nep-mac New Economics Papers
on Macroeconomics
Issue of 2018‒01‒01
eighty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. International Transmission of Financial Shocks without Financial Integration By Ohdoi, Ryoji
  2. The Macroeconomic Determinants of the Pass-Through from the Market Interest Rate to the Bank Lending Rate in Mozambique By Machava, Agostinho
  3. A Macroeconomic Model with Financial Panics By Gertler, Mark; Kiyotaki, Nobuhiro; Prestipino, Andrea
  4. Why so low for so long? A long-term view of real interest rates By Claudio Borio; Piti Disyatat; Mikael Juselius; Phurichai Rungcharoenkitkul
  5. Why so low for so long? A long-term view of real interest rates By Borio, Claudia; Disyatat, Piti; Juselius, Mikael; Rungcharoenkitkul, Phurichai
  6. Macroeconomic Implications of Financial Imperfections: A Survey By Stijn Claessens; M. Ayhan Kose
  7. Capturing macroprudential regulation effectiveness: A DSGE approach with shadow intermediaries By Federico Lubello; Abdelaziz Rouabah
  8. A New Keynesian model with unemployment: The effect of on-the-job search By Kantur, Zeynep; Keskin, Kerim
  9. Central Bank Optimism as a Policy Tool: Evidence from the Bank of England By Tola Adesina
  10. Teaching Modern Macroeconomics in the Mundell-Fleming Language: The IS-MR-UIP-AD-AS Mode By Waldo Mendoza
  11. Does Business Con?dence Matter for Investment? By Hashmat Khan; Santosh Upadhayaya
  12. The Effectiveness of Monetary and Fiscal Policy Shocks on U.S. Inequality: The Role of Uncertainty By Goodness C. Aye; Matthew W. Clance; Rangan Gupta
  13. Mapping China’s time-varying house price landscape By Funke, Michael; Leiva-Leon, Danilo; Tsang, Andrew
  14. Optimal Monetary Policy and Fiscal Policy Interaction in a non-Ricardian Economy By Massimiliano Rigon; Francesco Zanetti
  15. Optimal Inflation with Corporate Taxation and Financial Constraints By Daria Finocchiaro; Giovanni Lombardo; Caterina Mendicino; Philippe Weil
  16. Government Spending Shocks and Private Activity: The Role of Sentiments By Hyeongwoo Kim; Bijie Jia
  17. Economic policy, the international environment and the state of Poland’s public finances: Scenarios By Aleksander £aszek
  18. Funzioni economiche del risparmio per il buon funzionamento dell'economia. By Pietro Alessandrini
  19. A Kinked-Demand Theory of Price Rigidity By S. Dupraz
  20. Central bank financial strength and inflation: an empirical reassessment considering the key role of the fiscal support By Julien Pinter
  21. A BVAR Model for Forecasting of Czech Inflation By Frantisek Brazdik; Michal Franta
  22. Russia’s Crony Capitalism: Stagnant But Stable By Anders Aslund
  23. Macroeconomic implications of oil price fluctuations: a regime-switching framework for the euro area By Holm-Hadulla, Fédéric; Hubrich, Kirstin
  24. Asymmetric effects of monetary policy in regional housing markets By Knut Are Aastveit; André K. Anundsen
  25. VAT non-compliance in Poland under scrutiny (Problem nieœci¹galnoœci VAT w Polsce pod lup¹) By Grzegorz Poniatowski; dr. Jaros³aw Neneman; Tomasz Michalik
  26. Investing in Human Capital to Boost Growth! By Caroleo, Floro Ernesto; Pastore, Francesco
  27. Combining Monetary Policy and Prudential Regulation: An Agent-Based Modeling Approach By Michel Alexandre; Gilberto Tadeu Lima
  29. Predicting US Inflation: Evidence from a New Approach By Afees A. Salisu; Kazeem Isah
  30. Did the exchange rate interventions enhance inflation in Switzerland? By Žídek, Libor; Šuterová, Magdalena
  31. Employment Adjustment and Part-time Work: Lessons from the United States and the United Kingdom By Daniel Borowczyk-Martins; Etienne Lalé
  32. Oil and macroeconomic (in)stability By Hilde C. Bjørnland; Vegard H. Larsen; Junior Maih
  33. Ukraine: Selected Economic Issues By Vasily Astrov; Leon Podkaminer
  34. The Digital Economy, New Products and Consumer Welfare By Diewert, Erwin; FOX, Kevin J. Fox; SCHREYER, Paul
  35. Fiscal Consolidation Programs and Income Inequality By Pedro Brinca; Miguel H. Ferreira; Francesco Franco; Hans A. Holter; Laurence Malafry
  36. Can the Adoption of the Euro in Croatia Reduce the Cost of Borrowing? By Davor Kunovac; Nina Pavić
  37. How do the EM Central Bank talk? A Big Data approach to the Central Bank of Turkey By Joaquin Iglesias; Alvaro Ortiz; Tomasa Rodrigo
  38. Understanding the Size of the Government Spending Multiplier: It's in the Sign By Barnichon, Regis; Matthes, Christian
  39. Youth and gender-specific unemployment and Okun's law in Germany and Poland By Dunsch, Sophie
  40. Trinidad and Tobago; 2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Trinidad and Tobago By International Monetary Fund
  41. Los salarios en Galicia. Una visión a través de las fuentes estadísticas By González-Laxe, Fernando; Armesto-Pina, José Francisco; Sanchez-Fernandez, Patricio
  42. Constraints on LTV as a macroprudential tool: a precautionary tale By José Garcia Montalvo; Josep M. Raya
  43. The strong increase of Austrian government debt in the Kreisky era: Austro-Keynesianism or just stubborn forecast errors? By Florian Brugger; Joern Kleinert
  44. Government Expenditure Ceiling and Public Debt Dynamics in a Demand-led Macromodel By Rafael Saulo Marques Ribeiro; Gilberto Tadeu Lima
  45. The Rate of Return on Everything, 1870–2015 By Jorda, Oscar; Knoll, Katharina; Kuvshinov, Dmitry; Schularick, Moritz; Taylor, Alan M.
  46. The Impact of Uncertainty Shocks on the Volatility of Commodity Prices By Dimitrios Bakas; Athanasios Triantafyllou
  47. Economic Policy and Macroeconomic Developments in Hungary, 2010-2015 By Gábor Oblath
  48. Bank-based versus market-based financing: implications for systemic risk By Joost Bats; Aerdt Houben
  49. Inferring Inequality with Home Production By Boerma, Job; Karabarbounis, Loukas
  50. Philippines; 2017 Article IV Consultation-Press Release; Staff Report By International Monetary Fund
  51. Armenia; Technical Assistance Report-Upgrading Fiscal Rules By International Monetary Fund
  52. The real effects of overconfidence and fundamental uncertainty shocks By Ambrocio, Gene
  53. Spain; Financial Sector Assessment Program-Technical Note-Systemic Risk Oversight Framework and Macroprudential Policy By International Monetary Fund
  54. Consumer lending in Russia: prospects and risks based on household finance survey By Mamedli Mariam; Andrey Sinyakov
  55. Should one follow movements in the oil price or in money supply? Forecasting quarterly GDP growth in Russia with higher-frequency indicators By Mikosch, Heiner; Solanko, Laura
  56. Mexico; 2017 Article IV Consultation-Press Release; and Staff Report By International Monetary Fund
  57. Liberia; Seventh and Eighth Reviews Under the Extended Credit Facility Arrangement, and Request for Nonobservance of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Liberia By International Monetary Fund
  58. Housing booms and busts and local fiscal policy By Albert Solé-Ollé; Elisabet Viladecans-Marsal
  59. The condition of and prospects for the private equity funds market in Poland (Stan i perspektywy rozwoju rynku funduszy private equity w Polsce) By Barbara Nowakowska; Piotr Noceñ; Micha³ Surowski; Micha³ Popio³ek
  60. Fear Thy Neighbor: Spillovers from Economic Policy Uncertainty By Nina Biljanovska; Francesco Grigoli; Martina Hengge
  61. More for less: What tax system for Poland? By Stanis³aw Gomu³ka; Jaros³aw Neneman; Micha³ Myck
  62. Bayesian Inference for Structural Vector Autoregressions Identified by Markov-Switching Heteroskedasticity By Helmut Lütkepohl; Tomasz Woźniak
