nep-mac New Economics Papers
on Macroeconomics
Issue of 2017‒11‒26
77 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Inflation expectations and nonlinearities in the Phillips curve By Doser, Alexander; Nunes, Ricardo; Rao, Nikhil; Sheremirov, Viacheslav
  2. Sectoral inflation and the Phillips curve: what has changed since the Great Recession? By Luengo-Prado, Maria Jose; Rao, Nikhil; Sheremirov, Viacheslav
  3. The Rise, the Fall, and the Resurrection of Iceland By Sigríður Benediktsdóttir; Gauti B. Eggertsson; Eggert Þórarinsson
  4. Central Bank Information and the effects of Monetary shocks By Paul Hubert
  5. Communicating Uncertainty in Monetary Policy By Sharon Kozicki; Jill Vardy
  6. Monetary Policy Under Uncertainty: Practice Versus Theory By Rhys R. Mendes; Stephen Murchison; Carolyn A. Wilkins
  7. Should We Reject the Natural Rate Hypothesis? By Olivier J Blanchard
  8. Inequality, Redistributive Policies and multipliers dynamics in an agent based model with Credit rationing By Elisa Palagi; Mauro Napoletano; Andrea Roventini; Jean-Luc Gaffard
  9. Monetary Rule, Central Bank Loss and Household’s Welfare: an Empirical Investigation By Benchimol, Jonathan; Fourçans, André
  10. Residential investment and recession predictability By Knut Are Aastveit; André K. Anundsen; Eyo I. Herstad
  11. Eurozone bond market dynamics, ECB monetary policy and financial stress By Christophe Blot; Jérôme Creel; Paul Hubert; Fabien Labondance
  12. What Rule for the Federal Reserve? Forecast Targeting By Lars E.O. Svensson
  13. The mortgage rate conundrum By Justiniano, Alejandro; Primiceri, Giorgio E.; Tambalotti, Andrea
  14. Investing in human capital to boost growth! By Caroleo, Floro Ernesto; Pastore, Francesco
  15. Generalized Disappointment Aversion, Learning, and Asset Prices By Mykola Babiak
  16. From Wicksell to Le Bourva to Modern Monetary Theory: A Wicksell connection By Ehnts, Dirk; Barbaroux, Nicolas
  17. Structural Factor Analysis of Interest Rate Pass Through In Four Large Euro Area Economies By Anindya Banerjee; Victor Bystrov; Paul Mizen
  18. Dynamic Optimization under Uncertainty: A Case Study for Austrian Macroeconomic Policies. By Reinhard Neck; Sohbet Karbuz
  19. Geographic Inequality of Economic Well-being among U.S. Cities: Evidence from Micro Panel Data By Choi, Chi-Young; Chudik, Alexander
  20. Causes and consequences of hysteresis : aggregate demand, productivity and employment By Giovanni Dosi; Marcelo C. Pereira; Andrea Roventini; Maria Enrica Virgillito
  21. Productivity and Misallocation in General Equilibrium. By David Rezza Baqaee; Emmanuel Farhi
  22. The Bank of England as Lender of Last Resort: New historical evidence from daily transactional data By Mike Anson; David Bholat Author-Name-First: David; Miao Kang; Ryland Thomas
  23. Optimal monetary policy with international trade in intermediate inputs By Liutang Gong; Chan Wang; Heng-fu Zou
  24. Construction of a New Keynesian DSGE Model ( Algeria's Monetary policy approach) By Saloua Chaouche; Rachid Toumache
  25. The effects of skill-biased technical change on productivity flattening and hours worked By Hutter, Christian; Weber, Enzo
  26. Inflation and hyperinflation in Venezuela (1970s-2016): A post-Keynesian interpretation By Kulesza, Marta
  27. The Demand for Divisia Money: Theory and Evidence By Michael T. Belongia; Peter N. Ireland
  28. Internal Devaluation and Macroeconomic Adjustment: Lessons from the Great Recession in the US By Riccardo Trezzi; Luca Dedola; Giancarlo Corsetti
  29. The international bank lending channel of unconventional monetary policy By Gräb, Johannes; Żochowski, Dawid
  30. Macroeconomic Fluctuations with HANK & SAM: an Analytical Approach By Vincent Sterk; Morten Ravn
  31. Inflation Expectations and Monetary Policy Surprises By Snezana Eminidou; Marios Zachariadis; Elena Andreou
  32. Myths and Observations on Unconventional Monetary Policy -- Takeaways from Post-Bubble Japan -- By Yuto Iwasaki; Nao Sudo
  33. The distribution of excess liquidity in the euro area By Baldo, Luca; Hallinger, Benoît; Helmus, Caspar; Herrala, Niko; Martins, Débora; Mohing, Felix; Petroulakis, Filippos; Resinek, Marc; Vergote, Olivier; Usciati, Benoît; Wang, Yizhou
  34. Common Factors, Trends, and Cycles in Large Datasets By Matteo Barigozzi; Matteo Luciani
  35. Land-price dynamics and macroeconomic fluctuations with nonseparable preferences By Liutang Gong; Chan Wang; Fuyang Zhao; Heng-fu Zou
  36. Manufacturing Employment Elasticity and Its Drivers in Developing and Emerging Countries : Focus on Sub-Saharan Africa By Abdelaaziz Aït Ali; Yassine Msadfa
  37. Is consumption tax regressive? A libertarian perspective By Jim Fischer
  38. Comparative Analysis of Afghanistan and Pakistan Central Banks Monetary Policy By Tahiri, Noor Rahman
  39. The transmission of monetary policy shocks By Silvia Miranda-Agrippino; Giovanni Ricco
  40. An Assessment of UK Macroeconomic Volatility: Historical Evidence Using Over Seven Centuries of Data By Vasilios Plakandaras; Rangan Gupta; Mark E. Wohar
  41. Markups and markdowns By Mauro Caselli; Stefano Schiavo; Lionel Nesta
  42. The Gold Pool (1961-1968) and the Fall of the Bretton Woods System. Lessons for Central Bank Cooperation. By Michael Bordo; Eric Monnet; Alain Naef
  43. The Nature of Shocks in the Eurozone and Their Absorption Channels By Cinzia Alcidi; Mathias Dolls; Clemens Fuest; Carla Krolage; Florian Neumeier
  44. Designing a default structure: submission to the Inquiry into Superannuation: assessing efficiency and competitiveness By Barr, Nicholas; Diamond, Peter
  45. Foreign acquisition and internal organization By Paulo Bastos; Natália P. Monteiro; Odd Rune Straume
  46. The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten’s Theorem By David Rezza Baqaee; Emmanuel Farhi
  47. Contribution of increased life expectancy to economic growth: evidence from CEE countries By Gindrute Kasnauskiene; Karol Michnevich
  49. Following a balanced approach: remarks at The Economic Policy Forum Fall 2017, Department of Economics, Northeastern University, Boston, Massachusetts, November 15, 2017 By Rosengren, Eric S.
  50. Capital taxation : principles, properties and optimal taxation issues. By Céline Antonin; Vincent Touzé
  51. The Long-Run Effects of Recessions on Education and Income By Bryan Stuart
  52. Optimal Fiscal Policy with Heterogeneous Agents and Aggregate Shocks By Xavier Ragot; Francois Le Grand
  53. A New Approach Toward Detecting Structural Breaks in Vector Autoregressive Models By Florian Huber; Gregor Kastner; Martin Feldkircher
  54. When the United States Sneezes… By Williams, John C.
  55. Understanding the Time Variation in Exchange Rate Pass-Through to Import Prices By Rose Cunningham; Christian Friedrich; Kristina Hess; Min Jae Kim
  56. Observatorio Fiscal y Financiero de las CC.AA. By José Ignacio Conde-Ruiz; Manuel Díaz Mendoza; Carmen Marín; Juan Rubio-Ramírez
  57. News, Noise, and Tests of Present Value Models By Hamidi Sahneh, Mehdi
  58. What to Expect When You’re Expecting to Normalize Monetary Policy By Harker, Patrick T.
  59. Older Americans Would Work Longer If Jobs Were Flexible By John Ameriks; Joseph S. Briggs; Andrew Caplin; Minjoon Lee; Matthew D. Shapiro; Christopher Tonetti
  60. Recessions and Instable Estimates of Potential Output By Dovern, Jonas
  61. Nowcasting the Local Economy: Using Yelp Data to Measure Economic Activity By Edward L. Glaeser; Hyunjin Kim; Michael Luca
  62. Mentoring and the Dynamics of Affirmative Action By Michèle Müller-Itten; Aniko Ory
  63. The Aggregate Implications of Innovative Investment in the Garcia-Macia, Hsieh, and Klenow Model By Ariel Burstein
  64. Monetary Policy Divergence, Net Capital Flows, and Exchange Rates: Accounting for Endogenous Policy Responses By Davis, Scott; Zlate, Andrei
  65. Does inflation cause growth in the reform-era China? Theory and evidence By Qichun He; Heng-fu Zou
  66. Series enlazadas de algunos agregados economicos regionales, 1955-2014 By Angel De la Fuente
  67. Friedman’s Presidential Address in the Evolution of Macroeconomic Thought By N. Gregory Mankiw; Ricardo Reis
  68. Banks Cannot Either Multiply or Increase the Amount of Money or Create Deposits Without Backing of Matching Reserve; Only Central Bank Creates Money By NABA KUMAR ADAK
  69. TFP, News and "Sentiments:" The International Transmission of Business Cycles By Nitya Pandalai Nayar; Andrei Levchenko
  70. Privately Efficient Wage Rigidity Under Diminishing Returns By Bjoern Bruegemann
  71. Optimal Exchange-Rate Policy in a Model of Local-Currency Pricing with Vertical Production and Trade By Liutang Gong; Chan Wang; Heng-fu Zou
  72. Populism and central bank independence By Goodhart, Charles; Lastra, Rosa
  73. The Cobb-Douglas function as a flexible function. Analysing the substitution between capital, labor and energy. By Frédéric Reynès
  74. The rise and fall of the Brazilian economy (2004-2015): the economic antimiracle By Fernando Rugitsky
  75. Determinants and Macroeconomic Impact of Parallel Market For Foreign Exchange in Sudan By Ebaidalla Mahjoub Ebaidalla
  76. Tony Atkinson and his legacy By Aaberge, Rolf; Bourguignon, François; Brandolini, Andrea; Ferreira, Francisco H. G.; Gornick, Janet C.; Hills, John; Jäntti, Markus; Jenkins, Stephen P.; Micklewright, John; Marlier, Eric; Nolan, Brian; Picketty, Thomas; Radermacher, Walter J.; Smeeding, Timothy M.; Stern, Nicholas; Stiglitz, Joseph; Sutherland, Holly
  77. The Macroeconomic Impact of Money Market Freezes By Marie Hoerova; Harald Uhlig; Fiorella De Fiore

  1. By: Doser, Alexander (Federal Reserve Bank of Boston); Nunes, Ricardo (University of Surrey); Rao, Nikhil (Federal Reserve Bank of Boston); Sheremirov, Viacheslav (Federal Reserve Bank of Boston)
    Abstract: This paper shows that a simple form of nonlinearity in the Phillips curve can explain why, following the Great Recession, inflation did not decrease as much as predicted by linear Phillips curves, a phenomenon known as the missing disinflation. We estimate a piecewise-linear specification and document that the data favor a model with two regions, with the response of inflation to an increase in unemployment slower in the region where unemployment is already high. Nonlinearities remain important, even when we account for other factors proposed in the literature, such as consumer expectations of inflation or financial frictions. However, studying a range of specifications with different measures of inflation and economic activity, we conclude that, in most cases, consumer expectations are more robust than nonlinearities. We find that the role of consumer expectations was especially important in the 1970s and ’80s, during a turbulent rise in inflation followed by the Volcker disinflation; the nonlinearities make disinflation more problematic and require the inflation expectations process to be more forward-looking during this period, thereby putting a larger weight on survey expectations. We conclude that a nonlinear Phillips curve with forward-looking survey expectations can be a useful tool to understand inflation dynamics during episodes of rapid disinflation and persistent inflation.
