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on Macroeconomics |
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Issue of 2017‒10‒29
93 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Luca Gambetti (Universitat Autònoma de Barcelona); Dimitris Korobilis (University of Essex); John D. Tsoukalas (University of Glasgow); Francesco Zanetti (University of Oxford) |
| Abstract: | A VAR model estimated on U.S. data before and after 1980 documents systematic differences in the response of short- and long-term interest rates, corporate bond spreads and durable spending to news TFP shocks. Interest rates across the maturity spectrum broadly increase in the pre-1980s and broadly decline in the post-1980s. Corporate bond spreads decline significantly, and durable spending rises significantly in the post-1980 period while the opposite short-run response is observed in the pre-1980 period. Measuring expectations of future monetary policy rates conditional on a news shock suggests that the Federal Reserve has adopted a restrictive stance before the 1980s with the goal of retaining control over inflation while adopting a neutral/ accommodative stance in the post-1980 period. |
| Keywords: | news shocks, business cycles, VAR models, DSGE models. |
| JEL: | E20 E32 E43 E52 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkcam:1705&r=mac |
| By: | Katja Gattin Turkalj (The Croatian National Bank, Croatia); Igor Ljubaj |
| Abstract: | Central bank transparency implies clarity and openness in the implementation of monetary policy and comprehensive communication with the professional and general public. Transparency includes various aspects, primarily the transparency of monetary policy instruments as well as procedural transparency and transparency of implementation. It is closely connected to central bank independence, which implies the highest level of accountability. In addition, transparency is significantly determined by the monetary policy framework and, particularly, by the exchange rate arrangement. Literature measuring central bank transparency is relatively scarce, and established measures are biased in favour of inflation targeting regimes, which in the literature are considered the most transparent. Therefore, essential monetary framework characteristics can, by itself, make individual central banks more or less transparent. If various monetary policy frameworks and exchange rate arrangements are considered, the CNB's transparency is around the average of peer countries, while regarding financial stability, it is significantly above the average. The Croatian National Bank increased its transparency from 2010 to 2017, in line with the general trends. |
| Keywords: | transparency, central bank, monetary policy, CNB |
| JEL: | E52 E58 E61 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:hnb:survey:25&r=mac |
| By: | Marco Bernardini; Selien De Schryder; Gert Peersman |
| Abstract: | We use a novel quarterly dataset of U.S. states to examine the dynamics and determinants of relative government spending multipliers in the decade surrounding the Great Recession. We find average multipliers that are similar to those that have been reported for the decades preceding the crisis, but this masks substantial heterogeneity. First, average cumulative multipliers were around 2 in the impact quarter, but declined to less than 1 after one year. Second, implied relative multipliers ranged between 0 and more than 4 across states at particular points in time, as well as for the same state at different moments within the sample period depending on the individual state’s stance of the business cycle, household indebtedness and the interaction of both conditions. Finally, we provide evidence that, controlling for total expenditures, a mere redistribution of government spending across states did also had a significant influence on the aggregate U.S. economy due to cross-state heterogeneity of the effects. |
| Keywords: | fiscal multiplier, household debt, Great Recession, regional redistribution |
| JEL: | C23 E32 E44 E62 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6479&r=mac |
| By: | Ali Ozdagli; Michael Weber |
| Abstract: | Monetary policy shocks have a large impact on aggregate stock market returns in narrow event windows around press releases by the Federal Open Market Committee. We use spatial autoregressions to decompose the overall effect of monetary policy shocks into a direct (demand) effect and an indirect (network) effect. We attribute 50%-85% of the overall effect to indirect effects. The decomposition is robust to different sample periods, event windows, and types of announcements. Direct effects are larger for industries selling most of the industry output to end-consumers compared to other industries. We find similar evidence of large indirect effects using ex-post realized cash-flow fundamentals. A simple model with intermediate inputs guides our empirical methodology. Our findings indicate that production networks might be an important propagation mechanism of monetary policy to the real economy. |
| Keywords: | input-output linkages, spillover effects, asset prices, high frequency identification |
| JEL: | E12 E31 E44 E52 G12 G14 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6486&r=mac |
| By: | Ruediger Bachmann; Sebastian Rüth |
| Abstract: | What are the macroeconomic consequences of changing aggregate lending standards in residential mortgage markets, as measured by loan-to-value (LTV) ratios? In a structural VAR, GDP and business investment increase following an expansionary LTV shock. Residential investment, by contrast, falls, a result that depends on the systematic reaction of monetary policy. We show that, historically, the Fed tended to respond directly to expansionary LTV shocks by raising the monetary policy instrument, and, as a result, mortgage rates increase and residential investment declines. The monetary policy reaction function in the US appears to include lending standards in residential markets, a finding we confirm in Taylor rule estimations. Without the endogenous monetary policy reaction residential investment increases. House prices and household (mortgage) debt behave in a similar way. This suggests that an exogenous loosening of LTV ratios is unlikely to explain booms in residential investment and house prices, or run ups in household leverage, at least in times of conventional monetary policy. |
| Keywords: | loan-to-value ratios, monetary policy, residential investment, structural VAR, Cholesky identification, Taylor rules |
| JEL: | E30 E32 E44 E52 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6458&r=mac |
| By: | Benjamin Schwanebeck (University of Kassel) |
| Abstract: | The cross-country interbank market in the euro area was a crucial transmission channel of financial stress. By using a two-country DSGE model of a financially heterogeneous monetary union where banks in one country lend funds to their foreign counterparts, I examine its role as shock amplifier and the implications for unconventional policy interventions Using the international interbank market to pool and insure against shocks is not neutral, the resulting spillovers rather act as shock multipliers on union output. Country-specific unconventional policies of direct lending to firms seem to be the most effective interventions in terms of union and relative output stabilization. The higher the size of the interbank market, the more effective are these policies in terms of union stabilization. The effectiveness of interventions in the interbank market seems to be very sensitive to the type of shock and the interbank market size. Hence, the central bank should rather shy away from this policy as it is only useful under specific circumstances. |
| Keywords: | financial intermediation; financial frictions; interbank market; monetary union; unconventional policy; |
| JEL: | E32 E44 E58 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201741&r=mac |
| By: | Chris Garbers (Department of Economics, University of Stellenbosch); Guangling Liu (Department of Economics, University of Stellenbosch) |
| Abstract: | This paper investigates the impact of capital controls on business cycle fluctuations and welfare. To perform this analysis, we deploy an asymmetric two country model that is subject to negative foreign interest rate shocks. The results show that both an inflow and outflow capital control are able to attenuate capital flow dynamics, but each control bears different implications for macroeconomic outcomes. Whilst the outflow capital control is associated with shock attenuation benefits, the inflow capital control is shown to amplify the impact of shocks. Easier capital control regimes enhance the attenuation and amplification properties associated with each capital control, whilst strict regimes do the opposite. Lastly, the analysis shows that the welfare effects of capital controls are agent dependent, and that society prefers the outflow capital control to the inflow capital control. Taken together, these results are indicative of the comparative desirability of capital controls imposed on the financial sector (outflows) as compared to the real sector (inflows). |
| Keywords: | Capital controls, Welfare, Wealth, Real business cycle, Financial intermediation, DSGE |
| JEL: | E21 E32 E43 E44 E51 E52 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:sza:wpaper:wpapers288&r=mac |
| By: | Christina D. Romer; David H. Romer |
| Abstract: | Analysis based on a new measure of financial distress for 24 advanced economies in the postwar period shows substantial variation in the aftermath of financial crises. This paper examines the role that macroeconomic policy plays in explaining this variation. We find that the degree of monetary and fiscal policy space prior to financial distress—that is, whether the policy interest rate is above the zero lower bound and whether the debt-to-GDP ratio is relatively low—greatly affects the aftermath of crises. The decline in output following a crisis is less than 1 percent when a country possesses both types of policy space, but almost 10 percent when it has neither. The difference is highly statistically significant and robust to the measures of policy space and the sample. We also consider the mechanisms by which policy space matters. We find that monetary and fiscal policy are used more aggressively when policy space is ample. Financial distress itself is also less persistent when there is policy space. The findings may have implications for policy during both normal times and periods of acute financial distress. |
| JEL: | E32 E52 E62 G01 N10 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23931&r=mac |
| By: | Carlin, Wendy; Soskice, David |
| Abstract: | A major challenge is to build simple intuitive macroeconomic models for policy-makers and professional economists as well as students. A specific contemporary challenge is to account for the prolonged slow growth and stagnant productivity that has followed the post-financial crisis recession, along with low inflation despite low unemployment (notably in the UK). We set out a simple three-equation model, which extends the core model in our two recent books (Carlin and Soskice, 2006, 2015) to one with two equilibria and two associated macroeconomic policy regimes. One is the standard inflation-targeting policy regime with equilibrium associated with central bank inflation targeting through monetary policy. It is joined by a second, Keynesian policy regime and equilibrium, with a zero lower bound (ZLB) in the nominal interest rate and a ZLB in inflation in which only fiscal policy is effective (Ragot, 2015). Our approach is related to the Benigno and Fornaro (2016) Keynesian–Wicksellian model of growth with business cycles. It diverges from New Keynesian models because although we attribute model-consistent expectations to the policy-maker, we do not assume that these are the basis for inflation and growth expectations of workers and firms. We compare our approach to Ravn and Sterk's related multiple equilibrium New Keynesian model (Ravn and Sterk, 2016). |
| Keywords: | inflation-targeting; liquidity trap; multiple equilibria; Stagnation; strategic complementarity; zero lower bound |
| JEL: | E32 E43 E52 O42 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12369&r=mac |
| By: | Corsetti, Giancarlo; Dedola, Luca; Jarocinski, Marek; Mackowiak, Bartosz Adam; Schmidt, Sebastian |
| Abstract: | The euro area recently experienced a prolonged period of weak economic activity and very low inflation. This paper reviews models of business cycle stabilization with an eye to formulating lessons for policy in the euro area. According to standard models, after a large recessionary shock accommodative monetary and fiscal policy together may be necessary to stabilize economic activity and inflation. The paper describes practical ways for the euro area to be able to implement an effective monetary-fiscal policy mix. |
| Keywords: | eurobond; Government bonds; Joint Analysis of Fiscal and Monetary Policy; Lower Bound on Nominal Interest Rates; Self-Fulfilling Sovereign Default |
| JEL: | E31 E62 E63 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12371&r=mac |
