nep-mac New Economics Papers
on Macroeconomics
Issue of 2017‒07‒30
76 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Monetary Policy, Target Inflation and the Great Moderation: An Empirical Investigation By Qazi Haque
  2. (Un)expected Monetary Policy Shocks and Term Premia By Martin Kliem; Alexander Meyer-Gohde
  3. A Risk-centric Model of Demand Recessions and Macroprudential Policy By Ricardo J. Caballero; Alp Simsek
  4. The Dire Effects of the Lack of Monetary and Fiscal Coordination By Bianchi, Francesco; Melosi, Leonardo
  5. Financial Development and Monetary Policy: Loan Applications, Rates, and Real Effects By Abuka, Charles; Alinda, Ronnie; Minoiu, Camelia; Peydró, José Luis; Presbitero, Andrea
  6. Monetary and macroprudential policy with foreign currency loans By Michał Brzoza-Brzezina; Marcin Kolasa; Krzysztof Makarski
  7. The Capital Structure of Nations By Patrick Bolton; Haizhou Huang
  8. The Dire Effects of the Lack of Monetary and Fiscal Coordination By Francesco Bianchi; Leonardo Melosi
  9. Could the boom-bust in the eurozone periphery have been prevented? By Marcin Bielecki; Michał Brzoza-Brzezina; Marcin Kolasa; Krzysztof Makarski
  10. Should Inflation Measures Used by Central Banks Incorporate House Prices? The Czech Approach By Mojmir Hampl; Tomas Havranek
  11. Optimal Trend Inflation By Adam, Klaus; Weber, Henning
  12. Model averaging in markov-switching models: predicting national recessions with regional data By Pierre Guérin; Danilo Leiva-Leon
  13. Theories, techniques and the formation of German business cycle forecasts: Evidence from a survey among professional forecasters By Jörg Döpke; Ulrich Fritsche; Gabi Waldhof
  14. Croissance potentielle : la politique économique au royaume des aveugles ? By Jacques LE CACHEUX
  15. Secular Satiation By Saint-Paul, Gilles
  16. Transaction balances of small denomination banknotes: findings from the introduction of ES2 By Bartzsch, Nikolaus
  17. The optimal conduct of central bank asset purchases By Darracq-Pariès, Matthieu; Kühl, Michael
  18. Measuring business cycles intra-synchronization in us: a regime-switching interdependence framework By Danilo Leiva-Leon
  19. Indicators to monitor and follow construction investment By Ángel Luis Gómez; M.ª del Carmen Sánchez
  20. Interest Rates Modeling and Forecasting: Do Macroeconomic Factors Matter? By Adam Kucera
  21. Monetary policy and global banking By Brauning, Falk; Ivashina, Victoria
  22. Good Policies or Good Luck? New Insights on Globalization and the International Monetary Policy Transmission Mechanism By Martinez-Garcia, Enrique
  23. The Impact of Taxes on Income Mobility By Mario Alloza
  24. Pricing behaviour and the role of trade openness in the transmission of monetary shocks By Laura Povoledo
  25. Job duration and history dependent unemployment insurance By Andersen, Torben M; Ellermann-Aarslev, Christian
  26. Private and Public Risk Sharing in the Euro Area By Jacopo Cimadomo; Oana Furtuna; Massimo M. Giuliodori
  27. The use of large denomination banknotes in Switzerland By Assenmacher, Katrin; Seitz, Franz; Tenhofen, Jörn
  28. The Capital Structure of Nations By Bolton, Patrick; Huang, Haizhou
  29. The Optimal Degree of Monetary-Discretion in a New Keynesian Model with Private Information By Waki, Yuichiro; Dennis, Richard; Fujiwara, Ippei
  30. Wage dispersion and pension funds: Financialisation of non-financial corporations in the USA, 1966-2013 By Dögüs, Ilhan
  31. Inflation Convergence In East African Countries By Dridi, Jemma; Nguyen, Anh D. M.
  32. Asset Bubbles and Monetary Policy By Pengfei Wang; Jianjun Miao; Feng Dong
  33. Consumption Inequality and the Frequency of Purchases By Coibion, Olivier; Gorodnichenko, Yuriy; Koustas, Dmitri
  34. Fiscal Multipliers and Financial Crises By Miguel Faria-e-Castro
  35. Canaries in the coal mine. The tale of two signals: the VIX and the MOVE Indexes. By Bruce Budd
  36. Can indeterminacy and self-fulfilling expectations help explain international business cycles? By Stephen McKnight; Laura Povoledo
  37. The demand for cash in France: review of evidence By Politronacci, Emmanuelle; Ninlias, Élodie B.; Palazzeschi, Enda E.; Torre, Ghjuvanni
  38. Level and Volatility Shocks to Fiscal Policy: Term Structure Implications By Lorenzo Bretscher; Alex Hsu; Andrea Tamoni
  39. The Effects of Globalization and Technology on the Elasticity of Substitution By Sala, Hector; Trivín, Pedro
  40. Do Mincerian Wage Equations Inform How Schooling Influences Productivity? By Christian Groth; Jakub Growiec
  41. Local Bifurcations of Three and Four-Dimensional Systems: A Tractable Characterization with Economic Applications By Stefano Bosi; David Desmarchelier
  42. Monetary Conservatism, Default Risk, and Political Frictions By Joost Roettger
  43. Capital accumulation in the center and the periphery along the neoliberal period: A comparative analysis of the United States, Spain and Brazil By Juan Pablo Mateo
  44. Fiscal Stabilization and the Credibility of the U.S. Budget Sequestration Spending Austerity By Carlos Zarazaga; Ruiyang Hu
  45. Fintech: Is This Time Different? A Framework for Assessing Risks and Opportunities for Central Banks By Meyer Aaron; Francisco Rivadeneyra; Samantha Sohal
  46. Optimal taxation and the tradeoff between efficiency and redistribution By George Economides; Anastasios Rizos
  47. Changes in the Cost of Bank Equity and the Supply of Bank Credit By Célérier, Claire; Kick, Thomas; Ongena, Steven
  48. Moving towards "Cashlessness" in an emerging economy: A case study of latest policy steps in India By Dasgupta, Manjira
  49. Regional Heterogeneity and Monetary Policy By Joseph Vavra; Erik Hurst; Andreas Fuster; Martin Beraja
  50. Financial Shocks,Supply-chain Relationships and the Great Trade Collapse* By Alok Johri; Terry Yip
  51. Central Counterparties Help, But Do Not Assure Financial Stability By Lopez, Claude; Saeidinezhad, Elham
  52. Uncovering covered interest parity: the role of bank regulation and monetary policy By Brauning, Falk; Puria, Kovid
  53. Declining labor-labor exchange rates as a cause of inequality growth By Tangian, Andranik S.
  54. Product Cycles and Prices:Search Foundation By Yuki Teranishi
  55. Optimal Domestic (and External) Sovereign Default By Enrique Mendoza
  56. European Banks Straddling Borders: Risky or Rewarding? By Duijm, Patty; Schoenmaker, Dirk
  57. Why Has Regional Income Convergence in the U.S. Declined? By Peter Ganong; Daniel W. Shoag
  58. Paternalism and Pseudo-Rationality By Itzik Fadlon; David Laibson
  59. The Role of Taxes in the Disconnect between Corporate Performance and Economic Growth By Urooj Khan; Suresh Nallareddy; Ethan Rouen
  60. Brexit and the Macroeconomic Impact of Trade Policy Uncertainty By Joseph Steinberg
  61. Frequency-Domain Estimation as an Alternative to Pre-Filtering External Cycles in Structural VAR Analysis By Lovcha, Yuliya; Pérez Laborda, Alejandro
  62. الحساب الجاري للاقتصاد السعودي عبر نموذج داخلي الزمن دلائل من منهجية نموذج التقهقر الذاتي البنيوي By Ghassan, Hassan B.; Al-Jefri, Essam H.
  63. Assessing recent increases in cash demand By Jobst, Clemens; Stix, Helmut
  64. Sentiment indicators and macroeconomic data as drivers for low-frequency stock market volatility By Lindblad, Annika
  65. Benefits of the retail payments card market: Evidence from Russian merchants By Egor Krivosheya; Andrew Korolev
  66. Inequality and Production Elasticity By Goren, Amir
  67. Monetary Rules in a Two-Sector Endogenous Growth Model with Cash-in-Advance Constraint By Daria ONORI; Francesco MAGRIS; Antoine LE RICHE
  68. The Role of Inflation-Linked Bonds. Increasing, but Still Modest By Westerhout, Ed; Ciocyte, Ona
  69. Cyclical Fluctuations in Strike Activity By Sheena McConnell
  70. Choice of payment instrument for low-value transactions in Japan By Fujiki, Hiroshi; Tanaka, Migiwa
  71. Sources of Borrowing and Fiscal Multipliers By Srecko Zimic; Romanos Priftis
  72. How Australians Pay: Evidence from the 2016 Consumer Payments Survey By Mary-Alice Doyle; Chay Fisher; Ed Tellez; Anirudh Yadav
  73. Adoption of a New Payment Method: Theory and Experimental Evidence By Jasmina Arifovic; John Duffy; Janet Hua Jiang
  74. Hours Worked in Selected OECD Countries: an Empirical Assessment By Vincenzo Atella; Lorenzo Carbonari; Paola Samà
  75. The Blessing of Cash By Seitz, Franz; Krueger, Malte
  76. The Death of Cash? Not So Fast: Demand for U.S. Currency at Home and Abroad, 1990-2016 By Judson, Ruth

  1. By: Qazi Haque (School of Economics, University of Adelaide)
    Abstract: This paper compares the empirical fit of a Taylor rule featuring constant versus time-varying inflation target by estimating a Generalized New Keynesian model under positive trend inflation while allowing for indeterminacy. The estimation is conducted over two different periods covering the Great Inflation and the Great Moderation. We find that the rule embedding time variation in target inflation turns out to be empirically superior and determinacy prevails in both sample periods. Counterfactual simulations point toward both `good policy' and `good luck' as drivers of the Great Moderation. We find that better monetary policy, both in terms of a more active response to inflation gap and a more anchored inflation target, has resulted in the decline in inflation gap volatility and predictability. In contrast, the reduction in output growth variability is mainly explained by reduced volatility of technology shocks.