    Keywords: inflation expectations; Phillips curve; Volcker disinflation
    JEL: D84 E24 E31 E32
    Date: 2017–10–01
  2. By: Luengo-Prado, Maria Jose (Federal Reserve Bank of Boston); Rao, Nikhil (Federal Reserve Bank of Boston); Sheremirov, Viacheslav (Federal Reserve Bank of Boston)
    Abstract: Using sectoral data at a medium level of aggregation, we find that price changes became less responsive to aggregate unemployment around 2009–2010. The slopes of the disaggregated Phillips curves diminished in many sectors, including housing and some services. We also document a decrease in sectoral inflation persistence, suggesting an increase in the weight of the forward-looking inflation expectation component and a decrease in the weight of the backward-looking component.
    Keywords: disaggregate price indices; inflation persistence; Phillips curve
    JEL: E24 E31 E32
    Date: 2017–11–01
  3. By: Sigríður Benediktsdóttir; Gauti B. Eggertsson; Eggert Þórarinsson
    Abstract: This paper documents how the Icelandic banking system grew from 100 percent of GDP in 1998 to 9 times GDP in 2008 when it failed. We base the analysis on data from the banks that was made public when the Icelandic parliament lifted among others bank secrecy laws to investigate the run up to the financial crisis. We document how the banks were funded, and where the money went with a comprehensive analysis of their lending. We also analyze policies implemented after the crash, including emergency legislation, capital control, alleviation of balance of payment risks and preservation of the financial stability. We estimate the output costs of the crisis, which was about average relative to the 147 banking crisis documented Laeven and Valencia (2012) and the 100 banking crisis documented by Reinhart and Rogoff (2014). Our computation of the governments direct costs, reveals that the recently concluded negotiation with foreign creditors may leave the Icelandic government in net surplus as a consequence of the crisis, although there is still some uncertainty about the ultimate cost and our benchmark estimate is a cost corresponding to 5 percent of GDP. We summarize several lessons from the episode.
    JEL: E0 E32 E44 E6 E63 F31 F32 F34 F51 G01 G20 G21 G3 G33 H12 H6 H62
    Date: 2017–11
  4. By: Paul Hubert (OFCE Sciences Po)
    Abstract: Does the effect of monetary policy depend on the macroeconomic information released by the central bank? Because differences between central bank’s and private agents’ information sets affect private agents’interpretation of policy decisions, this paper aims to investigate whether the publication of macroeconomic information by the central bank modifies private responses to monetary policy. We assess the non-linear effects of monetary shocks conditional on the Bank of England’s macroeconomic projections on UK private inflation expectations. We find that inflation projections modify the impact of monetary shocks. When contractionary monetary shocks are interacted with positive (negative) projections, the negative effect of policy on inflation expectations is amplified (reduced). This suggests that providing guidance about central bank future expected inflation helps private agents’ information processing, and therefore changes their response to policy decisions..
    Keywords: Monetary policy, information processing, signal extraction, market-based inflation expectations, central bank projections, real-time forecasts.
    JEL: E62 E58
    Date: 2017–09
  5. By: Sharon Kozicki; Jill Vardy
    Abstract: While central banks cannot provide complete foresight with respect to their future policy actions, it is in the interests of both central banks and market participants that central banks be transparent about their reaction functions and how they may evolve in response to economic developments, shocks, and risks to their outlooks. This paper outlines the various ways in which the Bank of Canada seeks to explain its economic outlook and monetary policy decisions, with an emphasis on how different sources of uncertainty factor into monetary policy communications. To help markets and others understand its reaction function, the central bank must explain what uncertainties are weighing on policy and how (or if) these uncertainties are being considered in policy formulation. Discussion of uncertainty becomes particularly important when a large shock has hit the economy or when a central bank’s view or its policy stance is changing. Market views and the views of the central bank will not always be aligned. The aim of monetary policy communications should not be alignment but understanding—helping markets comprehend the central bank’s policy objectives and providing a coherent rationale for policy decisions. In doing so, the bank must be transparent about the uncertainties influencing the outlook, their possible impacts and how these uncertainties will be factored into policy decisions. This paper outlines some recent and upcoming initiatives to achieve those objectives and improve Bank of Canada communications.
    Keywords: Credibility, Monetary Policy, Uncertainty and monetary policy
    JEL: E E5 E52 E58 E61
    Date: 2017
  6. By: Rhys R. Mendes; Stephen Murchison; Carolyn A. Wilkins
    Abstract: For central banks, conducting policy in an environment of uncertainty is a daily fact of life. This uncertainty can take many forms, ranging from incomplete knowledge of the correct economic model and data to future economic and geopolitical events whose precise magnitudes and effects cannot be known with certainty. The objective of this paper is to summarize and compare the main results that have emerged in the literature on optimal monetary policy under uncertainty with actual central bank behaviour. To this end, three examples are studied in which uncertainty played a significant role in the Bank of Canada’s policy decision, to see how closely they align with the predictions from the literature. Three principles emerge from this analysis. First, some circumstances—such as when the policy rate is at risk of being constrained by the effective lower bound—should lead the central bank to be more pre-emptive in moving interest rates, whereas others can rationalize more of a wait-and-see approach. In the latter case, the key challenge is finding the right balance between waiting for additional information and not falling behind the curve. Second, the starting-point level of inflation can matter for how accommodative or restrictive policy is relative to the same situation without uncertainty, if there are thresholds in the central bank’s preferences associated with specific ranges for the target variable, such as the risk of inflation falling outside of the inflation control range. Third, policy decisions should be disciplined, where possible, by formal modelling and simulation exercises in order to support robustness and consistency in decision making over time. The paper concludes with a set of suggested areas for future research.
    Keywords: Monetary Policy, Uncertainty and monetary policy
    JEL: E52 E58 E61 E65
    Date: 2017
  7. By: Olivier J Blanchard (Peterson Institute for International Economics)
    Abstract: Fifty years ago, Milton Friedman articulated the natural rate hypothesis. It was composed of two sub-hypotheses: First, the natural rate of unemployment is independent of monetary policy. Second, there is no long-run tradeoff between the deviation of unemployment from the natural rate and inflation. Both propositions have been challenged. Blanchard reviews the arguments and the macro and micro evidence against each and concludes that, in each case, the evidence is suggestive but not conclusive. Policymakers should keep the natural rate hypothesis as their null hypothesis but keep an open mind and put some weight on the alternatives.
    Keywords: Unemployment, Hysteresis, Inflation, Phillips Curve, Fluctuations
    JEL: E10 E2 E32
    Date: 2017–11
  8. By: Elisa Palagi (Scuola Superiore Sant'Anna, Pisa, Italy); Mauro Napoletano (OFCE-Sciences PO, Paris); Andrea Roventini (Scuola Superiore Sant'Anna, Pisa, Italy); Jean-Luc Gaffard (Sciences PO OFCE, Paris)
    Abstract: We build an agent-based model populated by households with heterogenous and time-varying financial conditions in order to study how different inequality shocks affect income dynamics and the effects of different types of fiscal policy responses. We show that inequality shocks generate persistent falls in aggregate income by increasing the fraction of credit-constrained households and by lowering aggregate consumption. Furthermore, we experiment with different types of fiscal policies to counter the effects of inequality-generated recessions, namely deficit-spending direct government consumption and redistributive subsidies financed by different types of taxes. We find that subsidies are in general associated with higher fiscal multipliers than direct government expenditure, as they appear to be better suited to sustain consumption of lower income households after the shock. In addition, we show that the effectiveness of redistributive subsidies increases if they are financed by taxing financial incomes or savings.
    Keywords: Income inequality, fiscal multipliers,redistributive policies, credit-rationing, agent-based models.
    JEL: E63 E21 C63
    Date: 2017–01
  9. By: Benchimol, Jonathan (Bank of Israel); Fourçans, André (ESSEC Business School)
    Abstract: Which monetary policy rule best fits the historical data? Which rule is most effective to reach the central bank’s objectives? Is minimizing a central bank loss equivalent to maximizing households’ welfare? Are NGDP growth or level targeting good options, and if so, when? Do they perform better than Taylor-type rules? In order to answer these questions, we use Bayesian estimations to evaluate the Smets and Wouters (2007) model under nine monetary policy rules with US data ranging from 1955 to 2017 and over three different sub-periods (among them the zero lower bound period where a shadow rate is introduced). We find that when considering the minimization of the central bank’s loss function, the estimates generally indicate the superiority of NGDP level targeting rules. If the behavior of the Fed is expressed in terms of households-welfare, the implications are not necessarily the same.
    JEL: E32 E52 E58
    Date: 2017–10–01
  10. By: Knut Are Aastveit (Norges Bank (Central Bank of Norway) and BI Norwegian Business School); André K. Anundsen (Norges Bank (Central Bank of Norway)); Eyo I. Herstad (xUniversity of Chicago)
    Abstract: We assess the importance of residential investment in predicting economic recessions for an unbalanced panel of 12 OECD countries over the period 1960Q1-2014Q4. Our approach is to estimate various probit models with different leading indicators and evaluate their relative prediction accuracy using the receiver operating characteristic curve. We document that residential investment contains information useful in predicting recessions both in-sample and out-of-sample. This result is robust to adding typical leading indicators, such as the term spread, stock prices, consumer confidence surveys and oil prices. It is shown that residential investment is particularly useful in predicting recessions for countries with high home-ownership rates. Finally, in a separate exercise for the US economy, we show that the predictive ability of residential investment is robust to employing real-time data.