| By: | Athanasios Geromichalos (University of California – Davis); Lucas Herrenbrueck (Simon Fraser University) |
| Abstract: | We propose a new model of liquidity in the macroeconomy. It is simple and tractable, yet takes the foundations of liquidity seriously, and can thus be precise about the implementation, effects, and optimality of monetary policy. The model shines light on some open issues in macroeconomics: the effect of asset purchases, the tension between two channels through which the price of liquidity affects the economy (Friedman’s real balance effect vs Mundell’s and Tobin’s asset substitution effect), the liquidity trap, and the importance of using the right interest rate for empirical analysis. |
| Keywords: | monetary theory, monetary policy, financial frictions, liquidity trap |
| JEL: | E31 E43 E44 E52 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:sfu:sfudps:dp17-16&r=mac |
| By: | Balazs Egert; Peter Gal |
| Abstract: | This document describes and discusses a new supply side framework that quantifies the impact of structural reforms on per capita income in OECD countries. It presents the overall macroeconomic impacts of reforms by aggregating over the effects on physical capital, employment and productivity through a production function. On the basis of reforms defined as observed changes in policies, the paper finds that product market regulation has the largest overall single policy impact five years after the reforms. But the combined impact of all labour market policies is considerably larger than that of product market regulation. The paper also shows that policy impacts can differ at different horizons. The overall long-term effects on GDP per capita of policies transiting through capital deepening can be considerably larger than the 5- to 10-year impacts. By contrast, the long-term impact of policies coming only via the employment rate channel materialises at shorter horizon. |
| Keywords: | structural reforms, product markets, labour markets, regulation, simulation, multi-factor productivity, investment, employment, per capita impact, OECD |
| JEL: | D24 E17 E22 E24 J08 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6420&r=mac |
| By: | Bachmann, Rüdiger; Bai, Jinhui; Lee, Minjoon; Zhang, Fudong |
| Abstract: | This study explores the welfare and distributional effects of fiscal volatility using a neoclassical stochastic growth model with incomplete markets. In our model, households face uninsurable idiosyncratic risks in their labor income and discount factor processes, and we allow aggregate uncertainty to arise from both productivity and government purchases shocks. We calibrate our model to key features of the U.S. economy, before eliminating government purchases shocks. We then evaluate the distributional consequences of the elimination of fiscal volatility and find that, in our baseline case, welfare gains increase with private wealth holdings. |
| Keywords: | Distributional Effects; fiscal volatility; labor income risk; transition path; Wealth Inequality; Welfare costs |
| JEL: | E30 E32 E60 E62 H30 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12384&r=mac |
| By: | Kai Carstensen; Markus Heinrich; Magnus Reif; Maik H. Wolters |
| Abstract: | We estimate a Markow-switching dynamic factor model with three states based on six leading business cycle indicators for Germany preselected from a broader set using the Elastic Net soft-thresholding rule. The three states represent expansions, normal recessions and severe recessions. We show that a two-state model is not sensitive enough to reliably detect relatively mild recessions when the Great Recession of 2008/2009 is included in the sample. Adding a third state helps to clearly distinguish normal and severe recessions, so that the model identifies reliably all business cycle turning points in our sample. In a real-time exercise the model detects recessions timely. Combining the estimated factor and the recession probabilities with a simple GDP forecasting model yields an accurate nowcast for the steepest decline in GDP in 2009Q1 and a correct prediction of the timing of the Great Recession and its recovery one quarter in advance. |
| Keywords: | Markov-Switching Dynamic Factor Model, business cycles, Great Recession, leading indicators, turning points, GDP-nowcasting, GDP-forecasting |
| JEL: | C53 E32 E37 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6457&r=mac |
| By: | Rannenberg, Ansgar |
| Abstract: | I examine how the effects of fiscal policy and forward guidance are shaped by preferences over wealth calibrated based on microeconomic evidence on household saving behavior and individual discount rates. The contractionary effect of a permanent cut in government expenditure implemented during a period when monetary policy is constrained becomes larger due to smaller consumption crowding. Furthermore, the assumption much reduces the effect of forward guidance on the future policy interest rate. |
| JEL: | E52 E62 E32 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168070&r=mac |
| By: | Jess Benhabib; Mark M. Spiegel |
| Abstract: | We examine whether sentiment influences aggregate demand by studying the relationship between the Michigan Survey expectations concerning national output growth and future economic activity at the state level. We instrument for local sentiments with political outcomes, positing that agents in states with a higher share of congressmen from the political party of the sitting President will be more optimistic. This instrument is strong in the first stage, and our results confirm a positive relationship between sentiments and future state economic activity that is robust to a battery of sensitivity tests. |
| JEL: | E20 E3 E32 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23899&r=mac |
| By: | Céspedes Reynaga, Nikita (Banco Central de Reserva del Perú) |
| Abstract: | En este documento se estudia la demanda de crédito a nivel de personas en Perú. Se emplea una base de datos única que resulta de la fusión entre datos administrativos de los créditos bancarios incluidos en el Registro Consolidado de Créditos (RCC) y la Encuesta Nacional de Hogares (ENAHO). Los datos permiten identificar de manera ideal el monto del crédito y la tasa de interés así como las características de la oferta y demanda de cada crédito otorgado en el sistema bancario peruano. La elasticidad de la demanda de crédito respecto a la tasa de interés es aproximadamente -0,29, este valor implica que un incremento de 1% en la tasa de interés de mercado hace que la demanda de crédito sea menor en 0,29 %. Esta elasticidad es ligeramente inferior a la evidencia internacional y es heterogénea según el tipo de crédito, según la moneda en la cual se otorga el crédito y según el nivel de ingreso y la educación de las personas que acceden al crédito. |
| Keywords: | Demanda de crédito, Efecto hoja de balance, Heterogeneidad. |
| JEL: | E21 E44 E51 E52 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2017-009&r=mac |
| 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: | This work introduces a new mechanism generating procyclical comovements of labor productivity, employment, through endogenous variations of workers’ effort, in a simple model with efficiency wages, near a locally indeterminate steady state. A current endogenous countercyclical uncertainty shock makes risk averse workers more willing to provide imperfectly monitored “precautionary effort” by increasing their expected utility gain of not shirking. If workers’ relative prudence is small and decreasing fast near the steady state, firms’ efficiency wage contracts generate significant endogenous procyclical variations of effort, employment and labor productivity, in particular when the capital-efficient labor elasticity of substitution is smaller than and close to 1. |
| Keywords: | Efficiency wages, unemployment, expectation driven business cycles, conditionally heteroskedastic sunspots, countercyclical uncertainty shocks, prudence, procyclical labor effort and productivity |
| JEL: | D81 D84 E10 E24 E32 J30 J41 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2017:25&r=mac |
| By: | Almut Balleer; Nikolay Hristov; Dominik Menno |
| Abstract: | This paper investigates how financial market imperfections and the frequency of price adjustment interact. Based on new firm-level evidence for Germany, we document that financially constrained firms adjust prices more often than their unconstrained counterparts, both upwards and downwards. We show that these empirical patterns are consistent with a partial equilibrium menu-cost model with a working capital constraint. We then use the model to show how the presence of financial frictions changes profits and the price distribution of firms compared to a model without financial frictions. Our results suggest that tighter financial constraints are associated with lower nominal rigidities, higher prices and lower output. Moreover, in response to aggregate shocks, aggregate price rigidity moves substantially, the response of inflation is dampened, while output reacts more in the presence of financial frictions. This means that financial frictions make the aggregate supply curve flatter for all calibrations considered in our model. We show that this differs fundamentally from models in which the extensive margin of price adjustment is absent (Rotemberg, 1982) or constant (Calvo, 1983). Hence, the interaction of financial frictions and the frequency of price adjustment potentially induces important consequences for the effectiveness of monetary policy. |
| Keywords: | frequency of price adjustment, financial frictions, menu cost model |
| JEL: | E31 E44 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6309&r=mac |
| By: | Marine Charlotte André; Meixing Dai |
| Abstract: | This paper studies how the government should design a linear inflation contract to deal with the time-inconsistency problem arising from incentives for the central bank to exploit the inflation-output tradeoff with an overambitious output-gap objective when private expectations are based on adaptive learning. An intertemporal tradeoff due to learning leads the central bank to accommodate less the effect of inflation expectations and cost-push shocks on inflation. An optimal linear inflation contract is able to achieve many of the benefits, i.e., reducing inflation bias and stabilization bias, resulting from central bank conservatism and inflation targeting rules. The government can impose either a long-term or a short-term contract. The first is equivalent to appointing a hawkish central banker. The second implies that inflation penalty rate should be adjusted for inflation expectations in each period, and could be positive or negative, i.e., the central banker should shift between hawkish and dovish stances depending on inflation expectations and the speed of learning. |
| Keywords: | adaptive learning, inflation bias, stabilization bias, inflation contract, monetary policy delegation, central bank conservatism, optimal monetary policy. |
| JEL: | C62 D83 D84 E52 E58 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2017-25&r=mac |
| By: | Gregory Sutton; Dubravko Mihaljek; Agnė Subelytė |
| Abstract: | This paper estimates the response of house prices to changes in short- and long-term interest rates in 47 advanced and emerging market economies. We use data that statistical authorities selected as their best house price series, covering almost half a century of quarterly observations for the United States and over 1,000 annual observations for the rest of the sample. We find a surprisingly important role for short-term interest rates as a driver of house prices, especially outside the United States. Our interpretation is that this reflects the importance of the bank lending channel of monetary policy in house price fluctuations, especially in countries where securitisation of home mortgages is less prevalent. In addition, we document substantial inertia in house prices and find that changes in interest rates and other determinants affect house prices gradually rather than on impact. This suggests that modest cuts in policy rates are not likely to rapidly fuel house price increases. Finally, we find that US interest rates seem to affect house prices outside the United States. |
| Keywords: | interest rates, house prices, monetary policy, bank lending channel, random walk, house price bubble, United States, advanced economies, emerging market economies |
| JEL: | E39 E43 E58 G12 R31 R32 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:665&r=mac |
| By: | Lucas F. Husted; John H. Rogers; Bo Sun |
| Abstract: | We construct new measures of uncertainty about Federal Reserve policy actions and their consequences - monetary policy uncertainty (MPU) indexes. We show that, under a variety of VAR identification schemes, positive shocks to uncertainty about monetary policy robustly raise credit spreads and reduce output. The effects are of comparable magnitude to those of conventional monetary policy shocks. We evaluate the usefulness of our MPU indexes, and examine the influence of Fed communication. Our analysis suggests that policy rate normalization that is accompanied by reduced uncertainty can help neutralize the contractionary effects of the rate increases themselves. |
