nep-mac New Economics Papers
on Macroeconomics
Issue of 2017‒12‒18
75 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Macroprudential policy and foreign interest rate shocks: A comparison of different instruments and regulatory regimes By Chris Garbers; Guangling Liu
  2. Monetary Constitutionalism: Some Recent Developments By Van Den Hauwe, Ludwig
  3. Potential Impact of Financial Innovation on Financial Services and Monetary Policy By Marek Dabrowski
  4. Why are Banks Exposed to Monetary Policy? By Sebastian Di Tella; Pablo Kurlat
  5. Fiscal policy with an informal sector By Harris Dellas; Dimitris Malliaropulos; Dimitris Papageorgiou; Evangelia Vourvachaki
  6. R&D, growth, and macroprudential policy in an economy undergoing boom-bust cycles By Claudio Battiati
  7. The Effect of News Shocks and Monetary Policy By Francesco Zanetti; Luca Gambetti; Dimitiris Korobilis; John D. Tsoukalas
  8. Les canaux de transmission de la politique monetaire en Haiti: une approche narrative (1996-2016). By Simon, Carl Nally Regi
  9. Should Monetary Authorities Prick Asset Price Bubbles? Evidence from a New Keynesian Model with an Agent-Based Financial Market By Alexey Vasilenko
  10. Fiscal Policy with an Informal Sector By Dellas, Harris; Malliaropoulos, Dimitris; Papageorgiou, Dimitris; Vourvachaki, Evangelia
  11. Modeling Inflation in the WAEMU's Zone By Oulatta, Moon
  12. Amplification effects of news shocks through uncertainty By Danilo Cascaldi-Garcia
  13. Housing Bust, Bank Lending & Employment : Evidence from Multimarket Banks By David P. Glancy
  14. On the effectiveness of loan-to-value regulation in a multiconstraint framework By Grodecka, Anna
  15. Managing the UK National Debt 1694-2017 By Martin Ellison; Andrew Scott
  16. The optimal inflation target and the natural rate of interest By Philippe Andrade; Jordi Galí; Hervé Le Bihan; Julien Matheron
  17. Liquidity, Credit and Output: A Regime Change Model and Empirical Estimations By Willi Semmler; Levent Koçkesen
  18. Learning, optimal monetary delegation and stock prices dynamics. By Marine Charlotte André; Meixing Dai
  19. The behavior of the money multiplier during and after the subprime crisis: Implications for the transmission mechanism of monetary policy By Cukierman, Alex
  20. The quantification of structural reforms: Extending the framework to emerging market economies By Balázs Égert
  21. Optimal Long-Run Inflation and the Informal Economy By Claudio Cesaroni
  22. Debt-Financed Knowledge Capital Accumulation, Capacity Utilization and Economic Growth By Laura Carvalho; Gilberto Tadeu Lima, Gustavo Pereira Serra
  23. Expectations and uncertainty: A common-source infection model for selected European countries By Luca Gerotto; Antonio Paradiso
  24. Explaining Job Polarization: The Role of Heterogeneity in Capital Intensity By Wan-Jung Cheng
  25. Reconciling Jaimovich-Rebello Preferences, Habit in Consumption and Labor Supply By Tom Holden; Paul Levine; Jonathan Swarbrick
  26. Quantitative Easing and Sovereign Yield Spreads: Euro-Area Time-Varying Evidence By António Afonso; João Tovar Jalles
  27. A new database for financial crises in European countries By Marco Lo Duca; Anne Koban; Marisa Basten; Elias Bengtsson; Benjamin Klaus; Piotr Kusmierczyk; Jan Hannes Lang; Carsten Detken (editor); Tuomas Peltonen (editor)
  28. The fiscal projection framework in long-term scenarios By Yvan Guillemette; David Turner
  29. Fiscal Consolidation Programs and Income Inequality* By Holter, Hans A.; Brinca, Pedro; Ferreira, Miguel H; Franco, Francesco; Malafry, Laurence
  30. Fiscal Sustainability: Conceptual, Institutional, and Policy Issues By Marek Dabrowski
  31. Evaluación de la capacidad predictiva del índice de percepción del consumidor By Acuña, Guillermo
  32. The Nexus Between Key Macroeconomic Determinants and Economic Growth in Zambia: A Dynamic Multivariate Granger-Causality Linkage By Chirwa, Themba G.; Odhiambo, Nicholas M.
  33. Communism, Value Neutrality and Monetary Neutrality By Luo, Yinghao
  34. Un récit historique alternatif sur l’indépendance des banques centrales: la doctrine et les pratiques avant la théorie ou l’art avant la science By Adriano Do Vale
  35. Is the Thai Government Revenue-Spending Nexus Asymmetric? By Jiranyakul, Komain
  36. Do the rich pay their taxes early? By Fischer, Andreas M; Zachmann, Lucca
  37. Sweden; 2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Sweden By International Monetary Fund
  38. Technology Trade with Asymmetric Tax Regimes and Heterogeneous Labor Markets: Implications for Macro Quantities and Asset Prices By Giuliano Curatola; Michael Donadelli; Patrick Grüning
  39. Iraq; 2017 Article IV Consultation and Second Review under the Three-Year Stand-by Arrangement-and Requests for Waivers of Nonobservance and Applicability of Performance Criteria, and Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Iraq By International Monetary Fund
  40. Labour market adjustment in Europe during the crisis: microeconomic evidence from the wage dynamics network survey By Mario Izquierdo; Juan Francisco Jimeno; Theodora Kosma; Ana Lamo; Stephen Millard; Tairi Room; Eliana Viviano
  41. U. S. consumer cash use, 2012 and 2015: an introduction to the Diary of Consumer Payment Choice By Greene, Claire; O'Brien, Shaun; Schuh, Scott
  42. Bitcoin Reveals Exchange Rate Manipulation and Detects Capital Controls By Gina Christelle Pieters
  43. Public Debt and Economic Growth Nexus In The Euro Area: A Dynamic Panel ARDL Approach By Chirwa, Themba G; Odhiambo, Nicholas M.
  44. Forward Guidance with Bayesian Learning and Estimation By Edward Herbst; David Lopez-Salido; Christopher Gust
  45. Greece: Still in the woods By Bitros, George C.
  46. Wage Inequality and Job Stability By Pessoa de Araujo, Ana Luisa
  47. Investments, financial constraints in non-quoted Swedish Firms By Dastory, Linda; Eklund, Johan; Numminen, Emil
  48. Reviving productive investment in Estonia By Caroline Klein; Olena Havrylchyk; Lorenzo Casullo
  49. Choice of market in the monetary economy By Ryoji Hiraguchi; Keiichiro Kobayashi
  51. Capital-embodied technological progress and obsolescence: How do they affect investment behaviour? By Yosuke Jin
  52. Internal Rationality, Learning and Imperfect Information By Szabolcs Deák; Paul Levine; Joseph Pearlman; Bo Yang
  53. High Wage Workers Work for High Wage Firms By Katarína Borovičková; Robert Shimer
  54. Work-sharing from Different Angles: A literature review By Arvind Ashta
  55. Ramsey Taxation in the Global Economy By Chari, V. V.; Nicolini, Juan Pablo; Teles, Pedro
  56. Social Insurance and Occupational Mobility By Cubas, German; Silos, Pedro
  57. The Greek great depression:a general equilibrium study of its drivers By George Economides; Dimitris Papageorgiou; Apostolis Philippopoulos
  58. Revisiting the determinacy on New Keynesian Models By Alberto F. Boix; Adri\'an Segura Moreiras
  59. The Effect of Firm Entry on Capacity Utilization and Macroeconomic Productivity By Huw Dixon; ANTHONY SAVAGAR
  60. Competing Currencies in the Laboratory By Janet Hua Jiang; Cathy Zhang
  61. The middle income plateau: Trap or springboard? By Rauf Gönenç
  62. Reconsidering the Consequences of Worker Displacements: Firm versus Worker Perspective By Aaron B. Flaaen; Matthew D. Shapiro; Isaac Sorkin
  63. Fiscal Multipliers for Bosnia and Herzegovina By Dragana Stanišic; Belma Hadžihalilovic-Kasumovic;
  64. International Evidence on Long Run Money Demand By Warren E. Weber; Robert Lucas; Juan Pablo Nicolini; Luca Benati
  65. An endogenous regime-switching model of ordered choice with an application to federal funds rate target. By Andrei A. Sirchenko
  66. Milton Friedman and the case for flexible exchange rates and monetary rules By Harris Dellas; George S. Tavlas
  67. Urbanisation and household consumption in China By Margit Molnar; Thomas Chalaux; Qiang Ren
  68. Stagflation and the crossroad in macroeconomics: the struggle between structural and New Classical macroeconometrics By Aurélien Goutsmedt
  69. Financialisation at a Watershed in the USA JEL Classification: B50, E10, E44, G20 By Costas Lapavitsas; Ivan Mendieta-Muñoz
  70. Mortgages and Heterogeneity in the Transmission of Monetary Policy By Arlene Wong; Aaron Kirkman; Alejandro Justiniano
  71. What Drives Episodes of Settlement Fails in the Government of Canada Bond Market? By Jean-Sébastien Fontaine; James Pinnington; Adrian Walton
  72. Flight-to-Quality Cycles and the Real Economy By Peter Kondor; Maryam Farboodi
  73. Reacting to the Lucas Critique: The Keynesians' Pragmatic Replies By Aurélien Goutsmedt; Erich Pinzón-Fuchs; Matthieu Renault; Francesco Sergi
  74. A note on IYLM, ISLM and General Theory-compatible modelling By Angel Asensio
  75. How do firms adjust to rises in the minimum wage? Survey evidence from Central and Eastern Europe By Katalin Bodnár; Ludmila Fadejeva; Stefania Iordache; Liina Malk; Desislava Paskaleva; Jurga Pesliakaite; Nataša Todorovic Jemec; Peter Tóth; Robert Wyszynski

  1. By: Chris Garbers (Department of Economics, University of Stellenbosch); Guangling Liu (Department of Economics, University of Stellenbosch)
    Abstract: This paper presents a generic small open economy real business cycle model with banking and foreign borrowing. We incorporate capital requirements, reserve requirements, and loan-to-value (LTV) regulation into this framework, and subject the model to a positive foreign interest rate shock that raises the country risk premium and reduces the supply of foreign funds. The results show that these macroprudential instruments can attenuate the impact of such a shock, and that this attenuation property increases with the strictness of the regulatory regime. Capital requirements and LTV regulation deliver the largest attenuation benefits and are shown to be close substitutes. That being said, capital requirements are shown to be more effective at leaning against the financial cycle whereas LTV regulation is more effective at stimulating the financial cycle. The analysis indicates that capital and reserve requirements can interact such that reserve requirements are most effective when used to supplement existing capital requirement or LTV measures. We find that financial and macroeconomic stability objectives are aligned following a positive foreign interest rate shock such that a macroprudential response to such shocks can be to the benefit of both objectives. Lastly, our results show that capital requirements and LTV regulation exhibit decreasing returns to scale.
