nep-mac New Economics Papers
on Macroeconomics
Issue of 2017‒10‒22
77 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The Corridor’s Width as a Monetary Policy Tool By Guillaume A. Khayat
  2. The Globalisation of Inflation: The Growing Importance of Global Value Chains By Raphael A. Auer; Claudio Borio; Andrew Filardo
  3. Investigating First-Stage Exchange Rate Pass-Through: Sectoral and Macro Evidence from Euro Area Countries By Nidhaleddine Ben Cheikh; Christophe Rault
  4. Why it makes economic sense to help the have-nots in times of a financial crisis By De Koning, Kees
  5. The Anchoring of Inflation Expectations in the Short and in the Long Run By Nautz, Dieter; Netsunajew, Aleksei; Strohsal, Till
  6. The Macroeconomic Effects of Banking Crises: Evidence from the United Kingdom, 1750-1938 By Kenny, Seán; Lennard, Jason; Turner, John D.
  7. Wage Cyclicalities and Labor Market Dynamics at the Establishment Level: Theory and Evidence By Merkl, Christian; Stüber, Heiko
  8. IGEM-PA: a Variant of the Italian General Equilibrium Model for Policy Analysis By Barbara Annicchiarico; Claudio Battiati; Claudio Cesaroni; Fabio Di Dio; Francesco Felici
  9. IT Countries: A Breed Apart? the case of Exchange Rate Pass-Through By Antonia López-Villavicencio; Marc Pourroy
  10. The fallacy of the fiscal theory of the price level - one last time By Buiter, Willem H.; Sibert, Anne C.
  11. Helicopter money: survey evidence on expectation formation and consumption behavior By Djuric, Uros; Neugart, Michael
  12. Monetary Policy and Bank Profitability in a Low Interest Rate Environment By Carlo Altavilla; Miguel Boucinha; José-Luis Peydró
  13. News Shocks under Financial Frictions By Görtz, Christoph; Tsoukalas, John; Zanetti, Francesco
  14. Uncertainty and Monetary Policy in Good and Bad Times By Giovanni Caggiano; Efrem Castelnuovo; Gabriela Nodari
  15. The Transmission Mechanism of Credit Support Policies in the Euro Area By Jef Boeckx; Maite De Sola Perea; Gert Peersman
  16. International Inflation Spillovers Through Input Linkages By Raphael A. Auer; Andrei A. Levchenko; Philip Sauré
  17. Business financing in Europe: How will higher interest rates affect companies' financial situation? By Bendel, Daniel; Demary, Markus; Voigtländer, Michael
  18. The money creation process: A theoretical and empirical analysis for the US By Levrero, Enrico Sergio; Deleidi, Matteo
  19. Income and Wealth Inequality in America, 1949-2013 By Moritz Kuhn; Moritz Schularick; Ulrike I. Steins
  20. Fiscal stabilisation in the Euro-Area: A simulation exercise By Nicolas Carnot; Magdalena Kizior; Gilles Mourre
  21. Should Unconventional Monetary Policies Become Conventional? By Quint, Dominic; Rabanal, Pau
  22. Long memory in Turkish Unemployment Rates By Gil-Alana, Luis A.; Ozdemir, Zeynel Abidin; Tansel, Aysit
  23. Long Memory in Turkish Unemployment Rates By Gil-Alana, Luis A.; Ozdemir, Zeynel Abidin; Tansel, Aysit
  24. Dynamical Interaction Between Financial and Business Cycles By Monica Billio; Anna Petronevich
  25. Minimum Wages in the Presence of In-Kind Redistribution By George Economides; Thomas Moutos
  26. International spillovers in global asset markets By Belke, Ansgar; Dubova, Irina
  27. The Economics of Cryptocurrencies - Bitcoin and Beyond By Jonathan Chiu; Thorsten Koeppl
  28. Engineering Crises: Favoritism and Strategic Fiscal Indiscipline By Gilles Saint-Paul; Davide Ticchi; Andrea Vindigni
  29. Inflation Dynamics in Uganda: A Quantile Regression Approach By Francis Leni Anguyo; Rangan Gupta; Kevin Kotzé
  30. An analysis of revisions in Indian GDP data By Amey Sapre; Rajeswari Sengupta
  31. The Role of Corporate Taxes in the Decline of the Startup Rate By Neira, Julian; Singhania, Rish
  32. Price rigidities and the granular origins of aggregate fluctuations By Pasten, Ernesto; Schoenle, Raphael; Weber, Michael
  33. Does the Investment Model Explain Value and Momentum Simultaneously? By Andrei S. Gonçalves; Chen Xue; Lu Zhang
  34. Monetary transmission in India: Working of price and quantum channels By Ashima Goyal; Deepak Kumar Agarwal
  35. Taxes and the Fed : Theory and Evidence from Equities By Anthony M. Diercks; William Waller
  36. Preliminary steps toward a universal economic dynamics for monetary and fiscal policy By Yaneer Bar-Yam; Jean Langlois-Meurinne; Mari Kawakatsu; Rodolfo Garcia
  37. The Sovereign-Bank Interaction in the Eurozone Crisis By Maximilian Goedl
  38. Austerity, Inequality, and Private Debt Overhang By Klein, Mathias; Winkler, Roland
  39. Fiscal Stimulus and Households' Non-Durable Consumption Expenditures: Evidence from the 2009 Australian Nation Building and Jobs Plan By Aisbett, Emma; Brueckner, Markus; Steinhauser, Ralf
  40. Human Capital and Optimal Redistribution By Koeniger, Winfried; Prat, Julien
  41. Interest Rates and Exchange Rates in Normal and Crisis Times By Forti Grazzini, Caterina; Rieth, Malte
  42. Gravitation of Market Prices towards Normal Prices: Some New Results By Bellino, Enrico; Serrano, Franklin
  43. Directed Attention and Nonparametric Learning By Ian Dew-Becker; Charles G. Nathanson
  44. Procyclical endogenous taxation and aggregate instability By Mauro Bambi; Siritas Kettanurak
  45. The Troika’s variations on a trio: Why the loan programmes worked so differently in Greece, Ireland, and Portugal By Niamh Hardiman; Joaquim Filipe Araújo; Muiris MacCarthaigh; Calliope Spanou
  46. Piketty meets Pasinetti: On public investment and intelligent machinery By Mattauch, Linus; Klenert, David; Stiglitz, Joseph E.; Edenhofer, Ottmar
  47. Analysis of Housing Equity Withdrawal by its Forms By Declan French; Donal McKillop; Tripti Sharma
  48. Intangible Capital: Complement or Substitute in the Creation of Public Goods? By Gornig, Martin; Schiersch, Alexander
  49. Recent changes in measurement of India's GDP: Overall issues and some focus on agriculture By S. Mahendra Dev
  50. Non-performing assets in Indian Banks: This time it is different By Rajeswari Sengupta; Harsh Vardhan
  51. Heterogeneity in the Internationalization of R&D: Implications for anomalies in finance and macroeconomics By Grüning, Patrick
  52. Евразийский экономический союз By Vinokurov, Evgeny; Korshunov, Dmitry; Pereboev, Vladimir; Tsukarev, Taras
  53. Keeping up with the Joneses: Other-regarding Preferences and Endogenous Growth By Petach, Luke; Tavani, Daniele
  54. Simplifying choices in defined contribution retirement plan design: A case study By Mitchell, Olivia S.; Keim, Donald B.
  55. Virtual Relationships: Short- and Long-run Evidence from BitCoin and Altcoin Markets By Pavel, Ciaian; d'Artis, Kancs; Miroslava, Rajcaniova
  56. Three Questions for U.S. Monetary Policy : a presentation at Truman State University, Kirksville, Mo. September 27, 2017. By Bullard, James B.
  57. Regulation, Institutions and Aggregate Investment: New Evidence from OECD Countries By Balazs Egert
  58. What’s the Future of Interest Rates? The Answer’s in the Stars By Williams, John C.
  59. Monetary policy and bank profitability in a low interest rate environment By Altavilla, Carlo; Boucinha, Miguel; Peydró, José-Luis
  60. Sentiment, liquidity and asset prices By Vladimir Asriyan; William Fuchs; Brett Green
  61. Slowdown in bank credit growth: Aggregate demand or bank non-performing assets? By Ashima Goyal; Akhilesh Verma
  62. Financial Structure and Macroeconomic Volatility : a Panel Data Analysis By Emiel F.S. van Bezooijen; J.A. Bikker
  63. Securitization, bank vigilance, leverage and sudden stops By Patir, Assaf
  64. The economics of cryptocurrencies – bitcoin and beyond By Chiu, Jonathan; Koeppl, Thorsten V
  65. Do Americans Want to Tax Capital? Evidence from Online Surveys By Raymond Fisman; Keith Gladstone; Ilyana Kuziemko; Suresh Naidu
  66. In Search of a Spatial Equilibrium in the Developing World By Douglas Gollin; Martina Kirchberger; David Lagakos
  67. Improving productivity in New Zealand's economy By Andrew Barker
  68. The Democratic-Republican Presidential Growth Gap and the Partisan Balance of the State Governments By Dodge Cahan; Niklas Potrafke
  69. Gradual and predictable: reducing the size of the Federal Reserve’s balance sheet: remarks at SUERF – The European Money and Finance Forum, New York City By Potter, Simon M.
  70. Does past inflation predict the future? By Chris McDonald
  71. Aggregation with a non-convex labor supply decision, unobservable effort, and reciprocity ("gift exchange") in labor relations By Vasilev, Aleksandar
  72. Explaining Inequality Between Countries: The Declining Role of Political Institutions By Andrew J. Hussey; Michael Jetter; Dianne McWilliam
  73. Income inequality and private bank credit in developed economies By Kvedaras, Virmantas
  74. Regional Quality and Impaired Firms: Evidence from Italy By De Martiis, Angela; Fidrmuc, Jarko
  75. On the Effects of Infrastructure Investments on Industrial CO2 Emissions in Portugal By Alfredo Marvão Pereira; Rui Manuel Pereira
  76. Behavioral Heterogeneity : Pareto Distributions of Homothetic Preference Scales and Aggregate Expenditures Income Elasticities By Jean-Michel Grandmont
  77. Towards more inclusive growth in Colombia By Christine de la Maisonneuve

  1. By: Guillaume A. Khayat (Aix-Marseille Univ. (Aix-Marseille School of Economics), CNRS, EHESS and Centrale Marseille)
    Abstract: Credit institutions borrow liquidity from the central bank’s lending facility and deposit (excess) reserves at its deposit facility. The central bank directly controls the corridor: the non-market interest rates of its lending and deposit facilities. Modifying the corridor changes the conditions on the interbank market and allows the central bank to set the short-term interest rate in the economy. This paper assesses the use of the corridor’s width as an additional tool for monetary policy. Results indicate that a symmetric widening of the corridor boosts output and welfare while addressing the central bank’s concerns over higher risk-taking in the economy.