| Keywords: | Monetary policy uncertainty ; VAR identification ; FOMC communication |
| JEL: | E40 E50 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1215&r=mac |
| By: | Esu, Godwin; Atan, Johnson |
| Abstract: | In this study, we attempted the assessment of the validity of the Philip’s curve hypothesis in the Sub-Saharan African region. We employed a panel data technique of analysis, drawing data from twenty-nine countries in the region. The data spanned 24 years (1991 to 2015). The annual data for unemployment rate and inflation rate for these countries were obtained from World Development Indicators (WDI) (2016). The inflation rate was captured using the consumer price index (CPI), while unemployment rate was measured by total unemployment (as a percentage of total labour force, a national estimate) for these countries. Using a panel data analysis technique, our result showed that there was no significant relationship between inflation rate and the rate of unemployment. The result invalidated the existence of the common Philip’s Curve (that is, unemployment-inflation trade-off) in the Sub-Saharan African region. |
| Keywords: | Philip’s Curve, inflation, unemployment, economic policy, trade-off |
| JEL: | C23 E24 E31 |
| Date: | 2017–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:82112&r=mac |
| By: | Merkl, Christian (University of Erlangen-Nuremberg); Stüber, Heiko (Institute for Employment Research (IAB), Nuremberg) |
| Abstract: | Using the new AWFP dataset that covers all German establishments, we document a substantial cross-sectional heterogeneity of establishments' average real wages over the business cycle. While the median establishments' real wages are procyclical, there is a large fraction of establishments with countercyclical real wages. We are the first to show that establishments with more procyclical wages have a less procyclical hires rate and employment behavior. We propose a labor market flow model that is able to replicate these facts and thereby allows us to run counterfactual exercises. When we set the wage cyclicalities of all establishments to the one of the most procyclical establishments, labor market volatilities drop by more than 50 percent. |
| Keywords: | wage cyclicality, labor market flow model, labor market dynamics, establishments, administrative data, job and worker flows |
| JEL: | E32 E24 J64 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp11051&r=mac |
| By: | Vogel, Lukas; Hohberger, Stefan; Priftis, Romanos |
| Abstract: | This paper analyses the macroeconomic effects of the ECB’s quantitative easing using an open-economy DSGE model estimated with Bayesian techniques. Shock decompositions for real GDP growth and CPI inflation suggest positive contributions of up to 0.4 and 0.5 pp in the standard linearized version of model. Using piecewise linear solution techniques to allow for an occasionally binding zero-bound constraint raises the positive impact on growth and inflation to 0.8 and 0.7 pp. |
| JEL: | E52 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168060&r=mac |
| By: | Nägele, Johannes |
| Abstract: | Recently, the debate about the employment effects of a working time reduction regained the public attention in Germany. Heiner Flassbeck and Friederike Spiecker commented that such a reduction of working-time leads to a falling household consumption due to the lower income of the employees while new men are not employed instantly. In the end, the creation of new jobs becomes obsolete as the sales of the companies shrink. Fritz Helmedag criticizes their analysis. He instead comes to the conclusion that it is necessary not only to adjust the wages to the productivity growth but also to reduce the working time by the same amount the productivity grows; otherwise a higher unemployment is implied under stagnating demand. In this paper it is shown that Helmedag´s analysis suffers from serious analytical inconsistencies. Firstly, his model can be identified as a Keynesian textbook model. For this reason, the relevance for policy conclusions can be seriously doubted. Secondly, the key elements of Flassbeck and Spiecker`s argumentation can be implemented in the model easily. Therefore even within Helmedag´s model the results can differ. Some results can also be attributed to an implicit price stability. Thirdly, the model´s assumptions are highly unrealistic. Furthermore, even basic accounting rules are disregarded as the balance of the primary incomes is missing. This appears to be especially paradox when the core element of Helmedag´s approach is stock-flow consistency. After this examination of Helmedags work, an alternative Keynesian analysis – although heuristic – is provided. It turns out that a working time reduction can lead to significant positive employment effects. Nevertheless, it depends on the concrete shape of the conduction. Considering the current political landscape, heading towards more fiscal stimulus should be preferred to a reduction of working time. |
| Keywords: | work-sharing; working hours; unemployment; employment; Germany; Keynesianism; Saldenmechanik; |
| JEL: | E12 E24 E66 J22 J23 J60 |
| Date: | 2017–10–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:82109&r=mac |
| By: | Joshua C C Chan; Yong Song |
| Abstract: | Inflation expectations play a key role in determining future economic outcomes. The associated uncertainty provides a direct gauge of how well-anchored the inflation expectations are. We construct a model-based measure of inflation expectations uncertainty by augmenting a standard unobserved components model of inflation with information from noisy and possibly biased measures of inflation expectations obtained from financial markets. This new model-based measure of inflation expectations uncertainty is more accurately estimated and can provide valuable information for policymakers. Using US data, we find significant changes in inflation expectations uncertainty during the Great Recession. |
| Keywords: | Trend inflation, inflation expectations, stochastic volatility |
| JEL: | C11 C32 E31 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2017-61&r=mac |
| By: | Cooper, Daniel H. (Federal Reserve Bank of Boston); Luengo-Prado, Maria Jose (Federal Reserve Bank of Boston); Parker, Jonathan A. (Massachusetts Institute of Technology) |
| Abstract: | This paper examines the effect of minimum wage changes on local aggregate inflation and consumption growth. The paper utilizes variation in state-level minimum wages across locations and finds that minimum wage increases have a relatively modest effect on both city-level inflation and spending growth over the years following the change. The most noticeable effects are for food consumed at home and away from home—industries that typically employ a large share of low-wage and minimum-wage workers. Interestingly, consumers adjust their real food consumption when minimum wages rise, suggesting that some workers benefit from minimum wage changes. |
| Keywords: | minimum wage increases; prices; consumption; local aggregate effects |
| JEL: | E21 E31 E64 |
| Date: | 2017–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:17-8&r=mac |
| By: | Farley Grubb (Department of Economics, University of Delaware) |
| Abstract: | Beginning in 1712, North Carolina's assembly emitted its own paper money and maintained some of its paper money in public circulation for the rest of the colonial period. This paper money has been reviled as an archetype of what was bad about the paper monies issued by American colonial legislatures. Yet little systematic analysis of North Carolina's paper money has been undertaken. We correct that here. We reconstruct North Carolina's paper money regime from original sources—providing yearly quantitative data on printings, net new emissions, redemptions and removals, amounts remaining in circulation, denominational structure, as well as the paper money's current market value in pounds sterling. We identify different paper money regimes based on how the assembly structured and executed its paper money laws. We model and estimate how the market value of this money was determined. We compare the quantity theory of money with an asset-pricing model that treats the money as zero-coupon bonds to see which explains the observed market value of the paper money better. The asset-pricing model wins by a mile. Finally, we explore counterfactual redemption architectures to show how redemption affected monetary performance in periods of value collapse. |
| Keywords: | asset money, bills of credit, redemption, transaction premium, zero-coupon bonds |
| JEL: | E42 E51 G12 N11 N21 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:dlw:wpaper:17-01&r=mac |
| By: | Mario Forni; Luca Gambetti; Luca Sala |
| Abstract: | We formalize the idea that uncertainty is generated by news about future developments in economic conditions which are not perfectly predictable by the agents. Using a simple model of limited information, we show that uncertainty shocks can be obtained as the square of news shocks. We develop a two-step econometric procedure to estimate the effects of news and we find highly nonlinear e ects. Large news shocks increase uncertainty. This mitigates the effects of good news and amplifies the effects of bad news in the short run. By contrast, small news shocks reduce uncertainty and increase output in the short run. The Volcker recession and the Great Recession were exacerbated by the uncertainty effects of news. |
| Keywords: | news shocks, uncertainty shocks, imperfect information, structural VARs |
| JEL: | C32 E32 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:mod:recent:132&r=mac |
| By: | Jonathan A. Parker; Nicholas S. Souleles |
| Abstract: | We evaluate the consistency of two methods for estimating the effect of an economic policy: i) surveying people to report the change in their behavior caused by the policy, ii) inferring this change using (reported) actual behavior and differences in treatment across people. Both methods have been widely used to measure propensities to spend. Using Federal stimulus payments disbursed quasi-randomly over time in 2008, we find greater revealed-preference estimates of spending by households reporting greater spending and the two methods produce similar estimates of average spending. But, counterfactually, reported-preferences estimates are not higher for households with lower liquidity. |
| JEL: | B40 C42 D14 E21 E62 H31 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23920&r=mac |
| By: | Guglielmo Maria Caporale; Luis A. Gil-Alana |
| Abstract: | In this paper we propose a new modelling framework for the analysis of macro series that includes both stochastic trends and stochastic cycles in addition to deterministic terms such as linear and non-linear trends. We examine four US macro series, namely annual and quarterly real GDP and GDP per capita. The results indicate that the behaviour of US GDP can be captured accurately by a model incorporating both stochastic trends and stochastic cycles that allows for somedegree of persistence in the data. Both appear to be mean-reverting, although the stochastic trend is nonstationary whilst the cyclical component is stationary, with cycles repeating themselves every 6 – 10 years. |
| Keywords: | GDP, GDP per capita, trends, cycles, long memory, fractional integration |
| JEL: | C22 E32 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1695&r=mac |
| By: | Fusshoeller, Chantal; Balleer, Almut |
| Abstract: | This paper addresses the dynamic effects of a migration inflow on the host country. In particular, we focus on the role of skill composition and investment behaviour of migrants and show how these affect labour supply and investment behaviour of natives and, hence, the adjustment path of the economy to various shocks in a real business cycle model. We quantify these effects for the recent refugee inflow into the German economy in 2014 and 2015. |
| JEL: | E13 E32 F22 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168125&r=mac |
| By: | Ansgar Belke; Jens Klose |
| Abstract: | Is secular stagnation—a period of persistently lower growth such as that seen following the financial crisis of 2008/09—a valid concern for euro-area countries? We tackle this question using the well-established Laubach-Williams model to estimate the unobservable equilibrium real interest rate and compare it to the actual real rate. In light of the considerable increase in heterogeneity among EU member countries since the beginning of the financial crisis, we apply our approach to twelve euro-area countries to provide country-level answers to the question of secular stagnation. The presence of secular stagnation in a number of euro-area countries has important implications for ECB decision-making (i.e., voting power in the Governing Council) and EU governance. Our results indicate that secular stagnation is not a significant threat to most euro-area countries, with one possible exception: Greece. |
| Keywords: | equilibrium real interest rate, secular stagnation, euro-area countries, heterogeneity |
