis of Energy Revenue and Government Expenditure Shocks on Economic Growth in Trinidad and Tobago By Jeetendra Khadan
  7. When Keynes goes to Brussels : a new fiscal rule for the EMU By Francesco Saraceno
  8. Opportunities and limits of rebalancing the Eurozone via wage policies By Eckhard Hein; Eckhard Achim Truger
  9. Solving Endogenous Regime Switching Models By Jean Barthélemy; Magali Marx
  10. Fixed investment in Russia in 2016 By Izryadnova Olga
  11. Unconventional Monetary Policy: Interest Rates and Low Inflation. A Review of Literature and Methods By Mariarosaria Comunale; Jonas Striaukas
  12. Bond Finance, Bank Credit, and Aggregate Fluctuations in an Open Economy By Roberto Chang; Andres Fernandez; Adam Gulan
  13. Monetary Policy, Financial Frictions and Structural Changes: A Markov-Switching DSGE Approach By Francis Leni Anguyo; Rangan Gupta; Kevin Kotzé
  14. FISCAL SURPRISES AT THE FOMC By Croushore, Dean; van Norden, Simon
  15. Revisiting the Macroeconomic Effects of Labor Reallocation By Emmanouil Gkiourkas, Theodore Panagiotidis, Gianluigi Pelloni
  16. Do Term Premiums Matter? Transmission via Exchange Rate Dynamics By Mitsuru Katagiri; Koji Takahashi
  17. The macroeconomic impact of the ECB's expanded asset purchase programme (APP) By Gambetti, Luca; Musso, Alberto
  18. Aging, Informality and Public Policies in a Small Open Economy By Daniel Baksa; Mihnea Constantinescu; Zsuzsa Munkacsi
  19. Banking globalization, local lending, and labor market effects : Micro-level evidence from Brazil By Noth, Felix; Busch, Matias Ossandon
  20. The profit rate and asset-price inflation in the Spanish economy By Juan Pablo Mateo
  21. Unemployment or Credit: Who Holds The Potential? Results From a Small-Open Economy By Mihnea Constantinescu; Anh Dinh Minh Nguyen
  22. Uncertainty and the Real Effects of Monetary Policy Shocks in the Euro Area By Giovanni Pellegrino
  23. The Size of Fiscal Multipliers and the Stance of Monetary Policy in Developing Economies By Jair N. Ojeda-Joya; Oscar E. Guzman
  24. Monetary Policy under Behavioral Expectations: Theory and Experiment By Cars Hommes; Domenico Massaro; Matthias Weber
  25. The implications of liquidity expansion in China for the US dollar By Kang, Wensheng; Ratti, Ronald. A.; Vespignani, Joaquin
  26. A trendy approach to UK inflation dynamics By Forbes, Kristin; Kirkham, Lewis; Theodoridis, Konstantinos
  27. The impact of ECB policies on Euro area investment By Christophe Blot; Jérôme Creel; Paul Hubert; Fabien Labondance
  28. The ability of the ECB to control inflation in a global environment By Christophe Blot; Jérôme Creel; Paul Hubert; Fabien Labondance; Xavier Ragot
  29. Unpleasant monetarist arithmetic: Macroprudential edition By Jan Libich
  30. Optimal Taxes Under Private Information: The Role of the Inflation Tax By Gomis-Porqueras, Pedro; Waller, Christopher J.
  31. Monetary Aggregates and Monetary Policy in Peru By Lahura, Erick
  32. U.K. Monetary Policy under Inflation Targeting By Anh Dinh Minh Nguyen
  33. The Impact of Oil Price Changes in a New Keynesian Model of the U.S. Economy By Francesca Rondina
  34. Global uncertainty and the global economy: Decomposing the impact of uncertainty shocks By Kang, Wensheng; Ratti, Ronald. A.; Vespignani, Joaquin
  35. The Political Economy of Macroeconomic Policy in Arab Resource- Rich Economies By Adeel Malik
  36. Disagreement in inflation forecasts and inflation risk premia in Brazil By Doi, Jonas Takayuki; Fernandes, Marcelo; Nunes, Clemens V. de Azevedo
  37. Comment on: “when does a central bank’s balance sheet require fiscal support?” by Marco Del Negro and Christopher A. Sims By Ricardo Reis
  38. The impact of oil price shocks on the US stock market: A note on the roles of the US and non-US oil production By Kang, Wensheng; Ratti, Ronald. A.; Vespignani, Joaquin
  39. Personal Bankruptcy, Bank Portfolio Choice and the Macroeconomy By Eglë Jakuèionytë
  40. An approach to the structural features of the socio-economic activity of a country based on a Social Accounting Matrix.Evidences and multiplier effects on distribution of income. By Santos, Susana
  41. Expect the unexpected: housing price bubble on the horizon in Malaysia By Naseer, Areef Ahmed; Masih, Mansur
  42. Macroeconomic Fluctuations Under Natural Disaster Shocks in Central America and the Caribbean By Allan Wright; Patrice Borda
  43. Macroeconomic and bank-specific determinants of different categories of non-performing financing in Islamic banks: Evidence from Malaysia By Isaev, Mirolim; Masih, Mansur
  44. Innovation Dynamics and Fiscal Policy: Implications for Growth, Asset Prices, and Welfare By Michael Donadelli; Patrick Grüning
  45. Macroprudential Policy and Household Wealth Inequality By CARPENTIER Jean-François; OLIVERA Javier; VAN KERM Philippe
  46. Post-Keynesian macroeconomics since the mid-1990s - main developments By Eckhard Hein
  47. La economía de PPK. Promesas y resultados: la distancia que los separa By Waldo Mendoza Bellido; Erika Collantes Goicochea
  48. Investment-Specific Shocks, Business Cycles, and Asset Prices By Giuliano Curatola; Michael Donadelli; Patrick Grüning; Christoph Meinerding
  49. Exploring portfolio diversification opportunities in Islamic capital markets through bitcoin: evidence from MGARCH-DCC and Wavelet approaches By Lim, Siok Jin; Masih, Mansur
  50. La Dinámica de los Proyectos de Inversión: La Evidencia de Perú By Gondo, Rocío; Vega, Marco
  51. Financial Cycles and fiscal multipliers By Sebastian Gechert; Rafael Mentges
  52. Russia’s banking sector in 2016 By Khromov Mikhail
  53. The links between crude palm oil, conventional and Islamic stock markets: evidence from Malaysia based on continuous and discrete wavelet analysis By Razak, Razman; Masih, Mansur
  54. Unemployment and Income-Distribution Effects of Economic Growth: A Minimum-Wage Analysis with Optimal Saving By Richard A. Brecher; Till Gross
  55. Bangladesh; 2017 Article IV Consultation-Press Release; Staff Report By International Monetary Fund
  56. Episodes of financial deepening: credit booms or growth generators? By Peter L. Rousseau; Paul Wachtel
  57. A composed error model decomposition and spatial analysis of local unemployment By Cuéllar Martín, Jaime; Martín-Román, Ángel L.; Moral, Alfonso
  58. A PANIC Attack on Inflation and Unemployment in Africa: Analysis of Persistence and Convergence By DO ANGO, Simplicio; AMBA OYON, Claude Marius
  59. Does a country’s external debt level affect its Islamic banking sector development? evidence from Malaysia based on quantile regression and markov regime switching By Broni, Mohammed Yaw; Masih, Mansur
  60. Do macroeconomic variables affect stock–sukuk correlation in the regional markets? evidence from the GCC countries based on DOLS and FM-OLS By Abdi, Aisha Aden; Masih, Mansur
  61. Are Islamic risk factors blessings or curse for stock return? evidence from Malaysia based on dynamic GMM and quantile regression approaches By Hosen, Mosharrof; Masih, Mansur
  62. This paper considers the use of regime-switching dynamic stochastic general equilibrium models for monetary policy analysis and forecasting purposes. The model incorporates financial frictions that are introduced through the activities of heterogeneous agents in the household and several other features that are incorporated in most small open-economy models. Two variants of regime-switching models are considered: one includes switching in the monetary policy rule (only) and the other employs switching in both the monetary policy rule and the volatility of the shocks. The models are applied to the quarterly macroeconomic data for Uganda and most of the parameters are estimated with the aid of Bayesian techniques. The results of the extensive in- and out-of-sample evaluation suggest that the model parameters do not remain constant over the two regimes. In addition, the transition probabilities suggest that the nature of the regime-switching is consistent with the existence of isolated pulse effects that relate to significant shocks which affected the Ugandan economy, rather than level shifts in the central bank policy rule. It is also noted that the forecasting performance of the regime-switching models is possibly superior to the model that excludes these features. By Francis Leni Anguyo; Rangan Gupta; Kevin Kotze
  63. Rooms for extension of the ECB’s quantitative easing programme By Christophe Blot; Jérôme Creel; Paul Hubert
  64. Local bifurcations of three and four-dimensional systems: A tractable characterization with economic applications By Stefano Bosi; David Desmarchelier
  65. Austerity Measures: Do they avert solvency crises? By Christos Shiamptanis
  66. Finance, farms, and the Fed's early years By Bruce Carlin; William Mann
  67. Financial fragmentation in the Euro area By Christophe Blot; Jérôme Creel; Paul Hubert; Fabien Labondance
  68. La sharing economy y sus efectos en el mercado del trabajo By Andrés Camilo Cortés Gómez
  69. Current Growth, Inflation and Price Level Developments in the U.S.: a presentation at Keio University, Tokyo, Japan. May 26, 2017. By Bullard, James B.
  70. Tempting Goods, Self-Control Fatigue, and Time Preference in Consumer Dynamics1 By Shinsuke Ikeda; Takeshi Ojima
  71. Openness and Structural Labour Market Reforms: Counterfactuals for Lithuania By Povilas Lastauskas; Julius Stakënas
  72. Financial market regulation 2013–2016: new subjects and new requirements By Polezhaeva Natalia
  73. Russian industrial enterprises in 2016 (on business surveys’ findings) By Tsukhlo Sergey
  74. Oil, Volatility and Institutions: Cross-Country Evidence From Major Oil Producers By Kamiar Mohaddes; Amany El-Anshasy; Jeffrey B. Nugent
  75. Casting Off: How Ottawa Can Maximize the Value of Canada’s Major Ports and Benefit Taxpayers By Steven Robins
  76. Propagación de Choques de Encaje en el Sistema Bancario Peruano By Vega, Marco; Chávez, Joselin
  77. Fiscal- Monetary Interdependence and Exchange Rate Regimes in Oil Dependent Arab Economies By Ibrahim Elbadawi; Mohamed Goaied; Moez Ben Tahar
  78. Time-varying mixed frequency forecasting: A real-time experiment By Stefan Neuwirth
  79. Eastern Caribbean Currency Union; 2017 Discussion on Common Policies of Member Countries-Press Release and Staff Report By International Monetary Fund
  80. Estimating excess sensitivity and habit persistence in consumption using Greenbook forecast as an instrument By Bhatt, Vipul; Kishor, Kundan; Marfatia, Hardik
  81. Balance Sheet Effects in Colombian Non-Financial Firms By Adolfo Barajas; Sergio Restrepo; Roberto Steiner; Juan Camilo Medellín; César Pabón
  82. Reorganization or Liquidation: Bankruptcy Choice and Firm Dynamics By Dean Corbae; Pablo D'Erasmo
  83. Rural bank mergers/consolidations in the Philippines : a preliminary study By Kashiwabara, Chie
  84. The Effect of Public Debt on Growth in Multiple Regimes in the Presence of Long-Memory and Non-Stationary Debt Series By Irina Syssoyeva-Masson; João de Sousa Andrade
  85. Arco: an artificial counterfactual approach for high-dimensional panel time-series data By Carvalho, Carlos Viana de; Masini, Ricardo Pereira; Medeiros, Marcelo C.
  86. The Currency-Plus-Commodity Basket: A Proposal for Exchange Rates in Oil-exporting Countries to Accommodate Trade Shocks Automatically By Jeffrey A. Frankel
  87. Regional differences in the Okun’s Relationship: New Evidence for Spain (1980-2015) By Bande, Roberto; Martín-Román, Ángel L.
  88. A Price-Differentiation Model of the Interbank Market and Its Application to a Financial Crisis By Kyungmin Kim
  89. The Role of nominal wages in trade and current account surpluses By Gustav A. Horn; Fabian Lindner; Sabine Stephan
  90. Oil Prices and Informational Frictions: The Time-Varying Impact of Fundamentals and Expectations By Joseph P. Byrne; Marco Lorusso; Bing Xu
  91. Understanding Monetary Policy Stance By Rasa Stasiukynaitë
  92. Cyprus; First Post-Program Monitoring Discussions-Press Release; Staff Report; and Statement by the Executive Director for Cyprus By International Monetary Fund
  93. Colombia; Review Under the Flexible Credit Line Arrangement-Press Release and Staff Report By International Monetary Fund
  94. Morocco; First Review Under the Arrangement Under the Precautionary and Liquidity Line-Press Release; Staff Report; and Statement by the Executive Director for Morocco By International Monetary Fund
  95. Banks' leverage Procyclicality: Does Currency Diversification Matter? By Justine Pedrono; Aurélien Violon
  96. A Tie That Binds; Revisiting the Trilemma in Emerging Market Economies By Maurice Obstfeld; Jonathan David Ostry; Mahvash S Qureshi
  97. An empirical assessment of the Swedish Bullionist Controversy By Nils Herger
  98. Should the Malaysian Islamic stock market investors invest in regional and international equity market to gain portfolio diversification benefits ? By Umirah, Fatin; Masih, Mansur
  99. Financial Disruptions and the Cyclical Upgrading of Labor By Brendan Epstein; Alan Finkelstein Shapiro; Andrés González Gómez
  100. Negative interest rates: incentive or hindrance for the banking system? By Christophe Blot; Paul Hubert
  101. The Elusive Recovery By Guillaume Allegre; Céline Antonin; Christophe Blot; Jérôme Creel; Bruno Ducoudre; Paul Hubert; Sabine Lebayon; Sandrine Levasseur; Hélène Périvier; Raul Sampognaro; Aurélien Saussay; Vincent Touze; Sébastien Villemot; Xavier Timbeau
  102. The comparative statics of effective demand By Jochen Hartwig

  1. By: Gaetano Gaballo (Banque de France); Ariel Zetlin-Jones (Tepper School of Business)
    Abstract: This paper shows that an increase in banks’ holdings of domestic sovereign debt decreases the ability of domestic sovereigns to successfully enact bailouts. When sovereigns finance bailouts with newly issued debt and the price of sovereign debt is sensitive to unanticipated debt issues, then bailouts dilute the value of banks’ sovereign debt holdings rendering bailouts less effective. We explore this feedback mechanism in a model of financial intermediation in which banks are subject to managerial moral hazard and ex ante optimality requires lenders to commit to ex post inefficient bank liquidations. A benevolent sovereign may desire to enact bailouts to prevent such liquidations thereby neutralizing lenders’ commitment. In this context, home bias for sovereign debt may arise as a mechanism to deter bailouts and restore lenders’ commitment.