  63. What do aggregate saving rates (not) show? By Ponomarenko, Alexey A.; Ponomarenko, Alexey N.
  64. Forecast Performance in Times of Terrorism By Jonathan Benchimol; Makram El-Shagi
  65. Booms, Crises, and Recoveries: A New Paradigm of the Business Cycle and its Policy Implications By Valerie Cerra; Sweta Chaman Saxena
  66. Explaining the Historic Rise in Financial Profits in the US Economy By Costas Lapavitsas; Ivan Mendieta-MuÃ’oz
  67. Former Yugoslav Republic of Macedonia; 2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Former Yugoslav Republic of Macedonia By International Monetary Fund
  68. Drivers of price inertia: survey evidence By Nataliya Karlova; Irina Bogacheva; Elena Puzanova
  69. The debt tax shield, economic growth and inequality By Fischer, Marcel; Jensen, Bjarne Astrup
  70. The Golden Rule of Longevity By Gylfi Zoega; Gylfi Zoega
  71. Income-Factor Polarization: A Methodological Approach By Marco Ranaldi
  72. Investigating the macroeconomic determinants of household debt in South Africa By Nomatye, Anelisa; Phiri, Andrew
  73. Mortgage arrears, regulation and institutions: Cross-country evidence By Irina Stanga; Razvan Vlahu; Jakob de Haan
  74. Uncertainty Effects on the Financial Sector: International Evidence By Christopher F Baum; Mustafa Caglayan; Bing Xu
  75. Capital and liquidity buffers and the resilience of the banking system in the euro area By Budnik, Katarzyna; Bochmann, Paul
  76. A Term Structure Model of Interest Rates with Quadratic Volatility By TAKAMIZAWA, Hideyuki
  77. An Overview of Inflation-Targeting Frameworks: Institutional Arrangements, Decision-making, & the Communication of Monetary Policy By Alberto Naudon; Andrés Pérez
  78. Tax Reform, Unhealthy Commodities and Endogenous Health By Jiunn Wang; Laura Marsiliani; Thomas Renstrom
  79. Developing macroprudential policy for alternative investment funds By Koen van der Veer; Anouk Levels; Claudia Lambert; Luis Molestina Vivar; Christian Weistroffer; Raymond Chaudron; René de Sousa van Stralen
  80. The impact of health on labour supply near retirement By Richard Blundell; Jack Britton; Monica Costa Dias; Eric French
  81. Estimating the Benefits and Costs of New and Disappearing Products By Diewert, W, Erwin; Feenstra, Robert

  1. By: Ohdoi, Ryoji
    Abstract: This study analyzes how financial shocks in one country transmit to another country through international trade. To this end, it develops a dynamic general equilibrium model of two-country Ricardian trade with a continuum of goods. Financial frictions exist in each country and the two countries can be asymmetric in terms of the degree of frictions, which can be a novel source of comparative advantage. In the case of a permanent credit crunch, we can analytically show that such a shock reduces the long-run investment, GDP, wage income, and aggregate income of heterogeneous entrepreneurs in both countries. We also numerically investigate the transitory responses to a temporal credit shock and show that such an internationally synchronized economic downturn is also observed during transition periods.
    Keywords: Financial Frictions, Dynamic Ricardian Trade with a Continuum of Goods, Heterogeneous Agents, Asymmetric Countries, Credit Crunch
    JEL: E22 E32 E44 F11 F44
    Date: 2017–12
  2. By: Machava, Agostinho (Department of Economics, Umeå University)
    Abstract: This paper employs a linear regression with interaction terms, impulse response functions, and analysis of multiplier effects to identify the macroeconomic determinants of the market-to-bank interest rate pass-through in Mozambique. This paper also looks at how these macroeconomic fundamentals affect the interest rate pass-through mechanism. The study finds incomplete market-to-bank interest rate pass-through and shows that it takes approximately five months for the money market rate to be fully transmitted to the bank lending rate. There is evidence indicating the existence of asymmetry in the interest rate transmission mechanism, and the empirical findings also highlight that GDP growth and inflation are the most important macroeconomic variables influencing the degree of the interest rate pass-through in both the short and long run.
    Keywords: Mozambique; cointegration; interaction terms; asymmetry; interest rate pass-through; money market rate; bank lending rate
    JEL: E43 E44 G21
    Date: 2017–12–18
  3. By: Gertler, Mark; Kiyotaki, Nobuhiro; Prestipino, Andrea
    Abstract: This paper incorporates banks and banking panics within a conventional macroeconomic framework to analyze the dynamics of a financial crisis of the kind recently experienced. We are particularly interested in characterizing the sudden and discrete nature of the banking panics as well as the circumstances that makes an economy vulnerable to such panics in some instances but not in others. Having a conventional macroeconomic model allows us to study the channels by which the crisis affects real activity and the effects of policies in containing crises.
    Keywords: Bank Runs; Financial Crisis; New Keynesian DSGE
    JEL: E23 E32 E44 G01 G21 G33
    Date: 2017–12–15
  4. By: Claudio Borio; Piti Disyatat; Mikael Juselius; Phurichai Rungcharoenkitkul
    Abstract: Prevailing explanations of the decline in real interest rates since the early 1980s are premised on the notion that real interest rates are driven by variations in desired saving and investment. But based on data stretching back to 1870 for 19 countries, our systematic analysis casts doubt on this view. The link between real interest rates and saving-investment determinants appears tenuous. While it is possible to find some relationships consistent with the theory in some periods, particularly over the last 30 years, they do not survive over the extended sample. This holds both at the national and global level. By contrast, we find evidence that persistent shifts in real interest rates coincide with changes in monetary regimes. Moreover, external influences on countries' real interest rates appear to reflect idiosyncratic variations in interest rates of countries that dominate global monetary and financial conditions rather than common movements in global saving and investment. All this points to an underrated role of monetary policy in determining real interest rates over long horizons.
    Keywords: real interest rate, natural interest rate, saving, investment, inflation, monetary policy
    JEL: E32 E40 E44 E50 E52
    Date: 2017–12
  5. By: Borio, Claudia; Disyatat, Piti; Juselius, Mikael; Rungcharoenkitkul, Phurichai
    Abstract: Prevailing explanations of the decline in real interest rates since the early 1980s are premised on the notion that real interest rates are driven by variations in desired saving and investment. But based on data stretching back to 1870 for 19 countries, our systematic analysis casts doubt on this view. The link between real interest rates and saving-investment determinants appears tenuous. While it is possible to find some relationships consistent with the theory in some periods, particularly over the last 30 years, they do not survive over the extended sample. This holds both at the national and global level. By contrast, we find evidence that persistent shifts in real interest rates coincide with changes in monetary regimes. Moreover, external influences on countries’ real interest rates appear to reflect idiosyncratic variations in interest rates of countries that dominate global monetary and financial conditions rather than common movements in global saving and investment. All this points to an underrated role of monetary policy in determining real interest rates over long horizons.
    JEL: E32 E40 E44 E50 E52
    Date: 2017–12–21
  6. By: Stijn Claessens (Monetary and Economic Department, Bank for International Settlements; CEPR); M. Ayhan Kose (Development Prospects Group, World Bank; Brookings Institution; CEPR; CAMA)
    Abstract: This paper surveys the theoretical and empirical literature on the macroeconomic implications of financial imperfections. It focuses on two major channels through which financial imperfections can affect macroeconomic outcomes. The first channel, which operates through the demand side of finance and is captured by financial accelerator-type mechanisms, describes how changes in borrowers’ balance sheets can affect their access to finance and thereby amplify and propagate economic and financial shocks. The second channel, which is associated with the supply side of finance, emphasizes the implications of changes in financial intermediaries’ balance sheets for the supply of credit, liquidity and asset prices, and, consequently, for macroeconomic outcomes. These channels have been shown to be important in explaining the linkages between the real economy and the financial sector. That said, many questions remain.
    Keywords: Asset prices, balance sheets, credit, financial accelerator, financial intermediation, financial linkages, international linkages, leverage, liquidity, macro-financial linkages, output, real-financial linkages.
    JEL: D53 E21 E32 E44 E51 F36 F44 G01 G10 G12 G14 G15 G21
    Date: 2017–12
  7. By: Federico Lubello; Abdelaziz Rouabah
    Abstract: Shadow intermediaries activities have registered a spectacular increase during the last decades. Recently, their market shares have rapidly been gaining momentum partially due to “regulatory arbitrage". Although their centrality to the credit boom in the early 2000s and to the collapse during the financial crisis of 2007-2009 is widely documented, the number of contributions studying the implications on the real economy and the underlying transmission mechanisms is surprisingly limited. We contribute to filling this gap and devise a new DSGE model whose productive sector captures key characteristics of the European economy by accounting for small and large firms vertically linked in a production chain. The adopted framework includes commercial banks and shadow financial intermediaries directly interconnected in the interbank market with specific and differentiated channels of financing to the real economy. The framework also incorporates moral hazard for commercial banks which, together with regulatory arbitrage, might bring further incentives for banks to securitize part of their assets. An attempt to incorporate macroprudential policy is considered through the implementation of capital requirements and caps to securitization in the traditional banking sector. The results show that the complementarity of such tools devised by a macroprudential authority can be effective in dampening aggregate volatility and safeguarding financial stability.
    Keywords: DSGE models, Macroprudential Policy, Shadow Banking, SMEs
    JEL: C32 E32 E44 E5 G21 G23
    Date: 2017–10
  8. By: Kantur, Zeynep; Keskin, Kerim
    Abstract: Although New Keynesian models with labor market frictions found an increase in unemployment and a decrease in labor market tightness in response to a positive technology shock (which appears to be in line with recent empirical findings), the volatilities of unemployment and labor market tightness are not as high as their empirical counterparts. This calls for the introduction of new tools that will amplify the volatilities of these variables. This paper contributes to the theoretical literature by studying the effect of employment-to-employment flows in a New Keynesian model with labor market frictions. In that regard, the authors assume two types of firms which offer different wage levels, thereby incentivizing low-paid agents to search on-the-job. Differently from the literature, the main source of wage dispersion is the assumption of different bargaining powers of firms motivated by the strength of labor unions. The authors show that the proposed model generates a higher volatility of unemployment and labor market tightness in response to a positive technology shock compared to the model without on-the-job search without causing a change in the responses of the other variables.
