nep-mac New Economics Papers
on Macroeconomics
Issue of 2017‒08‒06
sixty papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. To Fed Watch or Not to Fed Watch: Equilibrium Analysis of Bank System Dynamics By William A. Brock; Joseph H. Haslag
  2. What do the shadow rates tell us about future inflation? By Kuusela, Annika; Hännikäinen, Jari
  3. Fiscal Policy and Lending Rate Nexus in Ghana By Asamoah, Lawrence Adu
  4. Households' inflation expectations in India: Role of economic policy uncertainty and global financial uncertainty spill-over By Taniya Ghosh; Sohini Sahu; Siddhartha Chattopadhyay
  5. Why Did the BOJ Not Achieve the 2 Percent Inflation Target with a Time Horizon of About Two Years? -- Examination by Time Series Analysis -- By Takuji Kawamoto; Moe Nakahama
  6. Une perspective macroprudentielle pour la stabilité financière By Pinshi Paula, Christian
  7. Forecasting Inflation in Latin America with Core Measures By Pincheira, Pablo; Selaive, Jorge; Nolazco, Jose Luis
  8. Implications for banking stability and welfare under capital shocks and countercyclical requirements By BEKIROS, Stelios; NILAVONGSE, Rachatar; UDDIN, Gazi Salah
  9. Effects of euro area monetary policy on institutional sectors: the case of Portugal By António Afonso,; Jorge Silva
  10. Boom, Slump, Sudden Stops, Recovery, and Policy Options: Portugal and the Euro By Olivier J Blanchard; Pedro Portugal
  11. Political Distribution Risk and Aggregate Fluctuations By Drautzburg, Thorsten; Fernández-Villaverde, Jesús; Guerron-Quintana, Pablo A.
  12. A DSGE model-based analysis of the Indian slowdown By Ashima Goyal; Abhishek Kumar
  13. The evolution of inflation expectations in Japan By Hattori, Masazumi; Yetman, James
  14. Active labour-market policies and output growth - is there a causal relationship? By Eleftherios Goulas; Athina Zervoyianni
  15. Corporate Income Tax, Legal Form of Organization, and Employment By Chen, Daphne; Qi, Shi; Schlagenhauf, Don E.
  16. Revisiting the Exchange Rate Pass-through in Emerging Markets By beldi, lamia; djelassi, mouldi; kadria, mohamed
  17. The Effect of Economic Uncertainty on the Housing Market Cycle By Goodness C. Aye; Matthew W. Clance; Rangan Gupta
  18. Government-sponsored labour-market training and output growth - cyclical, structural and globalization influences By Eleftherios Goulas; Athina Zervoyianni
  19. Is It All About the Fundamentals? A Structural Interpretation of Global Crisis By Turhan, Ibrahim M.
  20. Identifying asymmetric effects of labor market reforms By Gehrke, Britta; Weber, Enzo
  21. Forward Guidance, Monetary Policy Uncertainty, and the Term Premium By Bundick, Brent; Smith, Andrew Lee; Herriford, Trenton
  22. Money's causal role in exchange rate: Do Divisia monetary aggregates explain more? By Taniya Ghosh; Soumya Bhadury
  23. Step away from the zero lower bound: small open economies in a world of secular stagnation By Corsetti, Giancarlo; Mavroeidi, Eleonora; Thwaites, Gregory; Wolf, Martin
  24. Behavioral Biases in Firms' Growth Expectations By Maiko Koga; Haruko Kato
  25. The Transactions Demand for Paper and Digital Currencies By Koichiro Kamada
  26. Expenditure Cascades, Low Interest Rates or Property Booms? Determinants of Household Debt in OECD Countries By Stockhammer, Engelbert; Wildauer, Rafael
  27. Le Portugal et l`Euro By João de Sousa Andrade
  28. Labour market adjustments and reforms in Greece during the crisis: microeconomic evidence from the third wave of the wage dynamics By Theodora Kosma; Evangelia Papapetrou; Georgia Pavlou; Christina Tsochatzi; Pinelopi Zioutou
  29. The political economy of fiscal transparency and independent fiscal councils By Beetsma, Roel; Debrun, Xavier; Sloof, Randolph
  30. Examining the Eco-Macroeconomic Performance Index of India: A Data Envelopment Analysis Approach. By Mohanty, Ranjan Kumar; Sahoo, Biresh K.
  31. Fiscal Sustainability Analysis: The Case of PALOP Economies By António Afonso,; Emanuel Reis Leão,; Dilson Tiny,; Diptes C. P. Bhimjee
  32. Competition and Bank Fragility By Marsh, Blake; Sengupta, Rajdeep
  33. A Kinked-Demand Theory of Price Rigidity By Stephane Dupraz
  34. Zeroing in: Asset Pricing at the Zero Lower Bound By Mohsan Bilal
  35. Contagion During the Initial Banking Panic of the Great Depression By Erik Heitfield; Gary Richardson; Shirley Wang
  36. Financial Vulnerability and Monetary Policy By Fernando Duarte; Tobias Adrian
  37. Computing State Average Marginal Income Tax Rate: An Application to Missouri Abstract: Using filing-level data, we compute the average marginal income tax rate for the State of Missouri. We have data from 2000 through 2015. We start with a simple experiment: consider the effect that a $10 change in federal adjusted gross income would have on each filer’s tax payment. We find that with deductions, exemptions, and credits, the average marginal income tax rate has been remarkably steady over the years, ranging from 3.50 percent to 3.66 percent. This rate is much lower than the top marginal income tax rate, which has been 6 percent for taxable income greater than $9,000 for the entire sample period. In addition, we compute the average marginal income tax rate for different types of income in order to compare directly with the NBER’s reported state rate. By G. Dean Crader; Joseph H. Haslag
  38. The response of multinationals’ foreign exchange rate exposure to macroeconomic news By Boudt, Kris; Neely, Christopher J.; Sercu, Piet; Wauters, Marjan
  39. Interest Rate Spreads and Forward Guidance By Christian Bredemeier; Christoph Kaufmann; Andreas Schabert
  40. When to Lean Against the Wind By Richter, Björn; Schularick, Moritz; Wachtel, Paul
  41. Human Capital, Public Debt, and Economic Growth: A Political Economy Analysis By Tetsuo Ono; Yuki Uchida
  42. Are higher wages good for business? An assessment under alternative innovation and investment scenarios By Caiani, Alessandro; Russo, Alberto; Gallegati, Mauro
  43. Will Rising Interest Rates Lead to Fiscal Crises? By Olivier J Blanchard; Jeromin Zettelmeyer
  44. The Effects of Non-Existent Property Ownership Rights Within the Electricity Production Sector on Labor Force Participation in the Dominican Republic By Stacey, Brian
  45. Trend and Uncertainty in the Long-Term Real Interest Rate: Bayesian Exponential Tilting with Survey Data By Doh, Taeyoung
  46. Hours, Occupations, and Gender Differences in Labor Market Outcomes By Andrés Erosa; Luisa Fuster; Gueorgui Kambourov; Richard Rogerson
  47. A Cross-Country Database of Fiscal Space By M. Ayhan Kose; Sergio Kurlat; Franziska Ohnsorge; Naotaka Sugawara
  48. A Formal Test of Competition in the Banking Sector of Pakistan: An Application of PR-H Statistic By Mahmood ul Hasan Khan; Muhammad Nadim Hanif
  49. Does EU Cohesion Policy Work? Theory and Evidence By Davide Fiaschi; Andrea Mario Lavezzi; Angela Parenti
  50. Monetary Policy and the Stock Market: Time Series Evidence By Michael Weber; Andreas Neuhierl
  51. The effect of tax harmonisation in the Southern African Development Community on Foreign Direct Investment By Michael Ade; Jannie Rossouw; Tendai Gwatidzo
  52. Private Equity and Financial Fragility during the Crisis By Shai Bernstein; Josh Lerner; Filippo Mezzanotti
  53. How much Keynes and how much Schumpeter? An Estimated Macromodel of the US Economy By Philipp Pfeiffer
  54. Open Market Operations By Sylvia Xiao; Randall Wright; Guillaume Rocheteau
  55. Putting the Cycle Back into Business Cycle Analysis By Franck Portier; Dana Galizia; Paul Beaudry
  56. Capital Controls, Macroprudential Regulation, and the Bank Balance Sheet Channel By Shigeto Kitano; Kenya Takaku
  57. A ternary-state early warning system for the European Union By Savas Papadopoulos; Pantelis Stavroulias; Thomas Sager; Etti Baranoff
  58. An Empirical Evaluation of ‘Structure-Conduct-Performance’ and ‘Efficient-Structure’ Paradigms in the Banking Sector of Pakistan By Mahmood ul Hasan Khan; Muhammad Nadim Hanif
  59. Measuring Competition in the Banking Sector of Pakistan: An Application of Boone Indicator By Mahmood ul Hasan Khan; Muhammad Nadim Hanif
  60. Another Look at Residual Seasonality in GDP By Paul Lengermann; Norman J. Morin; Andrew D. Paciorek; Eugenio P. Pinto; Claudia R. Sahm

  1. By: William A. Brock (Department of Economics, University of Wisconsin-Madison and Department of Economics, University of Missouri-Columbia); Joseph H. Haslag (Department of Economics, University of Missouri-Columbia; University of Missouri-Columbia)
    Abstract: We build a model economy in which Fed watching occurs. There is a huge number of blogs, financial letters, and news reporting that talks about what the Federal Reserve is likely to do. We model this behavior by allowing for banks to Fed watch, meaning that the bank will apply a costly forecasting technology to predict next period’s price level. Here, the banks accept deposits to insure against idiosyncratic liquidity shocks. Within this model economy, we characterize the price-level dynamics. Our findings have direct implications for the notion of banking crises though related precisely to the role of insurance, not output fluctuations. We derive conditions in which there are endogenous oscillations between price level spikes and price-level falls; in other words, the model economy generates boom-andbusts cycles as real balances fluctuate from high to low values. We extend the model economy to consider how heterogeneity exists with the set of central bankers as they could have heterogeneous forecasts of the next-period price level.