    Keywords: Bailout, Sovereign debt, Home bias, Time inconsistency, Commitment, Macroprudential regulation
    JEL: E0 E44 E6 E61
    Date: 2016–07–15
  2. By: Valdivia Coria, Joab Dan; Valdivia Coria, Daney
    Abstract: At the end of 2014, the Bolivian economy, despite facing negative external shocks (falling oil prices), registered a high economic growth in the region of Latin America. Monetary policy was aimed at keeping the government bond rate close to zero and raising liquidity levels in the economy (monetary policy expansive). On the part of the government, the two main sources of income of the nonfinancial public sector (SPNF) are: i) tax revenues and ii) the sale of hydrocarbons (gas), at that time Bolivia's fiscal policy was countercyclical To the behavior of the Latin American Product (increases in fiscal expenditure in infrastructure). These antecedents, aid to the interest of the study of the coordination of the economic policy in Bolivia. The structure of a Dynamic Stochastic General Equilibrium Model (DSGE) helps us to understand the transmission channels of shocks (in Taylor rule, Phillips curve and public investment) and how the monetary and fiscal policy reacts to these shocks.
    Keywords: Bayesian Estimation, Monetary Policy, Fiscal Policy, Dynamic Stochastic General Equilibrium Model (DSGE).
    JEL: E52 E58 E59 E62
    Date: 2017–05
  3. By: Eckhard Hein
    Abstract: Empirically, the macroeconomic institutions and the macroeconomic policy approach in the Eurozone have failed badly, both in terms of preventing the global financial and economic cri-sis from becoming a euro crisis and in generating a rapid recovery from the crisis, in particular. In this paper I will argue that the dominating macroeconomic policy regime in the Eurozone can be seen as a version of what Steindl (1979) had called ?stagnation policy?. To underline this argument, I will provide a simple Steindlian distribution and growth model in order to identi-fy the main channels through which stagnation policy affects accumulation and productivity growth. This will also provide a set of elements of a Steindlian anti-stagnation policy. Against this theoretical background I will then examine the macroeconomic institutions and the macro-economic policy approach of the Eurozone which has been based on the New Consensus Macroeconomics (NCM) and I will highlight its main deficiencies. This will then provide the grounds for an outline of an alternative macroeconomic policy approach for the specific institu-tional setup of the Eurozone based on a post-Keynesian/Steindlian/neo-Kaleckian approach.
    Keywords: stagnation, stagnation policy, Eurozone, policy alternatives, Steindl
    JEL: E02 E11 E12 E61 E63 E64 E65 F45
    Date: 2017
  4. By: Bozhechkova Alexandra (Gaidar Institute for Economic Policy); Trunin Pavel (Gaidar Institute for Economic Policy); Knobel Alexander (Gaidar Institute for Economic Policy); Kiyutsevskaya Anna (Gaidar Institute for Economic Policy)
    Abstract: In 2016, the Bank of Russia implemented a conservative monetary policy aimed at mitigating inflation. Commercial banks decreased their demand for central bank refinancing as the Reserve Fund was spent, in which case the central bank had to employ a set of instruments to prevent an increase in the money supply. It happened twice over the course of the year – on June 14 and September 19 – that Russia’s central bank cut 0.5 percentage points off the key rate, to 10% p.a. With a declining inflation rate and inflation expectations available during the year, a rather moderate decline in the key rate suggested growth of the real interest rate in the money market. Maintaining a positive real rate in the money market helps prevent prices from hiking upwards as the savings appeal strengthened, although there is risk of economic slowdown.
    Keywords: Russian economy, monetary policy, money market, exchange rate, inflation, balance of payments
    JEL: E31 E43 E44 E51 E52 E58
    Date: 2017
  5. By: Nocera, Andrea; Roma, Moreno
    Abstract: We use a Bayesian stochastic search variable selection structural VAR model to investigate the heterogeneous impact of housing demand shocks on the macroeconomy and the role of house prices in the monetary policy transmission, across euro area countries. A novel set of identification restrictions, which combines zero and sign restrictions, is proposed. By exploiting the cross-sectional dimension of our data, we explore the differences in the propagation channels of house prices and monetary policy and the challenges they pose in the process of real and nominal convergence in the Eurozone. Among the main results, we find a comparatively stronger housing wealth effect on consumption in Ireland and Spain. We provide new evidence in support of the financial accelerator hypothesis, showing that house prices play an important role in the availability of loans. A significant and highly heterogeneous effect of monetary policy on house price dynamics is also documented. JEL Classification: C22, E21, E31, E44, E52
    Keywords: Bayesian vector autoregression, house prices, identified VARs, monetary policy, policy counterfactuals
    Date: 2017–06
  6. By: Jeetendra Khadan
    Abstract: Energy revenues represent roughly 45 percent of Trinidad and Tobago's GDP and are highly volatile since they are correlated with the price of oil and gas. Hence, sharp changes in energy prices, whether temporary or sustained, can have important consequences for economic growth and overall macroeconomic performance. After the 2014 crash in oil prices, a key challenge that emerged for policymakers in hydrocarbon-exporting countries is how to manage fiscal retrenchment in an environment of subdued growth. Using structural vector autoregression, this article examines three questions related to this challenge by focusing on Trinidad and Tobago: (1) what is the asymmetric effect of energy revenue shocks on macroeconomic performance, (2) what is the asymmetric effect of energy revenue shocks on government expenditure (disaggregated by categories), and (3) what is the effect of government expenditure shocks (disaggregated by categories) on economic growth. The results suggest that although positive energy revenue shock increases growth almost immediately, it is not sustained. A negative energy revenue shock is found to have a greater adverse effect on primary expenditure than a positive shock and this largely occurs through a reduction in capital expenditure. Transfers and subsidies, and goods and services are the most sensitive components of current expenditure to positive energy shocks. With respect to the effect of expenditure on growth, transfers and subsidies significantly reduce growth in the short run, whereas other categories of expenditure are found to have a largely positive effect on growth. These findings suggest three important implications for policymakers: the first is to reduce and or reorient public expenditure away from transfers and subsidies and towards more growth-enhancing areas; the second is the need for clear fiscal rules, and to more effectively balance the role of fiscal policy as a growth stimulus while also performing other social functions; and thirdly, these results bring into sharp focus the effectiveness of the rules of the country's stabilization fund to manage windfall energy revenues.
    Keywords: Government Revenue, GDP Growth, Oil Prices, Exchange rates, Commodity Prices, Wages, Macroeconomics, Economic Impact Analysis, economic growth, oil prices
    JEL: Q33 E37 E32
    Date: 2016–12
  7. By: Francesco Saraceno (Observatoire français des conjonctures économiques)
    Abstract: The Economic and Monetary Union (EMU) institutions are consistent with a New Consensus that emerged in the 1980s, limiting the role for macroeconomic (particularly fiscal) policy to short term stabilizations by means of rules. I will argue that the policy inertia induced by the Consensus may have played a role in the disappointing performance of EMU economies even before the crisis. The crisis of the Consensus, and the debate on secular stagnation, proved that Keynesian (and possibly) persistent excesses of savings over investment may hamper growth. This has put fiscal policy back to the center of the scene, and given the General Theory, at eighty, a second youth. I will argue therefore that the EMU fiscal rule should be amended to allow semi-permanent negative government savings. I will finally argue that a modified Golden Rule may serve this objective, and allow EU-wide policy coordination. This seems the only reasonable reform with some chances of being adopted by the EU divided policy makers.
    Keywords: Fiscal rules; Fiscal policy; EMU; Golden rules; Secular stagnation; Keynes; Policy mix
    JEL: B22 E62 E2 E65
    Date: 2016–12
  8. By: Eckhard Hein; Eckhard Achim Truger
    Abstract: In this paper we discuss the relationship between the current account rebalancing in the Eu-rozone, income distribution and wage policies with a focus on the main surplus economy, Germany. We will illustrate how and to which extent German wage policies could be able to contribute to a more balanced development of the Eurozone and to overcome the export-led mercantilist German model. Our analysis and our scenarios will be based on stylized econo-metric results for Germany, as they have recently been obtained in the empirical literature estimating the German demand and growth regime based on post-Kaleckian models. We will focus in particular on the relationship between nominal wages and functional income distribu-tion, on the one hand, and between functional income distribution and domestic demand, on the other hand. We show that more expansionary wage policy can contribute to reducing the excessive German current account surplus, mainly through the domestic income-imports channel. However, wage policy alone will be overburdened with the task of rebalancing. For this, in particular more expansionary fiscal policies are required.
    Keywords: Current account imbalances in the Eurozone, wage policies, distribution, exports, imports
    JEL: E21 E25 E27 E62 E64 F45 F47 H62
    Date: 2017
  9. By: Jean Barthélemy (Département d'économie); Magali Marx (Département d'économie)
    Abstract: This paper solves rational expectations models in which structural parameters switch across multiple regimes according to state-dependent (endogenous) transition probabilities. Assuming small shocks and smooth transition probabilities, we apply a perturbation approach. We first provide for conditions under which a unique bounded equilibrium exists. We then compute first- and second-order approximations. In a new-Keynesian model with monetary policy switching, we document new effects of monetary policy switching when transition probabilities depend on inflation.
    Keywords: Regime switching; Rational expectations models; Indeterminacy; Perturbation methods
    JEL: E32 E43
    Date: 2016–11
  10. By: Izryadnova Olga (Gaidar Institute for Economic Policy)
    Abstract: The period of 2014–2016 saw mixed investment dynamics driven by the factors and conditions for (1) recovery from the crisis of 2009–2012 and (2) for Russian economy’s adaptation amid restricted access to global capital markets. Russia’s investment crisis hit a peak in H1 2009, and fixed investment recovered bouncing back to pre-crisis levels by 2011 year end. Fixed investment accounted for 19.7% of GDP, one percentage point below the average of 2007–2008, despite a faster rate than GDP growth in the period of 2010–2011. In 2012, the year-on-year fixed investment growth of 6.8% was bolstered by major infrastructure and social investment projects in progress. However, with the savings available at that time, the fixed investment share in 2012 was still smaller than what it was prior to the crisis. Although fixed investment growth rates was close to zero in 2013, the year-on-year growth of 0.8% influenced the investment demand dynamics in the years that followed.
    Keywords: Russian economy, fixed investment
    JEL: E20 E21 E22 E60
    Date: 2017
  11. By: Mariarosaria Comunale (Bank of Lithuania); Jonas Striaukas (Bank of Lithuania)
    Abstract: In this paper we provide an overview of the different approaches identified to capture monetary policy in a period of Zero Lower Bound (ZLB). We focus here on the methods closely linked to interest rates, which include: spreads, synthetic indices from principal component analysis and different shadow rates. In the second section of this review we calculate these measures for the euro area and also draw comparisons among different approaches and look at the effects on main macroeconomic variables, with a special focus on inflation. The impact of unconventional monetary policy shocks on inflation is found to be significantly positive by the majority of the studies and by using different methods. Ultimately, we provide a summary of the literature on the Natural Real Rate of Interest, which may be useful for assessing how long low (real) interest rates in a ZLB may stay in place; also suggesting some possible improvement in the estimations which would lead to more accurate policy recommendations.
    Keywords: Unconventional monetary policy, zero lower bound, shadow rates, natural interest rate, inflation
    JEL: E43 E52 E58 F42
    Date: 2017–02–24
  12. By: Roberto Chang; Andres Fernandez; Adam Gulan
    Abstract: Corporate sectors in emerging markets have noticeably increased their reliance on foreign financing, presumably reflecting low global interest rates. The evidence also shows a rebalancing from bank loans towards bonds. To study these developments, this paper develops a dynamic open economy model where these modes of finance are determined endogenously. The model replicates the stylized facts following a drop in world interest rates; in particular, rebalancing towards bonds occurs because bank credit becomes relatively more expensive, reflecting the scarcity of bank equity. More generally, the model is suitable for studying interactions between modes of finance and the macroeconomy.
    Keywords: Bonds, Credit, Corporate Debt, Interest rates, Commodity Prices, Capital Goods, Financial Frictions, Emerging countries, bond finance, capital goods, interest rates
    JEL: G31 F41 E44 E32
    Date: 2016–08
  13. By: Francis Leni Anguyo (School of Economics, University of Cape Town, Rondebosch, South Africa); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa and IPAG Business School, Paris, France); Kevin Kotzé (School of Economics, University of Cape Town, Rondebosch, South Africa)
    Abstract: This paper considers the use of regime-switching dynamic stochastic general equilibrium models for monetary policy analysis and forecasting purposes. The model incorporates financial frictions that are introduced through the activities of heterogeneous agents in the household and several other features that are incorporated in most small open-economy models. Two variants of regime-switching models are considered: one includes switching in the monetary policy rule (only) and the other employs switching in both the monetary policy rule and the volatility of the shocks. The models are applied to the quarterly macroeconomic data for Uganda and most of the parameters are estimated with the aid of Bayesian techniques. The results of the extensive in- and out-of-sample evaluation suggest that the model parameters do not remain constant over the two regimes. In addition, the transition probabilities suggest that the nature of the regime-switching is consistent with the existence of isolated pulse effects that relate to significant shocks which affected the Ugandan economy, rather than level shifts in the central bank policy rule. It is also noted that the forecasting performance of the regime-switching models is possibly superior to the model that excludes these features.