    Keywords: Monetary policy, interbank market, heterogeneous interbank frictions, the corridor, excess reserves, financial intermediation
    JEL: E52 E58 E44
    Date: 2017–10
  2. By: Raphael A. Auer; Claudio Borio; Andrew Filardo
    Abstract: Greater international economic interconnectedness over recent decades has been changing inflation dynamics. This paper presents evidence that the expansion of global value chains (GVCs), ie cross-border trade in intermediate goods and services, is an important channel through which global economic slack influences domestic inflation. In particular, we document the extent to which the growth in GVCs explains the established empirical correlation between global economic slack and national inflation rates, both across countries and over time. Accounting for the role of GVCs, we also find that the conventional trade-based measures of openness used in previous studies are poor proxies for this transmission channel. The results support the hypothesis that as GVCs expand, direct and indirect competition among economies increases, making domestic inflation more sensitive to the global output gap. This can affect the trade-offs that central banks face when managing inflation.
    Keywords: globalization, inflation, Phillips curve, monetary policy, global value chain, production structure, international inflation synchronisation, input-output linkages, supply chain
    JEL: E31 E52 E58 F02 F41 F42 F14
    Date: 2017
  3. By: Nidhaleddine Ben Cheikh; Christophe Rault
    Abstract: In this paper, we evaluate the first-stage pass-through, namely the responsiveness of import prices to the exchange rate changes, for a sample of euro area (EA) countries. Our study aims to shed further light on the role of microeconomic factors vs. macroeconomic factors in influencing the extent of the exchange rate pass-through (ERPT). As a first step, we conduct a sectoral analysis using disaggregated import prices data. We find a much higher degree of pass-through for more homogeneous goods and commodities, such as oil and raw materials, than for highly differentiated manufactured products, such as machinery and transport equipment. Our results confirm that cross-country differences in pass-through rates may be due to divergences in the product composition of imports. The higher share of imports from sectors with lower degrees of pass-through, the lower ERPT for an economy will be. In a next step, we investigate for the impact of some macroeconomics factors or common events experienced by EA members on the extent of pass-through. Using the System Generalized Method of Moments within a dynamic panel-data model, our estimates indicate that decline of import-price sensitivity to the exchange rate is not significant since the introduction of the single currency. Our findings suggest instead that the weakness of the euro during the first three years of the monetary union significantly raised the extent of the ERPT. This outcome could explain why the sensitivity of import prices has not fallen since 1999. We also point out a significant role played by the inflation in the Eurozone, as the responsiveness of import prices to exchange rate fluctuations tends to decline in a low and more stable inflation environment. Overall, our findings support the view that the extent of pass-through is comprised of both macro- and microeconomic aspects that policymakers should take into account.
    Keywords: exchange rate pass-through, import prices, dynamic panel data
    JEL: E31 F31 F40
    Date: 2017
  4. By: De Koning, Kees
    Abstract: August 9, 2007 is often regarded as the starting date of the global financial crisis. BNP Paribas stopped trading in three of its investment funds exposed to the U.S. sub-prime mortgage markets as the liquidity in these markets had all but dried up. Liquidity considerations are a symptom of the supply side of funds: the lenders’ side. The latter could be banks, hedge funds, asset managers or pension funds, but equally rich individuals who would invest directly in these markets. The financial crisis of 2007-2008 was a lenders’ crisis. Generally, banks had insufficient capital to absorb the losses created by the reduced liquidity levels in the financial markets. Central banks had to step in to rescue quite a few of them. The fact was, however, that the underlying cause of the financial crisis was a borrowers’ crisis. In the U.S., over the years 1997-2007, households had to borrow an ever-growing percentage of their earnings in order to get themselves on the property ladder or rent a home. Long before 2007, in fact by 2003, the additional amount that a household had to borrow to get a home was equal to a full year of earnings. Average income growth and mortgage volume growth were on a collision course. Borrowers had to allocate increasing percentages of their earnings to servicing mortgage debts or renting a home. The notion that lenders will rein in their lending as a consequence of free market competition is a fallacy. The key is not the price of funds borrowed, but the volume of funds lend per time period in comparison to average household’ nominal income growth. The consequences of a borrowers’ crisis are different from a financial markets’ liquidity one. When households have to allocate an increasing share of their income to either buy or rent a home, fewer funds are available to spend on other goods and services. When households are subsequently confronted with foreclosure and ultimately repossession of homes, they lose most or all past savings accumulated in the home. The poor get poorer, both in income and asset values terms. The gap between the haves and the have-nots widens dramatically. Volume of lending control and to some extent rent controls can prevent a new financial crisis occurring. More measures are needed to overcome a borrowers’ crisis.
    Keywords: financial crisis, lenders' crisis, borrowers' crisis, income-house price gap, U.S. mortgage lending levels 1996-2016, annual U.S.housing starts, average U.S. home sales price, median U.S. annual household' income, economic versus legal solutions
    JEL: E3 E4 E44 E5 E58
    Date: 2017–08–30
  5. By: Nautz, Dieter; Netsunajew, Aleksei; Strohsal, Till
    Abstract: We introduce structural VAR analysis as a tool for investigating the anchoring of inflation expectations. We show that U.S. consumers’ inflation expectations are anchored in the long run because macro-news shocks are long-run neutral for long-term inflation expectations. The identification of structural shocks helps to explain why inflation expectations deviate from the central bank’s target.
    JEL: E31 E52 E58
    Date: 2017
  6. By: Kenny, Seán (Department of Economic History, Lund University); Lennard, Jason (Department of Economic History, Lund University); Turner, John D. (Queen's University Belfast)
    Abstract: This paper investigates the macroeconomic effects of UK banking crises over the period 1750 to 1938. We construct a new annual banking crisis series using bank failure rate data, which suggests that the incidence of banking crises was every 32 years. Using our new series and a narrative approach to identify exogenous banking crises, we find that industrial production contracts by 8.2 per cent in the year following a crisis. This finding is robust to a battery of checks, including different VAR specifications, different thresholds for the crisis indicator, and the use of a capital-weighted bank failure rate.
    Keywords: banking crisis; bank failures; narrative approach; macroeconomy; United Kingdom
    JEL: E32 E44 G21 N13 N23 N24
    Date: 2017–10–11
  7. By: Merkl, Christian; Stüber, Heiko
    Abstract: The paper analyzes the effects of different wage cyclicalities on labor market flow dynamics. We derive a model that allows for heterogeneous wage cyclicalities across firms over the business cycle and confront the theoretical results with the new AWFP dataset. Establishments with more procyclical wage movements over the business cycle have a more countercyclical hires rate. The quantitative responses are in line with the proposed model.
    JEL: E24 E32 J64
    Date: 2017
  8. By: Barbara Annicchiarico; Claudio Battiati; Claudio Cesaroni; Fabio Di Dio; Francesco Felici
    Abstract: This paper extends IGEM, the dynamic general equilibrium model for the Italian economy currently in use at the Italian Department of the Treasury for economic policy analysis. In this new variant of the model the public sector is explicitly modelled as suppliers of goods and services. With this tool in hand we are able to present an in-depth analysis of expenditure-based fiscal multipliers and ameliorate our understanding of the potential macroeconomic effects of several policy interventions,such as those aimed at the rationalization of public spending, at the improvement of the business environment and at fostering productivity of the public administration (PA).
    Keywords: Structural Reforms, Dynamic General Equilibrium Model, Italy, Public Administration Fiscal Multipliers, Simulation Analysis
    JEL: E27 E30 E60
    Date: 2017–05
  9. By: Antonia López-Villavicencio (Univ Lyon, Université Lyon 2, GATE UMR 5824, F-69130 Ecully, France); Marc Pourroy (University of Poitiers, France)
    Abstract: This paper estimates the effects of two monetary policy strategies in the exchange rate pass-through (ERPT). To this end, we employ propensity score matching and consider the adoption of a target by a country as a treatment to find suitable counterfactuals to the actual targeters. By controlling for self-selection bias and endogeneity of the monetary policy regime, we show that inflation target has helped in reducing the ERPT, with older regimes more successful than younger ones. However, a de facto flexible exchange rate regime has not noticeable advantages to reduce the extent to which exchange rate fluctuations contribute to inflation instability.
    Keywords: exchange rate pass-through, inflation targeting, exchange rate regime, propensity score matching
    JEL: E31 E42 E52 C30
    Date: 2017
  10. By: Buiter, Willem H.; Sibert, Anne C.
    Abstract: There have been attempts to resurrect the fiscal theory of the price revel (FTPL). The original FTPL rests on a fundamental compounded fallacy: confusing the intertemporal budget constraint (IBC) of the State, holding with equality and with sovereign bonds priced at their contractual values, with a misspecified equilibrium nominal bond pricing equation, and the "double use" of this IBC. This fallacy generates a number of internal inconsistencies and anomalies. The issue is not an empirical one. Neither does it concern the realism of the assumptions. It is about flawed internal logic. The issue is not just of academic interest. If fiscal policy authorities were to take the FTPL seriously, costly policy accidents, including sovereign default and hyperinflation, could be the outcome. Interpreting the FTPL as an equilibrium selection mechanism in models with multiple equilibria does not help. Attempts by Sims to extend the FTPL to models with nominal price rigidities fail. The attempted resurrection of the FTPL fails. It is time to bury it again - for the last time.
    Keywords: fiscal theory of the price level,intertemporal budget constraint,equilibrium bond pricing equation,monetary and fiscal policy coordination,equilibrium selection,fiscal dominance
    JEL: E31 E40 E50 E58 E62 H62 H63
    Date: 2017
  11. By: Djuric, Uros; Neugart, Michael
    Abstract: We fielded a representative survey among the German population randomly assigning respondents to various unconventional monetary policy scenarios that raise household income. We find that in all policy treatments people spend almost 40% of the transfer. Spending shares are independent of whether the transfer is debt financed and provided by the government or provided by the central bank as "helicopter money".