    Keywords: Monetary policy; Great Inflation; Great Moderation; Equilibrium Indeterminacy; Generalized New Keynesian Phillips curve; Taylor rules; Time-varying inflation target; Good policy; Good luck; Sequential Monte Carlo
    JEL: C11 C52 C62 E31 E32 E52 E58
    Date: 2017–07
  2. By: Martin Kliem; Alexander Meyer-Gohde
    Abstract: We analyze an estimated stochastic general equilibrium model that replicates key macroeconomic and financial stylized facts during the Great Moderation of 1983-2007. Our model predicts a sizeable and volatile nominal term premium - comparable to recent reduced-form empirical estimates - with real risk two times more important than in ation risk for the average nominal term premia. The model enables us to address salient questions about the effects of monetary policy on the term structure of interest rates. We nd that monetary policy shocks can have differing effects on risk premia. Actions by the monetary authority with a persistent effect on households' expectations have substantial effects on nominal and real risk premia. Our model rationalizes many of the opposing ndings on the effects of monetary policy on term premia in the empirical literature.
    Keywords: DSGE model, Bayesian estimation, Term structure, Monetary policy
    JEL: E13 E31 E43 E44 E52
    Date: 2017–07
  3. By: Ricardo J. Caballero; Alp Simsek
    Abstract: A productive capacity generates output and risks, both of which need to be absorbed by economic agents. If they are unable to do so, output and risk gaps emerge. Risk gaps close quickly: A decline in the interest rate increases the Sharpe ratio of the risky assets and equilibrates the risk markets. If the interest rate is constrained from below (or the policy response is slow), the risk markets are instead equilibrated via a decline in asset prices. However, the drop in asset prices also drags down aggregate demand, which further drags prices down, and so on. If economic agents are optimistic about the speed of recovery, a decline in asset prices leads to a large increase in the Sharpe ratio that stabilizes the drop. If they are pessimistic, the economy becomes highly susceptible to downward spirals due to the feedback between asset prices and aggregate demand. When beliefs are heterogenous, optimists take too much risk from a social point of view since they do not internalize their positive effect on asset prices and aggregate demand during recessions. Macroprudential policy can improve outcomes, and is procyclical as the negative aggregate demand effect of prudential tightening is more easily offset by interest rate policy during booms than during recessions. Forward guidance policies are also effective, but their robustness weakens as agents become more pessimistic. Our model also illustrates that interest rate rigidities and speculation generate endogenous price volatility that exacerbates demand recessions.
    JEL: E00 E12 E21 E22 E30 E40 G00 G01 G11
    Date: 2017–07
  4. By: Bianchi, Francesco; Melosi, Leonardo
    Abstract: What happens if the government's willingness to stabilize a large stock of debt is waning, while the central bank is adamant about preventing a rise in inflation? The large fiscal imbalance brings about inflationary pressures, triggering a monetary tightening, further debt accumulation, and additional inflationary pressure. Thus, the economy will go through a spiral of higher inflation, output contraction, and further debt accumulation. A coordinated commitment to inflate away the portion of debt resulting from a large recession leads to better macroeconomic outcomes by separating the issue of long-run fiscal sustainability from the need for short-run fiscal stabilization. This strategy can also be used to rule out episodes in which the central bank becomes constrained by the zero lower bound.
    Keywords: coordination; emergency budget; liquidity traps.; Markov-switching models; Monetary and Öscal policies
    JEL: D83 E31 E52 E62 E63
    Date: 2017–07
  5. By: Abuka, Charles; Alinda, Ronnie; Minoiu, Camelia; Peydró, José Luis; Presbitero, Andrea
    Abstract: The finance-growth literature argues that institutional constraints in developing countries impede financial intermediation and monetary policy transmission. Recent studies using aggregate data document a weak bank lending channel. For identification, we instead exploit Uganda's super- visory credit register, with loan applications and rates, and unanticipated variation in monetary policy. A monetary tightening strongly reduces credit supply - increasing loan application rejections and tightening volume and rates - especially for banks with more leverage and sovereign debt exposure (even within the same borrower-period). There are spillovers on inflation and eco- nomic activity, especially in more financially-developed areas, including on commercial building, trade, and social unrest.
    Keywords: Bank credit; bank lending channel; developing countries; Financial Development; monetary policy; Real effects
    JEL: E42 E44 E52 E58 G21 G28
    Date: 2017–07
  6. By: Michał Brzoza-Brzezina (Narodowy Bank Polski; Warsaw School Economics); Marcin Kolasa (Narodowy Bank Polski; Warsaw School Economics); Krzysztof Makarski (Narodowy Bank Polski; Warsaw School Economics; Group for Research in Applied Economics (GRAPE))
    Abstract: In a number of countries a substantial proportion of mortgage loans is denominated in foreign currency. In this paper we demonstrate how their presence affects economic policy and agents' welfare. To this end we construct a small open economy model with financial frictions, where housing loans can be denominated in domestic or foreign currency. The model is calibrated for Poland - a typical small open economy with a large share of foreign currency loans (FCL). We show that the presence of FCLs negatively affects the transmission of monetary policy and deteriorates the output-inflation volatility trade-off it faces. The trade-off can be improved with macroprudential policy but the outcomes are still worse than under this same policy mix applied to an economy with domestic currency debt. We also demonstrate that a high share of FCLs is harmful for social welfare, even if financial stability considerations are not taken into account. Finally, we show that regulatory policies that discriminate against FCLs may have a negative impact on economic activity and discuss the redistributive consequences of forced currency conversion of household debt.
    Keywords: foreign currency loans, monetary policy, macroprudential policy, DSGE models
    JEL: E32 E44 E58
    Date: 2017
  7. By: Patrick Bolton; Haizhou Huang
    Abstract: When a nation can finance its investments via foreign-currency denominated debt or domestic-currency claims, what is the optimal capital structure of the nation? Building on the functions of fiat money as both medium of exchange, and store of value like corporate equity, our model connects monetary economics, fiscal theory and international finance under a unified corporate finance perspective. With frictionless capital markets both a Modigliani-Miller theorem for nations and the classical quantity theory of money hold. With capital market frictions, a nation's optimal capital structure trades off inflation dilution costs and expected default costs on foreign-currency debt. Our framing focuses on the process by which new money claims enter the economy and the potential wealth redistribution costs of inflation.
    JEL: E5 E62 F3 F4 G3
    Date: 2017–07
  8. By: Francesco Bianchi; Leonardo Melosi
    Abstract: What happens if the government's willingness to stabilize a large stock of debt is waning, while the central bank is adamant about preventing a rise in inflation? The large fiscal imbalance brings about inflationary pressures, triggering a monetary tightening, further debt accumulation, and additional inflationary pressure. Thus, the economy will go through a spiral of higher inflation, output contraction, and further debt accumulation. A coordinated commitment to inflate away the portion of debt resulting from a large recession leads to better macroeconomic outcomes by separating the issue of long-run fiscal sustainability from the need for short-run fiscal stabilization. This strategy can also be used to rule out episodes in which the central bank becomes constrained by the zero lower bound.
    JEL: D83 E31 E52 E62 E63
    Date: 2017–07
  9. By: Marcin Bielecki (University of Warsaw; Narodowy Bank Polski); Michał Brzoza-Brzezina (Narodowy Bank Polski; Warsaw School Economics); Marcin Kolasa (Narodowy Bank Polski; Warsaw School Economics); Krzysztof Makarski (Narodowy Bank Polski; Warsaw School Economics; Group for Research in Applied Economics (GRAPE))
    Abstract: Boom-bust cycles in the eurozone periphery almost toppled the single currency and recent experience suggests that they may return soon. We check whether monetary or macroprudential policy could have prevented the periphery's violent boom and bust after the euro adoption. We estimate a DSGE model for the two euro area regions, core and periphery, and conduct a series of historical counterfactual experiments in which monetary and macroprudential policy follow optimized rules that use area-wide welfare as the criterion. We show that single monetary policy could have better stabilized output in both regions, but not the housing market or the periphery's trade balance. In contrast, region-specific macroprudential policy could have substantially smoothed the credit cycle in the periphery and reduced the build-up of external imbalances
    Keywords: euro-area imbalances, monetary policy, macroprudential policy
    JEL: E32 E44 E58
    Date: 2017
  10. By: Mojmir Hampl (Czech National Bank); Tomas Havranek (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank)
    Abstract: In this paper we describe the Czech National Bank’s approach to incorporating macroprudential considerations into monetary policy decision making: the use of a broader inflation measure that gives substantial weight to house prices and is considered along with headline CPI inflation. We argue that, in terms of theory, the broader inflation gauge is at least as suitable for measuring the value of money as headline CPI inflation is, but we also acknowledge practical problems that arise from the use of the broader index.
    Keywords: Consumer price index, financial stability, house prices, macroprudential policy, monetary policy, owner-occupied housing
    JEL: E31 E44 E50 R30
    Date: 2017–07
  11. By: Adam, Klaus; Weber, Henning
    Abstract: We present a sticky-price model incorporating heterogeneous firms and systematic firm-level productivity trends. Aggregating the model in closed form, we show that it delivers radically different predictions for the optimal inflation rate than canonical sticky price models featuring homogenous firms: (1) the optimal steady-state inflation rate generically differs from zero and (2) inflation optimally responds to productivity disturbances. Using micro data from the US Census Bureau to estimate the inflation-relevant productivity trends at the firm level, we find that the optimal US inflation rate is positive. It was slightly above 2 percent in the year 1986, but continuously declined thereafter, reaching about 1 percent in the year 2013.
    Keywords: Firm Heterogeneity; optimal inflation
    JEL: E31 E32 E52
    Date: 2017–07
  12. By: Pierre Guérin (Bank of Canada); Danilo Leiva-Leon (Banco de España)
    Abstract: This paper introduces new weighting schemes for model averaging when one is interested in combining discrete forecasts from competing Markov-switching models. In the empirical application, we forecast U.S. business cycle turning points with statelevel employment data. We find that forecasts obtained with our best combination scheme provide timely updates of U.S. recessions in that they outperform a notoriously dicult benchmark to beat (the anxious index from the Survey of Professional Forecasters) for short-term forecasts.