    Keywords: Monetary policy, inflation-targeting, financial frictions, small open-economy, low income country, dynamic stochastic general equilibrium model, Bayesian estimation.
    JEL: E32 E52 F41
    Date: 2017–06
  14. By: Croushore, Dean (Federal Reserve Bank of Philadelphia); van Norden, Simon (Federal Reserve Bank of Philadelphia)
    Abstract: This paper provides a detailed examination of a new set of fiscal forecasts for the U.S. assembled by Croushore and van Norden (2017) from FOMC briefing books. The data are of particular interest because (1) they afford a look at fiscal forecasts over six complete business cycles and several fiscal policy regimes, covering both peacetime and several wars, (2) the forecasts were precisely those presented to monetary policymakers, (3) they include frequently updated estimates of both actual and cyclically adjusted deficits, (4) unlike most other U.S. fiscal forecasts, they were neither partisan nor constrained by unrealistic assumptions about future fiscal policy, and (5) forecasts for other variables (GDP growth, inflation) from the same forecasters are known to compare favorably with most other available forecasts. We detail the performance of forecast federal expenditures, revenues, surpluses, and structural surpluses in terms of accuracy, bias, and efficiency. We find that (1) fiscal forecast errors can be economically large, even at relatively short forecast horizons, (2) while the accuracy of unemployment rate forecast errors improved after 1990, that of most fiscal variables deteriorated considerably, (3) there is limited evidence of forecast bias, and most of this evidence is confined to the period before 1993, (4) the forecasts appear to be efficient with respect to both the fed funds rate and CBO projections, and (5) cyclically adjusted deficit forecasts appear to be over-optimistic around both business cycle peaks and troughs.
    Keywords: fiscal policy; deficits; forecasting; FOMC; Greenbook
    JEL: E62 H68
    Date: 2017–06–20
  15. By: Emmanouil Gkiourkas, Theodore Panagiotidis, Gianluigi Pelloni (Wilfrid Laurier University)
    Abstract: We revisit the macroeconomic effects of labor reallocation within the framework of Campbell and Kuttner (1996). We re-estimate their model, update the sample, and employ generalized and local impulse response functions. We confirm that total employment responses to reallocation shocks remain significant.
    Keywords: labor reallocation, unemployment, sectoral shifts
    JEL: C32 C50 E24
    Date: 2017–06–01
  16. By: Mitsuru Katagiri (Bank of Japan); Koji Takahashi (Bank of Japan)
    Abstract: The macroeconomic effect of term premiums is a controversial issue both theoretically and quantitatively. In this paper, we explore the possibility that term premiums affect inflation and the real economy via exchange rate dynamics. For this purpose, we construct a small open economy model with limited asset market participation, focusing particularly on the empirical fact that uncovered interest parity (UIP) tends to hold for longer-term interest rate differentials. In a quantitative exercise, we estimate parameters using Japanese and U.S. data and show that changes in the term premiums of both Japanese and U.S. long-term yields have sizable effects on Japanese inflation rates via the yen-U.S. dollar exchange rate. This result implies that although decreasing domestic term premiums increased Japan's inflation rates via the exchange rate channel to some extent, it is almost equally influenced by foreign factors such as a rise in U.S. term premium.
    Keywords: Exchange Rate; Term Premium; Uncovered Interest Rate Parity
    JEL: E31 E52 E58
    Date: 2017–06–09
  17. By: Gambetti, Luca; Musso, Alberto
    Abstract: This paper provides empirical evidence on the macroeconomic impact of the expanded asset purchase programme APP) announced by the European Central Bank (ECB) in January 2015. The shock associated to the APP is identified with a combination of sign, timing and magnitude restrictions in the context of an estimated time-varying parameter VAR model with stochastic volatility. The evidence suggests that the APP had a significant upward effect on both real GDP and HICP inflation in the euro area during the first two years. The effect on real GDP appears to be stronger in the short term, while that on HICP inflation seems more marked in the medium term. Moreover, several channels of transmission appear to have been activated, including the portfolio rebalancing channel, the exchange rate channel, the inflation re-anchoring channel and the credit channel. JEL Classification: C32, E44, E52, E58
    Keywords: asset purchase programme, euro area, quantitative easing, time-varying VAR
    Date: 2017–06
  18. By: Daniel Baksa (Department of Economics, Central European University; Institute of Economics, Hungarian Academy of Sciences); Mihnea Constantinescu (Bank of Lithuania); Zsuzsa Munkacsi (Bank of Lithuania)
    Abstract: We extend OGRE, the overlapping generation model developed by Baksa and Munkacsi (2016) by adding openness. We then employ the model to explore how the macroeconomic effects of aging, assumed to manifest itself as a decrease in the mortality rate, can be counteracted through public policies. The extended version inherits the previous modelling features of OGRE allowing us to also account for the impact openness has on the effectiveness of the considered policies.
    Keywords: population aging, public pension reforms, pay-as-you-go, fully funded, shadow economy, informal employment, small open-economy, overlapping generations
    JEL: E24 E26 F41 H55 J11 J46
    Date: 2016–09–23
  19. By: Noth, Felix; Busch, Matias Ossandon
    Abstract: This paper estimates the effect of a foreign funding shock to banks in Brazil after the collapse of Lehman Brothers in September 2008. Our robust results show that bank-specic shocks to Brazilian parent banks negatively affected lending by their individual branches and trigger real economic consequences in Brazilian municipalities: More affected regions face restrictions in aggregated credit and show weaker labor market performance in the aftermath which documents the transmission mechanism of the global financial crisis to local labor markets in emerging countries. The results represent relevant information for regulators concerned with the real effects of cross-border liquidity shocks.
    JEL: E24 E44 G01 G21
    Date: 2017–06–14
  20. By: Juan Pablo Mateo (Department of Economics, New School for Social Research and University of Valladolid)
    Abstract: The measure of capital profitability in the Spanish economy is relevant because of both a process of capital accumulation since mid-nineties largely driven by asset-price inflation, as well as the deep economic crisis since late 2008. Therefore, in this article a comparative analysis is carried out using different databases and measures of the rate of profit, incorporating the financial sphere and addressing other different countries of the Eurozone. It shows the scope of the underlying valorization crisis in relation to previous decades and in terms of its fall experienced during the years not only of the housing boom, but also throughout the subsequent recession. In addition, this drop in profitability stands out in relation to other economies of the European periphery. Hence, this analysis puts the rate of profit at the center of the debate on the Great Recession in Spain, despite its absence in much of the economic literature, including heterodox approaches.
    Keywords: Profit rate, interest rates, Spain, Eurozone
    JEL: F60 E01 E32 E40 O52
    Date: 2017–06
  21. By: Mihnea Constantinescu (Bank of Lithuania); Anh Dinh Minh Nguyen (Bank of Lithuania)
    Abstract: This paper investigates the importance of unemployment and credit in determining the potential level of real activity for a small-open economy with a low degree of financialization. We estimate a multivariate unobserved component model (MUC) to derive the potential output and its associated output gap for the Lithuanian economy. The model is estimated via Bayesian methods and the time-paths of unobserved variables are extracted via the Kalman filter. We find that the inclusion of unemployment into the MUC model substantially improves the estimates of output gap in real-time. Once information about unemployment is accounted for, adding information about credit does not substantially alter either the estimates of output gap or its performance in real time. We uncover a strong negative correlation between the model-implied unemployment gap (without credit) and real credit growth. This explains the relatively muted impact of the financial variable on the level and dynamics of the output gap. Data revisions appear not to be the primary source of revisions on output gaps estimates.
    Keywords: Potential Output, Output Gap, Multivariate Unobserved Component, Kalman Filter, NAIRU, Real-Financial Cycle, Small-Open Economy
    JEL: C11 C32 E24 E32
    Date: 2017–04–24
  22. By: Giovanni Pellegrino (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: This paper estimates a nonlinear Interacted-VAR model to investigate whether the effectiveness of monetary policy shocks in the Euro area is influenced by the level of European uncertainty. Generalized Impulse Response Functions à la Koop et al. (1996) suggest that the peak and cumulative effects of monetary policy shocks are lower during uncertain times than during tranquil times, and significantly so once times of very high and very low uncertainty are considered.
    Keywords: Monetary policy shocks, Non-Linear Structural Vector Auto-Regressions, Interacted-VAR, Generalized Impulse Response Functions, uncertainty
    JEL: C32 E32 E52
    Date: 2017–06
  23. By: Jair N. Ojeda-Joya; Oscar E. Guzman
    Abstract: In this paper we estimate the effect of government consumption shocks on GDP using a panel of 21 developing economies. Our goal is to better understand the reasons for the low fiscal multipliers found in the literature by performing estimations for alternative exchange rate regimes, business-cycle phases, and monetary policy stances. In addition, we perform counterfactual simulations to analyze the possible gains from fiscal-monetary policy coordination. The results imply that government consumption shocks are usually followed by monetary policy tightening in developing economies with flexible regimes. Our simulations show that this reaction partially explains the presence of low fiscal multipliers in these economies. On the other hand, we find that government consumption shocks imply higher multipliers in developing economies during fixed regimes, economic booms or monetary expansions. In particular, implementing fiscal programs during monetary expansions seems to improve significantly their economic stimulus.
    Keywords: Fiscal Policy, Monetary Policy, Structural Vector Autoregression, Exchange Rate Regime, Panel VAR
    JEL: E62 E63 F32
    Date: 2017–06–13
  24. By: Cars Hommes (Amsterdam School of Economics (University of Amsterdam) & Tinbergen Institute); Domenico Massaro (Universit? Cattolica del Sacro Cuore & Complexity Lab in Economics); Matthias Weber (Bank of Lithuania & Faculty of Economics, Vilnius University)
    Abstract: Expectations play a crucial role in modern macroeconomic models. We consider a New Keynesian framework under rational expectations and under a behavioral model of expectation formation. We show how the economy behaves in the alternative scenarios with a focus on inflation volatility. Contrary to the rational model, the behavioral model predicts that inflation volatility can be lowered if the central bank reacts to the output gap in addition to inflation. We test the opposing theoretical predictions in a learning-to-forecast experiment. The results support the behavioral model and the claim that output stabilization can lead to less volatile inflation.
    Keywords: Experimental macroeconomics; Heterogeneous expectations; LtFE; Tradeoff inflation and output gap
    JEL: C90 E03 E52 D84
    Date: 2017–03–30
  25. 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: The value of the US dollar is of major importance to the world economy. Global liquidity has grown sharply in recent years with growing importance of China’s money supply to global liquidity. We develop out-of-sample forecasts of the US dollar exchange rate value using US and non-US global data on price level, output, interest rates, and liquidity on the US, China and non-US/non-China liquidity. Monetary model forecasts significantly outperform a random walk forecast in terms of MSFE in the long run. A monetary model/ECM with sticky prices performs best. Rolling sample analysis indicates changes over time in the influence of variables in forecasting the US dollar. China’s liquidity has a distinct, significant and changing influence on the US dollar exchange rate. Increases in the growth rate in the relative US-China M2 forecast a significantly higher value for the US dollar 1- and 6-month later.
    Keywords: China’s liquidity, trade-weighted US dollar, forecasting US dollar exchange rate
    JEL: E41 E51 F31 F41
    Date: 2016–02
  26. By: Forbes, Kristin (MIT-Sloan School of Management, Bank of England and NBER); Kirkham, Lewis (Monetary Policy Committee Unit, Bank of England); Theodoridis, Konstantinos (Monetary Policy Committee Unit, Bank of England)
    Abstract: This paper uses a ‘trendy’ approach to understand UK inflation dynamics. It focuses on the time series to isolate a low-frequency and slow-moving component of inflation (the trend) from deviations around this trend. We find that this slow-moving trend explains a substantial share of UK inflation dynamics. International prices are significantly correlated with the short-term cyclical movements in inflation around its trend, and the exchange rate is significantly correlated with movements in the slow-moving, persistent trend. Other variables emphasized in standard inflation models — such as slack and inflation expectations — may also play some role, but their significance varies and the magnitude of their effects is substantially smaller than for commodity prices and the exchange rate. These results highlight the sensitivity of UK inflation dynamics to events in the rest of the world. They also provide guidance on when deviations of inflation from target are more likely to be temporary, and when (and how quickly) a monetary policy response is appropriate.
    Keywords: UK; inflation; UCSV; exchange rate; slack; inflation expectations; monetary policy
    JEL: E31
    Date: 2017–06–16
  27. By: Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques); Fabien Labondance (Observatoire français des conjonctures économiques)
    Abstract: We analyze the reasons for which the very accommodative policy led by the ECB has not triggered a rebound of investment. After examining the evolutions of investment in the euro area, we observe a large heterogeneity both across sectors and countries. Consequently, it is questionable that the ECB’s monetary policy can increase investment in the whole area. Therefore, we study the extent to which monetary policy impacts investment. We use a counterfactual analysis and compute the level of investment had the ECB’s decisions been different. We observe the importance of the ECB in support to investment. Indeed, the investment in the euro area would have sunk without accommodative – first conventional, then unconventional – monetary policy. Finally, we lay the emphasis on the role of credit demand as one of the main determinants of investment since the 2008 crisis, which has depended among others on the impact of deleveraging and fiscal consolidation.
    JEL: E5
    Date: 2016–06
  28. By: Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques); Fabien Labondance (Observatoire français des conjonctures économiques); Xavier Ragot (Observatoire français des conjonctures économiques)
    Abstract: In this paper, we study the global determinants of euro area inflation and show that they are large - they explain around 50% of inflation dynamics – and make it impossible for the ECB to fully control headline inflation. Nevertheless, we show that the ECB retains some control on the domestic part of euro area inflation. We therefore argue in favour of a change in the inflation target pursued by the ECB. Unless a change occurs, the ECB should promote cooperation with other central banks in order to match its CPI inflation target at 2% as 40 to 50% of CPI determinants is related to foreign yields and foreign output growths.