    JEL: E21 E52 E58 E63
    Date: 2017
  12. By: Carlo Altavilla (Name: European Central Bank and CSEF); Miguel Boucinha (European Central Bank); José-Luis Peydró (ICREA-UPF, CREI, BGSE)
    Abstract: We analyse the impact of standard and non-standard monetary policy measures on bank profitability. For empirical identification, the analysis focuses on the euro area, thereby exploiting substantial bank and country heterogeneity within a monetary union where the central bank has implemented a broad range of unconventional policies, including quantitative easing and negative interest rates. We use both proprietary and commercial data on individual bank balance sheets and financial market prices. Our results show that monetary policy easing – a decrease in short-term interest rates and/or a flattening of the yield curve – is not associated with lower bank profits once we control for the endogeneity of the policy measures to expected macroeconomic and financial conditions. Importantly, our analysis indicates that the main components of bank profitability are asymmetrically affected by accommodative monetary conditions, with a positive impact on loan loss provisions and non-interest income largely offsetting the negative one on net interest income. We also find that a protracted period of low interest rates might have a negative effect on profits that, however, only materialises after a long period of time and tends to be counterbalanced by improved macroeconomic conditions. In addition, while more operationally efficient banks benefit more from monetary policy easing, banks engaging more extensively in maturity transformation experience a higher increase in profitability after a steepening of the yield curve. Finally, we assess the impact of unconventional monetary policies on market-based measures of expected bank profitability and credit risk, by employing an event study analysis using high frequency data, and find that accommodative monetary policies tend to increase bank stock returns and reduce credit risk.
    Keywords: bank profitability, monetary policy, lower bound, quantitative easing, negative rates
    JEL: E52 E43 G01 G21 G28
    Date: 2017–10–16
  13. By: Görtz, Christoph; Tsoukalas, John; Zanetti, Francesco
    Abstract: We examine the dynamic effects and empirical role of TFP news shocks in the context of frictions in financial markets. We document two new facts using VAR methods which provide robust evidence on the importance credit spreads for the propagation of news shocks. A DSGE model with financial frictions shows these are critical for the amplification of TFP news shocks. The very similar quantitative dynamics implied by VAR and DSGE methodologies provides support for the `news view' of business cycles.
    JEL: E2 E3
    Date: 2017
  14. By: Giovanni Caggiano (Department of Economics, Monash University); Efrem Castelnuovo (Melbourne Institute of Applied Economic and Social Research); Gabriela Nodari (Reserve Bank of Australia)
    Abstract: We investigate the role played by systematic monetary policy in the United States in tackling the real effects of uncertainty shocks in recessions and expansions. We model key indicators of the business cycle with a nonlinear vector autoregression model that allows for different dynamics in busts and booms. Uncertainty shocks are identified by focusing on historical events that are associated with jumps in financial volatility. Our results show that uncertainty shocks hitting in recessions trigger a more abrupt drop and a faster recovery in real economic activity than in expansions. Counterfactual simulations suggest that the effectiveness of systematic US monetary policy in stabilising real activity in the aftermath of an uncertainty shock is greater in expansions. Finally, we provide empirical and narrative evidence pointing to a risk management approach by the Federal Reserve.
    Keywords: uncertainty shocks; nonlinear smooth transition vector autoregressions; generalised impulse response functions; systematic monetary policy
    JEL: C32 E32
    Date: 2017–10
  15. By: Jef Boeckx; Maite De Sola Perea; Gert Peersman
    Abstract: We use an original monthly dataset of 131 individual euro area banks to examine the effectiveness and transmission mechanism of the Eurosystem’s credit support policies since the start of the crisis. First, we show that these policies have indeed been succesful in stimulating the credit flow of banks to the private sector. Second, we find support for the “bank lending view†of monetary transmission. Specifically, the policies have had a greater impact on loan supply of banks that are more constrained to obtain unsecured external funding, i.e. small banks (size effect), banks with less liquid balance sheets (liquidity effect), banks that depend more on wholesale funding (retail effect) and low-capitalized banks (capital effect). The role of bank capital is, however, ambiguous. Besides the above favorable direct effect on loan supply, lower levels of bank capitalization at the same time mitigate the size, retail and liquidity effects of the policies. The drag on the other channels has even been dominant during the sample period, i.e. better capitalized banks have on average responded more to the credit support policies of the Eurosystem as a result of more favourable size, retail and liquidity effects.
    Keywords: unconventional monetary policy, bank lending, monetary transmission mechanism
    JEL: E51 E52 E58 G01 G21
    Date: 2017
  16. By: Raphael A. Auer; Andrei A. Levchenko; Philip Sauré
    Abstract: We document that observed international input-output linkages contribute substantially to synchronizing producer price inflation (PPI) across countries. Using a multi-country, industry-level dataset that combines information on PPI and exchange rates with international and domestic input-output linkages, we recover the underlying cost shocks that are propagated internationally via the global input-output network, thus generating the observed dynamics of PPI. We then compare the extent to which common global factors account for the variation in actual PPI and in the underlying cost shocks. Our main finding is that across a range of econometric tests, input-output linkages account for half of the global component of PPI inflation. We report three additional findings: (i) the results are similar when allowing for imperfect cost pass-through and demand complementarities; (ii) PPI synchronization across countries is driven primarily by common sectoral shocks and input-output linkages amplify co-movement primarily by propagating sectoral shocks; and (iii) the observed pattern of international input use preserves fat-tailed idiosyncratic shocks and thus leads to a fat-tailed distribution of inflation rates, i.e., periods of disination and high inflation.
    Keywords: international inflation synchronization, globalization, inflation, input linkages, monetary policy, global value chain, production structure, input-output linkages, supply chain
    JEL: E31 E52 E58 F02 F14 F33 F41 F42
    Date: 2017
  17. By: Bendel, Daniel; Demary, Markus; Voigtländer, Michael
    Abstract: Companies' access to finance has a significant impact on their profitability and growth prospects. Without external financing, most firms are not able to invest, which is a prerequisite for economic growth. In contrast to the US, which has a capital market-based financial system, banks are the dominant lenders for firms in the euro area. Banking crises endanger access to finance. In the wake of the banking and sovereign debt crisis in the euro area, risk premiums for sovereign debt went up and spilled over to banking markets. Besides sovereigns, firms too faced credit constraints, especially in countries with presumably less sustainable public debt. After the European Central Bank (ECB) accelerated its accommodative monetary policy stance even further, interest rates for sovereigns and firms fell considerably, enabling firms to lend money at historically low rates. With the strengthened recovery of the euro area, the end of this ultra-low interest rate environment seems to be near, posing new challenges for firms in the euro area. The aim of this study is to analyse how firms have dealt with this changing financing environment in recent years and to what extent companies are ready for a change towards higher interest rates. To answer this research question, we have used data from the survey on the access to finance of enterprises (SAFE) provided by the ECB. We identify companies that are vulnerable to rising interest rates, as they will presumably encounter economic problems when financing costs rise. The percentage of vulnerable companies is extremely high in Greece (9.4 percent), Italy (8.5 percent) and France (5.7 percent). The lowest rate is in Germany (0.7 percent). In relation to the size of the national business sectors, 39 percent of all vulnerable firms are located in Italy, 23 percent in France and 15 percent in Spain. When the ECB starts to normalize monetary policy, these countries could be hit hard through their business sectors' vulnerability. As a comparatively many large companies are prone to the risk of rising interest rates in Portugal (4.0 percent of big Portuguese companies) and Greece (10.0 percent of big Greek companies), the labour markets in those countries could be disproportionally affected when interest rates rise too quickly or become too high.
    JEL: E32 E44 G30
    Date: 2017
  18. By: Levrero, Enrico Sergio; Deleidi, Matteo
    Abstract: The aim of this paper is to assess – on both theoretical and empirical grounds – the two main views regarding the money creation process,namely the endogenous and exogenous money approaches. After analysing the main issues and the related empirical literature, we will apply a VAR and VECM methodology to the United States in the period 1959-2016 to assess the causal relationship between a number of critical variables that are supposed to determine the money supply, i.e., the monetary base, bank deposits and bank loans. The empirical analysis carried out supports several propositions of the endogenous money approach. In particular, it shows that for the United States in the years 1959-2016 (i) bank loans determine bank deposits and (ii) bank deposits in turn determine the monetary base. Our conclusion is that money supply is mainly determined endogenously by the lending activity of commercial banks.
    Keywords: Money endogeneity; USA; Money Supply
    JEL: C32 E40 E50 E51 G21
    Date: 2017–10
  19. By: Moritz Kuhn; Moritz Schularick; Ulrike I. Steins
    Abstract: This paper studies the distribution of U.S. household income and wealth over the past seven decades. We introduce a newly compiled household-level dataset based on archival data from historical waves of the Survey of Consumer Finances (SCF). Complementing recent work on top income and wealth shares, the long-run survey data give a granular picture of trends in the bottom 90% of the population. The new data confirm a substantial widening of income and wealth disparities since the 1970s. We show that the main loser of rising income and wealth concentration at the top was the American middle class – households between the 25th and 75th percentile of the distribution. The household data also reveal that the paths of income and wealth inequality deviated substantially. Differences in the composition of household portfolios along the wealth distribution explain this divergence. While incomes stagnated, the middle class enjoyed substantial gains in housing wealth from highly concentrated and leveraged portfolios, mitigating wealth concentration at the top. The housing bust of 2007 put an end to this counterbalancing effect and triggered the largest spike in wealth inequality in postwar history. Our findings highlight the importance of portfolio composition, leverage and asset prices for wealth dynamics in postwar America.
    Keywords: income and wealth inequality, household portfolios, historical micro data
    JEL: D31 E21 E44 N32
    Date: 2017
  20. By: Nicolas Carnot; Magdalena Kizior; Gilles Mourre
    Abstract: This paper simulates a euro area stabilisation instrument that addresses some concerns often levied against such ideas. The simulation uses a 'double condition' over observed unemployment rates for triggering the payments to, as well as the contributions from, participating Member States. The functioning is symmetric between good and bad times and includes a form of experience rating as a further safeguard. The behaviour of the fund is assessed with simulations over the past three decades and with 'real time' simulations dating from the euro’s inception as a crucial robustness check. The simulations show that a significant and timely degree of stabilisation can be achieved, complementing national stabilisers without introducing permanent transfers or increasing overall debt. The paper also explores variants of the basic scheme including the introduction of a threshold for restricting the activity of the fund to large shocks.
    Keywords: Macroeconomic stabilisation; risk-sharing; income smoothing; fiscal stabilisers; transfer scheme
    JEL: E61 E62 F36 F42 H77
    Date: 2017–10–16
  21. By: Quint, Dominic; Rabanal, Pau
    Abstract: After the recent crisis, central banks deployed unconventional monetary policies (UMP) to affect credit conditions and to provide liquidity at a large scale. We study if UMP should still be used when economic conditions normalize. Using an estimated non-linear DSGE model with a banking sector and long-term debt for the US, we show that the benefits of using UMP in normal times are substantial. However, the benefits are shock-dependent and mostly arise when the economy is hit by financial shocks.