    Keywords: random relocation, heterogeneous forecasts, banks, fed watching
    JEL: C62 E31 E44 E52
    Date: 2017–08
  2. By: Kuusela, Annika; Hännikäinen, Jari
    Abstract: This paper investigates whether shadow interest rates contain predictive power for U.S. inflation in a data-rich environment. We find that shadow rates are useful leading indicators of inflation. Shadow rates contain substantial in-sample and out-of-sample predictive power for inflation in both the zero lower bound (ZLB) and non-ZLB periods. We find that the shadow rate suggested by Wu and Xia (2016) contains more information about future inflation than the shadow rate suggested by Krippner (2015b).
    Keywords: shadow interest rates, zero lower bound, unconventional monetary policy, inflation forecasting, data-rich environment, factor models
    JEL: C38 C53 E37 E43 E44 E58
    Date: 2017–08–01
  3. By: Asamoah, Lawrence Adu
    Abstract: This paper examines the macroeconomic effects of fiscal policy on retail interest rate in Ghana using the Autoregressive Distributed Lags model. A database of annual data on fiscal variables and lending rates for the period 1970 – 2013 are constructed largely from the World Bank Indicators and International Financial Statistics. Our findings show evidence of contemporaneous effects from fiscal spending to interest rate. Specifically, we show that fiscal deficit induces a sizable and robust effect on the retail interest rate in the short run, but contrary in the long run. We also find that government investment, exchange rate and the yields on government short-term treasury instruments have simultaneous effects on the downward stickiness of the retail interest rate.
    Keywords: Ghana; Fiscal policy; ARDL; Cointegration; Interest rate; Exchange rate
    JEL: E0 E6 E62
    Date: 2016–08
  4. By: Taniya Ghosh (Indira Gandhi Institute of Development Research); Sohini Sahu (Indian Institute of Technology, Kanpur); Siddhartha Chattopadhyay (Indian Institute of Technology, Kharagpur)
    Abstract: Inflation expectations are an important marker for the conduct of monetary policy. Using a Bayesian structural VAR-X model that includes the inflation expectations of general public based on the Inflation Expectations Survey of Households (IESH), in a first of its kind of study using this dataset, we analyze the macroeconomic factors that determine inflation expectations in India with special focus on economic uncertainty. Besides the standard macroeconomic factors like real output, inflation rate and monetary policy, we also include economic policy uncertainty as a possible endogenous variable in our model that influences inflation expectations, while international financial volatility that has spill-over effects is an exogenous variable. Using non-recursive identification strategy, we find that economic policy uncertainty has considerable effects on households' expectations of inflation and in a longer horizon the international financial volatility also matters. Additionally, in presence of inflation expectations and economic policy uncertainty, we find that the monetary policy shock causes output and inflation to fall significantly; thereby solving the "price puzzle" that otherwise exists in the monetary transmission mechanism literature for India.
    Keywords: BVAR, Inflation Expectations, Economic Policy Uncertainty, Price Puzzle
    JEL: E41 E52 E58
    Date: 2017–05
  5. By: Takuji Kawamoto (Bank of Japan); Moe Nakahama (Bank of Japan)
    Abstract: This paper explores why the inflation rate of CPI -- which excludes volatile fresh foods -- failed to reach the 2 percent "price stability target" even after more than three years had passed since the Bank of Japan (BOJ) introduced the Quantitative and Qualitative Monetary Easing (QQE) in April 2013. Specifically, we provide empirical evidence for what factors caused the actual CPI inflation rate to fall short of the BOJ's original forecast made in April 2013, by using historical decomposition technique of simple VAR analysis. The empirical results show that among the deviation of the CPI inflation rate for fiscal 2015 from the original forecast of minus 1.9 percentage points -- the difference between the forecast of 1.9 percent and the actual result of 0.0 percent -- about 50 percent (minus 1.0 percentage points) can be attributed to the unexpected decline in oil prices. A little more than 10 percent (minus 0.3 percentage points) can be explained by the unexpected slump in output gap and a little more than 30 percent (minus 0.7 percentage points) by inflation-specific negative shocks. These inflation-specific negative shocks are measured as declines in the inflation rate which cannot be explained by fluctuations in the output gap, oil prices and the nominal exchange rate, and thus implies that inflation expectations did not rise as much as originally anticipated by the BOJ.
    Keywords: Monetary Policy; Inflation; Inflation Expectations; VAR
    JEL: C32 E31 E52
    Date: 2017–07–28
  6. By: Pinshi Paula, Christian
    Abstract: The need to strengthen the macroprudential orientation of financial regulatory and supervisory frameworks stays a priority for financial and real healthy. Stability financial threatened with endogenous and exogenous risks translating crises, hence it has to a healthy regulation for the reduction risks. Macroprudential policy proves to be a best regulation for limiting systemic risk. We wonder about adoption a framework macroprudential for stability financial in Democratic Republic of the Congo (DRC). The correlation between countercyclical capital buffer and stability financial justify to make use of framework macroprudential. The causality analysis put in light the effect of policy macroprudential on financial stability. The coefficient of reserve requirements, used like an indicator par excellence, and countercyclical capital buffer cause financial stability. That’s justify an adoption of framework macroprudential in DRC. Finally, we suggest a best Framework governance for a macroprudential policy in DRC. The game have to be cooperative but flexible with monetary policy, it means, we must create a general management or autonomous institution macroprudential. However monetary policy must have a low of veto on this financial stability general management.
    Keywords: Monetary Policy, financial stability, macroprudential policy
    JEL: E37 E51 E58 G13 G18
    Date: 2017–06
  7. By: Pincheira, Pablo; Selaive, Jorge; Nolazco, Jose Luis
    Abstract: We explore the ability of core inflation to predict headline CPI annual inflation for a sample of 8 developing economies in Latin America during the period January 1995-May 2017. Our in-sample and out-of-sample results are roughly consistent in providing evidence of predictability in the great majority of our countries, although, as usual, a slightly stronger evidence of predictability comes from the in-sample analysis. The bulk of the out-of-sample evidence of predictability concentrates at the short horizons of 1 and 6 months. In contrast, at longer horizons of 12 and 24 months, we only find evidence of predictability for two countries: Chile and Colombia. This is both important and challenging, given that monetary authorities in our sample of developing countries are currently implementing or given steps toward the future implementation of inflation targeting regimes, which are heavily based on long run inflation forecasts.
    Keywords: Inflation, Forecasting, Time Series, Monetary Policy, Core Inflation, Developing Countries.