    Keywords: Recession predictability, Housing, Leading indicators, Real-time data
    JEL: C33 C53 E32 E37
    Date: 2017–11–16
  11. By: Christophe Blot (OFCE, Sciences Po Paris, France); Jérôme Creel (OFCE, Sciences Po Paris, France); Paul Hubert (OFCE, Sciences Po Paris, France); Fabien Labondance (OFCE, Sciences Po Paris, France)
    Abstract: We investigate the role of both ECB’s asset purchases and market sentiment in the Eurozone sovereign debt crisiscontext. We explain the evolution of long-term interest rates in the Eurozone and in some Member States since the ECB started to purchase various securities for monetary policy purposes. We control for four categories offundamentals: macroeconomic, international, financial and expectations. We show that unconventional monetary policies and country-specific market sentiment have significant negative and positive effects respectively. Our results suggest that ECB’s unconventional policies have been effective in mitigating the disruption in the channels of transmission across the different Eurozone countries
    Keywords: Asset purchase programmes, ECB, sovereign yields, unconventional monetary policies, CISS
    JEL: E52 E58
    Date: 2017–09
  12. By: Lars E.O. Svensson
    Abstract: How would the policy rule of forecast targeting work for the Federal Reserve? To what extent is the Federal Reserve already practicing forecast targeting? Forecast targeting means selecting a policy rate and policy-rate path so that the forecasts of inflation and employment “look good,” in the sense of best fulfilling the dual mandate of price stability and maximum employment, that is, best stabilize inflation around the inflation target and employment around its maximum level. It also means publishing the policy-rate path and the forecasts of inflation and employment forecasts and, importantly, explaining and justifying them. This justification may involve demonstrations that other policy-rate paths would lead to worse mandate fulfillment. Publication and justification will contribute to making the policy-rate path and the forecasts credible with the financial market and other economic agents and thereby more effectively implement the Federal Reserve's policy. With such information made public, external observers can review Federal Reserve policy, both in real time and after the outcomes for inflation and employment have been observed, and the Federal Reserve can be held accountable for fulfilling its mandate. In contrast to simple policy rules that rely on very partial information in a rigid way, such as Taylor-type rules, forecast targeting allows all relevant information to be taken into account and has the flexibility and robustness to adapt to new circumstances. Forecast targeting can also handle issues of time consistency and determinacy. The Federal Reserve is arguably to a considerable extent already practicing forecast targeting.
    JEL: E52 E58
    Date: 2017–11
  13. By: Justiniano, Alejandro (Federal Reserve Bank of Chicago); Primiceri, Giorgio E. (Northwestern University, CEPR, and NBER); Tambalotti, Andrea (Federal Reserve Bank of New York)
    Abstract: We document the emergence of a disconnect between mortgage and Treasury interest rates in the summer of 2003. Following the end of the Federal Reserve’s expansionary cycle in June 2003, mortgage rates failed to rise according to their historical relationship with Treasury yields, leading to significantly and persistently easier mortgage credit conditions. We uncover this phenomenon by analyzing a large data set with millions of loan-level observations, which allows us to control for the impact of varying loan, borrower, and geographic characteristics. These detailed data also reveal that delinquency rates started to rise for loans originated after mid-2003, exactly when mortgage rates disconnected from Treasury yields and credit became relatively cheaper.
    Keywords: credit boom; housing boom; securitization; private label; subprime
    JEL: E32 E44 G21
    Date: 2017–11–01
  14. By: Caroleo, Floro Ernesto; Pastore, Francesco
    Abstract: The Italian economy performs well below the EU average. The reason is a dramatic and persistent low rate of investment, always invoked but never supported by national and supra-national institutions. However, investment to increase the quantity and quality of human capital is key to boost economic growth and cannot be achieved without adequate financial resources. At the same time, the educational system needs to relaunch university reforms (including the Gelmini and 3+2 reforms) which have been unsuccessful so far because they were poorly implemented. Last but not least, more and better ties between the educational system and the labor market should be developed as soon as possible.
    Keywords: Public Investment,Aggregate Human capital,Economic Growth,Educational Reforms,3+2 University Reform
    JEL: E22 E24 H54 I25 I28 J24
    Date: 2017
  15. By: Mykola Babiak
    Abstract: This paper provides a generalized disappointment aversion (GDA) interpretation of the variance and skew risk premia in equity returns and the volatility skew in equity index options. The key ingredients are Bayesian learning about a hidden con- sumption growth rate and the investor's tail aversion induced by GDA preferences which amplify the impact of consumption shocks. This model with disappointment risk reproduces salient properties of the variance and skew risk premia and generates a realistic volatility skew implied by index options, while simultaneously matching the mean and volatility of risk-free rate and equity returns, and the level of the price-dividend ratio. Additionally, the time-varying probability of disappointment events generates a wide range of dynamic asset pricing phenomena.
    Keywords: equity premium; variance and skew risk premia; volatility skew; generalized disappointment aversion; learning; Markov switching
    JEL: D81 E32 E44 G12
    Date: 2017–10
  16. By: Ehnts, Dirk; Barbaroux, Nicolas
    Abstract: In the aftermath of the Great Financial Crisis (GFC), and within the context of significant macroeconomic imbalances in the world economy, economists have shown renewed interest in the way central banks and financial systems work. The rise of Modern Monetary Theory (MMT) has relied on the examination of balance sheets, which has led to advancements in the understanding of the nuts and bolts of the financial system and the fundamental role of taxes, reserves, and deposits. While the school is associated with Post-Keynesian economics, we make the case that it could just as well be called Post-Wicksellian. The aim is not to argue for or against some label, but to make explicit the Wicksellian connection. In doing this, we bring forward old discussions and insights, which can be integrated into recent debates. MMT authors emphasize the importance of endogenous money and the examination of assets and liabilities in balance sheets. In our inquiry, we demonstrate that a horizontalist approach - adopted by MMT scholars - was already present in Wicksell (1898) and in the writings of French economist Jacques Le Bourva (1959, 1962). We examine the essential publications of the two authors and compare their views with the insights of MMT. By doing this, we hope to show continuity in monetary thought. MMT should not be seen as an intruder from the outside of monetary theory, but rather as a continuation and expansion of certain ideas that have long been part of the discipline. Identifying areas of disagreement between the three views should help bring clarity to the issues that are still disputed.
    Keywords: central banking,monetary policy,discretionary practices,Wicksell,Modern Monetary Theory,MMT
    JEL: E4 E51 E58
    Date: 2017
  17. By: Anindya Banerjee (University of Canterbury); Victor Bystrov; Paul Mizen
    Abstract: In this paper we examine the influence of unconventional monetary policy at the ECB on mortgage and business lending rates offered by banks in the major euro area countries (Germany, France, Italy and Spain). Since there are many different policy measures that have been undertaken, we utilise a dynamic factor model based on the Bernanke Boivin and Eliasz (2005) approach, which allows examination of impulse responses to a policy rate conditioned by structurally identified latent factors. The distinct feature of this paper is that it explores the effects of all three phases of monetary policy to emphasize the transmission channels - through short-term rates, long-term yields and and perceived risk - ultimately directed towards bank lending rates. Further analysis of unconventional monetary policy is provided through rolling window impulse responses and variance decompositions of the identified financial factors on lending rates to demonstrate the changing influence of different policy measures on lending rates.
    Keywords: monetary policy, dynamic factor models, interest rates, pass through
    JEL: C32 C53 E43 E4
    Date: 2017–11–01
  18. By: Reinhard Neck (Alpen-Adria-Universität Klagenfurt); Sohbet Karbuz (Association of Mediterranean Energy Companies)
    Abstract: Results from optimum control problems with uncertain parameters are investigated in a numerical case study for Austria. Optimal budgetary policies are calculated under varying assumptions about stochastic parameters within the framework of a problem of quantitative economic policy. An intertemporal objective function is minimized subject to the constraints of a small macroeconometric model, and approximately optimal values for federal budget expenditures and revenues are determined. It is shown that the deterministic and the fully stochastic optimal policies are rather similar. If only some parameters are assumed to be stochastic, or if covariances between different parameters are not taken into account, on the other hand, optimization results can be very different from deterministic or fully stochastic optimization results.
    Keywords: optimal control; fiscal policy; stochastic control; stochastic parameters; econometric models
    JEL: E62 C54 C61
    Date: 2017–10
  19. By: Choi, Chi-Young (University of Texas at Arlington); Chudik, Alexander (Federal Reserve Bank of Dallas)
    Abstract: We analyze the geographic inequality of economic well-being among U.S. cities by utilizing a novel measure of quantity based product-level economic well-being, i.e., the number of goods and services that can be purchased by consumers with an average city wage. We find a considerable cross-city dispersion in the economic well-being and the geographic dispersion has been on the steady rise since the mid-1990s for most goods and services under study. Strong geographic correlations exist in the local economic well-being and our empirical analysis based on a Global VAR (GVAR) model suggests that national shocks are an important source behind it. On average, about 30-35% of the variance of local well-being is explained by common national shocks, but the impact of common national shocks varies considerably across products, albeit to a lesser extent across cities. Nationwide unemployment shock, for example, has a stronger effect in the products whose prices are adjusted more frequently and in the cities that have a larger fraction of high-skill workers. Taken together, our results indicate that the geographic inequality of economic well-being observed in the U.S. has proceeded over time mainly through the products with more flexible price adjustments and in the cities with higher concentration of skilled workers.
    JEL: E21 E31 R12 R31
    Date: 2017–11–01
  20. By: Giovanni Dosi (Scuola Superiore Sant'Anna, Pisa, Italy); Marcelo C. Pereira (Universita di Campinas, Campinas, Brazil); Andrea Roventini (Scuola Superiore Sant'Anna, Pisa, Italy); Maria Enrica Virgillito (Scuola Superiore Sant'Anna, Pisa, Italy)
    Abstract: In this work we develop an agent-based model where hysteresis in major macroeconomic variables (e.g. GDP, productivity, unemployment) emerges out of the decentralized interactions of heterogeneous firms and workers. Building upon the model in Dosi et al. (2016, 2017), we specify an endogenous process of accumulation of workers’ skills and a state-dependent process of entry, studying their hysteretic impacts. Indeed, hysteresis is ubiquitous. However, this is not due to market imperfections, but rather to the very functioning of decentralised economies characterised by coordination externalities and dynamic increasing returns. So, contrary to the insider-outsider hypothesis (Blanchard and Summers, 1986), the model does not support the findings that rigid industrial relations may foster hysteretic behaviour in aggregate unemployment. On the contrary, in line with the recent discussion in Ball et al. (2014), this contribution provides evidence that during severe downturns, and thus declining aggregate demand, phenomena like lower investment and innovation rates, skills deterioration, and declining entry dynamics are better candidates to explain long-run unemployment spells and lower output growth. In that, more rigid labour markets dampen hysteretic dynamics by supporting aggregate demand, thus making the economy more resilient.