    JEL: C32 E32 E52
    Date: 2017
  22. By: Gil-Alana, Luis A.; Ozdemir, Zeynel Abidin; Tansel, Aysit
    Abstract: In this paper we have examined the unemployment rate series in Turkey by using long memory models and in particular employing fractionally integrated techniques. Our results suggest that unemployment in Turkey is highly persistent, with orders of integration equal to or higher than 1 in most cases. This implies lack of mean reversion and permanence of the shocks. We found evidence in favor of mean reversion in the case of female unemployment and this happens for all the groups of non-agricultural, rural, urban and youth unemployment series. The possibility of non-linearities are observed only in the case of female unemployment and the degree of persistence is higher in the cases of female and youth unemployment series. Important policy implications emerge from our empirical results. Labor and macroeconomic policies will most likely have long lasting effects on the unemployment rates.
    Keywords: Unemployment,hysteresis,NAIRU,fractional integration,Turkey
    JEL: C22 E24
    Date: 2017
  23. By: Gil-Alana, Luis A. (University of Navarra); Ozdemir, Zeynel Abidin (Gazi University); Tansel, Aysit (Middle East Technical University)
    Abstract: In this paper we have examined the unemployment rate series in Turkey by using long memory models and in particular employing fractionally integrated techniques. Our results suggest that unemployment in Turkey is highly persistent, with orders of integration equal to or higher than 1 in most cases. This implies lack of mean reversion and permanence of the shocks. We found evidence in favor of mean reversion in the case of female unemployment and this happens for all the groups of non-agricultural, rural, urban and youth unemployment series. The possibility of non-linearities are observed only in the case of female unemployment and the degree of persistence is higher in the cases of female and youth unemployment series. Important policy implications emerge from our empirical results. Labor and macroeconomic policies will most likely have long lasting effects on the unemployment rates.
    Keywords: unemployment, hysteresis, NAIRU, fractional integration, Turkey
    JEL: C22 E24
    Date: 2017–09
  24. By: Monica Billio (Department of Economics, University Of Venice Cà Foscari); Anna Petronevich (Department of Economics, University Of Venice Cà Foscari, University of Paris 1 Pantheon-Sorbonne, CREST, National Research University Higher School of Economics)
    Abstract: We adopt the Dynamical Influence model from computer science and transform it to study the interaction between business and financial cycles. For this purpose, we merge it with Markov-Switching Dynamic Factor Model (MS-DFM) which is frequently used in economic cycle analysis. The model suggested in this paper, the Dynamical Influence Markov-Switching Dynamic Factor Model (DI-MS-FM), allows to reveal the pattern of interaction between business and financial cycles in addition to their individual characteristics. More specifically, this model allows to describe quantitatively the existing regimes of interaction in a given economy and to identify their timing, as well as to evaluate the effect of the government policy on the duration of each of the regimes. We are also able to determine the direction of causality between the two cycles for each of the regimes. The model estimated on the US data demonstrates reasonable results, identifying the periods of higher interaction between the cycles in the beginning of 1980s and during the Great Recession, while in-between the cycles evolve almost independently. The output of the model can be useful for policymakers since it provides a timely estimate of the current interaction regime, which allows to adjust the timing and the composition of the policy mix.
    Keywords: Business Cycle, Financial Cycle, Granger causality, Regime-switching models, Dynamic Factor Models, Dynamical interaction
    JEL: C32 C34 C38 E32
    Date: 2017
  25. By: George Economides; Thomas Moutos
    Abstract: To many economists the public’s support for the minimum wage (MW) institution is puzzling, since the MW is considered a “blunt instrument†for redistribution. To delve deeper in this issue we build models in which workers are heterogeneous in ability. In the first model, the government does not engage in any type of redistributive policies – except for the payment of unemployment benefits; we find that the MW is preferred by the majority of workers (even when the unemployed receive very generous unemployment benefits). In the second model, the government engages in redistribution through the public provision of private goods. We show that (i) the introduction of a MW can be preferred by a majority of workers only if the unemployed receive benefits which are substantially below the after-tax earnings they would have had in the perfectly competitive case, (ii) for a given generosity of the unemployment benefit scheme, the maximum, politically viable, MW is lower than in the absence of in-kind redistribution, and (iii) the MW institution is politically viable only when there is a limited degree of in-kind redistribution. These findings can possibly explain why a well-developed social safety net in Scandinavia tends to co-exist with the absence of a national MW, whereas in Southern Europe the MW institution “complements†the absence of a well-developed social safety net.
    Keywords: minimum wage, in-kind redistribution, heterogeneity, unemployment
    JEL: E21 E24 H23 J23
    Date: 2017
  26. By: Belke, Ansgar; Dubova, Irina
    Abstract: The paper estimates the financial transmission between bond and equity markets within and between across the four largest global financial markets - the United States, the Euro area, Japan, and the United Kingdom. In a globalized world, where the complex transmission process across various financial assets is not restricted to just domestic market, we argue that international bond and equity markets are highly interconnected both within and across asset classes.
    JEL: E52 E58 F42
    Date: 2017
  27. By: Jonathan Chiu (Bank of Canada); Thorsten Koeppl (Queen's University)
    Abstract: How well can a cryptocurrency serve as a means of payment? We study the optimal design of cryptocurrencies and assess quantitatively how well such currencies can support bilateral trade. The challenge for cryptocurrencies is to overcome double-spending by relying on competition to update the blockchain (costly mining) and by delaying settlement. We estimate that the current Bitcoin scheme generates a large welfare loss of 1.4% of consumption. This welfare loss can be lowered substantially to 0.08% by adopting an optimal design that reduces mining and relies exclusively on money growth rather than transaction fees to finance mining rewards. We also point out that cryptocurrencies can potentially challenge retail payment systems provided scaling limitations can be addressed.
    Keywords: Cryptocurrency, Blockchain, Bitcoin, Double Spending, Payment Systems
    JEL: E4 E5 L5
    Date: 2017–09
  28. By: Gilles Saint-Paul; Davide Ticchi; Andrea Vindigni
    Abstract: If people understand that some macroeconomic policies are unsustainable, why would they vote for them in the first place? We develop a political economy theory of the endogenous emergence of fiscal crises, based on the idea that the adjustment mechanism to a crisis favors some social groups, that may be induced ex-ante to vote in favor of policies that are more likely to lead to a crisis. People are entitled to a certain level of a publicly provided good, which may be rationed in times of crises. After voting on that level, society votes on the extend to which it will be financed by debt. Under bad enough macro shocks, a crisis arises: taxes are set at their maximum but despite that some agents do not get their entitlement. Some social groups do better in this rationing process than others. We show that public debt - which makes crises more likely - is higher, as is the probability of a crisis, the greater the level of favoritism. If the favored group is important enough to be pivotal when society votes on the entitlement level, favoritism also leads to greater public expenditure. We show that the favored group may strategically favor a weaker state in order to make crises more frequent. Finally, the decisive voter when choosing expenditure may be different from the one when voting on debt. In such a case, constitutional limits on debt may raise the utility of all the poor, relative to the equilibrium outcome absent such limits.
    Keywords: political economy, fiscal crises, favoritism, entitlements, public debt, inequality, state capacity
    JEL: E62 F34 H12 H60 O11 P16
    Date: 2017
  29. By: Francis Leni Anguyo (School of Economics, University of Cape Town, Rondebosch, South Africa and Research Department, Bank of Uganda, Kampala, Uganda); Rangan Gupta (University of Pretoria, Pretoria, South Africa and IPAG Business School, Paris, France); Kevin Kotzé (School of Economics, University of Cape Town, Rondebosch, South Africa)
    Abstract: This paper considers the measurement of inflation persistence in Uganda and how this has changed over time. As the data does not follow a normal distribution, we make use of the quantile regression approach to investigate how various shocks may affect the rate of inflation within different quantiles. The measures of inflation include headline inflation, the central bank's measure of core inflation, and an alternative measure of core inflation. The results suggest that while a unit root is found in many of the upper quantiles of headline inflation, there is evidence of mean reversion within the lower quantiles. In addition, we find higher levels of persistence after 2006 and during the inflation-targeting period. When considering the degree of persistence in the central bank's measure of core inflation, the results suggest that there is a unit root in this measure during the inflation-targeting period. In addition, the alternative measure of core inflation, which is derived from a wavelets transformation, provides similar results. However, this measure is less volatile and more correlated with headline inflation. All the results suggest that large positive deviations from the mean would influence the permanent behaviour of inflation, while small negative deviations are relatively short-lived.
    Keywords: Inflation persistence, Quantile regression, Structural break, monetary policy
    JEL: C22 E31
    Date: 2017–10
  30. By: Amey Sapre (National Institute of Public Finance and Policy); Rajeswari Sengupta (Indira Gandhi Institute of Development Research)
    Abstract: In this paper we study revisions in the annual estimates of India's GDP data. The objective of our analysis is to understand the revision policy adopted by the Central Statistical Organisation (CSO) and the issues therein. Using historic data, we study the magnitude and quality of revisions in the aggregate as well as the sectoral GDP series. We analyze the computation of the sectoral revised estimates and compare the extent of revision in growth rates from the first release to the final estimate. To understand the magnitude of revisions, we compute the standard deviation of revisions in growth rates for each sector and use that to build confidence bands around the initial estimates. The confidence bands provide a means to understand the extent of variation in the final growth rate estimate, and at the same time, provide a mechanism to contain revisions. Based on our analysis, we highlight some of the major issues in CSO's revision policy. We outline possible solutions that can be implemented to improve the quality of GDP data revisions. We identify sectors with large variations in growth rates and argue that improving or changing the low quality indicators can help contain growth rate revisions and enhance the credibility of the estimates.
    Keywords: GDP, National Accounts, Revisions, India
    JEL: E00 E01 C18
    Date: 2017–09
  31. By: Neira, Julian; Singhania, Rish
    Abstract: The business startup rate in the United States has exhibited a large secular decline in recent decades. The reasons behind the decline are not well understood. This paper hypothesizes that the startup rate declined in large part because corporate taxes raised the opportunity cost of entrepreneurship. We formalize this thesis using a model of occupational choice that features firm entry and exit. Quantitatively, the model accounts for much of the decline in the startup rate. Taxes alone account for one-fifth of the decline. Cross-sectoral patterns in US data support our results.