    Keywords: Macroprudential policy, Open economy macroeconomics, Financial stability, Business cycle, Welfare, DSGE
    JEL: E32 E44 E58 F41 G28
    Date: 2017
  2. By: Van Den Hauwe, Ludwig
    Abstract: The volume edited by Leland Yeager more than 50 years ago and published in 1962 under the title In Search of a Monetary Constitution has turned out to be remarkably prescient since the Great Inflation was then about to begin. One might expect that in the wake of the Global Financial Crisis and Great Recession interest in monetary-constitutional matters would be revived and this has indeed been the case. In this paper an attempt is made to assess whether and to what extent scientific progress has been made in defining the nature and characteristics of a monetary constitution for the post-Crisis world. To that end some recent contributions to the literature are reviewed critically.
    Keywords: Monetary Systems, Monetary Constitution, Monetary Constitutionalism
    JEL: A10 B53 E02 E5 E50 E6 E66
    Date: 2017–11–02
  3. By: Marek Dabrowski
    Abstract: The recent wave of financial innovation, particularly innovation related to the application of information and communication technologies, poses a serious challenge to the financial industry’s business model in both its banking and non-banking components. It has already revolutionised financial services and, most likely, will continue to do so in the future. If not responded to adequately and timely by regulators, it may create new risks to financial stability, as occurred before the global financial crisis of 2007-2009. However, financial innovation will not seriously affect the process of monetary policymaking and is unlikely to undermine the ability of central banks to perform their price stability mission. The recent wave of financial innovation, particularly innovation related to the application of information and communication technologies, poses a serious challenge to the financial industry’s business model in both its banking and non-banking components. It has already revolutionised financial services and, most likely, will continue to do so in the future. If not responded to adequately and timely by regulators, it may create new risks to financial stability, as occurred before the global financial crisis of 2007-2009. However, financial innovation will not seriously affect the process of monetary policymaking and is unlikely to undermine the ability of central banks to perform their price stability mission.
    Keywords: monetary policy, financial innovation, electronic money
    JEL: E41 E44 E51 E52 E58 G21
    Date: 2017–07
  4. By: Sebastian Di Tella; Pablo Kurlat
    Abstract: We propose a model of banks’ exposure to movements in interest rates and their role in the transmission of monetary shocks. Since bank deposits provide liquidity, higher interest rates allow banks to earn larger spreads on deposits. Therefore, if risk aversion is higher than one, banks' optimal dynamic hedging strategy is to take losses when interest rates rise. This risk exposure can be achieved by a traditional maturity-mismatched balance sheet, and amplifies the effects of monetary shocks on the cost of liquidity. The model can match the level, time pattern, and cross-sectional pattern of banks’ maturity mismatch.
    JEL: E41 E43 E44 E51
    Date: 2017–11
  5. By: Harris Dellas (University of Bern); Dimitris Malliaropulos (Bank of Greece); Dimitris Papageorgiou (Bank of Greece); Evangelia Vourvachaki (Bank of Greece)
    Abstract: Macroeconomic models that omit the shadow economy systematically mis-forecast and mis-measure the effect of fiscal –in particular tax– policy on economic activity and tax revenue. We add an informal sector to the Bank of Greece DSGE model and use the actual package of fiscal consolidation implemented in Greece over the period 2010–2015 to evaluate the role of the black economy. In the data, official Greek GDP declined by about 26%, budget deficits proved larger and more persistent and tax rates increased by much more and tax revenue by much less than predicted. The model replicates the official output decline but implies a true output decline that is less than two thirds of that in recorded output. The discrepancy is even more pronounced for employment. The model also implies that the size of fiscal adjustment and the drop in economic activity could have been considerably milder had the informal sector been curtailed (it instead increased by about 50%). The underground economy seems to have been a key factor in Greece’s failure to achieve orderly debt consolidation while avoiding economic depression.
    Keywords: Shadow economy; fiscal consolidation, multipliers, tax revenue, true output
    JEL: E26 E32 E62 E65 H26 H68
    Date: 2017–10
  6. By: Claudio Battiati (LUISS University, School of European Political Economy)
    Abstract: Recent evidence suggests that credit booms and asset price bubbles may undermine economic growth even as they occur, regardless of whether a crisis follows, by crowding out investment in more productive, R&D-intensive industries. This paper incorporates Schumpeterian endogenous growth into a DSGE model with credit-constrained entrepreneurs to show how shocks affecting firms' access to credit can generate boom-bust cycles featuring large fluctuations in land prices, consumption, and investment. During the expansion, rising land prices tend to crowd out capital and (especially) R&D investment: in the long run, this results in lower productivity levels, which in turn implies lower levels of aggregate output and consumption. Moreover, higher initial loan-to-value ratios tend to be associated with larger macroeconomic fluctuations. A counter-cyclical LTV ratio targeting credit growth has relevant stabilization effects but brings about small gains in terms of long-run consumption levels, and thus of welfare.
    Keywords: Schumpeterian Growth, Financial frictions, Land prices, Macroprudential policy
    JEL: E22 E32 E44 O30 O40
    Date: 2017–12–11
  7. By: Francesco Zanetti; Luca Gambetti; Dimitiris Korobilis; John D. Tsoukalas
    Abstract: Abstract A VAR model estimated on U.S. data before and after 1980 documents systematic differences in the response of short- and long-term interest rates, corporate bond spreads and durable spending to news TFP shocks. Interest rates across the maturity spectrum broadly increase in the pre-1980s and broadly decline in the post-1980s. Corporate bond spreads decline signi ficantly, and durable spending rises signi ficantly in the post-1980 period while the opposite short-run response is observed in the pre-1980 period. Measuring expectations of future monetary policy rates conditional on a news shock suggests that the Federal Reserve has adopted a restrictive stance before the 1980s with the goal of retaining control over inflation while adopting a neutral/accommodative stance in the post-1980 period.
    Keywords: News shocks, Business cycles, VAR models, DSGE models
    JEL: E20 E32 E43 E52
    Date: 2017–09–27
  8. By: Simon, Carl Nally Regi
    Abstract: Many studies aim to measure BRH monetary policy’s impact on real economy. But little attention has been paid to the description of the different decisions’ progress via transmission channels. This study attends to close this gap. Using Berg and al (2013)’s narrative approach, initiated by Romer and Romer (1989), we realize 4 case studies. The results show that credit channel could be the most operational channel in Haiti. The exchange rate channel follows it but in a smaller extent. Our analysis suggest that monetary chocks have certain impact on financial sector but this last difficultly convey them to the real economy. Transmission process is weakened year by year with a growing concentration of banking sector, a more uncertain climate and less transparent monetary regime. These help to confirm our hypothesis suggesting that monetary policy has very limited impact on financial and real variables because of the macroeconomic framework in which it operates. Clearing the business climate and promoting financial development are urgent musts.
    Keywords: Monetary policy, transmission channels, narrative approach, Haiti.
    JEL: E02 E31 E42 E52 E58
    Date: 2017–07–18
  9. By: Alexey Vasilenko (National Research University Higher School of Economics)
    Abstract: We develop the approach based on the synthesis of New Keynesian macroeconomics and agent-based models, and build a model, allowing for the incorporation of behavioral and speculative factors in ?nancial markets in a New Keynesian model with a ?nancial accelerator, `a la Bernanke et al. (1999). Using our model, we study the optimal strategy of central banks in pricking asset price bubbles for the maximization of social welfare and preserving ?nancial stability. Our results show that pricking asset price bubbles can be a policy that enhances social welfare, and reduces the volatility of output and in?ation; especially, in the cases when asset price bubbles are caused by credit expansion, or when the central bank conducts effective information policy, for example, effective verbal interventions. We also argue that pricking asset price bubbles with the lack of the effectiveness of information policy, only by raising the interest rate, leads to negative consequences to social welfare and ?nancial stability
    Keywords: optimal monetary policy; asset price bubble; New Keynesian macroeconomics; agent-based ?nancial market
    JEL: E44 E52 E58 G01 G02
    Date: 2017
  10. By: Dellas, Harris; Malliaropoulos, Dimitris; Papageorgiou, Dimitris; Vourvachaki, Evangelia
    Abstract: Macroeconomic models that omit the shadow economy systematically mis-forecast and mis-measure the effect of fiscal - in particular tax- policy on economic activity and tax revenue. We add an informal sector to the Bank of Greece DSGE model and use the actual package of fiscal consolidation implemented in Greece over the period 2010-2015 to evaluate the role of the black economy. In the data, official Greek GDP declined by about 26%, budget deficits proved larger and more persistent and tax rates increased by much more and tax revenue by much less than predicted. The model replicates the official output decline but implies a true output decline that is less than two thirds of that in recorded output. The discrepancy is even more pronounced for employment. The model also implies that the size of fiscal adjustment and the drop in economic activity could have been considerably milder had the informal sector been curtailed (it instead increased by about 50%). The underground economy seems to have been a key factor in Greece's failure to achieve orderly debt consolidation while avoiding economic depression.