    Keywords: Hysteresis, Aggregate demand, Multiple Equilibria, Skills deterioration, Market entry, Agent based model
    JEL: C63 E02 E24
    Date: 2017–03
  21. By: David Rezza Baqaee; Emmanuel Farhi
    Abstract: We provide a general non-parametric formula for aggregating microeconomic shocks in general equilibrium economies with distortions such as taxes, markups, frictions to resource reallocation, and nominal rigidities. We show that the macroeconomic impact of a shock can be boiled down into two components: its “pure” technology effect; and its effect on allocative efficiency arising from the associated reallocation of resources, which can be measured via changes in factor income shares. We also derive a formula showing how these two components are determined by structural microeconomic parameters such as elasticities of substitution, returns to scale, factor mobility, and network linkages. Overall, our results generalize those of Solow (1957) and Hulten (1978) to economies with distortions. To demonstrate their empirical relevance, we pursue different applications, focusing on markup distortions. For example, we operationalize our non-parametric results and show that improvements in allocative efficiency account for about 50% of measured TFP growth over the period 1997-2015. We also implement our structural results and conclude that eliminating markups would raise TFP by about 40%, increasing the economy-wide cost of monopoly distortions by two orders of magnitude compared to the famous 0.1% estimates of Harberger (1954).
    JEL: D24 D33 D42 D43 D5 D50 D57 D61 E01 E1 E25 E52 O4 O41
    Date: 2017–11
  22. By: Mike Anson; David Bholat Author-Name-First: David; Miao Kang; Ryland Thomas (Bank of England)
    Abstract: We use daily transactional ledger data from the Bank of EnglandÕs Archive to test whether and to what extent the Bank of England during the mid-nineteenth century adhered to Walter BagehotÕs rule that a central bank in a financial crisis should lend cash freely at a high interest rate in exchange for ÔgoodÕ securities. The archival data we use provides granular, loan-level insight on the price and quantity of credit, and information on its distribution to particular counterparties. We find that the BankÕs behaviour during this period broadly conforms to BagehotÕs rule, though with variation across the crises of 1847, 1857 and 1866. Using a new, higher frequency series on the BankÕs balance sheet, we find that the Bank did lend freely, with the number of discounts and advances increasing during crises. These loans were typically granted at a rate above pre-crisis levels and, in 1857 and 1866, typically at a spread above Bank Rate, though we also find some instances in the daily discount ledgers where individual loans were made below Bank rate in 1847. Another set of customer ledgers shows that the securities the Bank purchased were debts owed by a geographically and industrially diverse set of debtors. And using new data on the BankÕs income and dividends, we find the Bank and its shareholders profited from lender of last resort operations. We conclude our paper by relating our findings to contemporary debates including those regarding the provision of emergency liquidity to shadow banks.
    Keywords: Bank of England, lender of last resort, financial crises, financial history, central banking
    JEL: E58 G01 G18 G20 H12 N2 N4 N8
    Date: 2017–11
  23. By: Liutang Gong (Guanghua School of Management and LMEQF, Peking University); Chan Wang (Guanghua School of Management and LMEQF, Peking University); Heng-fu Zou (China Economics and Management Academy, Central University of Finance and Economics; Institute for Advanced Study, Wuhan University; Institute for Advanced Study, Shenzhen University)
    Abstract: This paper examines optimal monetary policy in a two-country New Keynesian model with international trade in intermediate inputs. We derive the loss function of a cooperative monetary policymaker and ï¬ nd that the optimal monetary policy must target intermediategoods price inflation rates, ï¬ nal-goods price inflation rates, ï¬ nalgoods output gaps, and relative-price gaps. We use the welfare loss under the optimal monetary policy as a benchmark to evaluate the welfare implications of three Taylor-type monetary policy rules. A main ï¬ nding is that the degree of price stickiness at the stage of intermediate-goods production is a key factor to determine which policy rule should be followed. Speciï¬ cally, when the degree of price stickiness at the stage of intermediate-goods production is high, the policymaker should follow intermediate-goods PPI-based Taylor rule, whereas CPI-based Taylor rule should be followed when the degree of price stickiness at the stage of intermediate-goods production is intermediate or low.
    Keywords: Vertical production and trade, Optimal monetary policy, Inflation targeting, Welfare
    JEL: E5 F3 F4
    Date: 2016–07
  24. By: Saloua Chaouche (High scholl of applied statistic and economic); Rachid Toumache (High scholl of applied statistic and economic)
    Abstract: The aim of the paper is to describe the theoretical structure of a New Keynesian DSGE model with sticky prices and wages , as well as a Taylor rule as monetary policy for the Algerian economy.Moreover, the clear specification of the stochastic shocks allows one to identify the source of economic fluctuations, the model incorporates various other features such as habit formation.We used the calibration/estimated strategy on key macro-economic variables: GDP, consumption, prices, real wages, employment and the nominal interest rate.The introduction of two orthogonal structural shocks including productivity, policy shocks allows for an empirical investigation of the effects of such shocks and of their contribution to business cycle fluctuations in the Algerian economy. Having as benchmark the model of Smets and Wouters (2003, 2007,2011), and Gali (1999). The thesis describes how the model works, how it is estimated, and how it is used for monetary policy analysis. The parameters of the New Keynesian DSGE model are calibrated in such a way that selected theoretical moments given by the model match as closely as possible those observed in the data. One way of achieving this, is by minimizing some distance function between the theoretical and empirical moments of interest. The output of the simulator is posterior estimates of The New Keynesian DSGE models, are summarized and compared to results in the existing literature.
    Keywords: New Keynesian DSGE model, Monetary policy, Calibration/estimation strategy, Taylor rule, Sticky prices, Sticky wages.
    JEL: C51
    Date: 2017–10
  25. By: Hutter, Christian (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]); Weber, Enzo (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany])
    Abstract: "In a structural macroeconometric analysis based on comprehensive micro data, we examine the role of skill-biased technical change for the flattening of productivity growth and effects on hours worked. The results show that more than 60 percent of the slowdown in productivity growth in Germany since the early 2000s can be explained by the SBTC development. Furthermore, skill-biased technology shocks reduce hours worked, while skill-neutral technology shocks have a positive effect in the long run." (Author's abstract, IAB-Doku) ((en))
    JEL: C32 E24 J24
    Date: 2017–11–16
  26. By: Kulesza, Marta
    Abstract: This paper aims to explain the causes of rapidly increasing prices in Venezuela and establish whether the current episode can be considered to be of hyperinflationary nature from the post-Keynesian theoretical approach. The chosen approach highlights the role of distributive conflict, indexation mechanism, balance of payments constraint, devaluation expectations and gradual rejection of national currency in favour of foreign currency. We argue that the root cause of the precarious economic situation in Venezuela lies in the long term failure to implement structural changes, ensuring industrial diversification and lessening the dependency on oil exports. The symptoms of the Dutch disease are observed in the prolonged currency overvaluation during the high oil revenue periods. In the face of a growing external constraint, the authorities introduce severe foreign currency rationing. This in turn ignites inflation due to external bottlenecks since many sectors face supply constraints as they depend on imports of inputs of production. This leads to a regressive distribution of income, which contributes to the growing distributive conflict and fuels inflation further, as workers oppose to the lowering of real wages. Moreover, the currency rationing puts pressure on the black market for exchange as the devaluation expectations increase, leading to a parallel market devaluation-inflation spiral, which threatens to turn into hyperinflation. Nevertheless, we argue that hyperinflation, according to the proposed post-Keynesian framework (the flight to foreign currency), does not materialise despite skyrocketing prices because of the particular institutional setting - the exchange controls, which have been in place since 2003, prevent full currency substitution.
    Keywords: hyperinflation,foreign exchange,distributive conflict,expectations,Dutch disease,Venezuela
    JEL: E12 E31 O54
    Date: 2017
  27. By: Michael T. Belongia (University of Mississippi); Peter N. Ireland (Boston College)
    Abstract: A money-in-the-utility function model is extended to capture the distinct roles of noninterest-earning currency and interest-earning deposits in providing liquidity services to households. It implies the existence of a stable money demand relationship that links a Divisia monetary aggregate to spending or income as a scale variable and the associated Divisia user-cost dual as an opportunity cost measure. Cointegrating money demand equations of this form appear in quarterly United States data spanning the period from 1967:1 through 2017:2, especially for the Divisia M2 aggregate. The identification of a stable money demand function over a period that includes the financial innovations of the 1980s and continues through the recent financial crisis and Great Recession suggests that a properly measured aggregate quantity of money can play a role in the conduct of monetary policy. That role can be of greater prominence when traditional interest rate policies are constrained by the zero lower bound.
    Keywords: Divisia monetary aggregates, money demand, money-in-the-utility function
    JEL: C43 E41
    Date: 2017–11–01
  28. By: Riccardo Trezzi (Board of Governors - Federal Reserve); Luca Dedola (European Central Bank); Giancarlo Corsetti (University of Cambridge)
    Abstract: This paper carries out a systematic reconsideration of the evidence on price, wage and employment adjustment in response to the housing price cycle during the Great Recession across US jurisdictions -- i.e., US Metropolitan Statistical Areas (henceforth MSAs). It offers an insightful decomposition of relative price adjustment by sectors, and relates it to determinants in terms of relative sectoral wages (cost) and employment (slack) dynamics. Over the period 2008-2013, asymmetric housing price shocks were virtually uncorrelated with price and wage inflation across MSAs, while they significantly affected output, income and employment in services, the retail sector and construction. Decomposing the response of relative price inflation into that of goods and services (ex-rents) shows that the relative price of consumption goods fell with housing prices, while the relative price of services increased, with roughly identical elasticities basically offsetting the effect of each other movements.
    Date: 2017
  29. By: Gräb, Johannes; Żochowski, Dawid
    Abstract: We use a confidential euro area bank-level data set of close to 250 banks to assess outward and inward spillovers of unconventional monetary policies on bank lending. We find that euro area banks increase lending to the rest of the world in response to non-standard ECB monetary policy accommodation. We also find strong evidence that euro area banks increase lending to the domestic non-financial private sector in response to accommodative unconventional monetary policy measures in the US. Inward and outward spillovers are substantially stronger for euro area banks which are liquidity constrained and which rely more on internal capital markets. This suggests that bank-specific supply effects, stemming from banks’ increased ability to lend following a central bank balance sheet expansion, are a major driver of monetary policy spillovers, providing strong support to the existence of an international bank lending channel that prevails at the effective lower bound. JEL Classification: E44, E52, G01
    Keywords: cross-border spillovers, international bank lending channel, monetary policy, quantitative easing
    Date: 2017–11
  30. By: Vincent Sterk (University College London); Morten Ravn (University College London)
    Abstract: New Keynesian models with unemployment and incomplete markets are rapidly becoming a new workhorse model in macroeconomics. Such models typically require heavy computational methods which may obscure intuition and overlook equilibria. We present a tractable version which can be characterized analytically. Our results highlight that - due the interaction between incomplete markets, sticky prices and endogenous unemployment risk - productivity shocks may have radically different effects than in traditional NK models, that the Taylor principle may fail, and that pessimistic beliefs may be self-fulfilling and move the economy into temporary episodes of low demand and high unemployment, as well as into a long-lasting "unemployment trap". At the Zero Lower Bound, the presence of endogenous unemployment risk can create inflation and overturn paradoxical properties of the model. We further study financial asset prices and show that non-negligible risk premia emerge.