    JEL: E5
    Date: 2015–11
  29. By: Jan Libich
    Abstract: The 2008 crisis highlighted the linkages between the financial sector and the real economy, as well as between the corresponding stabilization policies: macroprudential and monetary (M&Ms). Our game-theoretic analysis focuses on the increasingly adopted separation setup, in which M&Ms are conducted by two different institutions (e.g. in Australia, Canada, Eurozone, Sweden, Switzerland and the United States). We show that separated policy M&Ms are not as sweet as their chocolate counterparts, in fact they may turn sour. The main reason is that a strategic conflict is likely to arise between the autonomous prudential authority and the central bank in addressing exuberant credit booms, such as those during 1998-2000, 2003-2006 and 2011-2016. In this conflict - that manifests as the Game of Chicken under some parameter values - each institution prefers a different policy regime. In particular, both the prudential authority and the central bank prefer to do nothing about the credit boom and induce the other institution to respond instead; arguably the case of Sweden, Norway and other countries post- 2010. To allow for richer strategic interactions, we postulate the concept of Stochastic leadership, which generalizes Stackelberg leadership and simultaneous move game by allowing for Calvo-type probabilistic revisions of policy actions. We show that the most likely outcomes are Policy Deadlock, Regime Switching and Macroprudential Dominance, but all three are socially undesirable. This is not only because of excessive financial and economic cycles, but also because monetary policy coerced into leaning against the wind loses full control over price inflation. The separation setup of M&Ms is thus subject to a macroprudential version of unpleasant monetarist arithmetic.
    Keywords: Macroprudential policy, monetary policy, strategic interactions, Game of Chicken, financial stability, exuberant credit, leaning against the wind, unpleasant monetarist arithmetic.
    JEL: E61 G28
    Date: 2017–06
  30. By: Gomis-Porqueras, Pedro (Deakin University); Waller, Christopher J. (Federal Reserve Bank of St. Louis)
    Abstract: We consider an overlapping generation framework with search and private information to study optimal taxation. Agents sequentially trade in markets that are characterized by different frictions and trading protocols. In frictional decentralized markets, agents receive shocks that determine if they are going to be consumers or producers. Shocks are private information. Mechanism design is used to solve for the constrained optimal allocation. We then study whether a government can replicate the constrained optimal allocation with an array of policy instruments including fiat money. We show that if the government has a full set of non-linear taxes, then lump-sum taxes and inflation are irrelevant for the allocation. However, if the government is constrained to use linear taxes, then using the inflation tax is optimal even if lump-sum taxes are available.
    Keywords: Inflation; Monetary Policy; Fiscal Policy
    JEL: E52 E62 H21
    Date: 2017–05–31
  31. By: Lahura, Erick (Banco Central de Reserva del Perú)
    Abstract: This paper investigates empirically the usefulness of monetary aggregates as information variables in the conduct of monetary policy. For this purpose, some recent advances on the topic were used, which include the analysis of both real-time and revised final data, and the application of Bayesian model averaging to allow for model uncertainty regarding the lag length and number of cointegrating relationships. In this paper, money is considered as an information variable for Wt (e.g. output or prices) if the following two criteria are satisfied: (i) Mt is strongly exogenous, and (ii) Mt Granger-causes Wt. Strong exogeneity is relevant because it validates conditional forecasting of Wt using monetary aggregates as conditioning variables. The results show no strong evidence supporting the usefulness of monetary aggregates as information variables for prices or output. However, this does not preclude their potential use as information variables for other macroeconomic targets such as financial stability. It is worth mentioning that the results do not imply that monetary policy in Peru is not useful.
    Keywords: Bayesian Model Averaging, cointegration, Granger causality, monetary aggregates, monetary policy, real-time data, strong exogeneity
    JEL: C32 E52 E58
    Date: 2017–06
  32. By: Anh Dinh Minh Nguyen (Bank of Lithuania)
    Abstract: This paper considers a variety of reaction functions in the context of real time data to analyse U.K. monetary policy under inflation targeting adopted in 1992. In order to deal with lack of current and future data in real time, we construct the forecasts of expected variables in the first step and use the constructed data for the estimations of contemporaneous- and forward-looking rules. Moreover, we employ the impulse-indicator saturation method to deal with the issue of outliers and therefore obtain robust estimates of policy parameters. Our results show that the robust characteristics of monetary policy during the inflation targeting regime are forward-looking and raising the interest rate by more than one-to-one to movements in inflation, thereby satisfying the Taylor principle.
    Keywords: Real-time data, Taylor rule, Forecasting, Impulse indicator saturation, Autometrics
    JEL: C22 C52 C53 E52 E58
    Date: 2017–03–02
  33. By: Francesca Rondina (Department of Economics, University of Ottawa, Ottawa, ON)
    Abstract: This paper studies the impact of a change in real oil prices on output and inflation in a New Keynesian model of the U.S. economy. The main goal of the analysis is to assess whether the cross-equation restrictions imposed by the model play a role in the transmission mechanism of exogenous oil price shocks. I find that the interactions between oil prices, domestic variables, and expectations implied by the New Keynesian framework generate responses that are quite modest, and that can depart from those emerging from a more unrestricted SVAR model. I also find that changes in oil prices that cannot be predicted based on the available information are, for the most part, exogenous to the U.S. economy. As such, augmenting the model to account for their possible endogeneity does not deliver substantially different results.
    Keywords: Oil Prices, Endogeneity, New Keynesian Model, Expectations
    JEL: E12 E17 Q43 Q47
    Date: 2017
  34. 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: We constructed a new index of global uncertainty using the first principal component of the stock market volatility for the largest 15 economies. We evaluate the impact of global uncertainty on the global economy using the new global database from Global Economic Indicators (DGEI), Federal Reserve Bank of Dallas. Global uncertainty shocks are less frequent than those observed in data on the U.S. economy. Global uncertainty shocks are associated with a sharp decline in global inflation, global growth and in the global interest rate (based on official/policy interest rates set by central banks). Our decomposition of global uncertainty shocks shows that global financial uncertainty shocks are more important than non-financial shocks. Over the period 1981 to 2014 global financial uncertainty forecasts 18.26% and 14.95% of the variation in global growth and global inflation respectively. The non-financial uncertainty shocks have insignificant effects on global growth. The model for global variables shows more protracted and substantial negative effects of uncertainty on growth and inflation than does a panel model estimating associations of local country-level variables. This outcome is reversed for the effect of uncertainty on official interest rate.
    Keywords: global, uncertainty shccks, monetary policy, FAVAR
    JEL: D80 E44 E66 F62 G10
    Date: 2016–01
  35. By: Adeel Malik (University of Oxford)
    Abstract: Revisiting macroeconomic policies and outcomes of Arab resource-rich economies (RREs), this paper synthesizes the political economy considerations that underpin policy choices. The paper argues that, in the context of Arab RREs, fiscal and financial sector policies play a particularly important role in absorbing natural resource rents. Fiscal policy is highly pro-cyclical and rooted in the underlying political settlement, which is based on extensive distributional commitments. Financial systems are deep but are known for restricted financial access to vast areas of economy. Given the excessive dependence on hydrocarbon rents and the prevalence of fixed exchange rate regimes, the external constraint remains more binding. Even where monetary policy has greater room to operate, existing policy frameworks are not geared towards domestic targets, such as inflation and unemployment, and are largely determined outside the purview of macroeconomic policy. I argue that the political objective function is essential for understanding these macroeconomic arrangements. With weak productive constituencies and few institutional constraints, macroeconomic policy involves limited feedback from the private sector and upholds the interest of the sovereign. In this milieu, institutional constraints on fiscal policy are more important than central bank independence. The paper also discusses the stability implications of current macroeconomic arrangements, arguing that stability in Arab RREs is almost entirely predicated on the uninterrupted flow of oil rents rather than resilient institutional structures.
    Date: 2017–06–07
  36. By: Doi, Jonas Takayuki; Fernandes, Marcelo; Nunes, Clemens V. de Azevedo
    Abstract: The aim of this study is to investigate the link between the inflation risk premia implied by the term structures of nominal and real interest rates in Brazil and disagreements in inflation forecasts. We gauge the former by the difference between the breakeven inflation rate and agents’ inflation median expectations in the Focus Survey published by the Central Bank of Brazil. To proxy for disagreement, we employ the standard deviation of the 12-month inflation expectations in the Focus Survey. We first estimate the impact of disagreement on inflation risk premia across different horizons using a VAR approach. We find that shocks in inflation forecast disagreement significantly affect the 9-, 12-, 24- and 36-month inflation risk premia. The impact is positive, increasing with maturity at least up to 12 months. We then estimate an alternative VAR specification that summarizes the term structure of inflarion risk premia by means of level, slope and curvature factors. It turns out that shocks in disagreement do not affect the slope and curvature factors, resulting only in parallel shifts in the inflation premium term structure. This is in line with the fact that the higher the dispersion in inflation expectations, the higher is the compensation that investors will require to hold fixed rate bonds.
    Date: 2017–06–13
  37. By: Ricardo Reis
    Abstract: central bank is insolvent if its plans imply a Ponzi scheme on reserves so the price level becomes infinity. If the central bank enjoys fiscal support, in the form of a dividend rule that pays out net income every period, including when it is negative, it can never become insolvent independently of the fiscal authority. Otherwise, this note distinguishes between intertemporal insolvency, rule insolvency, and period insolvency. While period and rule solvency depend on analyzing dividend rules and sources of risk to net income, evaluating intertemporal solvency requires overcoming the difficult challenge of measuring the present value of seignorage.
    Keywords: central bank capital; fiscal support; monetary policy
    JEL: E42 E58 E59
    Date: 2015–07
  38. 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: Kilian and Park (IER 50 (2009), 1267–1287) find shocks to oil supply are relatively unimportant to understanding changes in U.S. stock returns. We examine the impact of both U.S. and non- U.S. oil supply shocks on U.S. stock returns in light of the unprecedented expansion in U.S. oil production since 2009. Our results underscore the importance of the disaggregation of world oil supply and of the recent extraordinary surge in the U.S. oil production for analysing impact on U.S. stock prices. A positive U.S. oil supply shock has a positive impact on U.S. real stock returns. Oil demand and supply shocks are of comparable importance in explaining U.S. real stock returns when supply shocks from U.S. and non-U.S. oil production are identified.
    Keywords: oil prices, stock returns, U.S. oil production
    JEL: E44 G12 Q43
    Date: 2016–03
  39. By: Eglë Jakuèionytë (Tinbergen Institute and the University of Amsterdam, the Netherlands)
    Abstract: This paper explores the spillover effects from increasing personal bankruptcy protection. Innovatively, the paper shows that the spillover effects can be influenced by the bank portfolio choice. Since a low level of personal bankruptcy protection keeps an insolvent individual liable until her debt is repaid in full, lender’s returns on mortgages are less uncertain than returns on other assets ceteris paribus. Risk-averse banks would prefer mortgages over other types of assets such as corporate loans. Corporate lending and thus equilibrium output would fall. In contrary to the popular view that creditor protection smooths credit provision and makes the allocation of resources more efficient, I show that in some cases a low level of personal bankruptcy protection can lead to aggregate consumption losses. Also I show that macroprudential policies (LTV ratios) can successfully complement higher personal bankruptcy protection in ensuring even higher welfare.
    Keywords: Personal bankruptcy, household debt, housing, general equilibrium, bank portfolio choice
    JEL: E44 G11 G21 K35 R21
    Date: 2017–04–24
  40. By: Santos, Susana
    Abstract: A Social Accounting Matrix (SAM) is presented as a tool to study the socio-economic activity of a country. This activity involves the monetary or nominal flows that are measured by the National Accounts, as well as production (organized in factors, industries and goods and services) and institutions (organized in households, general government, non-financial and financial corporations, non-profit institutions serving households, and rest of the world). In order to contribute to the definition of a methodology that can contribute to improving the knowledge of the different aspects of this activity, the potentialities of a SAM for its reading and interpreting are explored, as well as for carrying out experiments regarding its functioning. Through a SAM-based approach, how to construct more or less complex networks of linkages of the above-mentioned flows is shown, from which structural features can be evidenced and the associated multiplier effects studied. Following an application to Portugal, it is shown that a numerical version of a SAM, enables an empirical description of the origin, use, and distribution of income, whereas, an algebraic version of a SAM allows one to carry out, for example, a deeper study of the multiplier effects associated with the institutional distribution of income. The crucial role of the factors of production accounts is identified in this study, namely when they establish the link between the generation and the distribution and use of income. In this process, the important role the complementary details that the Input-Output Matrix (IOM) can add is also identified. Thus, being the generation of income the result of the output of goods and services and the associated costs, on the one hand, an industry-by-industry IOM can add details regarding domestic and imported intermediate consumption by and between industries and, on the other hand, a product-by-product IOM can add details regarding the domestic and imported intermediate consumption of goods and services.
    Keywords: Social Accounting Matrix; National Accounts; SAM-based approach; socio-economic structure; Input-Output Matrix; Income Distribution.
    JEL: D57 E01 E02 E16 E25
    Date: 2017–06
  41. By: Naseer, Areef Ahmed; Masih, Mansur
    Abstract: The growth of financial market has taken centre stage in today’s world economy. It takes a quarter of a second to change the whole dynamics of an economy. The moment an asset price bubble and burst occurs, the whole economy may collapse. This paper makes an attempt to investigate the existence of housing price bubble by taking Malaysia as a case study. In Malaysia, the housing market is in its boom, naturally housing prices are sky high. There is no consensus in the literature about what is a housing price bubble. The method applied in this study are the standard time series techniques of cointegration, long-run structural modelling, vector error correction, variance decomposition method. To our knowledge, this is the first study on housing bubble based on demand and supply side variables, for a period of 17 years of data. Our findings tend to indicate that variables are cointegrated and market tends to correct any disequilibrium that exists over time. The results also imply that house prices are on the rise. The policy implications are that, though housing prices bubble and burst are not imminent, the upward pressures on housing prices, might require more sustainable measures within the current housing boom period.
