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on Macroeconomics |
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Issue of 2017‒12‒03
104 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Stijn Claessens; M. Ayhan Kose |
| Abstract: | This paper surveys the literature on the linkages between asset prices and macroeconomic outcomes. It focuses on three major questions. First, what are the basic theoretical linkages between asset prices and macroeconomic outcomes? Second, what is the empirical evidence supporting these linkages? And third, what are the main challenges to the theoretical and empirical findings? The survey addresses these questions in the context of four major asset price categories: equity prices, house prices, exchange rates and interest rates, with a particular focus on their international dimensions. It also puts into perspective the evolution of the literature on the determinants of asset prices and their linkages with macroeconomic outcomes, and discusses possible future research directions. |
| Keywords: | Equity prices, exchange rates, house prices, interest rates, credit, output, consumption, investment, real-financial linkages, macro-financial linkages, imperfections, frictions. |
| JEL: | D53 E21 E32 E44 E51 F36 F44 G01 G10 G12 G14 G15 G21 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2017-76&r=mac |
| By: | Lopez, Jose Ignacio; Olivella, Virginia |
| Abstract: | We study the effects of financial shocks on labor markets in a model with both labor and financial frictions, two types of productive capital, physical and intangible, and in which only the former serves as collateral. A tighter borrowing constraint in this environment leads to a fall in credit and investment, skewed in detriment of intangibles, which in its turn lowers the marginal product of labor and reduces the incentives to hire workers. When feeding into the model financial shocks estimated from the data, we find that they explain labor outcomes during the last three downturns in the US, including the sharp increase in unemployment during the great recession. |
| Keywords: | Financial Shocks; Intangible Assets; Business Cycles; Employment Volatility |
| JEL: | E24 E32 E44 |
| Date: | 2016–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:1145&r=mac |
| By: | Acharya, Sushant (Federal Reserve Bank of New York); Bengui, Julien (Université de Montréal); Dogra, Keshav (Federal Reserve Bank of New York); Wee, Shu Lin (Carnegie Mellon University) |
| Abstract: | We present a model in which temporary shocks can permanently scar the economy's productive capacity. Unemployed workers lose skill and are expensive to retrain, generating multiple steady state unemployment rates. Large temporary shocks push the economy into a liquidity trap, generating deflation. With nominal wages unable to adjust freely, real wages rise, reducing hiring and catapulting the economy toward the high-unemployment steady state. Even after a short-lived liquidity trap, the economy recovers slowly at best; at worst, it falls into a permanent unemployment trap. Because monetary policy may be powerless to escape such a trap ex post, it is especially important to avoid it ex ante: policy should be preventive rather than curative. The model can quantitatively account for the slow recovery in the United States following the Great Recession. The model also suggests that a lack of swift monetary accommodation by the ECB can help explain stagnation in the European periphery. |
| Keywords: | hysteresis; monetary policy; multiple steady states; skill depreciation |
| JEL: | E24 E3 E5 J23 J64 |
| Date: | 2017–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:831&r=mac |
| By: | Burak Eroglu (Istanbul Bilgi University); Secil Yildirim-Karaman (Altinbas University) |
| Abstract: | This paper investigates the impact of the policy decisions by the Central Bank of the Republic of Turkey (CBRT) and Federal Reserve (FED) on the financial markets in Turkey between 2010 and 2016, the period in which CBRT adopted new policy objectives. We investigate the impact of monetary policy shocks on the term structure of interest rates, exchange rates and credit default swap (CDS) rates using VAR framework. For identification, we rely on the assumption that monetary policy shocks are heteroscedastic. Our results show that expansionary monetary policy shocks by the CBRT made the yield curve steeper, caused TL to depreciate and CDS rates to decrease. As for FED decisions, expansionary decisions decreased the bond yields and CDS rates and caused TL to appreciate. The paper contributes to the literature by investigating the response of the term structure of interest rates and other asset prices for the period in which CBRT prioritized financial stability and did not make guidance for the future stance of monetary policy and by testing whether bond yields with various maturities responded to monetary policy shocks differently. Our results imply that not following a long term inflation target and lack of communication weakened the control of the CBRT over the long term interest rates. |
| Keywords: | Monetary policy; Term structure of interest rates; Asset prices; Heteroscedasticity based identification |
| JEL: | E40 E43 E44 E52 E58 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:bli:wpaper:1705&r=mac |
| By: | Matteo Cacciatore; Romain Duval; Giuseppe Fiori; Fabio Ghironi |
| Abstract: | This paper studies the impact of product and labor market reforms when the economy faces major slack and a binding constraint on monetary policy easing---such as the zero lower bound. To this end, we build a two-country model with endogenous producer entry, labor market frictions, and nominal rigidities. We find that while the effect of market reforms depends on the cyclical conditions under which they are implemented, the zero lower bound itself does not appear to matter. In fact, when carried out in a recession, the impact of reforms is typically stronger when the zero lower bound is binding. The reason is that reforms are inflationary in our structural model (or they have no noticeable deflationary effects). Thus, contrary to the implications of reduced-form modeling of product and labor market reforms as exogenous reductions in price and wage markups, our analysis shows that there is no simple across-the-board relationship between market reforms and the behavior of real marginal costs. This significantly alters the consequences of the zero (or any effective) lower bound on policy rates. |
| JEL: | E24 E32 E52 F41 J64 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23960&r=mac |
| By: | Stijn Claessens; M. Ayhan Kose |
| Abstract: | This paper surveys the theoretical and empirical literature on the macroeconomic implications of financial imperfections. It focuses on two major channels through which financial imperfections can affect macroeconomic outcomes. The first channel, which operates through the demand side of finance and is captured by financial accelerator-type mechanisms, describes how changes in borrowers’ balance sheets can affect their access to finance and thereby amplify and propagate economic and financial shocks. The second channel, which is associated with the supply side of finance, emphasises the implications of changes in financial intermediaries’ balance sheets for the supply of credit, liquidity and asset prices, and, consequently, for macroeconomic outcomes. These channels have been shown to be important in explaining the linkages between the real economy and the financial sector. That said, many questions remain. |
| Keywords: | Asset prices, balance sheets, credit, financial accelerator, financial intermediation, financial linkages, international linkages, leverage, liquidity, macro-financial linkages, output, real-financial linkages. |
| JEL: | D53 E21 E32 E44 E51 F36 F44 G01 G10 G12 G14 G15 G21 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2017-75&r=mac |
| By: | Renato Faccini (Centre for Macroeconomics (CFM); London School of Economics and Political Science (LSE); Queen Mary, University of London); Eran Yashiv (Centre For Economic Policy Research (CEPR); Centre for Macroeconomics (CFM); London School of Economics and Political Science (LSE); Tel Aviv University) |
| Abstract: | The paper shows that there is an important direct role for hiring frictions in business cycles. This runs counter to key models in several strands of the macroeconomic literature, which imply that hiring frictions are not important per-se. In our model, conventional shocks yield non-standard and non-obvious macroeconomic outcomes in the presence of hiring frictions. Specifically, hiring frictions operate to offset, and possibly reverse, the effects of price frictions. This confluence of frictions has substantial effects. For a sub-set of the parameter space, model outcomes appear “frictionless,” though both hiring frictions and price frictions are at play. For a different sub-space, these interactions between the two frictions generate amplification in the responses of employment and unemployment to technology shocks, rather than friction-induced mitigation of responses. Despite the presence of price rigidity, positive technology shocks may still be expansionary in employment, and the effects of monetary policy shocks may still be negligible. We explain the underlying economic mechanisms and show their empirical implementation. In doing so, we argue in favor of the importance of explicitly using hiring frictions in business cycle modelling. |
| Keywords: | Hiring frictions, Business cycles, Interactions with price frictions, Endogenous wage rigidity |
| JEL: | E22 E24 E32 E52 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1736&r=mac |
| By: | Roberto Veneziani |
| Abstract: | This paper studies the implications of heterogeneous capital gain expectations on output andasset prices. We consider a disequilibrium macroeconomic model where agents' expectations on future capital gains affect aggregate demand. Agents' beliefs take two forms - fundamentalist and chartist - and the relative weight of the two types of agents is endogenously determined. We show that there are two sources of instability arising from the interaction of the financial with the real part of the economy, and from the heterogeneous opinion dynamics. Two main conclusions are derived. On the one hand, perhaps surprisingly, the non-linearity embedded in the opinion dynamics far from the steady state can play a stabilizing role by preventing the economy from moving towards an explosive path. On the other hand, however, real-financial interactions and sentiment dynamics do amplify exogenous shocks and tend to generate persistent fluctuations and the associated welfare losses. We consider alternative policies to mitigate these effects. |
| Keywords: | Real-financial interactions, heterogeneous expectations, aggregate sentiment dynamics, macro-financial instability |
| JEL: | E12 E24 E32 E44 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:imk:wpaper:186-2017&r=mac |
| By: | Gauti B. Eggertsson; Vaishali Garga |
| Abstract: | This paper shows that government spending multiplier at the zero lower bound (ZLB) is larger under sticky information than under sticky prices. Similarly, well known paradoxes, e.g., the paradox of toil and the paradox of flexibility become more severe under sticky information. For the case of sticky information it is important to assume that the fiscal policy intervention coincides with the duration of zero interest rates, while such distinction is less important in some special cases for sticky prices. This allows us to unify and clarify results that may appear to contradict each other in the literature. |
| JEL: | E31 E4 E5 E50 E51 E52 E6 E62 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23961&r=mac |
| By: | Elias Minaya; Miguel Cabello |
| Abstract: | Over the past decade, credit has grown significantly in Peru, a small and partially dollarised economy, and the mounting credit risk attached to foreign currency credit created severe challenges for financial regulators. This paper assesses the effectiveness of two macroprudential measures implemented by regulators: dynamic provisioning, to reduce the procyclicality of credit and conditional reserve requirements, to diminish the degree of dollarisation of the economy. Using credit register data that covers the period of 2004-2014, we find evidence that dynamic provisioning has decelerated the rapid growth of commercial bank lending. Moreover, mortgage dollarisation declined significantly after the implementation of the conditional reserve requirement scheme. |
| Keywords: | reserve requirement, dynamic provisioning, credit supply, macroprudential policy, dollarisation |
| JEL: | E51 E52 E58 G21 G28 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:675&r=mac |
| By: | Stephane Auray (CREST-Ensai and Universite du Littoral Cote d'Opale); Aurelien Eyquem (CREST-Ensai, GATE, UMR 5824, Universite de Lyon, and Universite Lumiere Lyon 2); Paul Gomme (Concordia University and CIREQ) |
| Abstract: | Following the Great Recession, U.S. government debt levels exceeded 100% of output. We develop a macroeconomic model to evaluate the role of various shocks during and after the Great Recession; labor market shocks have the greatest impact on macroeconomic activity. We then evaluate the consequences of using alternative fiscal policy instruments to implement a fiscal austerity program to return the debt-output ratio to its pre-Great Recession level. Our welfare analysis reveals that there is not much difference between applying fiscal austerity through government spending, the labor income tax, or the consumption tax; using the capital income tax is welfare-reducing. |
| Keywords: | fiscal policy; fiscal austerity; Great Recession |
| JEL: | E62 H63 E24 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:crd:wpaper:17003&r=mac |
| By: | João Barata R B Barroso; Rodrigo Barbone Gonzalez; Bernardus F Nazar Van Doornik |
| Abstract: | This paper estimates the impact of reserve requirements (RR) on credit supply in Brazil, exploring a large loan-level dataset. We use a difference-in-difference strategy, first in a long panel, then in a cross-section. In the first case, we estimate the average effect on credit supply of several changes in RR from 2008 to 2015 using a macroprudential policy index. In the second, we use the bank-specific regulatory change to estimate credit supply responses from (1) a countercyclical easing policy implemented to alleviate a credit crunch in the aftermath of the 2008 global crisis; and (2) from its related tightening. We find evidence of a lending channel where more liquid banks mitigate RR policy. Exploring the two phases of countercyclical policy, we find that the easing impacted the lending channel on average two times more than the tightening. Foreign and small banks mitigate these effects. Finally, banks are prone to lend less to riskier firms. |
| Keywords: | reserve requirement, credit supply, capital ratio, liquidity ratio, macroprudential policy |
| JEL: | E51 E52 E58 G21 G28 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:674&r=mac |
| By: | Thomas Obst; Özlem Onaran; Maria Nikolaidi |
| Abstract: | This paper develops a multi-country post-Kaleckian demand-led growth model that incorporates the role of the government. One novelty of this paper is to integrate crosscountry effects of both changes in income distribution and fiscal policy. The model is used to estimate econometrically the effects of income distribution and fiscal policy on the components of aggregate demand in EU15 countries. The results show that a policy mix that combines the simultaneous implementation of a pro-labour wage policy, an expansionary fiscal policy and a progressive tax policy in all EU countries leads to a significant rise in the EU15 GDP. The impact of wage policies is positive but small; the overall stimulus becomes much stronger with fiscal expansion. This policy mix leads to an improvement in the budget balance in all the EU15 countries, suggesting that expansionary fiscal policy is sustainable when it is combined with wage and progressive tax policy. |