    Keywords: business cycles, forecast combination, forecasting, Markov-switching, nowcasting
    JEL: C53 E32 E37
    Date: 2017–07
  13. By: Jörg Döpke (Hochschule Merseburg (University of Applied Sciences Merseburg)); Ulrich Fritsche (Universität Hamburg (University of Hamburg)); Gabi Waldhof (Leibniz-Institut für Agrarentwicklung in Transformationsökonomien)
    Abstract: The paper reports results of a survey among active forecasters of the German business cycle. Relying on 82 respondents from 37 different institutions, we investigate what models and theories forecasters subscribe to and find that they are pronounced conservative in the sense, that they overwhelmingly rely on methods and theories that have been well-established for a long time, while more recent approaches are relatively unimportant for the practice of business cycle forecasting. DSGE models are mostly used in public institutions. In line with findings in the literature there are tendencies of “leaning towards consensus†(especially for public institutions) and “sticky adjustment of forecasts†with regard to new information. We find little evidence that the behaviour of forecasters has changed fundamentally since the Great Recession but there are signs that forecast errors are evaluated more carefully. Also, a stable relationship between preferred theories and methods and forecast accuracy cannot be established.
    Keywords: Forecast error evaluation, questionnaire, survey, business cycle forecast, professional forecaster
    JEL: E32 E37 C83
    Date: 2017–07
  14. By: Jacques LE CACHEUX
    Abstract: La crise a révélé les insuffisances graves de la théorie macroéconomique dominante et des conceptions de politique macroéconomique qu’elle inspire. Le cadre analytique dans lequel raisonnent la plupart des macroéconomistes, celui qui guide les institutions nationales, européennes et internationales dans leurs orientations, est intrinsèquement inapte à rendre compte des évolutions structurelles d’une économie financiarisée et en profonde mutation. Les concepts-clés qui en sont les fondements induisent des choix d’indicateurs fournissant des signaux erronés. Les grandeurs macroéconomiques standards sur lesquelles se fondent les politiques économiques se sont vidées de leur sens, mais constituent néanmoins toujours les piliers des diagnostics. Refonder la macroéconomie est une urgence ; mais les ébauches actuellement offertes ne sont pas à la hauteur des défis. POTENTIAL GROWTH: ECONOMIC POLICY IN THE KINGDOM OF THE BLIND The 2009 crisis has shed a crude light on the deep shortcomings of standard macroeconomic theory and of its representation of the workings of macroeconomic policy. The analytical framework in which most macroeconomists reason, the one that guides national, European, and international institutions’ orientations, is intrinsically unable to deliver insights on the structural evolutions of economies that are massively intertwined with finance and in perpetual technological change. The key concepts on which this framework is built lead to the choice of indicators that generate misleading signals. Standard macroeconomic aggregates guiding economic policies have been losing their meaning, but continue to be relied upon when forming a diagnosis on national economies. Rebuilding macroeconomic theory on new foundations is urgent; but the avenues that are being explored currently are far from providing adequate answers.
    JEL: E00 E01 E60
    Date: 2017–06
  15. By: Saint-Paul, Gilles (Paris School of Economics)
    Abstract: Satiation of need is generally ignored by growth theory. I study a model where consumers may be satiated in any given good but new goods may be introduced. A social planner will never elect a trajectory with long-run satiation. Instead, he will introduce enough new goods to avoid such a situation. In contrast, the decentralized equilibrium may involve long run satiation. This, despite that the social costs of innovation are second order compared to their social benefits. Multiple equilibria may arise: depending on expectations, the economy may then converge to a satiated steady state or a non satiated one. In the latter equilibrium, capital and the number of varieties are larger than in the former, while consumption of each good is lower. This multiplicity comes from the following strategic complementary: when people expect more varieties to be introduced in the future, this raises their marginal utility of future consumption, inducing them to save more. In turn, higher savings reduces interest rates, which boosts the rate of innovation. When TFP grows exogenously and labor supply is endogenized, the satiated equilibrium generically survives. For some parameter values, its growth rate is positive while labor supply declines over time to zero. Its growth rate is then lower than that of the non satiated equilibrium. Hence, the economy may either coordinate on a high leisure, low growth, satiated "leisure society" or a low leisure, high growth, non satiated "consumption society".
    Keywords: growth, satiation, innovation, new products, consumer society, leisure society, labor supply, multiple equilibra, strategic complementarities
    JEL: E13 E14 E21 E22 E23
    Date: 2017–07
  16. By: Bartzsch, Nikolaus
    Abstract: At the end of 2015, the Deutsche Bundesbank had issued a total net amount of just over €45 billion in €20 banknotes. In statistical terms, each resident living in Germany was therefore issued with around 30 banknotes of this denomination. Up until now, it was not clear how many of these German-issued euro banknotes are actually used for payment purposes. Owing to the introduction of the new Europa series of banknotes on 25 November 2015, it was possible to estimate the volume of €20 banknotes that are held for transaction purposes both in Germany and outside the euro area. The estimation of the volume of €20 banknotes held for domestic transaction purposes (known as the domestic transaction balance) is primarily based on the observed return flows of the old series (ES1) of €20 banknotes received by the Deutsche Bundesbank. The cash balance of €20 banknotes held for domestic transaction purposes was estimated at around €8.5 billion at the end of October 2015. This means that only 19% of the total (net) amount of €20 banknotes issued by the Deutsche Bundesbank up to the end of October 2015 were used for transaction purposes within Germany. The remaining 81% has either migrated abroad, been hoarded or got lost. The results of the analysis are also important as a means of explaining the just over €36 billion worth of ES1 €20 banknotes which are still outstanding in the Deutsche Bundesbank's balance sheet. Given that the cash balance held for domestic transaction purposes has since been almost fully replaced, it is no longer to be expected that ES1 banknotes will flow back to the Deutsche Bundesbank in any sizeable amounts. The volume of German-issued €20 banknotes – officially stemming from banknote shipments by the Deutsche Bundesbank – held for transaction purposes outside the euro area was estimated at just over €3 billion at the end of July 2016 using the biometric method. This estimate represents a lower level for the actual cash balance held for transaction purposes, as it does not incorporate banknote exports resulting from foreign travel and cash amounts sent abroad. It is derived from cumulated shipments of ES2 €20 banknotes up to the end of July 2016 and the value of the ES1 and ES2 €20 notes deposited in July 2016 at the shipment branches. In terms of the Deutsche Bundesbank's cumulated net shipments of €20 banknotes in the amount of around €12 billion at the end of 2015, the estimated cash balance (resulting from shipments) held for transaction purposes outside the euro area accounts for around 28%.
    Keywords: euro banknotes,biometric method,foreign demand,transaction balances,hoarding,small denominations,ES2
    JEL: C49 E41 E58
    Date: 2017
  17. By: Darracq-Pariès, Matthieu; Kühl, Michael
    Abstract: We analyse the effects of central bank government bond purchases in an estimated DSGE model for the euro area. In the model, central bank asset purchases are relevant in so far as agency costs distort banks' asset allocation between loans and bonds, and households face transaction costs when trading government bonds. Such frictions in the banking sector induce inefficient time-variation in the term premia and allow for a credit channel of central bank government bond purchases. Considering ad hoc asset purchase programmes like the one implemented by the ECB, we show that their macroeconomic multipliers get stronger when the lower bound on the policy rate becomes binding and when the purchasing path is fully communicated and anticipated by the agents. From a more normative standpoint, interest rate policy and asset purchases feature strong strategic complementarities during both normal and crisis times. In an environment when nominal interest rates reach their effective lower bound, optimal monetary policy is to keep the policy rate low for a longer period in time and to engage in asset purchases. Our results also point to a clear sequencing of the exit strategy, first stopping the asset purchases and later raising the policy rate. In terms of macroeconomic stabilisation, optimal asset purchase strategies deliver sizeable benefits and have the potential to largely offset the costs of the lower bound on the policy rate.
    Keywords: Zero Lower Bound,Optimal Monetary Policy,Banking,Quantitative Easing,DSGE
    JEL: C61 E52 G11
    Date: 2017
  18. By: Danilo Leiva-Leon (Banco de España)
    Abstract: This paper proposes a Markov-switching framework to endogenously identify periods where economies are more likely to (i) synchronously enter recessionary and expansionary phases, and (ii) follow independent business cycles. The reliability of the framework is validated with simulated data in Monte Carlo experiments. The framework is applied to assess the timevarying intra-country synchronization in US. The main results report substantial changes over time in the cyclical affiliation patterns of US states, and show that the more similar the economic structures of states, the higher the correlation between their business cycles. A synchronization-based network analysis discloses a change in the propagation pattern of aggregate contractionary shocks across states, suggesting that the US has become more internally synchronized since the early 1990s.
    Keywords: business cycles, Markov-Switching, network analysis
    JEL: E32 C32 C45
    Date: 2017–07
  19. By: Ángel Luis Gómez (Banco de España); M.ª del Carmen Sánchez (Banco de España)
    Abstract: This paper presents the indicators available to monitor construction investment and forecast its short-term evolution, in the case of the Spanish economy. In addition, it is described a procedure followed to estimate medium-term forecasts for housing investment, mainly based on demographic fundamentals that determine the demand for primary dwellings. The analysis takes into consideration a number of features of the construction sector: long maturity period supply, heterogeneous products, and regional disparity.
    Keywords: construction investment, synthetic indicators, housing investment, expert judgment.
    JEL: E22 E27
    Date: 2017–07
  20. By: Adam Kucera (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank)
    Abstract: Recent studies documented a sufficient forecasting performance of shadow-rate models in the low yields environment. Moreover, it has been shown that including the macro-variables into the shadow-rate models further improves the results. We build on these findings and evaluate for the U.S. Treasury yields, whether the lower bound proximity was truly the only issue to reflect in the interest rate modeling since the Great Recession. Surprisingly, we discover that the relative importance of yield curve factors has changed as well. More specifically, instead of macroeconomic factors, financial market sentiment factors became dominant since the recent financial turmoil. Based on such finding, we show, that extending the macro-finance interest rate models by financial market sentiment proxies further improves the forecasting performance.