    Keywords: New Keynesian model,employment-to-employment flow,unemployment fluctuations,the Shimer puzzle,search and matching
    JEL: E12 E24 E32 J63 J65
    Date: 2017
  9. By: Tola Adesina (Birkbeck, University of London)
    Abstract: We evaluate the tone of optimism in the Bank of England’s Monetary Policy Committee (MPC) communication using computerised textual analysis and then explore the impacts of optimism shocks on key macroeconomic variables. We show that innovations in optimism impact key macroeconomic variables in the same way that a contractionary monetary policy would. We find that increasing optimism shocks in MPC communication leads to rising inflation, falling output, declining stock market returns and a rise in the Pound value. We further find evidence that optimism shocks reduce credit availability, the money supply, retail sales as well as earnings. Finally, government bond yields also tend to rise in response to optimism shocks.
    Keywords: Central Bank Communication, Monetary Policy, Optimism.
    JEL: E52 E58
    Date: 2017–11
  10. By: Waldo Mendoza (Departamento de Economía de la Pontificia Universidad Católica del Perú)
    Abstract: The traditional open aggregate demand and aggregate supply model backed by the Mundell-Fleming model, together with the supply curve that relates the price level to the output gap, should be abandoned in undergraduate Macroeconomics teaching. First, because economies do not return automatically to equilibrium; second, modern central banks set the interest rate, not the amount of money; and third, the main variable of interest is inflation, not price level. The New Keynesian models taught in intermediate macroeconomics have raised these questions, and had been expected to replace the traditional model. However, they lack its appeal and simplicity. At present, the Mundell-Fleming model, on the verge of turning 60, remains a fundamental part of undergraduate-level macroeconomics textbooks. In this article we present an alternative, the IS-MR-UIP-AD-AS, a simple New Keynesian model and a form of the Mundell-Fleming with inflation targeting that determines the equilibrium values ​​of production, inflation, the real interest rate, and the real exchange rate. The model is as simple as the traditional one in that it replicates the general equilibrium scheme, it contains a reasonable measure of mathematics and graphical treatment, and it has a simple connection between predictions and facts; but it is also useful in analyzing the main questions of interest. In addition, and more importantly, the device is as flexible as the traditional one, so it can be extended to deal with more complex matters.The main objective is that this model replace the traditional Mundell-Fleming in the teaching of macroeconomics at the undergraduate level. JEL Classification-JEL: E32 , E52 , E58
    Keywords: Teaching macroeconomics, Inflation Targeting Scheme, Mundell-Fleming Model, Open-Economy New Keynesian Model, monetary policy rule
    Date: 2017
  11. By: Hashmat Khan (Department of Economics, Carleton University); Santosh Upadhayaya (Department of Economics, Carleton University)
    Abstract: Business con?dence is a well-known leading indicator of future output. Whether it has information about future investment is, however, unclear. In this paper, we determine how informative business con?dence is for investment growth independently of other variables using US business con?dence survey data for 1955Q1–2016Q4. Our main ?ndings are: (i) business con?dence leads US business investment growth by one quarter, and structures investment by two quarters; (ii) business con?dence has predictive ability for investment growth; (iii) remarkably, business con?dence has superior forecasting power, relative to conventional predictors, for investment downturns over 1–3 quarter forecast horizons and for the sign of investment growth over a 2–quarter forecast horizon; and (iv) impulse response analysis reveals that exogenous shifts in business con?dence re?ect short-lived non-fundamental factors, consistent with the ‘animal spirits’ view of investment. Our ?nd-ings have implications for improving investment forecasts, developing new business cycle models, and studying the role of social and psychological factors determining investment growth.
    Keywords: Business con?dence, Investment, Forecasting, Downturns, Directional forecasts
    JEL: C32 E22 E32 E37
    Date: 2017–12–21
  12. By: Goodness C. Aye (Department of Economics, University of Pretoria, Pretoria, South Africa); Matthew W. Clance; Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa)
    Abstract: The study examines the effect of monetary and fiscal policy on inequality conditioned on low and high uncertainty. We use U.S. quarterly time series data on different measures of income, labour earnings, consumption and total expenditure inequality as well as economic uncertainty. Our analysis is based on the impulse responses from the local projection methods that enable us to recover a smoothed average of the underlying impulse response functions. The results show that both contractionary monetary and fiscal policies increase inequality, and in the presence of relatively higher levels of uncertainty, the effectiveness of both policies is weakened. Thus, pointing to the need for policy-makers to be aware of the level of uncertainty while conducting of economic policies in the U.S.
    Keywords: Inequality, Monetary and Fiscal Policies, Uncertainty
    JEL: C22 E24 E40 E62
    Date: 2017–12
  13. By: Funke, Michael; Leiva-Leon, Danilo; Tsang, Andrew
    Abstract: The recent increase in China’s house prices at the national level masks tremendous variation at the city level – a feature largely overlooked in the macroprudential literature. This paper considers the evolving heterogeneity in China’s house price dynamics across 70 cities and assess the main deter-minants. We gauge the heterogeneity of house price dynamics using a novel regime-switching modelling approach to estimate the time-varying patterns of China’s city-level housing price synchronization. After sorting city-level housing prices into four clusters sharing similar cyclical features, we see that each group shows increasing synchronization in the years leading up to 2015, and a decoupling pattern thereafter. We document high synchronization within each of the clusters of cities, but low synchronization among them. The empirical evidence suggests that differentials in the growth of households, income, investment and even differences in air quality explain housing price synchronization among cities.
    JEL: E31 E32 C32
    Date: 2017–12–09
  14. By: Massimiliano Rigon (Bank of Italy); Francesco Zanetti (University of Oxford)
    Abstract: This paper studies optimal discretionary monetary policy and its interaction with fiscal policy in a New Keynesian model with fi?nitely-lived consumers and government debt. Optimal discretionary monetary policy involves debt stabilization to reduce consumption dispersion across cohorts of consumers. The welfare relevance of debt stabilization is proportional to the debt-to-output ratio and inversely related to the household?s probability of survival that affects the household?s propensity to consume out ?financial wealth. Debt stabilization bias implies that discretionary optimal policy is suboptimal compared with the infl?ation targeting rule that fully stabilizes the output gap and the in?flation rate while leaving debt to freely fl?uctuate in response to demand shocks.
    Keywords: Optimal monetary policy, ?fiscal and monetary policy interaction.
    JEL: E52 E63
    Date: 2017–12
  15. By: Daria Finocchiaro; Giovanni Lombardo; Caterina Mendicino; Philippe Weil
    Abstract: How does inflation affect the investment decisions of financially constrained firms in the presence of corporate taxation? Inflation interacts with corporate taxation via the deductibility of i) capital expenditures and ii) interest payments on debt. Through the first channel, inflation increases firms’ taxable profits and further distorts their investment decisions. Through the second, expected inflation affects the effective real interest rate and stimulates investment. When debt is collateralized, the second effect dominates. Therefore, present a tax-advantage to debt financing, positive long-run inflation enhances welfare by mitigating or even eliminating the investment distortion.
    Keywords: optimal monetary policy; Friedman rule; credit frictions; tax benefits of debt
    JEL: E31 E43 E44 E52 G32
    Date: 2017–12
  16. By: Hyeongwoo Kim; Bijie Jia
    Abstract: This paper studies the dynamic effects of the fiscal policy shock on private activity using an array of vector autoregressive models for the post-war U.S. data. We are particularly interested in the role of consumer sentiment in the transmission of the government spending shock. Our major findings are as follows. Private spending fails to rise persistently in response to positive spending shocks, while they exhibit persistent and significant increases when the sentiment shock occurs. Employment and real wages in the private sector also respond significantly positively only to the sentiment shock. The government spending shock generates consumer pessimism, resulting in subsequent decreases in private activity, weakening the effectiveness of the fiscal policy. We further corroborate our claims via counterfactual simulation exercises and nonlinear state-dependent VAR model estimations.
    Keywords: Government Spending; Consumer Sentiment; Survey of Professional Forecasters; Nonlinear VAR; Counterfactual Simulations
    JEL: E32 E62
    Date: 2017–12
  17. By: Aleksander £aszek
    Abstract: Poland’s structural deficit is one of the largest in the EU. While other Member States are taking action to reduce their deficits, the Polish government has not only introduced costly projects, but has also announced additional projects that will further aggravate the state of Polish public finances. The aim of maintaining the nominal deficit under 3% of GDP, as declared by the government, is insufficient because it does not leave a margin of safety in case of an economic slowdown. In the meantime, the turbulent global economy and the structural challenges the Polish economy is facing make the scenario of an economic slowdown increasingly plausible. Dr. Aleksander £aszek evaluates the government’s current policy through the lens of the challenges that stand a head of Polish economy, and its resilience to shocks, in the new mBank-CASE Seminar Proceedings "Economic policy, the international environment and the state of Poland’s public finances: Scenarios".