| Keywords: | Wage Share, Growth, European Multiplier, Demand Regime, Fiscal Policy |
| JEL: | E12 E22 E25 E62 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:imk:fmmpap:10-2017&r=mac |
| By: | Garriga, Carlos (Federal Reserve Bank of St. Louis); Hedlund, Aaron (University of Missouri,) |
| Abstract: | Using a model with housing search, endogenous credit constraints, and mortgage default, this paper accounts for the housing crash from 2006 to 2011 and its implications for aggregate and cross-sectional consumption during the Great Recession. Left tail shocks to labor market uncertainty and tighter down payment requirements emerge as the key drivers. An endogenous decline in housing liquidity amplifies the recession by increasing foreclosures, contracting credit, and depressing consumption. Balance sheets act as a transmission mechanism from housing to consumption that depends on gross portfolio positions and the leverage distribution. Low interest rate policies accelerate the recovery in housing and consumption. |
| Keywords: | Housing; Consumption; Liquidity; Debt; Great Recession |
| JEL: | D31 D83 E21 E22 G11 G12 G21 |
| Date: | 2017–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2017-030&r=mac |
| By: | Tang, Jenny (Federal Reserve Bank of Boston) |
| Abstract: | In this paper, I examine whether communications by the Federal Open Market Committee (FOMC) play a role in determining the types of macroeconomic news that financial markets pay attention to. To do so, I construct novel measures of the intensity with which FOMC statements and meeting minutes discussed labor relative to other topics. I find that these labor topic intensity measures are related to the amount by which interest rates’ response to labor-related news exceeds their response to all other news. This relationship is especially strong for interest rates of longer maturities and is also present for short-term interest rate expectations over various horizons. |
| Keywords: | Federal Reserve; FOMC; central bank communication; interest rates |
| JEL: | E43 E52 E58 G12 |
| Date: | 2017–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:17-12&r=mac |
| By: | Robert J. Hill (University of Graz, Austria); Miriam Steurer (University of Graz, Austria); Sofie R. Waltl (Luxembourg Institute of Socio-Economic Research, Luxembourg) |
| Abstract: | The treatment of owner-occupied housing (OOH) is probably the most important unresolved issue in inflation measurement. In particular, for over a decade, the statistical institute of the European Union (Eurostat) has been grappling with the problem of how to include OOH in the Harmonized Index of Consumer Prices (HICP). The three main approaches for measuring OOH costs are the user cost, rental equivalence and acquisitions methods. There are also a number of different variants on each of these methods. We show that a particular version of the user cost method has desirable theoretical properties, and is easier to apply in practice than the more widely used rental equivalence and acquisitions methods. Using quantile hedonic regression methods and a housing dataset consisting of 1.3 million price and rent observations, we then compare the impact of eight different treatments of OOH on the consumer price index (CPI). We find that the impact is large, and that, with our preferred treatment of OOH, an inflation targeting central bank will automatically lean against a housing boom. The treatment of OOH in the CPI is therefore an important prerequisite to any discussion on how monetary policy should respond to housing booms and busts. |
| Keywords: | Measurement of infl ation; Owner occupied housing; Quantile regression; Hedonic imputation; Housing booms and busts; Monetary policy |
| JEL: | C31 C43 E01 E31 E52 R31 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:grz:wpaper:2017-12&r=mac |
| By: | Sichel, Daniel E. (Wellesley College); Wang, J. Christina (Federal Reserve Bank of Boston) |
| Abstract: | The long-run equilibrium real policy rate is a key concept in monetary economics and an important input into monetary policy decision-making. It has gained particular prominence lately as the Federal Reserve continues to normalize monetary policy. In this study, we assess the evolution, current level, and prospective values of this equilibrium rate within the framework of standard growth models. Our analysis considers as a baseline the single-sector Solow model, but it places more emphasis on the multi-sector neoclassical growth model, which better fits the data over the past three decades. We find that the long-run equilibrium policy rate has fallen between 0.3 and more than 1.6 percentage points from the 1973–2007 historical average, depending on the model and parameter values, mainly because of slower growth in total factor productivity (TFP) and the labor force. To the extent that the recent sluggish TFP growth persists, our estimates suggest a range of 0 percent to 1 percent for the equilibrium real rate in the current policy setting. But these estimates are subject to a substantial degree of uncertainty, as has been found in other studies. Policymakers thus need to interpret cautiously the guidance from policy rules that depend on the long-run equilibrium rate. This uncertainty also highlights the importance of the Federal Reserve’s standard practice of constantly monitoring a wide range of indicators of inflation and real activity to gauge as accurately as possible the economy’s reaction to policy. |
| Keywords: | natural rate of interest; productivity; growth models; monetary policy |
| JEL: | E43 E52 O33 O41 |
| Date: | 2017–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbcq:2017_006&r=mac |
| By: | van der Kwaak, Christiaan; van Wijnbergen, Sweder |
| Abstract: | Abstract We investigate the effectiveness of fiscal stimuli when banks are undercapitalized and have large holdings of government bonds subject to sovereign default risk. Deficit-financed government purchases then crowd out private expenditure and fiscal multipliers can turn negative. Crowding out increases for longer maturity bonds and higher sovereign default risk. We estimate a DSGE model with financial frictions for Spain and find that investment crowding out indeed leads to a negative cumulative fiscal multiplier. When monetary policy is exogenous, like at the ZLB or in a currency union, fiscal stimuli become more effective but multipliers are reduced when banks are undercapitalized. |
| Keywords: | Financial Intermediation; Macrofinancial Fragility; Fiscal Policy; Sovereign Default Risk |
| JEL: | E44 E62 H30 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12394&r=mac |
| By: | Brand, Thomas; Isoré, Marlène; Tripier, Fabien |
| Abstract: | We develop a business cycle model with gross flows of firm creation and destruction.The credit market is characterized by two frictions. First,entrepreneurs undergo a costly search for intermediate funding to create a firm. Second, upon a match, a costlystate-verification contract is set up. When defaults occurs, banks monitor firms, seize their assets, and a fraction of financial relationships are severed. The model is estimated using Bayesian methods for the U.S. economy. Among other shocks, uncertainty in productivity turns out to be a major contributor to both macro-financial aggregates and firm dynamics. |
| JEL: | D8 E3 E4 E5 |
| Date: | 2017–11–23 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2017_034&r=mac |
| By: | Kacperczyk, Marcin; Perignon, Christophe; Vuillemey, Guillaume |
| Abstract: | Do claims on the private sector serve the role of safe assets? We answer this question using high-frequency panel data on prices and quantities of certificates of deposit (CD) and commercial paper (CP) issued in Europe. We show that only very short-term private securities benefit from a premium for safety. Using several identification strategies, we show that the issuance of short-term CDs, but not of CPs, strongly responds to measures of safety demand. The private production of safe assets is stronger for issuers with high credit worthiness, and breaks down during episodes of market stress. We conclude that even very short-term private assets are sensitive to changes in the information environment and should not be treated as equally safe at all times. |
| Keywords: | information sensitivity; safe assets; safety premium |
| JEL: | E41 E43 E44 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12395&r=mac |
| By: | Luigi Bocola; Guido Lorenzoni |
| Abstract: | We study financial panics in a small open economy with floating exchange rates. In our model, bank runs trigger a decline in domestic wealth and a currency depreciation. Runs are more likely when banks have dollar debt. Dollar debt emerges endogenously in response to the precautionary motive of domestic savers: dollar savings provide insurance against crises; so when crises are possible it becomes relatively more expensive for banks to borrow in local currency, which gives them an incentive to issue dollar debt. This feedback between aggregate risk and savers' behavior can generate multiple equilibria, with the bad equilibrium characterized by financial dollarization and the possibility of bank runs. A domestic lender of last resort can eliminate the bad equilibrium, but interventions need to be fiscally credible. Holding foreign currency reserves hedges the fiscal position of the government and enhances its credibility, thus improving financial stability. |
| JEL: | E44 F34 F41 G11 G15 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23984&r=mac |
| By: | Giannetti, Mariassunta; Saidi, Farzad |
| Abstract: | We conjecture that lenders' decisions to provide liquidity are affected by the extent to which they internalize negative spillovers. We show that lenders with a large share of loans outstanding in an industry provide liquidity to industries in distress when spillovers are expected to be strong, because fire sales are likely to ensue. Lenders with a large share of outstanding loans also provide liquidity to customers and suppliers of industries in distress, especially when the disruption of supply chains is expected to be costly. Our results suggest a novel channel explaining why credit concentration may favor financial stability. |
| Keywords: | bank concentration; externalities; fire sales; Supply Chains; syndicated loans |
| JEL: | E23 E32 E44 G20 G21 L14 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12423&r=mac |
| By: | Castelnuovo, Efrem; Duc Tran, Trung |
| Abstract: | We develop uncertainty indices for the United States and Australia based on freely accessible, real time Google Trends data. Our Google Trends Uncertainty (GTU) indices are found to be positively correlated to a variety of alternative proxies for uncertainty available for these two countries. VAR investigations document an economically and statistically significant contribution to unemployment dynamics by GTU shocks in the United States. In contrast, the contribution of GTU shocks to unemployment dynamics in Australia is found to be much milder and substantially lower than that of monetary policy shocks. |
| Keywords: | Google Trends Uncertainty indices, Uncertainty shocks, Unemployment Dynamics, VAR analysis. |
| JEL: | C32 E32 E52 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:82297&r=mac |
| By: | Hubert Kempf |
| Abstract: | Fiscal federalism may not be a panacea in a monetary union if it does not address the non-cooperative behaviour between fiscal policymakers. To prove this, we assess the relative merits of a fiscal federalism scheme in a monetary union and intergovernmental fiscal cooperation without such a federal authority. Using a standard macroeconomic model commonly used for policy analysis we show that it is impossible to conclude that one solution is always preferable to the other. The benefits from an extra instrument and a policymaker with union-wide objectives may not compensate the adding of a non-cooperative player to the policy game. This result is sustained when an active monetary policy is introduced in the model or when shocks affect the functioning of the economy. The welfare ranking of these two options depends on the cross-border spillover effects, the objectives of policymakers and the variances of shocks. |
| Keywords: | monetary union, fiscal federation, cooperation, policymix |
| JEL: | E62 E63 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6725&r=mac |
| By: | Benjamin W. Pugsley (University of Notre Dame); Petr Sedlacek (Centre for Macroeconomics (CFM); University of Oxford); Vincent Sterk (Centre for Macroeconomics (CFM); University College London (UCL)) |
| Abstract: | Only half of all startups survive past the age of ve and surviving businesses grow at vastly dierent speeds. Using micro data on employment in the population of U.S. businesses, we estimate that the lion's share of these differences is driven by ex-ante heterogeneity across firms, rather than by ex-post shocks. We embed such heterogeneity in a firm dynamics model and study how ex-ante differences shape the distribution of firm size, "up-or-out" dynamics, and the associated gains in aggregate output. "Gazelles" - a small subset of startups with particularly high growth potential - emerge as key drivers of these outcomes. Analyzing changes in the distribution of ex-ante firm heterogeneity over time reveals that gazelles are driven towards extinction, creating substantial aggregate losses. |
| Keywords: | Firm dynamics, Startups, Macroeconomics, Big data |
| JEL: | D22 E23 E24 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1737&r=mac |
| By: | Bhamra, Harjoat Singh; Uppal, Raman |
| Abstract: | A common criticism of behavioral economics is that it has not shown that the psychological biases of individual investors lead to aggregate long-run effects on both asset prices and macroeconomic quantities. Our objective is to address this criticism by providing a simple example of a production economy where individual portfolio biases cancel when summed across investors, but still have an effect on aggregate quantities that does not vanish in the long-run. Specifically, we solve in closed form a model of a stochastic general-equilibrium production economy with a large number of heterogeneous firms and investors. Investors in our model are averse to ambiguity and so hold portfolios biased toward familiar assets. We specify this bias to be unsystematic so it cancels out when aggregated across investors. However, because of holding underdiversified portfolios, investors bear more risk than necessary, which distorts the consumption of all investors in the same direction. Hence, distortions in consumption do not cancel out in the aggregate and therefore increase the price of risk and distort aggregate investment and growth. The increased risk from holding biased portfolios, which increases the demand for the risk-free asset, leading to a higher equity risk premium and a lower risk-free rate that match the values observed empirically. Furthermore, all investors survive in the long-run, and so the effects of their biases never vanish. Our analysis illustrates that idiosyncratic behavioral biases can have long-run distortionary effects on both financial markets and the macroeconomy. |
| Keywords: | aggregate growth; ambiguity aversion; behavioral finance; investment; underdiversification |
| JEL: | E44 G02 G11 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12415&r=mac |
| By: | Bernard Michael Gilroy (Paderborn University); Julia Günthner (Paderborn University) |
