nep-mac New Economics Papers
on Macroeconomics
Issue of 2017‒11‒05
89 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Financial imbalances, crisis probability and monetary policy in Norway By Ragna Alstadheim; Ørjan Robstad; Nikka Husom Vonen
  2. The Fiscal-Monetary Policy Mix in the Euro Area: Challenges at the Zero Lower Bound By Athanasios Orphanides
  3. Uncertainty-driven Business Cycles: Assessing the Markup Channel By Benjamin Born; Johannes Pfeifer
  4. Monetary Momentum By Andreas Neuhierl; Michael Weber
  5. Redistributive Tax Policy at the Zero Bound By Lancastre, Manuel
  6. A Calibration of the Shadow Rate to the Euro Area Using Genetic Algorithms By Eric McCoy; Ulrich Clemens
  7. House Prices and Macroprudential Policy in an Estimated DSGE Model of New Zealand By Michael Funke; Robert Kirkby; Petar Mihaylovski
  8. External Imbalances and the Wage Curve: The Role of Labour and Product Market Regulation By Paulo Santos Monteiro
  9. Rethinking the Power of Forward Guidance: Lessons from Japan By Mark Gertler
  10. The Aggregate and Country-Specific Effectiveness of ECB Policy: Evidence from an External Instruments (VAR) Approach By Lucas Hafemann; Peter Tillmann
  11. Quantitative Easing in the Euro Area - An Event Study Approach By Florian Urbschat; Sebastian Watzka
  12. Fiscal Policy Stabilisation and the Financial Cycle in the Euro Area By Cinzia Alcidi
  13. Worker Churn and Employment Growth at the Establishment Level By Ruediger Bachmann; Christian Bayer; Christian Merkl; Stefan Seth; Heiko Stüber; Felix Wellschmied
  14. Monetary policy in times of debt By Mario Pietrunti; Federico M. Signoretti
  15. Revision of the small macro-econometric model of the Nigerian economy By Sam Olofin; Olusanya Olubusoye; Afees A. Salisu; Alarudeen Aminu; Uwatt B. Uwatt; Micheal A. Adebiyi
  16. The Impact of Monetary Strategies on Inflation Persistence By Evžen Kocenda; Balázs Varga
  17. Google It Up! A Google Trends-based Uncertainty Index for the United States and Australia By Efrem Castelnuovo; Trung Duc Tran
  18. China's Investment Rate: Implications and Prospects By Carsten A. Holz
  19. A Financial Conditions Index for the CEE economies By Simone Auer
  20. HOW Biased is the Behavior of the Individual Investor in Warrants? By Margaria Abreu
  21. Modeling the business and financial cycle in a multivariate structural time series model By Jasper de Winter; Siem Jan Koopman; Irma Hindrayanto; Anjali Chouhan
  22. The Effects of the Real Oil Price on Regional Wage Dispersion By Matthias Kehrig; Nicolas L. Ziebarth
  23. Wages and Nominal and Real Unit Labour Cost Differentials in EMU By Gustav A. Horn; Andrew Watt
  24. Uncertainty and Monetary Policy in Good and Bad Times By Giovanni Caggiano; Efrem Castelnuovo; Gabriela Nodari
  25. Inflation Rates Are Very Different When Housing Rents Are Accurately Measured By Ambrose, Brent W.; Coulson, N. Edward; Yoshida, Jiro
  26. The interaction between monetary and macroprudential policy: Should central banks "lean against the wind" to foster macro-financial stability? By Krug, Sebastian
  27. "Whatever it takes" to Resolve the European Sovereign Debt Crisis? Bond Pricing Regime Switches and Monetary Policy Effects By António Afonso; Michael G. Arghyrou; María Dolores Gadea; Alexandros Kontonikas
  28. Heterogeneous consumers, segmented asset markets, and the real effects of monetary policy By Enders, Zeno
  29. The Chaning Patterns of Investment in the PRC Economy By Carsten A. Holz
  30. Trade Policy and Structural Reforms at the Zero Lower Bound: Lessons Learned and Suggestions for Europe By Alessandro Barattieri; Matteo Cacciatore; Francesco Costamagna
  31. How Does the Policy Rate Respond to Output and Prices in Thailand? By Jiranyakul, Komain
  32. Does Clower’s Dual-Decision Hypothesis lead to the change in saving conclusion in Keynes’s General Theory? By Wu, Cheng
  33. Private-Sector Resolution of Contagion in Financial Networks: Capabilities, Incentives, and Optimal Interbank Networks By Zafer Kanık;
  34. Fiscal Rules, Bailouts, and Reputation in Federal Governments By Alessandro Dovis; Rishabh Kirpalani
  35. Inequality, imperfect competition, and fiscal policy By Balamatsias, Pavlos
  36. Does Inequality Matter for the Consumption-Wealth Channel? Empirical Evidence By Luc Arrondel; Pierre Lamarche; Frédérique Savignac
  37. Flexible Prices and Leverage By Francesco D'Acunto; Ryan Liu; Carolin Pflueger; Michael Weber
  38. Pension reform disabled By Sigurd Mølster Galaasen
  39. Fiscal Measures and Corporate Investment in France By Jean-Charles Bricongne; Lucia Granelli; Susanne Hoffmann
  40. Reacting to the Lucas Critique: The Keynesians' Pragmatic Replies By Aurélien Goutsmedt; Erich Pinzon-Fuchs; Matthieu Renault; Francesco Sergi
  41. When is there more employment, with individual or collective wage bargaining? By García Martínez, José Ramón; Sorolla i Amat, Valeri
  42. Physical Capital Estimates for China's Provinces, 1952-2015 and Beyond By Carsten A. Holz; SUN Yue
  43. Lower Oil Prices and the U.S. Economy: Is this Time Different? By Christiane Baumeister; Lutz Kilian
  44. On the Determinants of output Co-movements in the CEMAC Zone:Examining the Role of Trade, Policy Channel, Economic Structure and Common Factors By Etoundi Atenga, Eric Martial
  45. Financial Firm Production of Inside Monetary and Credit Card Services: An Aggregation Theoretic Approach By Barnett, William; Su, Liting
  46. Valuating the environmental impact of debit card payments By Erik Roos Lindgreen; Milan van Schendel; Nicole Jonker; Jorieke Kloek; Lonneke de Graaff; Marc Davidson
  47. Understanding Macroeconomic Statistics: An “Ideal-Type†Economy Approach By Kiyohiko G. Nishimura; Junko Ishikawa
  48. Impact of Global Uncertainty on the Global Economy and Large Developed and Developing Economies By Wensheng, Kang; Ratti, Ronald; Vespignani, Joaquin
  49. Is inequality increasing in r-g? Piketty’s principle of capitalist economics and the dynamics of inequality in Britain, 1210-2013 By Jakob B Madsen
  50. The Euro Area's Common Pool Problem Revisited: Has the Single Supervisory Mechanism Ameliorated Forbearance and Evergreening By Sven Steinkamp; Aaron Tornell; Frank Westermann
  51. Wealth Inequality and Externalities from Ex Ante Skill Heterogeneity By Konstantinos Angelopoulos; Spyridon Lazarakis; Jim Malley
  52. Follow the Money: Does the Financial Sector Intermediate Natural Resource Windfalls? By Thorsten Beck; Steven Poelhekke
  53. Search Cost and Search Duration for New Hires By Gartner, Hermann; Carbonero, Francesco
  54. Pulling up the Tarnished Anchor: The End of Silver as a Global Unit of Account By Ricardo T. Fernholz; Kris James Mitchener; Marc Weidenmier
  55. Taxation and Labor Supply of Married Couples across Countries: A Macroeconomic Analysis By Alexander Bick; Nicola Fuchs-Schündeln
  56. Do Firms Mitigate or Magnify Capital Misallocation? Evidence from Planet-Level Data By Matthias Kehrig; Nicolas Vincent
  57. Tax Policy and Economic Growth: Does It Really Matter? By Donatella Baiardi; Paola Profeta; Riccardo Puglisi; Simona Scabrosetti
  58. Stagflation and the crossroad in macroeconomics: the struggle between structural and New Classical macroeconometrics By Aurélien Goutsmedt
  59. Central Bank Policy Rates: Are they Cointegrated? By Guglielmo Maria Caporale; Hector Carcel; Luis A. Gil-Alana
  60. Capital Taxation and Government Debt Policy with Public Discounting By Malte Rieth
  61. The Limits of Political Compromise: Debt Ceilings and Political Turnover By Alexandre B. Cunha; Emanuel Ornelas
  62. The Limited Macroeconomic Effects of Unemployment Benefit Extensions By Loukas Karabarbounis; Gabriel Chodorow-Reich
  63. Credit Misallocation During the European Financial Crisis By Fabiano Schivardi; Enrico Sette; Guido Tabellini
  64. Independent Fiscal Institutions in the EU Member States: The Early Years By László Jankovics; Monika Sherwood
  65. Monetary policy transmission with two exchange rates and a single currency : The Chinese experience By Qing, He; Korhonen, Iikka; Zongxin, Qian
  66. Capital Misallocation and Financial Development: A Sector-Level Analysis By Daniela Marconi; Christian Upper
  67. Financial Frictions in the Small Open Economy By Shim, Jae-Hun
  68. Why Mandate Young Borrowers to Contribute to their Retirement Accounts? By Torben M. Andersen; Joydeep Bhattacharya
  69. The Lifetime Costs of Bad Health By Mariacristina De Nardi; Svetlana Pashchenko; Ponpoje Porapakkarm
  70. Revisiting the Dynamics Effects of Oil Price Shocks on Small Developing Economies By Shah, Imran H.; Carlos, Diaz Vela; Wang, Yuan
  71. A macroeconomic model of liquidity crises By Keiichiro Kobayashi; Tomoyuki Nakajima
  72. Stock Prices, Regional Housing Prices, and Aggregate Technology Shocks By Yoshida, Jiro
  73. Assessment of Current Economic Conditions and Implications for Monetary Policy: an essay, February 13, 2017 By Kaplan, Robert S.