| JEL: | E43 C32 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:rmn:wpaper:201712&r=mac |
| By: | T. Grjebine; U. Szczerbowicz; F. Tripier |
| Abstract: | This paper analyzes the business cycle behavior of the corporate debt structure and its interaction with economic recovery. The debt structure is measured as the share of bonds in the total credit to non-financial corporations for a quarterly panel of countries over the period 1989-2013. We first show that the substitution of loans for bonds in recoveries is a regular property of business cycles. Secondly, we provide evidence that economies with high bond share and important bond-loan substitution recover from the recessions faster. This identified link between corporate debt structure and business cycles is robust to the inclusion of traditional factors which shape recessions and recovery such as the size and the quality of financial markets, the occurrence of bank crisis, the dynamics of credit, and the distribution of firm size. |
| Keywords: | Corporate Debt; Bonds Markets; Banking; Business Cycles; Recovery; Financial Frictions. |
| JEL: | E3 E4 G1 G2 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:646&r=mac |
| By: | Luis E. Arango (Banco de la República de Colombia); Javier Pantoja; Carlos Velásquez |
| Abstract: | We carry out a reading analysis that consists of two elements. First, we observe the coherence between monetary policy actions and press releases. In this case, we found that inflation and growth are significant themes in the adoption of the policy measures between September 2004 and March 2016. Moreover, when inflation and economic growth are both raising the monetary actions becomes tighter. Nevertheless, economic activity has always coefficients greater than those of inflation. In second place, the monetary authority goes beyond explanations in the press releases: there are some traces of forward guidance in a number of communications with different degrees of commitment. We also assess whether Colombia’s Central Bank uses its communications as a complementary monetary policy tool and estimate the effectiveness of this strategy. To do so, we use a machine learning technique to unveil the semantic structure of the central bank´s communications. This technique allows us to extract some semantic factors that are used in a structural VAR to identify and measure the impact of these communications on inflation expectations. Our results indicate that Colombia’s Central Bank uses communications as a monetary policy tool and that this strategy influences market inflation expectations. Classification JEL: C4, E4, E5 |
| Keywords: | text mining, content analysis, latent semantic analysis, central bank’s communications |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:1024&r=mac |
| By: | Ansgar Belke; Daniel Kronen |
| Abstract: | In light of the rising political and economic uncertainty in Europe, we aim to provide a basic understanding of the impact of economic policy uncertainty and financial market uncertainty on a set of macroeconomic variables such as production, consumption and investment. In this paper, we apply a structural vector autoregressive (SVAR) model to gain first insights that may help to identify avenues for further research based on non-linear processes. We find that stock market uncertainty shows a fairly consistently negative effect on the real economy in Europe. However, the implications of economic policy uncertainty for Europe and the Euro area in particular are not so straightforward. It seems as if policy uncertainty raises general investment and consumption of long-lived goods in the EMU core countries in order to be prepared to react on different states of the world in the future. What is more, shifts of invest-ment from peripheral to core EMU member countries as safe havens in uncertain times may produce the same empirical pattern. |
| Keywords: | hysteresis, investment-type decisions, macroeconomic performance under uncertainty, economic policy uncertainty, financial uncertainty, option value of waiting, SVAR |
| JEL: | C32 E20 E60 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:rmn:wpaper:201711&r=mac |
| By: | Monica Hernandez (Department of Economics, New School for Social Research) |
| Abstract: | This research examines the change in the pattern of foreign indebtedness of countries in Central America in the 2010s and its relation to the second phase of global liquidity generated with the implementation of rounds of quantitative easing (QE) policies by developed countries after the 2008 economic crisis, as well as its implications. Drawing on an analysis of the Central American countries’ sectoral balances, their historic dependence on bank lending, and on their contemporary sources of funding, we find that the international bond market has become an important source of debt for these economies in the last decade but that, in contrast to the case of some big emerging economies around the world, the role of non-financial corporations’ foreign bond issuance is not so relevant in the case of Central America. By classifying these countries’ international debt securities by residence and nationality of issuer, we also identify another difference with big emerging economies and conclude that the financial fragility of some of these countries has been exacerbated more by the general government’s foreign bonds issuance than by the financial and non-financial corporations’ ones. |
| Keywords: | Monetary policy coordination, quantitative easing, developing countries |
| JEL: | N1 E58 E61 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:new:wpaper:1728&r=mac |
| By: | Mariana Spatareanu; Vlad Manole; Ali Kabiri |
| Abstract: | This paper investigates the impact of bank distress on firms’ performance using unique data during the Great Recession for Ireland. The results show that bank distress, measured as banks’ credit default swap spreads (CDS) has negatively and statistically significantly affected firms’ investment expenditures. Interestingly, firms with access to alternative sources of external finance are not impacted by bank distress. The results are robust to accounting for external finance dependence, demand and trade sensitivities, which affect firm performance and the demand for credit. |
| Keywords: | firm performance, bank distress, crisis |
| JEL: | E44 E50 G20 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:run:wpaper:2016-001&r=mac |
| By: | Pooyan Amir-Ahmadi; Thorsten Drautzburg |
| Abstract: | Set identification in Bayesian vector autoregression (VARs) is becoming increasingly popular while facing recent criticism about potentially unwanted prior dominance and underrepresented bounds of the identified set. This can lead to biased inference even in large samples. Common estimation strategies in high dimensions or with tight restrictions can prove to be highly inefficient or even practically infeasible. We propose to include micro data on heterogeneous entities for the estimation and identification of vector autoregressions to achieve sharper inference. First, we provide conditions when imposing a simple ranking of impulse responses will sharpen inference in bivariate and trivariate VARS. Importantly, we show that this sharpening also applies to variables not subject to ranking restrictions. Second, we develop two types of inference to address recent criticism: (i) A prior-robust posterior over the bounds of the identified set and (ii) a fully Bayesian sampling algorithm that allows us to efficiently include an agnostic prior over the non-identifiable parameters. Third, we apply our methodology to US data to identify productivity news and defense spending shocks. We find that under both algorithms the bounds of the identified sets shrink substantially under heterogeneity restrictions relative to standard sign restrictions. |
| Keywords: | Bayesian VAR, sign restrictions, set identification, micro data, news shocks, defense spending |
| JEL: | C32 E32 E62 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6359&r=mac |
| By: | Caballero, Julián; Fernández, Andrés |
| Abstract: | We document a considerable increase in foreign financing by the corporate sector in emerging economies (EMEs) since the early 2000s, mainly in the form of bond issuance, and claim that it has opened up an important channel by which external financial factors can drive economic activity in these economies. Such claim is substantiated by a strong negative relationship between economic activity and an external financial indicator that we construct for several EMEs using micro-level data on spreads of bonds issued by EMEs’ corporations in foreign capital markets. Three salient features characterize such a negative relationship. First, the financial indicator has considerable predictive power on future economic activity in these economies, even after controlling for other potential drivers of economic activity such as movements in sovereign risk and global financial risk, among others. Second, on average, an identified adverse shock to the financial indicator generates a large and protracted fall of real output growth in these economies, and between 11 to 20 percent of its forecast error variance is associated to this shock. Lastly, fluctuations in this indicator also respond strongly to shocks in global financial risk emanating from world capital markets, thereby implying that changes of our indicator also serve as a powerful propagating mechanism to changes in global investors’ appetite for risk. |
| JEL: | E32 E37 F34 F37 G15 |
| Date: | 2017–10–17 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2017_031&r=mac |
| By: | Maier, Carl G.; Marencak, Michal |
| Abstract: | Empirical evidence shows that low cost of signaling interest in offers can result in a significant number of inappropriate signals. This paper provides a theoretical explanation for this observation as an equilibrium outcome of a model with utility maximizing fully rational agents that decide to signal their interest without knowing whether the offer suits them or not. We show that falling transaction costs can decrease market efficiency and social welfare. |
| JEL: | C72 D83 E24 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168207&r=mac |
| By: | Hudgins, David; Crowley, Patrick M. |
| Abstract: | This paper develops a wavelet-based control system model that can be used to simulate fiscal and monetary strategies in an open economy context in the time-frequency domain. As the emphasis on real exchange rate stability is increased, the model simulates the effects on both the aggregate and decomposed trade balance under both constant and depreciating real exchange rate targets, and also the effects on the real GDP expenditure components. This paper adds to recent research in this area by incorporating an external sector via the use of a real effective exchange rate as a driver of output. The research is also the first to analyze exchange rate effects within a time-frequency model with integrated fiscal and monetary policies in an open-economy applied wavelet-based optimal control setting. To demonstrate the usefulness of this model, we use post-apartheid South African macro data under a political targeting design for the frequency range weights, where we simulate jointly optimal fiscal and monetary policy under varying preferences for real exchange rate stability. |
| JEL: | C61 C63 C88 E52 E61 F47 |
| Date: | 2017–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2017_032&r=mac |
| By: | Malte Krüger |
| Abstract: | In Ireland, there was a bank strike that led to a complete shut-down of the main part of the banking system from May to November 1970. The effects of this strike were surprisingly limited. This had led some observers to conclude that trade credit can easily substitute for bank deposits as a means of payment. In this paper, it is shown why it was possible to continue “business as usual” for an extended period of time. Subsequently, it is argued that such a situation would not have prevailed much longer. Due to rising risks for almost all transactors the use of trade credit would have declined and economic performance would have deteriorated progressively. |
| Keywords: | money, banking, payments, clearing&settlement, Ireland, trade credit |
| JEL: | E02 E59 E65 G21 N14 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:rmn:wpaper:201713&r=mac |
| By: | Dovern, Jonas; Zuber, Christopher |
| Abstract: | We analyze when and how much OECD estimates of potential output are revised after recessions and which factors explain the size of these revisions. Inter alia, we find that following a recession, the OECD substantially revises downwards potential output, those revisions are larger than what is to be expected under the assumption of no hysteresis, and the recession depth, the primary balance, and the current account balance are predictors of post-recession revisions of potential output. |
| JEL: | E32 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168180&r=mac |
| By: | Philip Jung; Moritz Kuhn |