| Abstract: | The international business competition fostered new forms of flexible working and atypical employment. The flexibilization process started during the 1970s and continues to change the labor market and the perception of labor to the present day. As a result, a new class, called the precariat, is establishing which can be characterized by insecure employment and living. Precarity resulting from fixed-term, short-term, part-time or temporary employment can concern everyone and has negative consequences on society, economy and health. In parallel to the development of precarity, a possibility of basic security in the form of the Unconditional Basic Income (UBI) is discussed globally. However, the particular situation in Germany, regarding the precariat and the UBI as a possible solution has not been outlined yet. Although, UBI implementation models have been proposed for Germany, there is no analysis in the current literature that would show the effect of the UBI on the German precariat. Applying a modern macroeconomic analysis within the scope of the jobless growth argument, the paper investigates the effect of an UBI on goods demand, economic growth, employment level and consequently, the precariat. The paper shows that an implemented UBI as well as labor-related security increase economic growth and can reduce the German precariat. Politicians and employers should be aware of this positive aspect of the UBI and implement policies to reduce labor-related insecurities in order to decrease the growing precarity. |
| Keywords: | Precariat, atypical employment, flexibility, basic income, jobless growth, AS, AD |
| JEL: | E21 E24 E27 H53 I13 J68 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:pdn:ciepap:109&r=mac |
| By: | Michele Tettamanzi (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore) |
| Abstract: | In this paper we develop a Hybrid Macroeconomic ABM. The economy is populated with firms heterogeneous in term of financial fragility, measured via the Equity Ratio. Firms are maximizing profit by choosing capital, which can not be raised on the stock market. Therefore they have to rely on a loan charged by the External Finance Pre- mium that is decreasing in the Equity Ratio; profits are retained as net worth. The economy is populated also with consumers, whom optimize their utility holding individual non-rational ex- pectations; thus they are heterogeneous in their expectations. The expectations formation process is the Heuristic Switching Model: given a fixed set of heuristics, agents choose the one which has performed the best in the past; this model has been extrapolated and validated in several Learn to Forecast Experiments. Thanks to the Variant Representative Agent approach, there can be built bottom-up a macro- economic system which encapsulates the heterogeneity by considering relevant moments rather than the whole the distributions of the heterogeneous characteristics of the agents. The emergent macro-economic system will be described by an optimized IS, a Taylor Rule and a Phillips Curve; thus the model tries to bridge NK-DSGE with ABM. The proposed approach result in a macro-economic system with a reduced dimensionality, thus it is analytical tractable and it resumes macroeconomic thinking: the ABM is used to link periods and keep track of the individual distribution, while the macro-economic model is a frame that pictures the value of the fundamentals given the distributions. The model is put at work through a fiscal shock and it shows it capabilities in disentangling the transmission of a shock in its direct and indirect effect: the former are the ones directly caused by the shocked variable, the latter instead derive from the evolution of the distributions. Moreover the model is also able to distinguish the contributions to the shock of the Representative Agent Component opposed to the Heterogeneous Agent Component. . |
| Keywords: | Heterogeneity, Financial fragility, Bounded Rationality, Heterogeneous Expectations, Aggregation, Business cycles. |
| JEL: | E32 E44 D84 D90 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:ctc:serie1:def062&r=mac |
| By: | Hevia, Constantino (Universidad Torcuato Di Tella); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis) |
| Abstract: | In this paper, we use a simple model of money demand to characterize the behavior of monetary aggregates in the United States from 1960 to 2016. We argue that the demand for the currency component of the monetary base has been remarkably stable during this period. We use the model to make projections of the nominal quantity of cash in circulation under alternative future paths for the federal funds rate. Our calculations suggest that if the federal funds rate is lifted up as suggested by the survey of economic projections made by the members of the Federal Open Market Committee (FOMC), the fall in total currency demanded in the next two years ranges between 50 and 200 billion. Our discussion suggests that specific measures by the Federal Reserve to absorb that cash could be worth considering to make the future path of the price level consistent with the price stability mandate. |
| Keywords: | Inflation; Money demand; Currency in circulation |
| JEL: | E31 E41 E51 |
| Date: | 2017–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:744&r=mac |
| By: | Bhamra, Harjoat Singh; Uppal, Raman |
| Abstract: | Households with familiarity biases tilt their portfolios toward a few risky assets. Consequently, household portfolios are underdiversified and excessively volatile. To understand the implications of underdiversification for social welfare, we solve in closed form a model of a stochastic, dynamic, general-equilibrium economy with a large number of heterogeneous firms and households that bias their investments toward a few familiar assets. We find that the direct mean-variance loss from holding an underdiversified portfolio that is excessively risky is equivalent to a reduction of 1.66% per annum in a household's portfolio return, consistent with the estimate in Calvet, Campbell, and Sodini(2007). However, we show that in a more general model with intertemporal consumption, underdiversified portfolios increase consumption-growth volatility, amplifying the mean-variance losses by a factor of four. Moreover, in general equilibrium where growth is endogenous, underdiversified portfolios distort also aggregate investment and growth even when familiarity biases in portfolios cancel out across households. We find that the overall social welfare loss is about six times as large as the direct mean-variance loss. Our results illustrate that financial markets are not a mere sideshow to the real economy and that financial literacy, regulation, and innovation that improve the financial decisions of households can have a significant positive impact on social welfare. |
| Keywords: | familiarity bias; growth; Portfolio choice; social welfare; underdiversification |
| JEL: | E44 G02 G11 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12414&r=mac |
| By: | Diewert, W. Erwin; Fox, Kevin J. |
| Abstract: | There are many decompositions of productivity growth for a production unit that rely on the ratio approach to index number theory. However, the business and accounting literatures tend to favour using differences rather than ratios. In this paper, three analogous decompositions for productivity growth in a difference approach to index number theory are obtained. The first approach uses the production unit’s value added function in order to obtain a suitable decomposition. It relies on various first order approximations to this function, but the decomposition can be given an axiomatic interpretation. The second approach uses the cost constrained value added function and assumes that the reference technology for the production unit can be approximated by the free disposal conical hull of past observations of inputs used and outputs produced by the unit. The final approach uses a particular flexible functional form for the producer’s value added function and provides an exact decomposition of normalized value added. |
| Keywords: | Productivity measurement, index numbers, indicator functions, the Bennet indicator |
| JEL: | C43 D24 D33 E23 E31 O47 |
| Date: | 2017–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:ubc:pmicro:erwin_diewert-2017-10&r=mac |
| By: | Athreya, Kartik B. (Federal Reserve Bank of Richmond); Mustre-del-Rio, Jose (Federal Reserve Bank of Kansas City); Sanchez, Juan M. (Federal Reserve Bank of St. Louis) |
| Abstract: | Using recently available proprietary panel data, we show that while many (35%) US consumers experience financial distress at some point in the life cycle, most of the events of financial distress are primarily concentrated in a much smaller proportion of consumers in persistent trouble. Roughly 10% of consumers are distressed for more than a quarter of the life cycle, and less than 10% of borrowers account for half of all distress events. These facts can be largely accounted for in a straightforward extension of a workhorse model of defaultable debt that accommodates a simple form of heterogeneity in time preference but not otherwise. |
| Keywords: | default; financial distress; consumer credit; credit card debt |
| JEL: | D60 E21 E44 |
| Date: | 2017–11–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:17-14&r=mac |
| By: | Athreya, Kartik B. (Federal Reserve Bank of Richmond); Mustre-del-Rio, Jose (Federal Reserve Bank of Kansas City); Sanchez, Juan M. (Federal Reserve Bank of St. Louis) |
| Abstract: | Using recently available proprietary panel data, we show that while many (35%) US consumers experience financial distress at some point in the life cycle, most of the events of financial distress are primarily concentrated in a much smaller proportion of consumers in persistent trouble. Roughly 10% of consumers are distressed for more than a quarter of the life cycle, and less than 10% of borrowers account for half of all distress events. These facts can be largely accounted for in a straightforward extension of a workhorse model of defaultable debt that accommodates a simple form of heterogeneity in time preference but not otherwise. |
| Keywords: | Default; financial distress; consumer credit; credit card debt |
| JEL: | D60 E21 E44 |
| Date: | 2017–11–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2017-038&r=mac |
| By: | Quint, Dominic; Tristani, Oreste |
| Abstract: | We study the macroeconomic consequences of the money market tensions associated with the financial crisis in the euro area. In a structural VAR, we identify a liquidity shock rooted in the interbank market and use its impulse response functions to calibrate key parameters of a Smets and Wouters (2003) closed-economy model augmented with a banking sector à la Gertler and Kiyotaki (2010). We highlight two main results. First, an identified liquidity shock causes a sizable and persistent fall in investment. The shock can account for one third of the observed, large fall in euro area aggregate investment in 2008–09. Second, the liquidity injected in the market by the ECB played an important role in attenuating the macroeconomic impact of the shock. According to our counterfactual simulations based on the structural model, in the absence of ECB liquidity injections interbank spreads would have been at least 200 basis points higher and their adverse impact on investment would have been more than twice as severe. JEL Classification: E44, E58 |
| Keywords: | ECB, euro area, financial crisis, financial frictions, interbank market, non-standard monetary policy |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20172113&r=mac |
| By: | Horacio A Aguirre; Gastón Repetto |
| Abstract: | We aim to assess the impact of capital- and currency-based macroprudential policy measures on credit growth at the bank-firm level, using credit registry data from Argentina. We examine the impact of the introduction and tightening of a capital buffer and a limit on the foreign currency position of financial institutions on credit growth of firms, estimating fixed effects and difference-in-difference models for the period 2009-2014; we control for macroeconomic, financial institutions and firms' variables, both observable and unobservable. We find that: the capital buffer and the limits on foreign currency positions generally contribute to moderating the credit cycle, both when introduced and when tightened; the currency-based measure appears to have a quantitatively more important impact; both measures operate on the extensive and the intensive margins, and have an impact on credit supply. Macroprudential policies also have an effect on ex post credit quality: growth of non-performing loans is reduced after their implementation. In general, credit granted by banks with more capital and assets evidences a higher impact of the introduction of the capital buffer, while this measure also acts more strongly during economic activity expansions. |
| Keywords: | macroprudential policy, credit registry data, panel data models |
| JEL: | E58 G28 C33 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:672&r=mac |
| By: | Albert Queralto; Patrick Donnelly Moran |
| Abstract: | To what extent can monetary policy impact business innovation and productivity growth? We use a New Keynesian model with endogenous total factor productivity (TFP) to quantify the TFP losses due to the constraints on monetary policy imposed by the zero lower bound (ZLB) and the TFP benefits of tightening monetary policy more slowly than currently anticipated. In the model, monetary policy influences firms incentives to develop and implement innovations. We use evidence on the dynamic effects of R&D and monetary shocks to estimate key parameters and assess model performance. The model suggests significant TFP losses due to the ZLB. |
| Keywords: | Endogenous Technology ; Business Cycles ; Monetary Policy |
| JEL: | E32 F41 F44 G15 |
| Date: | 2017–11–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1217&r=mac |
| By: | Xavier Raurich (University of Barcelona, CREB and BEAT); Thomas Seegmuller (Aix-Marseille Univ. (Aix-Marseille School of Economics), CNRS, EHESS and Centrale Marseille) |
| Abstract: | The aim of this paper is to study the role of the distribution of income by age group on the existence of speculative bubbles. A crucial question is whether this distribution may promote a bubble associated to a larger level of capital, i.e. a productive bubble. We address these issues in a three period overlapping generations (OC) model, where productive investment done in the first period of life is a long term investment whose return occurs in the following two periods. A bubble is a short term speculative investment that facilitates intertemporal consumption smoothing. We show that the distribution of income by age group determines both the existence and the effect of bubbles on aggregate production. We also show that fiscal policy, by changing the distribution of income, may facilitate or prevent the existence of bubbles and may also modify the effect that bubbles have on aggregate production. |
| Keywords: | bubble, efficiency, income distribution, overlapping generations |
| JEL: | E22 E44 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1740&r=mac |
| By: | Max Hanisch |
| Abstract: | This study investigates the international spillover effects of contractionary US monetary policy and its transmission channels on members of the euro area (EA) before and after the implementation of the euro. I find the multilateral spillover effects on individual EA economies' real activity and inflation to be asymmetric, i.e. the responses are mainly expansionary but not exclusively so. While the effects are diverse and rather large before 1999, responses become more homogeneous and smaller in size after the implementation of the euro. However, country-specific asymmetries remain. Trade and interest rates but also credit, stock and housing markets are identified as important transmission channels. |
| Keywords: | Structural dynamic factor model, sign restrictions, monetary policy, US, Euro area, spillover effects |
| JEL: | C32 E52 E58 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1701&r=mac |
| By: | Guglielmo Maria Caporale; Luis A. Gil-Alana |
| Abstract: | In this paper we propose a new modelling framework for the analysis of macro series that includes both stochastic trends and stochastic cycles in addition to deterministic terms such as linear and non-linear trends. We examine four US macro series, namely annual and quarterly real GDP and GDP per capita. The results indicate that the behaviour of US GDP can be captured accurately by a model incorporating both stochastic trends and stochastic cycles that allows for some degree of persistence in the data. Both appear to be mean-reverting, although the stochastic trend is nonstationary whilst the cyclical component is stationary, with cycles repeating themselves every 6 – 10 years. |