    Keywords: scal consolidation; multipliers; Shadow economy; tax revenue; true output
    JEL: E26 E32 E62 E65 H26 H68
    Date: 2017–12
  11. By: Oulatta, Moon
    Abstract: This paper introduces a simple AS-AD model to examine the determinants of inflation for the members of the West African Economic and Monetary Union (WAEMU). On the supply side, we found France's inflation, rainfall, and real crude oil inflation to be the most important drivers of domestic inflation. On the demand side, we found the output gap to be a significant determinant of domestic inflation. Given the estimated size of the effect of the output gap on inflation, we can conclude that the short-run aggregate supply curve may be relatively flat; bolstering the Keynesian view that monetary policy could be extremely effective in stabilizing output in the short-run.
    Keywords: Inflation, Two Stage Least Squares, Monetary policy, BCEAO
    JEL: C36 E31 E52
    Date: 2016–11–20
  12. By: Danilo Cascaldi-Garcia
    Abstract: In this paper I investigate the empirical relationship between agents' responses to future technological improvements and the level of uncertainty in the economy. I show that the economic responses to news shocks change substantially over time, and that this dynamic couples with periods of high and low uncertainty. Periods of high uncertainty are characterized by higher positive economic effects of news shocks on output, consumption, investment and real personal income. These results indicate that the continuous updating of agents' expectations about the current and future economic situation operates as a transmission channel for news shocks, amplifying its positive outcomes.
    JEL: E32 E44
    Date: 2017–11–20
  13. By: David P. Glancy
    Abstract: I use geographic variation in bank lending to study how bank real estate losses impacted the supply of credit and employment during the Great Recession. Banks exposed to distressed housing markets cut mortgage and small business lending relative to other banks in the same county. This lending contraction had real effects, as counties whose banks were exposed to adverse shocks in other markets suffered employment declines, especially in young firms. This finding is robust to instrumenting for bank exposure to housing shocks using shocks in distant markets, exposure based on historical lending, or exposure to markets with inelastic housing supply.
    Keywords: Bank lending ; Employment ; Financial crisis ; Residential real estate
    JEL: E24 E44 G21
    Date: 2017–12–01
  14. By: Grodecka, Anna (Financial Stability Department, Central Bank of Sweden)
    Abstract: Models in the infinite horizon macro-housing literature often assume that borrowers are constrained exclusively by the loan-to-value (LTV) ratio. Motivated by the Swedish micro-data, I explore an alternative arrangement where borrowers are constrained by the feasibility of repayment, but choose a house of maximum permissible size conditional on the LTV restriction. While stricter LTV limits are often considered as a measure to tackle the rise in household indebtedness, I find that policy designed to lower the maximum permissible LTV ratio may actually leave the debt-to-GDP ratio unchanged and increase housing prices in equilibrium if borrowers are bound by two constraints at the same time. In a model with occasionally binding constraints, I show that also for the analysis of the short-run effects of different policies, the consideration of multiple constraints, possibly binding at the same time, is important. The effectiveness of LTV as a measure to tackle the rise in indebtedness has to be reassessed and is likely lower than previously shown.
    Keywords: borrowing constraints; household indebtedness; macroprudential policy; housing prices; loan-to-value ratio; debt-service-to-income ratio
    JEL: E32 E44 E58 R21
    Date: 2017–11–01
  15. By: Martin Ellison; Andrew Scott
    Abstract: Abstract We construct a new monthly dataset for UK government debt over the period 1694 to 2017 based on price and quantity data for each individual bond issued. This enables us to examine long run fiscal sustainability using the theoretically relevant variable of the market value of debt, and investigate the historical importance of debt management. We find the general implications of the tax smoothing literature are replicated in our data, especially around financing wars, although we find major shifts over time in how fiscal sustainability is achieved. Before the 20th century, governments continued to pay bond holders a high rate of return and achieved sustainability through running fiscal surpluses but since then governments have relied on low growth adjusted real interest rates. The optimal debt management literature tends to favour the use of long bonds but we find the government would have been better off over the 20th century issuing short bonds. The contrast with the literature occurs because of an upward sloping yield curve and long bonds rarely providing fiscal insurance. This is particularly true during periods of financial crises when falling interest rates lead to sharp rises in the price of long bonds, making them an expensive form of finance. We examine the robustness of our conclusions to liquidity e¤ects, rollover risks, buyback operations and leverage. In general, these do suggest a greater role for long bonds but do not overturn an issuance strategy based mainly on short term bonds.
    Keywords: Debt Management, Fiscal Deficits, Fiscal Policy, Government Debt, Inflation, Maturity, Yield Curve
    JEL: E43 E62 H63
    Date: 2017–09–20
  16. By: Philippe Andrade; Jordi Galí; Hervé Le Bihan; Julien Matheron
    Abstract: We study how changes in the value of the steady-state real interest rate affect the optimal inflation target, both in the U.S. and the euro area, using an estimated New Keynesian DSGE model that incorporates the zero (or effective) lower bound on the nominal interest rate. We find that this relation is downward sloping, but its slope is not necessarily one-for-one: increases in the optimal inflation rate are generally lower than declines in the steady-state real interest rate. Our approach allows us not only to assess the uncertainty surrounding the optimal inflation target, but also to determine the latter while taking into account the parameter uncertainty facing the policy maker, including uncertainty with regard to the determinants of the steady-state real interest rate. We find that in the currently empirically relevant region for the US as well as the euro area, the slope of the curve is close to -0.9. That finding is robust to allowing for parameter uncertainty.
    Keywords: inflation target, effective lower bound.
    JEL: E31 E52 E58
    Date: 2017–12
  17. By: Willi Semmler (Department of Economics, New School for Social Research); Levent Koçkesen (Department of Economics, Columbia University)
    Abstract: There is a long tradition which maintains that liquidity and credit impact aggregate economic activity. Recent events seem to give fresh support to this line of research. Economic theory on credit and financial markets is in search of mechanisms that might explain the strong propagation effect of real, monetary and financial shocks. We employ a simple macrodynamic model of threshold and regime change type to provide such a propagation mechanism. We estimate the model by transforming our continuous time form into an estimable discrete time form using the Euler approximation and a method proposed by Ozaki. We also approximate the model by employing the discrete time Smooth Transition Regression (STR) methodology. Our estimation procedures are applied to U.S. time series data. We find essential nonlinearities and regime changes in the data. The change of the dynamic properties of the estimated model occur as the variables pass through certain thresholds. Locally unstable but globally bounded fluctuations as well as asymmetric responses to shocks are detected.
    Keywords: Regime change models, Smooth Transition Regression models, financial-real interaction, thresholds, asymmetry in business cycles
    JEL: C32 E32 E44
    Date: 2017–12
  18. By: Marine Charlotte André; Meixing Dai
    Abstract: This paper studies how learning affects the interactions between monetary policy and stock prices. Learning modifes the intertemporal trade-off of the central bank by giving to the latter the possibility to manipulate private expectations. The result of this manipulation is not socially optimal since it reduces excessively the stabilization bias. To remedy this, the government should appoint a central banker that is less conservative than the society. The turnover rate in the stock market is the key factor that determines the interactions between monetary policy (hence delegation) and stock prices. A positive turnover rate means that the presence of stocks in the households' portfolios distorts the optimal consumption path. This type of distortion compensates somehow these induced by learning. The central bank should be more conservative to avoid the effect of distortions on social welfare induced by learning than in the absence of stocks.
    Keywords: adaptive learning, stabilization bias, inflation penalty, optimal monetary delegation, central bank conservatism, stock prices.
    JEL: C62 D83 D84 E52 E58
    Date: 2017
  19. By: Cukierman, Alex
    Abstract: This short paper documents a dramatic decrease in the US conventional money multiplier since the downfall of Lehman's brothers and attributes it to the large scale quantitative easing operations of the Fed in conjunction with sluggish growth of banking credit. This, now almost ten years' old phenomenon, implies that shortage of reserves did not constitute a binding constraint on the expansion of banking credit since the start of the crisis. Since the Fed is unlikely to swiftly reduce its bloated balance sheet the banking system will continue to possess substantial excess reserves implying that they will not constitute a constraint on credit expansion for quite a while. Hence the conventional money multiplier is likely to be of little use as a predictor of the transmission of monetary base expansions to banking credit and the money supply in the foreseeable future.
    Keywords: banking credit and reserves.; monetary base; Money multiplier since the crisis and in the future; Quantitative easing
    JEL: E4 E5
    Date: 2017–12
  20. By: Balázs Égert
    Abstract: This paper estimates and quantifies the impact of structural reforms on per capita income for a large set of OECD and non-OECD countries. The findings suggest that the quality of institutions matters to a large extent for economic outcomes. More competition-friendly regulations, as measured by the OECDs’ Product Market Regulation (PMR) indicator improve economic outcomes. Lower barriers to foreign trade and investment help MFP. Lower barriers to entry and less pervasive state control of businesses boost the capital stock and the employment rate. No robust link between labour market regulation and MFP and capital deepening could be established. But looser labour market regulation is found to go hand in hand with higher employment rates. The paper shows that countries at different level of economic development face different policy impacts. Furthermore, PMR effects depend on the level of labour market regulations.
    Keywords: developing countries, emerging market economies, employment, institutions, investment, labour markets, multi-factor productivity, OECD, per capita impact, product markets, regulation, simulation, structural reforms
    JEL: D24 E17 E22 E24 J08
    Date: 2017–11–29
  21. By: Claudio Cesaroni (Economic Analysis and Research, Sace S.p.A.)
    Abstract: This paper studies the optimal long-run rate of inflation in a two-sector model of the Lithuanian economy with informal production and price rigidity in the regular sector. The government issues no debt and is committed to follow a balanced budget rule. The informal sector is unregulated and untaxed and its existence limits the government’s ability to collect revenues through fiscal policy. Such environment provides therefore the basis for quantifying the possible existence of a public finance motive for inflation. The main results can be summarized as follows: First, there is a strong heterogeneity in the optimal inflation rate which depends on the tax rate that is endogenously adjusted to keep the budget balanced. Inflation can be as high as 6.77% when the capital tax rate is endogenous, but when labor income taxes are adjusted optimal policy calls for a rate of deflation such that the nominal interest rate hits the zero lower bound. Second, the optimal inflation rate is a non-decreasing function of the size of the informal economy and, in most cases, there is a positive relationship between the two. Finally, substantial deviations from zero inflation are observed even in presence of a plausible degree of price rigidity.