    Keywords: housing bubble, error-correction model, variance decompositions, Malaysia
    JEL: C22 C58 E44 G15
    Date: 2016–12–20
  42. By: Allan Wright; Patrice Borda
    Abstract: This paper examines the role of disaster shock in a one-sector, representative agent dynamic stochastic general equilibrium model (DSGE). First, it estimates a panel vector autoregresive (VAR) model for output, investment, trade balance, consumption, and country spread to capture the economic effects of output, country risk, and exogenous natural disaster shocks. The study determines the empirical dynamic responses of ten Caribbean countries and seven countries in Central America. Second, by taking into account rare events and trend shocks, this paper also provides a baseline framework of the dynamic interactions between the macroeconomic effects of rare events and financial friction for two specific countries: Barbados and Belize. Similar findings between empirical and general frameworks show that disaster shocks in Central America and the Caribbean have only a significative impact in the short-run regional business cycle. The findings show that Caribbean countries are better prepared for natural disaster shocks.
    Keywords: Natural disasters, Productivity Shock, Macroeconomics, investment level, Financial Frictions, Economic Impact Analysis, Trade Balance, natural disaster shocks, trade balance, productivity shock, macroeconomic fluctuations
    JEL: F41 E32
    Date: 2016–12
  43. By: Isaev, Mirolim; Masih, Mansur
    Abstract: This paper explores the factors propelling Islamic bank’s non-performing financing in Malaysia for the period of 2010Q4 and 2016Q3. Dynamic OLS is employed to examine the effects of macroeconomic and bank specific variables on each financing categories (mortgage, business and consumer financing). The findings tend to indicate that macroeconomic variables, particularly, the unemployment rate, have strong impact on the level of non-performing financing for each financing portfolio. Adoption of effective risk management policy may ensure to mitigate the systematic risks derived from macroeconomic changes and enhance the level of quality of asset.
    Keywords: non-performing financing, Malaysian Islamic banking system, Dynamic OLS, risk management
    JEL: C58 E44 G15 G21
    Date: 2017–06–13
  44. By: Michael Donadelli (Faculty of Economics and Business Administration and Research Center SAFE, Goethe University Frankfurt); Patrick Grüning (Bank of Lithuania & Faculty of Economics, Vilnius University)
    Abstract: We study the general equilibrium implications of different fiscal policies on macroeconomic quantities, asset prices, and welfare by utilizing two endogenous growth models. The expanding variety model features only homogeneous innovations by entrants. The Schumpeterian growth model features heterogeneous innovations: “incremental” innovations by incumbents and “radical” innovations by entrants. The government levies taxes on labor income and corporate profits and supplies subsidies to consumption, capital investment, and investments in research and development by entrants and, if applicable, incumbents. With these models at hand, we provide new insights on the interplay of innovation dynamics and fiscal policy.
    Keywords: Endogenous growth, Asset pricing, Government, Fiscal policy, Heterogeneous innovation
    JEL: E22 G12 H20 I30 O30
    Date: 2017–04–03
  45. By: CARPENTIER Jean-François; OLIVERA Javier; VAN KERM Philippe
    Abstract: Macroprudential policies, such as caps on loan-to-value (LTV) ratios, have become part of the policy paradigm in emerging markets and advanced countries alike. Given that housing is the most important asset in household portfolios, relaxing or tightening access to mortgages may affect the distribution of household wealth in the country. In a stylised model we show that the final level of wealth inequality depends on the size of the LTV ratio, housing prices, credit cost and the strength of a bequest motive; ultimately with no unequivocal effect of LTV ratios on wealth inequality. These trade-offs are illustrated with estimations of "Gini Recentered Influence Function" regressions on household survey data from 12 Eurozone countries that participated in the first wave of the Household Finance and Consumption Survey (HFCS). The results show that, among the households with active mortgages, high LTV ratios at the time of acquisition are related to high contributions to wealth inequality today, while house price increases are negatively related to inequality contributions. A proxy for the strength of bequest motives tends to be negatively related with wealth inequality, but credit cost does not show a significant link to the distribution of wealth.
    Keywords: Macroprudential policiy; Wealth distribution; Household finance; LTV ratio; Inequality
    JEL: D31 E50 G21
    Date: 2017–06
  46. By: Eckhard Hein
    Abstract: In this paper the main developments in post-Keynesian macroeconomics since the mid-1990s will be reviewed. For this purpose the main differences between heterodox economics in general, including post-Keynesian economics, and orthodox economics will be reiterated and an overview over the strands of post-Keynesian economics, their commonalities and developments since the 1930s will be outlined. This will provide the grounds for touching upon three important areas of development and progress of post-Keynesian macroeconomics since the mid-1990s: first, the integration of distribution issues and distributional conflict into short- and long-run macroeconomics, both in theoretical and in empiri-cal/applied works; second, the integrated analysis of money, finance and macroeconomics and its appli-cation to changing institutional and historical circumstances, like the process of financialisation; and third, the development of full-blown macroeconomic models, providing alternatives to the mainstream ?New Consensus Model? (NCM), and allowing to derive a full macroeconomic policy mix as a more con-vincing alternative to the one implied and proposed by the mainstream NCM, which has desperately failed in the face of the recent crises.
    Keywords: post-Keynesian macroeconomics, heterodox vs. orthodox economics, pluralism in economics, distribution, money, finance, macroeconomics, macroeconomic policies
    JEL: B22 E12
    Date: 2017
  47. By: Waldo Mendoza Bellido (Departamento de Economía de la Pontificia Universidad Católica del Perú); Erika Collantes Goicochea (Departamento de Economía de la Pontificia Universidad Católica del Perú)
    Abstract: ¿Qué pasará con la economía peruana durante el gobierno de Pedro Pablo Kuczynski (PPK)? ¿Es verosímil el compromiso oficial de elevar la tasa de crecimiento del PBI a 5 por ciento anual a partir de 2019?A pesar que históricamente el peso de las condiciones internacionales en las fluctuaciones macroeconómicas ha sido dominante en el Perú, durante el gobierno de PPK el peso de las condiciones domésticas puede desempeñar ese rol. El agotamiento del crecimiento del PBI minero, los límites de la política del destrabe y la formalización, la ocurrencia del Niño Costero y la expansión fiscal que financie la reconstrucción marcarán la dinámica de nuestra economía en los siguiente 4 años.En el artículo se argumenta que la distancia que separará a las promesas gubernamentales de los resultados obtenidos será muy grande. JEL Classification-JEL: E31, E61, E62
    Keywords: Economía peruana, Factores externos e internos, Pedro Pablo Kuczynski,Reformas estructurales, Peru
    Date: 2017
  48. By: Giuliano Curatola (Goethe University Frankfurt); Michael Donadelli (Goethe University Frankfurt); Patrick Grüning (Bank of Lithuania & Faculty of Economics, Vilnius University); Christoph Meinerding (Goethe University Frankfurt)
    Abstract: This paper proposes and tests a new source of time variation in real investment opportunities, namely long-run shocks to the productivity of the investment sector, to explain the joint behavior of macroeconomic quantities and asset prices. A two-sector general equilibrium model with long-run investment shocks and wage rigidities produces both positive co-movement among key macroeconomic variables and a sizable return volatility differential between the investment and consumption sector. Moreover, positive long-run investment shocks are associated with low marginal utility and thus command a positive risk premium. We test our model using data on sectoral TFP and find evidence in support of our theoretical predictions.
    Keywords: General Equilibrium Asset Pricing, Production Economy, Long-Run Risk, Investment-Specific Shocks, Wage Rigidities.
    JEL: E32 G12
    Date: 2016–11–30
  49. By: Lim, Siok Jin; Masih, Mansur
    Abstract: Bitcoin is a form of digital currency that is circulating without the backing of any central bank and monitoring authority. Therefore, sceptics regularly question the status of Bitcoin as a legal tender. Nevertheless, due to increasing popularity and importance of Bitcoin, practitioners and researchers have recently started to assess Bitcoin from the perspective of business, economics and finance. This paper explores possibilities of using Bitcoin as a portfolio optimisation strategy for Islamic fund managers. We use three recent and appropriate methodologies: M-GARCH-DCC, Continuous Wavelet Transforms (CWT), and Maximum Overlap Discrete Wavelet Transform (MODWT). The results significantly tend to indicate that Bitcoin and Shari’ah stock indices are lowly and negatively correlated, suggesting that Islamic stock investors can benefit from diversification with Bitcoin and that the fundamentals of such crypto-currencies can be further investigated for the benefit of Islamic capital markets.
    Keywords: Islamic stocks, Bitcoin, portfolio diversification, MGARCH-DCC, Wavelets
    JEL: C58 E44 G15
    Date: 2017–06–15
  50. By: Gondo, Rocío (Bank for International Settlements); Vega, Marco (Banco Central de Reserva del Perú)
    Abstract: We analyse the effect of commodity price cycles on firm investment decisions at the project level, by considering the decision to delay, cancel or complete a project as initially announced. In particular, we use logit and duration models of competing risks on a novel dataset of announced investment projects in Peru from different economic sectors. The empirical framework for the timing of investment is motivated by real option models for projects that take time to build, with commodity prices used as a proxy of expected future income and their volatility as a proxy for uncertainty.Our results suggest that both a reduction in commodity prices and an increase in volatility increase the probability to delay investment in the mining sector, with an amplification effect when both simultaneously occur. In other sectors, delays in implementation occur more often in periods of high volatility. Probability regressions under a competing risk framework suggest that higher commodity prices lead to a higher probability of completion in all sectors of the economy.
    Keywords: Investment projects, panel logit, Competing Risks.
    JEL: E43 E51 E52
    Date: 2017–06
  51. By: Sebastian Gechert; Rafael Mentges
    Abstract: We show that fiscal multiplier estimations may be biased by movements in asset and credit markets, as they facilitate spurious correlations of changes in cyclically adjusted revenues and spending with GDP growth via an identification bias and an omitted variable bias, thus overstating episodes of expansionary consolidations and downplaying contractionary consolidations. When controlling for asset and credit market movements in otherwise standard approaches to identification, we find multipliers to increase on average by 0.3 to 1 units. Fiscal consolidations are thus more likely to be contractionary and more harmful to growth than expected by some strands of the existing literature.
    Keywords: multiplier effects, fiscal policy, asset markets, credit markets
    JEL: C22 E62 H30
    Date: 2017
  52. By: Khromov Mikhail (Gaidar Institute for Economic Policy)
    Abstract: In 2016, Russian banks’ total asset holdings contracted by 3.5% in nominal terms – from Rb 83.0 trillion as of January 1, 2016 to Rb 80.0 trillion as of January 1, 2017. In 2015, Russian banks’ total asset holdings increased 6.9%. The decline in the nominal value of banks’ asset holdings in 2016 was recorded for the first time since asset-holding data began to be published in 1998. An appreciating ruble had a substantial adverse effect on the asset-holding dynamics. In 2016, the ruble gained 16.8% and 19.9% against the US dollar and the euro respectively, and therefore the ruble equivalent of assets held in foreign currency dropped considerably during the year. Banks’ asset holdings, as adjusted for the revaluation of assets held in foreign currency, increased slightly by 2.1% in 2016 after a 1.5% fall in 2015. Thus, the value of banking sector’s asset holdings was steady over the past two years.
    Keywords: Russian economy, banking sector, profit, capital, corporate loans, retail deposits
    JEL: E41 E51 G28 G21 G24
    Date: 2017
  53. By: Razak, Razman; Masih, Mansur
    Abstract: The palm oil industry is crucial to the Malaysian economy. It is also becoming more relevant and important globally and plays a key role in the expansion of Islamic Finance. Hence, this study aims to ascertain the relationship between crude palm oil prices (CPO) and the stock market (both conventional and Islamic). This study has selected Malaysia as a case study for its reliance on the palm oil industry as well as its position in Islamic Finance. Furthermore, the potential inclusion of the palm oil industry into investment portfolios also warrants the analysis of the co-movement between crude palm oil and stock market indices over varying investment horizons or time scales. Thus, to accomplish this, the Continuous Wavelet Transformation (CWT) and Maximum Overlap Discrete Wavelet Transformation (MODWT) methods were employed. The results tend to indicate that there exists little relation between CPO price returns and both the Conventional and Islamic stock market returns in the short and medium term. Interestingly enough, in the long term, significant co-movement between the variables start to emerge. This is a compelling finding as it provides new information for the investors to diversify their portfolio and time their investments. The result of this study is also a significant contribution to the pool of knowledge which lacks prominent literature on the link between palm oil, the conventional and Islamic stock markets.
    Keywords: crude palm oil prices, EMAS Shariah, KLCI, Malaysia, Wavelet
    JEL: C58 E44 G15
    Date: 2017–06–12
  54. By: Richard A. Brecher (Department of Economics, Carleton University); Till Gross (Department of Economics, Carleton University)
    Abstract: Theoretically and numerically, we analyze the unemployment and income-distribution effects of economic growth, in a model with optimal saving (investment) and a minimum wage for unskilled labor. Within this three-factor model (including skilled labor), an exogenous rise in the growth rate increases unemployment if capital and unskilled labor are complements (versus substitutes), implying a trade-off between (faster) growth and (lower) unemployment. We also show how the growth rate affects the skill premium and factor shares of national income, providing little support for Piketty’s (2014) controversial thesis that capital’s share is higher when growth is slower.
    Keywords: Optimal growth, Minimum wage, Unskilled unemployment, Income distribution
    JEL: E24 O41
    Date: 2017–06–12
  55. By: International Monetary Fund
    Abstract: Steady monetary policy management and fiscal discipline have strengthened macroeconomic stability, allowing the economy to benefit from favorable external demand, high remittances, and low commodity prices. The result has been strong output growth, falling inflation, moderate public debt, and a rebuilding of external resilience. This solid macroeconomic performance is set to continue this year, with growth projected to remain close to current levels and inflation broadly in line with Bangladesh Bank’s target. Downside risks to the near-term outlook include a resumption of political unrest, security concerns affecting confidence and investment, a protracted slowdown in key export markets, and weaker remittances. Excess liquidity in the banking sector poses a latent risk to macroeconomic stability. Looking ahead, maintaining the economy’s past growth performance will become increasingly challenging and require upgrading the macroeconomic policy-making practices and institutions to support the country’s ambition to reach middle-income status.