    Keywords: Public finance, general government debt, general government deficit, structural deficit
    JEL: E20 E62 E66 G21 G28 H24 H25 H3 H6
    Date: 2017–03
  18. By: Pietro Alessandrini (Universita' Politecnica delle Marche, MoFiR)
    Abstract: La Costituzione Italiana, articolo 47, "incoraggia e tutela il risparmio in tutte le sue forme". Esplicitamente attribuisce al risparmio il ruolo di bene pubblico fondamentale per il sistema economico e sociale. Dobbiamo chiederci perché il risparmio è cosí importante da essere considerato nella carta costituzionale. La risposta a questa domanda può essere articolata riprendendo in esame le caratteristiche generali del risparmio, le sue principali determinanti, le fonti private, pubbliche e internazionali del risparmio, le forme di impiego attraverso il sistema finanziario, gli effetti sullo sviluppo economico. The Italian Constitution, article 47, "encourage and safeguard saving in all of its forms". Explicitly the role of fundamental public good for the economic and social system is attributed to saving. The question is to explain why saving is so important to be considered in the Constitution. The answer needs to consider different aspects of saving, like: general characteristics; main determinants; private, public, and international sources; different uses through the financial system, impacts on the economic growth.
    Keywords: saving, investment, macroeconomy
    JEL: E21 E22 E44
    Date: 2017–12
  19. By: S. Dupraz
    Abstract: I provide a microfounded theory for one of the oldest, but so far informal, explanations of price rigidity: the kinked demand curve theory. Assuming that some customers observe at no cost only the price of the store they happen to be at gives rise to a kink in firms' demand curves: a price increase above the market price repels more customers than a price decrease attracts. The kink in turn makes a range of prices consistent with equilibrium, but a selection criterion that captures firms' reluctance to be the first to change prices---the adaptive rational-expectations criterion---selects a unique equilibrium where prices stay constant for a long time. The kinked-demand theory is consistent with price-setters' account of price rigidity as arising from the customer's---not the firm's---side, and their account of their reluctance to make the first step in changing prices. The kinked-demand theory can be tested against menu-cost models in micro data: it predicts that prices should be more likely to change if they have recently changed, and that prices should be more flexible in markets where customers can more easily compare prices. At the macro level, the kinked-demand theory induces a trade-off between output and inflation that substantially differs from prominent theories of sticky prices: the Phillips curve is strongly convex but does not contain any (present or past) expectations of inflation, and is non-vertical in the long-run.
    Keywords: Kinked demand; Sticky prices; Coordination failures; Phillips curve.
    JEL: E31 E32
    Date: 2017
  20. By: Julien Pinter (Centre d'Economie de la Sorbonne & Amsterdam University)
    Abstract: This paper re-examines whether weak central bank finances affect inflation by scrutinizing the key rationale for such a relationship: that the absence of Treasury support makes central bank finances relevant for price stability. Specifically, I ask whether central banks which are not likely to enjoy fiscal support when needed experience higher inflation as their inflation as their financial situation deteriorates. I find this to be true among a large sample of 82 countries between 1998 and 2008. De facto potential fiscal support appears relevant, while de jure fiscal support, which I survey analyzing 82 central bank laws, does not appear to matter. No link is found in a general context. The results bring forward an explanation for the conflicting results of the previous empirical studies, which neglected this key component
    Keywords: Central bank financial strength; Central bank capital; Central bank balance sheet; Inflation; Fiscal space; Central bank law
    JEL: E58 E52 E42 E63
    Date: 2017–10
  21. By: Frantisek Brazdik; Michal Franta
    Abstract: Bayesian vector autoregressions (BVAR) have turned out to be useful for medium-term macroeconomic forecasting. Several features of the Czech economy strengthen the rationale for using this approach. These include in particular the short time series available and uncertainty about long-run trends. We compare forecasts based on a small-scale mean-adjusted BVAR with the official forecasts published by the Czech National Bank (CNB) over the period 2008q3-2016q4. The comparison demonstrates that the BVAR approach can provide more precise inflation forecasts over the monetary policy horizon. For other macroeconomic variables, the CNB forecasts either outperform or are comparable with the forecasts based on the BVAR model.
    Keywords: BVAR, forecast evaluation, inflation targeting, real-time forecasting
    JEL: E37 E52
    Date: 2017–11
  22. By: Anders Aslund
    Abstract: A conundrum this paper aims to explain is how Russia, a country that pursues such rigorous and conservative macroeconomic policies can be so tolerant of state and crony capitalism. The key issue is what Putin’s economic model amounts to, which is being presented already in section one. Section two reviews Russia’s recent economic performance, while the three ensuing sections examine three key aspects of the Russian economy, namely the eminent macroeconomic policy, the role of energy, and the impact of the Western sanctions since 2014. The final section attempts to answer the likelihood of serious market reforms.
    Keywords: Russia, crony capitalism, corruption, macroeconomic policy, economic growth, gas and oil
    JEL: D72 D73 E01 E60 E65 H63 P48 Q43
    Date: 2017–09
  23. By: Holm-Hadulla, Fédéric; Hubrich, Kirstin
    Abstract: We investigate whether the response of the macro-economy to oil price shocks undergoes episodic changes. Employing a regime-switching vector autoregressive model we identify two regimes that are characterized by qualitatively different patterns in economic activity and inflation following oil price shocks in the euro area. In the normal regime, oil price shocks trigger only limited and short-lived adjustments in these variables. In the adverse regime, by contrast, oil price shocks are followed by sizeable and sustained macroeconomic fluctuations, with inflation and economic activity moving in the same direction as the oil price. The responses of inflation expectations and wage growth point to second-round effects as a potential driver of the dynamics characterising the adverse regime. The systematic response of monetary policy works against such second-round effects in the adverse regime but is insufficient to fully offset them. The model also delivers (conditional) probabilities for being (staying) in either regime, which may help interpret oil price fluctuations – and inform deliberations on the adequate policy response – in real-time. JEL Classification: E31, E52, C32
    Keywords: inflation, inflation expectations, oil prices, regime switching models, time-varying transition probabilities
    Date: 2017–12
  24. By: Knut Are Aastveit (Norges Bank (Central Bank of Norway)); André K. Anundsen (Norges Bank (Central Bank of Norway))
    Abstract: The responsiveness of house prices to monetary policy shocks depends both on the nature of the shock – expansionary versus contractionary – and on city-specific housing supply elasticities. We test and find supporting evidence for the hypothesis that expansionary monetary policy shocks have a larger impact on house prices when supply elasticities are low on 263 US metropolitan areas. We also test whether contractionary shocks are orthogonal to supply elasticities, as implied by downward rigidity of housing supply, and find supporting evidence. A final theoretical conjecture is that contractionary shocks should have a greater impact on house prices than expansionary shocks, as long as supply is not perfectly inelastic. For areas with high housing supply elasticity, our results are in line with this conjecture. However, for areas with an inelastic housing supply, we find that expansionary shocks have a greater impact on house prices than contractionary shocks. We provide evidence that this is related to a momentum effect that is more pronounced when house prices are increasing than when they are falling.
    Keywords: House prices, Heterogeneity, Monetary policy, Non-linearity, Supply elasticities
    JEL: E32 E43 E52 R21 R31
    Date: 2017–12–19
  25. By: Grzegorz Poniatowski; dr. Jaros³aw Neneman; Tomasz Michalik
    Abstract: Since 2009, despite constant growth in the tax base and only slight variations in effective rates, the trend in VAT revenue in Poland has been reversed, and inflows have become less stable. The ongoing decline in VAT collection and the increase in the uncertainty related to the main component of budget revenues is a very important problem, which in the light of growing budget spending may threaten the stability of public finances. Three experts: Grzegorz Poniatowski, dr. Jaros³aw Neneman and Tomasz Michalik examine the structure and the causes of the VAT gap as well as the legal context and possible methods of improving VAT compliance at national and European level.
    Keywords: Economics and Finance, Macroeconomics and Monetary Economics
    JEL: E E02 E5 E6 E42
    Date: 2016–06
  26. By: Caroleo, Floro Ernesto (University of Naples Parthenope); Pastore, Francesco (Università della Campania Luigi Vanvitelli)
    Abstract: The Italian economy performs well below the EU average. The reason is a dramatic and persistent low rate of investment, always invoked but never supported by national and supra-national institutions. However, investment to increase the quantity and quality of human capital is key to boost economic growth and cannot be achieved without adequate financial resources. At the same time, the educational system needs to relaunch university reforms (including the Gelmini and 3+2 reforms) which have been unsuccessful so far because they were poorly implemented. Last but not least, more and better ties between the educational system and the labor market should be developed as soon as possible.