  74. Slow to Hire, Quick to Fire: Employment Dynamics with Asymmetric Responses to News By Cosmin Ilut; Matthias Kehrig; Martin Schneider
  75. The missing pieces of the euro architecture By Grégory Claeys
  76. Capital deepening and efficiency in Morocco By EZZAHID, Elhadj; NIHOU, Abdelaziz
  77. Safety, Liquidity, and the Natural Rate of Interest By Marc Giannoni; Domenico Giannone; Andrea Tambalotti; Marco Del Negro
  78. Asymmetries in Earnings, Employment and Wage Risk in Great Britain By Konstantinos Angelopoulos; Spyridon Lazarakis; Jim Malley
  79. Measuring Factor Misallocation: General Methods and Evidence on the Great Recession By Schelkle, Thomas
  80. The response of monetary policy shocks on Islamic bank deposits: evidence from Malaysia based on ARDL approach By Nazib, Nur Afiyah; Masih, Mansur
  81. Growing Productivity without Growing Wages: The Micro-Level Anatomy of the Aggregate Labor Share Decline By Matthias Kehrig; Nicolas Vincent
  82. Resilience, Supply Chains and the Great Recession By Steven Brakman; Charles van Marrewijk
  83. Remittance Inflows and State-Dependent Monetary Policy Transmission in Developing Countries By Machasio, Immaculate; Tillmann, Peter
  84. Global Dynamics in a Search and Matching Model of the Labor Market By Lazaryan, Nika; Lubik, Thomas A.
  85. Asset Prices and Leverage in a Model of Persistent Stagnation By Schlegl, Matthias; Illing, Gerhard; Ono, Yoshiyasu
  86. Information Aversion By Marianne Andries; Valentin Haddad
  87. How Do Banks and Households Manage Interest Rate Risk? Evidence from the Swiss Mortgage Market By Christoph Basten; Benjamin Guin; Cathérine Tahmee Koch
  88. Monetary Policy: Lessons Learned and Challenges Ahead. Summary of the 2017 BOJ-IMES Conference Organized by the Institute for Monetary and Economic Studies of the Bank of Japan By Ko Nakayama; Shigenori Shiratsuka
  89. Housing Wealth Effects in Japan: Evidence Based on Household Micro Data By Hori, Masahiro; Niizeki, Takeshi

  1. By: Ragna Alstadheim (Norges Bank (Central Bank of Norway)); Ørjan Robstad (Norges Bank (Central Bank of Norway)); Nikka Husom Vonen (The Ministry of Labour and Social Affairs)
    Abstract: We assess the strength of the impact of a monetary policy shock on financial crisis probability in Norway. Policy effects go via the interest rate impact on credit, house prices and banks’ wholesale funding. We find that the impact of a monetary policy shock on crisis probability is about 10 times larger than what previous studies suggest. The large impact is mostly due to a fall in property prices and banks’ wholesale funding in response to a contractionary monetary policy shock. In contrast, and in line with existing literature, there is a more limited contribution to reduced crisis probability from the impact of monetary policy on credit.
    Keywords: Monetary Policy, Financial Imbalances, Financial Crisis, Structural VAR
    JEL: E32 E37 E44 E52
    Date: 2017–10–26
  2. By: Athanasios Orphanides
    Abstract: This paper explores the reasons for the suboptimal fiscal-monetary policy mix in the euro area in the aftermath of the global financial crisis and ways in which the status quo can be improved. A comparison of fiscal and monetary policies and of economic outcomes in the euro area and the United States suggests that both fiscal and monetary policy in the euro area have been overly tight. Fiscal policy has been hampered by the institutional framework which constrains individual states and lacks instruments to secure an appropriate aggregate stance. ECB monetary policy has been hampered by the distributional effects of balance sheet policies which needed to be adopted at the zero lower bound, and by discretionary decisions taken before the crisis such as the reliance on credit rating agencies for determining collateral eligibility for monetary operations. The compromising of the “safe asset” status of euro area sovereign debt during the crisis complicated fiscal and monetary policy. Changes in the discretionary decisions governing the implementation of monetary policy in the euro area can potentially reduce the distributional effects of policy and improve the fiscal-policy mix and longerterm prospects for the euro area.
    JEL: E52 E58 E61 E62 G01
    Date: 2017–07
  3. By: Benjamin Born; Johannes Pfeifer
    Abstract: A growing recent literature relies on a precautionary pricing motive embedded in representative agent DSGE models with sticky prices and wages to generate negative output effects of uncertainty shocks. We assess whether this theoretical model channel is consistent with the data. Building a New Keynesian model, we show that indeed with sufficient nominal rigidities markups increase and output falls after uncertainty shocks. The model is also used as a business cycle accounting device to construct aggregate markups from the data. Time-series techniques are employed to study the conditional comovement between markups and output in the data. Consistent with the model’s precautionary wage setting, we find that wage markups increase after uncertainty shocks. Price markups in contrast fall. This finding - inconsistent with the model - is corroborated by industry-level data. Overall, these results point to a prominent role for sticky wages in the transmission of uncertainty shocks.
    Keywords: uncertainty shocks, price markup, wage markup
    JEL: E32 E01 E24
    Date: 2017
  4. By: Andreas Neuhierl; Michael Weber
    Abstract: We document a large return drift around monetary policy announcements by the Federal Open Market Committee. Stock returns start drifting up 25 days before expansionary monetary policy surprises, whereas they decrease before contractionary surprises. The cumulative return difference across expansionary and contractionary policy decisions amounts to 2.5% until the day of the policy move and continues to increase to more than 4.5% 15 days after the meeting. The return drift is a market-wide phenomenon, holds for all industries, and many international equity markets. In the cross section of stocks, size, value, profitability, and investment do not exhibit differential return drifts. Momentum is an exception, because past losers plummet around contractionary monetary policy surprises. A simple trading strategy exploiting the drift around FOMC meetings increases Sharpe ratios relative to a buy-and-hold investment by a factor of 4.
    Keywords: return drift, policy speeches, expected returns, macro news
    JEL: E31 E43 E44 E52 E58 G12
    Date: 2017
  5. By: Lancastre, Manuel
    Abstract: Emulating consumer price inflation with an increasing path of consumption taxes when the nominal interest rate binds and monetary policy becomes ineffective, as proposed by Correia et al. [1] in the Standard New Keynesian model, may not neutralize a liquidity trap of very long duration. Instead this paper presents a wealth redistributive tax policy, in an OLG model with credit constraints, able to prevent or counteract a liquidity trap caused by a credit shock. The tax prescription is opposite to the one proposed by Correia et al.[1]
    Keywords: Zero Bound; Fiscal policy; Credit constraints; Sticky prices; Heterogeneous agents; Redistribution
    JEL: E21 E24 E31 E40 E43 E52 E62
    Date: 2017–08–31
  6. By: Eric McCoy; Ulrich Clemens
    Abstract: In the face of the lower bound on interest rates, central banks have relied on unconventional policy tools such as large-scale asset purchases and forward guidance to try to affect long-term interest rates and provide monetary stimulus to the economy. Assessing the impact of these measures and summarising the overall stance of monetary policy in this new environment has proven to be a challenge for academics and central banks. As a result, researchers have worked on modifying current term structure models and have adapted them to the current situation of close to zero or even negative interest rates. The paper begins by providing a non-technical overview of Leo Krippner's two-factor shadow rate model (K-ANSM2), explaining the underlying mechanics of the model through an illustrative example. Thereafter, the paper presents the results obtained from calibrating Krippner's KANSM2 shadow rate model to the euro area using genetic algorithms and discusses the pros and the cons of using genetic algorithms as an alternative to the optimisation method currently used (Nelder-Mead optimisation routine). Finally, the paper ends by analysing the strengths and weaknesses of using the shadow short rate as a tool to illustrate the stance and the dynamics of monetary policy.
    JEL: E43 E44 E52 E58
    Date: 2017–07
  7. By: Michael Funke; Robert Kirkby; Petar Mihaylovski
    Abstract: We analyse the effects of macroprudential and monetary policies and their interactions using an estimated dynamic stochastic general equilibrium (DSGE) model tailored to New Zealand. We find that the main historical drivers of house prices are shocks specific to the housing sector. While our estimates show that monetary policy has large spillover effects on house prices, it does not appear to have been a major driver of house prices in New Zealand. We consider macroprudential policies, including the loan-to-value restrictions that have been implemented in New Zealand. We find that loan-to-value restrictions reduce house prices with negligible effects on consumer prices, suggesting that they can be used without derailing monetary policy. We estimate that the loan-to-value restrictions imposed in New Zealand in 2013 reduced house prices by 3.8 per cent and that greater forward guidance on their duration would have made them more effective.
    Keywords: macroprudential policies, housing, DSGE, Bayesian estimation, New Zealand
    JEL: E32 E44 E52 E58
    Date: 2017
  8. By: Paulo Santos Monteiro
    Abstract: This paper proposes a method to identify how labour market institutions and product market regulation interact with economic shocks, and affect unemployment and wage dynamics during periods of external imbalances corrections. This is done using a general equilibrium model of trade, external imbalances and unemployment that incorporates labour market frictions via a structural wage equation, and implies equilibrium cross-sectional dispersion of unemployment rates. We apply the method to study the role of macroeconomic shocks, labour market institutions and product market regulation in the correction of external imbalances in the European Monetary Union (EMU) over the last decade, and the concurrent heterogeneous unemployment dynamics.
    JEL: E52 E58 E61 E62 G01
    Date: 2017–07
  9. By: Mark Gertler (Henry and Lucy Moses Professor of Economics, New York University and National Bureau of Economic Research (E-mail:
    Abstract: In the spring of 2013 the Bank of Japan introduced a state-of- the-art monetary policy which included among other things inflation targeting and aggressive use of forward guidance. In contrast to the predictions of conventional macroeconomic theory, these policies have had only very limited success in reflating the economy. I argue that the disconnect between the Japanese experience and existing theory can be traced to the forward guidance puzzle (FGP). As recent literature suggests, the essence of the FGP is that existing models predict implausibly strong effects of expected future interest rate changes on the economy, with the strength of the effect increasing with the expected horizon of the interest rate change. Accordingly, in this lecture I sketch a model meant to capture the challenge of reflation in Japan. As in recent literature I attempt to mute the power of forward guidance by stepping outside of rational expectations. In particular, I introduce a hybrid adaptive/rational expectations belief mechanism. Most relevant to the Japanese experience is that individuals have adaptive expectations about trend inflation, which is consistent with the evidence. As Kuroda (2016) emphasizes, for an economy without a history of inflation being anchored by a target, individuals need direct evidence that the central bank is capable of moving inflation to target.
    Keywords: Forward guidance, Inflation targeting, Hybrid adaptive/rational expectations
    JEL: E31 E52 D84
    Date: 2017–10
  10. By: Lucas Hafemann; Peter Tillmann
    Abstract: This paper studies the transmission of ECB monetary policy, both at the aggregate euro area and the country level. We estimate a VAR model for the euro area in which monetary policy shocks are identified using an external instrument that reflects policy surprises. For that purpose we use the change in German bunds at meeting days of the Governing Council. The identified monetary policy shock is then put into country-specific local projections in order to derive country-specific impulse responses. We find that (i) the transmission is very heterogeneous, both across channels and across countries, (ii) policy is transmitted through spreads, yields and the exchange rate, but less through banks and the stock market, and (iii) the strength of the transmission depends on structural characteristics of member countries, among them are current account balanced, debt to GDP levels, and the strength of banking systems.
    JEL: E52 E32 E44
    Date: 2017–07
  11. By: Florian Urbschat; Sebastian Watzka
    Abstract: We examine the effects of the Asset Purchase Programme (APP) gradually introduced by the European Central Bank from September 2014 onwards. Studying the short-term reaction of financial markets after APP press releases, we analyse the development of bond yields and spreads around these releases. More precisely, we try to estimate different asset price channels by quantifying the cumulative decrease of spreads and by running event regressions for several Euro Area countries. Focusing on the signalling channel, measured by the OIS rate, and the portfolio rebalancing channel, proxied by the conditional bond-OIS spread, we find that the effects in yield and spread reduction were most pronounced for the initial announcement on the Public Sector Purchase Programme (PSPP) but declined afterwards for additional announcements. Possible explanations for this are the declining degree to which the ECB surprised markets and the increasingly burdensome institutional set-up of the APP. While yield reductions were larger for periphery countries’ than for core countries’ bonds, our evidence suggests that this stronger reduction is mostly due to a decreasing risk component of southern bonds. In fact, once controlling for this implicit credit risk reduction we find rather mild effects from portfolio rebalancing for all countries.