    Date: 2017
  31. By: Snezana Eminidou (University of Cyprus); Marios Zachariadis (University of Cyprus); Elena Andreou (University of Cyprus)
    Abstract: We use monthly data across fifteen euro-area economies for the period 1985:1-2015:3 to obtain monetary policy changes that can be regarded as surprises for different types of consumers. A novel feature of our empirical approach is the estimation of monetary policy surprises based on changes in monetary policy that were unanticipated according to the consumers stated beliefs about the economy. We go on to investigate how these monetary policy surprises affect consumers' inflation expectations. We find that such monetary policy surprises can have the opposite impact on inflation expectations to those obtained under the assumption that consumers are well informed about a set of macroeconomic variables describing the state of the economy. More specifically, when we relax the assumption of well informed consumers by focusing instead on their stated beliefs about the economy, unanticipated increases in the interest rate raise inflation expectations. This is consistent with imperfect information theoretical settings where unanticipated increases in interest rates are interpreted as positive news about the state of the economy by consumers that know policymakers have relatively more information. This impact changes sign since the Crisis.
    Date: 2017
  32. By: Yuto Iwasaki (Bank of Japan); Nao Sudo (Bank of Japan)
    Abstract: Reservations are sometimes raised regarding the effectiveness of unconventional monetary policy (UMP) due to the concerns about influences of impaired financial systems and low policy rates. To see if this is the case, we combine the local projection method of Jorda (2005) with shadow rates to estimate macroeconomic effects of monetary policy shocks during the implementation period of UMP, and test if effects of these shocks with the same magnitude differ across periods or states of the economy, using Japan's data from the 1980s to 2016. We find that monetary policy shocks during the implementation period of the UMP had statistically significant expansionary effects on the economy. We also find that an unexpected 100 basis point cut in shadow rates during the UMP yielded larger expansionary effects on key economic variables than it did during the conventional monetary policy (CMP), because of the following three reasons: (i) A cut in the shadow rates resulted in a larger reduction in the real interest rate, and affected a wider range of borrowing rates during the UMP; (ii) The effectiveness of monetary policy shocks was dampened when the financial system was significantly impaired, particularly during the CMP; (iii) Other things being equal, the effectiveness has been so far little affected by the level of policy rate. Our results show that UMP has been effective, but that the nature of monetary transmission is subject to change depending on financial conditions or other economic circumstances, and therefore monetary policy needs to be carefully implemented. Note also that our study only explores the effects of a one-unit shock to the monetary policy rule, and does not address the entire effects of monetary easing that are affected by the size of shocks as well.
    Keywords: Conventional and unconventional monetary policy; Shadow rates
    JEL: F39 G15 G18
    Date: 2017–11–09
  33. By: Baldo, Luca; Hallinger, Benoît; Helmus, Caspar; Herrala, Niko; Martins, Débora; Mohing, Felix; Petroulakis, Filippos; Resinek, Marc; Vergote, Olivier; Usciati, Benoît; Wang, Yizhou
    Abstract: Since 2008, excess liquidity – defined as the sum of holdings of central bank reserves in excess of reserve requirements and holdings of equivalent central bank deposits – has tended to accumulate in specific euro area countries and in a small, slowly changing group of credit institutions. Despite the stability of the concentration of excess liquidity in specific countries over time, the relevance of individual drivers has changed. First, risk aversion has played a much smaller role in explaining the concentration since 2013 than it did at the time of “flight-to-quality” phenomena in the period 2010-12. Second, the location of the relevant market infrastructures (i.e. central securities depositories, securities settlement systems and TARGET2 accounts) used by counterparties that sold assets to the Eurosystem has been a more important driver directing flows in the period 2015-16. In addition, the more recent concentration of excess liquidity is explained by the combination of a number of factors, such as banks following strict internal credit limits, investment incentives created by yield differences across the euro area and the “home bias” in euro area government bond holdings. Overall, the net cross-border flows of liquidity that resulted also determined TARGET2 balances. At the individual bank level, when controlling for banks’ capital, non-performing loans, credit risk and profitability, excess liquidity holdings in relation to total assets are found to be higher for smaller and better-capitalised banks, and for banking groups with liquidity centralised at the head institution. In addition, participation in Eurosystem longer-term refinancing operations and deposit inflows are associated with liquidity accumulation. Finally, new regulatory initiatives such as the liquidity coverage ratio are explained to be creating incentives to hold or not to distribute liquidity, thereby affecting its distribution. JEL Classification: D39, E41, E44, E50, G01, G28
    Keywords: asset purchase programme, bank characteristics, excess liquidity, financial structure, regulatory changes
    Date: 2017–11
  34. By: Matteo Barigozzi; Matteo Luciani
    Abstract: This paper considers a non-stationary dynamic factor model for large datasets to disentangle long-run from short-run co-movements. We first propose a new Quasi Maximum Likelihood estimator of the model based on the Kalman Smoother and the Expectation Maximisation algorithm. The asymptotic properties of the estimator are discussed. Then, we show how to separate trends and cycles in the factors by mean of eigenanalysis of the estimated non-stationary factors. Finally, we employ our methodology on a panel of US quarterly macroeconomic indicators to estimate aggregate real output, or Gross Domestic Output, and the output gap.
    Keywords: EM Algorithm ; Gross Domestic Output ; Kalman Smoother ; Non-stationary Approximate Dynamic Factor Model ; Output Gap ; Quasi Maximum Likelihood ; Trend-Cycle Decomposition
    JEL: C32 C38 E00
    Date: 2017–11–13
  35. By: Liutang Gong (Guanghua School of Management and LMEQF, Peking University); Chan Wang (School of Finance, Central University of Finance and Economics); Fuyang Zhao (Guanghua School of Management and LMEQF, Peking University); Heng-fu Zou (China Economics and Management Academy, Central University of Finance and Economics)
    Abstract: In this paper, we introduce a complementary relationship between consumption and labor hours by revising the household's period utility function in Liu et al. (2013). The revision concomitantly allows for a finite Frisch elasticity of labor supply and a stronger consumption smoothing motive. We find that, in general, the estimation of Liu et al. (2013) is quite robust. In addition, the propagation mechanism of the credit constraint triggered by a housing demand shock still persists. However, the amplification effect of the credit constraint triggered by the housing demand shock on key macroeconomic variables is greatly muted. We also find that, except for land price fluctuations, the housing demand shock cannot act as the primary force to drive the fluctuations in other macroeconomic variables.
    Keywords: Collateral constraint, Housing demand shock, Nonseparable preferences, Macroeconomic fluctuations
    JEL: E5 F3 F4
    Date: 2017–10
  36. By: Abdelaaziz Aït Ali; Yassine Msadfa
    Abstract: The aim of this work is to contribute to the empirical literature on employment-GDP elasticities in four main ways. First, it provides a set of employment-GDP elasticities for a sample of emerging and developing economies, including 11 sub-Saharan countries, based on the GGDC 10-sectors database. Second, it assesses the extent to which manufacturing activities are inclusive compared to the rest of the economy, in terms of employment creation. Third, it explores the determinants of cross-country variations in employment elasticities, both on overall and manufacturing levels, focusing in particular on the role played by structural, institutional and macroeconomic variables. Fourth, the present paper attempts to measure how different the manufacturing elasticity responsiveness is to the same set of explanatory variables, compared to the overall employment elasticity. The key results of the paper can be summarized as follows: (i) Overall point estimates of elasticities typically fall in the 0–1 range, with the majority of them ranging between 0.4 and 0.7. (ii) Elasticities vary considerably across countries and sectors, with manufacturing elasticity outperforming the rest of the economy in low-income countries in sub-Saharan Africa, while it’s below average in Latin American and Asian economies. (iii) Structural policies aimed at increasing labor market flexibility and accelerating the process of structural transformation have the same significant and positive impact on both overall and manufacturing employment elasticities. (iv) Macroeconomic policies aimed at reducing macroeconomic volatility have a significant and positive impact on manufacturing elasticity rather than the rest of the economy. We attribute that to the tradability characteristic of manufacturing products that exert pressure over the competitiveness of the domestic fabric and thus the scale of growth translation into employment. (v) Manufacturing activities tend to be more labor-intensive than the rest of the economy when agriculture employment is higher, suggesting that the “stock of unskilled labor in agriculture” feed growth in manufacturing more than the rest of the economy; (vi) The rule of law is a crucial determinant of how much growth is translated into employment. However, the sign of the coefficient is not consistent with the prevailing intuition. Countries with a better governance framework witness a lower elasticity and vice-versa. We argued that rule of law could be capturing the effect of the informal sector, which may allow more flexibility within labor markets. This channel seems to be effective in the manufacturing activities. (vii) Finally, it seems that elasticity at lower growth rates is bigger than elasticity at higher rates, even for the rest of the economy. However, the scale effect in the overall economy is lower than manufacturing. This could be explained by the possible scale economies in the manufacturing sector that outperform the rest of the economy. The automatization process and the substitution effect is more likely to occur in manufacturing than in services, especially considering that the above analysis has been conducted mainly over developing economies where services do not witness high productivity levels and low levels of cost-cuts.
    Date: 2017–09
  37. By: Jim Fischer (Mount Royal University)
    Abstract: Libertarians see a minimalist role for the state at best. That role should be limited to protecting liberty, or the ability of individuals to pursue economic opportunity. In doing so, the state provides the means for individuals to resolve contract disputes that inevitably result when one individual?s claim or pursuits conflict with another. To fulfill this role of administering justice, the state needs a revenue source. Traditionally, liberal democracies have allowed income tax to evolve as the prime source of revenue. This is difficult for libertarians, who see income tax as the theft of individual property by the state. Consumption tax is another option for financing the state, but it has been criticized as being regressive, and therefore unfair in its application. This paper challenges that assumption and makes the case that consumption tax, when applied as a retail sales tax at the point of sale, has inherent characteristics that make it progressive. As such, it overcomes the criticisms that libertarians find with income tax and make it a more acceptable alternative revenue source for financing the limited role of the state.
    Keywords: consumption tax, income tax, libertarian, progressive tax, regressive tax
    JEL: E21 H21
    Date: 2017–10
  38. By: Tahiri, Noor Rahman
    Abstract: This paper provides a broad overview of monetary policy cooperation of Afghanistan and Pakistan central banks through the differences framework of policy analysis. The framework proves useful for interpreting past policy decisions and mistakes of Policy during the 2005 but when closely examined within the context of the information available and policymaker perceptions in real time of those country , this change is indirect than usually appears at first glance with reviewing analysis in this research we also find the real GDP, Inflation, GDP per capita, PPP, GDP per capita, current dollars, GDP per capita, constant dollars, GDP, current U.S. dollars, External debt and Economic growth measure through the world banks internet measuring of Afghanistan and Pakistan compression .