    Keywords: public investment, aggregate human capital, economic growth, educational reforms, 3+2 University Reform
    JEL: E22 E24 H54 I25 I28 J24
    Date: 2017–11
  27. By: Michel Alexandre; Gilberto Tadeu Lima
    Abstract: This paper explores the interaction between monetary policy and prudential regulation in an agent-based modeling framework. Firms borrow funds from the banking system in an economy regulated by a central bank. The central bank carries out monetary policy, by setting the interest rate, and prudential regulation, by establishing the banking capital requirement. Different combinations of interest rate rule and capital requirement rule are evaluated with respect to both macroeconomic and financial stability. Several relevant policy implications were drawn. First, the efficacy of a given capital requirement rule or interest rate rule depends on the specification of the rule of the other type it is combined with. More precisely, less aggressive interest rate rules perform better when the range of variation of the capital requirement is narrower. Second, interest rate smoothing is more effective than the other interest rate rules assessed, as it outperforms those other rules with respect to financial stability and macroeconomic stability. Third, there is no tradeoff between financial and macroeconomic stability associated with a variation of either the capital requirement or the smoothing interest rate parameter. Finally, our results reinforce the cautionary finding of other studies regarding how output can be ravaged by a low inflation targeting.
    Keywords: Agent-based modeling; monetary policy; financial stability; prudential Regulation.
    JEL: E52 G18 C63
    Date: 2017–12–15
  28. By: Giovanni Scarano
    Abstract: Subsequent to the financial crisis of 2007-2008 there has been a revival of theories on the possibility of a “secular stagnation”. Some of these theories hark back to Alvin Hansen’s doctrine, developed on Keynesian bases. Nevertheless, they have shifted attention toward a disproportion between saving and investment only explained on the basis of demographic and technological factors, typical of a neoclassical framework of growth theory. However, the idea that neo-capitalist economies have an inherent tendency to stagnation has also long been the main research objective of many heterodox economists, in particular Kaleckian and neo-Marxist, who found stagnation to be a major result of the monopolistic nature of big corporations and the features of their monopolistic forms of competition. The paper deals with some of these theories and focuses on the role that corporate governance in big corporations can play in producing growing corporate savings and putting them into financial channels.
    Keywords: Stagnation, Capacity Utilization, Corporate Savings, Financialisation, Financial Crises.
    JEL: B51 E11 E12 E32 G35
    Date: 2017–12
  29. By: Afees A. Salisu (Centre for Econometric and Allied Research, University of Ibadan); Kazeem Isah (Centre for Econometric and Allied Research, University of Ibadan)
    Abstract: In this paper, we further subject to empirical scrutiny the conclusion of Stock and Watson (1999) that commodity prices do not improve the traditional Phillips curve-based inflation forecasts. Thus, a multi-predictor framework for US inflation is constructed by augmenting the traditional Phillips curve with symmetric and asymmetric oil price changes. We show that the underlying predictors of US inflation exhibit persistence, endogeneity and conditional heteroscedasticity effects which have implications on forecast performance. Thus, we employ the Westerlund and Narayan (WN hereafter) (2015) estimator which allows for these effects in the predictive model. Also, we follow the linear multi-predictor set-up by Makin et al. (2014) which is an extension of the bivariate predictive model of WN (2015). Thereafter, we extend the former in order to construct a non-linear multi-predictor model that allows for asymmetries based on Shin et al. (2014) approach. Using historical monthly and quarterly data for relevant variables ranging from 1957 to 2017, we demonstrate that the oil price-based augmented Phillips curve will outperform the traditional version if the inherent effects in the predictors are captured in the predictive model. In addition, we also construct a Dynamic Model Averaging version for the augmented Phillips curve, as well as linear time-series models as Autoregressive Integrated Moving Average (ARIMA) and Fractionally Integrated versions (ARFIMA). The WN-based approach is found to outperform the alternative models that ignore the inherent effects. Our results are robust to different measures of inflation, data frequencies and multiple in-sample periods and forecast horizons.
    Keywords: OECD; US, Phillips curve, Asymmetries, Inflation forecasts, Forecast evaluation
    JEL: C53 E31 E37
    Date: 2017–12
  30. By: Žídek, Libor; Šuterová, Magdalena
    Abstract: For nearly five years, the Swiss National Bank intervened against the Swiss franc to prevent increase of deflation pressures. An unexpected switch in monetary policy was made in January 2015, and the regime was abandoned. In this paper, the authors examine the exchange rate influence on the inflation in Switzerland, separately for the pre-crisis and the intervention period. Using autoregressive models, they quantify the extent of pass-through of an exchange rate shock to different price indices. The results suggest that the exchange rate interventions did indeed enhance the exchange rate pass-through into inflation. Despite the effect's moderate influence, the decline was not immediate. The authors additionally analysed long-term exchange rate pass-through. The examination reveals that the long-term behaviour arises rather from the intervention than from the precrisis period. The exchange rate effect on inflation was thus in a better accordance with theory during the intervention period. As such, currency depreciation did have a positive effect on inflation in Switzerland.
    Keywords: Swiss National Bank,exchange rate interventions,exchange rate passthrough,SVAR
    JEL: C32 E31 E52
    Date: 2017
  31. By: Daniel Borowczyk-Martins; Etienne Lalé
    Abstract: We document that fluctuations in part-time employment play a major role in movements in hours per worker during cyclical swings in the labor market. Building on this result, we develop a stock-flow framework to describe the dynamics of part-time employment. The evolution of part-time employment is predominantly explained by cyclical changes in transitions between full-time and part-time employment. Those transitions occur overwhelmingly at the same employer, entail sizable changes in individuals’ working hours and are associated with an increase in involuntary part-time work. Our findings provide a novel understanding of the cyclical dynamics of labor adjustment on the intensive margin.
    Keywords: Employment,Hours,Part-time Work,Business Cycles,Demand and Supply of Labor,
    JEL: E24 E32 J21 J23
    Date: 2017–12–11
  32. By: Hilde C. Bjørnland; Vegard H. Larsen; Junior Maih
    Abstract: We analyze the role of oil price volatility in reducing U.S. macroeconomic instability. Using a Markov Switching Rational Expectation New-Keynesian model we revisit the timing of the Great Moderation and the sources of changes in the volatility of macroeconomic variables. We find that smaller or fewer oil price shocks did not play a major role in explaining the Great Moderation. Instead oil price shocks are recurrent sources of economic fluctuations. The most important factor reducing overall variability is a decline in the volatility of structural macroeconomic shocks. A change to a more responsive (hawkish) monetary policy regime also played a role.
    Keywords: Oil price, Great Moderation, New-Keynesian model, Markov Switching
    JEL: C11 E32 E42 Q43
    Date: 2017–12
  33. By: Vasily Astrov (The Vienna Institute for International Economic Studies, wiiw); Leon Podkaminer (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Following the ‘Maidan revolution’ of February 2014, the National Bank of Ukraine (NBU) abandoned the exchange rate peg to the US dollar and switched to a flexible exchange rate, which was later formalised within the framework of the newly adopted inflation targeting regime. Our analysis suggests that this move has been questionable and, at the very least, premature. First, the presumed success of inflation targeting as a universally applicable ‘magical tool’ to reach low and stable levels of inflation in many countries has in reality been largely due to other factors rather than the inflation targeting concept. Second, the NBU’s announced inflation target (5% in the medium term) appears to be overly ambitious given Ukraine’s development level. Experience from other countries suggests that sticking to this target at all cost will likely require a consistently overly restrictive monetary policy, which will constrain Ukraine’s growth prospects. Last but not least, as capital controls are gradually eased, the exchange rate will likely become vulnerable to speculative attacks once again, given the numerous political and geopolitical uncertainties and the ‘thinness’ of the country’s foreign exchange market. Attempts at macroeconomic stabilisation in response to such exchange rate shocks by using ‘classical’ inflation targeting instruments such as interest rates will have a pro-cyclical impact, given the high degree of dollarisation and the related prevalence of so-called ‘balance sheet effects’. The experience of other countries in similar circumstances – both in Central and Eastern Europe and elsewhere – suggests that a preferable strategy would be to smooth exchange rate fluctuations via interventions rather than monetary policy instruments. For this, a certain minimum level of reserves is needed; the latter will not only provide the necessary policy space for interventions should such a need arise, but should discourage speculations against the currency in the first place. Another major reform effort undertaken recently (October 2017) has been a comprehensive pension reform, which envisaged most notably a gradual increase in the effective retirement age. Our analysis suggests that the current situation in Ukraine’s pension system hardly justifies such a step. The country’s statutory retirement age may be indeed rather low, but it is more than offset by the low life expectancy of Ukrainians, and the share of pensioners in the total population is not particularly high by international standards. Besides, while Ukraine’s Pension Fund may be in deficit, this is not very different from the situation observed in other countries, and there are no theoretical arguments why the Pension Fund must be necessarily balanced. Finally, the sustainability of the pension system is not necessarily a cause of major concern either, taking into account the likely future improvements in the labour market. To the extent that any reform of the pension system is needed at all, it should target above all efforts to curb the shadow economy and/or partial reversion of last year’s cuts in social security contributions.
    Keywords: monetary policy, inflation targeting, pension systems
    JEL: E52 E58 H55
    Date: 2017–12
  34. By: Diewert, Erwin; FOX, Kevin J. Fox; SCHREYER, Paul
    Abstract: Benefits of the Digital Economy are evident in everyday life, but there are significant concerns that these benefits may not be appropriately reflected in official statistics. Statistical agencies are typically unable to measure the benefits that result from introduction of such new goods and services. The measurement of the net benefits of new and disappearing products depends on what type of index the statistical agency is using to deflate final demand aggregates. We examine this measurement problem when the agency uses any standard price index formula for its deflation of the value aggregate, such as GDP. An Appendix applies the methodology to the problem of measuring the effects of product substitutions for disappearing items.