    Date: 2017–06–08
  56. By: Peter L. Rousseau (Vanderbilt University); Paul Wachtel (New York University, Stern School of Business)
    Abstract: One strand of the economics literature addresses financial deepening as a precursor to economic growth. Another views it as a cause of financial crises. We examine historical data for 17 economies from 1870 to 1929 to distinguish episodes of growth induced by financial deepening from crises induced by credit booms. Cross-country panel regressions with five-year averages indicate that deepening episodes, defined as increases of more than thirty percent (and alternatively more than twenty percentage points) in the ratio of M2 to GDP over a ten year period, significantly enhanced the standard finance-growth dynamic, while deepening associated with financial crises sharply hindered it. We then describe some specific episodes of financial deepening in our sample.
    Keywords: finance-growth nexus, Atlantic economies, financial deepening, financial crisis
    JEL: E5 N1
    Date: 2017–06–16
  57. By: Cuéllar Martín, Jaime; Martín-Román, Ángel L.; Moral, Alfonso
    Abstract: The differences in the regional unemployment rates, as well as their formation mechanism and persistence, have given rise to a great number of papers in the last decades. This work contributes to that strand of literature from two different perspectives. In the first part of our work, we follow the methodological proposal established by Hofler and Murphy (1989) and Aysun et al. (2014). We make use of an estimation of a stochastic cost frontier to breakdown the Spanish provincial effective unemployment (NUTS-3) in two different components: first one associated with aggregate supply side factors, and the other one more related to the aggregate demand side factors. The second part of our research analyzes the existence of spatial dependence patterns among the Spanish provinces in the effective unemployment and in both above mentioned components. The decomposition performed in the first part of our research will let us know the margin that the policymakers have when they deal with unemployment reductions by means of aggregate supply and aggregate demand policies. Finally, the spatial analysis of the unemployment rates amongst the Spanish provinces can potentially have also significant implications from an economic policy viewpoint since we find that there are common formation patterns or clusters of unemployment.
    Keywords: Unemployment, Local labor markets, Spatial dependence
    JEL: E24 J64 R11
    Date: 2017–06–19
  58. By: DO ANGO, Simplicio; AMBA OYON, Claude Marius
    Abstract: The purpose of the study is to analyze the nature of inflation and unemployment rates -in Africa and its regions- allowing cross-sectional dependence among their countries. The paper contributes to the literature assessing the stochastic properties of unemployment and inflation using the recently developed and more powerful panel unit root tests namely PANIC -Panel Analysis of Non-stationarity in Idiosyncratic and Common Component- from Bay and Ng (2010). To check the robustness of our finding we added Pesaran (2007) and Chang (2002). In our analysis, many PANIC tests clearly show that the validation of the hysteresis hypothesis for unemployment rates in Central Africa, East Africa and North Africa; and convergence of inflation in Africa and its regions
    Keywords: Panel unit root tests, PANIC, Unemployment, Inflation, African countries
    JEL: C12 C15 C22 C23 E31 J64
    Date: 2016
  59. By: Broni, Mohammed Yaw; Masih, Mansur
    Abstract: The importance of Islamic banking is recognized globally. Its development has become a matter of great interest for many economies. Initiatives such as establishment of institutions and regulatory framework in countries that are at the forefront of promoting Islamic banking, have been pursued, yet some stakeholders seem to suggest that Islamic banking development is in stagnation. This may be due to the fact that such initiatives have often ignored the macroeconomic environment in which Islamic banks operate. One such environment is the external debt levels of the country that hosts Islamic banks. The “debt overhang” theory suggests that huge debt levels discourage investment, and may lead to banking crisis. Other theories postulate that external debt provides liquidity which benefits the banking sector. Empirically too, conflicts exist in connection with the impact of external debt on the banking sector. While some findings report that external debts have effect on bank loan prices, others find banking crisis to be insensitive to external debt burden. This paper has two objectives; firstly, to investigate the impact of external debt on Islamic banking development, and secondly to find out whether the relationship between external debt and Islamic banking development is linear or non-linear. Analyzing ten years’ monthly data of Malaysia using VECM, Quantile Regression and Markov Regime Switching techniques, the findings tend to suggest that there exists a positive relationship between external debt and Islamic banking development, which seems to be non-linear. Under sound economic conditions, the impact of external debt on Islamic banking development is significantly positive, but the impact is insignificant during economic downturn and uncertainties.
    Keywords: External debt, Islamic banking sector, Malaysia, Quantile regression, Markov regime switching
    JEL: C58 E44 G15 G21
    Date: 2017–06–12
  60. By: Abdi, Aisha Aden; Masih, Mansur
    Abstract: It is so important for the investors, academicians and portfolio managers to know the co-movement and dynamic correlations between the Shariah compliant stock and sukuk, as well as the role they play in asset allocation and risk diversification and also, to identify the factors that affect the correlation between these assets. In the literature, the macroeconomic factors such as inflation and interest rate have great effects on the stock-sukuk correlation. In this paper, we investigate the correlation between sukuk and sharia-compliant stocks in GCC countries, with concentration on the macroeconomic factors that affect stock-sukuk co-movement. MGARCH dynamic conditional correlation (DCC) is estimated under Student-t distribution to get the required correlation and then we applied cointegration panel techniques such as DOLS and FMOLS for the estimation analysis. We found that we can reject the null hypothesis of cointegration which says there is no effect of the macroeconomic variables on the stock and sukuk correlation. The industrial production and interest rate have effects on the stock and sukuk correlation, however we found that the CPI doesn't have any effect on the stock and sukuk correlation. The policy makers should consider the correlation and volatility of the Islamic assets, and they should take into account the factors that affect the stock and sukuk correlation in GCC.
    Keywords: Macro-economic determinants of stock-sukuk correlation, GCC, DOLS, FM-OLS
    JEL: C58 E44 G15
    Date: 2017–06–15
  61. By: Hosen, Mosharrof; Masih, Mansur
    Abstract: This paper is motivated by the heightened interest in investing in Islamic equities. The paper is the first attempt at analysing the Islamic-effect in a cross-sectional stock return framework to individual 141 Islamic and non- Islamic firms using the dynamic GMM and Quantile regression techniques and we believe this is the first paper that investigates the Islamic-effect in such a context. We combine a unique Malaysian data set of individual Islamic stocks (as opposed to aggregate stock indices) since 1997 with a new method where we apply Islamic business activity and financial ratio screens to the universe of Malaysian stocks. Results tend to indicate that there is no significant relationship between Malaysian Islamic firms and average stock returns. We extend our results by using a Quantile regression approach to show that the non-significant Islamic effect is, in fact, changing at different percentiles that affect the cross-sectional expected returns of Malaysian common stocks. Results tend to show that some focus variables like market value and book to market and control variable, oil price are not significant at different percentiles, and this result has important implications for the growing Islamic finance industry around the world.
    Keywords: Islamic risk factors, Islamic equities, Malaysia, Dynamic GMM, Quantile regression
    JEL: C58 E44 G15
    Date: 2017–06–13
  62. By: Francis Leni Anguyo (School of Economics, University of Cape Town); Rangan Gupta (Department of Economics, University of Pretoria); Kevin Kotze (School of Economics, University of Cape Town)
    Date: 2017
  63. By: Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: The announcement of an extension of quantitative easing (QE) until March 2017, at least, has cast doubts on the strength of the Euro area recovery and it has raised concerns about the credibility of the ECB. In this contribution, we argue that the current design of QE prevents unlimited monetary accommodation and, meanwhile, it may reduce the effectiveness of QE. Extending QE again through a modification in its design is thus possible. It will be effective provided governments and the ECB are able to cooperate.
    JEL: E5
    Date: 2016–02
  64. By: Stefano Bosi; David Desmarchelier
    Abstract: We provide necessary and sufficient conditions to detect local bifurcations of three and four-dimensional dynamical systems in continuous time. We characterize the bifurcations of codimension one and two. Our methodology is both general and tractable. To illustrate its operability, we provide two analytical applications of dimension three and four to environmental economics, complemented with numerical simulations.
    Keywords: Local bifurcations, Codimensions one and two, Pollution, Natural capital
    JEL: C61 E32 O44
    Date: 2017–06–17
  65. By: Christos Shiamptanis (Wilfrid Laurier University)
    Abstract: Many countries are adopting austerity measures, whereby governments aggressively raise taxes, with the hope to dispel future solvency crisis. This paper investigates the implications of austerity on the likelihood of solvency crisis. We derive the maximum level of debt consistent with solvency, labelled as the effective fiscal limit on debt, and we show that its position depends on austerity. We find that countries like Italy that undergo strict austerity could lower their effective fiscal limit and induce a solvency crisis in the near future.
    Keywords: Austerity, Solvency Crisis, Fiscal Policy, Fiscal Limit, Default
    JEL: C63 E62 E63 F34 H63
    Date: 2017–06–19
  66. By: Bruce Carlin; William Mann
    Abstract: We provide causal evidence that discount rate changes by the Federal Reserve affected economic output in the 1920s. Our identification strategy exploits county-level variation in access to the Fed's discount window, and we implement this strategy with hand-collected data on banking and agriculture in Illinois in the early 20th century. The mechanism for the Fed's effect on agriculture was a bank credit channel, operating independently of any deflationary effect on money supply. Our findings suggest that the Fed deliberately managed transitory shocks during 1920-1921, mitigating debt burdens with which farms would struggle in the years leading to the Great Depression.
    JEL: B26 G21 G28
    Date: 2017–06
  67. By: Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques); Fabien Labondance (Observatoire français des conjonctures économiques)
    Abstract: Fragmentation has increased since the financial crisis. It remains, though, that differences in cross-border financial flows have been strong across Euro area member states since the creation of the Euro. We show that the transmission of ECB policies to the interest rates on loans to non-financial corporations is quite uneven in the Euro area: the pass-through is much stronger in the periphery than in the core since the Global financial crisis. Consequently, the ECB is able to reduce the spread between the periphery and the core. We also show that the monetary policy transmission to NFC rates is stronger when fragmentation is low. Limiting fragmentation is thus crucial to improve the interest-rate channel in the Euro area . We argue that TLTRO II and QE should be targeted towards peripheral countries in order to limit Euro area fragmentation. Moreover, institutional improvements to make banking systems more homogenous across Euro area should be advocated.
    JEL: E5
    Date: 2016–09
  68. By: Andrés Camilo Cortés Gómez
    Abstract: Este trabajo analiza el impacto que las plataformas de la economía colaborativa ?o ‘sharing economy’? tienen en el mercado de trabajo. Comprendiendo que la evidencia empírica aún es limitada, el trabajo emplea una metodología de revisión en medios de comunicación para ejes temáticos del debate entre plataformas y trabajo. El análisis parte de un marco teórico que permite comprender el debate sobre la innovación y sus efectos en el empleo, el efecto de polarización del trabajo, el cambio técnico sesgado por habilidades y por tareas y estrategias empresariales como el offshoring, para plantear las implicaciones que la economía colaborativa tiene en estos fenómenos.
    Keywords: sharing economy, mercado laboral, empleo, innovación, cambio técnico
    JEL: E24 J21 J24 O33
    Date: 2017–06–10
  69. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: In a lecture at Keio University in Tokyo, St. Louis Fed President James Bullard said that the U.S. price level is falling short of the 2 percent path maintained between 1995 and 2012. The gap between the current price level, measured by the personal consumption expenditures price index, and the previously established path has now widened to 4.6 percent. He also said 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. Financial market readings since then have moved in the opposite direction of what would typically be expected. “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 U.S. inflation are likely to be small.
    Date: 2017–05–26
  70. By: Shinsuke Ikeda; Takeshi Ojima
    Abstract: We describe consumers’ dynamic decision-making under limited self-control, emphasizing the fatiguing nature of self-regulation. The temptation theory is extended in a two-good setting with tempting and non-tempting goods, where self-regulation in moderating tempting good consumption depreciates mental capital (willpower). The resulting non-homothetic feature of consumer preferences helps describe self-regulatory behavior in such an empirically relevant way that it depends on the nature of the tempting good (luxury or inferior) and on consumer wealthiness. First, richer consumers are more selfindulgent and impatient in consuming tempting luxuries, whereas less so in consuming tempting inferiors: marginal impatience is increasing in wealth for high-end brand wine whereas decreasing for junk foods. Second, self-control fatigue weakens implied patience for tempting good consumption. Third, upon a stressful shock, with the resulting increasing scarcity of willpower, self-indulgence and impatience for tempting good consumption increase over time. Fourth, without substantial difference in wealth holdings, naive consumers, unaware of the willpower constraint, display weaker self-control in the long run than the sophisticated consumers do.
    JEL: D90 E21
    Date: 2017–06
  71. By: Povilas Lastauskas (Bank of Lithuania and Faculty of Economics, University of Cambridge); Julius Stakënas (Bank of Lithuania)
    Abstract: This paper deals with the macroeconomic responses to labour market reforms; something of utmost importance in times of monetary policy reaching its limits to affect real economy. We shed more light on the plausible macroeconomic reactions to the ex ante (planned but not implemented yet) reforms in the labour market, taking a currently proposed Social Model in Lithuania as an example. Not only contributing to the current debate on the efficacy of announced structural reforms, we also add to the literature on policy evaluation by assessing reforms from a global perspective. Omission of an international dimension could lead to seriously biased results on policy effects for any open and small economy. Taking trade connectivity and openness into account, we demonstrate macroeconomic reactions to shocks in unemployment benefits, active labour market policies, and tax wedge on the reforming economy. We contrast the results with the approach when global interdependencies are ignored – still a standard practice. Using a satellite model for the intermediate trade, we link the global framework with the sectoral extensive margin, which changes some of the initial findings. A discussion on counterfactuals, which use both cross-sectional and temporal dimensions to tackle anticipation effects, is also presented.