    Keywords: Interest Rate, Yield Curve, Macro-Finance Model, Affine Model, Nelson-Siegel
    JEL: C38 C51 C58 E43 E47
    Date: 2017–03
  21. By: Brauning, Falk (Federal Reserve Bank of Boston); Ivashina, Victoria (Harvard Business School)
    Abstract: Global banks use their global balance sheets to respond to local monetary policy. However, sources and uses of funds are often denominated in different currencies. This leads to a foreign exchange (FX) exposure that banks need to hedge. If cross‐currency flows are large, the hedging cost increases, diminishing the return on lending in foreign currency. We show that, in response to domestic monetary policy easing, global banks increase their foreign reserves in currency areas with the highest interest rate, while decreasing lending in these markets. We also find an increase in FX hedging activity and its rising cost, as manifested in violations of covered interest rate parity.
    Keywords: global banks; monetary policy transmission; cross‐border lending
    JEL: E44 E52 F36 G15 G21 G28
    Date: 2016–12–23
  22. By: Martinez-Garcia, Enrique (Federal Reserve Bank of Dallas)
    Abstract: The open-economy dimension is central to the discussion of the trade-offs that monetary policy faces in an increasingly integrated world. I investigate the monetary policy transmission mechanism in a two-country workhorse New Keynesian model where policy is set according to Taylor (1993) rules. I find that a common monetary policy isolates the effects of trade openness on the cross-country dispersion, and that the establishment of a currency union as a means of deepening economic integration may lead to indeterminacy. I argue that the common (coordinated) monetary policy equilibrium is the relevant benchmark for policy analysis showing that in that case open economies tend to experience lower macro volatility, a flatter Phillips curve, and more accentuated trade-offs between inflation and slack. Moreover, I show that the trade elasticity often magnifies the effects of trade integration (globalization) beyond what conventional measures of trade openness would imply. I also discuss how other features such as the impact of a stronger anti-inflation bias, technological diffusion across countries, and the sensitivity of labor supply to real wages influence the quantitative effects of policy and openness in this context. Finally, I conclude that the theoretical predictions of the workhorse open-economy New Keynesian model are largely consistent with the stylized facts of the globalization era started in the 1960s and the Great Moderation period that followed.
    JEL: C11 C13 F41
    Date: 2017–07–01
  23. By: Mario Alloza (Banco de España and CFM)
    Abstract: This paper investigates how taxes affect relative mobility in the income distribution in the US. Household panel data drawn from the PSID between 1967 and 1996 is employed to analyse the relationship between marginal tax rates and the probability of staying in the same income decile. Exogenous variation in marginal tax rates is identified by using counterfactual rates based on legislated changes in the tax schedule. I find that higher marginal tax rates reduce income mobility. An increase in one percentage point in marginal tax rates causes a decline of around 0.8 percentage points in the probability of changing to a different income decile. Tax reforms that reduce marginal rates by 7 percentage points are estimated to account for around a tenth of the average movements in the income distribution in a year. Additional results suggest that the effect of taxes on income mobility differs according to the level of human capital and that it is particularly significant when considering mobility at the bottom of the distribution.
    Keywords: income mobility, inequality, marginal tax rate
    JEL: E24 E62 D31 D63 H24 H31
    Date: 2017–07
  24. By: Laura Povoledo (University of the West of England, Bristol)
    Abstract: External demand is considered to be one of the channels of transmission of monetary policy to aggregate demand. If external demand matters in the monetary transmission, then the response of output to monetary shocks must be more pronounced in the sectors that are more open to trade and exposed to foreign competition. However, the empirical evidence is not conclusive. Using a New Keynesian open economy model, I show that the role of trade openness in the transmission of monetary shocks can be reversed completely by the degree of exchange-rate pass-through into import prices. If the pass-through is complete, traded output increases more than nontraded output after a positive monetary shock, if the pass-through is zero, traded output increases less. The lack of conclusive evidence on the role of external demand in the transmission of monetary shocks may also be explained by sectoral heterogeneity in price rigidity: if prices are more rigid in the nontraded sector, then it is not possible to find a positive correlation between the response of output to monetary shocks and the degree of openness, regardless of the degree of exchange rate pass-through.
    Keywords: Monetary transmission; External demand channel; Exchange rate pass-through;
    JEL: E52 F41
    Date: 2016–01–09
  25. By: Andersen, Torben M; Ellermann-Aarslev, Christian
    Abstract: Unemployment insurance schemes typically include eligibility conditions depending on the employment history of the unemployed. The literature on the design of unemployment insurance schemes has largely ignored this aspect, perhaps due to the implied history dependence and heterogeneity across otherwise identical workers. We develop an analytically tractable matching model permitting an analysis of the consequences of such history dependencies. Unemployed determine reservation durations to the jobs they find acceptable, and the stronger employment histories lead to higher reservation durations. Consequently, short-term jobs are only acceptable to unemployed with a weak employment history, while unemployed with a stronger employment history have higher reservation durations. This affects the equilibrium distribution of employment according to job durations; fewer short duration jobs are filled, but this also means that fewer are locked-into such jobs, and therefore more jobs with long durations are filled, although the net effect generally is to lower employment. Employment history contingencies this affect both the level and structure of employment. Equilibrium (un)employment depends not only on reservation durations, and a longer benefit duration combined with a decrease in the benefit level to retain reservation durations has a negative effect on employment.
    Keywords: Employment conditions; Employment history; job search; Unemployment insurance
    JEL: E24 J64 J65
    Date: 2017–07
  26. By: Jacopo Cimadomo (European Central Bank, Germany); Oana Furtuna (University of Amsterdam and Tinbergen Institute, the Netherlands); Massimo M. Giuliodori (University of Amsterdam and Tinbergen Institute, The Netherlands)
    Abstract: This paper investigates the contribution of private and public channels for consumption risk sharing in the EMU over the period 1999-2015. In particular, we explore the role of financial integration versus international financial assistance for private consumption smoothing in this set of countries. In addition, we present a time-varying test which allows estimating how risk sharing has evolved since the start of the EMU, and in particular during the recent crisis. Our results suggest that, whereas in the early years of the EMU only about 40% of output shocks were smoothed, in the aftermath of the euro zone’s sovereign debt crisis about 65% of output shocks were absorbed, therefore reducing consumption growth differentials across countries. This progressive improvement of the shock absorption capacity is due to a higher financial integration, but also to the activation of the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) channelling official loans to distressed euro zone economies. We also show that cross-border holdings of equities and debt seem to be more effective than cross-border bank loans in isolating households from country-specific shocks, therefore contributing to consumption smoothing.
    Keywords: risk sharing; time-variation; financial integration; international financial assistance
    JEL: C23 E62 G11 G15
    Date: 2017–07–18
  27. By: Assenmacher, Katrin; Seitz, Franz; Tenhofen, Jörn
    Abstract: We study the demand for Swiss banknotes over the period from 1956 to 2015 and present stylized facts on different banknote denominations since the inception of the Swiss National Bank (SNB) in 1907. Employing the so-called seasonal method, we focus on the demand for banknotes used as a store of value (“hoarding”), which can be expected to be particularly relevant for Switzerland against the backdrop of its status as a safe-haven country, its currently and historically low level of interest rates, and a banknote denomination with the largest value among advanced countries. Due to the pronounced seasonal pattern of CHF 1000 banknotes, which might not be related to transactions, we cannot rely on seasonal ranges including the December peak. Instead, we employ other peak dates as well as a method to correct for the excess seasonality, using institutional features of the tax system. The latter approach is not sufficient to eliminate the excess seasonality and thus does not lead to plausible estimates for the hoarding share of CHF 1000 banknotes. Employing other peak dates, however, indicates that since the turn of the millennium the share of CHF 1000 banknotes that is hoarded increased steadily from around 30% in the mid-1990s to over 70% in recent years.
    Keywords: currency in circulation,banknotes,hoarding
    JEL: E41 E52 E58
    Date: 2017
  28. By: Bolton, Patrick; Huang, Haizhou
    Abstract: When a nation can finance its investments via foreign-currency denominated debt or domestic-currency claims, what is the optimal capital structure of the nation? Building on the functions of fiat money as both medium of exchange, and store of value like corporate equity, our model connects monetary economics, fiscal theory and international finance under a unified corporate finance perspective. With frictionless capital markets both a Modigliani-Miller theorem for nations and the classical quantity theory of money hold. With capital market frictions, a nation's optimal capital structure trades off inflation dilution costs and expected default costs on foreign-currency debt. Our framing focuses on the process by which new money claims enter the economy and the potential wealth redistribution costs of inflation.
    Date: 2017–07
  29. By: Waki, Yuichiro (University of Queensland); Dennis, Richard (University of Glasgow); Fujiwara, Ippei (Keio University)
    Abstract: This paper considers the optimal degree of monetary-discretion when the central bank conducts policy based on its private information about the state of the economy and is unable to commit. Society seeks to maximize social welfare by imposing restrictions on the central bank's actions over time, and the central bank takes these restrictions and the New Keynesian Phillips curve as constraints. By solving a dynamic mechanism design problem we find that it is optimal to grant “constrained discretion” to the central bank by imposing both upper and lower bounds on permissible inflation, and that these bounds should be set in a historydependent way. The optimal degree of discretion varies over time with the severity of the timeinconsistency problem, and, although no discretion is optimal when the time-inconsistency problem is very severe, it is a transient phenomenon and some discretion is granted eventually.
    JEL: E52 E61
    Date: 2017–07–01
  30. By: Dögüs, Ilhan
    Abstract: It has already been pointed out in the literature on financialisation that private pension funds have played a key role in the inflation of financial markets. This paper argues that an increase in wage dispersion between white-collar and blue-collar workers affects pension funds in a direct and structural manner. Using Saez-Zucman and fred.stlouisfed annual datasets, the proposed argument is statistically analysed by applying Vector Autoregressive modelling for the period 1966-2013 in the USA. The results show that the responses of share of pension funds within US-household wealth to one-unit shock in wage dispersion are positive and significant over the first three years. Furthermore, wage dispersion explains 11% of variations in pension funds' share in household wealth in the short-run and 19% of variations in the long-run. The study concludes that wage dispersion has a direct and structural impact on pension funds and contributes to the literature by clarifying the rise and expansion of pension funds.