    Keywords: Firm Entry, Startups, Corporate Taxes, Declining Business Dynamism, Occupational Choice
    JEL: D2 E2 E6 H2
    Date: 2017–09–26
  32. By: Pasten, Ernesto; Schoenle, Raphael; Weber, Michael
    Abstract: We study the aggregate implications of sectoral shocks in a multi-sector New Keynesian model featuring sectoral heterogeneity in price stickiness, sector size, and input-output linkages. We calibrate a 341 sector version of the model to the United States. Both theoretically and empirically, sectoral heterogeneity in price rigidity (i) generates sizable GDP volatility from sectoral shocks, (ii) amplifies both the “granular” and the “network” effects, (iii) alters the identity and relative contributions of the most important sectors for aggregate fluctuations, (iv) can change the sign of fluctuations, (v) invalidates the Hulten (1978) Theorem, and (vi) generates a “frictional” origin of aggregate fluctuations. JEL Classification: E31, E32, O40
    Keywords: idiosyncratic shocks, input-output linkages, sticky prices
    Date: 2017–10
  33. By: Andrei S. Gonçalves; Chen Xue; Lu Zhang
    Abstract: Two innovations in the structural investment model go a long way in explaining value and momentum jointly. Firm-level investment returns are constructed from firm-level accounting variables, and are then aggregated to the portfolio level to match with portfolio-level stock returns. In addition, current assets form a separate production input besides physical capital. The model fits well the value, momentum, investment, and profitability premiums jointly, and partially explains the positive stock-investment return correlations, the procyclicality and short-term dynamics of the momentum and profitability premiums, and the countercyclicality and long-term dynamics of the value and investment premiums. However, the model fails to explain momentum crashes.
    JEL: E13 E22 G12 G14 G31
    Date: 2017–10
  34. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Deepak Kumar Agarwal
    Abstract: We examine the strength and efficacy of transmission from the policy rate and liquidity provision to market rates in India, using event window regression analysis. We find the interest rate transmission channel is dominant, but the quantity channel has an indirect impact in increasing the size of interest rate pass through. The speed of response is faster where there is more market depth. Short term liquidity matters for short term rates, especially where markets are thin and long-term liquidity for longer term government securities. Asymmetry, or more transmission during tightening, finds little support, but pass through is faster during tightening. Market rates respond similarly to policy rate changing direction. The quantum channel directly contributes more when in sync with the interest rate channel only occasionally, but contributes indirectly by increasing the size of coefficients. Implications for policy are drawn out.
    Keywords: Monetary transmission; Repo Rate; market rates; short and long-term liquidity
    JEL: E51 E58 E42
    Date: 2017–09
  35. By: Anthony M. Diercks; William Waller
    Abstract: We provide a critical theoretical and empirical analysis that suggests a key driver of fiscal effects on equity markets is the Federal Reserve. For the Post-1980 era, tax cuts lead to higher cash flow news and higher discount rates. The discount rate news tends to dominate such that tax cuts are associated with lower equity returns. This result is flipped for the Pre-1980 era. Our results are confirmed across multiple measures of tax shocks (narrative, SVAR, municipal bonds, etc.) at different frequencies (daily, quarterly, annual). We motivate our empirical findings with a standard New Keynesian model (in addition to the FRB/US model) that exhibits a shift in the aggressiveness of monetary policy. Moreover in our theoretical framework, downward nominal wage rigidities account for observed asymmetries in the response to tax cuts versus tax increases.
    Keywords: Federal Reserve ; Fiscal policy ; News Decomposition ; Stock Market
    JEL: G0 E0 E63 G12 E5
    Date: 2017–10–11
  36. By: Yaneer Bar-Yam; Jean Langlois-Meurinne; Mari Kawakatsu; Rodolfo Garcia
    Abstract: We consider the relationship between economic activity and intervention, including monetary and fiscal policy, using a universal dynamic framework. Central bank policies are designed for growth without excess inflation. However, unemployment, investment, consumption, and inflation are interlinked. Understanding dynamics is crucial to assessing the effects of policy, especially in the aftermath of the financial crisis. Here we lay out a program of research into monetary and economic dynamics and preliminary steps toward its execution. We use principles of response theory to derive implications for policy. We find that the current approach, which considers the overall money supply, is insufficient to regulate economic growth. While it can achieve some degree of control, optimizing growth also requires a fiscal policy balancing monetary injection between two dominant loop flows, the consumption and wages loop, and investment and returns loop. The balance arises from a composite of government tax, entitlement, subsidy policies, corporate policies, as well as monetary policy. We show empirically that a transition occurred in 1980 between two regimes--an oversupply to the consumption and wages loop, to an oversupply of the investment and returns loop. The imbalance is manifest in savings and borrowing by consumers and investors, and in inflation. The latter increased until 1980, and decreased subsequently, resulting in a zero rate largely unrelated to the financial crisis. Three recessions and the financial crisis are part of this dynamic. Optimizing growth now requires shifting the balance. Our analysis supports advocates of greater income and / or government support for the poor who use a larger fraction of income for consumption. This promotes investment due to growth in demand. Otherwise, investment opportunities are limited, capital remains uninvested, and does not contribute to growth.
    Date: 2017–10
  37. By: Maximilian Goedl (University of Graz, Austria)
    Abstract: This paper investigates the relationship between government debt default, the banking sector and the wider economy. It builds a model of the public bond market, the banking sector and the real economy to study the mechanism by which a government default affects the other sectors and shows that this model can explain some "stylized facts" of the Eurozone crisis. The key aspect of the model is a friction in the financial market which forces banks to hold part of their assets in the form of government bonds. In such a model, an exogenous increase in the probability of default can lead to the joint occurrence of a credit crunch (i.e. declining bank lending and rising spreads between loan interest rates and deposit rates) and a decline in output. The paper also shows that an adverse technology shock (an exogenous decline in total factor productivity) cannot fully explain these phenomena.
    Keywords: Government default; Financial frictions; Business cycle model
    JEL: E37 E44 H63
    Date: 2017–10
  38. By: Klein, Mathias; Winkler, Roland
    Abstract: We show that the distributional consequences of fiscal consolidations depend significantly on the level of private indebtedness. Austerity leads to a strong and persistent increase in income inequality when private debt is high. In contrast, there are no discernible distributional effects when private debt is low. This result is robust to alternative identifications of consolidations, to different ways of defining high and low debt states, and to controlling for the state of the business cycle.
    JEL: E62 E64 D63
    Date: 2017
  39. By: Aisbett, Emma; Brueckner, Markus; Steinhauser, Ralf
    Abstract: In 2009 the Australian government delivered $8 billion in direct payments to households. These payments were pre-announced and randomly allocated over a 5-week period. We exploit this random allocation to estimate the causal response of households consumption expenditures. While we don't find a effect on consumption expenditures at the time of transfer we find a small, albeit statistically significant increase in consumption expenditures at the time of the announcement of the fiscal stimulus.
    JEL: E62
    Date: 2017
  40. By: Koeniger, Winfried; Prat, Julien
    Abstract: We characterize optimal redistribution in a dynastic economy with observable human capital and hidden ability. We compute the optimal allocation and show how it can be implemented with student loans or means-tested grants. The numerical results reveal that human capital investment should decline in parental income because parents with high income bequeath more and this lowers the labor supply of their children through a wealth effect.
    JEL: E24 H21 I22 J24
    Date: 2017
  41. By: Forti Grazzini, Caterina; Rieth, Malte
    Abstract: The paper studies the relation between the US-Dollar/Euro exchange rate and US and euro area interest rates during normal and crisis times. We describe each asset price within a multifactor model and identify the causal contemporaneous relations through heteroskedasticity. We find that US rates and macroeconomic conditions dominate exchange rate and interest rate movements before and during the global financial crisis, while this pattern sharply reverses during the European debt crisis.
    JEL: E44 F31 G1
    Date: 2017
  42. By: Bellino, Enrico (Catholic University of the Sacred Heart); Serrano, Franklin (Federal University of Rio de Janeiro)
    Abstract: The gravitation process of market prices towards production prices is here presented by means of an analyti-cal framework where the classical capital mobility principle is coupled with a determination of the deviation of market from normal (natural) prices which closely follows the description provided by Adam Smith: each pe-riod the level of the market price of a commodity will be higher (lower) than its production price if the quanti-ty brought to the market falls short (exceeds) the level of effectual demand. This approach also simplifies the results with respect to those obtained in cross-dual literature. Three versions of the model are here proposed: i) assuming a given level of aggregate employment; ii) assuming a sort of Say’s law; iii) and on the basis of an explicit adjustment of actual outputs to effectual demands. All these cases describe dynamics in which market prices can converge asymptotically towards production prices.
    Keywords: Market prices; normal prices; Classical competition; gravitation; effectual demand
    JEL: B12 D20 E11 E30
    Date: 2017–10
  43. By: Ian Dew-Becker; Charles G. Nathanson
    Abstract: We study an ambiguity-averse agent with uncertainty about income dynamics who chooses what aspects of the income process to learn about. The agent chooses to learn most about income dynamics at the very lowest frequencies, which have the greatest effect on utility. Deviations of consumption from the full-information benchmark are then largest at high frequencies, so consumption responds strongly to predictable changes in income in the short-run but is closer to a random walk in the long-run. Whereas ambiguity aversion typically leads agents to act as though shocks are more persistent than the truth, endogenous learning here eliminates that effect.
    JEL: C14 D83 E21
    Date: 2017–10
  44. By: Mauro Bambi; Siritas Kettanurak
    Abstract: The existing contributions on endogenous taxation, and balanced budget rules, suggest that countercyclical taxes should be avoided, because they may lead to aggregate instability (i.e. sunspot equilibria); on the other hand, procyclical taxes have always been praised for their stabilizing role. In this paper, we re-examine this issue in an endogenous growth model with productive government investment, and we prove that an economy with procyclical taxes, and a sufficiently large income effect, can still be characterized by i) global indeterminacy because two balanced growth paths may exist; ii) aggregate instability around the balanced growth path with the lowest growth rate. Finally, we show that this dynamics may emerge for reasonable choices of the parameters.
    Keywords: Endogenous growth, time-varying consumption tax, local and global indeterminacy.
    JEL: C62 E32 H20 O41
    Date: 2017–10
  45. By: Niamh Hardiman (School of Politics and International Relations, and Geary Institute for Public Policy, University College Dublin, Ireland); Joaquim Filipe Araújo (Department of International Relations and Public Administration, University of Minho, Braga, Portugal); Muiris MacCarthaigh (School of History, Anthropology, Philosophy and Politics, and the George J. Mitchell Institute for Global Peace, Security and Justice, Queen’s University Belfast, UK); Calliope Spanou (Department of Political Science and Public Adminstration, National and Kapodistrian University of Athens, Greece)
    Abstract: Portugal and Ireland exited Troika loan programmes; Greece did not. The conventional narrative is that different outcomes are best explained by differences in national competences in implementing programme requirements. This paper argues that three factors distinguish the Greek experience from that of Ireland and Portugal: different economic, political, and institutional starting conditions; the ad hoc nature of the European institutions’ approach to crisis resolution; and the very different conditionalities built into each of the loan programmes as a result. Ireland and Portugal show some signs of recovery despite austerity measures, but Greece has been burdened beyond all capacity to recover convincingly.