    JEL: E31 E37 E4 E47 E50 E52 E58 F4 F41 F47 O11 O23 O54
    Date: 2017–07–17
  8. By: BEKIROS, Stelios; NILAVONGSE, Rachatar; UDDIN, Gazi Salah
    Abstract: This paper incorporates anticipated and unexpected shocks to bank capital into a DSGE model with a banking sector. We apply this model to study Basel III countercyclical capital requirements and their implications for banking stability and household welfare. We introduce three different countercyclical capital rules. The first countercyclical capital rule responds to credit to output ratio. The second countercyclical rule reacts to deviations of credit to its steady state, and the third rule reacts to credit growth. The second rule proves to be the most effective tool in dampening credit supply, housing demand, household debt and output fluctuations as well as in enhancing the banking stability by ensuring that banks have higher bank capital and capital to asset ratio. After conducting a welfare analysis we find that the second rule outranks the other ones followed by the first rule, the baseline and the third rule respectively in terms of welfare accumulation.
    Keywords: Banking stability, Basel III, Capital requirements, News shocks, Welfare analysis
    JEL: E32 E44 E52
    Date: 2017
  9. By: António Afonso,; Jorge Silva
    Abstract: We study the effects of the euro area monetary policy on the institutional sectors in Portugal during the period 2000:4-2015:4. Our results show that the single monetary policy affected some variables that are proxies for the funding of each institutional sector of the economy: general government, other monetary financial institutions, non-financial corporations, households and the external sector. The period of the economic and financial adjustment programme influenced all institutional sectors, and financial integration in the euro area had an effect on the funding for the economy: there was a reduction of long term-to-GDP ratio, external funding to the Portuguese other MFIs, and new loans to households Key Words: monetary policy, euro area, Portugal, non-conventional instruments, institutional sectors, financial integration
    JEL: C20 E44 E52 E62 G01
    Date: 2017–07
  10. By: Olivier J Blanchard (Peterson Institute for International Economics); Pedro Portugal (Bank of Portugal)
    Abstract: Over the past 20 years, Portugal has gone through a boom, a slump, a sudden stop, and now a timid recovery. Unemployment has decreased, but remains high, and output is still far below potential. Competitiveness has improved, but more is needed to keep the current account in check as the economy recovers. Private and public debts are high, both legacies of the boom, the slump and the sudden stop. Productivity growth remains low. Because of high debt and low growth, the recovery remains fragile. We review the history and the main mechanisms at work. We then review a number of policy options, from fiscal consolidation to fiscal expansion, cleaning up of nonperforming loans, labor market reforms, product market reforms, and euro exit. We argue that at this point, the main focus of macroeconomic policy should be twofold. The first is the treatment of nonperforming loans, which would allow for an increase in demand in the short run and an increase in supply in the medium run. We argue that, to the extent that such treatment requires recapitalization, it may make sense to finance it through an increased fiscal deficit, even in the face of high public debt. The second is product market reforms, and reforms aimed at increasing microflexibility in the labor market. Symmetrically, we also argue that at this point, some policies would be undesirable, among them faster fiscal consolidation, measures aimed at decreasing nominal wages and prices, and euro exit.
    Keywords: slump, boom, fiscal consolidation, non-performing loans, competitiveness, debt, sudden stop
    JEL: E3 E6
    Date: 2017–07
  11. By: Drautzburg, Thorsten; Fernández-Villaverde, Jesús; Guerron-Quintana, Pablo A.
    Abstract: We argue that political distribution risk is an important driver of aggregate fluctuations. To that end, we document significant changes in the capital share after large political events, such as political realignments, modifications in collective bargaining rules, or the end of dictatorships, in a sample of developed and emerging economies. These policy changes are associated with significant fluctuations in output and asset prices. Using a Bayesian proxy-VAR estimated with U.S. data, we show how distribution shocks cause movements in output, unemployment, and sectoral asset prices. To quantify the importance of these political shocks for the U.S. as a whole, we extend an otherwise standard neoclassical growth model. We model political shocks as exogenous changes in the bargaining power of workers in a labor market with search and matching. We calibrate the model to the U.S. corporate non-financial business sector and we back up the evolution of the bargaining power of workers over time using a new methodological approach, the partial filter. We show how the estimated shocks agree with the historical narrative evidence. We document that bargaining shocks account for 34% of aggregate fluctuations.
    Keywords: Aggregate fluctuations; bargaining shocks; historical narrative.; partial filter; Political redistribution risk
    JEL: E32 E37 E44 J20
    Date: 2017–07
  12. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Abhishek Kumar (Indira Gandhi Institute of Development Research)
    Abstract: In this paper we take a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model to the Indian data using Kalman filter based maximum likelihood estimation. Our model based output gap tracks the statistical Hodrick-Prescott filter based output gap well. Comparison of estimated parameters, impulse responses and forecast error variance decomposition between India and United States points to differences in the structure of the two economies and of their inflationary process. Our estimates suggest higher value of habit persistence, more volatile markup and interest rate shocks in India. Markup shocks play a much larger role in determination of Indian inflation, pointing to the importance of supply side factors. Impulse responses show a higher impact of interest rate shocks on output and inflation, and lower impact of technology shocks on output in comparison to US. The latter again suggests the presence of supply side bottlenecks. We use smoothed states obtained from the Kalman filter to create counterfactual paths of output and Inflation (during 2009 Q4 to 2013 Q2) in presence of a given shock. In the post 2011 slowdown, monetary shock imposed significant output cost and for a brief period of time made the output gap negative.
    Keywords: DSGE; India; Potential Output; Output Gap; Kalman Filter; Maximum Likelihood; Inflation; Monetary Policy; Supply Shock
    JEL: E31 E32 E52
    Date: 2017–04
  13. By: Hattori, Masazumi; Yetman, James
    Abstract: We model inflation forecasts as monotonically diverging from an estimated long-run anchor point towards actual inflation as the forecast horizon shortens. Fitting the model with forecaster-level data for Japan, we find that the estimated anchors across forecasters have tended to rise in recent years, along with the dispersion in estimates across forecasters. Further, the degree to which these anchors pin down inflation expectations at longer horizons has increased, but remains considerably lower than found in a similar study of Canadian and US forecasters. Finally, the wide dispersion in estimated decay paths across forecasters points to a diverse set of views across forecasters about the inflation process in Japan.
    Keywords: Inflation expectations, decay function, inflation targeting, deflation
    JEL: E31 E58
    Date: 2017–06
  14. By: Eleftherios Goulas (Department of Law & Finance, Bedfordshire University, UK); Athina Zervoyianni (Department of Economics, University of Patras, Greece; The Rimini Centre for Economic Analysis)
    Abstract: While the labour-market impact of ALMP interventions has been extensively studied, an issue that has not been widely addressed in the literature is to what extent active labour-market policies have beneficial effects for the whole economy at the macroeconomic level. This paper addresses this issue by examining how additional resources allocated to active labour-market policies relate to output-growth rates. It also examines the sensitivity of the growth-ALMP relationship to the economy's business-cycle position and the state of market expectations. Using data from OECD countries during 1991-2011, we find evidence of a positive output-growth differential due to implementing active labour-market policies in normal times of between 0.004 and 0.005 percentage point. This differential becomes larger during economic upturns and when market expectations are optimistic. These results are obtained after controlling for other standard, direct and indirect, influences on output-growth rates and after addressing the issue of potential endogeneities.
    Keywords: output growth, labour-market policy, cyclical influences
    JEL: E60 E23 J08 E30
    Date: 2017–07
  15. By: Chen, Daphne (Econ One Research); Qi, Shi (College of William and Mary); Schlagenhauf, Don E. (Federal Reserve Bank of St. Louis)
    Abstract: A dynamic stochastic occupational choice model with heterogeneous agents is developed to evaluate the impact of a corporate income tax reduction on employment. In this framework, the key margin is the endogenous entrepreneurial choice of the legal form of organization (LFO). A reduction in the corporate income tax burden encourages adoption of the C corporation legal form, which reduces capital constraints on firms. Improved capital re-allocation increases overall productive efficiency in the economy and therefore expands the labor market. Relative to the benchmark economy, a corporate income tax cut can reduce the non-employment rate by up to 7 percent.