    Keywords: Labour structural reforms, ex ante policy evaluation, global VAR, social model, spillovers
    JEL: C33 C54 E62 J38
    Date: 2016–08–25
  72. By: Polezhaeva Natalia (RANEPA)
    Abstract: Russia’s modern financial market, which emerged in the early 1990s, is nearing its 30th anniversary. Its development history may be conventionally divided into several phases
    Keywords: Russian economy, financial market regulation
    JEL: E44
    Date: 2017
  73. By: Tsukhlo Sergey (Gaidar Institute for Economic Policy)
    Abstract: Business surveys of industrial enterprises have been conducted by the Gaidar Institute using a European harmonized method in monthly cycles since September 1992, covering the entire territory of the Russian Federation. The panel size is around 1,000 enterprises employing over 13% of industrial employees. The panel is shifted towards large enterprises for each of the segregated sub-industries. The ratio of returned questionnaires is in the range of 70-75%. Business survey questionnaire contains a limited number of questions (not more than 15–20). The questions are of a qualitative and not quantitative nature. Simple questions structure allows the respondents to fill out the questionnaire quickly and without using any documents. It is paramount that respondent at each enterprise is a manager of the highest level who has a full understanding of state of business and is directly linked to the business management.
    Keywords: Russian economy, industry
    JEL: C53 E37 L21 L52
    Date: 2017
  74. By: Kamiar Mohaddes (University of Cambridge); Amany El-Anshasy; Jeffrey B. Nugent
    Abstract: This paper examines the long-run effects of oil revenue and its volatility on economic growth as well as the role of institutions in this relationship. We collect annual and monthly data on a sample of 17 major oil producers over the period 1961—2013, and use the standard panel autoregressive distributed lag (ARDL) approach as well as its cross-sectionally augmented version (CS-ARDL) for estimation. Therefore, in contrast to the earlier literature on the resource curse, we take into account all three key features of the panel: dynamics, heterogeneity and cross-sectional dependence. Our results suggest that (i) there is a significant negative effect of oil revenue volatility on output growth, (ii) higher growth rate of oil revenue significantly raises economic growth, and (iii) better fiscal policy (institutions) can offset some of the negative effects of oil revenue volatility. We therefore argue that volatility in oil revenues combined with poor governmental responses to this volatility drives the resource curse paradox, not the abundance of oil revenues as such.
    Date: 2017–06–29
  75. By: Steven Robins
    Keywords: Public Investments and Infrastructure
    JEL: E6 L3 R4
  76. By: Vega, Marco (Banco Central de Reserva del Perú); Chávez, Joselin (PUCP)
    Abstract: Se identifica cómo un choque de política de requerimientos de encaje en moneda nacional sobre el sistema bancario afecta el stock de crédito de las entidades bancarias, a nivel agregado e individual. El efecto de un choque expansivo de encaje es positivo en los créditos agregados en moneda nacional y extranjera así como en producto y precios, aunque estos últimos en menor cuantía. En general, a nivel individual, los efectos en los niveles de créditos en ambas monedas sigue el patrón agregado pero existe cierta heterogeneidad en las respuestas, en particular el efecto de un choque de encaje es más rápido y potente sobre los bancos pequeños. También se evalúa cómo se propaga un choque en créditos de un banco en particular sobre los demás bancos y analizamos si prevalecen los efectos de sustitución o contagio de externalidades.
    Keywords: Credito Bancario, Global VAR, Requerimientos de Encaje
    JEL: C32 E31 F31
    Date: 2017–06
  77. By: Ibrahim Elbadawi; Mohamed Goaied (IHEC Carthage); Moez Ben Tahar
    Abstract: This paper contributes to the literature on the interdependence between fiscal and monetary policies in resource-dependent economies. In the context of this general theme we analyze the fiscal foundation of the choice of monetary regimes and the extent of pro-cyclicality of fiscal policy during the post mid-1990s oil boom in the relatively under-research oil-dependent Arab economies. We find preliminary evidence on the existence of a threshold effect for oil rents per capita, below which countries tend to be subject to fiscal dominance and pro-cyclical fiscal policy. This might explain the country experiences of low rents per capita and relatively populous Sudan and Yemen, compared to the GCC member countries of Oman, Saudi Arabia, the UAE as well as Algeria. The latter managed to sustain credible de facto pegged exchange rate regimes and convertible currencies (for the GCC) or graduate to flexible regime (for Algeria). Instead, the former had to abandon their pegged regimes as a result of their unsuccessful exchange rate-based stabilization programs. However, the contrast with resource-dependent Chile and Norway suggests that for the Arab oil economies to accommodate future oil busts they need to establish explicit fiscal rules and high technical capabilities for conducting monetary policy.
    Date: 2017–06–07
  78. By: Stefan Neuwirth (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This paper tests the usefulness of time-varying parameters when forecasting with mixed-frequency data. For this we compare the forecast performance of bridge equations and unrestriced MIDAS models with constant and time-varying parameters. An out-of-sample forecasting exercise with US real-time data shows that the use of time-varying parameters does not improve forecasts significantly over all vintages. However, since the Great Recession, forecast errors are smaller when forecasting with bridge equations due to the ability of time-varying parameters to incorporate gradual structural changes faster.
    Date: 2017–06
  79. By: International Monetary Fund
    Abstract: Favorable external conditions continue to support economic recovery, but flat tourism receipts and falling revenues from citizenship programs have weakened growth. Fiscal vulnerability remains a concern, with most ECCU members not reaching the 2030 public debt target of 60 percent of GDP on current policies. Despite progress on financial sector reform, bank lending continues to decline. Risks are broadly balanced, but stronger fiscal and structural policies are needed to lower debt and address impediments to medium-term growth.
  80. By: Bhatt, Vipul; Kishor, Kundan; Marfatia, Hardik
    Abstract: In this paper, we revisit the issue of excess sensitivity of consumption to income and address the weak instrument problem that is well documented in this literature. Using quarterly data for the U.S. economy, we first highlight the weak instrument problem by showing that the use of conventional instruments tends to overestimate the share of rule-of-thumb consumers. To address this weak instrument problem, we propose a new instrument for endogenous disposable income growth in the consumption function, namely, the Greenbook forecast of real disposable income growth. We show that this instrument encompasses the information contained in the conventional set of instruments, and is a superior predictor of income growth. We find that using our proposed instrument ameliorates the weak instrument problem and provides a much smaller estimate for the rule-of-thumb consumers. We also extend our empirical framework to allow for habit persistence and provide an estimate for this important parameter of the consumption function. Finally, we use a time-varying specification of consumption function that allows for endogenous regressors, and document a decline in the share of rule-of-thumb consumers and a rise in the habit- persistence parameter in the U.S. over our sample period. We find that an increase in credit growth and supplementary income benefits are negatively correlated with share of rule-of-thumb consumers, whereas they are positively correlated with habit persistence parameter.
    Keywords: Consumption, Greenbook Forecast, Rule-of-Thumb, Weak Identification, Time-Varying Parameter Model
    JEL: C22 C26 C53 E21
    Date: 2017–06–16
  81. By: Adolfo Barajas; Sergio Restrepo; Roberto Steiner; Juan Camilo Medellín; César Pabón
    Abstract: After building up foreign currency-denominated (FC) liabilities over several years, the balance sheets of Colombian firms might be particularly vulnerable to a shift in external conditions. This paper undertakes four exercises in order to get a better understanding of these vulnerabilities. First, probit/logit estimations are used to identify the firm-level and macroeconomic determinants of FC borrowing by non-financial corporations. Second, the implications of the balance sheet vulnerability for real activity are investigated. Evidence is found of an FC balance sheet effect that transmits exchange rate fluctuations to firm-level investment, and show that that this effect is asymmetric, much greater for depreciations than for appreciations. Third, using logit/probit estimations, it is shown that not all firms use forward exchange derivatives solely to hedge their FC liabilities. This might be a consequence of exchange rate intervention by the monetary authority, protecting against extreme exchange rate misalignments. Finally, results are reported of a survey-based qualitative analysis on the hedging policies and activities of 12 large non-financial firms.
    Keywords: Capital flows, investment level, Bonds, Macroeconomics, Interest rates, Exporting Firm, Corporate Debt, Firm performance, Devaluation of currency, Foreign Currency Debt, investment level, Non-Financial Firms, Foreign Currency Debt
    JEL: F31 E22
    Date: 2016–10
  82. By: Dean Corbae; Pablo D'Erasmo
    Abstract: In this paper, we ask how bankruptcy law affects the financial decisions of corporations and its implications for firm dynamics. According to current U.S. law, firms have two bankruptcy options: Chapter 7 liquidation and Chapter 11 reorganization. Using Compustat data, we first document capital structure and investment decisions of non-bankrupt, Chapter 11, and Chapter 7 firms. Using those data moments, we then estimate parameters of a firm dynamics model with endogenous entry and exit to include both bankruptcy options in a general equilibrium environment. Finally, we evaluate a bankruptcy policy change recommended by the American Bankruptcy Institute that amounts to a “fresh start” for bankrupt firms. We find that changes to the law can have sizable consequences for borrowing costs and capital structure which via selection affects productivity (allocative efficiency rises by 2.58%) and welfare (rises by 0.54%).
    JEL: E22 G32 G33
    Date: 2017–06
  83. By: Kashiwabara, Chie
    Abstract: The central bank of the Philippines (Bangko Sentral ng Pilipinas, BSP) has encouraged the country’s rural banks to merger/consolidate for strengthening their financial soundness and competiveness, and extending branch networks with providing some incentive measures mainly financial supports. Overviewing the cases realized from January 2000 to December 2016, we found (1) the rural banks which are considered to have expansive business strategies spend about a decade to repeat bilateral mergers, unlike BSP’s intention to realize “at least five rural banks” in one merger case, (2) most of the mergers are bilateral and one-off cases, where surviving banks seem to increase some assets and branch(es). In order to further promote mergers/consolidations in the sector, BSP may need to consider modifying the incentive measures to answer actual cases, and/or allying them more closely to the on-going capital increase requirements.
    Keywords: Rural credit,Banks,Monetary policy,Mergers,Consolidations,Rural banks,The banking sector,The Philippines
    JEL: E42 E52 G38
    Date: 2017–03
  84. By: Irina Syssoyeva-Masson (Department of Finance and Economics, University of Savoy Mont Blanc, France; Association CEMAFI International); João de Sousa Andrade (CeBER and Faculty of Economics of the University of Coimbra)
    Abstract: The study of the relationship between public debt and economic growth came again to the spotlight with the financial crisis (2007-2008) and with the sovereign debt crisis that followed in Europe. This literature aims to shed light about the sign, magnitude, mechanisms and threshold regimes relating debt to growth and to make policy recommendations with important consequences in terms of government’s policies. We empirically investigate this relationship for a group of 60 countries for a long-time period (the shorter one from 1970 to 2012) using the historical public debt database (HPDD) built by the International Monetary Fund (IMF) and we defend that the empirical strategy underlying most of the studies on this topic should be revised. We claim that: a) the study of the long-memory property of the public debt GDP ratio and stationarity (using the last generation tests) has to be performed as a first step of the empirical analysis, what has been done using 87 countries; b) In the presence of a non-stationary public debt GDP ratio cointegration analysis was used to estimate the relationship between the public debt GDP ratio and output; c) under the no rejection of the null of no cointegration, the above mentioned relationship was studied between the public debt GDP ratio first difference and GDP growth rate using threshold models and searching for thresholds using a wide variety of variables. The main conclusions of this study are that the debt series have a long memory and should not be analyzed in a short-term framework; additionally, the non-stationarity of the debt series does not allow researchers to apply stationary econometrics methods to model its behavior. This finding implies that the relationship between economic growth and national debt that has been characterizing the literature on the subject, has disputable econometric foundations. We thus recommend our empirical strategy to overcome the above-mentioned drawbacks of the existent empirical literature. Finally, it should be mentioned that the relationship between the public debt GDP ratio first difference and GDP growth rate is always negative despite the different threshold regimes identified.
    Keywords: Public Debt, Growth, Long Memory, Stationary, Co-integration and Thresholds.
    JEL: C24 C51 E62 H6 O11
    Date: 2017–06
  85. By: Carvalho, Carlos Viana de; Masini, Ricardo Pereira; Medeiros, Marcelo C.
    Abstract: We consider a new, flexible and easy-to-implement method to estimate causal effects of an intervention on a single treated unit and when a control group is not readily available. We propose a two-step methodology where in the first stage a counterfactual is estimated from a large-dimensional set of variables from a pool of untreated units using shrinkage methods, such as the Least Absolute Shrinkage Operator (LASSO). In the second stage, we estimate the average intervention effect on a vector of variables, which is consistent and asymptotically normal. Our results are valid uniformly over a wide class of probability laws. Furthermore, we show that these results still hold when the exact date of the intervention is unknown. Tests for multiple interventions and for contamination effects are also derived. By a simple transformation of the variables of interest, it is also possible to test for intervention effects on several moments (such as the mean or the variance) of the variables of interest. A Monte Carlo experiment evaluates the properties of the method in finite samples and compares it with other alternatives such as the differences-in-differences, factor and the synthetic control methods. In an application we evaluate the effects on inflation of an anti tax evasion program.
    Date: 2017–06–13
  86. By: Jeffrey A. Frankel (Harvard Kennedy School, Harvard University)
    Abstract: The paper proposes an exchange rate regime for oil-exporting countries. The goal is to achieve the best of both flexible and fixed exchange rates. The arrangement is designed to deliver monetary policy that counteracts rather than exacerbates the effects of swings in the oil market, while yet offering the day-to-day transparency and predictability of a currency peg. The proposal is to peg the national currency to a basket, but a basket that includes not only the currencies of major trading partners (in particular, the dollar and the euro), but also the export commodity (oil). The plan is called Currency-plus-Commodity Basket (CCB). The paper begins by fleshing out the need for an innovative arrangement that allows accommodation to trade shocks. The analysis provides evidence from six Gulf countries that periods when their currencies were “undervalued”, in the sense that the actual foreign exchange value lay below what it would have been under the CCB proposal, were periods of overheating as reflected in high inflation and of external imbalance as reflected in high balance of payments surpluses. Conversely, periods when the currencies were “overvalued,” in the sense that their foreign exchange value lay above what it would have been under CCB, featured unusually low inflation and low balance of payments. These results are suggestive of the implication that the economy would have been more stable under CCB. The last section of the paper offers a practical blueprint for detailed implementation of the proposal.