    Keywords: large scale asset purchase, yield curve, quantitative easing, APP, event study
    JEL: E43 E44 E52 E58 G14
    Date: 2017
  12. By: Cinzia Alcidi
    Abstract: This paper examines the impact of the financial cycle on the capacity of the economy to deal with shocks, with a particular focus on fiscal policy in the euro area member states. It starts by measuring national financial cycles and investigating the synchronisation across them as well as their relationship to the medium-term business cycle. It finds that financial cycles tend to be synchronised but their amplitudes differ significantly across countries. Business cycles tend to be positively correlated with the financial cycle, but they usually are smaller. The paper then examines if and how the financial cycle affects international risk-sharing among euro area member states and finds that economic booms and busts are often associated with phases of financial integration and disintegration at the level of the euro area. Such developments are reflected in the degree of international risk-sharing, which turns out to behave procyclically. Lastly, the capacity of domestic fiscal policy to smooth asymmetric shocks in the euro area declines dramatically during recessionary phases of the domestic financial cycle. The paper concludes that macroprudential policies are an important tool for preventing excessive swings in the financial cycle, but they should be complemented by a central stabilisation mechanism, which can make both capital markets and fiscal policy more resilient to disruption associated with the financial cycle.
    JEL: G01 E62 H30
    Date: 2017–07
  13. By: Ruediger Bachmann; Christian Bayer; Christian Merkl; Stefan Seth; Heiko Stüber; Felix Wellschmied
    Abstract: We study the relationship between employment growth and worker flows in excess of job flows (churn) at the establishment level using the new German AWFP dataset spanning from 1975–2014. Churn is above 5 percent of employment along the entire employment growth distribution and most pronounced at rapidly-adjusting establishments. We find that the patterns of churn along the employment growth distribution can be explained by separation rate shocks and time-to-hire frictions. These shocks become larger on average during boom periods leading to procyclical worker churn. Distinguishing between separations into non-employment and to other establishments, we find that separations to other establishments drive all procyclical churn. In a secondary contribution, we compare German worker and job flows with their US counterparts and recent US findings.
    Keywords: job flows, worker flows, churn, job-to-job transitions, aggregate fluctuations
    JEL: E20 E24 E32 J23 J63
    Date: 2017
  14. By: Mario Pietrunti (Bank of Italy); Federico M. Signoretti (Bank of Italy)
    Abstract: We model an economy with long-term mortgages and show that some characteristics of mortgage contracts – such as the type of interest rate (adjustable versus fixed) and the loan-to-value ratio – matter for the transmission of monetary policy impulses, both conventional and unconventional. A conventional monetary policy shock has a stronger impact on output and inflation with adjustable-rate mortgages, also reflecting the higher sensitivity of installments to changes in the short-term rate. When households borrow at a fixed rate, unconventional monetary policy can stimulate the economy mainly through a redistribution of income from savers to borrowers, who have a higher marginal propensity to consume. The impact of monetary policy – both conventional and unconventional – is stronger when the level of households' mortgage debt is high relative to housing wealth.
    Keywords: long-term mortgages, monetary policy, income channel
    JEL: E52 E58 G21
    Date: 2017–10
  15. By: Sam Olofin (Centre for Econometric and Allied Research, University of Ibadan); Olusanya Olubusoye (Centre for Econometric and Allied Research, University of Ibadan); Afees A. Salisu (Centre for Econometric and Allied Research, University of Ibadan); Alarudeen Aminu (Centre for Econometric and Allied Research, University of Ibadan.); Uwatt B. Uwatt (Monetary Policy Department, Central Bank of Nigeria, Nigeria.); Micheal A. Adebiyi (Monetary Policy Department, Central Bank of Nigeria, Nigeria.)
    Abstract: The first operational small-scale macro-econometric model of the Nigerian Economy was developed in 2013. Ever since, the country had witnessed significant changes owing to oil price shock which culminated into internal and external imbalances. To address these challenges among others, informed the revision of the model. Thus, in the revised model, provisions are made for unemployment and the role of expectations and uncertainty surrounding the oil and foreign exchange markets. By simulating three alternative policy scenarios using oil price, monetary policy rate and cash reserve ratio, some striking results are obtained with implications for monetary policy in Nigeria.
    Keywords: Macro-econometric models; Policy simulation; Nigerian economy
    JEL: C50 E27 E58
    Date: 2017–10
  16. By: Evžen Kocenda; Balázs Varga
    Abstract: We analyze the impact of price stability-oriented monetary strategies (inflation targeting—IT—and constraining exchange rate arrangements) on inflation persistence using a time-varying coefficients framework in a panel of 68 countries (1993–2013). We show that explicit IT has a stronger effect on taming inflation persistence than implicit IT and is effective even during and after the financial crisis. We also show that once a country hits the ZLB its inflation persistence mildly decreases and that there exists a mild pull to return to inflation persistence mean once a central bank moves away from its inflation target. The link between inflation persistence and constraining exchange rate regimes is less pronounced than that of IT and regimes with the U.S. dollar as a reserve currency are less effective than those using the Euro (Deutsche mark). On other hand, the U.S. persistence transers disproportionately lower effect on other countries’ persistence than the IP of Germany.
    Keywords: inflation persistence, inflation targeting, exchange rate regime, flexible least squares
    JEL: C22 C32 E31 E52 F31
    Date: 2017
  17. By: Efrem Castelnuovo; Trung Duc Tran
    Abstract: We develop uncertainty indices for the United States and Australia based on freely accessible, real time Google Trends data. Our Google Trends Uncertainty (GTU) indices are found to be positively correlated to a variety of alternative proxies for uncertainty available for these two countries. VAR investigations document an economically and statistically significant contribution to unemployment dynamics by GTU shocks in the United States. Differently, the contribution of GTU shocks to unemployment dynamics in Australia is found to be much milder and substantially lower than that of monetary policy shocks.
    Keywords: Google trends uncertainty indices, uncertainty shocks, unemployment dynamics, VAR analysis
    JEL: C32 E32 E52
    Date: 2017
  18. By: Carsten A. Holz
    Abstract: For the past nearly forty years, China has experienced average annual real GDP growth of close to ten percent, much of it driven by investment and capital accumulation. By 2014, gross capital formation had reached 46 percent of aggregate expenditures. This paper documents the role of investment in driving economic growth in China, questions how much longer China can sustain a relatively high investment rate, and examines the arguments that have been offered for an impending drastic reduction in investment. It also notes that investment in China remains broad-based across all economic sectors, with little specialization; the size of the Chinese economy may allow continued comprehensive development across all economic sectors. At the same time, the relative size of foreign investment in China has become negligible and the China growth story thus has become a domestic one.
    Keywords: investment rate, capital-output ratio, ICOR, national investment strategy, economic growth
    JEL: E01 E22 E60 O11 O53
    Date: 2017
  19. By: Simone Auer (Bank of Italy)
    Abstract: Financial Conditions Indexes (FCIs) are analytical tools devised to synthesize the information contained in a set of financial variables in order to identify how financial conditions affect economic activity. In this paper, for each of the three main Central and Eastern EU member states outside the euro area (Hungary, Poland and the Czech Republic) an FCI is constructed as an unobserved factor estimated using the EM algorithm. After having assessed their performance in providing information about future economic activity (both in-sample and out-of-sample), these FCIs are used to describe the evolution of financial conditions in the three economies between 2001 and 2016. The overall findings of this study support a narrative whereby all three economies, after their integration into the EU, enjoyed very accommodative financial conditions until 2008; the Czech Republic and Hungary subsequently turned out to have been more exposed than Poland to the spillover effects from both the global financial crisis and euro sovereign debt crisis.
    Keywords: Financial Conditions Index, dynamic factor models, forecasting, macro-financial linkages
    JEL: C43 E5 E17 E44 G01
    Date: 2017–10
  20. By: Margaria Abreu
    Abstract: Based on the actual trading behavior of individual investors in the Portuguese financial market during almost ten years this paper examines the socio-demographic characteristics of retail investors in warrants, and discusses the hypothesis that some behavioral biases do have an impact on the investors’ predisposition to invest and trade in warrants, a complex financial instrument. One finds that there is a profile of investors in warrants: younger and less educated men are more likely to invest in warrants and that overconfident, disposition-prone and investors exhibiting a gambling attitude are more likely to invest and trade in warrants. Secondly, the gambling motive seems to be a distinguishing characteristic of investors in warrants. In other words, when investors are driven to trade in financial markets for pleasure/fun they tend to trade complex products more and to trade simple and easier to understand financial instruments less. Finally, the higher the intensity of trading the more relevant are the disposition and the gambler’s biases. Key Words: Warrants, overconfidence, disposition effect, gambling effect, individual investor behavior
    JEL: C20 E44 E52 E62 G01
    Date: 2017–10
  21. By: Jasper de Winter; Siem Jan Koopman; Irma Hindrayanto; Anjali Chouhan
    Abstract: We consider a multivariate unobserved component time series model to disentangle the short-term and medium-term cycle for the G7 countries and the Netherlands using four key macroeconomic and financial time series. The novel aspect of our approach is that we simultaneously decompose the short-term and medium-term dynamics of these variables by means of a combination of their estimated cycles. Our results show that the cyclical movements of credit volumes and house prices are mostly driven by the medium-term cycle, while the macroeconomic variables are equally driven by the short-term and medium-term cycle. For most countries, the co-movement between the cycles of the financial and macroeconomic variables is mainly present in the medium-term. First, we find strong co-cyclicality between the medium-term cycles of house prices and GDP in all countries we analyzed. Second, the relation between the medium-term cycles of GDP and credit is more complex. We find strong concordance between both cycles in only three countries. However, in three other countries we find 'indirect' concordance, i.e. the medium-term cycles of credit and house prices share co-cyclicality, while in turn the medium-term cycles of house prices and GDP share commonality. This outcome might indicate that the house price cycle is -at least partly- driven by the credit cycle. Lastly, the cross-country concordance of both the short-term cycles and the medium-term cycles of GDP, house prices and credit is low. Hence, the bulk of the cyclical movements seem to be driven by domestic rather than global factors.
    Keywords: unobserved component time series model; Kalman filter; maximum likelihood estimation; short-term and medium-term cycles
    JEL: C32 E32 G01
    Date: 2017–10
  22. By: Matthias Kehrig; Nicolas L. Ziebarth
    Abstract: We find that oil supply shocks decrease average real wages, particularly skilled wages, and increase wage dispersion across regions, particularly unskilled wage dispersion. In a model with spatial energy intensity differences and nontradables, labor demand shifts, while explaining the response of average wages to oil supply shocks, have counterfactual implications for the response of wage dispersion. Only an additional response in labor supply can explain this latter fact highlighting the importance of general equilibrium effects in a spatial context. We provide additional empirical evidence of regionally directed worker reallocation and housing prices consistent with our spatial model. Finally, we show that a calibrated version of our model can quantitatively match the estimated effects of oil supply shocks.
    Keywords: wage dispersion, labor reallocation, skill heterogeneity, oil prices
    JEL: E24 J24 J31 J61
    Date: 2017
  23. By: Gustav A. Horn; Andrew Watt
    Abstract: This paper addresses the issue of current account imbalances of countries within a monetary union, now widely agreed to have been a major contributor to the persistent economic crisis in the EMU. In particular we focus on the role of wages for current account developments and a possible role for nominal incomes policies in limiting and correcting imbalances. We set out why national current accounts remain important in a monetary union and examine the forces driving the current account balance. We present empirical evidence on current account developments in the Euro Area, focusing on countries in which a correction has occurred. Detailed counter-factual model-based simulations for Germany show that “wage policy” on its own is scarcely able to make an impact on its huge and destabilising surplus; what is needed is a combined approach in which nominal wages follow a wage norm (productivity plus ECB target inflation rate) while aggregate demand is managed (in this case stimulated) to fully utilise productive potential. Against this analytical background we develop a proposal for institutional reform of the Euro Area, building on existing institutions. Key elements are: reinstating the Broad Economic Policy Guidelines as the conceptual framework guiding economic policy, expanding the remit of the Fiscal Council and the Productivity Boards to cover the entire policy mix, and substantially developing the EU Macroeconomic Dialogue in particular by setting up MEDs at Euro Area and Member State levels.