    Keywords: Corporate Income Tax; Legal form of Organization; Employment
    JEL: E02 E24 E60 L22
    Date: 2017–07–31
  16. By: beldi, lamia; djelassi, mouldi; kadria, mohamed
    Abstract: This paper aims to investigate the links between exchange rate pass-through (ERPT) and monetary policy. We examine the degree of ERPT to consumer prices for 11 emerging markets (6 inflation targeters and 5 non-inflation targeters) using both multivariate cointegrated VAR (CVAR) and impulse responses derived from the vector error correction model (VECM). Results of cointegration analyses suggest that the degree of ERPT is lower in ITers than in non-ITers. Besides, the impulse response estimates at 48 months are extremely close to the cointegration estimates in IT countries compared to those non-IT countries. The adjustment process is fully completed during the considered time horizon in the impulse response analysis. This finding confirms the literature review on the importance of the inflation environment and the monetary policy credibility in determining ERPT. The level of ERPT tend to decline in the countries where monetary policy moved strongly towards stabilizing inflation.
    Keywords: Exchange Rate pass-through; Domestic prices; Cointegration; Emerging Markets.
    JEL: E31 F31
    Date: 2017
  17. By: Goodness C. Aye (Department of Economics, University of Pretoria, Pretoria, South Africa); Matthew W. Clance (Department of Economics, University of Pretoria, Pretoria, South Africa); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa)
    Abstract: This paper examines the spill over effect of economic uncertainty on the duration probability of housing market booms, busts and normal times among 12 OECD countries. Quarterly data from 1985 to 2012 were used. Based on a discrete-time duration (hazard) model, we find that the probability of exiting housing market busts increases with higher economic uncertainty in a statistically significant fashion. Uncertainty, however, is not found to influence the likelihood of leaving booms and normal times. Our results tend to suggest that housing serves as possible hedge against uncertainty.
    Keywords: Housing Market Cycles, Uncertainty, Hazard Model
    JEL: C41 E32 E51 E52 R31
    Date: 2017–08
  18. By: Eleftherios Goulas (Department of Law & Finance, Bedfordshire University, UK); Athina Zervoyianni (Department of Economics, University of Patras, Greece; The Rimini Centre for Economic Analysis)
    Abstract: Empirical work on the effects of government-sponsored labour-market training programs (LTPs) has been largely focused on the unemployment-exit and employment-entry probabilities of program participants using micro-level data. This paper seeks to add to the current literature by providing broad cross-country evidence on whether or not additional public-sector resources allocated to LTPs contributes to raising output growth and per-capita incomes. Using data from OECD countries during 1989-2009 and GMM estimation, we find evidence suggesting that on average labour-market training programs are growth-enhancing. The positive growth-effect of LTP-spending is found to be stronger the more favourable are business-cycle conditions, the larger is the magnitude of structural shocks at country level and the greater is the scale of opening-up of markets at the global level.
    Keywords: training policy, output growth, cyclical, structural and globalization influences
    JEL: E23 J08 E30
    Date: 2017–07
  19. By: Turhan, Ibrahim M.
    Abstract: The world has been struggling with the economic and financial crisis for almost a decade and yet, in spite of all efforts we have so far witnessed, problems persist. Volatility in financial and commodity markets, protracted low inflation in some advanced economies, debt overhang and geopolitical risks cast a shadow over the global outlook. Furthermore, economies both advanced and emerging exhibit some very unusual, unprecedented and even odd patterns; Policy makers are bounded with data dependency due to contradicting and confusing economic data. Surprisingly, despite the overwhelming reign of real business cycle models in graduate teaching and despite the prevalence of mainstream economics whose inspiration is mainly neoclassical approach, there is almost no emphasis on real factors which might have caused to this controversial situation. This study argues the crisis is related with the permanent total factor productivity decline and it is simply another iteration of boom-bust cycles due to arriving at the edge of productivity for the existing system of economic relationships that has already happened four times for the last two hundred years.
    Keywords: Crisis, real business cycle, productivity, economic history
    JEL: E23 E65 N1 N10 O40
    Date: 2017–07–31
  20. By: Gehrke, Britta (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]); Weber, Enzo (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany])
    Abstract: "This paper investigates whether the effects of structural labor market reforms depend on the business cycle. Based on search and matching theory, we propose an unobserved components approach with Markov switching to distinguish the effects of structural reforms that increase the flexibility of the labor market in recession and expansion. Our results for Germany and Spain show that reforms have substantially weaker expansionary effects in the short-run when implemented in recessions. In consequence, reforms are unlikely to mitigate the impact of crisis in the short-run. From a policy perspective, these results highlight the costs of introducing reforms in recessions." (Author's abstract, IAB-Doku) ((en))
    JEL: C32 E02 E32 J08
    Date: 2017–07–31
  21. By: Bundick, Brent (Federal Reserve Bank of Kansas City); Smith, Andrew Lee (Federal Reserve Bank of Kansas City); Herriford, Trenton (Federal Reserve Bank of Kansas City)
    Keywords: Monetary policy; Bond Forward Guidance; Policy Uncertainty; Term Premium
    JEL: E32 E52
    Date: 2017–07–12
  22. By: Taniya Ghosh (Indira Gandhi Institute of Development Research); Soumya Bhadury (National Council of Applied Economic Research)
    Abstract: We investigate the predictive power of Divisia monetary aggregates in explaining exchange rate variations for India, Israel, Poland, UK and the US, in the years leading up to and following the 2007-08 recessions. One valid concern for the chosen sample period is that the interest rate has been stuck at or near the zero lower bound (ZLB) for some major economies. Consequently, the interest rate have become uninformative about the monetary policy stance. An important innovation in our research is to adopt the Divisia monetary aggregate as an alternative to the policy indicator variable. We apply bootstrap Granger causality method which is robust to the presence of non-stationarity in our data. Additionally, we use bootstrap rolling window estimates to account for the problems of parameter non-constancy and structural breaks in our sample covering the Great recession. We find strong causality from Divisia money to exchange rates. By capturing the time-varying link of Divisia money to exchange rate, the importance of Divisia is further established at ZLB.
    Keywords: Monetary Policy; Divisia Monetary Aggregates; Simple Sum; Nominal Exchange Rate; Real Effective Exchange Rate; Bootstrap Granger Causality
    JEL: C32 C43 E41 E51 E52 F31 F41
    Date: 2017–07
  23. By: Corsetti, Giancarlo; Mavroeidi, Eleonora; Thwaites, Gregory; Wolf, Martin
    Abstract: We study how small open economies can escape from deflation and unemployment in a situation where the world economy is permanently depressed. Building on the framework of Eggertsson et al (2016), we show that the transition to full employment and at-target inflation requires real and nominal depreciation of the exchange rate. However, because of adverse income and valuation effects from real depreciation, the escape can be beggar thy self, raising employment but actually lowering welfare. We show that as long as the economy remains financially open, domestic asset supply policies or reducing the effective lower bound on policy rates may be ineffective or even counterproductive. However, closing domestic capital markets does not necessarily enhance the monetary authorities' ability to rescue the economy from stagnation.
    Keywords: beggar-thy-neighbour; capital controls; Deflation; depreciation; monetary policy; zero lower bound
    JEL: E62 F41
    Date: 2017–07
  24. By: Maiko Koga (Bank of Japan); Haruko Kato (Bank of Japan)
    Abstract: This paper provides evidence that firms exhibit behavioral biases in their growth expectations. Using firm-level survey data, we document that optimism and pessimism biases are generated by the business cycle, financial market conditions, and firm-specific factors including firms' past experiences. We also demonstrate that biases affect the real business decisions of firms. Firms' fixed investment and R&D spending are raised by optimism and hampered by pessimism. The above findings imply that behavioral biases generated by the firms can be an alternative mechanism on how macroeconomic and financial conditions affect their investment behavior in addition to the traditional optimization mechanism.
    Keywords: Behavioral bias, Expectation, Firm, Investment, Optimism bias, Pessimism bias, Survey data
    JEL: D84 E03 E22
    Date: 2017–07–21
  25. By: Koichiro Kamada (Deputy Director-General, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: This paper investigates optimal currency choice, particularly the choice between paper and digital currencies, when currency is utilized solely as a medium of exchange. The Baumol-Tobin model of transactions demand for money is extended to derive conditions under which digital currency is preferred to paper currency, taking into consideration the network externality in the choice of currencies. The model is applied to explain potential variations in currency preferences across countries, especially between advanced and developing economies. Also discussed is how the introduction of negative interest rates, currency taxes, and central bank digital currency affect optimal currency choice.