    Keywords: financialisation,pension funds,wage dispersion,savings out of salaries,white-collar workers,capital market inflation
    JEL: J31 D14 E44
    Date: 2017
  31. By: Dridi, Jemma; Nguyen, Anh D. M.
    Abstract: The paper investigates inflation convergence in five East African Countries: Burundi, Kenya, Rwanda, Tanzania, and Uganda, as they aspire to form a monetary union by 2024 under the umbrella of the East African Community. Based on various panel unit root tests, we find that inflation rates in these countries have been converging. An explanation for the convergence is also provided from the perspective of a Global Vector Autoregressive (GVAR) model, which attributes this convergence to a similarity in terms of the nature of shocks affecting EAC countries as well as the role of foreign factors as drivers of inflation given that inflation has been low and less volatile in industrial and emerging countries since the early 1990s.
    Keywords: Inflation, Global VAR (GVAR), Panel Unit Root Tests, Spillovers, East African Community.
    JEL: C32 C33 E31 F40
    Date: 2017–07
  32. By: Pengfei Wang (Hong Kong University of Science and Tech); Jianjun Miao (Boston University); Feng Dong (Shanghai Jiao Tong University)
    Abstract: We provide an infinite-horizon model of rational asset bubbles in a Dynamic New Keynesian framework. Entrepreneurs are heterogeneous in investment efficiency and face credit constraints. They can trade land as an asset, which also serves as collateral to borrow from banks with reserve requirements. Land commands a liquidity premium and a land bubble can emerge. Monetary policy can affect the condition for the existence of a bubble, its steady-state size, and its dynamics including the initial size. The `leaning against the wind' interest rate policy will reduce the bubble volatility, but it may come at the cost of raising the inflation volatility. Whether monetary policy should respond to asset bubbles depends on the particular interest rate rule adopted by the central bank and on the exogenous shocks hitting the economy.
    Date: 2017
  33. By: Coibion, Olivier (University of Texas at Austin); Gorodnichenko, Yuriy (University of California, Berkeley); Koustas, Dmitri (University of California, Berkeley)
    Abstract: We document a decline in the frequency of shopping trips in the U.S. since 1980 and consider its implications for the measurement of consumption inequality. A decline in shopping frequency as households stock up on storable goods (i.e. inventory behavior) will lead to a rise in expenditure inequality when the latter is measured at high frequency, even when underlying consumption inequality is unchanged. We find that most of the recently documented rise in expenditure inequality in the U.S. since the 1980s can be accounted for by this phenomenon. Using detailed micro data on spending which we link to data on club/warehouse store openings, we directly attribute much of the reduced frequency of shopping trips to the rise in club/warehouse stores.
    Keywords: consumption inequality, expenditure inequality
    JEL: D31 E21 D63
    Date: 2017–07
  34. By: Miguel Faria-e-Castro (New York University)
    Abstract: What is the impact of an extra dollar of government spending during a financial crisis? How important was U.S. fiscal policy during the Great Recession? I develop a macroeconomic model of fiscal policy with a financial sector that allows me to study the effects of fiscal policy tools such as government purchases and transfers, as well as of financial sector interventions such as bank recapitalizations and credit guarantees. Solving the model with nonlinear methods allows me to show how the linkages between household and bank balance sheets generate new channels through which fiscal policy can stimulate the economy, and study the state dependent effects of fiscal policy. I combine the model with data to assess the impact of the fiscal policy response during the financial crisis and Great Recession. My main findings are that: (i) the fall in consumption would have been 50% worse in the absence of fiscal interventions; and (ii) transfers to households and bank recapitalizations yielded the largest fiscal multipliers.
    Date: 2017
  35. By: Bruce Budd (Dar Al-Hekma University)
    Abstract: The purpose of this paper is to explore derived signals of the historical implied volatility measures between the U.S. equities market and the U.S. bond market using the VIX and MOVE Indices 2010-2015 respectively. This paper further examines the co-movement and dynamics (i.e. changes) within and between these markets. This empirical analysis finds implied volatility of the treasury market MOVE Index can forecast the implied volatility of the equities market (VIX), though not always reliably. The signals between the VIX and MOVE Indexes in the last ten years has changed and the gap between these markets has widened. A relationship not witnessed since the early days before the 2008 Global Financial Crisis. The contributing factor to this widening gap is the greater volatility experienced by the MOVE Index compared to its VIX counterpart heightened by the record-low global interest rates and lack of liquidity in the bond market. The implications of this research are important for strategic forecasting policy decision-makers and analysts alike.
    Keywords: VIX Index, MOVE Index, Implied Volatility.
    JEL: G10 E44
    Date: 2017–07
  36. By: Stephen McKnight (El Colegio de México); Laura Povoledo (University of the West of England, Bristol)
    Abstract: We introduce equilibrium indeterminacy into a two-country incomplete asset model with imperfect competition and analyze whether self-fulfilling, belief-driven fluctuations (i.e., sunspot shocks) can help resolve the major puzzles of international business cycles. In contrast to the one-good models of the existing literature, we show that sunspot shocks alone cannot replicate the data. Next, we consider a combination of sunspot shocks and technology shocks, and find that the indeterminacy model can now account for the counter-cyclical behavior observed for the terms of trade and real net exports, while simultaneously increasing their volatilities relative to output. The empirical success of the model is due to an unconventional transmission mechanism, whereby the terms of trade appreciates, rather than depreciates, in response to a positive technology shock. This unconventional feature, when combined with sunspot shocks, helps to reconcile the model with the data. However, the major failure of the model is its inability to resolve the Backus-Smith puzzle without a strongly negative cross-country correlation for productivity shocks.
    Keywords: Indeterminacy; Sunspots; International Business Cycles; Net Exports; Terms of
    JEL: E32 F41 F44
    Date: 2016–01–10
  37. By: Politronacci, Emmanuelle; Ninlias, Élodie B.; Palazzeschi, Enda E.; Torre, Ghjuvanni
    Abstract: Despite the well-known difficulties to measure national euro circulations within the euro area, several methods have been used to estimate the national demand for euro banknotes in France, such as key-based calculations (ECB capital), approaches using average return time of banknotes or extrapolated data from legacy currencies historical trends, methods relying on the replacement indicators of the first euro banknote series. This paper proposes an update of these approaches and complements them with two additional methods. First, exportations of banknotes data enable to infer the French national circulation from the difference between banknotes issued by the Banque de France and the banknotes it shipped outside the euro area, directly or via the French wholesale bank. Second, a “bottom-up” approach can be built-up, where the cash holdings of the different institutional sectors (MFIs, households, non-financial corporations) are summed up in order to estimate the use of cash for transactional purpose. Bearing in mind that those various approaches do not always separate the hoarding from the transactional purposes nor take into account banknotes migrations flows across countries, the analysis of the similarities and differences between those several methods sheds light on the French national demand for cash by giving hints on both the low and the top ends of the range.
    Keywords: banknotes in circulation,cash usage,payment instruments
    JEL: E41
    Date: 2017
  38. By: Lorenzo Bretscher (London School of Economics); Alex Hsu (Georgia Institute of Technology); Andrea Tamoni (London School of Economics)
    Abstract: We estimate a New-Keynesian model with heterogeneous agents to study the impact of level and volatility shocks to fiscal policy on the term structure of interest rates and bond risk premia. We derive three key insights from the theoretical model. First, government spending level shocks generate positive covariance between marginal utility to consume and inflation, making nominal bonds poor hedges against consumption risk and result in positive risk premium. Second, variability in the nominal term premium is caused by variation in the real term premium while inflation risk premium is remarkably stable over time. Fluctuation of the real term premium is entirely driven by government spending volatility shocks. Third, at the zero lower bound (ZLB), impact of level and volatility shocks to government spending are amplified. This is especially pronounced for volatility shocks producing substantial bond risk premium when the ZLB is binding.
    Date: 2017
  39. By: Sala, Hector (Universitat Autònoma de Barcelona); Trivín, Pedro (Universitat Autònoma de Barcelona)
    Abstract: The elasticity of substitution between capital and labor (σ) is usually considered a "deep parameter". This paper shows, in contrast, that σ is affected by both globalization and technology, and that different intensities in these drivers have different consequences for the OECD and the non-OECD economies. In the OECD, we find that the elasticity of substitution between capital and labor is below unity; that it increases along with the degree of globalization; but it decreases with the level of technology. Although results for the non-OECD area are more heterogeneous, we find that technology enhances the substitutability between capital and labor. We also find evidence of a non-significant impact of the capital-output ratio on the labor share irrespective of the degree of globalization (which would be consistent with an average aggregate Cobb-Douglas technology). Given the relevance of σ for economic growth and the functional distribution of income, the intertwined linkage among globalization, technology and the elasticity of substitution should be taken into account in any policy makers' objective function.
    Keywords: labor share, capital-output ratio, elasticity of substitution, globalization, technology
    JEL: E25 F62 E22 O33
    Date: 2017–07
  40. By: Christian Groth; Jakub Growiec
    Abstract: We study the links between the Mincerian wage equation (the cross-sectional relationship between wages and years of schooling) and the human capital production function (the causal effect of schooling on labor productivity). Based on a stylized Mincerian general equilibrium model with imperfect substitutability across skill types and ex ante identical workers, we demonstrate that the mechanism of compensating wage differentials renders the Mincerian wage equation uninformative for the human capital production function. Proper identification of the human capital production function should take into account the equilibrium allocation of individuals across skill types.
    Keywords: Mincerian wage equation, Human capital production function, Skill distribution, Compensating wage differentials, Golden rule of skill formation
    JEL: E24 I26 J24
    Date: 2017–07–17
  41. 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
  42. By: Joost Roettger (University of Cologne)
    Abstract: This paper studies the consequences of delegating monetary policy to an inflation conservative central banker as in Rogoff (1985) for an emerging economy that faces three frictions which might undermine the success of such a policy reform: (i) incomplete financial markets, (ii) risk of default and (iii) political distortions. To do so, a quantitative sovereign default model is developed in which monetary and fiscal policies are set by two different authorities that both cannot commit to future policies. Inflation conservatism tends to result in lower and more stable inflation as well as a higher average debt burden, more frequent default events and more volatile fiscal policy. Whether the economy benefits from the appointment of a conservative central banker depends on the degree of inflation conservatism, the amount of political distortions and the volatility of fiscal shocks.
    Date: 2017
  43. By: Juan Pablo Mateo (Department of Economics, New School for Social Research and University of Valladolid)
    Abstract: This paper presents a comparative analysis of the process of capital accumulation in three economies, US, Spain and Brazil, between 1990 and 2014. The objective is to analyze the peculiarities existing in these cases, corresponding to the main contemporary economy (US), a developed one, but with a peripheral integration into a more developed area, such as the Euroarea (Spain), and a semiperipheral economy (Brazil); and in a period in which, specially for both Spain and Brazil, a neoliberal turn is carried out, and achieving certain monetary stalibity that ultimately affect the macroeconomic performance.