    Keywords: Optimal Inflation, Informal Economy, Endogenous Tax Changes
    JEL: E26 E52 H26
    Date: 2017–09–20
  22. By: Laura Carvalho; Gilberto Tadeu Lima, Gustavo Pereira Serra
    Abstract: Motivated to some extent by the empirical significance of student loans to human capital accumulation, this paper incorporates debt-financed knowledge capital accumulation to a demand-led model of capacity utilization and growth. Average labor productivity varies positively with the average stock of knowledge capital across the labor force. Any increase in labor productivity ensuing from knowledge capital accumulation is fully passed on to the real wage, but insufficient aggregate effective demand, by generating unemployment, gives rise to underutilization of the knowledge capital capacity. Both the stability properties and financial fragility (in the Minskyan sense) of the long-run equilibrium outcome depend on how the debt servicing of working households is specified. The same dependence applies to how the rates of physical capital utilization and labor employment (where the latter also measures the rate of knowledge capital utilization) respond to changes in the ratio of working households’ debt to physical capital
    Keywords: Knowledge capital; debt; capacity utilization; employment
    JEL: E12 E22 E24
    Date: 2017–12–04
  23. By: Luca Gerotto (Department of Economics, University Of Venice Cà Foscari); Antonio Paradiso (Department of Economics, University Of Venice Cà Foscari)
    Abstract: We present a common-source infection model for explaining the formation of expectations by households. Starting from the framework of "Macroeconomic expectations of household and professional forecasters" (C.D. Carroll, The Quarterly Journal of Economics, 2003), we augment the original model assuming that also uninformed individuals are able to update expectations according to a naive econometric process. In this novel framework, a key role is played by the parameter measuring the probability of being informed: the dynamics of this factor over time capture the level of uncertainty perceived by households. This new framework is applied to study unemployment expectations for a selected group of European countries (France, Germany, Italy and the UK). Our results show that: (i) the novel framework is supported by data on unemployment expectations; and (ii) the probability of being informed is (negatively) correlated with the level of uncertainty spread by newspapers and conveyed by Internet.
    Keywords: Expectations, Unemployment
    JEL: D84 E24
    Date: 2017
  24. By: Wan-Jung Cheng (Institute of Economics, Academia Sinica, Taipei, Taiwan)
    Abstract: This paper proposes a new perspective to explain job polarization over the past few decades. Consisting of employment and wage polarization, job polarization is a widely documented phenomenon that involves the decline in both the employment shares and relative wages of middle-skill occupations with respect to high- and low-skill occupations. I present empirical evidence and build a task-based model demonstrating that job polarization stems from the interaction of the decrease in the relative price of capital goods, heterogeneity in job task production, and the complementarity of job tasks in final goods production. First, I construct a measure of occupation-level capital intensities and document that the tasks of middle-skill workers tend to be more capital intensive. Second, I build a task-based model with two goods sectors and three job tasks, where the job task production differs in capital intensity and how a worker’s skill is utilized. The model shows that when there is a decrease in the price of capital goods, employment shifts away from capital-intensive tasks, and the relative wages are driven down, implying that decreasing price of capital goods predicts job polarization. A quantitative analysis suggests that the model can account for approximately one-third to one-half of the employment polarization and approximately half of the upper tail of the wage polarization in the U.S. between 1980 and 2010.
    Keywords: Job polarization, Task-based model, Capital intensity
    JEL: E24 E25 J21 J31 O33
    Date: 2017–12
  25. By: Tom Holden (University of Surrey); Paul Levine (University of Surrey); Jonathan Swarbrick (Bank of Canada)
    Abstract: This note studies two forms of a utility function of consumption with habit and leisure that are (a) compatible with long-run balanced growth, (b) hit a steady state observed target for hours worked and (c) are consistent with micro-econometric evidence for the inter-temporal elasticity of substitution and the Frisch elasticity of labor supply. For Jaimovich-Rebello pref- erences our Theorems 1 and 2 highlight a constraint on the preference parameter needed to target the Frisch elasticity leading to a lower bound for the latter that cannot be reconciled empirically with external habit. Even with internal or no habit, the range of possible values of the Frisch elasticity lie outside empirical results unless we allow for a modest wealth e ect. In Theorem 3 we propose a generalized JR utility function that in conjunction with a labor wedge solves the problem.
    JEL: E21 E24
    Date: 2017–11
  26. By: António Afonso; João Tovar Jalles
    Abstract: We assess the determinants of sovereign bond yield spreads in the period 1999-2016, considering non-conventional monetary policy measures in the Euro area. We use a 2-step approach: i) confirm (by means of model selection methods) and estimate (by means of panel techniques) the determinants of sovereign bond yield spreads; ii) compute bivariate time-varying coefficient (TVC) models of each determinant on government bond spreads and analyse the temporal dynamics of resulting estimates. Our results show that the baseline determinants of sovereign bond yield spreads in the Euro area are the bid-ask spread, the VIX, fiscal developments and rating developments, REER, and economic growth. In recent years, additional relevant determinants became the QE measures implemented by the ECB in the aftermath of the economic and financial crisis. From the TVC analysis, the Covered Bond Purchase Programme contributed to reduce yield spreads in all Euro area countries in the analysis, particularly in the crisis period, 2011-2013. In addition, longer-term refinancing operations contributed to reduce yield spreads in most countries.
    Keywords: sovereign bonds, fiscal policy, non-conventional monetary policy, time-varying coefficients, model selection, panel data
    JEL: C23 E52 E62 G10 H63
    Date: 2017–12
  27. By: Marco Lo Duca; Anne Koban; Marisa Basten; Elias Bengtsson; Benjamin Klaus; Piotr Kusmierczyk; Jan Hannes Lang; Carsten Detken (editor); Tuomas Peltonen (editor)
    Abstract: This paper presents a new database for financial crises in European countries, which serves as an important step towards establishing a common ground for macroprudential oversight and policymaking in the EU. The database focuses on providing precise chronological definitions of crisis periods to support the calibration of models in macroprudential analysis. An important contribution of this work is the identification of financial crises by combining a quantitative approach based on a financial stress index with expert judgement from national and European authorities. Key innovations of this database are (i) the inclusion of qualitative information about events and policy responses, (ii) the introduction of a broad set of non-exclusive categories to classify events, and (iii) a distinction between event and post-event adjustment periods. The paper explains the two-step approach for identifying crises and other key choices in the construction of the dataset. Moreover, stylised facts about the systemic crises in the dataset are presented together with estimations of output losses and fiscal costs associated with these crises. A preliminary assessment of the performance of standard early warning indicators based on the new crises dataset confirms findings in the literature that multivariate models can improve compared to univariate signalling models. JEL Classification: G01, E44, E58, E60, H12
    Keywords: financial crises, macroprudential, crises database, early warning models, central bank statistics
    Date: 2017–07
  28. By: Yvan Guillemette; David Turner
    Abstract: The paper describes the fiscal framework used in long-term economic scenarios, with some emphasis on revisions made since the 2013 vintage of the long-term model. Long-term projections for public spending on pensions, health and long-term care are now separate from other primary expenditure and sourced from previous OECD work taking account of population ageing and other cost pressures. Other primary expenditure are assumed to remain constant in real terms on a per capita basis, rather than remaining stable as a share of GDP. This difference is important for long-term fiscal projections because government finances are sensitive to the employment rate, whereas expenditure is linked to the total population. A fiscal rule adjusts government revenue to ensure that public debt eventually stabilises as a share of GDP, making government revenue as a share of GDP the preferred indicator of future fiscal pressure.
    Keywords: Fiscal projections, long-term model, long-term scenarios
    JEL: E17 E62 H68
    Date: 2017–11–29
  29. By: Holter, Hans A. (Dept. of Economics, University of Oslo); Brinca, Pedro (Nova School of Business and Economics, Universidade Nova de Lisboa); Ferreira, Miguel H (Nova School of Business and Economics, Universidade Nova de Lisboa); Franco, Francesco (Nova School of Business and Economics, Universidade Nova de Lisboa); Malafry, Laurence (Department of Economics, Stockholm University)
    Abstract: Following the Great Recession, many European countries implemented fiscal consolidation policies aimed at reducing government debt. Using three independent data sources and three different empirical approaches, we document a strong positive relationship 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, including 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 responses 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.
    Keywords: Fiscal Consolidation; Income Inequality; Fiscal Multipliers; Public Debt; Income Risk
    JEL: E21 E62 H31 H50
    Date: 2017–11–16
  30. By: Marek Dabrowski
    Abstract: The chronic nature of sovereign debt crises has resulted in the growing interest of analysts in finding both their real causes and the mechanisms of cross-country transmission - the so-called contagion effect. In this paper, we will try to answer the frequently asked question: what is the “safe” level of public debt (i.e. what level helps to avoid the risk of sovereign default)? Simultaneously, we will address various conceptual, institutional, and statistical dilemmas related to the definition and measurement of public debt.