    Keywords: Digital currency, Money demand, Network externality, Negative interest rate, Currency tax
    JEL: E41 E58 E20 P44
    Date: 2017–07
  26. By: Stockhammer, Engelbert (Kingston University London); Wildauer, Rafael (Kingston University London)
    Abstract: The past decades have witnessed a strong increase in household debt and high growth of private consumption expenditures in many countries. This paper empirically investigates four explanations: First, the expenditure cascades hypothesis argues that an increase in inequality induced lower income groups to copy the spending behaviour of richer peer groups and thereby drove them into debt (‘keeping up with the Joneses’). Second, the housing boom hypothesis argues that increasing property prices encourage household spending and household borrowing due to wealth effects, eased credit constraints and the prospect of future capital gains. Third, the low interest hypothesis argues that low interest rates encouraged households to take on more debt. Fourth, the financial deregulation hypothesis argues that deregulation of the financial sector boosted credit supply. The paper tests these hypotheses by estimating the determinants of household borrowing using a panel of 11 OECD countries (1980-2011). Results indicate that real estate prices and low interest rates were the most important drivers of household debt. In contrast the data does not support the expenditure cascades hypothesis as a general explanation of debt accumulation across OECD countries. Our results are consistent with the financial deregulation hypothesis, but its explanatory power for the 1995-2007 period is low.
    Keywords: household debt; income distribution; property prices
    JEL: D31 E12 E51
    Date: 2017–08–01
  27. By: João de Sousa Andrade (CeBER and Faculty of Economics of the University of Coimbra)
    Abstract: The European economic and monetary integration of Portugal should be analyzed from a historical perspective, taking into account not only economic but also political aspects. Despite its colonial heritage, Portugal is a country of emigrants in which Europe holds a very important part. Portuguese people have a European feeling they do not forget a dictatorship that has lasted almost half a century. The incomes of Portuguese are nowadays much higher as also the level of fixed capital - especially in infrastructure - and human capital than before European integration. The recent economic problems of the Portuguese economy are the result of imbalances that developed during the years after the Democratic Revolution. The absence of more appropriate policies for a monetary zone with a fixed exchange rate and with financial shocks caused by the reduction of interest rates and the massive entry of structural funds is responsible for the poor performance of the Portuguese economy after 2002 At present the banking crisis and public debt does not allow the exit of the Euro. But in spite of this constraint Portuguese governments and the great majority of the political parties envisage a deeper integration on the monetary union.
    Keywords: Emigration, dictatorship, democracy, public debt, real exchange rate, Euro.
    JEL: E31 E42 N10
    Date: 2017–07
  28. By: Theodora Kosma (Bank of Greece); Evangelia Papapetrou (Bank of Greece); Georgia Pavlou (Bank of Greece); Christina Tsochatzi (Bank of Greece); Pinelopi Zioutou (Bank of Greece)
    Abstract: The recession that followed the global financial crisis and the sovereign debt crisis resulted in large falls in output and rises in unemployment across Europe. In this context, many countries implemented significant reforms of their labour market. In order to analyse the impact of labour market reforms and, in particular, to investigate, how firms adjusted to the shocks affecting them, the European System of Central Banks (ESCB) conducted a third wave of the Wage Dynamics Network (WDN3) survey in 2014-15. This paper describes the main findings of the Greek WDN3 survey. The results show that the decline in economic activity, during the period 2010-2013, had a significant negative impact on Greek firms’ activity. Greek firms reacted to the shocks affecting them by adjusting both labour input and wages and reforms seem to have made it easier for this adjustment to take place.
    Keywords: Survey data; wage adjustment; employment adjustment; labour market reforms
    JEL: E24 J30 J50
    Date: 2017–06
  29. By: Beetsma, Roel; Debrun, Xavier; Sloof, Randolph
    Abstract: The global surge in independent fiscal councils (IFCs) raises three related questions: How can IFCs improve the conduct of fiscal policy? Are they simultaneously desirable for voters and elected policymakers? And are they resilient to changes in political conditions? We build a model in which voters cannot observe the true competence of elected policymakers. IFC's role is to mitigate this imperfection. Equilibrium public debt is excessive because policymakers are "partisan" and "opportunistic". If voters only care about policymakers' competence, both the incumbent and the voters would be better off with an IFC as the debt bias would fall. However, when other considerations eclipse competence and give the incumbent a strong electoral advantage or disadvantage, setting up an IFC may be counterproductive as the debt bias would increase. If the incumbent holds a moderate electoral advantage or disadvantage, voters would prefer an IFC, but an incumbent with a large advantage may prefer not to have an IFC. The main policy implications are that (i) establishing an IFC can only lower the debt bias if voters care sufficiently about policymakers' competence; (ii) not all political environments are conducive to the emergence of IFCs; and (iii) IFCs are vulnerable to shifts in political conditions.
    Keywords: competence; congruence; fiscal transparency; Independent fiscal councils; opportunistic bias; partisan bias; public debt
    JEL: E62 H6
    Date: 2017–07
  30. By: Mohanty, Ranjan Kumar (National Institute of Public Finance and Policy); Sahoo, Biresh K. (Xavier Institute of Management, Bhubaneswar)
    Abstract: The prime objective of the paper is to construct a robust macroeconomic performance (MEP) index of India using Data Envelopment Analysis (DEA) approach. Six major macro indicators, namely, economic growth, employment rate, terms of trade, inflation rate, fiscal deficit, and pollution are used to computeMEP and Eco-MEP index of the Indian economy from 1980-81 to 2015-16. Overall, both the MEP and Eco-MEP index scores have quite similar best performing years, worst performing years, and have also captured the major events that adversely affected the economy during the last 35 years. This shows that the trend in overall performance of Indian economy was better in the 1980s and the 1990s but has deteriorated after the 2000s. The ARDL Bounds Testing approaches to cointegration methods are used to test the robustness/utility of these indices. The estimated results find that MEP and Eco-MEP have a positive impact on private investment, negative effect on current account deficit (CAD), and positive impact on foreign investment inflows (FIIs) and foreign direct investment (FDI). Hence, the suggested composite MEP index is stable, robust and truly captures the economic performance of India.
    Keywords: Macroeconomic performance ; Eco-macroeconomic performance ; Data Envelopment Analysis ; Autoregressive Distributed Lag (ARDL) ; India.
    JEL: E60 C14 C32
    Date: 2017–07
  31. By: António Afonso,; Emanuel Reis Leão,; Dilson Tiny,; Diptes C. P. Bhimjee
    Abstract: The Global Financial Crisis has typically led to a significant widening of fiscal positions (i.e., higher budget deficits and public debt). We address the sustainability of public finances in Portuguese-speaking African countries (PALOP), through adequate econometric testing. Our findings for the period 1975-2015 suggest that most of the PALOP have compromised the sustainability of their corresponding fiscal positions, leading these economies to be set on unsustainable public finance trajectories. Key Words: Debt Sustainability, Global Financial Crisis, Fiscal Policy, PALOP
    JEL: C22 E62 H62
    Date: 2017–07
  32. By: Marsh, Blake (Federal Reserve Bank of Kansas City); Sengupta, Rajdeep (Federal Reserve Bank of Kansas City)
    Keywords: Bank lending; Bank regulation; Commercial real estate
    JEL: E44 G21 G28
    Date: 2017–06–01
  33. By: Stephane Dupraz (Columbia University)
    Abstract: I provide a microfounded theory for one of the oldest, but so far informal, explanations of price rigidity: the kinked demand curve theory. Assuming that some customers observe at no cost only the price of the store they happen to be at gives rise to a kink in firms' demand curves: a price increase above the market price repels more customers than a price decrease attracts. The kink in turn makes a range of prices consistent with equilibrium, but an intuitive criterion---the adaptive rational-expectations criterion---selects a unique equilibrium where prices stay constant for a long time. The kinked-demand theory is consistent with price-setters' account of price-rigidity as arising from the customer's---not the firm's---side, and can be tested against menu-cost models in micro data: it predicts that prices should be more likely to change if they have recently changed, and that prices should be more flexible in markets where customers can more easily compare prices. The kinked-demand theory has novel implications for monetary policy: its Phillips curve is strongly convex but does not contain any (present or past) expectations of inflation; its trade-off between output and inflation persists in the long-run; changes to the distribution of sectoral productivity shift the Phillips curve; and monetary shocks have a much longer-lasting real effect than in a menu-cost model, despite also being a model of state-dependent pricing.