| Abstract: | Large and persistent earnings losses following displacement have adverse consequences for the individual worker and the macroeconomy. Leading models cannot explain their size and disagree on their sources. Two mean-reverting forces make earnings losses transitory in these models: search as an upward force allows workers to climb back up the job ladder, and separations as a downward force make nondisplaced workers fall down the job ladder. We show that job stability at the top rather than search frictions at the bottom is the main driver of persistent earnings losses. We provide new empirical evidence on heterogeneity in job stability and develop a life-cycle search model to explain the facts. Our model offers a quantitative reconciliation of key stylized facts about the U.S. labor market: large worker flows, a large share of stable jobs, and persistent earnings shocks. We explain the size of earnings losses by dampening the downward force. Our new explanation highlights the tight link between labor market mobility and earnings dynamics. Regarding the sources, we find that over 85% stem from the loss of a particularly good job at the top of the job ladder. We apply the model to study the effectiveness of two labor market policies, retraining and placement support, from the Dislocated Worker Program. We find that both are ineffective in reducing earnings losses in line with the program evaluation literature. |
| Keywords: | life-cycle labor market mobility, job tenure, earnings losses, worker- and match-specific skills |
| JEL: | E24 J63 J64 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6552&r=mac |
| By: | SeHyoun Ahn; Greg Kaplan; Benjamin Moll; Thomas Winberry; Christian Wolf |
| Abstract: | We develop an efficient and easy-to-use computational method for solving a wide class of general equilibrium heterogeneous agent models with aggregate shocks, together with an open source suite of codes that implement our algorithms in an easy-to-use toolbox. Our method extends standard linearization techniques and is designed to work in cases when inequality matters for the dynamics of macroeconomic aggregates. We present two applications that analyze a two-asset incomplete markets model parameterized to match the distribution of income, wealth, and marginal propensities to consume. First, we show that our model is consistent with two key features of aggregate consumption dynamics that are difficult to match with representative agent models: (i) the sensitivity of aggregate consumption to predictable changes in aggregate income and (ii) the relative smoothness of aggregate consumption. Second, we extend the model to feature capital-skill complementarity and show how factor-specific productivity shocks shape dynamics of income and consumption inequality. |
| JEL: | A00 C00 E00 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6581&r=mac |
| By: | Howard Kung (London Business School); Gonzalo Morales (University of Alberta); Alexandre Corhay (University of Toronto) |
| Abstract: | This paper explores the interactions between yield curve dynamics and nominal government debt maturity operations under fiscal stress in a New Keynesian model with endogenous bond risk premia. Violations of debt maturity neutrality occur when the yield curve slope is nonzero in a fiscally-led policy regime. When the risk profiles of government liabilities differ, rebalancing the maturity structure changes the government cost of capital. In the fiscal theory, changes in discount rates affect inflation through the intertemporal government budget equation. When the yield curve is upward-sloping (downward-sloping), the fiscal discount rate channel implies that shortening the maturity structure dampens (amplifies) the stimulative effects of quantitative easing policies. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:840&r=mac |
| By: | Zhang, Xue; Poeschl, Johannes |
| Abstract: | We study the macroeconomic effects of retail bank capital regulation in an economy with a retail and a shadow banking sector. The financial instability takes the form of bank runs on the shadow banking sector. Retail bank capital regulation reduces the frequency of bank runs by mitigating the drops in capital price during fire sales. The aggregate capital stock decreases as a result of capital misallocation. The cost of bank capital requirement outweighs its benefit of fewer bank runs. |
| JEL: | E44 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168275&r=mac |
| By: | Hills, Robert (Bank of England); Ho, Kelvin (Hong Kong Monetary Authority); Reinhardt, Dennis (Bank of England); Sowerbutts, Rhiannon (Bank of England); Wong, Eric (Hong Kong Monetary Authority); Wu, Gabriel (Hong Kong Monetary Authority) |
| Abstract: | This paper explores the cross-border transmission of monetary policy by comparing and contrasting the results for two major international financial centres: Hong Kong and the United Kingdom. We examine the effect of monetary policy in the US, euro area and Japan, on UK and Hong Kong-resident banks’ domestic lending behaviour, using individual bank-level data. Focusing on financial interconnections and other balance sheet characteristics as a transmission mechanism, we find that both of these factors play an important role in the transmission of foreign monetary policy. We are able to establish evidence for both a bank funding and bank portfolio channel of monetary policy, for both Hong Kong and the United Kingdom. There are important differences between the two countries; in particular, the currency denomination of lending appears to play a major role only in the United Kingdom, which probably reflects Hong Kong’s linked exchange rate system by which the HK dollar is pegged with the US dollar. These results contrast to the largely inconclusive results from previous studies, whose aggregate nature may have masked offsetting individual bank effects. |
| Keywords: | International financial linkages; monetary policy transmission; bank lending |
| JEL: | E52 F42 G21 |
| Date: | 2017–10–16 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0682&r=mac |
| By: | Farhi, Emmanuel; Tirole, Jean |
| Abstract: | Traditional banking is built on four pillars: SME lending, access to public liquidity, deposit insurance, and prudential supervision. This vision has been shattered by repeated bailouts of shadow financial institutions. This paper puts "special depositors and borrowers'" at the core of the analysis, provides a rationale for the covariation yielding the quadrilogy, and analyzes how prudential regulation must adjust to the possibility of migration toward less regulated spheres. Ring fencing between regulated and shadow banking and the sharing of liquidity in centralized platforms are motivated by the supervision of syphoning and financial contagion. |
| Keywords: | CCPs.; deposit insurance; lender of last resort; migration; Retail and shadow banks; ring fencing; Supervision |
| JEL: | E44 E58 G21 G28 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12373&r=mac |
| By: | Friedrich Schneider |
| Abstract: | In this paper, first, the MIMIC estimation method is described and criticized and due to a double counting problem a correction is suggested. Second, the measurement methods used for National Accounts Statistics – the discrepancy method and two new micro survey methods – are described and a third, a micro method, using a combination of company manager surveys and their knowledge to calibrate the size of the shadow economy in firms, is presented, too. Third, a detailed comparison of the four micro estimation methods with the MIMIC and the corrected MIMIC method are presented. One major result is that the corrected MIMIC method, especially, comes quite close to various types of lately developed micro survey methods. |
| Keywords: | MIMIC estimation methods, macro and adjusted, micro survey method asking company managers, micro survey method using households’ data, using the consumption-income-gap, comparison of results of size of shadow economy of European countries, shadow economies |
| JEL: | E26 E01 H26 H32 K42 P24 O17 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6522&r=mac |
| By: | Santanu Chatterjee; Olaf Posch; Dennis Wesselbaum |
| Abstract: | In this paper, we analyze the consequences of delays and cost overruns typically associated with the provision of public infrastructure in the context of a growing economy. Our results indicate that uncertainty about the arrival of public capital can more than offset its positive spillovers for private-sector productivity. In a decentralized economy, unanticipated delays in the provision of public capital generate too much consumption and too little private investment relative to the first-best optimum. The characterization of the first-best optimum is also affected: facing delays in the arrival of public goods, a social planner allocates more resources to private investment and less to consumption relative to the first-best outcome in the canonical model (without delays). The presence of delays also lowers equilibrium growth, and leads to a diverging growth path relative to that implied by the canonical model. This suggests that delays in public capital provision may be a potential determinant of cross-country differences in income and economic growth. |
| Keywords: | public goods, delays, time overrun, cost overrun, implementation lags, fiscal policy, economic growth |
| JEL: | C61 E62 H41 O41 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6341&r=mac |
| By: | Brunnermeier, Markus K; Rother, Simon; Schnabel, Isabel |
| Abstract: | This paper empirically analyzes the effects of asset price bubbles on systemic risk. Based on a broad sample of banks from 17 OECD countries between 1987 and 2015, we show that asset price bubbles in stock and real estate markets raise systemic risk at the bank level. The strength of the effect depends strongly on bank characteristics (bank size, loan growth, leverage, and maturity mismatch) as well as bubble characteristics (length and size). These findings suggest that the adverse effects of bubbles can be mitigated substantially by strengthening the resilience of financial institutions. |
| Keywords: | Asset price bubbles; CoVaR; Credit Booms; Financial crises; systemic risk |
| JEL: | E32 G01 G12 G20 G32 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12362&r=mac |
| By: | Joachim Jungherr; Immo Schott |
| Abstract: | We introduce long-term debt (and a maturity choice) into a standard model of firm financing and investment. This allows us to study two distortions of investment: (1.) Debt dilution distorts firms’ choice of debt which has an indirect effect on investment; (2.) Debt overhang directly distorts investment. In a dynamic model of investment, leverage, and debt maturity, we show that the two frictions interact to reduce investment, increase leverage, and increase the default rate. We provide empirical evidence from U.S. firms that is consistent with the model predictions. Using our model, we isolate and quantify the effect of debt dilution and debt overhang. Debt dilution is more important for firm value than debt overhang. Debt overhang can actually increase firm value by reducing debt dilution. The negative effect of debt dilution on investment is about half as strong as that of debt overhang. Eliminating the two distortions leads to an increase in investment equivalent to a reduction in the corporate income tax of 3.5 percentage points. |
| Keywords: | investment, debt dilution, Debt Overhang |
| JEL: | E22 E44 G32 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:997&r=mac |
| By: | R. Barrell (Brunel University London, UK); D. Karim (Brunel University London, UK); Corrado Macchiarelli (London School of Economics and Political Science, UK; The Rimini Centre for Economic Analysis) |
| Abstract: | Macroprudential policy is now based around a countercyclical buffer, relating capital requirements for banks to the degree of excess credit in the economy. We consider the construction of the credit to GDP gap looking at different ways of extracting the cyclical indicator for excess credit. We compare different smoothing mechanisms for the credit gap, and demonstrate that some countries require an AR(2) smoother whilst other do not. We embed these different estimates of the credit gap in Logit models of financial crises, and show that the AR(2) cycle is a much better contributor to their explanation than is the HP filter suggested by the BIS and currently in use in policy making. We show that our results are robust to changes in assumptions, and we make criticisms of current policy settings. |
| Keywords: | credit cycle, financial crisis, banks, macro-prudential policy, filtering |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:17-28&r=mac |
| By: | Gechert, Sebastian; Paetz, Christoph; Villanueva, Paloma |
| Abstract: | We construct a narrative dataset of net-revenue shocks for Germany by extending the tax shock series of Hayo and Uhl (2014) and coding a shock series for social security. We estimate the multiplier effects of shocks to taxes, social security contributions and benefits in a proxy SVAR framework (Mertens and Ravn 2013) and compare them with the top-down identification (Blanchard and Perotti 2002). We find multipliers of all components between 0 and 1 for both approaches. |