    Keywords: Loan programme, Eurozone crisis, Troika, European periphery, conditionality
    JEL: E02 E62 G01 H30 H77 H87
    Date: 2017–10–17
  46. By: Mattauch, Linus; Klenert, David; Stiglitz, Joseph E.; Edenhofer, Ottmar
    Abstract: N/A
    JEL: D31 E21 H31 H41 H54
    Date: 2017
  47. By: Declan French; Donal McKillop; Tripti Sharma
    Abstract: Using the household level data from the UK Wealth and Asset Survey for years 2006-2014, we explore a household’s decision to use one particular method of withdrawing home equity from a range of options available to them. These options include financial products such as remortgage contracts and equity release schemes (reverse mortgage and home reversion schemes) and informal mediums carried out by individual households themselves, for example downsizing of homeownership. The results show that homeowners prefer using formal channels of equity withdrawal. This tendency persists when controlling for household characteristics such as age profile, marital status and demographics and levels of housing wealth, income, savings and unsecured and secured debts. Our findings support the argument that while the decision to withdraw home equity conforms to consumption smoothing motives, the choice of an equity withdrawal medium goes beyond those motives and depends on the circumstances facing individual households.
    Keywords: Equity release schemes; Reverse mortgage; Refinancing; Downsizing; Housing; Homeownership; Retirement; Wealth de-accumulation
    JEL: D14 E21 G21 J14 R21
    Date: 2017–10
  48. By: Gornig, Martin; Schiersch, Alexander
    Abstract: This paper tests whether intangible capital is a substitute or, to some degree, a complement to standard inputs in the production process. The analysis is conducted for public sectors in which governmental institutions are directly responsible both for efficiently producing public goods and for investing in new production factors. The results reveal that intangible capital is a relevant input factor in the production of public goods and only weakly substitutable with other inputs.
    JEL: E22 E23 D20
    Date: 2017
  49. By: S. Mahendra Dev (Indira Gandhi Institute of Development Research)
    Abstract: This paper discusses (a) changes in measurement in industry and services (b) changes made in agriculture sector and (c) major issues on the measurement of GDP in new series. There are long term or legacy issues in agriculture, industry and services. The paper examines 10 major issues on measurement of GDP in the new series. These are: (1) MCA 21 data problems; (2) separation of Quasi corporations from household sector; (3) effective labour input method; (4) high growth rate of GDP vs. ground realities; (5) GDP at market prices vs. GVA at basic prices vs. GDP at factor prices; (6) GDP production and GDP expenditure method; (7) single vs. double deflation; (8) price deflators WPI vs. CPI; (9) nominal growth vs. real growth; (10) reference point for growth: advance estimates, provisional estimates, first revised estimates and second revised estimates. In our view, although there are some gaps in the measurement of GDP the new series and the methodology adopted are based on 'best advice' from experts available in the country. The issues discussed in the paper will be useful for next base revision of National Accounts Statistics.
    Keywords: GDP, Agriculture, Manufacturing, Services, price deflators, Consumer price index
    JEL: E01 Q10
    Date: 2017–09
  50. By: Rajeswari Sengupta (Indira Gandhi Institute of Development Research); Harsh Vardhan (Bain and Company)
    Abstract: Growing non-performing assets is a recurrent problem in the Indian banking sector. Over the past two decades, there have been two such episodes when the banking sector was severely impaired by balance sheet problems. In this paper we do a comparative analysis of the two banking crisis episodes-the one in the late 1990s and one that started in the aftermath of the 2008 Global Financial Crisis and is yet to be resolved. We describe the macroeconomic and banking environment preceding the episodes, the degree and nature of the crises and also discuss the policy responses that have been undertaken. We conclude by drawing policy lessons from this discussion and suggest some measures that can be adopted to better deal with a future balance sheet related crisis in the banking sector such that the impact on the real economy is minimal.
    Keywords: Non-performing assets, Public-sector banks, Capital adequacy, Bank recapitalisation, Balance-sheet crisis
    JEL: G21 G28 E44
    Date: 2017–09
  51. By: Grüning, Patrick
    Abstract: Empirical evidence suggests that investments in research and development (R&D) by older and larger firms are more spread out internationally than R&D investments by younger and smaller firms. In this paper, I explore the quantitative implications of this type of heterogeneity by assuming that incumbents, i.e. current monopolists engaging in incremental innovation, have a higher degree of internationalization in their R&D technologies than entrants, i.e. new firms engaging in radical innovation, in a two-country endogenous growth general equilibrium model. In particular, this assumption allows the model to break the perfect correlation between incumbents' and entrants' innovation probabilities and to match the empirical counterpart exactly.
    Keywords: Heterogeneous innovation,Technology spillover,Endogenous growth,Creative destruction,International finance
    JEL: E22 F31 G12 O30 O41
    Date: 2017
  52. By: Vinokurov, Evgeny; Korshunov, Dmitry; Pereboev, Vladimir; Tsukarev, Taras
    Abstract: The monograph serves as a full-fledged introduction to the Eurasian Economic Union (EAEU) — its institutions, legal foundation, evolution, and, above all, economic integration issues. The authors focus on the common markets for goods, services, capital, and labour, as well as the EAEU foreign economic policies. They strive to provide a balanced analysis using a variety of approaches. In 300 pages of text, augmented by 50 tables and figures, the authors not only present a plethora of facts on economics and politics of the Union, but also attempt to explain why Eurasian integration processes are evolving in this particular way. Furthermore, they indicate the tasks and problems that the Union may have to deal with over the next 10 years.
    Keywords: Eurasian Economic Union, common markets, history of Eurasian integration, regional integration, non-tariff barriers, free trade area, foreign direct investments, trade, labour, China, European Union, post-Soviet states
    JEL: E44 E52 F15 F21 F36 F53 J61 O11 O15
    Date: 2017–10–17
  53. By: Petach, Luke; Tavani, Daniele
    Abstract: We study a series of sustained growth models in which households' preferences are affected by the consumption of other households as summarized by average consumption. In endogenous growth models, the equilibrium paths involve lower savings and lower growth than the corresponding efficient paths. Both savings and growth are inversely related to the extent of social preferences. In semi-endogenous models, other-regarding preferences have no growth effects, but have positive level effects on the long-run research intensity, because they increase the market size for potential monopolists in the intermediate goods sector. To test the extent to which consumption is other-regarding, we use Consumer Expenditure Survey data: our identification strategy relies on a two-stage estimator that uses the Tax Reform Act of 1986 and the Omnibus Budget Reconciliation Act of 1993 as a positive and a negative consumption shocks to top incomes respectively. In the first stage, we use a difference-in-difference approach to exploit the exogenous variation in consumption caused by federal tax reform. We then use the predicted values for average within-cohort consumption by income deciles as an instrument to estimate the extent of social preferences. Our results point toward highly significant long-run `keeping up' effects on the order of 30%.
    Keywords: Keeping up with the Joneses,Endogenous Growth
    JEL: D12 E21 O41 O51
    Date: 2017
  54. By: Mitchell, Olivia S.; Keim, Donald B.
    Abstract: The growth and popularity of defined contribution pensions, along with the government's increasing attention to retirement plan costs and investment choices provided, make it important to understand how people select their retirement plan investments. This paper shows how employees in a large firm altered their fund allocations when the employer streamlined its pension fund menu and deleted nearly half of the offered funds. Using administrative data, we examine the changes in plan participant investment choices that resulted from the streamlining and how these changes might affect participants' eventual retirement wellbeing. We show that streamlined participants' new allocations exhibited significantly lower within-fund turnover rates and expense ratios, and we estimate this could lead to aggregate savings for these participants over a 20-year period of $20.2M, or in excess of $9,400 per participant. Moreover, after the reform, streamlined participants' portfolios held significantly less equity and exhibited significantly lower risks by way of reduced exposures to most systematic risk factors, compared to their non-streamlined counterparts.
    Keywords: retirement saving,default investment,pension,portfolio allocation,choice overload
    JEL: J32 D14 G11 E21
    Date: 2017
  55. By: Pavel, Ciaian (European Commission – JRC); d'Artis, Kancs (European Commission – JRC); Miroslava, Rajcaniova (Department of Economic Policy Faculty of Economics and Management Slovak University of Agriculture)
    Abstract: This study empirically examines interdependencies between BitCoin and altcoin markets in the short- and long-run. We apply time-series analytical mechanisms to daily data of 17 virtual currencies (BitCoin + 16 alternative virtual currencies) and two Altcoin price indices for the period 2013-2016. Our empirical findings confirm that indeed BitCoin and Altcoin markets are interdependent. The BitCoin-Altcoin price relationship is significantly stronger in the short-run than in the long-run. We cannot fully confirm the hypothesis that the BitCoin price relationship is stronger with those Altcoins that are more similar in their price formation mechanism to BitCoin. In the long-run, macro-financial indicators determine the altcoin price formation to a greater degree than BitCoin does. The virtual currency supply is exogenous and therefore plays only a limited role in the price formation.
    Keywords: BitCoin, altcoins, virtual currencies, price formation, supply, demand, macroeconomic development
    JEL: E31 E42 G12
    Date: 2017–09
  56. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: St. Louis Fed President James Bullard addressed questions related to real GDP growth in the second half of 2017, inflation surprising to the downside in the first half of 2017 and the impact of strong U.S. labor-market performance on inflation going forward. During a presentation at Truman State University in Kirksville, Mo., he said recent data indicate that U.S. real GDP growth remains consistent with the 2 percent growth “regime” of recent years, adding that growth in the second half of 2017 will probably not move meaningfully above 2 percent. He noted that effects from the hurricanes will add uncertainty to data interpretation in the coming months. On inflation, he said that the downside surprise is unlikely to reverse itself in the second half of 2017. He also said that continued strong performance of labor markets is unlikely to drive inflation meaningfully higher. In terms of monetary policy, he concluded that the current level of the federal funds rate target “is appropriate given current macroeconomic data.”
    Date: 2017–09–27
  57. By: Balazs Egert
    Abstract: This paper investigates the relationship linking investment (capital stock) and structural policies. Using a panel of 32 OECD countries from 1985 to 2013, we show that more stringent product and labour market regulations are associated with less investment (lower capital stock). The paper also sheds light on the existence of non-linear effects of product and labour market regulation on the capital stock. Several alternative testing methods show that the negative influence of product and labour market regulation is considerably stronger at higher levels. The paper uncovers important policy interactions between product and labour market policies. Higher levels of product market regulations (covering state control, barriers to entrepreneurship and barriers to trade and investment) tend to amplify the negative relationships between product and labour market regulations and the capital stock. Equally important is the finding that the rule of law and the quality of (legal) institutions alters the overall impact of regulations on capital deepening: better institutions reduce the negative effect of more stringent product and labour market regulations on the capital stock, possibly through the reduction of uncertainty as regards the protection of property rights.