    Date: 2017
  34. By: Mohsan Bilal (New York University, Stern School)
    Abstract: This paper analyzes the effect of the Zero Lower Bound (ZLB) on asset prices, risk premia, and the co-movement of asset returns using a New Keynesian framework with nominal rigidities. I ï¬ nd that the presence of the ZLB generates a new source of macroeconomic risk: the risk that the ZLB will be binding in the future. When the monetary policy rate is high, stocks and bonds are both risky, and bond risk premia are high. In contrast, at the ZLB, stock market risk increases but bond risk decreases. When the probability of the ZLB binding in the near future increases, investors cut spending to increase savings. This lowers current and future output and dividends. Lower expected dividends and higher equity risk premia lower current stock prices. Simultaneously, investors expect future short rates and bond risk premia to drop which raise long-term bond prices. These opposite exposures to the same ZLB risk sharply lower the correlation between stock and bond returns. In fact, the stock-bond correlation turns negative. I develop and calibrate a model that endogenously generates these observed changes while respecting unconditional macroeconomic and asset pricing moments.
    Date: 2017
  35. By: Erik Heitfield; Gary Richardson; Shirley Wang
    Abstract: The initial banking crisis of the Great Depression has been the subject of debate. Some scholars believe a contagious panic spread among financial institutions. Others argue that suspensions surged because fundamentals, such as losses on loans, drove banks out of business. This paper nests those hypotheses in a single econometric framework, a Bayesian hazard rate model with spatial and network effects. New data on correspondent networks and bank locations enables us to determine which hypothesis fits the data best. The best fitting models are ones incorporating network and geographic effects. The results are consistent with the description of events by depression-era bankers, regulators, and newspapers. Contagion - both interbank and spatial - propelled a panic which healthy banks survived but which forced illiquid and insolvent banks out of operations.
    JEL: C11 C23 C41 E02 N1 N12 N2 N22
    Date: 2017–07
  36. By: Fernando Duarte (Federal Reserve Bank of New York); Tobias Adrian (Federal Reserve Bank of New York)
    Abstract: We present a parsimonious New Keynesian model that features financial vulnerabilities. The vulnerabilities generate time varying downside risk of GDP growth by driving the dynamics of risk premia. Monetary policy impacts the output gap directly via the IS curve, and indirectly via its impact on financial vulnerabilities. The optimal monetary policy rule always depends on financial vulnerabilities in addition to output, inflation, and the real rate. We show that a classic Taylor rule exacerbates downside risk of GDP growth relative to an optimal Taylor rule, thus generating welfare losses associated with negative skewness of GDP growth.
    Date: 2017
  37. By: G. Dean Crader (Department of Economics, University of Missouri-Columbia); Joseph H. Haslag (Department of Economics, University of Missouri-Columbia)
    Keywords: average marginal tax rate, individual income, MOSIM
    JEL: C81 E62 H24
    Date: 2017–07
  38. By: Boudt, Kris (Vrije Universiteit Brussel and Vrije Universiteit Amsterdam); Neely, Christopher J. (Federal Reserve Bank of St. Louis); Sercu, Piet (KU Leuven); Wauters, Marjan (Vrije Universiteit Brussel and KU Leuven)
    Abstract: We use intraday data to estimate the daily foreign exchange exposure of U.S. multinationals and show that macroeconomic news affects these firms’ foreign exchange exposure. News creates a substantial shift in the joint distribution of stock and exchange rate returns that has both a transitory and a persistent component. For example, a positive domestic demand surprise, as reflected in higher-than-expected nonfarm payroll, increases the value of the low-exposure domestic activities and results in a persistent decrease in foreign exchange exposure.
    Keywords: Foreign exchange exposure; High-frequency data; Macro
    JEL: E3 F3 F44 G14
    Date: 2017–07–31
  39. By: Christian Bredemeier; Christoph Kaufmann; Andreas Schabert
    Abstract: Announcements of future monetary policy rate changes have been found to be imperfectly passed through to various interest rates. We provide evidence for rates of return on less liquid assets to respond by less than, e.g., treasury rates to forward guidance announcements of the US Federal Reserve, suggesting that single-interest-rate models tend to overestimate their macroeconomics effects. We apply a macroeconomic model with interest rate spreads stemming from differential pledgeability of assets, implying that assets provide liquidity services to different extents. Consistent with empirical evidence, announcements of future reductions in the policy rate lead to an increase in liquidity premia. The output effects of forward guidance do not increase with length of the guidance period and are substantially less pronounced than they are predicted to be by a standard New Keynesian model. We thereby provide a solution to the so-called ”forward guidance puzzle”.
    Date: 2017–07–26
  40. By: Richter, Björn; Schularick, Moritz; Wachtel, Paul
    Abstract: This paper shows that policy-makers can distinguish between good and bad credit booms with high accuracy and they can do so in real time. Evidence from 17 countries over nearly 150 years of modern financial history shows that credit booms that are accompanied by house price booms and a rising loan-to-deposit-ratio are much more likely to end in a systemic banking crisis. We evaluate the predictive accuracy for different classification models and show that the characteristics of the credit boom contain valuable information for sorting the data into good and bad booms. Importantly, we demonstrate that policy-makers have the ability to spot dangerous credit booms on the basis of data available in real time. We also show that these results are robust across alternative specifications and time-periods.
    Keywords: Banking Crisis; Credit Booms; crisis prediction; macroprudential policy
    JEL: E32 E52 G01
    Date: 2017–07
  41. By: Tetsuo Ono (Graduate School of Economics, Osaka University); Yuki Uchida (Faculty of Economics, Seikei University)
    Abstract: This study considers the politics of public education policy in an overlapping- generations model with physical and human capital accumulation. In particular, this study examines how debt and tax financing differ in terms of growth and welfare across generations, as well as which fiscal stance voters support. The analysis shows that the growth rate in debt financing is lower than that in tax financing, and that debt financing creates a tradeoff between the present and future generations. The analysis also shows that debt financing attains slower economic growth than that realized by the choice of a social planner who cares about the welfare of all generations.
    Keywords: Economic growth, Human capital, Public debt, Political equilib- rium
    JEL: D70 E24 H63
    Date: 2016–01
  42. By: Caiani, Alessandro; Russo, Alberto; Gallegati, Mauro
    Abstract: This paper aims at investigating the interplay between inequality, innovation dynamics, and investment behaviors in shaping the long-run patterns of development of a closed economy. By extending the analysis proposed in Caiani et al. (2017) we explore the effects of alternative wage regimes under different investment and technological change scenarios. Experiments results seem to de-emphasize the role of technological progress as a possible source of greater inequality. Overall, simulation results are consistent with the predominance of a wage-led growth regime in most of the scenarios analyzed: a faster growth of low and middle level workers’ wages, relative to managers’, generally exert beneficial effects on the economy and allows to counteract the labor-saving effects of technological progress. Furthermore, contrary to what is sometimes argued in the academic and political debate, a distribution more favorable to workers does not compromise firms’ profitability, but rather strengthen it creating a more favorable macroeconomic environment which encourages further innovations, stimulates investment, and sustains economic growth.
    Keywords: Innovation; Investment; Inequality; Agent-Based Macroeconomics; Stock Flow Consistent Models
    JEL: E22 E64 O41
    Date: 2017–01–31
  43. By: Olivier J Blanchard (Peterson Institute for International Economics); Jeromin Zettelmeyer (Peterson Institute for International Economics)
    Abstract: A balanced, broad-based economic recovery seems under way in all major regions of the world. Managing the recovery poses challenges in the short run but they appear relatively benign. Looking forward, however, the authors see a set of new risks: (1) Partly because of the crisis and partly because of subsequent low growth, public debt has reached postwar historical highs in many advanced countries; (2) productivity growth, and with it potential growth, has declined. Whether it remains low or picks up in the future is uncertain; (3) interest rates are expected to increase from their current low levels. By how much and at what pace is—again—uncertain; and (4) many advanced countries have strong populist movements (or even populist leaders) espousing risky macroeconomic policies. The authors warn that rising interest rates, combined with low growth, high debt, and populist pressure, would be a recipe for fiscal crises.ivity growth. If they avoid policy errors, President Trump or his successor could have the good fortune of presiding over a productivity revival.