| JEL: | E62 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168204&r=mac |
| By: | Raül Santaeulàlia-Llopis; Yu Zheng |
| Abstract: | We exploit a novel and unique opportunity to document the transmission of income risks to consumption in a growing economy. Our laboratory is China, an economy that has witnessed enormous and sustained growth and for which we build a long panel of household-level consumption and income. We find that consumption insurance deteriorates along the growth process with a transmission of permanent income shocks to consumption that at least triples from 1989 to 2009. Although preliminary, our calculations suggest that the loss of consumption insurance has implications for the welfare assessment of economic growth. |
| Keywords: | economic growth, income risk, consumption insurance, China |
| JEL: | O11 O12 E21 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:995&r=mac |
| By: | Francesco Caprioli (Bank of Italy); Marzia Romanelli (Bank of Italy); Pietro Tommasino (Bank of Italy) |
| Abstract: | The depth and the length of the recent crisis prompted a more positive re-assessment of a countercyclical fiscal stance, especially in the euro area. Against this background, we look at discretionary fiscal policy in the euro area from three different perspectives. First, we provide evidence that the discretionary fiscal policy in euro-area countries has been mostly a-cyclical even if our estimates suggest that using it counter-cyclically could have been useful, particularly during the crisis. Second, focusing on the short-run – i.e. taking as given the economic and institutional constraints that currently make a significant fiscal expansion quite unrealistic in Europe – we discuss some budget-neutral proposals aimed at fostering economic growth. Finally, taking a more forward-looking perspective, we discuss the issue of the appropriate fiscal stance for the euro area as a whole, and argue that the advantages of having a coordinated approach (e.g. through a centralized fiscal capacity) can be substantial. |
| Keywords: | discretionary fiscal policy; automatic stabilizers; European Monetary Union |
| JEL: | E62 H87 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_398_17&r=mac |
| By: | Paul Whelan (Copenhagen Business School); Gyuri Venter (Copenhagen Business School); Andrea Vedolin (London School of Economics); Matteo Leombroni (Stanford) |
| Abstract: | We decompose ECB monetary policy surprises into target and communication shocks and document a number of novel findings. First, consistent with the idea that concurrent implementation of monetary policy is largely anticipated, we find that target shocks only have a limited effect on yields. However, we show that communication shocks have a large and economically significant impact on sovereign yields, displaying a hump-shaped pattern across maturity. Second, we document that around the European debt crisis communication had the effect of driving a wedge between yields on core versus peripheral countries. We study two explanations for this finding, revelation of the ECB’s private information and credit risk, and argue that neither channel can explain the effect on yield spreads. Motivated by this, we consider an alternative explanation in which central bank communication affects the aggregate demand due to the presence of reaching-for-yield investors. We show that a resulting risk premium channel helps to rationalize our findings. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:844&r=mac |
| By: | Ma, Zhixia |
| Abstract: | This dissertation addresses two distinct issues. The first paper studies business cycles with asset fire sales under limited commitment in financial markets. Paper 2 and 3 study firm entry and exit dynamics in a global game with incomplete information. The second paper derives analytical solutions when firms’ productivity is uniformly distributed. The third paper extends the analysis to span more general distributions and solves the problem numerically.The first paper develops a stochastic over-lapping generations’ model to study the intertemporal and intergenerational transmission of productivity shocks. Productivity shocks cause fire sales of capital, which in turn affects the income of future generations. From a constrained-efficiency perspective, competitive equilibria can be inefficient as agents' choices in equilibrium exhibit ex-ante over-borrowing. The inefficiency arises because entrepreneurs cannot get fully financed from outside funds due to limited commitment in financial markets. The fact that the capital prices are determined in competitive markets also contributes to the above inefficiency because agents fail to internalize potential ex-post fire sales. A capital requirement policy can reduce fire sales when adverse productivity shocks occur, and can thus increase the income for all future generations. On the other hand, a lower capital stock even when good productivity shocks occur decreases income for all future generations. Overall, this paper shows that in the long run, a capital requirement policy can (strictly) increase welfare of agents.The second paper develops a static general equilibrium model to study firms' entry and exit decision in a global game with incomplete information. Firms' choices are strategic substitutes. This paper analytically proves the existence and uniqueness of a monotonic pure strategy equilibrium when the mean productivity and the productivity conditional on the mean are both drawn from uniform distributions. Using numerical examples, it is shown that when the precision of public information increases, the equilibrium switching productivity level increases and, as a result, the aggregate industry productivity increases. By reallocating resources to more productive firms, an increase in the precision of public information leads to a higher welfare.The third paper extends the problem studied in the second paper to examine whether and how the shapes of productivity distributions affect the existence of the monotonic pure strategy equilibria. The mean productivity is now drawn from a truncated normal distribution and individual firm's productivity conditional on the mean is drawn from more general (truncated) distributions, such as truncated normal, truncated gamma, and truncated exponential distributions. With numerical examples, it is shown that a unique monotonic pure strategy equilibrium continues to exist when firms’ productivity is drawn from non-uniform distributions. As in paper 2, both the aggregate productivity and the welfare per worker increase with the increase in the precision of public information. However, unlike in paper 2, the impact of an increase in the precision of private information on aggregate productivity and the welfare depends on the shape of the distribution. In particular, this impact is uncertain when the productivity conditional on the mean is drawn from truncated gamma distribution, which is skewed. |
| Date: | 2016–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genstf:201601010800006049&r=mac |
| By: | Garnadt, Niklas |
| Abstract: | While the significant decline in US startup rates over the past 30 years has raised concern about the health of the US economy its causes have not yet been fully understood. I document the concurrent increase in the size and presence of large firms in the US economy and link it to the decline in firm creation rates. I construct a simple model that rationalizes this channel by increases in the span of control of managers. |
| JEL: | E24 L25 L26 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168091&r=mac |
| By: | J. Liu; C.J.M. Kool |
| Abstract: | In this paper, we use panel cointegration estimation to analyze the determinants of heterogeneous monetary dynamics in ten euro area member countries over the period 1999-2013. In particular, we investigate the role of real house prices, real equity prices and cross border bank credit. For the period up till 2008 we find a significantly positive income effect, a significantly negative interest rate effect, a significantly negative effect of net foreign credit and a significantly positive housing price effect. Inclusion of the financial crisis shows evidence of a structural break in money demand and some sign reversals, most significantly so for the interest rate effect. Finally, we find evidence of a divide in the long-term money demand relation between the Northern and Southern parts of the euro area, potentially complicating monetary policy. |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:1714&r=mac |
| By: | Alina Mika; Robert Zymek |
| Abstract: | We re-visit the evidence about the trade benefits of European Monetary Union (EMU), focusing on the experience of countries which adopted the common currency since 2002. Based on “state of the art†gravity estimations for the period 1992-2013, we reach three main conclusions. First, estimates from an appropriately specified and estimated gravity equation provide no evidence of a euro effect on trade flows among early euro adopters up to the year 2002. Second, this finding is robust to extending the sample period to incorporate data up to 2013, covering five additional euro accessions. Third, while there is no robust evidence of a euro effect, there is evidence that intra-EU trade flows have expanded faster than the global average during the 2002-2013 period. Using the functional form of a theory-consistent gravity equation, we perform pseudo out-of-sample forecasts of trade flows for recent euro joiners. In line with our estimation results, we show that pseudo forecasts of the change in trade flows after euro accession, assuming no euro effect, outperform forecasts based on the expectation of a significantly positive effect. This suggests that euro accession countries should not expect a significant boost to their trade from joining EMU. |
| Keywords: | euro, trade, gravity, poisson |
| JEL: | F14 F15 F17 F33 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6308&r=mac |
| By: | Konstantinos Angelopoulos; Andrea Benecchi; Jim Malley |
| Abstract: | A well-established stylised fact is that employer provided job-related training raises productivity and wages. Using UK data, we further find that job-related training is positively related to subsidies aimed at reducing training costs for employers. We also find that there is a positive, albeit quantitatively small, relationship between wage inequality and training inequality in the UK. Motivated by the above, we explore whether policies to subsidise firms’ monetary cost of training can improve earnings for the lower skilled and reduce inequality. We achieve this by developing a dynamic general equilibrium model, featuring skilled and unskilled labour, capital-skill complementarity in production and an endogenous training allocation. Our results suggest that training subsidies for the unskilled have a significant impact on the labour income of unskilled workers. These subsides also increase earnings for skilled workers and raise aggregate income with implied lifetime multipliers exceeding unity. Finally, the positive spill over effects to skilled workers imply that training subsidies are not very effective in reducing inequality, measured as the distance between skilled and unskilled wages and incomes. |
| Keywords: | job-related training, wage and earning inequality, training subsidies |
| JEL: | E24 J24 J31 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6605&r=mac |
| By: | Gerlach, Stefan |
| Abstract: | This paper studies long-run demand functions for Swiss M1 and M3, using annual data spanning the period 1907-2016. While the demand functions display plausible price and income elasticities, tests for structural breaks at unknown points in time detect instability in 1929 for real M1 and 1943 for real M3. This instability appears to arise from the way in which the opportunity cost is modelled. While using a single interest rate may be appropriate for M1, for M3 it would likely be helpful to take into consideration both the own return and the return on non-monetary assets. |
| Keywords: | cointegration; money demand; opportunity cost; Switzerland |
| JEL: | E4 E5 N1 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12356&r=mac |
| By: | Nakatani, Ryota |
| Abstract: | We analyze the relationships among shocks, exchange rate regimes, and capital controls in relation to the probabilities of currency crises. Based on the theoretical model by Nakatani (2016, 2017a), we use panel data on 34 developing countries and apply a probit estimation. We find that both productivity shocks and country risk premium shocks trigger currency crises, whereas productivity shocks are important for severe currency crises. We also find that the effects of these shocks on the probability of a crisis are larger for floating exchange rate regimes and that capital controls mitigate the effects of productivity shocks in pegged regimes. |
| Keywords: | Currency Crisis; Productivity Shock; Risk Premium Shock; Exchange Rate Regimes; Capital Control; Probit Model |
| JEL: | E5 F3 F41 G01 |
| Date: | 2017–10–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:82186&r=mac |