    Keywords: aggregate investment, capital deepening, structural policy, product market regulation, labour market regulation, policy interaction, OECD
    JEL: E24 C13 C23 C51 L43 L51
    Date: 2017
  58. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Presentation to the Salt Lake Area Community Leaders Luncheon, Salt Lake City, Utah, John C. Williams, President and CEO, Federal Reserve Bank of San Francisco, October 11, 2017
    Date: 2017–10–12
  59. By: Altavilla, Carlo; Boucinha, Miguel; Peydró, José-Luis
    Abstract: We analyse the impact of standard and non-standard monetary policy measures on bank profitability. For empirical identification, the analysis focuses on the euro area, thereby exploiting substantial bank and country heterogeneity within a monetary union where the central bank has implemented a broad range of unconventional policies, including quantitative easing and negative interest rates. We use both proprietary and commercial data on individual bank balance sheets and financial market prices. Our results show that monetary policy easing – a decrease in short-term interest rates and/or a flattening of the yield curve – is not associated with lower bank profits once we control for the endogeneity of the policy measures to expected macroeconomic and financial conditions. Importantly, our analysis indicates that the main components of bank profitability are asymmetrically affected by accommodative monetary conditions, with a positive impact on loan loss provisions and non-interest income largely offsetting the negative one on net interest income. We also find that a protracted period of low interest rates might have a negative effect on profits that, however, only materialises after a long period of time and tends to be counterbalanced by improved macroeconomic conditions. In addition, while more operationally efficient banks benefit more from monetary policy easing, banks engaging more extensively in maturity transformation experience a higher increase in profitability after a steepening of the yield curve. Finally, we assess the impact of unconventional monetary policies on market-based measures of expected bank profitability and credit risk, by employing an event study analysis using high frequency data, and find that accommodative monetary policies tend to increase bank stock returns and reduce credit risk. JEL Classification: E52, E43, G01, G21, G28
    Keywords: bank profitability, lower bound, monetary policy, negative rates, quantitative easing
    Date: 2017–10
  60. By: Vladimir Asriyan; William Fuchs; Brett Green
    Abstract: We study a dynamic market for durable assets, in which asset owners are privately informed about the quality of their assets and experience occasional productivity shocks that generate gains from trade. An important feature of our environment is that asset buyers must worry not only about the quality of assets they are buying, but also about the prices at which they can re-sell the assets in the future. We show that this interaction between adverse selection and resale concerns generates an inter-temporal coordination problem and gives rise to multiple self-fulfilling equilibria. We find that there is a rich set of sentiment driven equilibria, in which sunspots generate large fluctuations in asset prices, output and welfare, resembling what one may refer to as “bubbles.”
    Keywords: Sentiment, adverse selection, liquidity, capital reallocation, bubbles
    JEL: D82 E32 G12
    Date: 2017–10
  61. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Akhilesh Verma (Indira Gandhi Institute of Development Research)
    Abstract: This paper tests the bank lending channel against the aggregate demand channel as an explanation for slow credit growth by estimating the determinants of credit and of non- performing assets (NPAs) using three types of data sets: a quarterly macroeconomic time series, a bank panel on advances and NPAs and a firm level panel. The results suggest demand was and remains the key constraint for credit. Only demand variables affected corporate credit for a broad set of firms-sales and inventory were the only significant variables. Only for a subset of indebted firms in a difference-in-difference type analysis, did lagged credit and assets reduce credit, even so sales remained the dominant variable. From the bank panel gross NPAs did not have a negative effect on advances but the Asset Quality Review did have a strong negative effect. NPAs fell with growth, increased with repo rates and with past advances Therefore, while high interest rates and low growth raised NPAs, so did past credit. If the priority is to revive assets and get credit flowing again, the valuable deadline imposed by the new bankruptcy code must be supported by flexibility in restructuring, funds infusion in PSBs, and easing of macroeconomic conditions.
    Keywords: Credit slowdown; aggregate demand; bank lending; non-performing assets; firm debt
    JEL: G21 E51
    Date: 2017–09
  62. By: Emiel F.S. van Bezooijen; J.A. Bikker
    Abstract: In 2015, the European Commission (EC) launched its action plan for the creation of a European Capital Markets Union. The EC aims to return the European economy to sustainable growth and to enhance its shock absorbing capacity by reducing the reliance on bank finance and stimulating financial deepening and cross-border integration of Europe’s capital markets. Financial diversification and integrated European capital markets are expected to improve risk sharing among households, supporting economic stability. However, the economic literature reveals a lack of theoretical and empirical consensus on the superiority of either a bank-based or a market-based financial system in promoting growth or reducing macroeconomic volatility. This paper is the first to include bond markets in its financial structure indicators, besides stock markets and bank lending. Using panel data on 55 countries between 1975 and 2014 and three different measures of financial structure, we investigate the effect of the structure of the financial system on the volatility of output and investment growth as well as their cyclical components. We do not find evidence that market-based financial structures dampen volatility of output or overall investment. Increase of the stock market size relative to that of the banking sector has a significant positive effect on the business cycle volatility of investments.
    Keywords: financial developmen, financial system structure, macroeconomic volatility, market-based finance, bank-based finance, capital market integration, business cycle
    Date: 2017–09
  63. By: Patir, Assaf
    Abstract: Accounts of the recent financial crisis claim that the practice of securitizing bank loans had led banks to be less vigilant in their lending habits. Securitization, the argument goes, gives the originators of the loans worse incentives to screen potential borrowers and monitor them as compared to traditional direct lending. But, unless investors are pricing securities irrationally, wouldn't contract theory suggest that banks should always prefer the contract that allows them to commit to higher vigilance? This paper addresses this problem by introducing a model in which securitization leads to laxer lending standards, even though it is chosen optimally by banks and investors. I construct a model where investment is performed through intermediaries (banks) that choose the volume of lending and a variable level of effort in screening potential borrowers, set the lending standards, and can finance their activities either by eliciting deposits or selling securities. Securitization allows the banks to credibly communicate to investors information about the borrowers, which depositors cannot access. Securitization has two effects: at fixed leverage, securitization gives banks better incentives to screen borrowers and leads to higher lending standards; however, it also allows banks to choose a higher level of leverage, which in turn degrades the screening effort. In equilibrium, securitization leads to lower vigilance, but is still preferred because it allows the banks to intermediate more funds. Paradoxically, the method of finance that allows banks to better communicate information about borrowers leads in equilibrium to less information being produced. The model also provides a natural explanation for why securitization is not observed below a strict credit rating cutoff (FICO 620), and why securitization activity can discontinuously stop as a continuous function of overall economic conditions.
    Keywords: securitization, leverage, banks, SPV, MBS, sudden stops
    JEL: E22 G14 G18 G21
    Date: 2017–10–12
  64. By: Chiu, Jonathan; Koeppl, Thorsten V
    Abstract: How well can a cryptocurrency serve as a means of payment? We study the optimal design of cryptocurrencies and assess quantitatively how well such currencies can support bilateral trade. The challenge for cryptocurrencies is to overcome double-spending by relying on competition to update the blockchain (costly mining) and by delaying settlement. We estimate that the current Bitcoin scheme generates a large welfare loss of 1.4% of consumption. This welfare loss can be lowered substantially to 0.08% by adopting an optimal design that reduces mining and relies exclusively on money growth rather than transaction fees to finance mining rewards. We also point out that cryptocurrencies can potentially challenge retail payment systems provided scaling limitations can be addressed.
    Keywords: Cryptocurrency, Blockchain, Bitcoin, Double spending, Payment systems,
    Date: 2017
  65. By: Raymond Fisman; Keith Gladstone; Ilyana Kuziemko; Suresh Naidu
    Abstract: A vast theoretical literature in public finance has studied the question of the desirability of capital taxation. Distinct from questions of the optimality of taxing wealth is whether it is politically feasible. We provide, to our knowledge, the first investigation of individuals' preferences over jointly taxing income and wealth, via a survey on Amazon's Mechanical Turk. We provide subjects with a set of hypothetical individuals' incomes and wealth and elicit subjects' preferred (absolute) tax bill for these individuals. Our method allows us to unobtrusively map both income earned and accumulated wealth into desired tax levels. Our regression results yield roughly linear desired tax rates on income of about 14 percent. Respondents' suggested tax rates indicate positive desired wealth taxation. When we distinguish between sources of wealth we find that, in line with recent theoretical arguments, subjects' implied tax rate on wealth is three percent when the source of wealth is inheritance, far higher than the 0.8 percent rate when wealth is from savings. We show these tax rates are consistent with reasonable parameterizations of recent theoretical optimal wealth tax formulae.
    JEL: D6 D7 E22 H21
    Date: 2017–10
  66. By: Douglas Gollin; Martina Kirchberger; David Lagakos
    Abstract: In most developing countries, there is a large gap in average consumption per capita between urban and rural areas. One appealing interpretation of this gap is that it reflects a spatial equilibrium, in which the higher consumption levels of urban areas are offset by lower non-monetary amenities. In this paper, we draw on new high-resolution evidence to document how non-monetary amenities vary across space within 20 developing countries. We focus on measures of health, public goods, crime and pollution. These vary substantially across locations within countries and can be carefully measured with highly comparable data. We find that in almost all countries, and for almost all measures, the quality of these amenities is non-decreasing in population density. In addition, net internal migration flows are directed toward denser areas in every country. These findings are hard to reconcile with a spatial equilibrium. Instead, they suggest that developing countries are undergoing a reallocation of workers to densely populated areas, consistent with many models of structural change but inconsistent with models that assume a simple static spatial equilibrium.
    JEL: E0 O11 O18
    Date: 2017–10
  67. By: Andrew Barker
    Abstract: New Zealand ranks highly on most indicators of well-being, but incomes are below the OECD average due to low labour productivity. Low labour productivity is only partly explained by the industry composition of the NZ economy and is primarily a consequence of sustained low multi-factor productivity growth within industries, as well as weak investment. Economic geography is an important factor in New Zealand’s poor productivity performance, as the small size and remoteness of the economy diminish its access to global markets, the scale and efficiency of domestic businesses, the level of competition, and the ability to benefit from innovation at the global frontier. Policy and institutions are generally supportive of productivity growth, but there are a number of areas where there is scope for reforms that would help offset the country’s geographical disadvantages and improve the welfare of New Zealanders over the coming decades. This includes promoting international connections, removing barriers to fixed capital investment (including taxation), accessing benefits from agglomeration by improving urban planning and infrastructure provision, enhancing competition and increasing investment in innovation and intangibles. This Working Paper relates to the 2017 OECD Economic Survey of New Zealand ( y-new-zealand.htm).