    Keywords: Host Country Growth, GDP, Policy
    JEL: C54 D12 E52
    Date: 2017–11–01
  39. By: Silvia Miranda-Agrippino; Giovanni Ricco (University of Warwick, OFCE-SciencesPo Paris)
    Abstract: Despite years of research, there is still uncertainty around the effects of monetary policy shocks. We reassess the empirical evidence by combining a new identification that accounts for informational rigidities, with a flexible econometric method robust to misspecifications that bridges between VARs and Local Projections. We show that most of the lack of robustness of the results in the extant literature is due to compounding unrealistic assumptions of full information with the use of severely misspecified models. Using our novel methodology, we find that a monetary tightening is unequivocally contractionary, with no evidence of either price or output puzzles.
    Keywords: Monetary policy, local projections, VARs, expectations, information rigidity, survey forecasts, external instruments
    JEL: C11 C14 E52 G14
    Date: 2017–05
  40. By: Vasilios Plakandaras (Department of Economics, Democritus University of Thrace, Greece); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Mark E. Wohar (College of Business Administration, University of Nebraska at Omaha USA, and School of Business and Economics, Loughborough University)
    Abstract: Breaking ground from all previous studies, we estimate a time-varying Vector Autoregression model that examines the time-period 1270-2016 - the entire economic history of the U.K. Focusing on permanent and transitory shocks in the economy, we study the fluctuation in conditional volatilities and time-varying long-run responses of output growth and inflation. Unlike all previous studies that use time invariant linear models, our approach reveals that the pre 1600 period is a turbulent economic period of high volatility that is only repeated in the 20th century. The repeating patterns in the conditional volatilities follow the approach of aggregate supply shocks, while most of the inflation responses follow from aggregate demand shocks. Thus, we uncover that despite the technological growth and the various changes in the structure of the U.K. economy in the last century, the recurring patterns call for an examination of the true impact of the various policies to the economy.
    Keywords: Time-Varying VAR, Macroeconomic Shocks
    JEL: C32
    Date: 2017–11
  41. By: Mauro Caselli (School of international studies, University of Tento, Italy); Stefano Schiavo (School of international studies, University of Tento, Italy,OFCE Sciences Po Paris, France); Lionel Nesta (OFCE Sciences Po Paris, France & GREDEG CNRS and SKEMA Business school, France)
    Abstract: This paper studies the high yet undocumented incidence of firms displaying markups lower than unity, i.e., prices lower than marginal costs, for protracted periods of time. Using a large sample of French manufacturing firms for the period 1990-2007, the paper estimates markups at the firm level and documents the extent to which firms exhibit negative price cost margins. The paper is able to provide an explanation for this phenomenon using the option value approach to investment decisions. The results suggest that firms facing higher investment irreversibility tend to continue operating even when prices fall below marginal costs as they wait for market conditions to improve. This effect is magnified in the presence of uncertainty.
    Keywords: Markups, irreversibility, uncertainty, negative price-cost margins, French manufacturing data
    JEL: D22 D24 D81 E22 L11
    Date: 2017–04
  42. By: Michael Bordo; Eric Monnet; Alain Naef
    Abstract: The Gold Pool (1961-1968) was one of the most ambitious cases of central bank cooperation in history. Major central banks pooled interventions – sharing profits and losses – to stabilize the dollar price of gold. Why did it collapse? From at least 1964, the fate of the Pool was in fact tied to sterling, the first line of defense for the dollar. Sterling’s unsuccessful devaluation in November 1967 spurred speculation and massive losses for the Pool. Contagion occurred because US policies were inflationary and insufficiently credible as well. The demise of the Pool provides a striking example of contagion between reserve currencies.
    JEL: E42 F31 F33 N14
    Date: 2017–11
  43. By: Cinzia Alcidi; Mathias Dolls; Clemens Fuest; Carla Krolage; Florian Neumeier
    Abstract: We investigate the degree of (a)symmetry of macroeconomic fluctuations within the euro area (EA). Our findings indicate, first, a high degree of co-movement of cyclical GDP across EA member states. However, the amplitudes of national business cycles appear to vary notably, meaning that booms and recessions differ with regard to their severity across EA member states. Second, the co-movement of cyclical unemployment is somewhat less pronounced than that of cyclical GDP and the sensitivity to common shocks is even more heterogeneous, suggesting that differences in labour market conditions play an important role with regard to the vulnerability to common shocks. Turning to potential stabilization mechanisms, we find that in general, the private sector has a huge potential to absorb asymmetric shocks. However, in international comparison, the shock-absorption capacity of the private sector in the EA is rather weak. Recent evidence suggests that promoting capital market integration may improve the private sector’s shock absorption capacity.
    Date: 2017
  44. By: Barr, Nicholas; Diamond, Peter
    JEL: E6
    Date: 2017–09
  45. By: Paulo Bastos (Development Research Group, World Bank, MC3-303, 1818 H Street NW,Washington DC, 20433, United States); Natália P. Monteiro (Department of Economics/NIPE, University of Minho); Odd Rune Straume (Department of Economics/NIPE, School of Economics and Management, University of Minho and Department of Economics, University of Bergen)
    Abstract: We study the effect of foreign takeovers on firm organization. Using a comprehensive data set of Portuguese firms and workers spanning two decades, we find that foreign acquisitions lead to: (1) an expansion in the scale of operations; (2) a higher number of hierarchical layers; and (3) higher wage inequality between the top and bottom layers. These results accord with a theory of knowledge-based hierarchies in which foreign takeovers lead to improved productivity, higher demand, or reduced internal communication costs, and thereby induce the acquired firms to reorganize. Evidence from auxiliary survey data reveals that acquired firms are more likely to use information technologies that reduce internal communication costs.
    Keywords: Foreign direct investment, internal organization, wage inequality, information technologies
    JEL: D24 E23 F23 M10 M16 O30
    Date: 2017–11
  46. By: David Rezza Baqaee (Centre for Macroeconomics (CFM); London School of Economics (LSE)); Emmanuel Farhi (Harvard University)
    Abstract: We provide a nonlinear characterization of the macroeconomic impact of microeconomic productivity shocks in terms of reduced-form non-parametric elasticities for efficient economies. We also show how structural parameters are mapped to these reduced-form elasticities. In this sense, we extend the foundational theorem of Hulten (1978) beyond first-order terms. Key features ignored by first-order approximations that play a crucial role are: structural elasticities of substitution, network linkages, structural returns to scale, and the extent of factor reallocation. Higher-order terms magnify negative shocks and attenuate positive shocks, resulting in an output distribution that is asymmetric, fat-tailed, and has a lower mean even when shocks are symmetric and thin-tailed. In our calibration, output losses due to business-cycle fluctuations are an order of magnitude larger than the cost calculated by Lucas (1987). Second-order terms also show how shocks to critical sectors can have large macroeconomic impacts, tripling the estimated impact of the 1970s oil price shocks.
    Date: 2017–06
  47. By: Gindrute Kasnauskiene (Vilnius university); Karol Michnevich (Vilnius university)
    Abstract: Population ageing in a backdrop of growing average life expectancy can be seen in many advanced economies, but the rapid pace of these demographic changes in Central and Eastern Europe (CEE) makes it a pressing matter for the region. We investigate these two phenomenon and compare results with prior research to determine their separate and combined effect on output growth in a panel regression model using Eurostat data for the period 1996 to 2013. Our findings point to both life expectancy and population ageing exerting a statistically significant, overlapping effect on real output. The conclusions of our research demonstrate the utility of augmenting macroeconomic models with a demographics-sensitive component.
    Keywords: demographics, life expectancy, population ageing, economic growth, CEE countries
    JEL: E10 J10 J11
    Date: 2017–10
  48. By: Nuno Palma (University of Manchester)
    Abstract: PhD dissertation summary forthcoming at: European Review of Economic History
    Keywords: Early modern monetary injections, liquidity effects, monetary non- neutralities, historical money supply, economic growth
    JEL: E40 E50 N13 O40
    Date: 2017–11
  49. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: In remarks, Boston Fed President Eric Rosengren summed up the current “dilemma” for monetary policymakers: inflation remains below target, which might suggest more patience before tightening monetary conditions – but unemployment is below the level most policymakers think will be sustainable, which would suggest less accommodative policy.
    Date: 2017–11–15
  50. By: Céline Antonin (OFCE-SCIENCES PO); Vincent Touzé (OFCE Sciences Po)
    Abstract: This article addresses the issue of capital taxation relying on three levels of analysis. The first level deals with the multiple ways to tax capital (income or value, proportional or progressive taxation, and the temporality of the taxation) and presents some of France's particular features within a heterogeneous European context. The second area of investigation focuses on the main dynamic properties generated by capital taxation: the principle of equivalence with a tax on consumption; the issue of double taxation if it targets taxation of nominal income; neutrality of the uniform tax on the capital value; lastly, the risk of confiscatory taxation if there is a disjunction between taxation of the value and the income. The final level of analysis consists in assessing the debate on the optimal level of capital taxation drawing on the lessons in the literature. These discussions are organized into eight themes: (1) double taxation, (2) optimal growth, (3) property, (4) tax competition, (5) supervisory arguments, (6) measuring capital gains, (7) complexity and (8) fiscal stability
    Keywords: Taxation, savings, accumulation of capital
    JEL: D90 E21 H20
    Date: 2017–03–14
  51. By: Bryan Stuart (George Washington University)
    Abstract: This paper examines the long-run effects of the 1980-1982 recession on education and income. Using confidential Census data, I estimate difference-in-differences regressions that exploit variation across counties in recession severity and across cohorts in age at the time of the recession. For individuals age 0-10 in 1979, a 10 percent decrease in earnings per capita in their county of birth reduces four-year college degree attainment by 9 percent and income in adulthood by 3 percent. Simple calculations suggest that, in aggregate, the 1980-1982 recession led to 1-3 million fewer college graduates and $64-$145 billion less earned income per year.
    Keywords: human capital, education, income, recessions
    JEL: E32 I20 I30 J13 J24
    Date: 2017
  52. By: Xavier Ragot (Sciencespo); Francois Le Grand (EMLyon Business School)
    Abstract: We show that allocations in incomplete insurance-market economies can be represented as the solution of the program of a constrained planner. This representation allows for solving Ramsey programs in incomplete-market economies with aggregate shocks. We apply this framework to derive optimal fiscal policy and public debt dynamics in an economy with capital after persistent technology shocks, when the planner can use distorting taxes on capital and labor and positive lump-sum transfers. Average capital taxation is a simple function of the tightness of credit constraints. In a quantitative exercise, it is shown that private savings increase too much after a technology shock, and are absorbed by an increase in public debt and a decrease in capital taxes. Simulations of these optimal solutions can be obtained by simple perturbation methods.
    Date: 2017
  53. By: Florian Huber; Gregor Kastner; Martin Feldkircher
    Abstract: Incorporating structural changes into time series models is crucial during turbulent economic periods. In this paper, we propose a flexible means of estimating vector autoregressions with time-varying parameters (TVP-VARs) by introducing a threshold process that is driven by the absolute size of parameter changes. This enables us to detect whether a given regression coefficient is constant or time-varying. When applied to a medium-scale macroeconomic US dataset our model yields precise density and turning point predictions, especially during economic downturns, and provides new insights on the changing effects of increases in short-term interest rates over time.