    JEL: D40 E31 L51
    Date: 2017–07
  24. By: Giovanni Caggiano; Efrem Castelnuovo; Gabriela Nodari
    Abstract: We investigate the role played by systematic monetary policy in tackling the real effects of uncertainty shocks in U.S. recessions and expansions. We model key indicators of the business cycle with a nonlinear VAR that allows for different dynamics in busts and booms. Uncertainty shocks are identified by focusing on historical events that are associated to jumps in financial volatility. Uncertainty shocks hitting in recessions are found to trigger a more abrupt drop and a faster recovery in real activity than in expansions. Counterfactual simulations suggest that the effectiveness of systematic monetary policy in stabilizing real activity is greater in expansions. Finally, we provide empirical and narrative evidence pointing to a risk management approach by the Federal Reserve.
    Keywords: uncertainty shocks, nonlinear Smooth Transition Vector AutoRegressions, Generalized Impulse Response Functions, systematic monetary policy
    JEL: C32 E32
    Date: 2017
  25. By: Ambrose, Brent W.; Coulson, N. Edward; Yoshida, Jiro
    Abstract: One of the largest components of official price indexes is housing services, which account for 16 percent to 41 percent of major price indexes in the United States (e.g., Consumer Price Index). This paper demonstrates that the current measure of housing rents does not accurately track the actual inflation rate of housing rents. We construct an alternative quality-adjusted measure of housing rents that is based on a monthly statistic of landlord net rental income. Compared with our modified inflation rate, the official rate was overestimated by 1.4 percent to 3.4 percent annually during the Great Recession but underestimated by 0.3 percent to 0.7 percent annually during the current expansionary period after the recession. We further demonstrate significant impacts of our improved measurement of inflation rates on the cost of living adjustment to Social Security and real gross domestic product. These impacts persist for a long term because the modified price indexes are integrated of order one whereas the official indexes are trend stationary.
    Keywords: measurement error, economic statistics, owners' equivalent rent, Consumer Price Index, Personal Consumption Expenditures, National Income and Product Accounts
    JEL: E01 E31 R31 H55
    Date: 2017–10
  26. By: Krug, Sebastian
    Abstract: The extensive harm caused by the financial crisis raises the question of whether policymakers could have done more to prevent the build-up of financial imbalances. This paper aims to contribute to the field of regulatory impact assessment by taking up the revived debate on whether central banks should "lean against the wind" or not. Currently, there is no consensus on whether monetary policy is, in general, able to support the resilience of the financial system or if this task should better be left to the macroprudential approach of financial regulation. The author aims to shed light on this issue by analyzing distinct policy regimes within an agent-based computational macromodel with endogenous money. He finds that policies make use of their comparative advantage leading to superior outcomes concerning their respective intended objectives. In particular, he shows that "leaning against the wind" should only serve as first line of defense in the absence of a prudential regulatory regime and that price stability does not necessarily mean financial stability. Moreover, macroprudential regulation as unburdened policy instrument is able to dampen the build-up of financial imbalances by restricting credit to the unsustainable high-leveraged part of the real economy. In contrast, leaning against the wind seems to have no positive impact on financial stability which strengthens proponents of Tinbergen's principle arguing that both policies are designed for their specific purpose and that they should be used accordingly.
    Keywords: financial stability,monetary economics,macroprudential policy,financial regulation,central banking,agent-based macroeconomics
    JEL: E44 E50 G01 G28 C63
    Date: 2017
  27. By: António Afonso; Michael G. Arghyrou; María Dolores Gadea; Alexandros Kontonikas
    Abstract: This paper investigates the role of unconventional monetary policy as a source of time-variation in the relationship between sovereign bond yield spreads and their fundamental determinants. Our results provide evidence of a new bond-pricing regime following the announcement of the Outright Monetary Transactions (OMT) programme in August 2012. This regime is characterised by a weakened link between spreads and fundamentals, but with higher spreads relative to the pre-crisis period and residual redenomination risk. We also find that unconventional monetary policy measures affect the pricing of sovereign risk not only directly, but also indirectly through changes in banking risk.
    Keywords: euro area, spreads, crisis, time-varying relationship, unconventional monetary policy
    JEL: E43 E44 F30 G01 G12
    Date: 2017
  28. By: Enders, Zeno
    Abstract: This paper proposes a novel mechanism by which changes in the distribution of money holdings have real effects. Specifically, I develop a flexible-price model of segmented asset markets that generates real aggregate effects of monetary policy through the dependence of optimal markups on the heterogeneity of money holdings. Because varieties of consumption bundles are purchased sequentially, newly injected money disseminates slowly throughout the economy via second-round effects.
    JEL: E31
    Date: 2017
  29. By: Carsten A. Holz
    Abstract: The investment-intensive growth model of the People’s Republic of China (PRC) is often viewed as state-driven and ultimately unsustainable. But largely unnoticed, a shift has taken place. This paper examines the changes in investment patterns since 2003 and the potential impact of industrial policies on these patterns. The point of view is macroeconomic, based on economy-wide data with various breakdown. Significant shifts in investment patterns across sectors and ownership forms have occurred over time, supporting a new growth model with a reduced role of the state, and these shifts appear driven more by market factors than by government policies.
    Keywords: investment rate, investment policy, national investment strategy, sector distribution of investment, ownership distribution of investment, causes of investment, economic growth
    JEL: E22 E60 L52 O11 O25 O53
    Date: 2017
  30. By: Alessandro Barattieri; Matteo Cacciatore; Francesco Costamagna
    Abstract: Calls for market reforms to help improve economic performance have become a mantra in European policy discussions. In the recent years, fears of a new wave of protectionism reopened the debate on the macroeconomic effects of raising tariff and non-tariff barriers. In this policy paper, we evaluate the consequences of such policy options for economies in a liquidity trap - i.e. at times of major slack and binding constraints on monetary policy easing (such as when the zero lower bound on nominal interest rates is binding). First, we analyse the consequences of protectionism through the lens of a benchmark business cycle model. We show that raising trade barriers has contractionary effects both domestically and abroad. Such detrimental effects are larger in a liquidity trap. We conclude that Europe should not engage in protectionism, even in response to an increase in the level of tariffs imposed by a major trading partner (such as the U.S.). We then review recent trends in product and labor market regulation across the European Union members. Using results from the academic literature, we argue that market reforms in Europe are unlikely to induce significant deflationary effects, suggesting that the inability of monetary policy to deliver interest rate cuts might not be a relevant obstacle to reform. While coordinated structural reforms across the EU members would maximise short- and long-term gains, legal considerations of the implementation of reforms across countries pose challenges to the harmonisation process.
    JEL: F10 F40 E20 L60
    Date: 2017–07
  31. By: Jiranyakul, Komain
    Abstract: This paper attempts to examine how the policy rate as a monetary policy stance reacts to output and price level in Thailand during 2005Q1 and 2016Q2. An empirical relationship that characterizes the way the Bank of Thailand adjusts its policy rate to output growth and inflation is identified. Johansen ointegration technique and VAR methodology are used in the analysis. The results from the cointegration analysis show that there exists a long-run relationship of the policy rate with real GDP and prices. This long-run equation differs from the empirical Taylor-type rule. However, the result from short-run dynamics captures the short-run interest rate equation. The partial adjustment coefficient in the estimated interest rate equation is negative and highly significant, which indicates that any deviation of the policy rate from its equilibrium value is corrected by monetary policy actions. Furthermore, there is long-run causality running from inflation and economic growth to a change in policy rate. In the short run, economic growth negatively causes a change in the policy rate while inflation positively causes a change in the policy rate. Also, impulse response analysis from an unrestricted VAR model indicates that both output growth and inflation shocks cause fluctuation in the policy rate.
    Keywords: Policy rate, output, prices, error correction mechanism, impulse responses
    JEL: C32 E52
    Date: 2017–10
  32. By: Wu, Cheng
    Abstract: Keynes’ General Theory (1936) is probably the most challenging economics book ever written, with an abundance of hypotheses, concepts and theories. Twenty five years after its publication, Clower proposed an insightful explanation on Keynes, the Dual-Decision Hypothesis (DDH). Hall (1978) and Flavin (1981) seemingly reached the conclusion that, under certain conditions, consumption was independent of income. In contrast, Wu (2016) has shown that, change in saving has to be a function of income growth. In fact, applying Wu’s corrected consumption for period t+1, it is possible to show DDH equations leading to Keynes’ change in saving (and disequilibrium) conclusion.
    Keywords: consumption; martingale; savings; growth; income; trade; Clower; dual decision hypothesis; keynes
    JEL: A10 B22 C2 E2 E6 F0 J0 N1
    Date: 2017–10–22
  33. By: Zafer Kanık (Boston College, Department of Economics.);
    Abstract: This paper develops a framework to analyze private-sector resolution of contagion in financial networks. Inefficiencies in rescue arise due to the network structure itself. The banks which are least affected from the contagion have the least incentives to prevent failures. Optimal networks minimize the realized bankruptcy costs, and are potentially contagious and evenly connected with intermediate integration (ratio of interbank liabilities to total assets per bank) and low diversification (number of counterparties per bank). The rescue capability and incentives endogenously arise in optimal networks, which encourage banks to borrow and lend in the interbank market with minimal concern about individual failure risk and no concern about contagion risk. In optimal networks, the government assists only the rescue of the first failure, and only for small enough shocks.
    Keywords: acquisition, contagion, financial network, merger, rescue, resolution, systemic risk.
    JEL: D85 E44 G01 G32 G33 G34 G38 H81
    Date: 2017–10
  34. By: Alessandro Dovis; Rishabh Kirpalani
    Abstract: Expectations of bailouts by central governments incentivize overborrowing by local governments. In this paper, we ask if fiscal rules can correct these incentives to overborrow when central governments cannot commit and if these rules will arise in equilibrium. We address these questions in a reputation model in which the central government can either be a commitment or a no-commitment type and the local governments learn about this type over time. We find that if the central government's reputation is low enough, then fiscal rules can lead to even more debt accumulation relative to the case with no rules. This is because the punishment for violating the fiscal rule worsens the payoffs of preserving reputation. Despite being welfare reducing, binding fiscal rules will arise in the equilibrium of a signaling game due to the incentives of the commitment type to reveal its type.
    JEL: E40 E6 E61 F5 H6 H7
    Date: 2017–10
  35. By: Balamatsias, Pavlos
    Abstract: This paper analyses a simple model of an economy with imperfect competition in the goods markets and heterogeneous individuals due to different skill endowments. We then examine how the combination of income inequality, and imperfect competition, affect taxing and spending policies. Results indicate that firms’ market power and income inequality positively affect the size of fiscal multipliers, meaning that spending and taxing multipliers are bigger the more unequal an economy is. We also use the balanced budget multiplier to examine how income inequality and imperfect competition affect the net increase in output and expenditure caused by fiscal policies. The model shows that in highly unequal societies the maximum net increase in output and expenditure comes when increased government spending is funded by taxing the minority of high-income workers, as the adverse effects on the economy will be smaller compared to a tax imposed on the majority. However, this result changes as the economy becomes more equal and for high enough percentages of the population belonging in the high-income group the maximum net increase in output and expenditure comes when the government increases government spending and taxes low-income people instead. Finally, we examine the welfare effects of government policies. We see that while taxes reduce taxpayers’ welfare, if the net increase in output and expenditure is big enough, fiscal policy can be Pareto improving, as both income groups benefit from it; or at least the income group not paying taxes benefits while the income group paying taxes is not worse off. Income inequality is once again crucial in our analysis as it affects the size of welfare losses the taxpaying segments of the population have and whether government policies can be Pareto improving.