    Keywords: Maximum overlap indexes, Hicksian reservation prices, Laspeyres, Paasche, Fisher and Törnqvist price indexes
    JEL: C43 D11 D60 E01 E31 O31 O47
    Date: 2017–12–14
  35. By: Pedro Brinca (Nova School of Business and Economics, Universidade Nova de Lisboa; Center for Economics and Finance, Universidade do Porto); Miguel H. Ferreira (Nova School of Business and Economics, Universidade Nova de Lisboa); Francesco Franco (Nova School of Business and Economics, Universidade Nova de Lisboa); Hans A. Holter (Department of Economics, University of Oslo); Laurence Malafry (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: 2017–12
  36. By: Davor Kunovac (The Croatian National Bank, Croatia); Nina Pavić (The Croatian National Bank, Croatia)
    Abstract: The paper analyses the impact of euro adoption on the reduction of borrowing costs of EU member states. The results of the analysis point to the existence of a "euro premium" – after controlling for the dynamics in the macroeconomic fundamentals of particular countries and the market sentiment, member states of the monetary union have, on average, lower borrowing costs and higher credit ratings than other EU member states. In order to draw attention to the significance that the results could have for bank interest rates in Croatia in the event of euro adoption, a simple VAR model is used to demonstrate that there is a statistically significant transmission of the changes in government borrowing costs to interest rates on bank loans.
    Keywords: euro, borrowing costs, CDS premium, credit rating, Croatia
    JEL: E42
    Date: 2017–11
  37. By: Joaquin Iglesias; Alvaro Ortiz; Tomasa Rodrigo
    Abstract: We apply the natural language processing or computational linguistics (NLP) to the analysis of the communication policy (i.e statements and minutes) of the Central Bank of Turkey (CBRT). While previous literature has focused on Developed countries, we extend the NLP analysis to the Central Banks of the Emerging Markets using the Dynamic Topic Modelling approach.
    Keywords: Working Paper , Central Banks , Digital economy , Economic Analysis , Emerging Economies , Turkey
    JEL: E52 E58
    Date: 2017–12
  38. By: Barnichon, Regis (Federal Reserve Bank of San Francisco); Matthes, Christian (Federal Reserve Bank of Richmond)
    Abstract: The literature on the government spending multiplier has implicitly assumed that an increase in government spending has the same (mirror-image) effect as a decrease in government spending. We show that relaxing this assumption is important to understand the effects of fiscal policy. Regardless of whether we identify government spending shocks from (i) a narrative approach, or (ii) a timing restriction, we find that the contractionary multiplier—the multiplier associated with a negative shock to government spending—is above 1 and even larger in times of economic slack. In contrast, the expansionary multiplier—the multiplier associated with a positive shock—is substantially below 1 regardless of the state of the cycle. These results help understand seemingly conflicting results in the literature.
    Keywords: government spending;
    JEL: C32 E62
    Date: 2017–12–15
  39. By: Dunsch, Sophie
    Abstract: The unemployment rates, especially youth unemployment rates, increased in various countries of Europe over the last years. This paper examines gender-specific youth unemployment developments in Germany and Poland with Okun's law to test the hypothesis that young male employees are more vulnerable to the business cycle. I estimate gender- and country-specific Okun coefficients for five different age cohorts. The results show that young men are more sensitive to the business cycle, while for women the reaction is less strong. A further examination of the different labour markets regarding genderspecific youth employment results in policy recommendations beyond GDP growth, such as a reduction of the discrepancy in employment protection between permanent and temporary contracts and an approach to maintain youth connected to the labour market.
    Keywords: Youth Unemployment,Okun's Law,Poland,Germany
    JEL: E24 E32 J64
    Date: 2017
  40. By: International Monetary Fund
    Abstract: Continued low energy prices and three years of recession have significantly widened fiscal deficits. Absent consolidation, fiscal balances and public debt are projected to be on an unsustainable medium-term trajectory. The external balance assessment indicates the currency remains overvalued. Together with low prices and weak output in the energy sector, this has considerably widened the current account deficit. These large current account deficits have been financed by official borrowing, private capital inflows, and some reserve losses, thus starting to rapidly erode a large positive foreign asset position. That said, reserve losses have been limited by the rationing of foreign exchange, which, however, has led to persistent and highly distortionary shortages in the foreign exchange (f/x) market. Monetary policy has been on hold on concerns that lower interest rates would exacerbate pressures in the foreign exchange (f/x) market, where shortages are already widespread.
  41. By: González-Laxe, Fernando; Armesto-Pina, José Francisco; Sanchez-Fernandez, Patricio
    Abstract: The aim of this paper is to present a descriptive analysis, and therefore apt to be interpreted, of the salary evolution in Galicia. For this reason, it is approached from three different perspectives: firstly, a macroeconomic approximation is carried out analyzing the remuneration of the employees according to the data of the macroeconomic picture of Galicia; Secondly, the salary payments declared in the “IRPF” to the Tax Agency are considered; Finally, the data obtained through surveys are collected: the “EPA” and the annual labor cost survey
    Keywords: Salaries, Galicia, National Accounts, EPA, Taxation, Salary Survey
    JEL: E24 H25 H83
    Date: 2017–12
  42. By: José Garcia Montalvo; Josep M. Raya
    Abstract: The introduction of limits or regulatory penalties on high LTV ratios for residential mortgages is one of the most frequently used tools of macroprudential policy. The available evidence seems to indicate that this instrument can reduce the feedback loop between credit and house prices. In this paper, we show that these constraints on LTV ratios, used by Spanish banking regulators before the onset of the housing crisis of 2008, did not prevent that feedback loop. In the Spanish case, the fact that appraisal companies were mostly owned by banks led to a situation in which the LTV limits were used to generate appraisal values adjusted to the needs of the clients, rather than trying to appropriately represent the value of the property. This tendency towards over-appraisals produced important externalities in terms of a higher than otherwise demand for housing, and intensification of the feedback loop between credit and house prices.
    JEL: E52 E58 Y G28
    Date: 2017–12
  43. By: Florian Brugger (University of Graz, Austria); Joern Kleinert (University of Graz, Austria)
    Abstract: In the Kreisky era (1970–1983), Austrian government debts increased strongly. Historically, the attitude of Kreisky and the Social Democrats towards Keynesian fiscal policy measures to fight unemployment during the oil crises has been held to be responsible for the successive budget deficits. Kreisky’s ideological debt policy has become a narrative that has strongly influenced Austrian fiscal policy until today. While this explanation for the strong increase in public debt during the Kreisky era is widely accepted, it is not necessarily true. In this paper, we assess a different explanation: the deficits might simply have resulted from forecast errors of GDP growth in those turbulent times. We find that about one-third of the increase in the debt-over-GDP ratio is directly explained by short-run forecast errors, i.e., the difference between the approved and the realized budget, and an additional one-fifth is the lower bound of forecast error regarding the long-run growth rate.
    Keywords: Fiscal policy; Government debt; Forecast errors; Narrative economics
    JEL: H62 H68 E37 E65
    Date: 2017–12
  44. By: Rafael Saulo Marques Ribeiro; Gilberto Tadeu Lima
    Abstract: This article explores some aspects of the debate about the efficacy of a fiscal rule that sets a government expenditure ceiling for the stabilisation of the public debt-to-output ratio. We develop a demand-led macromodel that assumes a closed economy operating with excess capacity and show that a fiscal rule that sets a limit for government spending, excluding the payment of interests, may not ensure a non-explosive trajectory of the public debt-to-output ratio. Our model allows us to map out different outcomes in terms of the stabilisation of the public debt stemming from the process of fiscal consolidation and conclude that the commitment of the fiscal authority to comply with the ceiling by cutting government spending is less likely to stabilise the public debt-to-output ratio in economies enduring excessively high interest rates accompanied by more regressive taxation systems. Our model also suggests that a more progressive tax structure may increase the likelihood of public debt stabilisation in the long run.
    Keywords: Fiscal policy; government expenditure ceiling; growth; public debt stability; income distribution.
    JEL: E62 O40 C01 C02
    Date: 2017–12–22
  45. By: Jorda, Oscar (Federal Reserve Bank of San Francisco); Knoll, Katharina (Deutsche Bundesbank); Kuvshinov, Dmitry (University of Bonn); Schularick, Moritz (University of Bonn); Taylor, Alan M. (University of California, Davis)
    Abstract: This paper answers fundamental questions that have preoccupied modern economic thought since the 18th century. What is the aggregate real rate of return in the economy? Is it higher than the growth rate of the economy and, if so, by how much? Is there a tendency for returns to fall in the long-run? Which particular assets have the highest long-run returns? We answer these questions on the basis of a new and comprehensive dataset for all major asset classes, including—for the first time—total returns to the largest, but oft ignored, component of household wealth, housing. The annual data on total returns for equity, housing, bonds, and bills cover 16 advanced economies from 1870 to 2015, and our new evidence reveals many new insights and puzzles.