    Date: 2016–07
  54. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Presentation to the 2017 Asia Economic Policy Conference: Monetary Policy Challenges in a Changing Global Environment San Francisco, California, John C. Williams, President and CEO, Federal Reserve Bank of San Francisco, November 16, 2017
    Date: 2017–11–16
  55. By: Rose Cunningham; Christian Friedrich; Kristina Hess; Min Jae Kim
    Abstract: In this paper, we analyze the presence of time variation in the pass-through from the nominal effective exchange rate to import prices for 24 advanced economies over the period 1995–2015. In line with earlier studies in the literature, we find substantial heterogeneity in the level of exchange rate pass-through across countries. But, in addition, we show that the dynamics of exchange rate pass-through also differ across countries. Potential explanations for this observation could be of a country-specific nature or could relate to differences in the composition or transmission of global shocks across countries. We then investigate the role of global demand shocks as potential determinants of exchange rate pass-through dynamics in seven advanced economies. We conduct this analysis by running a set of instrumental variable regressions to quantify the contemporaneous exchange rate pass-through that arises from different shocks. Out of the global demand shocks that we examine, we find that oil demand shocks, in particular, are associated with a relatively higher exchange rate pass-through to import prices, while US fiscal policy shocks appear to have the lowest impact.
    Keywords: Exchange rates, Inflation and prices, International topics, Transmission of monetary policy
    JEL: F31 F41 E31
    Date: 2017
  56. By: José Ignacio Conde-Ruiz; Manuel Díaz Mendoza; Carmen Marín; Juan Rubio-Ramírez
    Abstract: Fedea presenta hoy un nuevo número de su Observatorio Fiscal y Financiero de las Comunidades Autónomas (CC.AA.) que ha sido elaborado por Ignacio Conde, Manuel Díaz, Carmen Marín y Juan Rubio. En la primera parte del informe se analizan las cuentas autonómicas correspondientes a los primeros siete meses de 2017 a partir de los datos de ejecución presupuestaria que publica el Ministerio de Hacienda y Función Pública, en los que se introducen ciertas correcciones. En la segunda parte, se realiza una proyección del saldo en Contabilidad Nacional (CN) del cierre de 2017 bajo el supuesto de que las CC.AA. se comportan en términos fiscales durante el resto del año de la misma forma en que lo hicieron durante la parte final de 2016. Esta proyección incluye dos salvedades: el aumento de las entregas a cuenta recogido en los PGE y el aumento del gasto observado durante los siete primeros meses de 2017.
    Date: 2017–11
  57. By: Hamidi Sahneh, Mehdi
    Abstract: I use a present value framework to explore the e�ects of news (or noisy information) onstock prices and drive theoretical restrictions that link price volatility to noise and information. In particular, I show that market e�ciency implies that noise cannot explain more than half of price uctuations. I propose a novel methodology to decompose stock prices into a value component, related to information about future economic fundamentals, and a noise component. The key observation is that noise by construction cannot change future economic fundamentals, but affects stock prices. The advantage of my approach is that it does not require any particular assumptions on unobserved discount rates and econometricians' information set. Consistent with the predictions of the model, my estimates show that in the prewar period noise explains up to 28% of the S&P 500 index, and 36% in the postwar period. Finally, I �nd that the U.S. stock market was undervalued during the 1970s and overvalued during the 1990s, but there is no evidence that the market was overvalued before the crash of 1929.
    Keywords: Cross-Equation Restrictions; Excess Volatility; Non-Causal VAR Representation; Present Value Models;
    JEL: C5 C58
    Date: 2017–10–04
  58. By: Harker, Patrick T. (Federal Reserve Bank of Philadelphia)
    Abstract: "Removing accommodation is the right next step,” said President Patrick Harker in a speech on November 13 in Tokyo. He also said in “the event of another shock,” making sure tools are effective, in his view, “means reducing our balance sheet.”
    Keywords: monetary; policy
    Date: 2017–11–13
  59. By: John Ameriks; Joseph S. Briggs; Andrew Caplin; Minjoon Lee; Matthew D. Shapiro; Christopher Tonetti
    Abstract: Older Americans, even those who are long retired, have strong willingness to work, especially in jobs with flexible schedules. For many, labor force participation near or after normal retirement age is limited more by a lack of acceptable job opportunities or low expectations about finding them than by unwillingness to work longer. This paper establishes these findings using an approach to identification based on strategic survey questions (SSQs) purpose-designed to complement behavioral data. These findings suggest that demand-side factors are important in explaining late-in-life labor market behavior and may be the most appropriate target for policy aimed at promoting working longer.
    JEL: E24 J22 J26
    Date: 2017–11
  60. By: Dovern, Jonas
    Abstract: This paper analyzes how the OECD revises potential output (PO) estimates after recessions. We show that downward revisions are substantial and mostly driven by supply shocks while PO estimates do not significantly react to demand shocks. In addition, revisions are partly caused by avoidable mismeasurement of PO before recessions. In particular, we show that the length of the preceding boom and pre-recession values of the current account balance and credit volumes are predictors of post-recession PO revisions. Our results call for improved methods for estimating PO and provide evidence against the existence of substantial hysteresis effects of demand shocks.
    Keywords: potential output; trend; output gap; hysteresis; OECD
    Date: 2017–11–10
  61. By: Edward L. Glaeser; Hyunjin Kim; Michael Luca
    Abstract: Can new data sources from online platforms help to measure local economic activity? Government datasets from agencies such as the U.S. Census Bureau provide the standard measures of local economic activity at the local level. However, these statistics typically appear only after multi-year lags, and the public-facing versions are aggregated to the county or ZIP code level. In contrast, crowdsourced data from online platforms such as Yelp are often contemporaneous and geographically finer than official government statistics. In this paper, we present evidence that Yelp data can complement government surveys by measuring economic activity in close to real time, at a granular level, and at almost any geographic scale. Changes in the number of businesses and restaurants reviewed on Yelp can predict changes in the number of overall establishments and restaurants in County Business Patterns. An algorithm using contemporaneous and lagged Yelp data can explain 29.2 percent of the residual variance after accounting for lagged CBP data, in a testing sample not used to generate the algorithm. The algorithm is more accurate for denser, wealthier, and more educated ZIP codes.
    JEL: E17 O33 R11
    Date: 2017–11
  62. By: Michèle Müller-Itten (Department of Economics, University of Notre Dame); Aniko Ory (Cowles Foundation, Yale University)
    Abstract: We study the evolution of labor force composition when mentoring is more effective within members of the same socio-demographic type. Typically, multiple steady states exist. Some completely exclude juniors of one type. Even a mixed steady state tends to over-represent the type that is dominant in the population. In contrast, the efficient labor force balances talent recruitment against mentoring frictions. It may even underrepresent the dominant type and typically calls for persistent government intervention. This contrasts with the public discourse around temporary affirmative action. We consider specific policy instruments and show that hiring quotas can induce equilibrium employment insecurity.
    Keywords: Affirmative action, Continuous time overlapping generations, Human capital, Labor participation, Employment insecurity, Mentoring, Talent
    JEL: D62 E24 I2 J15 J16 J24
    Date: 2017–11
  63. By: Ariel Burstein (UCLA)
    Abstract: We extend the model firm dynamics of Garcia-Macia, Hsieh, and Klenow (2016) to include a description of the costs of innovative investments as in the model of Klette and Kortum (2004). In this model, aggregate productivity (TFP) grows as a result of innovative investment by incumbent and entering firms in improving continuing products and acquiring new products to the firm. This model serves as a useful benchmark because it nests both Quality-Ladders based Neo-Shumpeterian models and Expanding Varieties models commonly used in the literature and, at the same time, it provides a rich model of firm dynamics as described in GHK. We show how data on firm dynamics and firm value can be used to infer the elasticities of aggregate productivity growth with respect to changes in incumbent firms' investments in improving their incumbent products, incumbent firms' investments in acquiring products new to the firm, and entering firms' investments in acquiring new products. As discussed in Atkeson and Burstein (2015), these elasticities are a crucial input in evaluating the extent to which it is possible to alter the medium term growth path of the macroeconomy through policies aimed at stimulating innovative investments by firms. We use these methods to provide quantitative estimates of these elasticities of aggregate TFP growth with respect to changes in each of the three categories of innovative investment in the model as well as of the rate of social depreciation of innovation expenditures.
    Date: 2017
  64. By: Davis, Scott (Federal Reserve Bank of Dallas); Zlate, Andrei (Federal Reserve Bank of Boston)
    Abstract: This paper measures the effect of monetary tightening in key advanced economies on net capital flows and exchange rates around the world. Measuring this effect is complicated by the fact that the domestic monetary policies of affected economies respond endogenously to the foreign tightening shock. Using a structural VAR framework with quarterly panel data we estimate the impulse responses of domestic policy variables and net capital flows to a foreign monetary tightening shock. We find that the endogenous responses of domestic monetary policy depends on each economy’s capital account openness and exchange rate regime. We develop a method to plot counter-factual impulse responses for net capital outflows under the assumption that domestic interest rates are held constant despite foreign monetary tightening. Our results suggests that failing to account for the endogenous response of domestic monetary policy biases down the estimated elasticity of net capital flows to foreign interest rates by as much as ¼ for floaters and ½ for peggers with open capital accounts.
    JEL: E5 F3 F4
    Date: 2017–10–01
  65. By: Qichun He (Central University of Finance and Economics); Heng-fu Zou (Central University of Finance and Economics; World Bank)
    Abstract: The government reaps seigniorage revenue from higher rates of money growth, hiring away more workers from entrepreneurs (the government crowding-out effect). There is also a positive seigniorage effect when part of the revenue goes to entrepreneurs, acting as a subsidy to R&D. When the government retains a larger share of the revenue, the government crowding-out effect dominates, and inflation retards growth. When entrepreneurs get the larger share, the seigniorage effect dominates, and inflation increases growth. Both OLS (ordinary least squares) and IV (instrumental variable) regressions using time-series data during 1979–2014 in China show that differenced inflation (to ensure stationarity) has a significantly positive effect on growth. When we use the level of inflation, we find that a 1 percentage point increase in annual inflation would bring a 0.53 percentage point increase in annual growth of per worker real GDP. The robust, causal effect of inflation on growth in China provides support for our theory.
    Keywords: Seigniorage revenue, R&D, Augmented Solow model, Instrumental variables estimation
    JEL: R12 H87 C73
    Date: 2016–09
  66. By: Angel De la Fuente
    Abstract: En el presente trabajo se completa la construccion de una base de datos de renta y empleo regional que cubre el periodo 1955-2014. En el se construyen, en particular, series homogeneas de ocupados, puestos de trabajo y ocupados asalariados, remuneracion de asalariados y rentas totales del trabajo para 1955-2014 y series mas cortas de otras variables de empleo.