    Keywords: Capital accumulation, productivity, profit rate, underdevelopment
    JEL: E11 E22 F00 O47 O5
    Date: 2017–07
  44. By: Carlos Zarazaga (Federal Reserve Bank of Dallas); Ruiyang Hu (Southern Methodist University)
    Abstract: Fiscal imbalances predating the Great Recession but aggravated by it prompted the U.S. Congress to enact in 2011 legislation that, in the absence of other measures, would trigger two years later a so-called "budget sequestration" procedure that implied reducing government discretionary spending to unprecedented low levels over the following decade. For that reason, economic agents may not have expected this “fiscal stabilization measure of last resort†to be sustainable when it was put into effect in 2013 as scheduled. This is exactly the issue this paper set out to explore, on the grounds that sizing up the expectations that economic agents had about the budget sequestration can provide powerful insights on how fiscal stabilization is likely to proceed in the U.S. going forward. The paper makes inferences about the credibility enjoyed by the budget sequestration with an adapted version of the Business Cycle Accounting approach, originally developed for other purposes. The main finding is that the evidence favors a scenario in which spending cuts are half the size of those actually implied by the sequester. The paper takes this result as an indication that the U.S. is unlikely to address its unresolved fiscal imbalances with just austerity in discretionary spending, an interpretation consistent with existing literature that traces the seemingly anomalous behavior of economic variables during the Great Recession and its aftermath to alternative fiscal stabilization mechanisms.
    Date: 2017
  45. By: Meyer Aaron; Francisco Rivadeneyra; Samantha Sohal
    Abstract: We investigate the risks and opportunities to the mandates of central banks arising from fintech developments. Fintech may affect the different areas of responsibility of central banks—mainly monetary policy and financial stability—by changing money demand and by changing the industrial organization of the financial system. We present a competitive strategy framework to help evaluate the likelihood of these changes.
    Keywords: Central bank research, Digital Currencies, Financial Institutions, Payment clearing and settlement systems
    JEL: G1 G2 L1 E42
    Date: 2017
  46. By: George Economides (Athens University of Economics and Business); Anastasios Rizos
    Abstract: This paper studies the aggregate and distributional implications of introducing consumption taxes into an otherwise deterministic version of the standard neoclassical growth model with income taxes only and heterogeneity across agents. In particular, the economic agents differ among each other with respect to whether they are allowed to save (in physical capital) or not. Policy is optimally chosen by a benevolent Ramsey government. The main theoretical finding comes to confirm the widespread belief that the introduction of consumption taxes into a model with income taxes only, creates substantial efficiency gains for the economy as whole, but at the cost of higher income inequality. In other words, consumption taxes reduce the progressivity of the tax system, and maybe, from a normative point of view, this result justifies the design of a set of subsidies policies which will aim to outweigh the regressive effects of the otherwise more efficient consumption taxes.
    Keywords: Ramsey taxation, heterogeneity, efficiency, inequality
    JEL: H21 H23 E62
    Date: 2017–06–30
  47. By: Célérier, Claire; Kick, Thomas; Ongena, Steven
    Abstract: Does the relative cost of equity determine the composition of bank balance sheets and credit supply? To answer this question, we exploit the staggered introduction of tax reforms in Europe from 2000 to 2012 as exogenous sources of changes in the cost of equity. We investigate the effect on credit supply using loan-level data in a country where firms are not affected by these reforms, and where foreign banks affected by the reforms are lending actively: Germany. We find that the relative decrease in the cost of equity leads banks to rely more on equity financing and to increase lending to firms while decreasing security and interbank asset holdings. Overall, we show that taxation can be an effective tool to contain bank leverage while maintaining credit supply.
    Keywords: bank capital; credit; regulation
    JEL: E51 E58 G21 G28
    Date: 2017–07
  48. By: Dasgupta, Manjira
    Abstract: On November 08, 2016, India took a decisive step towards going “cashless” by suddenly announcing withdrawal of its existing currency notes of two highest denominations, namely, the Rs. 500/= and the Rs. 1000/=. The move, announced with a suddenness that took the entire nation by surprise, had at its root the purpose of countering the threefold menaces of rampant corruption, counterfeit money and cross-border and internal terror funding. It has generated widespread controversy, the main criticism being that while the policy intent was sound, the execution plan was rather unsound. With one of the highest cash-GDP ratio in the world (close to 11%), India was revealed by RBI (Reserve Bank of India) data as having a staggering share of nearly 86% held in Rs.500/= and 1,000/= notes in the currency stock in circulation (end of FY 2014-15). The cost of “retiring” this volume of currency was therefore, going to be enormous which, as economists like former World Bank Chief Kaushik Basu (Basu 2016) emphasize, could far exceed the gains. In view of the intriguing developments overtaking the Indian economy since the date of submission of the initial abstract, problems that subsequently emerged as considerably more pressing and pertinent have been treated in greater detail in this study. Consequently, the approach and methodology has been substantially modified, although of course retaining the original motivation. With its laudable objectives of striking at the cash-corruption link, India saw, within the first four days of the announcement of demonetization, a staggering surge in bank deposits exceeding USD 52 billion, leading to high hopes of trapping unaccounted or illegal money through this route, a hope that was unfortunately to be belied. Given the enormous problem of Non-Performing Assets plaguing Indian Banks, we have also paid special attention to this potential vast source of unaccounted money in some detail. Next, an overview of India’s vast informal sector has been given, and the guidelines by Schneider and Williams (2013) and Schneider and Buehn (2008) have been used in an attempt to estimate the shadow economy in India using cointegration in a MIMIC framework. Finally, not only did India’s decision to demonetize have enormous economic or financial implications, but it also has had huge social and political ramifications that must be recognized.
    Keywords: India,Demonetization,Cashlessness,Informal Sector,Shadow Economy
    JEL: E26 E42 E58 E65 G00 O17
    Date: 2017
  49. By: Joseph Vavra (University of Chicago); Erik Hurst (University of Chicago); Andreas Fuster (Federal Reserve Bank of New York); Martin Beraja (MIT and Princeton University)
    Abstract: We argue that the time-varying regional distribution of housing equity shapes the aggregate consequences of monetary policy through its influence on mortgage refinancing. Using detailed loan-level data, we begin by showing that: (i) the refinancing response to interest rate cuts is strongly affected by regional differences in housing equity, and (ii) both regional differences in refinancing and overall refinancing vary over time with changes in the regional distribution of house price growth and unemployment. Then, we build a heterogeneous household model of refinancing in order to derive aggregate implications of monetary policy from our regional evidence. We find that the 2008 equity distribution made spending in depressed regions less responsive to interest rate cuts, thus dampening aggregate stimulus and increasing regional consumption inequality, whereas the opposite occurred in some earlier recessions. Taken together, our results strongly suggest that monetary policy makers should track the regional distribution of equity over time.
    Date: 2017
  50. By: Alok Johri; Terry Yip
    Abstract: The collapse in trade relative to GDP during 2008-09 was unusually large historically and puzzling relative to the predictions of canonical two-country models.In a calibrated dynamic general equilibrium two-country model where firms must build supply chain relationship in order to sell their product, we show that a tightening of credit can cause a sizable fall in the trade-GDP ratio (44 percent of the observed value) while productivity shocks cannot. The key mechanism underlying the sharper fall in trade relative to GDP involves an endogenous reallocation of scarce resources from international to domestic supply-chains, that are acquired and maintained at lower cost.
    JEL: E32 F41 F44
    Date: 2017–06–07
  51. By: Lopez, Claude; Saeidinezhad, Elham
    Abstract: Key Observations 1. Central counterparties (CCPs) provide derivative markets with benefits of multilateral netting and better collateralization, assurances of trade finality and settlement, and help bolster the market integrity. 2. Strengthening CCPs is a necessary but hardly sufficient condition to ensure financial system stability. Macroprudential policy should supplement the work of CCPs with attentive monitoring and rapid resolution procedures: Market liquidity conditions must be monitored vigilantly to ensure effective price discovery and market continuity. Regulators and supervisors must stand ready to support illiquid financial intermediaries if CCPs and markets threaten to seize. A fast and certain recovery and resolution procedure of a failed CCP is essential. It would facilitate the CCP’s recapitalization and its ability to resume its function within the financial system.
    Keywords: Central counterparties, macroprudential, systemic risk, fiancial stability
    JEL: E5 G1
    Date: 2017–07
  52. By: Brauning, Falk (Federal Reserve Bank of Boston); Puria, Kovid (Federal Reserve Bank of Boston)
    Abstract: We analyze the factors underlying the recent deviations from covered interest parity. We show that these deviations can be explained by tighter post-crisis bank capital regulations that made the provision of foreign exchange swaps more costly. Moreover, the recent monetary policy and related interest rate divergence between the United States and other major foreign countries has led to a surge in demand for swapping low interest rate currencies into the U.S. dollar. Given the higher bank balance sheet costs resulting from these regulatory changes, the increased demand for U.S. dollars in the swap market could not be supplied at a constant price, thereby amplifying violations of covered interest parity. Furthermore, we show that dollar swap line agreements existing between the Federal Reserve and foreign central banks mitigate pressure in the swap market. However, the current conditions that govern the provision of dollar funding through foreign central banks are not favorable enough to reduce deviations from covered interest parity to zero.
    Keywords: covered interest parity; banking; monetary policy
    JEL: E52 F31 G15 G18 G2
    Date: 2017–06–01
  53. By: Tangian, Andranik S.
    Abstract: The current trends in the capital/labor split and the impacts thereof on the growth of inequality are one of the main concerns of national governments, European Commission and international organizations like UN, ILO, IMF, OECD and WB. These trends are usually studied at the macro level of functional distribution of income, that is, among capital and labor, and less with regard to productivity, remuneration policies or some other particular factors. In this paper, we contribute to the studies of the second type, explaining the decreasing labor income share in terms of unpaid working time and underpaid hourly earnings. For this purpose, we refer to the decreasing labor-labor exchange rate, i.e. devaluation of one's labor in exchange for other's labor embodied in the commodities affordable for one's earnings. We show that the productivity growth allows employers to compensate workers with always a lower labor equivalent, i.e. increasingly underpay works, maintaining however an impression of fair pay due to an increasing purchasing power of earnings. This conclusion is based on the OECD 1990-2014 data for G7 countries (Canada, France, Germany, Italy, Japan, United Kingdom and United States) and Denmark (known for the world least inequality). Then statistically significant implications for the growth of inequality are derived and some policy suggestions are formulated like taxing the enterprises with the inner Gini that surpasses the national level.