    JEL: D31 E10 E44 G12 N10
    Date: 2017–12–20
  46. By: Dimitrios Bakas (Nottingham Business School, Nottingham Trent University, UK; The Rimini Centre for Economic Analysis); Athanasios Triantafyllou (Essex Business School, University of Essex, UK)
    Abstract: In this paper, we empirically examine the impact of uncertainty shocks on the volatility of commodity prices. Using alternative measures of economic uncertainty for the U.S. we estimate their effects on commodity price volatility by employing both VAR and OLS regression models. We find that the unobservable economic uncertainty measures of Jurado et al. (2015) have a significant and long-lasting positive impact on the volatility of commodity prices. Our results indicate that a positive shock in both macroeconomic and financial uncertainty leads to a persistent increase in the volatility of the broad commodity market index and of the individual commodity prices, with the macroeconomic effect being more significant. The impact is stronger in energy commodities compared to the agricultural and metals markets. In addition, our findings show that the measure of unpredictability of the macroeconomic environment has the most significant impact on the commodity price volatility when compared to the observable measures of economic uncertainty that have a rather small and transitory effect. Finally, we show that uncertainty in the macroeconomy is significantly reduced after the occurrence of large commodity market volatility episodes.
    Keywords: Economic Uncertainty, Commodity Prices, Volatility
    JEL: C22 E32 G13 O13 Q02
    Date: 2017–12
  47. By: Gábor Oblath
    Abstract: Following a prolonged period of economic decline and stagnation, Hungary’s GDP growth accelerated to 3.7% in 2014 and was close to 3% in 2015. The reasons for the country’s economic performance over the last six years are only partly related to the economic policies pursued since 2010. Deleveraging (the decrease in excessive debt, both at the macroeconomic and the microeconomic level) had a negative impact on Hungary’s growth performance between 2010 and 2013. However, the acceleration of growth observed in 2014 is also mainly due to “exogenous” factors, in particular exceptionally large transfers from EU funds, which have nothing to do with the government’s so-called “unorthodox” economic policy. The deteriorating institutional environment of the economy, in turn, is a direct consequence of this policy. Without fundamental improvements in the institutional environment and stability/predictability of economic policy, the country’s potential growth is expected to be rather low, implying a very slow convergence with the more affluent nations of the European Union and a divergence relative to the other central and eastern European member states of the EU.
    Keywords: Economic policy in Hungary, macroeconomic developments, international comparisons, EU transfers, institutional quality
    JEL: E65 E66
    Date: 2016–09
  48. By: Joost Bats; Aerdt Houben
    Abstract: Against the background of the great financial crisis, this paper assesses the merits of bank-based versus market-based financing by exploring the relationship between financial structure and systemic risk. A fixed effects regression model is estimated over a panel of 22 OECD countries. The results show that bank-based financing generates systemic risk while market-based debt and especially market-based stock financing reduce systemic risk. A threshold regression model estimated over the same panel suggests that banks no longer contribute to systemic risk when there is little bank-based financing. In the case of relatively market-based financial structures, the influence of banks on systemic risk is low. The findings indicate that countries can increase their resilience to systemic risk by reducing the share of bank-based financing and increasing the share of market-based financing.
    Keywords: financial structure; systemic risk; bank-based financing; market-based financing
    JEL: E44 G10 G21 O16
    Date: 2017–12
  49. By: Boerma, Job (Federal Reserve Bank of Minneapolis); Karabarbounis, Loukas (Federal Reserve Bank of Minneapolis)
    Abstract: We revisit the causes, welfare consequences, and policy implications of the dispersion in households' labor market outcomes using a model with uninsurable risk, incomplete asset markets, and a home production technology. Accounting for home production amplifies welfare-based differences across households meaning that inequality is larger than we thought. Using the optimality condition that households allocate more consumption to their more productive sector, we infer that the dispersion in home productivity across households is roughly three times as large as the dispersion in their wages. There is little scope for home production to offset differences that originate in the market sector because productivity differences in the home sector are large and the time input in home production does not covary with consumption expenditures and wages in the cross section of households. We conclude that the optimal tax system should feature more progressivity taking into account home production.
    Keywords: Home production; Labor supply; Consumption; Inequality
    JEL: D10 D60 E21 J22
    Date: 2017–12–22
  50. By: International Monetary Fund
    Abstract: The Philippine economy has performed well and is in a favorable position to address its socioeconomic challenges. Sound policies have delivered solid growth, low inflation, financial stability, and external and fiscal buffers. However, poverty remains high and the country needs to create jobs for its young and growing population. Sustaining the growth momentum in an uncertain and volatile external environment requires tackling the constraints to inclusive growth, while protecting policy anchors, adapting policies to changing conditions, and maintaining vigilance against risks, including from high credit growth, loan concentration, and overheating.
    Keywords: Philippines;Asia and Pacific;
    Date: 2017–11–10
  51. By: International Monetary Fund
    Abstract: Armenia has made significant strides in enhancing macroeconomic stability over the past two decades. This has recently come under strain. Before a full recovery from the Global Financial Crisis (GFC) could take root, a second wave of external shocks, resulting from the slowdown in Russia and the ensuing sharp currency depreciation, buffeted the economy. Armenian public finances have deteriorated steadily since 2013, triggering the debt brake mechanism in 2016.
    Keywords: Armenia;Middle East;
    Date: 2017–11–10
  52. By: Ambrocio, Gene
    Abstract: This study provides estimates of the real effects of macro-uncertainty de- composed into fundamental and overconfidence bias components. Crucially, overconfidence biases lower ex-ante measures of uncertainty, while fundamen- tal uncertainty raises both ex-ante and ex-post measures. This distinction is useful since the estimates on the real effects of the overconfidence component of uncertainty mitigate endogeneity concerns. I first document evidence for overconfidence biases from survey density forecasts in the US survey of pro- fessional forecasters. Then, using a sign and zero restrictions identification scheme in a vector autoregression (VAR), I find that increases in fundamental uncertainty and declines in overconfidence tend to lower real activity.
    JEL: C32 D84 E37
    Date: 2017–12–22
  53. By: International Monetary Fund
    Abstract: Macroprudential oversight for banking is a shared responsibility between Banco de España (BdE) and the European Central Bank (ECB). BdE is the national competent and designated authority for exercising macroprudential powers under the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD) IV, respectively. Similar to other countries in the banking union, macroprudential oversight is shared with the ECB, which possesses the “topping-up" power—the ability to apply more stringent measures under the CRR/CRD IV framework than those applied by national authorities. At the European level, the ESRB can also recommend national authorities and European institutions to adopt measures to mitigate systemic risk on a “comply-orexplain” basis. However, in Spain, the national macroprudential authority, responsible for maintaining financial stability for the entire financial system, has not been set up.
    Keywords: Europe;Spain;
    Date: 2017–11–13
  54. By: Mamedli Mariam (Bank of Russia, Russian Federation); Andrey Sinyakov (Bank of Russia, Russian Federation)
    Abstract: As our calculations show, borrowers with incomes above the median level, who did not apply for loans earlier, could represent 2/3 of extensive growth in the volume of consumer lending. But in the new environment it is difficult to rely on individuals who did not apply for loans even during the boom period of 2010-2012, in the context of rising oil prices and growing incomes. Banks’ choice of this area will necessitate additional costs that will make credit more expensive and thus less attractive to this group. As regards intensive credit growth, the debt burden of borrowers with incomes below the median level has growth potential. Due to the interestrate sensitivity of this group’s demand for credit, the Bank of Russia’s transition to a neutral key rate may provide some support to credit growth, provided that banks are willing to choose business models with lower profit margins. Macroprudential policy measures can incentivise banks to adapt less risky business models, helping them lower interest rates and thus making loans more attractive to creditworthy borrowers. The identified structural features of loan supply and demand make it possible to draw a number of conclusions for the regulator’s policy: 1. The transmission of monetary policy to consumer lending may prove weaker than commonly assumed. First, the reduction of the key rate by the Bank of Russia may modestly translate to a decline in banks’ interest rates due to the fact that high interest rates reflect the particularity of banks’ business models, which target high-risk borrowers. In order to enhance the trans mission, banks will have to adapt to a different model. Second, the level of loan interest rates per se has only a limited impact on demand for loans of this kind, the structures of which are governed to a significant extent by demand from low-income borrowers who are largely insensitive to interest rate levels. 2. The growth of lending in a context of magnified inflation expectations facilitates the accumulation of vulnerabilities in the consumer lending segment, posing risks to financial stability and requiring macroprudential policy adjustment. Magnified inflation expectations can prompt borrowers who evaluate real interest rates as extremely low to take further risks and accumulate excess debt. When these borrowers possess predominantly low and unstable incomes that are sensitive to macroeconomic shocks, banks find themselves exposed to increased credit risks, which, in certain circumstances, can have systemic consequences. In these situations, macroprudential policy measures are capable of protecting both banks and borrowers from taking excess risks, directing banks towards less risky groups of borrowers and thus increasing their resilience in the new environment.