    Keywords: Documento de Trabajo , Analisis Regional , Analisis Macroeconomico , España
    JEL: E01 R1
    Date: 2017–09
  67. By: N. Gregory Mankiw (Department of Economics Harvard University); Ricardo Reis (Centre for Macroeconomics (CFM); Economics Department London School of Economics (LSE))
    Abstract: This essay discusses the role of Milton Friedman's presidential address to the American Economic Association, which was given half a century ago and helped set the stage for modern macroeconomics. We discuss where macroeconomics was before this address, what insights Friedman offered, where researchers and central bankers stand today on these issues, and (most speculatively) where we may be heading in the future.
    Date: 2017–11
    Abstract: This paper presents a critical analysis of whether banks can multiply their available existing deposits of money, that is their liability, and or whether banks can create new money and thereby increase money supply. Economists held different views. Some argue that individual bank cannot multiply credit. Some view individual bank can multiply credit if the borrowers purchase with the borrowed money and, then, the sellers deposit successively the same money in the same bank, the money can be multiplied to the extent of credit divided by reserve ratio times. Some others argue that banks don?t need deposit at all; it can create money when it gives loan and deposit it in the borrower?s account. They are of the view that ?The money supply is created as ?fairy dust? produced by the banks individually, ?out of thin air?. (Werner 2014, P1). From the critical review of these theories, some important issues come to the surface. First, Money cannot be multiplied, second, money cannot be created out of thin air, third, what is increased is only the IOUs from the banks to their customers and from the customers to their banks, fourth, as banks are bound to keep certain percent of their reserve (deposit) in the custody of the central bank, in every successive deposit the quantity of money reduces and after the final deposit and lending all money will be placed at the custody of the central bank. No money will be there in the economy to repay the loan and its interest. Repeated depositing and lending of same money, thus, reduces the money available for economic activities.
    Keywords: Credit creation, money multiplier, financial intermediary, reserve ratio, central bank reserve, deposit, IOU, creation and destruction of money
    Date: 2017–10
  69. By: Nitya Pandalai Nayar (Princeton University and UT Austin); Andrei Levchenko (University of Michigan)
    Abstract: We propose a novel identification scheme for a non-technology business cycle shock, that we label “sentiment.” This is a shock orthogonal to identified surprise and news TFP shocks that maximizes the short-run forecast error variance of an expectational variable, alternatively a GDP forecast or a consumer confidence index. We then estimate the international transmission of three identified shocks – surprise TFP, news of future TFP, and “sentiment” – from the US to Canada. The US sentiment shock produces a business cycle in the US, with output, hours, and consumption rising following a positive shock, and accounts for the bulk of US short-run business cycle fluctuations. The sentiment shock also has a significant impact on Canadian macro aggregates. In the short run, it is more important than either the surprise or the news TFP shocks in generating business cycle comovement between the US and Canada, accounting for over 40% of the forecast error variance of Canadian GDP and over one-third of Canadian hours, imports, and exports. The news shock is responsible for some comovement at 5-10 years, and surprise TFP innovations do not generate synchronization. We provide a simple theoretical framework to illustrate how US sentiment shocks can transmit to Canada.
    Date: 2017
  70. By: Bjoern Bruegemann (VU University Amsterdam)
    Abstract: Matching frictions have been shown to reconcile wage rigidity and private efficiency in settings with constant marginal returns to labor. A recent line of research has studied the implications of wage rigidity in models with matching frictions and diminishing returns. I show that the allocation of labor is privately inefficient off the equilibrium path in the models used in this line of research, and thus inconsistent with any theory of wage determination that yields private efficiency. The culprit is rigidity of the wage with respect to firm-level employment. I examine how wage rigidity can be reconciled with private efficiency, focusing on two polar specifications. In the first, wages are rigid with respect to aggregate shocks and flexible with respect to firm-level employment. The labor market responds strongly to aggregate shocks. Yet novel policy implications obtained by this line of research are lost, and thereby shown to be driven by rigidity with respect to firm-level employment. In the second, the wage only adjust when called for by private efficiency, and workers fully appropriate rents in the event of adjustment. Novel policy implications obtained in this line of research are restored, including the existence of unemployment in the limit as matching frictions vanish. But fighting this type of rationing unemployment is much easier than in existing models.
    Date: 2017
  71. By: Liutang Gong (Guanghua School of Management and LMEQF, Peking University); Chan Wang (Guanghua School of Management and LMEQF, Peking University); Heng-fu Zou (China Economics and Management Academy, Central University of Finance and Economics; Institute for Advanced Study, Wuhan University; Institute for Advanced Study, Shenzhen University)
    Abstract: In this paper, we examine optimal exchange-rate flexibility in a model of local-currency pricing with vertical production and trade. Following a large body of empirical evidence, we assume that final-goods prices are sticky, but intermediategoods prices are flexible. We find that, unlike what is found in the literature, optimal nominal exchange rate is flexible under local-currency pricing. The key element in deriving our conclusion is the difference in expenditure shares between home and foreign households. The conclusion holds even if the degrees of home bias in production are identical between home and foreign final-goods producers, which contrasts with the findings in the literature.
    Keywords: Optimal monetary policy, Local-currency pricing, Vertical production and trade, Exchange-rate policy
    JEL: E5 F3 F4
    Date: 2017–02
  72. By: Goodhart, Charles; Lastra, Rosa
    Abstract: The consensus that surrounded the granting of central bank independence in the pursuit of a price stability oriented monetary policy has been challenged in the aftermath of the global financial crisis, in the light of the rise of populism on the one hand and the expanded mandates of central banks on the other hand. After considering the economic case for independence and the three Ds (distributional, directional and duration effects), the paper examines three different dimensions in the debate of how the rise in populism - or simply general discontent with the status quo - affects central bank independence. Finally, the paper examines how to interpret the legality of central bank mandates, and whether or not central banks have exceeded their powers. This analysis leads us in turn to consider accountability and, in particular, the judicial review of central bank actions and decisions. It is important to have in place adequate mechanisms to "guard the guardians" of monetary and financial stability.
    Keywords: accountability; central bank independence; Judicial review; Legitimacy; Mandates; populism
    JEL: N0 F3 G3 E6
    Date: 2017–06
  73. By: Frédéric Reynès (OFCE Sciences Po)
    Abstract: By defining the Variable Output Elasticities Cobb-Douglas function, this article shows that a large class of production functions can be written as Cobb-Douglas function with non-constant output elasticity. Compared to standard flexiblefunctions such as the Translog function, this framework has several advantages. [1] It does not requires the use of a second order approximation. [2] This greatly facilitates the deduction of linear input demands function without the need of involving the duality theorem. [3] It allows for a generalization of the CES function to the case where the elasticity of substitution between each pair of inputs is not necessarily the same. [4] This provides a more general and more flexible framework compared to the traditional nested CES approach while facilitating the analyze of the substitution properties of nested CES functions. The case of substitutions between energy, capital and labor is provided.
    Keywords: flexible production functions, Cobb-Douglas function, substitution capital-labor-energy
    JEL: D24 E23
    Date: 2017–04–20
  74. By: Fernando Rugitsky
    Abstract: The aim of this paper is to interpret the recent trajectory of the Brazilian economy, from around 2004 to 2015, focusing on the interaction between demand, income distribution, and the productive structure. An interpretative hypothesis is formulated within a framework that combines an effective demand schedule from the Kaleckian growth and distribution literature and a distributive schedule of Goodwin heritage (following Taylor, 2004, and Barbosa-Filho and Taylor, 2006). Such hypothesis indicates the determinants of the growth acceleration and of the increase of the wage share on income that started around 2004, as well as the determinants of their later reversal. Then, the framework is modified to incorporate sectoral heterogeneity, as suggested by Rugitsky (2016), and a modified hypothesis points out that a cumulative process involving reductions of wage inequality and changes of the productive structure may explain part of the recent Brazilian trajectory. Both hypotheses are examined empirically. The contrast of the cumulative process suggested with the one that seems to have taken place during Brazil’s “economic miracle” (1968-1973) allows it to be called an economic antimiracle.
    Keywords: aggregate demand; income distribution; productive structure; Kalecki; Goodwin; Brazilian economy
    JEL: E11 N16 O11 O54
    Date: 2017–11–14
  75. By: Ebaidalla Mahjoub Ebaidalla (University of Khartoum)
    Abstract: This paper attempts to identify the factors that influencing the parallel exchange rate premium in Sudan during the period 1979–2014. In addition, the impact of parallel exchange rate premium on economic performance is examined; focusing on three key macroeconomic indicators namely, economic growth, inflation and exports. The empirical results show that parallel exchange rate premium is significantly affected by policy variables such as, real exchange rate, trade openness and money supply. The results also reveal that GDP growth, expected rate of devaluation, and foreign aid are the most significant factors affecting parallel exchange premium. Moreover, the results demonstrate that parallel premium has a detrimental impact on both economic growth and export performance. Expectedly, the results show a positive association between premium and inflation rate. These outcomes are still hold under robustness checks, indicating that parallel exchange rate premium has negative consequences on macroeconomic performance in Sudan. Accordingly, the paper concludes with some policy implications that aim to narrow the spread between the black and official exchange rate as an important way out to contain inflationary pressures, improve export competitiveness, and boost economic growth.
    Date: 2017–11–16
  76. By: Aaberge, Rolf; Bourguignon, François; Brandolini, Andrea; Ferreira, Francisco H. G.; Gornick, Janet C.; Hills, John; Jäntti, Markus; Jenkins, Stephen P.; Micklewright, John; Marlier, Eric; Nolan, Brian; Picketty, Thomas; Radermacher, Walter J.; Smeeding, Timothy M.; Stern, Nicholas; Stiglitz, Joseph; Sutherland, Holly
    Abstract: Tony Atkinson is universally celebrated for his outstanding contributions to the measurement and analysis of inequality, but he never saw the study of inequality as a separate branch of economics. He was an economist in the classical sense, rejecting any sub-field labelling of his interests and expertise, and he made contributions right across economics. His death on 1 January 2017 deprived the world of both an intellectual giant and a deeply committed public servant in the broadest sense of the term. This collective tribute highlights the range, depth and importance of Tony’s enormous legacy, the product of over fifty years’ work.
    Keywords: Anthony B. Atkinson; inequality; poverty; public economics
    JEL: N0 E6
    Date: 2017–08–25
  77. By: Marie Hoerova (European Central Bank); Harald Uhlig (University of Chicago); Fiorella De Fiore (European Central Bank)
    Abstract: We build a general equilibrium model featuring unsecured and secured interbank markets, and collateralized central bank funding. The model accounts for some key facts about the European money markets since 2008: i) the decline in the ratio of interbank liabilities in total bank assets since the onset of the global financial crisis; ii) the reduced ability of banks to access the unsecured market during the sovereign crisis, and their shift to secured market funding; iii) the increased reliance on central bank funding, particularly for banks in countries with a vulnerable sovereign. Using the calibrated model, we find that a decline in the share of unsecured to secured interbank market transactions, as observed during the crisis, generates a sizeable macroeconomic impact.
    Date: 2017

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