| Keywords: | GDP, GDP per capita, trends, cycles, long memory, fractional integration |
| JEL: | C22 E32 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6728&r=mac |
| By: | Martín Uribe |
| Abstract: | I investigate the effects of an increase in the nominal interest rate on inflation and output in the United States and Japan during the postwar period. I postulate a structural autoregressive model that allows for transitory and permanent nominal and real shocks. I find that nominal interest-rate increases that are expected to be temporary, lead, in accordance with conventional wisdom, to a temporary increase in real rates that is contractionary and deflationary. By contrast, nominal interest-rate increases that are perceived to be permanent cause a temporary decline in real rates with inflation adjusting faster than the nominal interest rate to a higher permanent level. Estimated impulse responses show that inflation reaches its long-run level within a year. Importantly, because real rates are low during the transition, the economy does not suffer an output loss. This result is relevant for the design of monetary policy in economies plagued by chronic below-target inflation, for it is consistent with the prediction that a credible announcement of a gradual return of nominal rates to normal levels can bring about a swift convergence of inflation to its target level without negative consequences for aggregate activity. |
| JEL: | E52 E58 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23977&r=mac |
| By: | Chella, Namapsa; Phiri, Andrew |
| Abstract: | The primary objective of this paper is to investigate the relationship between foreign direct investment, domestic investment and unemployment in South Africa. Our mode of empirical investigation is the autoregressive distributive lag (ARDL) cointegration model which provides the advantage of accommodating for a mixture of levels stationary and difference stationary time series variables and is applied to quarterly data collected between 1970 and 2014. Our empirical results point to the existence of a negative effect of domestic investments on unemployment levels whereas foreign direct investment appears to have no significant effect on reducing unemployment levels. Collectively, these results hold crucial implications for South African policymakers. |
| Keywords: | FDI; domestic investment; unemployment; ARDL; cointegration; South Africa; developing country. |
| JEL: | C22 C32 E22 E24 |
| Date: | 2017–11–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:82371&r=mac |
| By: | Peter N. Ireland (Boston College) |
| Abstract: | Allan Meltzer developed his model of the monetary transmission mechanism in research conducted with Karl Brunner. The Brunner-Meltzer model implies that the Federal Reserve would benefit from drawing brighter lines between monetary and fiscal policy actions, eschewing credit market intervention and focusing, instead, on using its control over the monetary base to stabilize the aggregate price level. The model downplays the importance of the zero lower interest rate bound and suggests a greater role for monetary aggregates in the Fed’s policymaking strategy. Finally, it highlights the benefits that accrue when policy is conducted according to a rule rather than discretion. |
| Keywords: | Allan Meltzer, Karl Brunner, Monetarism, Monetary Transmission Mechanism |
| JEL: | B31 E52 |
| Date: | 2017–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:938&r=mac |
| By: | Emi Nakamura; Jón Steinsson |
| Abstract: | This paper discusses empirical approaches macroeconomists use to answer questions like: What does monetary policy do? How large are the effects of fiscal stimulus? What caused the Great Recession? Why do some countries grow faster than others? Identification of causal effects plays two roles in this process. In certain cases, progress can be made using the direct approach of identifying plausibly exogenous variation in a policy and using this variation to assess the effect of the policy. However, external validity concerns limit what can be learned in this way. Carefully identified causal effects estimates can also be used as moments in a structural moment matching exercise. We argue that such "identified moments" are often powerful diagnostic tools for distinguishing between important classes of models (and thereby learning about the effects of policy). To illustrate these notions we discuss the growing use of cross-sectional evidence in macroeconomics and consider what the best existing evidence is on the effects of monetary policy. |
| JEL: | E0 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23968&r=mac |
| By: | Adriel Jost |
| Abstract: | Central banks have increased their engagement in the information and education of the broad public. But what can be said about the nonprofessional’s knowledge of monetary policy and central banking? Based on the Bank of England’s Inflation Attitudes Survey, I construct a score to capture the central banking knowledge of the respondents. I show that the average British person displays limited knowledge of central banking. At the same time, the data reveal that satisfaction with the Bank of England’s policies increases with a better understanding of monetary policy. |
| Keywords: | Economic literacy, Monetary policy, Bank of England |
| JEL: | D83 E52 E58 I21 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2017-15&r=mac |
| By: | Anson, Mike; Bhola, David; Kang, Miao; Thomas, Ryland |
| Abstract: | We use daily transactional ledger data from the Bank of England's Archive to test whether and to what extent the Bank of England during the mid-nineteenth century adhered to Walter Bagehot's rule that a central bank in a financial crisis should lend cash freely at a high interest rate in exchange for "good" 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 Bank's behaviour during this period broadly conforms to Bagehot's rule, though with variation across the crises of 1847, 1857 and 1866. Using a new, higher frequency series on the Bank's 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 Bank's 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 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:eabhps:1703&r=mac |
| By: | Deepa Dhume Datta; Juan M. Londono; Bo Sun; Daniel O. Beltran; Thiago Revil T. Ferreira; Matteo Iacoviello; Mohammad Jahan-Parvar; Canlin Li; Marius del Giudice Rodriguez; John H. Rogers |
| Abstract: | A large number of measures for monitoring risk and uncertainty surrounding macroeconomic and financial outcomes have been proposed in the literature, and these measures are frequently used by market participants, policy makers, and researchers in their analyses. However, risk and uncertainty measures differ across multiple dimensions, including the method of calculation, the underlying outcome (that is, the asset price or macroeconomic variable), and the horizon at which they are calculated. Therefore, in this paper, we review the literature on global risk, uncertainty, and volatility measures drawing on internal and external academic research as well as ongoing monitoring conducted by the Federal Reserve Board’s economics divisions to catalog measures by method of data collection, computation, and subject. We first explore a set of non asset-marketbased measures of risk and uncertainty, including news-based and survey-based uncertainty measures of monetary policy and macroeconomic outcomes. We then turn to asset-market-based measures of risk uncertainty for equity prices, interest rates, currencies, oil prices, and inflation. |
| Keywords: | Risk ; Uncertainty ; Volatility ; Monetary policy ; Geopolitical risk ; Equities ; Interest rates ; Exchange rates ; Commodities ; Inflation ; Variance risk premium |
| JEL: | E6 G1 G15 |
| Date: | 2017–11–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1216&r=mac |
| By: | Emine Boz; Gita Gopinath; Mikkel Plagborg-Møller |
| Abstract: | We document that the U.S. dollar exchange rate drives global trade prices and volumes. Using a newly constructed data set of bilateral price and volume indices for more than 2,500 country pairs, we establish the following facts: 1) The dollar exchange rate quantitatively dominates the bilateral exchange rate in price pass-through and trade elasticity regressions. U.S. monetary policy induced dollar fluctuations have high pass-through into bilateral import prices. 2) Bilateral non-commodities terms of trade are essentially uncorrelated with bilateral exchange rates. 3) The strength of the U.S. dollar is a key predictor of rest-of-world aggregate trade volume and consumer/producer price inflation. A 1% U.S. dollar appreciation against all other currencies in the world predicts a 0.6--0.8% decline within a year in the volume of total trade between countries in the rest of the world, controlling for the global business cycle. 4) Using a novel Bayesian semiparametric hierarchical panel data model, we estimate that the importing country's share of imports invoiced in dollars explains 15% of the variance of dollar pass-through/elasticity across country pairs. Our findings strongly support the dominant currency paradigm as opposed to the traditional Mundell-Fleming pricing paradigms. |
| JEL: | E5 F1 F3 F4 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23988&r=mac |
| By: | Raihan, Tasneem |
| Abstract: | This paper seeks to uncover the non-linear characteristics of uncertainty underlying the US inflation rates over the period 1971-2015 within a regime-switching framework. Accordingly, we employ two variants of a Markov regime-switching GARCH model, one with normally distributed errors (MS-GARCH-N) and another with t-distributed errors (MS-GARCH-t), and compare their relative in-sample as well as out-of-sample performances with those of their standard single-regime counterparts. Consistent with the findings in existing studies, both of our regime-switching models are successful in identifying the year 1984 as the breakpoint in inflation volatility. Among other interesting results is a new finding that the process of switching to the low volatility regime started around April, 1979 and continued until mid 1983. This time frame is matched with the period of aggressive monetary policy changes implemented by the then Fed chairman Paul Volcker. As regards the performance in forecasting uncertainty, for shorter horizons spanning 1 to 5 months, MS-GARCH-N forecasts are found to outperform all other models whereas for 8 to 12-month ahead forecasts MS-GARCH-t appears superior. |
| Keywords: | Markov switching, GARCH, inflation uncertainty |
| JEL: | C01 C53 E31 |
| Date: | 2017–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:82343&r=mac |
| By: | Michael Callaghan (Reserve Bank of New Zealand) |
| Abstract: | Financial market prices contain valuable information about market participants’ expectations. Information on market participants' expectations of future growth, inflation, and interest rates may help policy-makers reflect on the plausibility of their own forecast assumptions, and understand the likely market reaction to any policy announcement. However, the existence of risk premiums will bias the information content of financial market prices. For interest rate securities, the term premium will create a wedge between market participants’ expectation of the future path of the policy rate and the price being traded.Therefore, in order to extract the ‘true’ underlying policy expectations of market participants, market pricing needs to be adjusted for the term premium. In theory, adjusting for the term premium should improve forecast performance on average, given that it provides an unbiased measure of market participants’ expectations. I therefore use a popular term structure model to test the out-of-sample forecast performance of US market pricing with and without a term premium adjustment. I focus on the short-end of the yield curve, up to two years, as it is directly relevant for policy-makers and financial market commentators. The results suggest that the short-term forecasting performance of US interest rates over the medium term can be improved by adjusting for the term premium in zero-coupon rates and overnight index swap rates. The current negative term premium implies that market participants at present expect the future policy rate in the United States to be higher than that implied by market prices. I also show how the model can be applied to monitor expectations for the future path of the federal funds rate at a daily frequency. The analysis has important implications for policy-makers and financial commentators. Adjusting for the term premium should provide a better measure of market participants’ actual expectations for the future path of the policy rate, and as such can improve forecast performance over the medium term. |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbans:2017/08&r=mac |
| By: | Bok, Brandyn (Federal Reserve Bank of New York); Caratelli, Daniele (Federal Reserve Bank of New York); Giannone, Domenico (Federal Reserve Bank of New York); Sbordone, Argia M. (Federal Reserve Bank of New York); Tambalotti, Andrea (Federal Reserve Bank of New York) |
| Abstract: | Data, data, data . . . Economists know it well, especially when it comes to monitoring macroeconomic conditions—the basis for making informed economic and policy decisions. Handling large and complex data sets was a challenge that macroeconomists engaged in real-time analysis faced long before “big data” became pervasive in other disciplines. We review how methods for tracking economic conditions using big data have evolved over time and explain how econometric techniques have advanced to mimic and automate the best practices of forecasters on trading desks, at central banks, and in other market-monitoring roles. We present in detail the methodology underlying the New York Fed Staff Nowcast, which employs these innovative techniques to produce early estimates of GDP growth, synthesizing a wide range of macroeconomic data as they become available. |
| Keywords: | monitoring economic conditions; business cycle; macroeconomic data; large data sets; high-dimensional data; real-time data flow; factor model; state space models; Kalman filter |
| JEL: | C32 C53 E32 |
| Date: | 2017–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:830&r=mac |
| By: | Augustyński, Iwo; Laskoś-Grabowski, Paweł |
| Abstract: | There is growing literature in macroeconomics, especially on business cycle synchronization, employing different methods of time series clustering. However, even as an unsupervised learning method, this technique requires making choices that are nontrivially influenced by the nature of the data involved. By extensively testing various possibilities, we arrive at a choice of a dissimilarity measure (compression-based dissimilarity measure, or CDM) which is particularly suitable for clustering macroeconomic variables. We check that the results are stable in time and consistent with the literature on core-periphery pattern of European business cycles. We also successfully apply our findings to the analysis of national economies, specifically to identifying their structural relations. To our knowledge, it is the first comprehensive analysis of the usefulness of the different dissimilarity measures for the macroeconomic research. |
| Keywords: | time series clustering,similarity,cluster analysis,GDP |
| JEL: | E00 C18 C63 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:171380&r=mac |
| By: | Drozd, Lukasz A. (Federal Reserve Bank of Philadelphia); Kolbin, Sergey (Amazon); Nosal, Jaromir B. (Boston College) |