    Keywords: public debt, fiscal deficit, fiscal policy, public finance management, general government, fiscal rules
    JEL: E62 H62 H63 H81
    Date: 2016
  31. By: Acuña, Guillermo
    Abstract: In this paper the ability of the Economic Perception Index, IPECO, to predict aggregate consumption and other macroeconomic variables is studied. The accuracy of the predictions is improved when IPECO is used as predictor of consumption, in comparison with the predictions of an autoregressive model. The predictive ability of IPECO is higher than the one of its components and, among the components, the most informative are the expectations indexes
    Keywords: confianza, consumidor, prediccion
    JEL: E21 E27
    Date: 2017–12–05
  32. By: Chirwa, Themba G.; Odhiambo, Nicholas M.
    Abstract: This study investigates the nexus between key macroeconomic determinants and economic growth in Zambia by employing the Autoregressive Distributed Lag model to test for Granger-causality covering the period 1970???2015. The empirical results reveal that there are three distinct Granger-causality hypotheses that exist in Zambia related to economic growth. The dominant hypothesis is the feedback hypothesis between investment, population growth, foreign aid and economic growth in both the short and long run; between real exchange rate, trade openness and economic growth in the short run; and between government consumption, inflation and economic growth in the long run. The second is the supply-leading hypothesis that runs from government consumption and inflation to economic growth in the short run; and from real exchange rate and trade openness to economic growth in the long run. Lastly, the neutrality hypothesis holds between human capital and economic growth in the short run. These results have significant policy implications for the Zambian economy. They imply that the authorities should focus on promoting economic incentives that encourage the growth of real GDP per capita and investment, improve the quality of human capital, trade reforms, population control, macroeconomic stability, and the effectiveness of foreign aid
    Keywords: Zambia; Autoregressive Distributed Lag Models; Cointegration; Granger-causality; Economic Growth
    Date: 2017–12
  33. By: Luo, Yinghao
    Abstract: One of the most puzzling aspects about the functioning of the floating exchange rate regime of the 1980s has been that huge swings in exchange rate have had only muted effects on anything real. To understand this phenomenon, we study the relationship between communism and value neutrality and monetary neutrality. We find that the symmetry of communism is bound to lead to value neutrality. In the case of value neutrality, the economic man will certainly accept monetary neutrality. If money is neutral in the long run then even if purchasing power parity (PPP) is not valid in the short-run it will valid over the long run. However, without considering the time factor, communism is a kind of symmetry that is almost impossible to achieve. While considering the time factor, the symmetry of communism can be achieved in theory!
    Keywords: communism, symmetry, value neutrality, monetary neutrality, purchasing power parity
    JEL: A13 D24 D3 E5 F3
    Date: 2017–05–20
  34. By: Adriano Do Vale (Centre d'Economie de l'Université de Paris Nord (CEPN))
    Abstract: La fin des années 80 et les années 90 ont été marquées par une grande vague d’adoption de l’indépendance des banques centrales (IBC). Les manuels et les revues de la littérature adoptent souvent un récit historique standard la présentant comme une sucess story, comme l’application d’un consensus théorique. L’art aurait suivi le pas de la science. Cet article a comme finalité ultime de proposer un récit alternatif concernant l’IBC. Adoptant une perspective historique centrée sur la première partie des années 20, nous entendons démontrer que la doctrine des banquiers centraux et les pratiques, comprises en tant qu’adoption de l’IBC, précédent la théorie, l’art venant alors avant la science. Vue de façon normative par la littérature économique à partir des années 80, l’indépendance est pensée, dès les années 20, par les praticiens qui posent eux-mêmes les principes du central banking. Dans la nouvelle donne de l’après-guerre, marquée par l’absence de l’ancrage nominal autrefois fourni par l’étalon-or, l’IBC s’avère un arrangement institutionnel alternatif face à l’inflation. Elle est recommandée au niveau international et constitue un principe central de la doctrine du central banking avancé par le gouverneur anglais Montagu Norman. Comme pour le principe d’indépendance, les pratiques précèdent la théorie. On considère qu’il y a eu une première vague d’adoption de l’IBC dans la première moitié des années 20, bien avant la vague d’adoption de l’IBC de la fin des années 80 et des années 90. Suite à des expériences hyper-inflationnistes et dans le cadre de plans de stabilisation monétaire sous tutelle internationale, les banques centrales de l’Autriche (1923), de la Hongrie (1924) et de l’Allemagne (1922-24) deviennent légalement indépendantes.
    Keywords: années 20, doctrine, indépendance des banques centrales, pratiques, récit, théorie
    JEL: B52 E58 F33 N44 N14
    Date: 2017–11
  35. By: Jiranyakul, Komain
    Abstract: This paper examines the relationship between government revenue and spending in Thailand using a nonlinear framework. Both TAR and MTAR models are estimated. The empirical results from the estimate of the TAR model show the presence of asymmetry in the long-run relationship between revenue and spending. The results of short-run dynamics indicate that both revenue and spending respond to budgetary disequilibrium when there is improving government budget. Furthermore, bidirectional causality is found. The evidence appears to support the fiscal synchronization hypothesis with asymmetric adjustment towards the long-run equilibrium. This finding implies that policymakers should cut deficits when they exceed the threshold level.
    Keywords: Government revenue and expenditures, TAR, MTAR, synchronization hypothesis
    JEL: C32 E62
    Date: 2017–12
  36. By: Fischer, Andreas M; Zachmann, Lucca
    Abstract: This paper examines the distributional effects of interest credits from early tax payments on average household income at the municipality level. The hypothesis that households from high-income municipalities pay their income taxes early is tested in a demand specification for interest credit for early tax payments. The empirical analysis considers regional data from 170 municipalities in the canton of Zurich from 2007 to 2013. The income elasticity of interest credit for early tax payments is estimated to be near unity for the top 5th percentile of average household income, whereas the same elasticity is below one-half for the lower 95th percentile and is statistically insignificant. The finding that high-income households pay their taxes early supports the view that the rich are not liquidity constrained. Early tax payments make the tax system more regressive for high-income households.
    Keywords: demand for interest credit on early tax payment; early tax payment
    JEL: D14 D30 E21 E41 H31
    Date: 2017–12
  37. By: International Monetary Fund
    Abstract: Sweden’s economy continues to perform well, yet wage rises and inflation remain low. Growth of just over 3 percent is expected in 2017, with job creation running at over 2 percent, and underlying inflation around 1.3 percent. The outlook is for further solid growth in coming years, yet, even as employment rates reach EU highs, business sector wage rises are only 2.2 percent, posing downside risks to an expected inflation pick up.
    Date: 2017–11–17
  38. By: Giuliano Curatola (Faculty of Economics and Business Administration and Research Center SAFE, Goethe University Frankfurt); Michael Donadelli (Faculty of Economics and Business Administration and Research Center SAFE, Goethe University Frankfurt); Patrick Grüning (Bank of Lithuania & Faculty of Economics, Vilnius University)
    Abstract: The international diffusion of technology plays a key role in stimulating global growth and explaining co-movements of international equity returns. Existing empirical evidence suggests that countries are heterogeneous in their attitude toward innovation: Some countries rely more on technology adoption while other countries rely more on internal technology production. European countries that rely more on adoption are also typically characterized by lower fiscal policy flexibility and higher labor market rigidity. We develop a two-country model, in which both countries rely on R&D and adoption, to study the shortand long-run effects of aggregate technology and adoption probability shocks on economic growth in the presence of the aforementioned asymmetries. Our framework suggests that an increase in the ability to adopt technology from abroad stimulates future economic growth in the country that benefits from higher adoption rates but the beneficial effects also spread to the foreign country. Moreover, it helps to explain the differences in macro quantities and equity returns observed in the international data.
    Keywords: Technology Adoption, R&D Investment, Asymmetric Tax Regimes, Asset Prices
    JEL: E3 F3 F4 G12
    Date: 2017–10–05
  39. By: International Monetary Fund
    Abstract: Iraq is an oil-dependent and state-dominated fragile economy that has been hit hard by the conflict with ISIS and the fall in oil prices. The conflict has hurt the economy through displacement and impoverishment of millions of people, and destruction of infrastructure and assets. The oil price decline has resulted in a massive reduction in budget revenue, pushing the fiscal deficit to an unsustainable level. The authorities are responding to the crisis with ambitious but necessary fiscal adjustment while maintaining their commitment to the exchange rate peg, which provides a key nominal anchor in a highly uncertain environment.
    Keywords: Iraq;Middle East;
    Date: 2017–08–09
  40. By: Mario Izquierdo (Banco de Espana); Juan Francisco Jimeno (Banco de Espana); Theodora Kosma (Bank of Greece); Ana Lamo (European Central Bank); Stephen Millard (Bank of England); Tairi Room (Eesti Pank); Eliana Viviano (Banca d’Italia)
    Abstract: Against the backdrop of continuing adjustment in EU labour markets in response to the Great Recession and the sovereign debt crisis, the European System of Central Banks (ESCB) conducted the third wave of the Wage Dynamics Network (WDN) survey in 2014-15 as a follow-up to the two previous WDN waves carried out in 2007 and 2009. The WDN survey collected information on wage-setting practices at the firm level. This third wave sampled about 25,000 firms in 25 European countries with the aim of assessing how firms adjusted wages and employment in response to the various shocks and labour market reforms that took place in the European Union (EU) during the period 2010-13. This paper summarises the main results of WDN3 by identifying some patterns in firms’ adjustments and labour market reforms. It seeks to lay out the main lessons learnt from the survey in terms of both the general response of EU labour markets to the crisis and how these responses varied across the countries that took part in the survey.
    Keywords: Wage Dynamics Network; Survey data; Labour market adjustment; Labour market reforms
    JEL: E24 J30 J52 J68
    Date: 2017–09
  41. By: Greene, Claire (Federal Reserve Bank of Boston); O'Brien, Shaun (Federal Reserve Bank of San Francisco); Schuh, Scott (Federal Reserve Bank of Boston)
    Abstract: U.S. consumer cash payments averaged 26 percent of all U.S. consumer payments by number (volume share) from 2008 to 2015, according to the Survey of Consumer Payment Choice (SCPC), and were essentially unchanged between 2012 and 2015. New estimates from the Diary of Consumer Payment Choice (DCPC) show that the volume share of consumer cash payments is higher than estimated in the SCPC and suggest that the cash volume share was 8 percentage points lower in 2015 than in 2012. The DCPC most likely does not provide an accurate estimate of the actual change in the cash volume share, however, due to changes in survey methodology. Counterfactual simulations controlling for survey and economic changes suggest the cash volume share declined approximately 2 to 5 percentage points due to changes in consumer preferences between 2012 and 2015.