    Keywords: Income inequality, Fiscal multiplier, Public Expenditure, Taxation
    JEL: D63 E12 E62
    Date: 2017–10–24
  36. By: Luc Arrondel; Pierre Lamarche; Frédérique Savignac
    Abstract: This paper studies the heterogeneity of the marginal propensity to consume out of wealth based on French household surveys. This heterogeneity is driven by differences in both wealth composition and wealth levels. We find a decreasing marginal propensity to consume out of wealth across the wealth distribution for all net wealth components. The marginal propensity to consume out of financial assets tends to be higher compared with the effect of housing assets, except at the top of the wealth distribution. The marginal propensity to consume out of housing wealth increases with debt pressure and depends on debt composition. Based on a simulation exercise, we find a limited effect of wealth shocks on consumption inequality. An increase in stock prices tends however to slightly increase consumption inequality, especially at the top of the distribution.
    Keywords: consumption, marginal propensity to consume out of wealth, policy distributive effects, household survey
    JEL: D12 E21 C21
    Date: 2017
  37. By: Francesco D'Acunto; Ryan Liu; Carolin Pflueger; Michael Weber
    Abstract: The frequency with which firms adjust output prices helps explain persistent differences in capital structure across firms. Unconditionally, the most exible-price firms have a 19% higher long-term leverage ratio than the most sticky-price firms, controlling for known determinants of capital structure. Sticky-price firms increased leverage more than exible-price firms following the staggered implementation of the Interstate Banking and Branching Efficiency Act across states and over time, which we use in a difference-in-differences strategy. Firms’ frequency of price adjustment did not change around the deregulation.
    Keywords: capital structure, nominal rigidities, bank deregulation, industrial organization and finance, price setting, bankruptcy
    JEL: E12 E44 G28 G32 G33
    Date: 2017
  38. By: Sigurd Mølster Galaasen (Norges Bank (Central Bank of Norway))
    Abstract: Old-age pension reform is on the agenda across the OECD, and a key target is to delay retirement. Most of these countries also have a disability insurance (DI) program accounting for a large share of labor force exits. This paper builds a quantitative life-cycle model with endogenous retirement to study how DI and old-age pension (OA-pension) systems interact with health and wages to determine retirement age, with particular focus on the macroeconomic effects of OA-pension reforms. Individuals face uncertain future health status and wages, and if in bad health they are eligible for DI if they choose to retire before reaching the statutory retirement age. I calibrate the model to the Norwegian economy and explore the effects of raising the statutory retirement age and cutting OA-pension on labor supply and public finances. The main contribution of the paper is that I, in contrast to standard macro pension models, include DI as another endogenous margin of retirement. I show that failure to account for this margin might severely bias the analysis of OA-pension reforms.
    Keywords: Retirement, disability insurance, life-cycle, pension reform
    JEL: E2 E6 H31 H55 J26
    Date: 2017–10–23
  39. By: Jean-Charles Bricongne; Lucia Granelli; Susanne Hoffmann
    Abstract: The purpose of this paper is to assess the effect of fiscal measures on the investment decisions of French non-financial corporations. As a reference framework, we use the model developed by Eudeline et al. (2013). We extend this framework by introducing the effect of fiscal incentives on investments. We estimate the effect of a decrease in the corporate tax rate in France, which passed from 42 % in 1990 to 33.3 % nowadays and is planned to be reduced to 28 % by 2020 and to 25% in 2022. Fiscal measures are found to have a positive effect on investment, although the growth rate of economic activity and the corporate saving rate remain the main drivers of corporate investment.
    JEL: C22 E22 E62
    Date: 2017–07
  40. By: Aurélien Goutsmedt (Centre d'Economie de la Sorbonne, Chaire Energie et Prospérité); Erich Pinzon-Fuchs (Los Andes University); Matthieu Renault (Centre d'Economie de la Sorbonne); Francesco Sergi (University of Bristol)
    Abstract: We illustrate how the Lucas Critique was called into question by Keynesian macroeconomists during the 1970s and 1980s. Our claim is that Keynesians' reactions were carried out from a pragmatic approach, which addressed the empirical and practical relevance of the Critique. Keynesians rejected the Critique as a general principle with no relevance for concrete macroeconometric practice; their rejection relied on econometric investigations and contextual analysis of the U.S. 1970s stagflation and its aftermath. Keynesians argued that the parameters of their models remained stable across this period, and that simpler ways to account for stagflation (such as the introduction of supply shocks into their models) provided better alternatives to improve policy evaluation
    Keywords: History of macroeconomics; Lucas Critique; Keynesian macroeconometrics; Stagflation
    JEL: B22 B41 E60 E12
    Date: 2017–10
  41. By: García Martínez, José Ramón; Sorolla i Amat, Valeri
    Abstract: In a standard Diamond-Mortensen-Pissarides labour market with frictions, the authors seek to determine when there is more employment with individual wage bargaining than with collective wage bargaining, using a wage equation generated by the standard total surplus sharing rule. Using a Cobb-Douglas production function (AL,
    Keywords: Matching Frictions,Unemployment,Individual and Collective Wage Setting
    JEL: E24 O41
    Date: 2017
  42. By: Carsten A. Holz; SUN Yue
    Abstract: Capital estimates are widely used in economic growth and productivity studies, for profitability considerations and wealth accounting exercises. Yet the calculation of “capital†frequently receives only cursory attention, despite the challenges posed by conceptual difficulties, the complexity of calculations, and the extensive data requirements. This paper (i) calculates long-run provincial (and national) physical capital series for China, (ii) distinguishes between capital services and wealth capital stock, and (iii) applies the most recent methodology advanced by the OECD, the U.S. Bureau of Labor Statistics, and the Australian Bureau of Statistics. The complete set of data is available online and is expected to be updated on an annual basis in the future.
    Keywords: capital services, wealth capital stock, capital concepts
    JEL: E01 E22 O11 O53
    Date: 2017
  43. By: Christiane Baumeister; Lutz Kilian
    Abstract: We explore the effect on U.S. real GDP growth of the sharp and sustained decline in the global price of crude oil and hence in the U.S. price of gasoline after June 2014. Our analysis suggests that this decline produced a cumulative stimulus of about 0.9 percentage points of real GDP growth by raising private real consumption and non-oil related business investment and an additional stimulus of 0.04 percentage points reflecting a shrinking petroleum trade deficit. This stimulating effect, however, has been largely offset by a large reduction in real investment by the oil sector. Hence, the net stimulus since June 2014 has been close to zero. We show that the response of the U.S. economy was not fundamentally different from that observed after the oil price decline of 1986. Then as now the response of the U.S. economy is consistent with standard economic models of the transmission of oil price shocks. We found no evidence of an additional role for frictions in reallocating labor across sectors or for increased uncertainty about the price of gasoline in explaining the sluggish response of U.S. real GDP growth. Nor did we find evidence of financial contagion, of spillovers from oil-related investment to non-oil related investment, of an increase in household savings, or of households deleveraging.
    Keywords: stimulus, oil price decline, uncertainty, reallocation, savings, shale oil, oil loans
    JEL: E32 Q43
    Date: 2017
  44. By: Etoundi Atenga, Eric Martial
    Abstract: This paper aims to examine the forces driving co-movements in the CEMAC. For that purpose, a two-step methodology is employed. First, a DCC-GARCH is used to assess correlations between member states. Second, panel models are employed to examine whether and the extent to which trade, policies, economic structure and common factors determine output growth correlations. Results from the DCC-GARCH model suggest that spikes of co-movements appear during high volatility oil prices episodes namely the 1998 oil crisis, the 2008 financial crisis and the recent 2014 collapse. Panel regressions suggest that trade has negative effects on output co-movements. The differential fiscal policy displays strong and significant positive effects on output correlations while the role of the single monetary policy is not robust across models. The degree of specialization has negative effects while the financial development increase co-movements. The landlocked situation of Chad and Central Africa reduces their co-movements with other member states. Results also reveal non-linearities in the effects of trade linkages which are non-significant when the country is landlocked. As a policy implication, national governments may limit the cyclical behaviour of their fiscal policy in order to in increase co-movements in the region.
    Keywords: output co-movements, trade integration, common shocks, fiscal and monetary policy, GMM dynamic panel, specialization, Monsoon effects, random effects.
    JEL: E32
    Date: 2017–10–20
  45. By: Barnett, William; Su, Liting
    Abstract: A monetary-production model of financial firms is employed to investigate supply-side monetary aggregation, augmented to include credit card transaction services. Financial firms are conceived to produce monetary and credit card transaction services as outputs through financial intermediation. While credit cards provide transactions services, credit cards have never been included into measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities to assets. However, index number theory measures service flows and is based on microeconomic aggregation theory, not accounting. Barnett, Chauvet, Leiva-Leon, and Su (2016) have derived and applied the relevant aggregation theory applicable to measuring the demand for the joint services of money and credit cards. But because of the existence of required reserves and differences in taxation on the demand and supply side, there is a regulatory wedge between the demand and supply of monetary services. We derive theory needed to measure the supply of the joint services of credit cards and money, to estimate the output supply function, and to compute value added. The resulting model can be used to investigate the transmission mechanism of monetary policy. Earlier results on the monetary policy transmission mechanism based on the correlation between simple sum inside money and final targets are not likely to approximate or even be relevant to results that can be acquired by empirical implementation of this model or its extensions. Our financial-firm value-added measure and its supply function are fundamentally different from prior measures of inside money, shadow banking output, or money supply functions. The data needed for empirical implementation of our theory are available online from the Center for Financial Stability (CFS) in New York City. We show that the now discredited conventional accounting-based measures of privately produced inside money can be replaced by our measures, based on microeconomic aggregation theory, to provide the information originally contemplated in the literature on monetary theory for over a century.
    Keywords: Inside money, aggregation theory, index number theory, financial firm production
    JEL: C5 C58 D2 D22 E4 E41 G2 G21
    Date: 2017–10–18
  46. By: Erik Roos Lindgreen; Milan van Schendel; Nicole Jonker; Jorieke Kloek; Lonneke de Graaff; Marc Davidson
    Abstract: Purpose: Consumers in the Netherlands made more than 3.2 billion debit card transactions at points-of-sale in 2015, corresponding to over half of all point-of-sale payments in that year. This study provides insights into the environmental impact of debit card transactions based on a life cycle assessment (LCA). In addition, it identifies several areas within the debit card payment chain where the environmental impact can be reduced. Conclusions: For the first time, the environmental consequences of electronic card payment systems are evaluated. The total environmental impact of debit card transactions in the Netherlands is relatively modest compared to the impact of cash payments, which are the closest substitute of debit card payments at the point-of-sale. Scenario analysis indicates that the environmental impact can be reduced by 44%.