    Date: 2017–07
  44. By: Stacey, Brian
    Abstract: The labor market in the Dominican Republic is in disarray. There has been a high rate of unemployment and a very high rate of non-participation within the labor force for years. Output growth has been steady in manufacturing, telecommunication, and financial services, and new jobs have been added in the service sector consistently, however these gains have led to no real increase in available quality jobs and wage stagnation (Williams & Adedeji, 2004). Abdullaev and Marcello (2013) describe a dichotomous approach to solving the problem; through targeted education for the long term and through product market reforms in the near term. The energy sector in the Dominican Republic is a prime example of an area where reforms are needed to improve the operating environment to spur and sustain growth. At present the losses in transmission and distribution are significantly higher than in most places as a result of fraud (Smith 2004). Until recently it has not been against the law to steal electricity (Enerdata 2011). The rationale being that if electricity is a basic human right we cannot punish those who attempt to gain it. This lack of property law within the context of electricity underpins a significant failure by the government when viewed from the point of the electricity producers. Property ownership is a fundamental concept of free markets. Without ownership rights there is no (or limited) ability to charge for goods produced with that property. Electricity is a commodity property and without the ability to effectively charge for its consumption the producers have struggled.
    Keywords: Property Rights, Macroeconomic Forecast, Growth Models, Labor Force Participation
    JEL: E24 E66 K11
    Date: 2016–10–03
  45. By: Doh, Taeyoung (Federal Reserve Bank of Kansas City)
    Keywords: Long-run real interest rate; Time-varying parameter vectorautoregression; Bayesian predictive density
    JEL: C11 E43
    Date: 2017–07–31
  46. By: Andrés Erosa; Luisa Fuster; Gueorgui Kambourov; Richard Rogerson
    Abstract: We document a robust negative relationship between the log of mean annual hours in an occupation and the standard deviation of log annual hours within that occupation. We develop a unified model of occupational choice and labor supply that features heterogeneity across occupations in the return to working additional hours and show that it can match the key features of the data both qualitatively and quantitatively. We use the model to shed light on gender differences in labor market outcomes that arise because of gender asymmetries in home production responsibilities. Our model generates large gender gaps in hours of work, occupational choices, and wages. In particular, an exogenous difference in time devoted to home production of ten hours per week increases the observed gender wage gap by roughly eleven percentage points and decreases the share of females in high hours occupations by fourteen percentage points. The implied misallocation of talent across occupations has significant aggregate effects on productivity and welfare.
    JEL: E2 J2
    Date: 2017–07
  47. By: M. Ayhan Kose (WorldBank, Development Prospects Group; Brookings Institution; CEPR, and CAMA); Sergio Kurlat (WorldBank, Development Prospects Group); Franziska Ohnsorge (WorldBank, Development Prospects Group; CAMA); Naotaka Sugawara (WorldBank, Development Prospects Group)
    Abstract: This paper presents a comprehensive cross-country database of fiscal space, broadly defined as the availability of budgetary resources for a government to service its financial obligations. The database covers up to 200 countries over the period 1990-2016, and includes 28 indicators of fiscal space grouped into four categories: debt sustainability, balance sheet vulnerability, external and private sector debt related risks as potential causes of contingent liabilities, and market access. We illustrate potential applications of the database by analyzing developments in fiscal space across three time frames: over the past quarter century; during financial crises; and during oil price plunges. The main results are as follows. First, fiscal space had improved in many countries before the global financial crisis. In advanced economies, following severe deteriorations during the crisis, many indicators of fiscal space have virtually returned to levels in the mid-2000s. In contrast, fiscal space has shrunk in many emerging market and developing economies since the crisis. Second, financial crises tend to coincide with deterioration in multiple indicators of fiscal space, but they are often followed by reduced reliance on short-term borrowing. Finally, fiscal space narrows in energy-exporting emerging market and developing economies during oil price plunges but later expands, often because of procyclical fiscal tightening and, in some episodes, a recovery in oil prices.
    Keywords: Fiscal policy; sovereign debt; fiscal deficit; private debt; financial crises; oil prices.
    JEL: E62 H62 H63
    Date: 2017–08
  48. By: Mahmood ul Hasan Khan (State Bank of Pakistan); Muhammad Nadim Hanif (State Bank of Pakistan)
    Abstract: This study explores competition in the banking sector of Pakistan in the context of transformation in its structure and business environment since the implementation of financial sector reforms in the country. Instead of relying on the changes in the market structure indicators (like concentration ratio), we employ widely used Panzar and Rosse H statistic as a formal test of competition. PR-H statistic is estimated by using a balanced panel data comprising 24 commercial banks operating in Pakistan from the year 1996 to 2015. The results suggest that the banking sector of Pakistan exhibits the characteristics of monopolistic and perfectly competitive market structures.
    Keywords: Competition, Banking Market Structure, Panzar and Rosse H statistic
    JEL: C12 D40 E50 G20
    Date: 2017–07
  49. By: Davide Fiaschi; Andrea Mario Lavezzi; Angela Parenti
    Abstract: This paper evaluates the effectiveness of European Cohesion Policy in the regions of 12 EU countries in the period 1991-2008, on the basis of a spatial growth model which allows for the identification of both direct and indirect effects of EU funds on GDP per worker growth. We find that âObjective 1â funds are characterized by strong spatial externalities and a positive and concave effect on the growth of GDP per worker, which reaches a peak at the ratio funds/GDP of approximately 3% and becomes non-significant after 4%. âObjective 2â and âCohesionâ funds have non-significant effects, while all the other funds exert a positive and significant effect, but their size is very limited. EU Cohesion Policy, moreover, appears to have increased its effectiveness over time. In the period 2000-2006 Objective 1 funds are estimated to have a median multiplier equal to 1.52, and to have added 0.37% to the GDP per worker growth. Overall, in the period 1991- 2008 funds are estimated to have added 1.4% to the median annual growth, and to have reduced regional disparities of 8 basis points in terms of the Gini index.
    Keywords: European regional disparities, European regional policy, spatial spillovers, Structural and Cohesion Funds, spatial panel model
    JEL: C21 E60 O52 R11 R12
    Date: 2017–01–01
  50. By: Michael Weber (University of Chicago); Andreas Neuhierl (University of Notre Dame)
    Abstract: We construct a slope factor from changes in federal funds futures of different horizons. Slope predicts stock returns at the weekly frequency: faster monetary policy easing positively predicts excess returns. Investors can achieve increases in weekly Sharpe ratios of 20% conditioning on the slope factor. The tone of speeches by the FOMC chair correlates with the slope factor. Slope predicts changes in future interest rates and forecast revisions of professional forecasters. Our findings show that the path of future interest rates matters for asset prices, and monetary policy affects asset prices throughout the year and not only at FOMC meetings.
    Date: 2017
  51. By: Michael Ade; Jannie Rossouw; Tendai Gwatidzo
    Abstract: This paper investigates the effect of tax harmonisation on foreign direct investment (FDI) in the Southern African Development Community (SADC) region. Findings of a first attempt to investigate the linkage between taxation (tax rates and policy) and FDI (in all 15 countries), using an eclectic panel data modeling approach from 1990-2010 are presented. A new value added tax (VAT) harmonisation variable is introduced (in addition to a corporate income tax (CIT) harmonisation variable) via a tax policy harmonisation measure (TPHM) in the panel empirical investigation, complemented by a sensitivity analysis (using the extreme-bound analysis (EBA) technique) on the impact of taxation on FDI inflows to the SADC. The investigation shows that when errors in the regressors (for instance contemporaneous correlation, heteroskedasticity, cross-sectional dependence, endogeneity) are controlled for, tax harmonisation (amongst other contributing factors) does indeed have a significant causal relationship with FDI in the SADC. The study generally provides empirical evidence to support the argument for effectively using taxation towards higher FDI inflows in the region. Policy considerations towards improved tax harmonisation emanating from the paper include the need for individual SADC governments to promote national tax policies aimed at supporting regional tax harmonisation objectives, through strengthening existing tax agreements and treaties. This is necessary to reduce disparity in tax rates (including the definition of tax bases), improve existing level of tax co-movement, mitigate tax leakages and promote FDI inflows.