| Abstract: | We show that the trade-comovement puzzle - theory's failure to account for the positive relation between trade and business cycle synchronization - is intimately related to its counterfactual implication that short- and long-run trade elasticities are equal. Based on this insight, we show that modeling the disconnect between the low short- and the high long-run trade elasticity in consistency with the data is promising in resolving the puzzle. In a broader context, our findings are relevant for analyzing business cycle transmission in a large class of models and caution against the use of static elasticity models in cross-country studies. |
| Keywords: | trade-comovement puzzle; elasticity puzzle; international business cycle synchronization |
| JEL: | E32 F31 |
| Date: | 2017–11–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:17-42&r=mac |
| By: | Yu Awaya; Hiroki Fukai; Makoto Watanabe |
| Abstract: | This paper presents a simple equilibrium model in which collateralized credit emerges endogenously. Just like in repos, individuals cannot commit to the use of collateral as a guarantee of repayment, and both lenders and borrowers have incentives to renege. Our theory provides a micro-foundation to justify the borrowing constraints that are widely used in the existing macroeconomic models. We provide an explanation to the question of why assets are often used as collateral, rather than simply as a means of payment, why there is a tradeoff in assets between return and liquidity, and what kinds of assets are useful as collateral. |
| Keywords: | collateral, search, medium of exchange, voluntary separable repeated game |
| JEL: | E30 E50 C73 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6731&r=mac |
| By: | Grégory Claeys; Maria Demertzis |
| Abstract: | This policy contribution was prepared for the Committee on Economic and Monetary Affairs of the European Parliament (ECON) as an input for the Monetary Dialogue of 20 November 2017 between ECON and the President of the ECB. Copyright remains with the European Parliament at all times As the global financial crisis unfolded, the European Central Bank (ECB) and other central banks greatly extended their monetary policy toolboxes and adjusted their operational frameworks. These unconventional monetary policies have left central banks with large balance sheets. As growth picks up in the euro area, there are discussions about how to normalise monetary policy, but it is unclear if normalisation means returning to monetary policy as it was prior to the crisis, or whether there is a ‘new normal’ that would justify different monetary policies. The debate on the optimal size of the central bank’s balance sheet has not yet been settled. We discuss the benefits and drawbacks of central banks having permanently large balance sheets. It might be difficult to reduce them quickly without negatively affecting financial markets. In order to avoid market volatility, this process needs to be done gradually and preferably passively, by holding to maturity assets purchased during the crisis. The interest rate – the central banks’ main conventional tool – might stay at a much lower level than historical standards and closer to the zero-lower bound because of a fall in the neutral rate, implying that in the future monetary policy would have to rely more on balance sheet policies and less on interest rate cuts to provide accommodation during recessions. The combination of these two issues implies that the normalisation of monetary policy will be very slow and entail a long period with a large balance sheet. In the meantime, the ECB will not be able to go back to its pre-crisis operational framework. In terms of the sequencing of the normalisation process, the experience of the US Federal Reserve, which was one of the first central banks to use unconventional tools during the crisis, could provide useful pointers to the ECB. Following the Fed’s example would involve tapering (ie gradually reducing asset purchases), then increasing key policy rates slowly before reducing passively the size of the balance sheet. The Fed’s experience shows that the normalisation process needs to be communicated early in order to reduce uncertainty for market participants and avoid any disruption of financial markets. So far, the ECB has been quite successful in smoothly scaling back its asset purchases, but it has not yet provided a clear vision of what its monetary policy or operational framework will look like at the end of the normalisation process. |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:22931&r=mac |
| By: | Hippolyte W. Balima; Eric G. Kilama; Rene Tapsoba |
| Abstract: | Inflation targeting (IT) has gained much traction over the past two decades, becoming a framework of reference for the conduct of monetary policy. However, the debate about its very merits and macroeconomic consequences remains inconclusive. This paper digs deeper into the issue through a meta-regression analysis (MRA) of the existing literature, making it the first application of a MRA to the macroeconomic effects of IT adoption. Building on 8,059 estimated coefficients from a very broad sample of 113 studies, the paper finds that the empirical literature suffers from two types of publication bias. First, authors, editors and reviewers prefer results featuring beneficial effects of IT adoption on inflation volatility, real GDP growth and fiscal performances; second, they promote results with estimated coefficients that are significantly different from zero. However, after filtering out the publication biases, we still find meaningful (genuine) effects of IT in reducing inflation and real GDP growth volatility, but no significant genuine effects on inflation volatility and the level of real GDP growth. Interestingly, the results indicate that the impact of IT varies systematically across studies, depending on the sample structure and composition, the time coverage, the estimation techniques, country-specific factors, IT implementation parameters, and publication characteristics. |
| Keywords: | Central banks and their policies;Inflation targeting;Meta-regression analysis, Monetary Policy (Targets, Instruments, and Effects) |
| Date: | 2017–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/213&r=mac |
| By: | Santiago Gamba (Banco de la República de Colombia); Oscar Jaulín (Banco de la República de Colombia); Angélica Lizarazo (Banco de la República de Colombia); Juan Carlos Mendoza (Banco de la República de Colombia); Paola Morales (Banco de la República de Colombia); Daniel Osorio (Banco de la República de Colombia); Eduardo Yanquen (Banco de la República de Colombia) |
| Abstract: | This paper presents the first version of SYSMO, the analytical framework employed by the Financial Stability Department at the Banco de la República (the Central Bank of Colombia) to perform its biannual, top-down, stress testing exercise. The framework comprises: (i) a module to produce internally consistent macroeconomic scenarios; (ii) a set of satellite risk models that capture the materialization of credit and market risks in times of stress, and (iii) a bank model that simulates the endogenous response of banks to an adverse scenario. The framework also incorporates endogenous contagion and funding risks, key regulatory constraints (solvency and liquidity), and the feedback effects between the endogenous response of banks and the macroeconomic scenario. The use of SYSMO is illustrated with the example of the stress testing exercise published in the Banco de la República’s Financial Stability Report of the second semester of 2017. Classification JEL: E44, E58, G01, G17, G20. |
| Keywords: | Stress Testing, DSGE Models, VAR models, Credit Risk, Market Risk, Liquidity Risk, Funding Risk, Contagion Risk. |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:1028&r=mac |
| By: | Akinwande A. Atanda; Andrea K. Menclova (University of Canterbury); W. Robert Reed (University of Canterbury) |
| Abstract: | Rising health care costs are a policy concern across the OECD and relatively little consensus exists concerning their causes. One explanation that has received revived attention is Baumol’s Cost Disease (BCD). However, developing a theoretically appropriate test of BCD has been a challenge. In this paper, we construct a two-sector model firmly based on Baumol’s axioms. We then derive several testable propositions. In particular, the model predicts that: 1) the share of total labor employed in the health care sector and (2) the relative price index of the health and non-health care sectors should both be positively related to economy-wide productivity. The model also predicts that (3) the share of labor in the health sector will be negatively related, and (4) the ratio of prices in the health and non-health sectors unrelated, to the demand for non-health services. Using annual data from 28 OECD countries over the years 1995-2016 and from 14 U.S. industry groups over the years 1947-2015, we find little evidence to support the predictions of BCD once we address spurious correlation due to coincident trending and other econometric issues. |
| Keywords: | Baumol’s Cost Disease, health care industry, panel data |
| JEL: | I11 J30 E24 |
| Date: | 2017–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:17/11&r=mac |
| By: | Francisco Arizala; Jesus R Gonzalez-Garcia; Charalambos G Tsangarides; Mustafa Yenice |
| Abstract: | This paper examines the growth performance of sub-Saharan African countries since 1960 through the lens of growth turning points (accelerations and decelerations) and periods of sustained growth (growth spells). Growth accelerations are generally associated with improved external conditions, increased investment and trade openness, declines in inflation, better fiscal balances, and improvements in the institutional environment. Transitioning from growth accelerations to growth spells often requires additional efforts beyond what is needed to trigger an acceleration. Growth spells are sustained by fiscal policy that prevents excessive public debt accumulation, monetary policy geared toward low inflation, outward-oriented trade policies, and structural policies that reduce market distortions, as well as supportive external environment and improvements in democratic institutions. Overall, determinants of growth spells in sub-Saharan Africa are different from those in the rest of the emerging and developing countries. |
| Keywords: | Africa;Angola;Benin;Botswana;Burkina Faso;Burundi;Cameroon;Central African Republic;Chad;Comoros;Djibouti;Equatorial Guinea;Eritrea;Ethiopia;Gabon;Gambia, The;Ghana;Guinea;Guinea-Bissau;Kenya;Lesotho;Liberia;Madagascar;Malawi;Mali;Mauritania;Mauritius;Middle East;Mozambique;Namibia;Niger;Nigeria;Rwanda;Senegal;Seychelles;Sierra Leone;South Africa;Sub-Saharan Africa;Swaziland;Tanzania;Uganda;Togo;Zambia;Zimbabwe;Congo, Democratic Republic of the;Congo, Republic of;Growth, accelerations, duration analysis, Africa JEL Classification Numbers: O11, O47, C41, O55, Macroeconomic Analyses of Economic Development |
| Date: | 2017–09–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/202&r=mac |
| By: | João Barata R. B. Barroso; Rodrigo Barbone Gonzalez; Bernardus F. Nazar Van Doornik |
| Abstract: | This paper estimates the impact of reserve requirements (RR) on credit supply in Brazil, exploring a large dataset with several policy shocks. We use a difference-in-difference strategy; first in a long panel, then in a cross-section exploring the effects of changes in RR on credit. In the first case, we average several RR changes from 2008 to 2015 using a macroprudential policy index. In the second, we use the bank-specific regulatory change to estimate credit supply responses from (1) a countercyclical easing policy implemented to alleviate a credit crunch in the aftermath of the 2008 global crisis; and (2) from its related tightening. We find evidence of a lending channel where more liquid banks mitigate RR policy. Exploring the two phases of countercyclical policy, we find that the easing impacted the lending channel on average two times more than the tightening. Foreign and small banks mitigate theses effects |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:467&r=mac |
| By: | Tarishi Matsuoka; Makoto Watanabe |
| Abstract: | This paper studies banks’ liquidity provision in the Lagos and Wright model of monetary exchanges. With aggregate uncertainty we show that banks sometimes exhaust their cash reserves and fail to satisfy their depositors’ need of consumption smoothing. The banking panics can be eliminated by the zero-interest policy for the perfect risk sharing, but the first best can be achieved only at the Friedman rule. In our monetary equilibrium, the probability of banking panics is endogenous and increases with inflation, as is consistent with empirical evidence. The model derives a rich array of non-trivial effects of inflation on the equilibrium deposit and the bank’s portfolio. |
| Keywords: | money search, monetary equilibrium, banking panic, liquidity |
| JEL: | E40 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6722&r=mac |
| By: | Giannone, Domenico (Federal Reserve Bank of New York); Lenza, Michele (European Central Bank and ECARES); Primiceri, Giorgio E. (Northwestern University, CEPR, and NBER) |
| Abstract: | We propose a class of prior distributions that discipline the long-run predictions of vector autoregressions (VARs). These priors can be naturally elicited using economic theory, which provides guidance on the joint dynamics of macroeconomic time series in the long run. Our priors for the long run are conjugate, and can thus be easily implemented using dummy observations and combined with other popular priors. In VARs with standard macroeconomic variables, a prior based on the long-run predictions of a wide class of theoretical models yields substantial improvements in the forecasting performance. |
| Keywords: | Bayesian vector autoregression; forecasting; overfitting; initial conditions; hierarchical model |
| JEL: | C11 C32 C33 E37 |
| Date: | 2017–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:832&r=mac |
| By: | Dmitry Plotnikov |
| Abstract: | I carry out a business cycle accounting exercise (Chari, Kehoe and McGrattan, 2007) on the U.S. data measured in wage units (Farmer (2010)) for the entire postwar period. In contrast to a conventional approach, this approach preserves common medium-term business cycle fluctuations in GDP, its components and the unemployment rate. Additionally, it facilitates decomposition of the labor wedge into the labor supply and the labor demand wedges. Using this business cycle accounting methodology, I find that in the transformed data, most movements in GDP are accounted for by the labor supply wedge. Therefore, I reverse a key finding of the real business cycle literature which asserts that 70% or more of economic fluctuations can be explained by TFP shocks. In other words, the real business cycle model fits the data badly because the assumption that households are on their labor supply equation is flawed. This failure is masked by data that has been filtered with a conventional approach that removes fluctuations at medium frequencies. My findings are consistent with the literature on incomplete labor markets. |
| Keywords: | Unemployment;United States;Western Hemisphere;Business cycles;labor wedge, Forecasting and Simulation, Demand and Supply, Energy and the Macroeconomy |
| Date: | 2017–09–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/201&r=mac |
| By: | Frédérique Bec (Thema, University of Cergy-Pontoise); Raouf Boucekkine (Aix-Marseille Univ. (Aix-Marseille School of Economics), CNRS, EHESS and Centrale Marseille); Caroline Jardet (Banque de France, DGEI-DCPM, Paris) |
| Abstract: | This paper proposes a theoretical model of forecasts formation which implies that in presence of information observation and forecasts communication costs, rational professional forecasters might find it optimal not to revise their forecasts continuously, or at any time. The threshold time- and state-dependence of the observation review and forecasts revisions implied by this model are then tested using inflation forecast updates of professional forecasters from recent Consensus Economics panel data for France and Germany. Our empirical results support the presence of both kinds of dependence, as well as their threshold-type shape. They also imply an upper bound of the optimal time between two information observations of about six months and the co-existence of both types of costs, the observation cost being about 1.5 times larger than the communication cost. |