    Keywords: inequality,productivity,hourly earnings,consumer prices,housing prices,labor-labor exchange rate
    JEL: D31 D63 E31 E64 J24 J3 O47
    Date: 2017
  54. By: Yuki Teranishi (Keio University)
    Abstract: This paper develops a price model with search foundation based on product cycles and prices. Observations conclude that firms match with a new product, then set a new price with negotiation and fix the price until the product exits from a market. This evident behavior brings a new model of price stickiness as a Search-based Phillips curve. The model includes a New Keynesian Phillips curve with the Calvo mechanism as a special case and describes new features. First, new parameters related to product entry and product exit play important roles for price dynamics. Second, such parameters for price stickiness directly appear on an expected price and lagged price. Third, an adjustment cost for price change brings a lag of adjusted inflation rate into a model without assumption of indexation to the past inflation rate.
    Keywords: Phillips curve; search and matching
    Date: 2017–07
  55. By: Enrique Mendoza (University of Pennsylvania)
    Abstract: Infrequent but turbulent episodes of outright sovereign default on domestic creditors are considered a “forgotten history†in Macroeconomics. We propose a heterogeneous-agents model in which optimal debt and default on domestic and foreign creditors are driven by distributional incentives and endogenous default costs due to the value of debt for self-insurance, liquidity and risk-sharing. The government's aim to redistribute resources across agents and through time in response to uninsurable shocks produces a rich dynamic feedback mechanism linking debt issuance, the distribution of government bond holdings, the default decision, and risk premia. Calibrated to Spanish data, the model is consistent with key cyclical co-movements and features of debt-crisis dynamics. Debt exhibits protracted fluctuations. Defaults have a low frequency of 0.93 percent, are preceded by surging debt and spreads, and occur with relatively low external debt. Default risk limits the sustainable debt and yet spreads are zero most of the time.
    Date: 2017
  56. By: Duijm, Patty; Schoenmaker, Dirk
    Abstract: Theory suggests that cross-border banking is beneficial as long as there is a non-perfect correlation across country-specific risks. Using a unique hand-collected dataset with cross-border loans for the 61 largest European banks, we find that cross-border banking in general decreases bank risk, and that the beneficial impact from cross-border banking increases when banks diversify more into countries with dissimilar economic and financial conditions. However, we find that banks do not fully utilize these diversification opportunities as banks mainly invest in countries that are economically more similar to their home country.
    Keywords: Bank Regulation; Financial Stability; Geographical Diversification; International Banking; Risk
    JEL: E44 G21 G28
    Date: 2017–07
  57. By: Peter Ganong; Daniel W. Shoag
    Abstract: The past thirty years have seen a dramatic decline in the rate of income convergence across states and in population flows to high-income places. These changes coincide with a disproportionate increase in housing prices in high-income places, a divergence in the skill-specific returns to moving to high-income places, and a redirection of low-skill migration away from high-income places. We develop a model in which rising housing prices in high-income areas deter low-skill migration and slow income convergence. Using a new panel measure of housing supply regulations, we demonstrate the importance of this channel in the data.
    JEL: E24 J23 J24 R14 R23 R52
    Date: 2017–07
  58. By: Itzik Fadlon; David Laibson
    Abstract: Resource allocations are jointly determined by the actions of social planners and households. In this paper we highlight the distinction between planner optimization and household optimization. We show that planner optimization is a substitute for household optimization and that this is true even when there are information asymmetries, so that households know more about their preferences than planners. Our analysis illustrates the scope for mis-attribution in economic analysis. Are seemingly optimal allocations caused by optimizing households, or are such allocations caused by planners who paternalistically influence myopic and passive households? We show that widely studied allocative optimality conditions that are implied by household optimization also arise in an economy with a rational planner who uses tools such as default savings and Social Security to influence the choices of non-optimizing households. Many classical optimization conditions do not resolve the question of household optimization. Pseudo-rationality arises when rational planners elicit approximately optimal behavior from non-optimizing households.
    JEL: D14 E21 H0 H55
    Date: 2017–07
  59. By: Urooj Khan (Columbia University); Suresh Nallareddy (Duke University); Ethan Rouen (Harvard Business School, Accounting and Management Unit)
    Abstract: We investigate the relation between the growth in corporate profits and the overall U.S. economy, focusing on the impact of the U.S. corporate tax regime on this relation. We document that the growth of corporate profits, on average, has outpaced the growth of the economy and this disconnect increases as the difference between the corporate income tax rate of the U.S. and the other OECD countries increases. The underlying mechanism is fewer corporate profits being channeled into subsequent domestic investments when the U.S. tax rate is relatively higher, leading to lower economic growth. Our findings have implications for policy setters.
    Keywords: Taxes, economic growth, GDP, corporate profits, American Jobs Creation Act of 2004
    JEL: E20 H25 K34 O10 M40 M41
    Date: 2017–07
  60. By: Joseph Steinberg (University of Toronto)
    Abstract: The United Kingdom has voted to leave the European Union but the trade policies that will replace E.U. membership are uncertain, and speculation abounds that this uncertainty will harm the U.K. economy until it is resolved. To assess the impact of uncertainty about post-Brexit trade policies, I study a dynamic general equilibrium model with endogenous export participation and uncertainty about whether future U.K.-E.U. trade costs will be high or low. I find that the total welfare cost of Brexit for U.K. households is between £7,000 and £18,000 per person, while uncertainty about Brexit costs less than £45 per person.
    Date: 2017
  61. By: Lovcha, Yuliya; Pérez Laborda, Alejandro
    Abstract: This paper shows that the frequency domain estimation of VAR models over a frequency band can be a good alternative to pre-filtering the data when a low-frequency cycle contaminates some of the variables. As stressed in the econometric literature, pre-filtering destroys the low-frequency range of the spectrum, leading to substantial bias in the responses of the variables to structural shocks. Our analysis shows that if the estimation is carried out in the frequency domain, but employing a sensible band to exclude (enough) contaminated frequencies from the likelihood, the resulting VAR estimates and the impulse responses to structural shocks do not present significant bias. This result is robust to several specifications of the external cycle and data lengths. An empirical application studying the effect of technology shocks on hours worked is provided to illustrate the results. Keywords: Impulse-response, filtering, identification, technology shocks. JEL Classification: C32, C51, E32, E37
    Keywords: Previsió econòmica, Models economètrics, Cicles econòmics, 33 - Economia,
    Date: 2016
  62. By: Ghassan, Hassan B.; Al-Jefri, Essam H.
    Abstract: The paper aims to analyze the current account of the Saudi economy using an intertemporal modeling and tested by the structural VAR methodology. By deriving the long-run current account to GDP ratio, we analyze the impacts of global and local shocks on the current account. Considering that the Saudi economy is linked to international demand for oil products and domestic demand for consumer goods and technological products, the variances in the current account and output are inevitably influenced by international shocks. The findings indicate that the long-run impact of local shocks on the current account variance exceeds by 3.92 percent its impact on the output variance, reflecting the explanation power of local dynamic shock on the current account growth. Most of the previous papers suggest that the local impact dominates the international one (Souki and Enders 2008), and few papers advocate that the global impact exceeds the domestic effect Hoffmann (2013). The shocks analysis on the Saudi current account exhibits the relative dominance of the global markets shocks, but local and mainly supply shocks have significant impacts on the current account, referring to a dual local and global influence.
    Keywords: Current account, Intertemporal modeling, Shocks, SVAR model, KSA.
    JEL: C5 F4 G1
    Date: 2016–09
  63. By: Jobst, Clemens; Stix, Helmut
    Abstract: Contrary to predictions that demand for cash will decline with the increased availability and use of non-cash payment means, currency demand has increased in the Euro area and the US over the past 15 years. Against this background, this short article summarizes recent findings from Jobst and Stix (2017), who provide a discussion of trends in currency demand, and presents additional descriptive evidence. In a first step, currency demand over a longer period is analyzed for the USA, Germany and the Euro area. This is helpful for understanding and assessing recent trends. In a second step, evidence from 70 economies is analyzed for the period from 2001 to 2014. This broader perspective informs us about the development for currencies that do not circulate internationally. Our descriptive account provides several insights: (i) Recent increases for the euro and the US dollar are strong even if seen over a 100 year horizon. (ii) Over the period from 2001 to 2014 currency demand has increased in many economies. (iii) In economies where currency demand increased, the increase typically happened after the start of the economic and financial crisis of 2007/08. What are the drivers of recent increases in currency demand? Jobst and Stix (2017) estimate panel money demand models, accounting for changes in GDP, interest rates and shadow economic activities. In economies with high GDP, a substantial share of the increase cannot be explained by changes in interest rates or in the size of the shadow economy. We conjecture that the unexplained component is related to increased hoarding.
    Date: 2017
  64. By: Lindblad, Annika
    Abstract: I use the GARCH-MIDAS framework of Engle et al. (2013) to examine the relationship between the macro economy and stock market volatility, focusing on the role played by survey-based sentiment indicators compared to macroeconomic variables. I find that once the information in sentiment indicators is controlled for, backward-looking macroeconomic data does not include useful information for predicting stock return volatility. On the other hand, forward-looking macroeconomic variables remain useful for forecasting stock market volatility after sentiment data is taken into account. The term spread is the best predictor for stock return volatility over long horizons.
    Keywords: stock market volatility, volatility components, MIDAS, survey data, macro finance link
    JEL: C53 G12 G17
    Date: 2017–07–19
  65. By: Egor Krivosheya (Moscow school of management SKOLKOVO); Andrew Korolev (Moscow school of management SKOLKOVO)
    Abstract: This article evaluates merchants' benefits resulting from the participation in the retail payments market. Using surveys to obtain a representative sample of 800 traditional (offline) Russian merchants, the article finds significant, robust evidence in favor of positive merchant' benefits. This study further separates the benefits into direct and opportunity finding that the non-welfare improving regulatory initiatives might result from the failure to account opportunity benefits of merchants. This article also examines the factors affecting the level of merchants' benefits. Results show that factors affecting the value of benefits and the probability to accept payment cards differ. Findings imply that unbalanced intervention may be detrimental to the agents' welfare and propose a mechanism for ex-ante evaluation of the effect of shocks and interventions.