    Keywords: SADC, FDI and Tax Policy Harmonisation, Panel data, Cross-sectional dependence, Sensitivity analysis
    JEL: E60 F15 F21 H25 H27
    Date: 2017–07
  52. By: Shai Bernstein; Josh Lerner; Filippo Mezzanotti
    Abstract: Do private equity firms contribute to financial fragility during economic crises? We find that during the 2008 financial crisis, PE-backed companies increased investments relative to their peers, while also experiencing greater equity and debt inflows. The effects are stronger among financially constrained companies and those whose private equity investors had more resources at the onset of the crisis. PE-backed companies consequentially experienced higher asset growth and increased market share during the crisis.
    JEL: E32 G24
    Date: 2017–07
  53. By: Philipp Pfeiffer (Technische Universität Berlin)
    Abstract: The macroeconomic experience of the last decade stressed the importance of jointly studying the growth and business cycle fluctuations behavior of the economy. To analyze this issue, we embed a model of Schumpeterian growth into an estimated medium-scale DSGE model. Results from a Bayesian estimation suggest that investment risk premia are a key driver of the slump following the Great Recession. Endogenous innovation dynamics amplifies financial crises and helps explain the slow recovery. Moreover, financial conditions also account for a substantial share of R&D investment dynamics.
    Date: 2017
  54. By: Sylvia Xiao (University of Wisconsin-Madison); Randall Wright (University of Wisconsin); Guillaume Rocheteau (University of California, Irvine)
    Abstract: We develop models with liquid government bonds and currency to analyze monetary policy, especially open market operations. Various specifications are considered for market structure, and for the liquidity — i.e., acceptability or pledgeability — of money and bonds in their roles as media of exchange or collateral. Theory delivers sharp policy predictions. It can also generate negative nominal yields, endogenous market segmentation, liquidity traps, and nominal prices or interest rates that appear sluggish. Differences in acceptability or pledgeability are not simply assumed; they are endogenized using information frictions. This naturally generates multiple equilibria, but conditional on selection, we still deliver sharp predictions.
    Date: 2017
  55. By: Franck Portier (Toulouse School of Economics); Dana Galizia (Carleton University); Paul Beaudry (University of British Columbia)
    Abstract: This paper begins by re-examining the spectral properties of several cyclically sen- sitive variables such as hours worked, unemployment and capacity utilization. For each of these series, we document the presence of an important peak in the spectral density at a periodicity of approximately 36-40 quarters. We take this pattern as suggestive of intriguing but little-studied cyclical phenomena at the long end of the business cycle, and we ask how best to explain it. In particular, we explore whether such patterns may reflect slow-moving limit cycle forces, wherein booms sow the seeds of the subsequent busts. To this end, we present a general class of models, featuring local complementarities, that can give rise to unique-equilibrium behavior characterized by stochastic limit cycles. We then use the framework to extend a New Keynesian-type model in a manner aimed at capturing the notion of an accumulation-liquidation cycle. We esti- mate the model by indirect inference and find that the cyclical properties identified in the data can be well explained by stochastic limit cycles forces, where the exogenous disturbances to the system are very short lived. This contrasts with results from most other macroeconomic models, which typically require very persistent shocks in order to explain macroeconomic fluctuations.
    Date: 2017
  56. By: Shigeto Kitano (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Kenya Takaku (Faculty of International Studies, Hiroshima City University, Japan)
    Abstract: We develop a sticky price, small open economy model with financial frictions à la Gertler and Karadi (2011), in combination with liability dollarization. An agency problem between domestic financial intermediaries and foreign investors of emerging economies introduces financial frictions in the form of time-varying endogenous balance sheet constraints on the domestic financial intermediaries. We consider a shock that tightens the balance sheet constraint and show that capital controls, the effects of which are rigorously examined as a policy tool for the emerging economies, can be a credit policy tool to mitigate the negative shock.
    Keywords: Capital control; Macroprudential regulation; Financial frictions; Financial intermediaries; Balance sheets; Small open economy; Liability dollarization; DSGE; Welfare
    JEL: E69 F32 F41
    Date: 2017–07
  57. By: Savas Papadopoulos (Bank of Greece); Pantelis Stavroulias (Democritus University of Thrace); Thomas Sager (University of Texas); Etti Baranoff (Virginia Commonwealth University)
    Abstract: The global financial crisis of 2007-2008 focused the attention of financial authorities on developing methods to forecast and avoid future financial crises of similar magnitude. We contribute to the literature on crisis prediction in several important ways. First, we develop an early warning system (EWS) that provides 7-12 quarters advance warning with high accuracy in out-of-sample testing. Second, the EWS applies region-wide to the leading economies in the European Union. Third, the methodology is transparent – utilizing only publicly available macro-level data and standard statistical classification methodology (multinomial logistic regression, discriminant analysis, and neural networks). Fourth, we employ two relatively novel methodological innovations in EWS modeling: ternary state classification to guarantee a minimum advance warning period, and a fitting and evaluation criterion (the total harmonic mean) that prioritizes avoiding classification errors for the relatively infrequent events of most interest. As a consequence, a policymaker who uses these methods will enjoy a high probability that future crises will be signaled well in advance and that warnings of crisis will not be false alarms.
    Keywords: Banking crisis; financial stability; macroprudential policy; classification methods; goodness-of-fit measures
    JEL: C53 E58 G28
    Date: 2017–04
  58. By: Mahmood ul Hasan Khan (State Bank of Pakistan); Muhammad Nadim Hanif (State Bank of Pakistan)
    Abstract: Based upon the indicators of market structure, this paper tests the relevance of Structure-Conduct-Performance (SCP), Relative Market Power (RMP), and the Efficient Structure (ES) paradigms for banking industry of Pakistan. We use a (balanced) panel data from 24 commercial banks of Pakistan from the year 1996 to 2015. Descriptive statistics and the formal tests suggest that: (a) there is a weak association between the indicators of market structure and banks’ performance in case of Pakistan; (b) the empirical evaluation results do not provide meaningful support to SCP or RMP paradigms; and (c) the ES paradigm is more relevant in case of Pakistan. At policy level, the findings of this paper suggest that the focus of policymakers should be to improve the efficiency of banking sector, as the excessive focus on indicators of market structure like concentration ratio to improve competition in the banking sector could be counterproductive.
    Keywords: Structure-Conduct-Performance, Efficient-Structure, Competition, Banking Sector
    JEL: D40 E50
    Date: 2017–07
  59. By: Mahmood ul Hasan Khan (State Bank of Pakistan); Muhammad Nadim Hanif (State Bank of Pakistan)
    Abstract: The banking sector of Pakistan has witnessed a notable transformation in its structure and business activities following the implementation of financial sector reforms since the early 1990s. Specifically, the reforms helped transform a repressed financial sector into a market oriented and sound financial sector, predominantly owned and managed by the private sector. How these developments have impacted competition among the banks is still an open question. This study attempts to answer this question with the application of a new approach to measure competition: Boone Indicator of competitiveness. This measure postulates that inefficient firms (banks) in a competitive environment are punished harshly, and there is an output reallocation from inefficient to efficient firms/banks. We have estimated elasticity of market share to marginal costs for 24 banks in Pakistan, using a balanced panel of bank level (annual) data for the year 1996 to 2015. Marginal costs are obtained indirectly by first estimating a translog cost function using earning assets as an output, and cost of financial capital, physical capital and labor as inputs. The estimated Boone Indicator value of negative 0.31 is significant and suggests that inefficient banks have been losing their market share to efficient banks over the estimation period: a reflection of underlying competitive environment. Increasing value of Boone Indicator (in absolute terms) over the period of study suggests that competition among the banks in Pakistan has increased over time.
    Keywords: Boone Indicator, Translog Cost Function, Competition in Banking Sector
    JEL: D40 E50
    Date: 2017–07
  60. By: Paul Lengermann; Norman J. Morin; Andrew D. Paciorek; Eugenio P. Pinto; Claudia R. Sahm
    Abstract: According to the Bureau of Economic Analysis, real GDP rose at an annual rate of 1.2 percent in the first quarter of this year, a step down from the 2.3 percent pace in the second half of last year. However, we argue in this note that residual seasonality is unlikely to be the primary reason for the slowdown in first-quarter growth this year.
    Date: 2017–07–28

This nep-mac issue is ©2017 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.