| Keywords: | forecast revision, binary choice models, information and communication costs |
| JEL: | C23 D8 E31 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1744&r=mac |
| By: | Sangyup Choi; Davide Furceri; Prakash Loungani; Saurabh Mishra; Marcos Poplawski-Ribeiro |
| Abstract: | We study the impact of fluctuations in global oil prices on domestic inflation using an unbalanced panel of 72 advanced and developing economies over the period from 1970 to 2015. We find that a 10 percent increase in global oil inflation increases, on average, domestic inflation by about 0.4 percentage point on impact, with the effect vanishing after two years and being similar between advanced and developing economies. We also find that the effect is asymmetric, with positive oil price shocks having a larger effect than negative ones. The impact of oil price shocks, however, has declined over time due in large part to a better conduct of monetary policy. We further examine the transmission channels of oil price shocks on domestic inflation during the recent decades, by making use of a monthly dataset from 2000 to 2015. The results suggest that the share of transport in the CPI basket and energy subsidies are the most robust factors in explaining cross-country variations in the effects of oil price shocks during the this period. |
| Keywords: | Monetary policy;JEL Classification Numbers: E31, E37, Q43 Keywords: oil price shocks, inflation pass-through, local projections, oil price shocks, Forecasting and Simulation, Energy and the Macroeconomy, Q43, Keywords: oil price shocks |
| Date: | 2017–09–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/196&r=mac |
| By: | Fabiano Schivardi; Enrico Sette; Guido Tabellini |
| Abstract: | Do banks with low capital extend excessive credit to weak firms, and does this matter for aggregate efficiency? Using a unique dataset that covers almost all bank-firm relationships in Italy in the period 2004-2013, we find that during the Eurozone financial crisis (i) undercapitalized banks were less likely to cut credit to non-viable firms; (ii) credit misallocation increased the failure rate of healthy firms and reduced the failure rate of non-viable firms and (iii) nevertheless, the adverse effects of credit misallocation on the growth rate of healthier firms were negligible, as were the effects on TFP dispersion. This goes against previous influential findings, which, we argue, face serious identification problems. Thus, while banks with low capital can be an important source of aggregate inefficiency in the long run, their contribution to the severity of the great recession via capital misallocation was modest. |
| Keywords: | bank capitalization, zombie lending, capital misallocation |
| JEL: | D23 E24 G21 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:669&r=mac |
| By: | Garriga, Carlos (Federal Reserve Bank of St. Louis) |
| Abstract: | In this paper, we explore the proposition that the optimal capital income tax is zero using an overlapping generations model. We prove that for a large class of preferences, the optimal capital income tax along the transition path and in steady state is non-zero. For a version of the model calibrated to the US economy, we find that the model could justify the observed rates of capital income taxation for an empirically reasonable intertemporal utility function and a robust demographic structure. |
| Keywords: | Optimal taxation; uniform commodity taxation |
| JEL: | E62 H21 |
| Date: | 2017–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2017-032&r=mac |
| By: | Gerhard Illing; Yoshiyasu Ono; Matthias Schlegl |
| Abstract: | Why do advanced economies fall into prolonged periods of economic stagnation, particularly in the aftermath of credit booms? We present a model of persistent aggregate demand shortage based on strong liquidity preferences of households, in which we incorporate financial imperfections to study the interactions between debt, liquidity and asset prices. We show that financially more deregulated economies are more likely to experience persistent stagnation. In the short run, credit booms can mask this structural aggregate demand deficiency. However, the resulting debt overhang permanently depresses spending in the long run since deleveraging becomes self-defeating because of debt deflation. These findings are in line with the macroeconomic developments in Japan during its lost decades and other advanced economies before and during the Great Recession. |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0988r&r=mac |
| By: | Theologos Dergiades; Costas Milas; Theodore Panagiotidis |
| Abstract: | An effective inflation targeting (IT) regime assumes both a change in the stationarity properties of inflation and a lower variability. Within a framework that does not make a priori assumptions about the order of integration, we examine whether there is a change in the inflation persistence in forty-five, developed and developing, countries and in three groups of countries, the G7, the OECD, and OECD Europe. For the inflation targeters, we find that the endogenously identified break dates are not consistent with the formal adoption of the IT regime. We employ a test for the variability of inflation that tracks how frequently inflation variability is in control. Logit analysis reveals that inflation targeters do not experience a greater probability than non-inflation targeters of inflation persistence changing, and they are not more in control of their inflation variability. The quality of institutions emerges as being more significant for taming inflation |
| Keywords: | structural change, persistence change, inflation targeting |
| JEL: | C12 E4 E5 |
| Date: | 2017–11–09 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2017-11&r=mac |
| By: | Matteo Cacciatore; Romain A Duval; Giuseppe Fiori; Fabio Ghironi |
| Abstract: | This paper studies the impact of product and labor market reforms when the economy faces major slack and a binding constraint on monetary policy easing. such as the zero lower bound. To this end, we build a two-country model with endogenous producer entry, labor market frictions, and nominal rigidities. We find that while the effect of market reforms depends on the cyclical conditions under which they are implemented, the zero lower bound itself does not appear to matter. In fact, when carried out in a recession, the impact of reforms is typically stronger when the zero lower bound is binding. The reason is that reforms are inflationary in our structural model (or they have no noticeable deflationary effects). Thus, contrary to the implications of reduced-form modeling of product and labor market reforms as exogenous reductions in price and wage markups, our analysis shows that there is no simple across-the-board relationship between market reforms and the behavior of real marginal costs. This significantly alters the consequences of the zero (or any effective) lower bound on policy rates. |
| Date: | 2017–10–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/215&r=mac |
| By: | Verstegen, Loes (Tilburg University, School of Economics and Management) |
| Abstract: | This dissertation consists of three chapters on fiscal and monetary integration in Europe. The first chapter investigates quantitatively the benefits from participation in the Economic and Monetary Union for individual Euro area countries. The synthetic control method is used to estimate how real GDP per capita would have developed for the EMU member states, if those countries had not joined the EMU. The estimates show that most countries have profited from having the euro, though the crisis leads to negative effects of EMU membership. The PIGS countries in particular would have been better off if they had not been an EMU member during the crisis. The second chapter examines the effectiveness of an automatic fiscal transfer mechanism for the Economic and Monetary Union. A transfer scheme is incorporated into a DSGE model for a monetary union with an extensive fiscal sector. Using a heterogeneous setup, the model is estimated for the North and the South of Europe using Bayesian methods. The transfer mechanism is shown to be effective in stabilizing the economy of the southern block of countries during the financial crisis, although the total welfare effect for the EMU is negative, though small. Ex ante, a transfer mechanism would be beneficial for both the North and the South in terms of welfare and stabilization purposes. In the third chapter, an EMU-wide unemployment insurance is incorporated into an estimated DSGE model for the Euro area. The European unemployment benefit scheme, if introduced in 2013 replacing the regional systems, would have had positive risk sharing effects on the North and the South. If this introduction would have led to a higher level of the unemployment benefit in a region, unemployment would have increased. Ex ante, the European unemployment benefit scheme would be beneficial for both the northern and southern block of countries in terms of welfare and stabilization of employment. Labor market harmonization would lead to higher gains from European unemployment insurance. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiutis:49f73a6c-d32d-4dff-b5ec-4068b371a643&r=mac |
| By: | Hadjinikolov, Dimitar |
| Abstract: | Over the last few years the European Union has experienced crises. It is sufficient to mention, for instance, Brexit or the defeat of Matteo Renzi in Italy’s referendum. Populism and Euroscepticism have been growing. One reason for this is social discontent. The question then arises - how is it possible to have social discontent in one of the most economically developed parts of the world with such a high GDP per capita? In order to understand this phenomenon, we need to approach the notion of "poverty" within the framework of Europe. It is true that the poor in the EU are not deprived of food and essential necessities, as is the case in some other regions of the world, but they consider themselves as poor and underprivileged because they are neglected by society, they cannot find realization, they are turned into passive users of social security benefits. To resolve this issue is not to increase social assistance but to develop policies and programs that are mainly oriented towards the needs of people - education, medicine, culture. In the EU, these policies remain within the exclusive competence of national states. This creates great inequalities. Four different social models have emerged in the EU – Scandinavian, Continental, Mediterranean, and recently the Globalization model, which is least related to the traditions of the European social market economy, but seems to be gaining ground. If the European Union wants to achieve greater sustainability, it has to focus more on the social aspect of its activities and expand its competences in the social affairs and to develop a single EU social model. |
| Keywords: | European Union, social sustainability, new poverty, Euroscepticism |
| JEL: | E62 E64 I3 Q01 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:81566&r=mac |
| By: | Yuriy Gorodnichenko; Byoungchan Lee |
| Abstract: | We propose and study properties of several estimators of variance decomposition in the local-projections framework. We find for empirically relevant sample sizes that, after being bias corrected with bootstrap, our estimators perform well in simulations. We also illustrate the workings of our estimators empirically for monetary policy and productivity shocks. |
| JEL: | C53 E37 E47 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23998&r=mac |
| By: | Crosignani, Matteo (Federal Reserve Board); Faria-e-Castro, Miguel (Federal Reserve Bank of St. Louis); Fonseca, Luis (London Business School) |
| Abstract: | We study the design of lender of last resort interventions and show that the provision of long-term liquidity incentivizes purchases of high-yield short-term securities by banks. Using a unique security-level data set, we find that the European Central Bank's three-year Long-Term Refinancing Operation caused Portuguese banks to purchase short-term domestic government bonds that could be pledged to obtain central bank liquidity. This "collateral trade" effect is large, as banks purchased short-term bonds equivalent to 10.6% of amounts outstanding. The steepening of peripheral sovereign yield curves after the policy announcement is consistent with the equilibrium effects of the collateral trade. |
| Keywords: | Lender of Last Resort; Unconventional Monetary Policy; Collateral; Sovereign Debt; Eurozone Crisis |
| JEL: | E58 G21 G28 H63 |
| Date: | 2017–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2017-039&r=mac |
| By: | Pedro Brinca; Miguel H. Ferreira; Francesco Franco; Hans A. Holter; Laurence Malafry |
| Abstract: | Following the Great Recession, many European countries implemented fiscal con- solidation policies aimed at reducing government debt. Using three independent data sources and three different empirical approaches, we document a strong positive re- lationship between higher income inequality and stronger recessive impacts of fiscal consolidation programs across time and place. To explain this finding, we develop a life-cycle, overlapping generations economy with uninsurable labor market risk. We calibrate our model to match key characteristics of a number of European economies, in- cluding the distribution of wages and wealth, social security, taxes and debt, and study the effects of fiscal consolidation programs. We find that higher income risk induces precautionary savings behavior, which decreases the proportion of credit-constrained agents in the economy. Credit-constrained agents have less elastic labor supply re- sponses to fiscal consolidation achieved through either tax hikes or public spending cuts, and this explains the relationship between income inequality and the impact of fiscal consolidation programs. Our model produces a cross-country correlation between inequality and the fiscal consolidation multipliers, which is quite similar to that in the data. JEL codes: E21, E62, H31, H50 |
| Keywords: | fiscal consolidation, income inequality, fiscal multipliers, public debt, income risk |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:unl:unlfep:wp617&r=mac |
| By: | Sergio Salas; Javier Núñez |
| Abstract: | What are the consequences of asymmetry of information about the future state of the economy between a benevolent Central Bank (CB) and private agents near the zero lower bound? How is the conduct of monetary policy modified under such a scenario? We propose a game theoretical signaling model, where the CB has better information than private agents about a future shock hitting the economy. The policy rate itself is the signal that conveys information to private agents in addition to its traditional role in the monetary transmission mechanism. We find that only multiple "pooling equilibria" arise in this environment, where a CB privately forecasting a contraction will most likely follow a less expansionary policy compared to a complete information context, in order to avoid making matters worse by revealing bad times ahead. On the other hand, a CB privately forecasting no contraction is most likely to distort its complete information policy rate, the consequences of which are welfare detrimental. However, this is necessary because deviating from the pooling policy rate would be perceived by private agents as an attempt to mislead them into believing that a contraction is not expected, which would be even more harmful for society. |
| Keywords: | Monetary Policy, Signaling, Zero lower bound |
| JEL: | E58 C72 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:ucv:wpaper:2017-02&r=mac |
| By: | David Haab; Thomas Nitschka |