    Keywords: Cash; money; payments; consumer behavior; Diary of Consumer Payment Choice; Survey of Consumer Payment Choice
    JEL: D12 D14 E42
    Date: 2017–10–25
  42. By: Gina Christelle Pieters
    Abstract: Many countries manipulate the value of their currency or use some form of capital control, yet the data usually used to detect these manipulations are low frequency, expensive, lagged, and potentially mismeasured. I demonstrate that the price data of the internationally traded cryptocurrency Bitcoin can approximate unocial exchange rates which, in turn, can be used to detect both the existence and the magnitude of the distortion caused by capital controls and exchange rate manipulations. However, I document that bitcoin exchange rates contain problematic bitcoin-market-speci c elements and must be adjusted before being used for this purpose. As bitcoin exchange rates exist at a daily frequency, they reveal transitory interventions that would otherwise go undetected. This result also serves as veri cation that Bitcoin is used to circumvent capital controls and manipulated exchange rates.
    JEL: F30 F31 E42 G15
    Date: 2017–11–20
  43. By: Chirwa, Themba G; Odhiambo, Nicholas M.
    Abstract: This study investigates the relationship between public debt and economic growth using panel data from 10 European countries. Using a panel ARDL approach, the results show that public debt, government consumption, and the real exchange rate are negatively associated with economic growth in both the short and the long run. Furthermore, investment and the real interest rate were found to be positively associated with economic growth in both the short and the long run. Inflation and trade openness were found to have mixed results: both were negatively associated with economic growth in the long run while in the short run the relationship was positive and consistent across groups with a few exceptions. Second, the study results also showed that debt is nonlinear at the 70% threshold only in the long run, while in the short run the results were consistently negative and across groups. The study results have significant policy implications for the Stability and Growth Pact of the Euro area. It is recommended that member states should ensure fiscal sustainability by balancing their fiscal budgets to effectively reduce the accumulation of public debt as well as implementing structural reforms that will improve the efficiency of investment as well as macroeconomic stability.
    Keywords: Cointegration; Economic Growth; Euro Area; Panel ARDL Models; Public Debt
    Date: 2017–12
  44. By: Edward Herbst (Federal Reserve Board); David Lopez-Salido (Federal Reserve Board); Christopher Gust (Federal Reserve Board)
    Abstract: We estimate a New Keynesian model in which the private sector has incomplete information about a central bank’s reaction function and must infer it based on economic outcomes. A central bank’s reaction function can change across regimes and we document a systematic change in U.S. policymakers’ reaction function during the 2009-2016 period in which the federal funds rate was at the effective lower bound. This regime is characterized by being more responsive to economic slack and implies that policymakers sought to keep the policy rate at the ZLB longer than would the case by the pre-existing reaction function; hence, we call this the forward guidance regime. We use the model to assess the impact of forward guidance on the macroeconomy and to evaluate the role of imperfect information and learning in limiting its effectiveness.
    Date: 2017
  45. By: Bitros, George C.
    Abstract: Greece went bankrupt in 2009 presumably because it run an exorbitant public deficit and had accumulated a huge public debt. However, in reality Greece went bankrupt because its model of social and economic organization has been surpassed by European and international developments. To avoid this tragedy, Greece had been given by EEC initially and EU later on enough time to prepare before integrating into the Eurozone. From the treaties it signed Greece ought to have introduced structural transformations to render its economy consistent with the four European freedoms. Instead, time and again successive governments procrastinated and employed all sorts of gimmicks to protect the model of state socialism they had erected on the pillars of the 1975 Constitution. But time and circumstances caught up with their policies and now the cost for confronting the challenges that lie ahead has become enormous. Hopefully, sooner than later, those responsible for the bankruptcy of Greece and the hardships that have befell on the Greek people will discover that their self-interest coincides with that of the country and they will take the lead in the replacement of the present hard core statist model with one based on free and open markets and outward looking entrepreneurship.
    Keywords: Economic crises, austerity policies, ownership of reforms, state socialism, European freedoms
    JEL: E02 G3 H1 H6 O52
    Date: 2017
  46. By: Pessoa de Araujo, Ana Luisa (Federal Reserve Bank of Minneapolis)
    Abstract: How much wage inequality in Brazil is caused by firing costs? To answer this question, I develop and estimate a general equilibrium search and matching model with heterogeneous layoff rates among firms. Using matched employer-employee data from Brazil, I estimate the model, and I find that it replicates the observed residual wage inequality in the data. I simulate a counterfactual removal of existing firing costs, and I find that residual wage inequality drops by 26% as measured by wage variance and by 4.4% as measured by the p95-p5 ratio among 25- to 55-year-old males working in the private sector with at most a high school degree. Worker welfare among this subgroup of households increases by almost 1% in response to the abolishment of firing costs.
    Keywords: Layoff rates; Earnings inequality; Firm heterogeneity; Matched employer-employee data; Wage differentials; Equilibrium search model
    JEL: E61 J31 J63
    Date: 2017–12–05
  47. By: Dastory, Linda (Royal Institute of Technology); Eklund, Johan (Department of Industrial Economics, Blekinge Inst of Technology); Numminen, Emil (Department of Industrial Economics, Blekinge Inst of Technology)
    Abstract: Using panel data from 10 573 non-quoted Swedish SMEs over the period 2006-2014, we examine how dependent investments made by Swedish SMEs are of internally generated cash-flows. To control for investment opportunities, we use an accelerator model. Applying a static accelerator model our result shows that, investment levels are in fact affected by the availability of internal funding. It takes between 2-2.5 years for the capital stock to adjust to shocks in demand. As the speed of the adjustment rate increases firms’ investment levels become more dependent on internal funding, indicating high adjustment costs. Finally, as firms become larger their investment level becomes less dependent on internal funding, indicating that it may be easier for larger firms to attract external funding.
    Keywords: Non-quoted SMEs; Cash flow; Investments; Financial Constraints; Accelerator model.
    JEL: D92 E22
    Date: 2017–12–12
  48. By: Caroline Klein; Olena Havrylchyk; Lorenzo Casullo
    Abstract: Since the crisis, Estonia has experienced one of the most pronounced declines in the ratio of non-residential investment to GDP in the OECD. In addition, investment in intangible capital has remained well below OECD standards, partly explaining the low innovative capacities of typical Estonian firms. Uncertainty created by regional geopolitical tensions has played a role but poor investment performance stems from domestic factors too, such as a normalisation after the boom years, the lack of adequate skills and insufficient incentives for risk-taking. Improving lifelong learning and maintaining skilled mothers in employment can contribute to reducing shortages in skills needed by investors. Restructuring of insolvent firms should be eased to increase credit recovery and redirect capital to the most productive ones. Developing alternatives to bank funding can support investment in small and innovative firms. While there is room to improve the quality of infrastructure further, selection and prioritisation of projects should improve. Incentives for green investment, in particular to reduce pollution emitted by the oil shale industry and to achieve energy efficiency gains, could be strengthened. This Working Paper relates to the 2017 OECD Economic Survey of Estonia ( y-estonia.htm).
    Keywords: business environment, financing, Fintech, infrastructure, insolvency, intangible capital
    JEL: E22 G21 G23 G28 J24 O52 Q56
    Date: 2017–11–22
  49. By: Ryoji Hiraguchi; Keiichiro Kobayashi
    Abstract: We investigate a monetary model with two kinds of decentralized markets and where each agent stochastically chooses the market in which to participate. In one market, the pricing mechanism is competitive, whereas in the other, the terms of trade are determined by Nash bargaining. We show the sub-optimality of the Friedman rule, which is already demonstrated by existing models, where the setting of search externality in the competitive market is not completely satisfactory. We show this result in the more plausible setting when the competitive market does not have a search externality.
    Date: 2017–11
  50. By: Farm, Ante (Swedish Institute for Social Research, Stockholm University)
    Abstract: This is an introduction to money and the workings of the financial system. The creation of money is discussed in detail in Chapter 1. Chapter 2 explains how international payments can add to money creation but also generate a new type of money, usually called Eurodollars. Basic securities are defined and characterized in Chapter 3, namely bills, bonds and shares, but basic derivatives, like futures, swaps, and options, are also discussed. Chapter 4 deals with pricing by banks when extending loans, but also with price formation in markets for securities. Chapter 5 surveys possible threats to the financial system and discusses three different approaches to the problem of stabilizing it, namely crisis management, regulation, and structural reforms.
    Keywords: Money; interest; securities; payments system; financial system
    JEL: E40 E50
    Date: 2017–12–08
  51. By: Yosuke Jin
    Abstract: This paper analyses how technological progress embodied in capital goods raises productivity and income, while at the same time it can modify the allocation of consumption, investment and the capital stock. With capital-embodied technological progress, new capital goods become more productive, thus more valuable, but the production capacity of the existing capital goods declines comparatively and they become less valuable. In a dynamic and stochastic general equilibrium framework, a shock to the process of capital-embodied technological progress is shown not to raise investment as much as could be expected, allowing the owners of capital goods mainly to raise consumption instead. As a result, overall capacity taking account of the improvement in the quality of capital goods rises only modestly. The muted investment response might seem very conservative, because the owners of capital could take greater advantage of the sudden acceleration in the improvement of the quality of capital goods which allows them to raise their production capacity more than usually. However, this conservative behaviour is consistent with an anticipated faster decline in the value of capital goods which become quickly obsolete, raising the cost of capital for the owners. Finally, this paper analyses the implications of the shock to capital-embodied technological progress coinciding with other shocks, namely, a positive one to the investment accelerator mechanism and a negative one to the risk premium. With deceleration in the quality improvement of capital goods, investors would require higher rates of return while affecting negatively the valuation of the capital stock.