| By: | Steiner (University of Groningen); Steinkamp (Osnabrück University); Westermann (Osnabrück University) |
| Abstract: | In the winter 2011/12 a wave of internal capital flight prompted the ECB to abandon its exit strategy and to announce an unprecedented monetary expansion. We analyze this episode in several dimensions: (i) by providing an event-study analysis covering key variables from national central banks' balance sheets, (ii) by rationalizing their patterns in a portfolio balance model of the exchange rate, augmented by institutional characteristics of the TARGET2 system, and (iii) by proposing a theory-based index of exchange market pressure within the euro area. We argue that the euro area entails an inherent policy trilemma that makes it prone to speculative attacks. |
| Keywords: | Currency Union; Exchange Market Pressure; Policy Trilemma; Speculative Attack; TARGET2. |
| JEL: | E42 F36 F41 |
| Date: | 2017–10–23 |
| URL: | http://d.repec.org/n?u=RePEc:iee:wpaper:wp0108&r=mac |
| By: | De Nardi, Mariacristina; Pashchenko, Svetlana; Porapapakkarm, Ponpoje |
| Abstract: | Health shocks are an important source of risk. People in bad health work less, earn less, face higher medical expenses, die earlier, and accumulate much less wealth compared to those in good health. Importantly, the dynamics of health are much richer than those implied by a low-order Markov process. We first show that these dynamics can be parsimoniously captured by a combination of some lag-dependence and ex-ante heterogeneity, or health types. We then study the effects of health shocks in a structural life-cycle model with incomplete markets. Our estimated model reproduces the observed inequality in economic outcomes by health status, including the income-health and wealth-health gradients. Our model has several implications concerning the pecuniary and non-pecuniary effects of health shocks over the life-cycle. The (monetary) lifetime costs of bad health are very concentrated and highly unequally distributed across health types, with the largest component of these costs being the loss in labor earnings. The non-pecuniary effects of health are very important along two dimensions. First, individuals value good health mostly because it extends life expectancy. Second, health uncertainty substantially increases lifetime inequality by affecting the variation in lifespans. |
| Keywords: | health; Health Insurance; life-cycle models; medical spending; wealth-health gradient |
| JEL: | D52 D91 E21 H53 I13 I18 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12386&r=mac |
| By: | Céspedes Reynaga, Nikita (Banco Central de Reserva del Perú) |
| Abstract: | En este documento se estudia la heterogeneidad de la dolarización de créditos a nivel de personas en Perú. La dolarización de créditos se caracteriza utilizando una base de datos única que resulta de la fusión entre el Registro Consolidado de Créditos (RCC) y la Encuesta Nacional de Hogares (ENAHO), esta base de datos resultante permite identificar el monto y las características observables de cada crédito y de cada persona que accede a este. Se encuentra que la dolarización es heterogénea según las características de las personas, siendo mayor entre las personas de altos ingresos, de mayor edad y más educadas. A nivel regional, Lima tiene los más altos ratios de dolarización, y según tipo de empleo, los trabajadores formales son los más dolarizados en sus créditos. |
| Keywords: | Dolarización, Crédito, Efecto hoja de balance, Heterogeneidad. |
| JEL: | E5 G11 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2017-008&r=mac |
| By: | Tetsuo Ono (Graduate School of Economics, Osaka University); Yuki Uchida (Faculty of Economics, Seikei University) |
| Abstract: | This study considers the politics of public education policy in an overlapping- generations model with physical and human capital accumulation. In particular, this study examines how debt and tax financing differ in terms of growth and welfare across generations, as well as which fiscal stance voters support. The analysis shows that the growth rate in debt financing is lower than that in tax financing, and that debt financing creates a tradeoff between the present and future generations. The analysis also shows that debt financing attains slower economic growth than that realized by the choice of a social planner who cares about the welfare of all generations. |
| Keywords: | Economic growth, Human capital, Public debt, Political equilib- rium |
| JEL: | D70 E24 H63 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1601r3&r=mac |
| By: | Dlugoszek, Grzegorz |
| Abstract: | This paper combines the bifurcation theory and the nonlinear moving average approximation to solve asymmetric DSGE models with portfolio choice. Contrary to existing local solution techniques, the proposed method captures the direct effect of risk on agents’ portfolios. The risk-adjusted net and gross asset positions are shown to lie close to the ergodic mean of the global solution. Hence, the method is able to account for asymmetries in the model, which improves accuracy of the approximation. |
| JEL: | E44 F41 G11 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168182&r=mac |
| By: | T. Terry Cheung; Theodore Palivos; Ping Wang; Yin-Chi Wang; Chong K. Yip |
| Abstract: | To explore the interplays between trade and institutions, we construct a staged development framework with multi-period discrete choices to study the colonization of Hong Kong, which served to facilitate the trade of several agricultural and manufactured products, including opium, between Britain and China. Based on the historical data and documents that we collected from limited sources, we design our dynamic trade model to capture several key features of the colonization process and use it to characterize the endogenous transition from the pre-Opium War era, to the post-Opium War era and then to the post-opium trade era, which span the period 1773-1933. We show that while the low opium trading cost and the high warfare cost initially postponed any military action, the high valuation of the total volume of bilateral trade, the rising opium trading cost and the anticipated increase in the demand for opium eventually led the British government to declare the Opium Wars, legalizing opium trade via the colonial Hong Kong. We also show that, in response to a drastic drop in opium demand and a rising opium trading cost, it became optimal for the British government to abandon opium trade soon after the founding of the Republic of China. |
| JEL: | E02 E65 F54 O11 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23937&r=mac |
| By: | Bacchetta, Philippe |
| Abstract: | The Sovereign Money Initiative will be submitted to the Swiss people in 2018. This paper reviews the arguments behind the initiative and discusses its potential impact. I argue that several arguments are inconsistent with empirical evidence or with economic logic. In particular, controlling sight deposits neither stabilizes credit nor avoids financial crises. Also, assuming that deposits at the central bank are not a liability has implications for fiscal and monetary policy; and Benes and Kumhof (2012) do not provide support for the reform as they do not analyze the proposed Swiss monetary reform and their closed-economy model does not fit the Swiss economy. Then, using a simple model with monpolistically competitive banks, the paper assesses quantitatively the impact of removing sight deposits from commercial banks balance sheets. Even though there is a gain for the state, the overall impact is negative, especially because depositors would face a negative return. Moreover, the initiative goes much beyond what would be the equivalent of full reserve requirement and would impose severe constraints on monetary policy; it would weaken financial stability rather then reinforce it; and it would threaten the trust in the Swiss monetary system. Finally, there is high uncertainty both on the details of the reform and on its impact. |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12349&r=mac |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:993&r=mac |
| By: | Dupor, William D. (Federal Reserve Bank of St. Louis); Rodrigo , Guerrero (Federal Reserve Bank of St. Louis) |
| Abstract: | Government-financed health care (GFHC) expenditures, through Medicare and Medicaid, have grown from roughly zero to over 7.5 percent of national income over the past 50 years. Recently, some advocates (e.g., the Council of Economic Advisers (2014)) have argued that an expansion of GFHC (in particular Medicaid) has large positive employment effects. Using quarterly data between 1976 and 2016, this paper estimates the impact of GFHC spending on the unemployment rate by using an instrumental variables strategy that exploits exogenous variation in Medicare spending. We find that an exogenous GFHC expansion either increases or has no effect on the unemployment rate. Although the unemployment rate responses using aggregate data are estimated imprecisely, they are considerably sharper when estimated using state-level data. We also show the so-called relative (or local) multiplier approach based on the state-level panel provides similar estimates to those based on aggregate data. Finally, we show how the absence of a negative effect of GFHC expansions on the unemployment rate may be due to the implications these policies have for taxes across states. |
| Keywords: | Government spending; multipliers; government-financed health care |
| JEL: | E62 |
| Date: | 2017–10–16 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2017-027&r=mac |
| By: | Niklas Potrafke |
| Abstract: | This paper describes the role of government ideology on economic policy-making in the United States. I consider studies using data for the national, state and local level and elaborate on checks and balances, especially divided government, measurement of government ideology and empirical strategies to identify causal effects. Many studies conclude that parties do matter in the United States. Democratic presidents generate, for example, higher economic growth than Republican presidents, but these studies using data for the national level do not derive causal effects. Ideology-induced policies are prevalent at the state level: Democratic governors implement somewhat more expansionary and liberal policies than Republican governors. At the local level, government ideology hardly influences economic policymaking. How increasing political polarization and demographic change will influence the role of government ideology on economic policy-making will be an important issue for future research. |
| Keywords: | government ideology, economic policy-making, partisan politics, United States, Democrats, Republicans, political polarization, causal effects |
| JEL: | D72 E60 H00 N12 N42 P16 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6444&r=mac |
| By: | David Grigorian; Vlad Manole |
| Abstract: | The unprecedented expansion of sovereign balance sheets since the beginning of the global crisis has given a new meaning to the term sovereign risk. Developments in Europe since early 2010 revealed new challenges for the functioning of private banks in an environment of heightened sovereign risk and may have contributed to deleveraging. The paper uses an innovative way of measuring the perception of sovereign risk and its impact. Using an extension of a common market discipline framework, it shows that exposure to sovereign risk may have limited the ability of banks in Europe to collect deposits. Potential identification issues between deposits and bank efficiency are controlled by using Data Envelopment Analysis. The results are robust to inclusion of conventional measures of bank performance and the sector-wide holdings of foreign sovereign debt. |
| Keywords: | Sovereign risk, market discipline, bank deposits, European crisis |
| JEL: | E44 G21 G28 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:run:wpaper:2016-003&r=mac |
| By: | von Weizsäcker, Carl Christian |
| Abstract: | Der neue Protektionismus speist sich aus der Sparschwemme. Nur wegen seines Gewaltmonopols (Leviathan) kann der Staat dauerhaft entsparen. Die Befreiung vom Zwang der Schuldenbremse und ein Übergang im Euro-Gebiet zu einer Leistungsbilanzbremse kann eine handels-strategische Antwort auf die weltweiten protektionistischen Tendenzen sein. |
| JEL: | F50 E62 H62 P16 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168219&r=mac |
| By: | Isaac Sorkin |
| Abstract: | This paper estimates workers' preferences for firms by studying the structure of employer-to-employer transitions in U.S. administrative data. The paper uses a tool from numerical linear algebra to measure the central tendency of worker flows, which is closely related to the ranking of firms revealed by workers' choices. There is evidence for compensating differential when workers systematically move to lower-paying firms in a way that cannot be accounted for by layoffs or differences in recruiting intensity. The estimates suggest that compensating differentials account for over half of the firm component of the variance of earnings. |