| Abstract: | Stylized facts of asset return predictability are mainly based on evidence from the US, a large, closed economy, and, hence, are not necessarily representative of small, open economies. Furthermore, discountrate news mainly drive US asset returns. This is not the case in other economies. We use Switzerland as example to highlight the importance of these issues and to assess the impact of global risks on the predictability of asset returns of a small, open economy. We find that the forecast ability of the best Swiss predictive variable varies over time. This time variation is linked to global foreign currency risks. |
| Keywords: | bond market, business cycle, foreign exchange rate, predictability, risk premium, stock market |
| JEL: | E32 F31 G15 G17 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2017-14&r=mac |
| By: | Jessica Foo; Lek-Heng Lim; Ken Sze-Wai Wong |
| Abstract: | Peer-to-peer (P2P) lending is a fast growing financial technology (FinTech) trend that is displacing traditional retail banking. Studies on P2P lending have focused on predicting individual interest rates or default probabilities. However, the relationship between aggregated P2P interest rates and the general economy will be of interest to investors and borrowers as the P2P credit market matures. We show that the variation in P2P interest rates across grade types are determined by three macroeconomic latent factors formed by Canonical Correlation Analysis (CCA) - macro default, investor uncertainty, and the fundamental value of the market. However, the variation in P2P interest rates across term types cannot be explained by the general economy. |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1710.11283&r=mac |
| By: | Feld, Lars P.; Köhler, Ekkehard A.; Nientiedt, Daniel |
| Abstract: | Ordoliberalism is often accused as being responsible for Germany's policy stance during the Eurozone crisis. Ordoliberalism originates from the so-called Freiburg School of Economics, founded by Walter Eucken during the 1930s at the University of Freiburg, which is in fact in Germany. It is however neither true that ordoliberal thought has continuously been predominant and a prevailing idea in German macroeconomic policy, nor that it is responsible for Germany's policy stance during the crisis in EMU. In this paper, we show why a proper analysis must arrive at this conclusion by referring to Eucken's thinking and the development of German ordoliberalism across time in relation to the "Rules vs. Discretion" debate and to Constitutional Economics. Although ordoliberalism may have had some influence on the design of EMU, pragmatism, the status-quo and national interests are dominant in German economic policy. |
| Keywords: | Ordoliberalism,Eurozone Crisis,Constitutional Economics,Monetary and Fiscal Policy |
| JEL: | B13 B26 B31 D78 E61 E63 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:aluord:1703&r=mac |
| By: | Pablo Duarte; Gunther Schnabl |
| Abstract: | Based on the concepts of justice by Hayek, Rawls and Buchanan we argue that the growing political dissatisfaction in industrialized countries is rooted in the asymmetric pattern in monetary policies since the 1980s for two reasons. First, the structurally declining interest rates and the unconventional monetary policy measures have granted privileges to specific groups. Second, the increasingly expansionary monetary policies have negative growth effects, which reduce the scope for compensation of the ones excluded from the privileges. The result is the fading acceptance of the economic order and growing political instability. |
| Keywords: | Hayek, Rawls, Buchanan, privileges, inequality, monetary policy, order of rules, difference principle, economic order |
| JEL: | D63 E02 E52 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6734&r=mac |
| By: | Abbas, Malaika |
| Abstract: | The paper quantifies the various costs incurred due to power outages in Punjab by the small scale manufacturing sector. The previous studies that calculated the cost of power outrages have focused at a national level only. The type of costs identified are: Direct Costs like spoilage cost and value of output loss and Adjustment Costs like inbuilt power generation costs (capital cost, fuel cost, operation and maintenance costs of generators etc.) and costs of other adjustments. The methodology used for quantifying the cost of outages is based largely on Pasha, et al. (1989). In conclusion, the paper estimates that the total outage cost for small scale industry of Punjab for 2012 is almost Rs. 21 billion which accounts for 12.4 percent of small scale manufacturing value added. Policy recommendations are made to mitigate the impact of load shedding. |
| Keywords: | Punjab Power outages Direct Costs Adjustment Costs Small Scale Manufacturing |
| JEL: | E2 E23 H4 P41 P42 P48 R11 |
| Date: | 2016–10–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:81264&r=mac |
| By: | Ojo, Marianne |
| Abstract: | Information sharing, as a means of resource generating capabilities – as well as mitigating information gaps which present challenges to the development of innovative techniques, has also been facilitated through information technology, the rise of the digital economy and resources which avail from the rapidly advancing era of information technology. To what extent are our creative abilities still motivated and stimulated? Can an unhealthy balance and level of competition serve as a deterrent to constructive innovation? This paper attempts to investigate – as well as appreciate the role of information technology in generating economic stimulus and development – particularly in a world where budding entrepreneurs and innovation constitute key elements in addressing poverty alleviating initiatives. It also aims to highlight why, whilst certain geniuses may still exist, it is certainly evident that the current environment does not really stimulate or generate the same enthusiasm or kind of magical revolution that took place during the Golden Age. |
| Keywords: | competition; innovation; information technology; digital economy; the Magic Flute; the Knowledge Based Economy |
| JEL: | E6 F1 F12 F18 K2 M40 M41 Q5 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:82217&r=mac |
| By: | Zineddine Alla; Raphael A Espinoza; Atish R. Ghosh |
| Abstract: | We develop an open economy New Keynesian Model with foreign exchange intervention in the presence of a financial accelerator mechanism. We obtain closed-form solutions for the optimal interest rate policy and FX intervention under discretionary policy, in the face of shocks to risk appetite in international capital markets. The solution shows that FX intervention can help reduce the volatility of the economy and mitigate the welfare losses associated with such shocks. We also show that, when the financial accelerator is strong, the risk of multiple equilibria (self-fulfilling currency and inflation movements) is high. We determine the conditions under which indeterminacy can occur and highlight how the use of FX intervention reinforces the central bank’s credibility and limits the risk of multiple equilibria. |
| Keywords: | Foreign exchange;Central banks and their policies;Central bank reserves; Speculative attack; Portfolio balance model; Equilibrium determinacy; Capital flows; Capital controls; Open Economy New Keynesian Model, Central bank reserves, Speculative attack, Portfolio balance model, Equilibrium determinacy, Capital flows, Capital controls, Open Economy New Keynesian Model, Monetary Policy (Targets, Instruments, and Effects) |
| Date: | 2017–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/207&r=mac |
| By: | Nwanne, Nkem |
| Abstract: | Literature on the classical dichotomy has focused on single economies with empirical evidence either substantiating or refuting the neutrality of money hypothesis. However this paper focuses on the neutrality of foreign money supply – in this case the US broad money supply – and its neutrality in both the long and short run on the real and nominal variables of the Nigerian economy. Based on data culled from the World Development Indicators (WDI) and time series methods such as the Augmented Dickey Fuller test, Johansen trace and maximum eigen value tests and the Vector Error Correction estimation; the US money supply was found to be non-neutral in both the long and short runs. US monetary policy was found to have profound impact on Nigerian interest rates followed by the consumer price index and the gross domestic product. This paper concludes that the US monetary policy must be a veritable factor considered in the design of monetary policy rules. |
| Keywords: | Neutrality, US Money Supply, Interest Rate, Consumer Price Index, Gross Domestic Product |
| JEL: | E51 |
| Date: | 2017–10–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:82227&r=mac |
| By: | Elsby, Michael (University of Edinburgh); Michaels, Ryan (Federal Reserve Bank of Philadelphia); Ratner, David (Board of Governors of the Federal Reserve System) |
| Abstract: | Labor market frictions are able to induce sluggish aggregate employment dynamics. However, these frictions have strong implications for the source of this propagation: They distort the path of aggregate employment by impeding the flow of labor across firms. For a canonical class of frictions, we show how observable measures of such flows can be used to assess the effect of frictions on aggregate employment dynamics. Application of this approach to establishment microdata for the United States reveals that the empirical flow of labor across firms deviates markedly from the predictions of canonical labor market frictions. Despite their ability to induce persistence in aggregate employment, firm-size flows in these models are predicted to respond aggressively to aggregate shocks but react sluggishly in the data. This paper therefore concludes that the propagation mechanism embodied in standard models of labor market frictions fails to account for the sources of observed employment dynamics. |
| Keywords: | Labor market frictions; firm dynamics; adjustment costs |
| JEL: | E32 J63 J64 |
| Date: | 2017–11–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:17-40&r=mac |
| By: | Davide Furceri; Bin Grace Li |
| Abstract: | This paper provides new empirical evidence of the macroeconomic effects of public investment in developing economies. Using public investment forecast errors to identify unanticipated changes in public investment, the paper finds that increased public investment raises output in the short and medium term, with an average short-term fiscal multiplier of about 0.2. We find some evidence that the effects are larger: (i) during periods of slack; (ii) in economies operating with fixed exchange rate regimes; (iii) in more closed economies; (iv) in countries with lower public debt; and (v) in countries with higher investment efficiency. Finally, we show that increases in public investment tend to lower income inequality. |
| Keywords: | Fiscal policy;Public investment;Growth, Inequality, Demand and Supply, Energy and the Macroeconomy, Government Policy |
| Date: | 2017–10–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/217&r=mac |
| By: | Margherita Borella; Mariacristina De Nardi; Fang Yang |
| Abstract: | In the U.S., both taxes and old age Social Security benefits explicitly depend on one's marital status. We study the effects of eliminating these marriage-related provisions on the labor supply and savings of two different cohorts. To do so, we estimate a rich life-cycle model of couples and singles using the Method of Simulated Moments (MSM) on the 1945 and 1955 birth-year cohorts. Our model matches well the life cycle profiles of labor market participation, hours, and savings for married and single people and generates plausible elasticities of labor supply. We find that these marriage-related provisions reduce the participation of married women over their life cycle, the participation of married men after age 55, and the savings of couples. These effects are large for both the 1945 and 1955 cohorts, even though the latter had much higher labor market participation of married women to start with. |
| JEL: | E21 H3 H31 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23972&r=mac |
| By: | Arvind Krishnamurthy; Stefan Nagel; Annette Vissing-Jorgensen |
| Abstract: | We evaluate the effects of three ECB policies (the Securities Markets Programme, the Outright Monetary Transactions, and the Long-Term Refinancing Operations) on government bond yields. We use a novel Kalman-filter augmented event-study approach and yields on euro-denominated sovereign bonds, dollar-denominated sovereign bonds, corporate bonds, and corporate CDS rates to understand the channels through which policies reduced sovereign bond yields. On average across Italy, Spain and Portugal, considering both the Securities Markets Programme and the Outright Monetary Transactions, yields fall considerably. Decomposing this fall, default risk accounts for 37% of the reduction in yields, reduced redenomination risk for 13%, and reduced market segmentation effects for 50%. Stock price increases in distressed and core countries suggest that these policies also had beneficial macro-spillovers. |
| JEL: | E4 G01 G18 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23985&r=mac |
| By: | Kaplan, Robert S. (Federal Reserve Bank of Dallas) |
| Date: | 2017–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddsp:169&r=mac |
| By: | Martín Saldías |
| Abstract: | This paper analyzes the nonlinear relationship between monetary policy and financial stress and its effects on the transmission of shocks to output. Results from a Bayesian Threshold Vector Autoregression (TVAR) model show that the effects of monetary policy shocks on output growth are stronger during normal times than during times of financial stress. Monetary policy shocks are effective to ease stressed financial conditions, but have limited ability to fully contain the buildup of vulnerabilities. These results have important policy implications for central banks’ countercyclical policies under different financial conditions and for “lean against the wind” policies to address financial vulnerabilities. |
| Date: | 2017–08–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/184&r=mac |
| By: | Hong, Sungki (Federal Reserve Bank of St. Louis) |
| Abstract: | Many models in the business cycle literature generate counter-cyclical price markups. This paper examines if the prominent models in the literature are consistent with the empirical findings of micro-level markup behavior in Hong (2016). In particular, I test the markup behavior of the following two models: (i) an oligopolistic competition model, and (ii) a New Keynesian model with heterogeneous price stickiness. First, I explore the Atkeson and Burstein (2008) model of oligopolistic competition, in which markups are an increasing function of firm market shares. Coupled with an exogenous uncertainty shock as in Bloom (2009), i.e. a second-moment shock to firm productivities in recessions, this model results in a countercyclical average markup, as in the data. However, in contrast with the data, this model predicts that smaller firms reduce their markups. Second, I calibrate both Calvo and menu cost models of price stickiness to match the empirical heterogeneity in price durations across small and large firms, as in Goldberg and Hellerstein (2011). I find that both models can match the average counter-cyclicality of markups in response to monetary shocks. Furthermore, since small firms adjust prices less frequently, they exhibit greater markup counter-cyclicality, consistent with the empirical patterns. Quantitatively, however, only the menu cost model, through its selection effect, can match the extent of the empirical heterogeneity in markup cyclicality. In addition, both sticky price models imply pro-cyclical markup behavior in response to productivity shocks. |
| Date: | 2017–09–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2017-034&r=mac |
| By: | Ambrogio Cesa-Bianchi; Emilio Fernández Corugedo |