    Keywords: competition, economic geography, foreign investment, housing, innovation, investment
    JEL: E22 F21 O24 O38 O43 O47 R31
    Date: 2017–10–11
  68. By: Dodge Cahan; Niklas Potrafke
    Abstract: Higher economic growth was generated during Democratic presidencies compared to Republican presidencies in the United States. The question is why. Blinder and Watson (2016) explain that the Democratic-Republican presidential growth gap (D-R growth gap) can hardly be attributed to the policies under Democratic presidents, but Democratic presidents – at least partly – just had good luck, although a substantial gap remains unexplained. A natural place to look for an explanation is the partisan balance at the state level. We show that pronounced national GDP growth was generated when a larger share of US states had Democratic governors and unified Democratic state governments. However, this fact does not explain the D-R growth gap. To the contrary, given the tendency of electoral support at the state level to swing away from the party of the incumbent president, this works against the D-R growth gap. In fact, the D-R presidential growth gap at the national level might have been even larger were it not for the mitigating dynamics of state politics (by about 0.3-0.6 percentage points). These results suggest that the D-R growth gap is an even bigger puzzle than Blinder and Watson’s findings would suggest.
    Keywords: Democratic-Republican GDP growth gap, federalism, partisan politics, government ideology, United States, Democrats, Republicans
    JEL: D72 E60 H00 N12 N42 P16
    Date: 2017
  69. By: Potter, Simon M. (Federal Reserve Bank of New York)
    Abstract: Remarks at SUERF – The European Money and Finance Forum, New York City.
    Keywords: FRBNY; Federal Reserve bank of New York; portfolio size; balance sheet; confidence; taper tantrum; normalization; FOMC; gradualism; predictability; the Desk; Treasury market; stock view; stock view; Soros; recruitment effect
    Date: 2017–10–11
  70. By: Chris McDonald (Reserve Bank of New Zealand)
    Abstract: Forecasts of non-tradables inflation have been produced using Phillips curves, where capacity pressure and inflation expectations have been the key drivers. The Bank had previously used the survey of 2-year ahead inflation expectations in its Phillips curve. However, from 2014 non-tradables inflation was weaker than the survey and estimates of capacity pressure suggested. Bank research indicated the weakness in non-tradables inflation may have been linked to low past inflation and its impact on pricing behaviour. This note evaluates whether measures of past inflation could have been used to produce forecasts of inflation that would have been more accurate than using surveys of inflation expectations. It does this by comparing forecasts for annual non-tradablesinflation one year ahead. Forecasts are produced using Phillips curves that incorporate measures of past inflation or surveys of inflation expectations, and other information available at the time of each Monetary Policy Statement (MPS). This empirical test aims to determine the approach that captures pricing behaviour best, highlighting which may be best for forecasting going forward. The results show that forecasts constructed using measures of past inflation have been more accurate than using survey measures of inflation expectations, including the 2-year ahead survey measure previously used by the Bank. In addition, forecasts constructed using measures of past inflation would have been significantly more accurate than the Bank’s MPS forecasts since 2009, and only slightly worse than these forecasts before the global financial crisis (GFC). The consistency of forecasts using past-inflation measures reduces the concern that this approach is only accurate when inflation is low, and suggests it may be a reasonable approach to forecasting non-tradables inflation generally. From late 2015, the Bank has assumed that past inflation has affected domestic price-setting behaviour more than previously. As a result, monetary policy has needed to be more stimulatory than would otherwise be the case. This price-setting behaviour is assumed to persist, and is consistent with subdued non-tradables inflation and low nominal wage inflation in 2017.
    Date: 2017–04
  71. By: Vasilev, Aleksandar
    Keywords: Aggregation,Indivisible Labor,Reciprocity,Non-convexities
    JEL: E1 J22 J41
    Date: 2017
  72. By: Andrew J. Hussey; Michael Jetter; Dianne McWilliam
    Abstract: Within the fundamental determinants of cross-country income inequality, ‘humanly devised’ political institutions represent a hallmark factor that societies can influence, as opposed to, for example, geography. Focusing on the portion of inequality explainable by differences in political institutions, we decompose annual cross-country Gini coefficients for 95 countries (representing 85 percent of the world population) from 1960-2012. Since 1988, inequality has marginally decreased (from a Gini of 0.525 to 0.521) but the portion that cannot be explained by political institutions has increased substantially (from 0.411 to 0.459). Specifically, the explanatory power of institutions fell rapidly from the late 1980s to the early 1990s. This result prevails when using alternative variables, expanding the sample, weighting countries by population size, and controlling for the remaining fundamental determinants of income: culture and education. Over the same timeframe, the explanatory power of geographical conditions has been rising. This phenomenon appears to be global and is unlikely to be driven by contemporary regional events alone, such as the fall of the Soviet Union, Asian success stories (e.g., China), or institutional monocropping in Africa. A corollary of our finding implies that, if we hold societies responsible for their political institutions, inequality has become notably less fair since the late 1980s.
    Keywords: fairness of income inequality, fundamental determinants of development, international inequality, political institutions
    JEL: D63 D72 E02 O11 O43 O47
    Date: 2017
  73. By: Kvedaras, Virmantas (European Commission – JRC)
    Abstract: The influence of financial deepening on income inequality in developed economies is studied with particular interest in the European Union member states that have large penetration of bank credit. Building on the model of financially open economies (Kunieda et al, 2014) and extending its implications for the top-income shares, it is shown that a simultaneous increase in private bank credit relative to the gross domestic product (GDP) and the gap between real interest rate and GDP growth rate increases inequality, as measured by both the Gini index and the top-income shares. To establish the effect on the top-income shares, a simultaneous estimation procedure is proposed that exploits the implications of the fact that a higher income range is well-characterized by the Pareto distribution.
    Keywords: credit, financial deepening, European Union, income inequality
    JEL: D31 E51 G21 O16 O41
    Date: 2017–09
  74. By: De Martiis, Angela; Fidrmuc, Jarko
    Abstract: We analyze how regional quality affects firm’s efficiency by identifying the impaired firms receiving financial assistance as those paying an implicit interest rate lower than the prime rate. Then, we decompose them into: real impaired firms unable to repay their loans, and those not repaying their debts even if financially they could. The regions with a high share of loans and crime exhibit a higher concentration of distressed firms, and crime increases the performance of existing companies.
    JEL: O43 E51 G33
    Date: 2017
  75. By: Alfredo Marvão Pereira (Department of Economics, The College of William and Mary, Williamsburg VA 23187); Rui Manuel Pereira (Department of Economics, The College of William and Mary, Williamsburg VA 23187)
    Abstract: We estimate how infrastructure investments affect industrial CO2 emissions in Portugal. Using empirical evidence on the economic effects of twelve types of infrastructure investments at the industry level, we consider twenty-two industries and the respective CO2 emission factors. Our conclusions are as follows. First, given the current emission factors for each industry, almost all types on infrastructure investments help the emissions intensity of the economy. Only for investments in airports and in health facilities are such positive effects absent. Second, the relevance of the economic effects of the different types of infrastructure investments on the electrical power industry is central in determining the overall effects on emissions. This is not surprising, given that electric power accounts for nearly 35% of CO2 emissions in Portugal and the extremely high emissions factor of this industry amplifies even small economic effects. Third, under an alternative scenario in which the emissions from the electric power industry have been eliminated – due to the use of renewable energy in production, for example – , or are otherwise ignored, we still see that most infrastructure investments lead to a decline in the CO2 emissions intensity. In this case, however, investments in national roads leave the emissions intensity essentially unchanged, while investments in health infrastructure have adverse effects on emissions. There are several important policy implications of these results when we consider infrastructure investment strategies that are mindful of their CO2 emission effects. Consider, for instance, transportation infrastructures. Given the present electric power generating mix, investment in national roads would be an appropriate policy recommendation from an environmental perspective, while investments in airport infrastructure should be avoided. Under a scenario of aggressive use of renewable energy sources in the production of electricity, however, the best investments would be in railroads and airports, two industries highly dependent on the use of electricity
    Keywords: Infrastructure Investment, CO2 Emissions, Industry-level Economic Effects, Industry-level Emission Effects, VAR, Portugal
    JEL: C32 E22 H54 L90 O52 Q43 Q58
    Date: 2017–10
  76. By: Jean-Michel Grandmont (Department of Economics, University Of Venice Cà Foscari; CREST (EXCESS, UMR CNRS 9194), University of Paris-Saclay, France; and RIEB Fellow, University of Kobe, Japan)
    Abstract: We evaluate the income elasticity of the aggregate budget share spent on a sub-group of commodities, in a competitive framework, by a continuum of agents having the same income, but heterogeneous behavior described by an "homothetic preferences scaling factor" having a bounded Pareto distribution in the population. If individual budget share increases globally significantly in the limit from low to large incomes, aggregate budget share is locally increasing with medium range incomes when the logarithm of the heterogeneity factor has an increasing (exponential) density with a large support. Aggregate income elasticity converges to that exponential density parameter when its support becomes infinitely large. Symmetric results hold in the decreasing case. Applications are made to market expenditures, wealth effects on portfolio choice with many risky assets, concave expenditures, that are compatible with standard (expected) utility maximization or other "behavioral" decision making processes.
    Keywords: ICEF, Department of Economics, Ca' Foscari University Venice Italy; CREST (EXCESS, UMR CNRS 9194), University of Paris-Saclay, France; and RIEB Fellow, University of Kobe, Japan
    JEL: D01 D03 D11 D14 D30 D41 D53 E10 E20 G02 G11
    Date: 2017
  77. By: Christine de la Maisonneuve (OECD)
    Abstract: Growth has become more inclusive in recent years in Colombia. Strong growth and targeted social policies have reduced absolute poverty. Conditional cash transfers and education policies have increased attendance in schools. Universal health care is improving wellbeing of many Colombians. Reductions in non-wage labour costs have increased formal employment and access to social benefits. However, income inequality remains high with large disparities across regions. The causes are many. High informality keeps many workers in low quality jobs without social benefits or access to finance. Inequality is a gender issue as labour force participation rates and wages are lower for women than for men. Inequalities also reflect low social mobility as opportunities for education and jobs are influenced by socio-economic backgrounds. More targeted programmes are necessary to increase education enrolment rates of disadvantaged children in less developed regions. Further reductions in non-wage labour costs can raise formal employment. Better access to labour market programmes, early childhood education and elderly and disability care can boost female labour market participation. More resources are needed for targeted social programmes to achieve stronger outcomes. A comprehensive pension system reform is needed to extend coverage and alleviate old-age poverty. This Working Paper relates to the 2017 OECD Economic Survey of Colombia ( y-colombia.htm)
    Keywords: Education, Health, Inclusive growth, Inequality, Informality, Labour market, Pensions, Regional Development, Social protection
    JEL: E24 E26 H20 H50 I0 J0
    Date: 2017–10–18

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