    Keywords: Datacentre; Debit card payment system; Debit card; Environmental impact; LCA; Payment terminal
    JEL: E42 Q50
    Date: 2017–10
  47. By: Kiyohiko G. Nishimura (Professor of Economics, National Graduate Institute for Policy Studies (GRIPS); Emeritus Professor and Distinguished Project Research Fellow, Center for Advanced Research in Finance (CARF) at the University of Tokyo; Chair, Statistics Commission of Japan; Former Deputy Governor, Bank of Japan); Junko Ishikawa (Researcher, Nomura Research Institute)
    Abstract: GDP statistics have been a focus of debates, especially about whether real (constant-price) GDP figures appropriately represent the economic conditions of the economy. This paper shows that the official nominal (current price) GDP is the nominal value of utility the nation enjoys from the current consumption and future consumption that current investment enables to realize in an ideal-type economy with money, which is an intuitive interpretation. However, in this framework, an appropriate real GDP is not the official constant-price GDP but the utility or value GDP, which is the nominal GDP divided by the Consumer Price Index (most broadly defined).
    Date: 2017–10
  48. By: Wensheng, Kang; Ratti, Ronald; Vespignani, Joaquin
    Abstract: Global uncertainty shocks are associated with a sharp decline in global inflation, growth and interest rate. From 1981 to 2014, global financial uncertainty forecasts 18.26% and 14.95% of the variation in global growth and global inflation, respectively. Global uncertainty shocks exhibit more protracted, statistically significant and substantial effects on the global growth, inflation and interest rate than U.S. uncertainty shocks. U.S. uncertainty lags global uncertainty by one month. When controlling for domestic uncertainty, the decline in output following a rise in global uncertainty is statistically significant in each country, with the exception of the decline for China. The effects for the U.S. and China are also relatively small. For most economies, a positive shock to global uncertainty has a depressing effect on prices and official interest rates – exceptions are Brazil, Mexico and Russia, which represent economies with large capital outflows during financial crises. Decomposition of global uncertainty shocks shows that global financial uncertainty shocks are more important than non-financial shocks.
    Keywords: Global, Uncertainty Shocks, Monetary Policy, FAVAR
    JEL: E00 E1
    Date: 2017–10–15
  49. By: Jakob B Madsen
    Abstract: In his 2014 book, Thomas Piketty argues that wealth inequality is sharply increasing in r-g and refers to r>g as ‘the central contradiction of capitalist economics’, where r is asset returns and g is real income growth. To assess whether inequality is increasing in the (r-g)-gap this paper: 1) constructs unique annual data on asset returns for a balanced portfolio and several other variables for Britain over the period 1210-2013, and 2) examines whether the dynamics in the wealth-income ratio, W-Y, and capital’s income share, SW, are governed by (r-g). It is shown that r and g are robust and significant determinants of wealth and income inequality and that they have been the major forces behind the large inequality waves over the past eight centuries.
    Keywords: Inequality and the (r-g)-gap; dynamics of inequality; inequality in Britain, 1210-2013
    JEL: E1 E2 O4 N1 N30 P1
    Date: 2017–10
  50. By: Sven Steinkamp; Aaron Tornell; Frank Westermann
    Abstract: The Single Supervisory Mechanism was introduced to eliminate the common-pool problem and limit uncontrolled lending by national central banks (NCBs). We analyze its effectiveness. Second, we model how, by forbearing and providing refinancing credit, NCBs avoid domestic resolution costs and, instead, share potential losses within the Euro Area. This results in “evergreening” of bad loans. Third, we construct a new evergreening index based on a large worldwide survey administered by the ifo institute. Regressions show evergreening is significantly greater in the Euro Area and where banks are in distress. Finally, greater evergreening accompanies higher growth of NCB-credit and Target2-liabilities.
    Keywords: single supervisory mechanism, evergreening, nonperforming loans, common-pool problem
    JEL: F33 F55 E58
    Date: 2017
  51. By: Konstantinos Angelopoulos; Spyridon Lazarakis; Jim Malley
    Abstract: This paper develops an incomplete markets model with state dependent (Markovian) stochastic earnings processes and ex ante skill heterogeneity corresponding to being university educated or not. Using the Wealth and Assets Survey for Great Britain, we find that the university educated group has higher average wealth, higher earnings risk but lower within group wealth inequality. Using estimates of the earnings processes for each group to calibrate the model, we find wealth inequality within and between the groups that is consistent with the data. Moreover, the predictions for overall wealth inequality are closer to the data, compared to the benchmark model with ex ante identical households. In this framework, ex ante skill heterogeneity generates a between-group pecuniary externality which in turn leads to the predicted differences in wealth inequality between the groups and works as an amplification mechanism to increase overall wealth inequality.
    Keywords: incomplete markets, education differences, pecuniary externalities
    JEL: E21 E25 H23
    Date: 2017
  52. By: Thorsten Beck; Steven Poelhekke
    Abstract: The need to absorb windfalls gains and manage them appropriately has been discussed extensively by academics and policy makers alike. We explore the role of the financial sector in intermediating these windfalls. Controlling for the level of financial development, inflation, GDP growth and country fixed-effects, we find a relative decline in financial sector deposits in countries that experience an unexpected natural resource windfall as measured by shocks to exogenous world prices. Moreover, we find a similar relative decline in lending, which is mostly due to the decrease in deposits. The smaller role for the financial sector in intermediating resource booms is accompanied by a stronger role of governments in channeling resources into the economy, mostly through higher government consumption.
    Keywords: natural resources, financial development, banking
    JEL: E20 F41 G20 O10 Q32 Q33
    Date: 2017
  53. By: Gartner, Hermann; Carbonero, Francesco
    Abstract: Fixed search costs, i.e. costs that don’t vary with search duration, can amplify the cyclical volatility on the labor market. To assess the size of fixed costs, we analyse the relation of search costs and search duration with data from Germany. We find that fixed search costs are about one half of total search costs, but this is not enough to solve the labor market volatility puzzle completely.
    JEL: E24
    Date: 2017
  54. By: Ricardo T. Fernholz; Kris James Mitchener; Marc Weidenmier
    Abstract: We use the demise of silver-based standards in the 19th century to explore price dynamics when a commodity-based money ceases to function as a global unit of account. We develop a general equilibrium model of the global economy with gold and silver money. Calibration of the model shows that silver ceased functioning as a global price anchor in the mid-1890s - the price of silver is positively correlated with agricultural commodities through the mid-1890s, but not thereafter. In contrast to Fisher (1911) and Friedman (1990), both of whom predict greater price stability under bimetallism, our model suggests that a global bimetallic system, in which the gold price of silver uctuates, has higher price volatility than a global monometallic system. We confirm this result using agricultural commodity price data for 1870-1913.
    Keywords: bimetallism, classical gold standard, silver, unit of account, fixed exchange rates
    JEL: E42 F33 N10 N20
    Date: 2017
  55. By: Alexander Bick; Nicola Fuchs-Schündeln
    Abstract: We document contemporaneous differences in the aggregate labor supply of married couples across 17 European countries and the US. Based on a model of joint household decision making, we quantify the contribution of international differences in non-linear labor income taxes and consumption taxes to the international differences in hours worked in the data. Through the lens of the model, taxes, together with wages and the educational composition, account for a significant part of the small differences in married men’s and the large differences in married women’s hours worked in the data. Taking the full non-linearities of labor income tax codes, including the tax treatment of married couples, into account is crucial for generating the low cross-country correlation between married men’s and women’s hours worked in the data, and for explaining the variation of married women’s hours worked across European countries.
    Keywords: taxation, two-earner households, hours worked
    JEL: E60 H20 H31 J12 J22
    Date: 2017
  56. By: Matthias Kehrig; Nicolas Vincent
    Abstract: Almost two thirds of the cross-plant dispersion in marginal revenue products of capital occurs across plants within the same firm rather than between firms. Even though firms allocate invest- ment very differently across their plants, they do not equalize marginal revenue products across their plants. We reconcile these findings in a model of multi-plant firms, physical adjustment costs and credit constraints. Credit constrained multi-plant firms can utilize internal capital markets by concentrating internal funds on investment projects in only a few of their plants in a given period and rotating funds to another set of plants in the future. The resulting increase in within-firm dispersion of marginal revenue products of capital is hence not a symptom of misallocation within the firm, but rather actions taken by the firm to mitigate external credit constraints and adjustment costs of capital. Economies with multi-plant firms produce more aggregate output despite higher dispersion in marginal revenue products of capital compared to economies with single-plant firms. Because emerging economies are predominantly populated by single-plant firms, the gains from reducing their distortions to the level of developed are larger than previously thought.
    Keywords: misallocation, productivity dispersion, multi-plants firms, internal capital markets
    JEL: E20 G30
    Date: 2017
  57. By: Donatella Baiardi; Paola Profeta; Riccardo Puglisi; Simona Scabrosetti
    Abstract: We challenge the “OECD view†(Arnold et al. 2011) according to which a shift from direct to indirect taxation is associated with higher long-run economic growth. We study the relationships between per capita GDP, overall tax revenue and tax composition (in particular direct vs. indirect taxation). We can replicate the findings in Arnold et al. when focusing on the same sample of countries and time period, but not when adopting more cautious estimates of the standard errors. The results are not robust to adding countries and/or extending the time period under consideration. They also differ in the short- and long-run.
    Keywords: economic growth, taxation, tax mix, OECD countries
    JEL: E62 H20 P50
    Date: 2017
  58. By: Aurélien Goutsmedt (Centre d'Economie de la Sorbonne, Chaire Energie et Prospérité)
    Abstract: The article studies the 1978 macroeconomics conference titled “After the Phillips Curve”, where Lucas and Sargent presented their fierce attack against structural macroeconometric models, “After Keynesian Macroeconomics”. The article aims at enlarging the comprehension of changes in macroeconomics in the 1970s. It shows: 1) that Lucas and Sargent dit not tackle directly the issue of the explanation of stagflation; 2) but that the struggle between different methodological stances in the conference cannot be separated from the way macroeconomists interpreted stagflation; 3) that it was not an opposition between being in favor or against microfounded models, but rather on the way we build microfoundations; 4) finally that the study of the 1978 conference opens the doors for scrutinizing the evolution of institution macroeconometric models of the 1970s which were not totally overthrown by Lucas and Sargent's arguments
    Keywords: History of macroeconomics; Keynesian economics; Microfoundations; Structural Macroeconometric Models
    JEL: B22 B41 E60
    Date: 2017–10
  59. By: Guglielmo Maria Caporale; Hector Carcel; Luis A. Gil-Alana
    Abstract: This paper analyses the stochastic properties of and the bilateral linkages between the central bank policy rates of the US, the Eurozone, Australia, Canada, Japan and the UK using fractional integration and cointegration techniques respectively. The univariate analysis suggests a high degree of persistence in all cases: the fractional integration parameter d is estimated to be above 1, ranging from 1.26 (US) to 1.48 (UK), with the single exception of Japan, for which the unit root null cannot be rejected. Concerning the bivariate results, Australian interest rates are found to be cointegrated with the Eurozone and UK ones, Canadian rates with the UK and US ones, and Japanese rates with the UK ones. The increasingdegree of integration of international financial markets and the coordinated monetary policy responses following the global financial crisis might both account for such linkages.
    Keywords: interest rates, long memory, fractional integration and cointegration
    JEL: C22 C32 E47
    Date: 2017
  60. By: Malte Rieth
    Abstract: This paper characterizes capital taxation and public debt policy in a quantitative macroeconomic model with an impatient government and uncertainty. The government has access to linear taxes on capital and labor, and to non-state-contingent bonds. Government impatience generates positive and empirically realistic longrun levels of both capital taxes and public debt. Prior predictive analysis shows that the simulated model matches the distribution of both variables in a sample of 42 countries, alongside other statistics. The paper then presents econometric evidence that countries with higher political instability, used as an approximation of unobservable public discount rates, have both higher capital taxes and debt.