    Date: 2017–06–22
  87. By: Bande, Roberto; Martín-Román, Ángel L.
    Abstract: This paper provides new empirical evidence on the relationship between the unemployment rate and the output growth in Spain at the regional level. The “gap version” with the output growth on the left-hand side of the equation is our benchmark model. We observe in our estimates that all coefficients are significant and show the expected negative sign. Significant regional differences in the Okun’s relationship, both for the short run and the long run, are found. These results are robust to two different specifications for the gaps: the HP filter and the QT procedure. In the final part of the paper, we also find that the OLS and the GMM estimates for panel data exhibit a similar pattern and that there is a clear asymmetry in the Okun’s relationship in booming and recession phases of the Spanish business cycle.
    Keywords: Okun’s Law, unemployment, GDP, Spanish regions.
    JEL: C23 E23 J64 R11 R23
    Date: 2017–06
  88. By: Kyungmin Kim
    Abstract: Rate curves for overnight loans between bank pairs, as functions of loan values, can be used to infer valuation of reserves by banks. The inferred valuation can be used to interpret shifts in rate curves between bank pairs, for example, in response to a financial crisis. This paper proposes a model of lending by a small bank to a large monopolistic bank to generate a tractable rate curve. An explicit calibration procedure for model parameters is developed and applied to a dataset from Mexico around the 2008 financial crisis. During the crisis, relatively small banks were lending to large banks at lower rates than usual, and the calibration suggests that a broad decline in valuation of reserves is responsible for this outcome, rather than a general increase in the supply of lending or compositional effects.
    Keywords: Banking ; Crisis ; Interbank
    JEL: E50 G21
    Date: 2017–06–16
  89. By: Gustav A. Horn; Fabian Lindner; Sabine Stephan
    Abstract: A macroeconomically oriented wage policy in Germany in the years 2001 to 2015 would have led to a reduced growth of real net exports but would not have significantly reduced Germany's trade and current account surpluses. While real exports would have declined, higher export prices would have led to an increase in overall export receipts so that the current account surplus - denominated in euro terms - would scarcely have shrunk. Such a wage policy, however, would have increased domestic demand and would have influenced income distribution positively (an increase in the wage share). Such a policy would however, have improved the government's financial situation, thereby increasing its spending capacity. A combination of macroeconomic wage policy and a support by fiscal policy making use of the financial leeway created by higher wages would have decreased the nominal trade and current account balance to a greater degree than wage policy alone. Surpluses would mainly have been reduced through an increase in imports due to an improved domestic economic development. However, for the current account balance to be in line with EU rules, much stronger financial impulses would be needed.
    Date: 2017
  90. By: Joseph P. Byrne (Department of Accountancy, Economics and Finance, School of Social Sciences, Heriot-Watt University); Marco Lorusso (Centre for Energy Economics Research and Policy, Heriot-Watt University); Bing Xu (School of Management and Languages G.54 Mary Burton Building Heriot-Watt University Edinburg)
    Abstract: This paper accounts for informational frictions when modelling the time-varying relationship between crude oil prices, traditional fundamentals and expectations. Informational frictions force a wedge between oil prices and supply and/or demand shocks, especially during periods of elevated risk aversion and uncertainty. In such a context expectations can be a key driver of oil price movements. We utilize a variety of proxies for forward-looking expectations, including business confidence, consumer confidence and leading indicators. In addition, our paper implements a time-varying parameter approach to account empirically for time-varying informational frictions. Our results illustrate firstly that oil supply shocks played an important role in both the 1970’s and coinciding with the recent shale oil boom. Secondly, demand had a positive impact upon oil prices, especially from the mid-2000’s. Finally, we provide evidence that oil prices respond strongly to expectations but the source of the shock matter: business leaders’ expectations are positively related, while markets’ expectations are not strongly linked to oil prices.
    Keywords: Crude Oil Prices; Informational Frictions; Fundamentals; Expectations; Time-Varying Parameters
    JEL: C30 E30 F00 Q43
    Date: 2017–06
  91. By: Rasa Stasiukynaitë (Bank of Lithuania)
    Abstract: The paper discusses monetary policy stance assessment in times of both conventional and unconventional monetary policy. Prior to the financial crisis, many central banks had one primary target and one instrument, the short-term rate. Over the years there was a consensus that the rule-of-thumb characterization known as the Taylor rule could broadly outline the policy and supplement discretionary policy. In the post-crisis period, one instrument was no longer sufficient and unconventional measures, such as large-scale asset purchases and forward guidance, were put in the policy makers' agendas. Therefore, assessing the impact of the implemented unconventional measures and understanding the overall monetary policy stance in traditional ways no longer suffices, while finding new suitable ways is not an easy task. The shadow rate literature is able to circumvent the lower bound constraint and incorporate the monetary policy accommodation provided by the asset purchase programmes. However, application of the shadow rate estimates, in order to assess monetary policy stance, has to be done with caution since the estimates lack robustness.
    Keywords: monetary policy stance, Taylor rule, equilibrium real rate of interest, unconventional monetary policy, shadow rates
    Date: 2017–03–24
  92. By: International Monetary Fund
    Abstract: The economic recovery has strengthened since Cyprus exited the Fund-supported program 15 months ago. Broad-based growth and improved external competitiveness have reduced unemployment. The fiscal position is in small surplus. External adjustment has continued, and borrowing costs for the public and private sectors have moderated. While the stock of credit continues to decline, returning confidence in the banks has encouraged deposit inflows.
    Date: 2017–06–08
  93. By: International Monetary Fund
    Abstract: Colombia is adjusting smoothly to a large and persistent oil price shock against the backdrop of a complex external environment. Growth fell in response to policy tightening and lower oil prices but is projected to recover gradually. Inflation rose above the target band due to temporary shocks but has started to moderate and is projected to converge to the band guided by tight monetary policy. Oil-related risks have receded but capital-account risks remain elevated. Colombia’s exposure to financial account shocks increased with higher nonresident participation in the local bond market. A faster-than-expected pace of interest rate hikes in the U.S. could tighten financial conditions in emerging markets. Global policy uncertainty and protectionism could affect global growth and generate spillovers to emerging markets.
  94. By: International Monetary Fund
    Abstract: Macroeconomic vulnerabilities have declined since 2012, but growth remains sluggish and sensitive to volatile agricultural output. External imbalances are contained. The fiscal deficit declined between 2012–15, but the fiscal and external year-end objectives were missed in 2016. Following a protracted political transition, which led to a delay in the completion of this review, the new government has now confirmed its commitment to resume fiscal adjustment and meet key program objectives, including bringing public debt to about 60 percent of GDP by 2020. The outlook is subject to elevated risks, including fragile recovery in the euro area and geopolitical risks in the region. On the domestic side, reducing unemployment rates, and achieving higher and more inclusive growth remain key challenges.
    Date: 2017–06–07
  95. By: Justine Pedrono; Aurélien Violon
    Abstract: Currency diversification, which measures how much of assets are denominated in foreign currency, introduces a credit risk diversification and a valuation effect due to fluctuations of exchange rate. It affects banks' leverage responsiveness to the value of assets, namely the leverage procyclicality. Using novel micro data on banks' exposures, we confront theoretical conclusions by focusing on the US dollar diversification of banks located in France between 1999 and 2015. Distinguishing between commercial and investment banks, our analysis first supports previous empirical results where investment banks are more pro-cyclical than commercial banks. Second, our results show that the largest pro-cyclicality of investment banks comes from the effect of currency diversification, especially from the valuation effect of currency diversification which increases procyclicality. Finally, our results confirm the theoretical prediction where a currency mismatch does not strongly affect leverage procyclicality. Our conclusions support the idea that currency diversification is relevant to micro and especially macro-prudential policy.
    Keywords: banks;procyclicality;exchange rate;diversification;balance sheet;financial cycle;financial intermediaries
    JEL: F3 F4 G15
    Date: 2017–06
  96. By: Maurice Obstfeld; Jonathan David Ostry; Mahvash S Qureshi
    Abstract: This paper examines the claim that exchange rate regimes are of little salience in the transmission of global financial conditions to domestic financial and macroeconomic conditions by focusing on a sample of about 40 emerging market countries over 1986–2013. Our findings show that exchange rate regimes do matter. Countries with fixed exchange rate regimes are more likely to experience financial vulnerabilities—faster domestic credit and house price growth, and increases in bank leverage—than those with relatively flexible regimes. The transmission of global financial shocks is likewise magnified under fixed exchange rate regimes relative to more flexible (though not necessarily fully flexible) regimes. We attribute this to both reduced monetary policy autonomy and a greater sensitivity of capital flows to changes in global conditions under fixed rate regimes.
    Date: 2017–06–08
  97. By: Nils Herger (Study Center Gerzensee)
    Abstract: In the eighteenth century, a fierce political debate broke out in Sweden about the causes of an extraordinary depreciation of its currency. More specifically, the dete- riorating value of the Swedish daler was discretionarily blamed on monetary causes, e.g. the overissuing of banknotes, or nonmonetary causes, such as balance of payments deficits. This paper provides a comprehensive empirical assessment of this so-called "Swedish Bullionist Controversy". The results of vector autoregressions suggest that increasing amounts of paper money did give rise to in ation and a depreciation of the exchange rate. Conversely, nonmonetary factors were probably less important for these developments.
    Date: 2017–06
  98. By: Umirah, Fatin; Masih, Mansur
    Abstract: This paper is aimed at determining the dynamic links of conventional and Islamic, regional and international equity markets with Shariah compliant equity (FTSE Hijrah Shariah Index) investing in Malaysia using MGARCH-DCC and Wavelet Coherence, given different holding periods. The data for this study is taken for the year 2007-2017. Overall, the results show there is a dynamic link between six sample stocks and this indicates that the Malaysian Shariah Compliant investors can invest in international or regional markets with different investment horizons bearing important implications for portfolio diversification strategies. In particular, the results tend to show that the FTSE Bursa Malaysia Hijrah Shariah Index has the low correlation with global stock market indexes, regardless of conventional or Islamic. However, the correlation between Islamic stocks are quite high. These results have implications for the portfolio diversification by the Malaysian Shariah investors.
    Keywords: Stock market, Dynamic link, MGARCH, Wavelet Coherence, Malaysia, FTSE Hijrah Shariah Stock Index
    JEL: C58 E44 G11 G15
    Date: 2017–06–14
  99. By: Brendan Epstein; Alan Finkelstein Shapiro; Andrés González Gómez
    Abstract: Amid total factor productivity (TFP) shocks job-to-job flows amplify the volatility of unemployment, but the aggregate implications of job-to-job flows amid financial shocks are less understood. To develop such understanding we model a general equilibrium labor-search framework that incorporates on-the-job (OTJ) search and distinctly accounts for the differential impact of TFP and financial shocks. Surprisingly, we find that the interaction of OTJ search with financial shocks is sufficiently different from its interaction with TFP shocks so that, under standard calibrations, our model generates aggregate dynamics exceedingly in line with the behavior of key U.S. macro data across several decades and in the wake of the Global Financial Crisis as well. Importantly, as in the data, the model yields relatively high volatilities of consumption, labor income, and unemployment. As such, our work contributes to resolving two limitations of current general equilibrium labor-search theory: under standard calibrations models without OTJ search generate implausibly low unemployment volatility, while models with OTJ search generate unemployment volatility closer to the data but at the expense of implausibly low consumption and labor-income volatility.
    Date: 2017–06–08
  100. By: Christophe Blot (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: Since 2014, the ECB has applied a negative interest rate on the excess reserves (and deposit facilities) of commercial banks. This policy is complementary to Quantitative Easing (QE), a program whereby the ECB purchases securities on financial markets. Indeed, the QE provides liquidity to the banks and negative interest rates encourage them to reallocate this liquidity. The negative reserve rate amplifies the fall in short-term and long-term market rates and reinforces the incentive for commercial banks to operate reallocation on their portfolios towards riskier assets. The total amount of liquidity subject to a negative interest rate is 1047 billion euros. Negative interest rates should reduce interest rate margins but the impact on profitability is mitigated by the capital gains banks realise when selling securities to the ECB under QE, by the possibility banks have to finance themselves at negative rates, by a decrease in the risk of default and by the possibility to raise non-interest income.
    JEL: E5
    Date: 2016–11
  101. By: Guillaume Allegre (Observatoire français des conjonctures économiques); Céline Antonin (Observatoire français des conjonctures économiques); Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Bruno Ducoudre (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques); Sabine Lebayon; Sandrine Levasseur (Observatoire français des conjonctures économiques); Hélène Périvier (Observatoire français des conjonctures économiques); Raul Sampognaro (Observatoire français des conjonctures économiques); Aurélien Saussay (Observatoire français des conjonctures économiques); Vincent Touze (Observatoire français des conjonctures économiques); Sébastien Villemot (Observatoire français des conjonctures économiques); Xavier Timbeau (Observatoire français des conjonctures économiques)
    Abstract: The economic, financial and institutional crisis which started in 2008 looks like it is never going to end. Nearly 9 years after the meltdown of the financial system of developed countries, after a violent recession followed by the euro debt crisis in 2012, a recovery finally started in late 2014. It has been pushed by a mix of fair winds, such as low oil prices, low interest rates, a lower effective exchange rate of the euro, a less negative fiscal stance in the euro area and unconventional monetary policies. Adding to those fair winds, the Juncker commission took stock of the worrying situation in 2015 and proposed the Juncker Plan to boost (mostly private) investment in the EU.
    Keywords: Economic ; Financial; Crisis
    Date: 2016–12
  102. By: Jochen Hartwig
    Abstract: Keynes introduces the term 'effective demand' in chapter 3 of the General Theory as designating the point of intersection of two functions: the 'aggregate demand function' (D) and the 'aggregate supply function' (Z). For the first time in the literature, I here specify exact functional forms for the D and Z functions and run numerical simulations which allow to study the comparative statics of the model in the face of various 'shocks'. The demonstration of how the D/Z model actually works will hopefully prove useful for future students of the economics of Keynes.
    Keywords: Keynes, effective demand, D/Z model
    JEL: B31 E12
    Date: 2017

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