| Abstract: | Are uncertainty shocks a major source of business cycle fluctuations? This paper studies the effect of a mean preserving shock to the variance of aggregate total factor productivity (macro uncertainty) and to the dispersion of entrepreneurs' idiosyncratic productivity (micro uncertainty) in a financial accelerator DSGE model with sticky prices. It explores the different mechanisms through which uncertainty shocks are propagated and amplified. The time series properties of macro and micro uncertainty are estimated using U.S. aggregate and firm-level data, respectively. While surprise increases in micro uncertainty have a larger impact on output than macro uncertainty, these account for a small (non-trivial) share of output volatility. |
| Keywords: | Business cycles;Uncertainty shocks, Credit frictions, uncertainty, General, Financial Markets and the Macroeconomy |
| Date: | 2017–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/211&r=mac |
| By: | McInish, Thomas (University of Memphis); Neely, Christopher J. (Federal Reserve Bank of St. Louis); Planchon, Jade (Rhodes College, Memphis, TN) |
| Abstract: | In November 2008, the Federal Reserve announced the first of a series of unconventional monetary policies, which would include asset purchases and forward guidance, to reduce long-term interest rates. We investigate the behavior of shorts, considered sophisticated investors, before and after FOMC announcements not fully anticipated in spot bond markets. Short interest in Treasury and agency securities declined prior to expansionary anouncements, indicating shorts anticipated these surprises, and declined further after these announcements. The failure of shorts to reinstitute their positions after the last purchase announcement confirms that the Fed convinced sophisticated investors that interest rates would remain low. |
| Date: | 2017–10–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2017-031&r=mac |
| By: | David Cuberes (Clark University); Marc Teignier (Universitat de Barcelona) |
| Abstract: | In this paper, survey data are used to document the presence of gender gaps in selfemployment, employership, and labor force participation in seven Balkan countries and Turkey. The paper examines the quantitative effects of the gender gaps on aggregate productivity and income per capita in these countries. In the model used to carry out this calculation, agents choose between being workers, self-employed, or employers, and women face several restrictions in the labor market. The data display very large gaps in labor force participation and in the percentage of employers and self-employed in the labor force. In almost all cases, these gaps reveal a clear underrepresentation of women. The calculations show that, on average, the loss associated with these gaps is about 17 percent of income per capita. One-third of this loss is due to distortions in the choice of occupations between men andwomen. The remaining two-thirds corresponds to the costs associated with gaps in labor force participation. The dimensions of these gender gaps and their associated costs vary considerably across ages groups, with the age bracket 36–50 years being responsible for most of the losses. |
| Keywords: | gender inequality, entrepreneurship talent, factor allocation, aggregate productivity, span of control, Balkans, Turkey |
| JEL: | E2 J21 J24 O40 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:xrp:wpaper:xreap2017-10&r=mac |
| By: | Alexander Guschanski; Engelbert Stockhammer |
| Abstract: | This paper analyses the emergence of current account imbalances as a result of the co-existence of trade flows and financial flows. The literature has tended to view these factors in isolation: many post-Kaleckian models, as well as Net-saving approaches assume that financial flows will adjust to trade flows. Models focusing on financial crises feature a strong role for financial flows but ignore drivers of trade flows. Similarly, empirical analyses either ignore drivers of financial flows or insufficiently capture determinants of trade flows. The paper, first, proposes a simple macroeconomic framework of the current account which gives equal emphasis to trade flows, determined by price competitiveness, and financial flows, determined by asset prices. Second, we test a reduced form of the model for 28 OECD countries for the period 1971-2014. Our results indicate that cost competitiveness as well as asset prices play a role in the determination of current accounts, but asset prices have dominated in the last two decades. |
| Keywords: | current account, financial flows, competitiveness, asset prices |
| JEL: | E12 F32 F41 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:pke:wpaper:pkwp1716&r=mac |
| By: | Ogura, Yoshiaki |
| Abstract: | We examine the significance of the distortionary effect of the collateral requirement to investments in assets pledgeable for collateral by small and medium-sized enterprises (SMEs). The theory predicts that the binding collateral constraint causes over-investment if the price of pledgeable assets is expected to go up steeply while it causes under-investment otherwise. Our structural estimation of the Euler equation under a collateral constraint using the dataset on Japanese SMEs in the 1980s and 1990s shows that the collateral constraint is binding when the price of a pledgeable asset is declining, whereas it is not when the price is increasing. This finding indicates that the binding collateral constraint causes mainly the problem of under-investment for many SMEs in a recession and casts doubt on the welfare effect of the loan-to-value (LTV) ratio cap as a macroprudence policy. |
| Keywords: | collateral constraint, investment, small and medium-sized enterprises, real estate price, loan-to-value ratio |
| JEL: | E22 G31 R30 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:hit:remfce:73&r=mac |
| By: | Bullard, James B. (Federal Reserve Bank of St. Louis) |
| Date: | 2017–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlps:294&r=mac |
| By: | Mariacristina De Nardi; Svetlana Pashchenko; Ponpoje Porapakkarm |
| Abstract: | Health shocks are an important source of risk. People in bad health work less, earn less, face higher medical expenses, die earlier, and accumulate much less wealth compared to those in good health. Importantly, the dynamics of health are much richer than those implied by a low-order Markov process. We first show that these dynamics can be parsimoniously captured by a combination of some lag-dependence and ex-ante heterogeneity, or health types. We then study the effects of health shocks in a structural life-cycle model with incomplete markets. Our estimated model reproduces the observed inequality in economic outcomes by health status, including the income-health and wealth-health gradients. Our model has several implications concerning the pecuniary and non-pecuniary effects of health shocks over the life-cycle. The (monetary) lifetime costs of bad health are very concentrated and highly unequally distributed across health types, with the largest component of these costs being the loss in labor earnings. The non-pecuniary effects of health are very important along two dimensions. First, individuals value good health mostly because it extends life expectancy. Second, health uncertainty substantially increases lifetime inequality by affecting the variation in lifespans. |
| JEL: | E21 H31 I14 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23963&r=mac |
| By: | Duernecker, Georg; Herrendorf, Berthold |
| Abstract: | Basic theory suggests that increases in labor-income taxes induce people to substitute household production for market work. Time-use surveys for 12 OECD countries during 1970-2010, however, show that instead people substituted leisure for market work. To understand why this happened, we carefully measure the labor productivity of household production and find that it grew strongly in many countries of our sample. Employing a calibrated model of household production, we show that strong growth in the labor productivity of household production implies that leisure absorbs the reductions in market work after labor-income tax increases. |
| Keywords: | Household production; income tax; labor productivity; leisure |
| JEL: | E1 J4 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12393&r=mac |
| By: | Benjamin Born (Centre For Economic Policy Research; University of Bonn); Gernot J. Müller (Centre For Economic Policy Research; University of Tübingen); Moritz Schularick (Centre For Economic Policy Research; University of Bonn); Petr Sedlacek (Centre For Economic Policy Research; Centre for Macroeconomics (CFM); University of Oxford) |
| Abstract: | This paper introduces a data-driven, transparent and unbiased method to calculate the economic costs of the Brexit vote in June 2016. We let a matching algorithm determine a combination of comparison economies that best resembles the growth path of the UK economy before the Brexit referendum. The economic cost of the Brexit vote is the difference in output between the UK economy and and its synthetic doppelganger. We show that, contrary to public perception, by the third quarter of 2017 the economic costs of the Brexit vote are already 1.3% of GDP. The cumulative costs amount to almost 20 billion pounds and are expected to grow to more than 60 billion pounds by end-2018. We provide evidence that heightened policy uncertainty has already taken a toll on investment and consumption. |
| Keywords: | Brexit, European Union, Policy uncertanity, Synthetic control method |
| JEL: | E65 F13 F42 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1738&r=mac |
| By: | Calisto Guambe; Rodwell Kufakunesu |
| Abstract: | We discuss an optimal investment, consumption and insurance problem of a wage earner under inflation. Assume a wage earner investing in a real money account and three asset prices, namely: a real zero coupon bond, the inflation-linked real money account and a risky share described by jump-diffusion processes. Using the theory of quadratic-exponential backward stochastic differential equation (BSDE) with jumps approach, we derive the optimal strategy for the two typical utilities (exponential and power) and the value function is characterized as a solution of BSDE with jumps. Finally, we derive the explicit solutions for the optimal investment in both cases of exponential and power utility functions for a diffusion case. |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1711.01760&r=mac |
| By: | Frieling, Julius (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN)); Madlener, Reinhard (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN)) |
| Abstract: | Since the Industrial Revolution, the economy of the UK has transformed from that of an industrial manufacturing giant to a service economy and a central hub for the financial sector. Energy and energy services derived from fossil fuels have played a key role as drivers behind this structural change. Using data from 1855—2015 on capital, labor, and energy in a CES production function, we show that during this period input factors were mostly gross complements. However, between 1960 and 1980, the elasticity of substitution of energy increased substantially, from around 0.7 to more than 2.4. These high elasticity estimates were not permanent, and this wave of change that characterized the transition has since dissipated. Elasticities have since returned to even lower values around 0.3, indicating that energy services which depend primarily on fossil fuel inputs, such as transportation, pose a serious limit to the efficacy of efforts aimed at reducing fossil fuel consumption. |
| Keywords: | Elasticity of substitution; Energy inputs; Aggregate Production; Industrialization; Structural change |
| JEL: | E13 E23 N10 Q43 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:ris:fcnwpa:2017_007&r=mac |
| By: | Jaremski, Matthew (Colgate University); Wheelock, David C. (Federal Reserve Bank of St. Louis) |
| Abstract: | Bank lending booms and asset price booms are often intertwined. Although a fundamental shock might trigger an asset boom, aggressive lending can push asset prices higher, leading to more lending, and so on. Such a dynamic seems to have characterized the agricultural land boom surrounding World War I. This paper examines i) how banks responded to the asset price boom and how they were affected by the bust; ii) how various banking regulations and policies influenced those effects; and iii) how bank lending contributed to rising farm land values in the boom, and how bank closures contributed to falling prices in the bust. We find that rising crop prices encouraged bank entry and balance sheet expansion in agriculture counties. State deposit insurance systems amplified the impact of rising crop prices on the size and risk of bank portfolios, while higher minimum capital requirements dampened the effects. Further, increases in county farm land values and mortgage debt were correlated with the number of local banks ex ante and increases in bank loans during the boom. When farm land prices collapsed, banks that had responded most aggressively to the asset boom had a higher probability of closing, while counties with more bank closures experienced larger declines in land prices than can be explained by falling crop prices alone. |
| Keywords: | Asset booms and busts; banks; bank lending; bank entry; bank closure; deposit insurance; regulation |
| JEL: | E58 N21 N22 |
| Date: | 2017–11–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2017-036&r=mac |
| By: | Muhammad Kabir Salihu; Andrea Guariso |
| Abstract: | Do changes in the distribution of rainfall between ethnic groups increase the risk of armed conflicts within Nigeria? In this paper, we exploit variation in rainfall during the growing season, to study how resource inequality between ethnic groups affects the risks of violent conflicts in Nigeria. Our main results show that a one standard deviation change in between-group rainfall inequality during the growing season increases civil conflicts prevalence in Nigeria by about seven percentage points. This relationship is driven, in part, by declining social capital. Specifically, we demonstrated that an unequal distribution of rainfall between ethnic groups reinforces citizens grievances over government performance and creates mistrust between predominantly farming communities and those engaged in nomadic herding. The analysis highlights the need to develop conflict-sensitive mitigation and adaptation strategies to reduce the adverse effects of climatic shock. |
| Keywords: | Conflict, Inequality, Rainfall, Trust, Nigeria |
| JEL: | D63 D74 E01 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:lan:wpaper:205618510&r=mac |
| By: | Michael Jetter; Saskia Moesle; David Stadelmann |
| Abstract: | This paper revisits the hypothesis that landlocked regions are systematically poorer than regions with ocean access, using panel data for 1,527 subnational regions in 83 nations from 1950-2014. This data structure allows us to exploit within-country-time variation only (e.g., regional variation within France at one point in time), thereby controlling for a host of unobservables related to country-level particularities, such as a country's unique history, cultural attributes, or political institutions. Our results suggest lacking ocean access decreases regional GDP per capita by 10 - 13 percent. We then explore potential mechanisms and possible remedies. First, national political institutions appear to play a marginal role at best in the landlocked-income relationship. Second, the income gap between landlocked and non-landlocked regions within the same nation widens as i) GDP per capita rises, ii) international trade becomes more relevant for the nation, and iii) national production shifts to manufacturing. Finally, we find evidence consistent with the hypothesis that national infrastructure (i.e., transport-related infrastructure and rail lines) can alleviate the lagging behind of landlocked regions. |
| Keywords: | landlockedness, geography, GDP per capita, trade openness, infrastructure |
| JEL: | E43 H54 O18 O40 R12 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6733&r=mac |