    Keywords: asset valuation, capital goods, Capital stock, investment, obsolescence, technological progress
    JEL: D92 E22 O31 O47
    Date: 2017–12–08
  52. By: Szabolcs Deák (University of Surrey); Paul Levine (University of Surrey); Joseph Pearlman (City University); Bo Yang (Swansea University)
    Abstract: We construct, estimate and explore the monetary policy consequences of a New Keynesian (NK) behavioural model with bounded-rationality and heterogeneous agents. We radically depart from most existing models of this genre in our treatment of bounded rationality and learning. Instead of the usual Euler learning approach, we assume that agents are internally rational (IR) given their beliefs of aggregate states and prices. The model is inhabited by fully rational (RE) and IR agents where the latter use simple heuristic rules to forecast aggregate variables exogenous to their micro-environment. We nd that IR results in an NK model with more persistence and a smaller policy space for rule parameters that induce stability and determinacy. In the most general form of the model, agents learn from their forecasting errors by observing and comparing them with those under RE making the composition of the two types endogenous. In a Bayesian estimation with xed proportions of RE and IR agents and a general heuristic forecasting rule we nd that a pure IR model ts the data better than the pure RE case. However, the latter with imperfect rather than the standard perfect information assumption outperforms IR (easily) and RE-IR composites (slightly), but second moment comparisons suggest that the RE-IR composite can match data better. Our ndings suggest that Kalman- ltering learning with RE can match bounded-rationality in matching persistence seen in the data.
    JEL: E12 E32
    Date: 2017–12
  53. By: Katarína Borovičková; Robert Shimer
    Abstract: We develop a new approach to measuring the correlation between the types of matched workers and firms. Our approach accurately measures the correlation in data sets with many workers and firms, but a small number of independent observations for each. Using administrative data from Austria, we find that the correlation between worker and firm types lies between 0.4 and 0.6. We use artificial data sets with correlated worker and firm types to show that our estimator is accurate. In contrast, the Abowd, Kramarz and Margolis (1999) fixed effects estimator suggests no correlation between types in our data set. We show both theoretically and empirically that this reflects an incidental parameter problem.
    JEL: E24 J3 J6
    Date: 2017–11
  54. By: Arvind Ashta
    Abstract: Could work-sharing solves the problems of unemployment, inequality and global warming, and yet produce a happier world? This literature review takes a multidisciplinary view of the problem. We find that theoretically work-sharing can do all these things, but the existing evidence of its performance is debatable and there are hesitations from industry to implement it. We recommend a global initiative, riding on the sustainable development wave, with an appealing narrative to create a just distribution in today's world.
    Keywords: Unemployment; worktime; sharing; work reduction; inequality; happiness
    JEL: E24 J21 J64 J81 M55
    Date: 2017–12–05
  55. By: Chari, V. V. (Federal Reserve Bank of Minneapolis); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis); Teles, Pedro (Banco de Portugal)
    Abstract: We study cooperative optimal Ramsey equilibria in the open economy addressing classic policy questions: Should restrictions be placed to free trade and capital mobility? Should capital income be taxed? Should goods be taxed based on origin or destination? What are desirable border adjustments? How can a Ramsey allocation be implemented with residence-based taxes on assets? We characterize optimal wedges and analyze alternative policy implementations.
    Keywords: Capital income tax; Free trade; Value-added taxes; Border adjustment; Origin- and destination-based taxation; Production efficiency
    JEL: E60 E61 E62
    Date: 2017–12–11
  56. By: Cubas, German; Silos, Pedro
    Abstract: This paper studies how insurance from progressive taxation improves the matching of workers to occupations. We propose an equilibrium dynamic assignment model to illustrate how social insurance encourages mobility. Workers experiment to find their best occupational fit in a process filled with uncertainty. Risk aversion and limited earnings insurance induce workers to remain in unfitting occupations. We estimate the model using microdata from the United States and Germany. Higher earnings uncertainty explains the U.S. higher mobility rate. When workers in the United States enjoy Germany’s higher progressivity, mobility rises. Output and welfare gains are large.
    Keywords: Progressive Taxation, Social Insurance, Occupational Choice
    JEL: E21 H24 J31
    Date: 2017–12
  57. By: George Economides (Athens University of Economics and Business); Dimitris Papageorgiou (Bank of Greece); Apostolis Philippopoulos (Athens University of Economics and Business)
    Abstract: This paper provides a quantitative study of the main determinants of the Greek great depression since 2010. We use a medium-scale DSGE model calibrated to the Greek economy between 2000 and 2009 (the euphoria years that followed the adoption of the euro). Then, departing from 2010, our simulations show that the fiscal policy mix adopted, jointly with the deterioration in institutional quality and, specifically, in the degree of protection of property rights, can explain essentially all the total loss in GDP between 2010 and 2015 (around 26%). In particular, the fiscal policy mix accounts for 14% of the total output loss, while the deterioration in property rights accounts for another 8%. It thus naturally follows that a less distorting fiscal policy mix and a stronger protection of property rights are necessary conditions for economic recovery in this country.
    Keywords: Growth; public debt; institutions
    JEL: O4 H6 E02
    Date: 2017–09
  58. By: Alberto F. Boix; Adri\'an Segura Moreiras
    Abstract: The goal of this paper is to shed light on the determinacy question that arises in New Keynesian models as result of a combination of several monetary policy rules; in these models, we provide conditions to guarantee existence and uniqueness of equilibrium by means of results that are obtained from theoretical analysis. In particular, we show that Taylor--like rules in interest rate setting are not the only way to reach determinacy of the rational expectations equilibrium in the New Keynesian setting. The key technical tool that we use for that purposes is the so--called Budan--Fourier Theorem, that we review along the paper.
    Date: 2017–12
  59. By: Huw Dixon (Cardiff University); ANTHONY SAVAGAR (University of Kent)
    Abstract: This paper argues that firm entry causes endogenous fluctuations in macroeconomic productivity through its effect on incumbent firms’ capacity utilization. The analysis shows that imperfect competition causes long-run excess entry leading to many small firms each with excess capacity. Since entry occurs slowly, macroeconomic shocks are initially borne by these incumbents who respond by altering their capacity utilization. As they vary utilization efficiency changes because of non-constant returns to scale and this aggregates to affect the economy’s productivity. In the long run, entry occurs and new firms dissipate the shock, which alleviates incumbents’ alteration in capacity. Therefore the endogenous productivity effect is temporary.
    Date: 2017
  60. By: Janet Hua Jiang; Cathy Zhang
    Abstract: We investigate competition between two intrinsically worthless currencies as a result of decentralized interactions between human subjects. We design a laboratory experiment based on a simple two-country, two-currency search model to study factors that affect circulation patterns and equilibrium selection. Experimental results indicate foreign currency acceptance rates decrease with relative country size but are not significantly affected by the degree of integration. The laboratory economies tend to converge to a unified currency regime where both currencies circulate at home and abroad, even if other regimes are theoretical possibilities. Introducing government transaction policies biased towards domestic currency significantly reduces the acceptability of foreign currency. These findings suggest government policies can serve as a coordination device when multiple currencies are available.
    Keywords: Central bank research, Digital Currencies
    JEL: C92 D83 E40
    Date: 2017
  61. By: Rauf Gönenç
    Abstract: The mixed growth performance of emerging market economies has revived angst about a "middle-income trap". However, a forensic review of statistical evidence shows that middle-income countries “escape” to higher income levels more often than both poorer and richer countries. At the same time, growth slowdowns are also more frequent in this group. Recent econometric research confirms that the impact of economic policies on GDP growth is greater at middle than at lower and higher income levels. Middle-income countries harvest higher returns from structural reforms, but also meet special political economy obstacles in implementing them. The resulting policy divergences imply differences in performance, reflecting notably the uneven expansion of their high-productivity entrepreneurial firms. The paper highlights the channels through which performance improves when obstacles to policy innovations are overcome and reforms are implemented.
    Keywords: Economic growth, entrepreneurship, financial deepening, human capital, institutions, middle-income countries, productivity convergence, rule of law
    JEL: B15 D02 E02 L26 O10 O17 P48
    Date: 2017–12–12
  62. By: Aaron B. Flaaen; Matthew D. Shapiro; Isaac Sorkin
    Abstract: Displaced workers suffer persistent earnings losses. This stark finding has been established by following workers in administrative data after mass layoffs under the presumption that these are involuntary separations owing to economic distress. This paper examines this presumption by matching survey data on worker-supplied reasons for separations with administrative data. Workers exhibit substantially different earnings dynamics in mass layoffs depending on the reason for separation. Using a new methodology to account for the increased separation rates across all survey responses during a mass layoff, the paper finds earnings loss estimates that are surprisingly close to those using only administrative data.
    JEL: J0 J26 J63 J65
    Date: 2017–11
  63. By: Dragana Stanišic; Belma Hadžihalilovic-Kasumovic;
    Abstract: The aim of this paper is to determine the size of fiscal multipliers (spending and tax multipliers)using a structural vector autoregressive model for Bosnia and Herzegovina (BiH). This is the first attempt of its kind for the BiH economy. The results show that the spending multiplier is higher than the tax multiplier, as expected. The tax multiplier has a negative effect on output and does not have any positive effects on other variables. The spending multiplier has positive effects, but they are limited to the first year after the shock. Both multipliers are within the set of values obtained in other studies on emerging economies.
    Date: 2017–12
  64. By: Warren E. Weber (University of South Carolina); Robert Lucas (University of Chicago); Juan Pablo Nicolini (Minneapolis Fed); Luca Benati (University of Bern)
    Abstract: We explore the long-run demand for M1 based on a data set that has comprised 32 countries since 1851. In many cases, cointegration tests identify a long-run equilibrium relationship between either velocity and the short rate or M1, GDP, and the short rate. Evidence is especially strong for the United States and the United Kingdom over the entire period since World War I and for moderate and high-inflation countries. With the exception of high-inflation countries–for which a “log-log” specification is preferred–the data often prefer the specification in the levels of velocity and the short rate originally estimated by Selden (1956) and Latané (1960). This is especially clear for the United States and other low-inflation countries.