    Keywords: Fiscal policy, prior predictive analysis, political instability, macro panel, Ramsey optimal policy
    JEL: E62 H21 H63 C23
    Date: 2017
  61. By: Alexandre B. Cunha; Emanuel Ornelas
    Abstract: We study the desirability of limits on the public debt and of political turnover in an economy where incumbents have an incentive to set public expenditures above the socially optimal level due to rent-seeking motives. Parties alternate in office and cannot commit to future policies, but they can forge a political compromise where each party curbs excessive spending when in office if it expects future governments to do the same. In contrast to the received literature, we find that strict limits on government borrowing can exacerbate political economy distortions by making a political compromise unsustainable. This tends to happen when political turnover is limited. Conversely, a tight limit on the public debt fosters a compromise that yields the efficient outcome if political turnover is vigorous. Our analysis thus suggests that to sustain good economic policies, a society needs to restrict either the extent of political turnover or the ability of governments to issue debt, but not both.
    Keywords: debt limits, political turnover, efficient policies, fiscal rules
    JEL: E61 E62 H30 H63
    Date: 2017
  62. By: Loukas Karabarbounis (University of Minnesota); Gabriel Chodorow-Reich (Harvard University)
    Abstract: By how much does an extension of unemployment benefits affect macroeconomic outcomes such as unemployment? Answering this question is challenging because U.S. law extends benefits for states experiencing high unemployment. We use data revisions to decompose the variation in the duration of benefits into the part coming from actual differences in economic conditions and the part coming from measurement error in the real-time data used to determine benefit extensions. Using only the variation coming from measurement error, we find that benefit extensions have a limited influence on state-level macroeconomic outcomes. We use our estimates to quantify the effects of the increase in the duration of benefits during the Great Recession and find that they increased the unemployment rate by at most 0.3 percentage point.
    Date: 2017
  63. By: Fabiano Schivardi; Enrico Sette; Guido Tabellini
    Abstract: Do banks with low capital extend excessive credit to weak firms, and does this matter for aggregate efficiency? Using a unique data set that covers almost all bank-firm relationships in Italy in the period 2004-2013, we find that, during the Eurozone financial crisis: (i) Under-capitalized banks were less likely to cut credit to non-viable firms. (ii) Credit misallocation increased the failure rate of healthy firms and reduced the failure rate of non viable firms. (iii) Nevertheless, the adverse effects of credit misallocation on the growth rate of healthier firms were negligible, and so were the effects on TFP dispersion. This goes against previous inuential findings that, we argue, face serious identification problems. Thus, while banks with low capital can be an important source of aggregate inefficiency in the long run, their contribution to the severity of the great recession via capital misallocation was modest.
    Keywords: bank capitalization, zombie lending, capital misallocation
    JEL: D23 E24 G21
    Date: 2017
  64. By: László Jankovics; Monika Sherwood
    Abstract: This study takes stock of the early history of independent fiscal institutions (IFI) in the EU and draws horizontal lessons for the future from the experiences of Member States. First, it briefly recalls how the consensus of the economic literature about well-designed IFIs was reflected in the EU legislation which prompted the spread of IFIs across the whole EU. The paper then describes the significant differences between IFIs across the Member States in terms of the breadth of their mandates, their resources, their visibility in public debates etc. Subsequently, the paper zooms in on two core tasks of IFIs: i) their production or endorsement of the official macroeconomic forecasts used for fiscal planning, and ii) their assessment of national compliance with numerical rules. Qualitative and some tentative quantitative evidence suggest that in the early years of their operation, IFIs have already played a useful role in national budgetary processes, although some common challenges remain present. The discussion paper concludes with a number of potential ideas for strengthening the role of IFIs to the benefit of sound fiscal policymaking. These include, most notably, ensuring more appropriate independence safeguards, improvements in the forecast endorsement process, a more timely and comprehensive monitoring of numerical rules, as well as a broader application of the comply-or-explain principle in relation to IFIs’ assessments.
    JEL: E62 H61 H68
    Date: 2017–07
  65. By: Qing, He; Korhonen, Iikka; Zongxin, Qian
    Abstract: In emerging market economies, transmission of monetary policy through the foreign exchange market is complicated by the coexistence of financial restrictions and arbitrages. Using China as an example, we show that the coexistence of exchange rate interventions, capital controls and an on-shore-offshore exchange rate differential makes the long run equilibrium in the currency market nonlinear. Disturbances to this nonlinear long run equilibrium could offset the impact of monetary policy actions on domestic price stability. Omitting such nonlinearity leads to biased inference on the effectiveness of monetary policy.
    JEL: E52 F31 F40
    Date: 2017–10–21
  66. By: Daniela Marconi (Bank of Italy); Christian Upper (Bank for International Settlements)
    Abstract: This study investigates how financial development affects capital allocation across industries in a panel of countries at different stages of development (China, India, Mexico, Korea, Japan and the US) over the period 1980-2014. Following the approach proposed by Chari et al (2007) and Aoki (2012), we compute wedges for capital and labour inputs for 26 industrial sectors in the six countries and add them up to economy-wide measures of capital and labour misallocation. We find that more developed financial systems allocate capital investment more efficiently than less developed ones. If financial development is low, faster capital accumulation is associated with a worsening of allocative efficiency. This effect reverses for higher levels of financial development. Sectors with high R&D expenditures or high capital investment benefit most from financial development. These effects are not only statistically significant, they are also large in economic terms.
    Keywords: factor allocation, total factor productivity, financial development.
    JEL: E22 E23 O16 O47
    Date: 2017–10
  67. By: Shim, Jae-Hun
    Abstract: This paper introduces a global banking system in a small open economy DSGE model with financialfrictions. The model features global relative price adjustments with incomplete asset market. Three mainfindings stand out. Firstly, foreign financial shocks capture negative spillovers from foreign country ina global financial crisis. We show that country differences in the severity of the shocks depend on thedegree of trade openness and banking system stability. Secondly, credit policy could be more powerfulthan monetary policy to alleviate foreign financial shocks since an expansionary monetary policy andalternative policy rules are not a sufficient tool in the global financial crisis. In particular, credit policybased on international credit spread outperforms credit policy based on domestic credit spread since thelatter leads to “excess smoothness” in the real exchange rate. Lastly, foreign credit policy has a negligibleinfluence on domestic welfare so that the small open economy can effectively reduce welfare losses onlyif the central bank in the economy injects credit.
    Date: 2016–06
  68. By: Torben M. Andersen; Joydeep Bhattacharya
    Abstract: Many countries, in an effort to address the problem that too many retirees have too little saved up, impose mandatory contributions into retirement accounts, that too, in an age-independent manner. This is puzzling because such funded pension schemes effectively mandate the young, who wish to borrow, to save for retirement. Further, if agents are present-biased, they disagree with the intent of such schemes and attempt to undo them by reducing their own saving or even borrowing against retirement wealth. We establish a welfare case for mandating the middle-aged and the young to contribute to their retirement accounts, even with age-independent contribution rates. We find, somewhat counterintuitively, that even though the young responds by borrowing more that too at a rate higher than offered by pension savings, their life-time utility increases.
    Keywords: present-biased preferences, mandatory pensions, pension offsets, crowding out
    JEL: H55 D91 D03 E60
    Date: 2017
  69. By: Mariacristina De Nardi (University College London / Federal Reserve Bank of Chicago / IFS / NBER); Svetlana Pashchenko (University of Georgia); Ponpoje Porapakkarm (National Graduate Institute for Policy Studies)
    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, medical spending, wealth-health gradient, life-cycle model
    JEL: D52 D91 E21 H53 I13 I18
    Date: 2017–10
  70. By: Shah, Imran H.; Carlos, Diaz Vela; Wang, Yuan
    Abstract: This paper examines the dynamic effects of oil price, aggregate demand and aggregate supply shocks on output and inflation in four small developing economies using a structural VAR model. For all countries, despite finding the expected response of output to oil price shocks, an upward causal effect of oil price innovations on the domestic price level is established which adversely accompanies the growth stimulating effects in oil-exporting countries. This paper also finds asymmetric effects of oil price changes on macroeconomic variables in all sample countries. Finally, our empirical results find two further things: firstly, that for Malaysia, Pakistan and Thailand, nominal demand and supply shocks are the main sources of fluctuations in inflation and output respectively, whereas for Indonesia the converse holds and secondly that whilst the 1998 recession was largely induced by only supply and demand shocks the recession of 2008-09 could potentially be explained by oil price changes.
    Date: 2017–03–17
  71. By: Keiichiro Kobayashi; Tomoyuki Nakajima
    Abstract: We develop a model of liquidity crises based on debt overhang and credit networks. Firms need liquidity for its operation. Defaults of a group of fi rms may cause chain reaction of defaults of banks and firms through a credit network. Our model is consistent with the observation that the decline in output during the Great Recession is mostly attributable to the deterioration in the labor wedge, rather than in productivity.
    Date: 2017–10
  72. By: Yoshida, Jiro
    Abstract: The correlation between stock and housing prices, which is critical for household asset allocations, varies widely by metropolitan area and country. A general equilibrium model demonstrates that an aggregate positive technology shock increases stock prices and housing demand but can decrease housing prices where land supply is elastic because stable future rents are discounted at higher interest rates. Using panel data of U.S. metropolitan areas and OECD countries, I find that the housing price response to TFP shocks as well as the stock-housing correlation are smaller and even negative where the housing supply is elastic. I also find that household equity investment is positively related to housing supply elasticity.
    Keywords: macroeconomic shocks, total factor productivity, general equilibrium, regional heterogeneity, house price, housing supply elasticity, asset allocation
    JEL: E32 R21 R31 G11
    Date: 2017–10
  73. By: Kaplan, Robert S. (Federal Reserve Bank of Dallas)
    Date: 2017–02–13
  74. By: Cosmin Ilut; Matthias Kehrig; Martin Schneider
    Abstract: Concave hiring rules imply that firms respond more to bad shocks than to good shocks. They provide a unified explanation for several seemingly unrelated facts about employment growth in macro and micro data. In particular, they generate countercyclical movement in both aggregate conditional “macro†volatility and cross-sectional “micro†volatility as well as negative skewness in the cross section and in the time series at different level of aggregation. Concave establishment level responses of employment growth to TFP shocks estimated from Census data induce significant skewness, movements in volatility and amplification of bad aggregate shocks.