    Keywords: Retail payments; payment cards; merchant?s acceptance; benefits; financial services.
    JEL: G21 E42 D53
    Date: 2017–07
  66. By: Goren, Amir
    Abstract: We address a contention regarding capital deepening when the labor share of income declines and the elasticity of substitution is above unity between Karabarbounis and Neiman (2013) and Elsby et. al (2013). We demonstrate the incentive for technical change, which increases inequality and how investments in new technology create temporal misalignment between a decrease in the labor share of income and capital deepening. We show how the decline in the saving rate that occurred during the 80's and 90's may resolve the contention regarding capital deepening. We find that elasticity of substitution below unity is less consistent with the decline in the labor share of income. A second contention is whether the elasticity of substitution is above or below unity. We perform a time-varying state-space estimation of the evolution of elasticity using the unadjusted marginal product of labor and the Kalman Filter. We find that the elasticity between capital and labor has been fluctuating slightly above unity since 1980, which is consistent with our theoretical findings. We note that an elasticity of substitution above unity has important implications for balanced growth under capital augmentation.
    Keywords: Inequality, Technical Change, Elasticity of Substitution, Labor Share
    JEL: E1 E2
    Date: 2017–07–22
  67. By: Daria ONORI; Francesco MAGRIS; Antoine LE RICHE
    Date: 2017
  68. By: Westerhout, Ed (Tilburg University, Center For Economic Research); Ciocyte, Ona
    Abstract: Although the market for inflation-linked bonds has expanded enormously, nominal bonds are still the main instrument to finance public debts. This paper seeks to explain why. It focuses on the Eurozone countries for which the standard argument that inflation-linked bonds may help to reduce inflation expectations, is less relevant. The paper demonstrates that inflation-linked bonds suffer from a lack of liquidity. Further, governments may find the use of inflation-linked bonds less attractive as these bonds amplify the volatility of the public deficit ratio. Two pieces of empirical evidence support our argument.
    Keywords: inflation-linked bonds; public debt; inflation risk; liquidity
    JEL: G12 H63
    Date: 2017
  69. By: Sheena McConnell
    Abstract: One of the few well-established facts about strikes is that they vary systematically with the business cycle.
    Keywords: Strikes, business cycle, labor, employment
    JEL: J
  70. By: Fujiki, Hiroshi; Tanaka, Migiwa
    Abstract: In this paper, we examine the determinants of the choice of payment instrument for low-value day-to-day transactions. Using Japanese household data from 2007 to 2014, we find that three payment instruments, namely, cash, electronic money, and credit cards, comprise the major payment choices for transactions with values less than 1,000 yen (about 8.7 euros). We also find that high-income, financially sophisticated households in urban areas tend to use both electronic money and cash. Further, family households choosing electronic money and cash do not have higher cash holdings compared with family households exclusively choosing cash, holding all other variables constant. We obtain weak evidence that single-person households choosing electronic money and cash have higher cash holdings compared with single-person households exclusively choosing cash, holding all other variables constant.
    Keywords: cash demand,electronic money
    JEL: E41
    Date: 2017
  71. By: Srecko Zimic (European Central Bank); Romanos Priftis (European Commission)
    Abstract: We find that debt-financed government spending multipliers vary considerably depending on the location of the debt holder. In a sample of 59 countries we find that government spending multipliers are larger when government purchases are financed by issuing debt to foreign investors (non-residents), compared to the case when government purchases are financed by issuing debt to home investors (residents). In a theoretical model we show that the location of the government debt holder produces these differential responses through the extent that private investment is crowded out in each case. Increasing international capital mobility of the resident private sector decreases the difference between the two types of financing, a prediction, which is also confirmed by the data. The share of rule-of-thumb workers, as well as the strength of the public good in the utility function play a key role in generating model-based fiscal multipliers, which are quantitatively comparable with those of the data.
    Date: 2017
  72. By: Mary-Alice Doyle (Reserve Bank of Australia); Chay Fisher (Reserve Bank of Australia); Ed Tellez (Reserve Bank of Australia); Anirudh Yadav (Reserve Bank of Australia)
    Abstract: The Reserve Bank's triennial Consumer Payments Survey (CPS) provides a detailed snapshot of how Australian consumers make payments. The 2016 CPS recorded information on around 17 000 day-to-day payments made by over 1 500 participants during a week. The data show that Australian consumers continued to switch from paper-based ways of making payments such as cash and cheques, towards digital payment methods (particularly debit and credit cards). Cards were the most frequently used means of payment in the 2016 survey, overtaking cash for the first time. Contactless 'tap and go' cards are an increasingly popular way of making payments, displacing cash for many lower-value transactions. Despite these trends, cash still accounts for a material share of consumer payments and is intensively used by some segments of the population. Payments using a mobile phone at a card terminal are a relatively new feature of the payments system and this technology was not widely used at the time of the survey. However, consumers are increasingly using their mobile phones to make online and person-to-person payments. Similarly, consumers are using automatic payments, such as direct debits, more frequently.
    Keywords: consumer payment choice; consumer survey; method of payment; payment systems
    JEL: D12 D14 E42
    Date: 2017–07
  73. By: Jasmina Arifovic; John Duffy; Janet Hua Jiang
    Abstract: We model the introduction of a new payment method, e.g., e-money, that competes with an existing payment method, e.g., cash. The new payment method involves relatively lower per-transaction costs for both buyers and sellers, but sellers must pay a fixed fee to accept the new payment method. As a result of the network effects, our model admits two symmetric pure strategy Nash equilibria. In one equilibrium, the new payment method is not adopted and all transactions continue to be carried out using the existing payment method. In the other equilibrium, the new payment method is adopted and completely replaces the existing payment method. The equilibrium involving only the new payment method is socially optimal as it minimizes total transaction costs. Using this model, we study the question of equilibrium selection by conducting a laboratory experiment. We find that, depending on the fixed fee charged for the adoption of the new payment method and on the choices made by participants on both sides of the market, either equilibrium can be selected. More precisely, a lower fixed fee for sellers favors very quick adoption of the new payment method by all participants, while for a sufficiently high fee, sellers gradually learn to refuse to accept the new payment method and transactions are largely conducted using the existing payment method. We also find that an evolutionary learning model captures the dynamics of the experimental data well.
    Keywords: Central bank research, Digital Currencies
    JEL: E41 C35 C83 C92
    Date: 2017
  74. By: Vincenzo Atella (CEIS & DEF, University of Rome "Tor Vergata"); Lorenzo Carbonari (CEIS & DEF, University of Rome "Tor Vergata"); Paola Samà (DEF, University of Rome "Tor Vergata")
    Abstract: In this paper, we empirically assess the evolution of the aggregate hours worked, with a particular emphasis on their age structure, in a sample of OECD countries, along the period 1970-2007. We show that the age composition of the workforce has a large and statistically significant ffect on hours worked volatility. To exploit the multilevel structure of our data, we use a Mixed Linear Model to investigate the consequences of (i) demographic change, (ii) sector-specific and (iii) country-specific factors on hours worked by \young"(aged 15-29) and \prime-aged"(29+) individuals. We show that changes in workforce demographics, captured by the ratio between population older than 29 and population younger than 29, are strongly and significantly correlated with the amount of hours worked by \young"individuals. We also document the impact of sectoral capital intensity and profitability on the dynamics of (aggregate) hours worked. Finally, we show that productive public expenditure, here proxied by the public investment in ICT, is beneficial for the hours worked both by young and prime-aged individuals.
    Keywords: Aggregate hours of work, Labor market institutions
    JEL: E2 J2 J6
    Date: 2017–07–21
  75. By: Seitz, Franz; Krueger, Malte
    Abstract: This study investigates the benefits of cash in a general context. First, we explicitly address the arguments of cash critics, who are calling for cash to be abolished altogether. Second, we show that cash plays a crucial role in the current two-tier banking system. Third, we are discussing a number of selected benefits of cash, inter alia its use in financial crisis and the provision of privacy. We conclude that the abolition of cash would have major drawbacks and could entail undesirable consequences.
    Keywords: cash,payments,cash abolition,monetary policy
    JEL: D12 D61 E41 G21 O33
    Date: 2017
  76. By: Judson, Ruth
    Abstract: It would seem that physical currency should be fading out as the world of payments is increasingly electronic, with new technologies emerging at a rapid pace, and as governments look to restrictions on large-denomination notes as a way to reduce crime and tax evasion. Nonetheless, demand for U.S. dollar banknotes continues to grow, and consistently increases at times of crisis both within and outside the United States because it remains a desirable store of value and medium of exchange in times and places where local currency or bank deposits are inferior. After allowing for the effect of crises, demand for U.S. banknotes appears to be driven by the same factors as demand for other types of money, with no discernible downward trend. In this work, I review developments in demand for U.S. currency since the collapse of Lehman Brothers in late 2008 with a focus on some new questions. First, what are the factors driving demand for lower denominations, especially $20s, which are the most commonly used in domestic transactions? To what extent can the recent strength in demand be attributed to the long spell of very low interest rates? Finally, for the larger denominations, I revisit the question of international demand: I present the raw data available for measuring international banknote flows and presents updates on indirect methods of estimating the stock of currency held abroad. These methods continue to indicate that a large share of U.S. currency is held abroad, especially in the $100 denomination. As shown in an earlier paper, once a country or region begins using dollars, subsequent crises result in additional inflows: the dominant sources of international demand over the past two decades are the countries and regions that were known to be heavy dollar users in the early to mid-1990s. While international demand for U.S. currency eased during the early 2000s as financial conditions improved, the abrupt return to strong international demand that began nearly a decade ago with the collapse of Lehman Brothers in 2008 has shown only limited signs of slowing. In contrast, the growth rate of demand for smaller denominations is slowing, perhaps indicating the first signs of declining domestic cash demand.
    Keywords: currency,banknotes,dollarization,crisis
    JEL: C82 E4 E49
    Date: 2017

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