    Date: 2017
  65. By: Andrei A. Sirchenko
    Abstract: This paper introduces a class of ordered probit models with endogenous switching among N latent regimes and possibly endogenous explanatory variables. The paper contributes to and bridges two strands of microeconometric literature. First, it extends endogenous switching regressions to models of ordered choice with N unknown regimes. Second, it generalizes the existing zero-inflated ordered probit models to make them suitable for ordinal data that take on negative, zero and positive values and characterized by abundant and heterogeneous zero observations. From a macroeconomic perspective, it is the first attempt to implement regime switching and accommodate endogenous regressors in discrete-choice monetary policy rules. Recurring oscillating regime switches in the three regimes evolving endogenously in response to the state of economy are detected during a relatively stable policy period such as the Greenspan era. The Monte Carlo experiments and an application to the federal funds rate target demonstrate that ignoring endogeneity and regime-switching environment can lead to seriously distorted statistical inference. In the simulations, the new models perform well in small samples. In the application, they not only have better in-sample fit for the Greenspan era than the existing models but also forecast better out of sample for the entire Bernanke era, correctly predicting 91 percent of policy decisions.
    JEL: C34 C35 C36 E52
    Date: 2017–11–19
  66. By: Harris Dellas (University of Bern and Bank of Greece); George S. Tavlas (Bank of Greece and University of Leicester)
    Abstract: Managed currency without definite, stable, legislative rules is one of the most dangerous forms of "planning." A free enterprise economy can function only within a legal framework of rules; and no part of that framework is more important than the rules which define the monetary system. In the past those rules have been empty and inadequate; but there is no tolerable solution to be found in resort to the wisdom of "authorities." No liberal can contemplate with equanimity the prospect of an economy in which every investment and business venture is largely a speculation in the future actions of the Federal Reserve Board. [Henry Simons (1935, p. 558)]
    Keywords: exchange rate systems; monetary rules; Taylor Rule.
    JEL: F02 F33 E52
    Date: 2017–10
  67. By: Margit Molnar; Thomas Chalaux; Qiang Ren
    Abstract: This paper focusses on the link between urbanisation and consumption behaviour in China. Urbanisation is defined here as rural people moving to cities to work and migrant workers in cities obtaining urban residential status, against the backdrop of government plans to settle 100 million rural dwellers into cities and grant urban residential status to another 100 million migrant workers who already reside in cities. Using household data of the China Family Panel Studies dataset, the paper investigates the impact of those residential status changes on household consumption. The results of the analysis suggest that moving up the residential ladder in this way will likely result in increased consumption by almost 30% for both groups of people and thus contribute to rebalancing of the economy. Higher incomes and longer times in education are important drivers of this process, while a greater number of children in the family discourages consumption. This Working Paper relates to the 2017 OECD Economic Survey of China ( y-china.htm).
    Keywords: consumption, migrant workers, rebalancing, residential status, urbanisation
    JEL: E21 J61 P23 P25
    Date: 2017–11–22
  68. By: Aurélien Goutsmedt (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, Chaire Energie & Prospérité - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique - Ecole Polytechnique - X - ENS Paris - Ecole Normale Supérieure de Paris - Institut Louis Bachelier)
    Abstract: The article studies the 1978 macroeconomics conference titled “After the Phillips Curve”, where Lucas and Sargent presented their fierce attack against structural macroeconometric models, “After Keynesian Macroeconomics”. The article aims at enlarging the comprehension of changes in macroeconomics in the 1970s. It shows: 1) that Lucas and Sargent dit not tackle directly the issue of the explanation of stagflation; 2) but that the struggle between different methodological stances in the conference cannot be separated from the way macroeconomists interpreted stagflation; 3) that it was not an opposition between being in favor or against microfounded models, but rather on the way we build microfoundations; 4) finally that the study of the 1978 conference opens the doors for scrutinizing the evolution of institution macroeconometric models of the 1970s which were not totally overthrown by Lucas and Sargent's arguments.
    Keywords: History of macroeconomics,Keynesian economics,Microfoundations,Structural Macroeconometric Models
    Date: 2017–10
  69. By: Costas Lapavitsas; Ivan Mendieta-Muñoz
    Abstract: Since the Great Recession of 2007-9 the financialisation of the US economy has reached a watershed characterised by stagnant financial profits, falling mortgage debt and rising public debt. The reliance of households on the formal financial system appears to have weakened for the first time in the post-war period. The financial sector has lacked the dynamism characteristic of the previous three decades and has become more reliant on the state, which has greatly increased its own indebtedness and has driven public interest rates close to zero. At the same time, state intervention has tightened the regulatory framework for big banks. The future path of financialisation in the USA will depend heavily on government policy with regard to state debt and to financial regulation.
    Date: 2017
  70. By: Arlene Wong (Federal Reserve Bank of Minneapolis); Aaron Kirkman (Northwestern University); Alejandro Justiniano (Federal Reerve Chicago)
    Abstract: We study the transmission of monetary policy to consumption and the accumulation of mortgage debt. Using a comprehensive and representative borrower-loan level panel the analysis focuses on how decisions to obtain new mortgages or refinance existing ones following policy driven changes in interest rates vary with individual characteristics, particularly age. Furthermore, we document whether this heterogeneity varies by type of refinancing and so look separately at refinancing with and without an increase in mortgage balance. We then explore how these differences in accessing mortgages interact with decisions to tap into housing net worth through home equity loans and lines of credit. Finally, we extended the analysis to other forms of borrowing such as credit card debt and car loans. The latter in turn informs the pass-through to a crucial component of durable consumption.
    Date: 2017
  71. By: Jean-Sébastien Fontaine; James Pinnington; Adrian Walton
    Abstract: We study settlement fails for trades in the Government of Canada bond market. We find that settlement fails do not occur independently. Using a novel and comprehensive dataset, we examine three drivers of fails. First, we find that fails are more likely following the release of surprise macroeconomic news. Second, settlement fails are more likely for bonds with greater trading activity in the borrowing market. These findings suggest that the recirculation of bonds through long settlement chains is important for understanding fails. Third, fails are more likely when interest rates are low and when the cost for borrowing a bond is high, which is likely because of frictions acting as constraints on the price to borrow a bond. Together, the evidence suggests that improvements to the price mechanism in the borrowing market could improve the recirculation of scarce bonds and may improve the functioning of the bond market.
    Keywords: Financial markets, Market structure and pricing, Payment clearing and settlement systems
    JEL: E4 G1 G2 G21 L1
    Date: 2017
  72. By: Peter Kondor (London School of Economics); Maryam Farboodi (Princeton University)
    Abstract: In this paper, we build a novel model of flight-to-quality cycles and investment. We show that informational frictions can lead to flight-to-quality cycles. Also, this fluctuation leads to diverse investment decisions where the issuers who are perceived as low types under-invest ex-ante, and inefficiently liquidate projects ex-post. The smaller is the ex-ante probability of a flight-to-quality event, the larger is the ex-post spread and the inefficient liquidation.
    Date: 2017
  73. By: Aurélien Goutsmedt (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, Chaire Energie & Prospérité - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique - Ecole Polytechnique - X - ENS Paris - Ecole Normale Supérieure de Paris - Institut Louis Bachelier); Erich Pinzón-Fuchs (Universidad de los Andes [Bogota]); Matthieu Renault (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Francesco Sergi (University of Bristol [Bristol])
    Abstract: We illustrate how the Lucas Critique was called into question by Keynesian macroeconomists during the 1970s and 1980s. Our claim is that Keynesians' reactions were carried out from a pragmatic approach, which addressed the empirical and practical relevance of the Critique. Keynesians rejected the Critique as a general principle with no relevance for concrete macroeconometric practice; their rejection relied on econometric investigations and contextual analysis of the U.S. 1970s stagflation and its aftermath. Keynesians argued that the parameters of their models remained stable across this period, and that simpler ways to account for stagflation (such as the introduction of supply shocks into their models) provided better alternatives to improve policy evaluation.
    Keywords: History of macroeconomics,Lucas Critique,Keynesian macroeconometrics,Stagflation
    Date: 2017–10
  74. By: Angel Asensio (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In a recent article titled 'IYLM: a General Theory-compatible replacement to ISLM', Roderick O'Donnell and Colin Rogers (2016, Cambridge J. of Econ. 40(1), 349-364) offer a model claimed to be 'a representation of the GT’s central general propositions' substantially different from the ISLM version. In this short note, it is shown that: a) the IY equation (product market equilibrium condition) is mis-specified, b) once the additional ‘overall equilibrium condition’ i = mec is added, the IY-LM model is formally an IS-LM model. It is argued furthermore that the effects of the entrepreneurs’ long-term expectations and of the state of liquidity preference can be made explicit in the investment and money demand functions to account for those highly Keynesian features within the IS-LM framework.
    Keywords: ISLM, IYLM, Keynes, macroeconomics, model
    Date: 2017–10–17
  75. By: Katalin Bodnár (Magyar Nemzeti Bank); Ludmila Fadejeva (Latvijas Banka); Stefania Iordache (Banca Nationala a Romaniei); Liina Malk (Eesti Pank); Desislava Paskaleva (Bulgarian National Bank); Jurga Pesliakaite (Lietuvos Bankas); Nataša Todorovic Jemec (Banka Slovenije); Peter Tóth (Národná banka Slovenska); Robert Wyszynski (Narodowy Bank Polski)
    Abstract: We study the transmission channels for rises in the minimum wage using a unique firm-level dataset from eight Central and Eastern European countries.Representative samples of firms in each country were asked to evaluate the relevance of a wide range of adjustment channels following specific instances of rises in the minimum wage during the recent post-crisis period. The paper contributes to the literature by presenting the reactions of firms to rises in the minimum wage as a combination of strategies, and evaluates the relative importance of those strategies. Our findings suggest that the most popular adjustment channels are cuts in non-labour costs, rises in product prices, and improvements in productivity. Cuts in employment, which is the adjustment channel most commonly studied in the empirical literature, is less popular and occurs mostly through reduced hiring rather than direct layoffs. Our study also provides evidence of potential spillover effects that rises in the minimum wage can have on firms without minimum wage workers. Finally, we analyse the different firm-level characteristics that drive the choice of adjustment strategies.
    Keywords: minimum wages, adjustment channels, firm survey
    JEL: D22 E23 J31
    Date: 2017–12

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