    Keywords: business cycles, time varying volatility, asymmetric adjustment, skewness
    JEL: D20 D80 E20 J20
    Date: 2017
  75. By: Grégory Claeys
    Abstract: A version of this paper was prepared for the conference ‘20 years after the Asian Financial Crisis - Lessons, Challenges, Way Forward’, Tokyo, 13-14 April 2017, organised jointly by the Asian Development Bank and the Asian Development Bank Institute, and was published as ADBI Working Paper No. 778, September 2017, ‘How to build a resilient monetary union? Lessons from the Euro Crisis’. This version of the paper is published with the permission of the ADBI. This policy contribution describes the institutional flaws of the single currency revealed by the euro crisis and the institutional reforms that were put in place during and in the aftermath the crisis, and evaluates the remaining fragilities of the architecture of the European monetary union. In order to achieve a more resilient monetary union in Europe, we propose - 1) to form a ‘financing union’ through the completion of the banking union and the promotion of an ambitious capital markets union to provide private risk sharing between the countries of the monetary union; and 2) to improve the defective macroeconomic policy framework to avoid a repeat of the mistakes of recent years. The latter involves - reforming the European Stability Mechanism / Outright Monetary Transactions framework to clarify its functions and improve its governance system, reforming the European fiscal rules to make them more effective to achieve the two desirable objectives of sustainability and stabilisation, and creating a small-scale euro-area stabilisation tool to provide public risk sharing in case of significant shocks that members of the monetary union cannot deal with alone and to help manage the euro-area aggregate fiscal stance. A promising option to carry out these tasks would be to establish a European Unemployment Insurance Scheme. To ensure the democratic legitimacy of this overhauled euro-area governance framework, a European Fiscal Governing Council composed of six executive board members – including a euro-area finance minister – and of the finance ministers of the euro-area countries, would oversee the whole system and exercise the necessary discretion, while being accountable to the European Parliament in euro-area format.
    Date: 2017–10
  76. By: EZZAHID, Elhadj; NIHOU, Abdelaziz
    Abstract: Investment is at the heart of economic growth. It increases the available stock of capital for productive activities and allows the introduction, in the productive process, of improved technology embedded in new capital items. Monitoring accumulation and use of this capital is a big issue. Our paper aims to bring a diagnostic of the Moroccan case by responding to these two questions: is capital stock sufficient? Is it efficiently used? Our results show that Morocco recorded an overinvestment in the 1970s, an underinvestment in the period 1982-2004 and an overinvestment since mid-2000s. The estimation of the rate of return to capital in the Moroccan economy indicates that RRK was under 10% until the beginning of the 1990s. Since then, it recorded a steady increase that culminated at 18% around 2004. After this date, it began to decrease. We attribute the low level of capital-labor ratio in Morocco to the high price of investment goods compared to consumption goods especially before 2000, to the insufficiency of human capital accumulation and absorption, and to the low level of TFP. The major conclusion of this paper is that the debate about the efficiency of capital use must go hand in hand with an exploration of why capital accumulation in Morocco is insufficient.
    Keywords: Investment, capital, efficiency of capital use, rate of return to capital, factors’ total productivity, Morocco
    JEL: E22 O11
    Date: 2017–10–03
  77. By: Marc Giannoni (Federal Reserve Bank of New York); Domenico Giannone (Federal Reserve Bank of New York); Andrea Tambalotti (Federal Reserve Bank of New York); Marco Del Negro (Federal Reserve Bank of New York)
    Abstract: Why are interest rates so low in the Unites States? We nd that they are low mostly because the premium for safety and liquidity has increased since the late 1990s. We reach this conclusion using two complementary perspectives: a exible time series model of trends in nominal rates, Treasury and corporate yields, in ation, and long term expectations, and a medium-scale DSGE model. We discuss the implications of this nding for the natural rate of interest.
    Date: 2017
  78. By: Konstantinos Angelopoulos; Spyridon Lazarakis; Jim Malley
    Abstract: This paper examines the relationship between idiosyncratic risk in labour income and fluctuations in aggregate labour market quantities for Great Britain. We use data from the British Household Panel Survey (BHPS) for 1991-2008 and from the BHPS sub-sample of Understanding Society for 2010-2014. We measure idiosyncratic risk in labour income by the relevant moments of the distributions of earnings, employment and wage shocks across individuals. Our main finding is that idiosyncratic risk increases during contractions in the labour market. Furthermore, we find evidence of insurance, both at the household level and in the form of public insurance. However, private and public insurance mechanisms against an increase in idiosyncratic risk are less e¤ective for households whose head does not hold a University degree.
    Keywords: idiosyncratic income risk, employment, social insurance policy
    JEL: D31 E24 J31
    Date: 2017
  79. By: Schelkle, Thomas
    Abstract: Das Papier entwickelt neue Methoden zur Messung der Misallokation von Produktionsfaktoren zwischen verschiedenen Produktionseinheiten. Diese Methoden beruhen nur auf sehr allgemeinen Annahmen. Eine empirische Anwendung dieser Methoden liefert Evidenz für eine beträchtliche Misallokation von Arbeit und Kapital zwischen verschiedenen Industrien in den USA und für einen substantiellen Anstieg von Misallokation während der Great Recession.
    JEL: E23
    Date: 2017
  80. By: Nazib, Nur Afiyah; Masih, Mansur
    Abstract: As much as it is important in a conventional system, monetary policy also plays a critical role in governing the Islamic economic system. However, in a dual banking system, things may have to be designed and devised differently to cater to the needs of both. Thus, assessing the impact of monetary policy shocks on the Islamic banking system is the key to understanding the addition of the industry towards financial stability and the extent of quality of the industry. The purpose of this paper is to initially revisit the issue of monetary policy shocks on the Islamic banking system, in the case of Malaysia. Our paper extends the previous study by using the most recent monthly data available which is from the year 2010 to the year 2016. Additionally, we incorporate the use of a robust time series technique, ARDL, and paired our analysis with an analysis of variance decomposition to strengthen our findings. Based on the results, we find evidence that despite being in the industry for almost half a century, the monetary policy shocks still have an influence on the Islamic banking deposit in Malaysia. Additionally, the Islamic banking deposits are also highly influenced by the level of inflation which comes out to be the most exogenous variable amongst all. An important implication from our analysis is that it is very critical for the central bank to help maintain the resiliency of the system by designing an appropriate monetary policy that could cater to both system and start devising legitimate risk management procedures that is applicable to these Islamic institutions.
    Keywords: Islamic bank deposits, monetary policy, ARDL, Malaysia
    JEL: C22 C58 E52
    Date: 2017–06–05
  81. By: Matthias Kehrig; Nicolas Vincent
    Abstract: The aggregate labor share in U.S. manufacturing declined dramatically over the last three decades: Since the mid-1980’s, the compensation for labor declined from 67% to 47% of value added which is unseen in any other sector of the U.S. economy. The labor share of the typical U.S. manufacturing plants, in contrast, rose by over 5 percentage points. We reconcile these two facts by documenting (1) an important reallocation of production towards “hyper-productive plants†and (2) a downward adjustment of the labor share of those same plants over time. These two related forces account for almost all the change in the trend of aggregate labor share in the manufacturing sector, with only a small role for exit of high-labor-share plants. Relative to their peers, plants that account for the majority of production by the late 2000's arrive at a low labor share by gradually increasing value added by a factor of three while keeping employment and compensation unchanged.
    Keywords: labor share, productivity, firm size distribution, organization of markets
    JEL: E20 L10 L20 L60 O40
    Date: 2017
  82. By: Steven Brakman; Charles van Marrewijk
    Abstract: We analyse the link between supply chains and the extent to which the Great Recession has affected national economies. Our analysis is in two steps, namely first for value added measures of supply chains and then for the Grubel-Lloyd index using gross-export data. Regarding value added measures we find, in general, no effect. Only if we separate out Europe do we find that the trough in Europe occurs about 0.17 years later and the recovery (for the countries that have recovered) about 1.55 years later. Moreover, the duration of the decline in Europe is about 4 months longer and of the recovery about 17 months longer. We explain this link and Europe’s special role using a detailed Grubel-Lloyd index applied to gross-exports as an alternative supply chain measure, which significantly affects the impact of the Great Recession regarding the timing and duration of the recovery (later and longer).
    Keywords: resilience, Great Recession, supply chains
    JEL: E32 R11 R12
    Date: 2017
  83. By: Machasio, Immaculate; Tillmann, Peter
    Abstract: Remittance inflows from overseas workers are an important source of foreign funding for developing and emerging economies. This paper estimates nonlinear (smooth-transition) local projections to study the effectiveness of monetary policy under different remittance inflows regimes. We show that for Kenya, Mexico, Colombia and the Philippines monetary policy has a smaller effect under strong inflows of remittances.
    JEL: E52
    Date: 2017
  84. By: Lazaryan, Nika (Federal Reserve Bank of Richmond); Lubik, Thomas A. (Federal Reserve Bank of Richmond)
    Abstract: We study global and local dynamics of a simple search and matching model of the labor market. We show that the model can be locally indeterminate or have no equilibrium at all, but only for parameterizations that are empirically implausible. In contrast to the local results, we show that the model exhibits chaotic and periodic dynamics for reasonable parameter values both in backward and forward time. In contrast to earlier work, we establish these results analytically without placing numerical restrictions on the parameters.
    Keywords: Indeterminacy; Bifurcation; Chaos; Backward Map; Forward Map
    JEL: C62 C65 E24 J64
    Date: 2017–10–20
  85. By: Schlegl, Matthias; Illing, Gerhard; Ono, Yoshiyasu
    Abstract: We use a stylized MIU-model with a housing sector and financial frictions to study the interactions between debt, liquidity and asset prices under persistent stagnation. Stagnation can occur in equilibrium when households have insatiable liquidity preferences. We show that financially more advanced economies are more likely to enter into stagnation and that stagnation is more severe the higher private sector debt. Moreover, credit booms can temporarily mask the transition into stagnation.
    Date: 2017
  86. By: Marianne Andries; Valentin Haddad
    Abstract: The main features of households' attention to savings are rationalized by a model of information aversion, a preference-based fear of receiving flows of news. In line with the empirical evidence, information averse investors observe the value of their portfolios infrequently; inattention is more pronounced for more risk averse investors and in periods of low or volatile stock prices. The model also explains how changes in information frequencies affect risk-taking decisions, as observed in the field and the lab. Further, we find that receiving state-dependent alerts following sharp downturns improves welfare, suggesting a role for financial intermediaries as information managers.
    JEL: E21 G02 G11
    Date: 2017–10
  87. By: Christoph Basten; Benjamin Guin; Cathérine Tahmee Koch
    Abstract: We exploit a unique data set that features both un-intermediated mortgage requests and independent offers from multiple banks for each request. We show that households typically are not prudent risk managers but prioritize the minimization of current mortgage payments over the risk of possible hikes in future mortgage payments. We also provide evidence that banks do influence the contracted mortgage rate fixation periods, trading off their own exposure to interest rate risk against the borrowers’ affordability and credit risk. Our results challenge the implicit assumption of the existing mortgage choice literature whereby fixation periods are determined entirely by households.
    Keywords: Fixed-Rate Mortgage (FRM), Adjustable-Rate Mortgage (ARM), fixation period, maturity mismatch, interest rate risk, credit risk, duration
    JEL: D12 E43 G21
    Date: 2017
  88. By: Ko Nakayama (Associate Director-General, Head of Economic and Financial Studies Division, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Shigenori Shiratsuka (Director-General, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Date: 2017–10
  89. By: Hori, Masahiro; Niizeki, Takeshi
    Abstract: Using micro data covering almost 500,000 Japanese households over the period 1983−2012, this paper examines to what extent household consumption responds to changes in housing wealth. Instead of employing self-reported or regionally averaged values of housing wealth, we directly estimate the housing wealth of individual households by matching several official statistics, providing an ideal setting to identify housing wealth effects on consumption. Employing cross-section and pseudo-panel based regressions, we find that the marginal propensity to consume (MPC) out of housing wealth is approximately 0.0008−0.0013 for nondurable consumption and 0.0059−0.0082 for total consumption. We further find that the consumption response of older households is larger than that of younger households, which is consistent with the pure wealth effects hypothesis.
    Keywords: Housing wealth, household consumption, life cycle/permanent income hypothesis
    JEL: D12 D31 E21
    Date: 2017–09

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