| JEL: | E24 J01 J3 J32 J42 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23938&r=mac |
| By: | Marianna Kudlyak (Federal Reserve Bank of San Francisco); Andreas Hornstein (Federal Reserve Bank of Richmond) |
| Abstract: | We introduce a simple representation of endogenous search effort into the standard matching function with job-seeker heterogeneity. Using the estimated augmented matching function, we study the sources of changes in the average employment transition rate. In the standard matching function, the contribution of matching efficiency is decreasing in the matching function elasticity. In contrast, for our matching function with variable search effort and small matching elasticity, search effort is procyclical, accounting for most of the transition rate volatility; and the decline of the aggregate matching efficiency accounts for a small part of the decline in the transition rate after 2007. For a large matching elasticity, search effort is countercyclical, and large movements in matching efficiency compensate for that; and the decline in the matching efficiency accounts for a large part of the decline in the transition rate after 2007. The data on employment transition rates provide evidence for endogenous search effort but do not separately identify cyclicality of search effort and matching elasticity. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:881&r=mac |
| By: | Cristina Conflitti; Matteo Luciani |
| Abstract: | Quantifying the magnitude and establishing the timing of the pass-through of oil price changes to consumer prices is crucial for forecasting inflation. Characterizing this pass-through is particularly important because oil prices tend to undergo wide fluctuations. In this note we presented estimates of the oil price pass-through into consumer prices both in the US and in the euro area. |
| Date: | 2017–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2017-10-19-1&r=mac |
| By: | Andreas Schrimpf (Bank for International Settlements); Semyon Malamud (Ecole Polytechnique Federale de Lausanne) |
| Abstract: | We introduce intermediation frictions into the classical monetary model with fully flexible prices. Trade in financial assets happens through intermediaries who bargain over a full set of state-contingent claims with their customers. Monetary policy is redistributive and affects intermediaries' ability to extract rents; this opens up a new channel for transmission of monetary shocks into rates in the wider economy, which may be labelled the markup channel of monetary policy. Passthrough efficiency depends crucially on the anticipated sensitivity of future monetary policy to future stock market returns (the ``Central Bank Put"). The strength of this put determines the room for maneuver of monetary policy: when it is strong, monetary policy is destabilizing and may lead to market tantrums where deteriorating risk premia, illiquidity and markups mutually reinforce each other; when the put is too strong, passthrough becomes fully inefficient and a surprise easing even begets a rise in real rates. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:812&r=mac |
| By: | Emmanuel Farhi; Jean Tirole |
| Abstract: | Traditional banking is built on four pillars: SME lending, access to public liquidity, deposit insurance, and prudential supervision. This vision has been shattered by repeated bailouts of shadow financial institutions. This paper puts ``special depositors and borrowers'' at the core of the analysis, provides a rationale for the covariation yielding the quadrilogy, and analyzes how prudential regulation must adjust to the possibility of migration toward less regulated spheres. Ring fencing between regulated and shadow banking and the sharing of liquidity in centralized platforms are motivated by the supervision of syphoning and financial contagion. |
| JEL: | E0 G0 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23930&r=mac |
| By: | Rosengren, Eric S. (Federal Reserve Bank of Boston) |
| Abstract: | Boston Fed President Eric Rosengren weighed in on a longstanding debate: Should monetary policymakers adhere to a rules–based approach, as recent legislation would suggest? Or should they be able to determine how best to achieve the outcomes mandated by Congress (maximum sustainable employment and stable prices)? |
| Date: | 2017–10–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbsp:123&r=mac |
| By: | Christina Christou (School of Economics and Management, Open University of Cyprus, Latsia, Cyprus); Rangan Gupta (University of Pretoria, Pretoria, South Africa); Christis Hassapis (School of Economics and Management, Department of Economics, University of Cyprus, Nicosia, Cyprus); Tahir Suleman (School of Economics and Finance, Victoria University of Wellington and School of Business, Wellington Institute of Technology) |
| Abstract: | In this paper, we investigate whether the news-based measure of economic policy uncertainty (EPU), can be used to forecast exchange rate returns and volatility using a quantile regression approach, which accounts for persistence and endogeneity, using data from thirteen different countries. Our main findings suggest that: (i) EPU is useful for forecasting exchange rate returns and volatility, (ii) forecasting ability-quantile order relationships exhibit U-shape, possibly asymmetric form around the median and (iii) asymmetries are more pronounced in the case of forecasting volatility. |
| Keywords: | Economic Policy Uncertainty, Exchange Rate Returns, Volatility, Quantile Predictive Regressions, Developed and Emerging Markets |
| JEL: | C32 C53 E60 F31 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201774&r=mac |
| By: | Davide Cantoni; Jeremiah Dittmar; Noam Yuchtman |
| Abstract: | Using novel microdata, we document an unintended, first-order consequence of the Protestant Reformation: a massive reallocation of resources from religious to secular purposes. To understand this process, we propose a conceptual framework in which the introduction of religious competition shifts political markets where religious authorities provide legitimacy to rulers in exchange for control over resources. Consistent with our framework, religious competition changed the balance of power between secular and religious elites: secular authorities acquired enormous amounts of wealth from monasteries closed during the Reformation, particularly in Protestant regions. This transfer of resources had important consequences. First, it shifted the allocation of upper-tail human capital. Graduates of Protestant universities increasingly took secular, especially administrative, occupations. Protestant university students increasingly studied secular subjects, especially degrees that prepared students for public sector jobs, rather than church sector-specific theology. Second, it affected the sectoral composition of fixed investment. Particularly in Protestant regions, new construction shifted from religious toward secular purposes, especially the building of palaces and administrative buildings, which reflected the increased wealth and power of secular lords. Reallocation was not driven by preexisting economic or cultural differences. Our findings indicate that the Reformation played an important causal role in the secularization of the West. |
| JEL: | E02 J24 N13 N33 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23934&r=mac |
| By: | Gene M. Grossman; Elhanan Helpman; Ezra Oberfield; Thomas Sampson |
| Abstract: | We explore the possibility that a global productivity slowdown is responsible for the widespread decline in the labor share of national income. In a neoclassical growth model with endogenous human capital accumulation a la Ben Porath (1967) and capital-skill complementarity a la Grossman et al. (2017), the steady-state labor share is positively correlated with the rates of capital-augmenting and labor-augmenting technological progress. We calibrate the key parameters describing the balanced growth path to U.S. data for the early post-war period and find that a one percentage point slowdown in the growth rate of per capita income can account for between one half and all of the observed decline in the US labor share. |
| Keywords: | neoclassical growth, balanced growth, technological progress, capital-skill complementarity, labor share, capital share |
| JEL: | O40 E25 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1504&r=mac |
| By: | Sergio Rebelo (Northwestern University); Arlene Wong (Federal Reserve Bank of Minneapolis); Eric Anderson (Northwestern University) |
| Abstract: | How does the margin of price over costs vary across firms and products? How does the price margin vary over the business cycle? Do firms adjust their mark-ups or other dimensions of production in response to different types of aggregate shocks? Answering these questions is crucial for distinguishing between different macro models of firm dynamics, and for understanding the nature of business cycles and employment dynamics. In this paper, we provide direct evidence on the cross-sectional distribution and cyclicality of price margins, rather than relying on parametric assumptions on production functions and demand systems. We use a unique data source of prices and marginal costs from a large U.S. retailer, as well as firm-level data on gross margins and profits for large firms in the retail sector. We describe a simple geography model in the spirit of Melitz (2003) that is consistent with our empirical findings. We discuss the implications of these models for spatial variation, employment and regional inequality following aggregate economic shocks. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:899&r=mac |
| By: | Brainard, Lael (Board of Governors of the Federal Reserve System (U.S.)) |
| Date: | 2017–10–16 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgsq:977&r=mac |
| By: | Bar, Michael; Hazan, Moshe; Leukhina, Oksana; Weiss, David; Zoabi, Hosny |
| Abstract: | Recent public discussion has focused on inequality and social justice, while economists have looked at inequality's adverse effects on economic growth. One economic theory builds on the empirically negative relationship between income and fertility observed in the post demographic transition era. It argues that rising inequality leads to greater differential fertility -- the fertility gap between rich and poor. In turn, greater differential fertility lowers the average education level, as the poor invest less in the education of their children. We show that the relationship between income and fertility has flattened between 1980 and 2010 in the US, a time of increasing inequality, as the rich increased their fertility. These facts challenge the standard theory. We propose that marketization of parental time costs can explain the changing relationship between income and fertility. We show this result both theoretically and quantitatively, after disciplining the model on US data. Without marketization, the impact of inequality on education through differential fertility is reversed. Policies, such as the minimum wage, that affect the cost of marketization, have a large effect on the fertility and labor supply of high income women. We apply the insights of this theory to the literatures of the economics of childlessness and marital sorting. |
| Keywords: | Differential Fertility; economic growth.; Human Capital; Income inequality; Marketization |
| JEL: | E24 J13 J24 O40 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12376&r=mac |
| By: | Leonard Nakamura; Jon Samuels; Rachel Soloveichik (Bureau of Economic Analysis) |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:bea:wpaper:0146&r=mac |
| By: | Margarida Duarte; Diego Restuccia |
| Abstract: | The relative price of services rises with development. A standard interpretation of this fact is that productivity differences across countries are larger in manufacturing than in services. The service sector comprises heterogeneous categories. We document that many disaggregated service categories--such as transportation, communication, and finance--feature a negative income elasticity of relative prices, whereas the relative price of aggregate services is mostly driven by large expenditure categories in housing, health, and education that feature a positive income elasticity of relative prices. We also document a substantial reallocation of expenditures in services from categories with positive income elasticities (traditional services) to categories with negative elasticities (non-traditional services) as income raises. Using an otherwise standard multi-sector development accounting framework extended to include an input-output structure, we find that the cross-country income elasticity of sectoral productivity is large in non-traditional services (1.14), smaller in manufacturing (1.06) and much smaller in traditional services (0.67). We also find that heterogeneity in services has a substantial impact on aggregate productivity and that the input-output structure is important in this assessment. |
| Keywords: | Productivity, services, input-output structure, non-traditional services. |
| JEL: | O1 O4 E0 |
| Date: | 2017–10–23 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-591&r=mac |