    Date: 2017–09
  55. By: Mikosch, Heiner; Solanko, Laura
    Abstract: GDP forecasters face tough choices over which leading indicators to follow and which forecasting models to use. To help resolve these issues, we examine a range of monthly indicators to forecast quarterly GDP growth in a major emerging economy, Russia. Numerous useful indicators are identified and forecast pooling of three model classes (bridge models, MIDAS models and unrestricted mixed-frequency models) are shown to outperform simple benchmark models. We further separately examine forecast accuracy of each of the three model classes. Our results show that differences in performance of model classes are generally small, but for the period covering the Great Recession unrestricted mixed-frequency models and MIDAS models clearly outperform bridge models. Notably, the sets of top-performing indicators differ for our two subsample observation periods (2008Q1–2011Q4 and 2012Q1–2016Q4). The best indicators in the first period are traditional real-sector variables, while those in the second period consist largely of monetary, banking sector and financial market variables. This finding supports the notion that highly volatile periods of recession and subsequent recovery are driven by forces other than those that prevail in more normal times. The results further suggest that the driving forces of the Russian economy have changed since the global financial crisis.
    JEL: C53 E27
    Date: 2017–11–30
  56. By: International Monetary Fund
    Abstract: The Mexican economy has exhibited resilience in the face of a complex external environment. However, the country still faces significant challenges, namely to preserve macro-economic stability, and foster stronger and inclusive growth. These challenges are complicated by the uncertainty associated with the future economic relations with the United States and the future political landscape in Mexico. Prospects hinge on steadfast implementation of the structural reform agenda that would boost growth and improve living standards, supported by continued fiscal consolidation that would put the public debt ratio on a sustainable downward path.
    Keywords: Mexico;Western Hemisphere;
    Date: 2017–11–13
  57. By: International Monetary Fund
    Abstract: Lingering effects of the Ebola epidemic and the commodity price decline and the withdrawal of the United Nations Mission in Liberia (UNMIL) are delaying the economic recovery. Growth is below expectations, while fiscal space is constrained. A sharp decline in net foreign exchange inflows has put pressure on the exchange rate and inflation, and led to a loss of international reserves. The Presidential election is adding near-term uncertainty.
  58. By: Albert Solé-Ollé (IEB, Universitat de Barcelona); Elisabet Viladecans-Marsal (IEB, Universitat de Barcelona)
    Abstract: This paper examines how local governments adjust their spending, savings and taxes in response to a temporary revenue windfall generated by a housing boom and how they cope with the inevitable shortfall that appears during the bust. We focus on Spanish local governments given the intensity of the last housing boom-bust experienced there and the large share of construction-related revenues they obtain. We find, first, that just a small share of the boom windfall was saved, with revenues being used primarily to increase spending (above all, current spending) and (to a lesser extent) cut taxes. Second, we find that the failure to save during the boom is higher in places with less informed voters and more contested elections. Third, we also examine what happens during the bust, and find that these governments had to cut abruptly their spending (above all, capital), raise taxes, and allow deficits to grow. Finally, in places wit less informed voters and more contested elections local governments had more trouble in adjusting during the bust, and they tend to rely more on spending cuts than on tax increases.
    Keywords: Tax volatility, forward-looking behavior, policy myopia
    JEL: E62 H72 R5
    Date: 2017–12
  59. By: Barbara Nowakowska; Piotr Noceñ; Micha³ Surowski; Micha³ Popio³ek
    Abstract: In the publication, Barabara Nowakowska and Piotr Noceñ discuss 'Poland’s Private Equity Market: Current Conditions and Development Prospects', and Micha³ Surowski and Micha³ Popio³ek describe 'Private Equity From a Bank’s Perspective'.
    Keywords: Financial Markets and the Macroeconomy, Financial institutions and Services, Non-bank Financial Institutions, Institutional Investors
    JEL: E44 G2 G23
    Date: 2016–02
  60. By: Nina Biljanovska; Francesco Grigoli; Martina Hengge
    Abstract: High levels of economic policy uncertainty in various parts of the world revamped the de- bate about its impact on economic activity. With increasingly stronger economic, fi nancial, and political ties among countries, economic agents have more reasons to be vigilant of for- eign economic policy. Employing heterogeneous panel structural vector autoregressions, this paper tests for spillovers from economic policy uncertainty on other countries' economic ac- tivity. Furthermore, using local projections, the paper zooms in on shocks originating in the United States, Europe, and China. Our results suggest that economic policy uncertainty re- duces growth in real output, private consumption, and private investment, and that spillovers from abroad account for about two-thirds of the negative effect. Moreover, uncertainty in the United States, Europe, and China reduces economic activity in the rest of the world, with the effects being mostly felt in Europe and the Western Hemisphere.
    Keywords: Private consumption;Private investment;Europe;China;United States;Economic policy uncertainty, spillover, General, International Policy Coordination and Transmission
    Date: 2017–11–15
  61. By: Stanis³aw Gomu³ka; Jaros³aw Neneman; Micha³ Myck
    Abstract: When building a long-term economic policy in an important area – and the tax system is important – we begin by drawing up a list of key challenges, meaning particularly difficult problems that need to be addressed. The problems are usually of varying significance, so it’s necessary to indicate the problems that require particular attention. In the second stage of building a program, then, there is the need of drawing up a list of goals, as far as possible in order of their importance. Often, formulating the primary goal is particularly important. I will argue that in the case of tax policy for Poland, there is one goal that stands out in its significance. Finally, the third part of the program, the most important, is drawing up the methods of achieving the goals, and particularly the main one. Here it is also necessary to show, through argumentation and as far as possible quantitative estimates, that the proposed methods measure up to the challenges, i.e. that they are able to achieve the intended goals, particularly the primary goal. It is also necessary to demonstrate, or in any case to argue, that the proposed package of methods is economically and socially well justified – i.e. not worse, and rather better, than other packages.
    Keywords: Economic and Finance, Fiscal Policy, Tax policy
    JEL: E62 H20 H21 H60
    Date: 2017–10
  62. By: Helmut Lütkepohl; Tomasz Woźniak
    Abstract: In order to identify structural shocks that affect economic variables, restrictions need to be imposed on the parameters of structural vector autoregressive (SVAR) models. Economic theory is the primary source of such restrictions. However, only over-identifying restrictions can be tested with statistical methods which limits the statistical validation of many just-identified SVAR models. In this study, Bayesian inference is developed for SVAR models in which the structural parameters are identified via Markov-switching heteroskedasticity. In such a model, restrictions that are just-identifying in the homoskedastic case, become over-identifying and can be tested. A set of parametric restrictions is derived under which the structural matrix is globally identified and a Savage-Dickey density ratio is used to assess the validity of the identification conditions. For that purpose, a new probability distribution is defined that generalizes the beta, F, and compound gamma distributions. As an empirical example, monetary models are compared using heteroskedasticity as an additional device for identification. The empirical results support models with money in the interest rate reaction function.
    Keywords: Identification through heteroskedasticity, Markov-Switching models, Savage-Dickey Density Ratio, monetary policy shocks, Divisia Money
    JEL: C11 C12 C32 E32
    Date: 2017
  63. By: Ponomarenko, Alexey A.; Ponomarenko, Alexey N.
    Abstract: The aggregate saving indicator does not directly reflect changes in individuals' microeconomic behavior. From the official statistics' point of view, households choosebetween spending, which generates additional income and consumption in the economy, and setting money aside, which does not. Formally, households may not (if the authors disregard housing investment) choose to save, because the aggregate saving statistical indicator is a residual concept defined as the ensuing difference between aggregate disposable income and consumption. It measures the change in net worth, which, in a closed economy, may only be generated by the production of capital goods and an increase in inventories. Using an agentbased model, the authors show that shocks unrelated to structural changes in households' behavior may generate positively correlated fluctuations in the aggregate saving rate, productivity growth and lending. Meanwhile, a genuine increase in the average individual propensity to save is not necessarily associated with a higher aggregate saving rate.
    Keywords: saving,economic growth,credit,agent-based model,national accounts
    JEL: C63 G21 O16 O40
    Date: 2017
  64. By: Jonathan Benchimol; Makram El-Shagi (Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China)
    Abstract: Governments, central banks, and private companies make extensive use of expert and market-based forecasts in their decision-making processes. These forecasts can be affected by terrorism, which should be considered by decision makers. We focus on terrorism, as a mostly endogenously driven form of political uncertainty, and use new econometric tests to assess the forecasting performance of market and professional inflation and exchange-rate forecasts in Israel. We show that expert forecasts are better than market-based forecasts, particularly during periods of terrorism. However, forecasting performance and abilities of both market-based and expert forecasts are significantly reduced during such periods. Thus, policymakers should be particularly attentive to terrorism when considering inflation and exchange-rate forecasts.
    Keywords: inflation, exchange rate, forecast performance, terrorism, market forecast, expert forecast
    JEL: C53 E37 F37 F51
    Date: 2017–12
  65. By: Valerie Cerra; Sweta Chaman Saxena
    Abstract: All types of recessions, on average, not just those associated with financial and political crises (as in Cerra and Saxena, AER 2008), lead to permanent output losses. These findings have far-reaching conceptual and policy implications. A new paradigm of the business cycle needs to account for shifts in trend output and the puzzling inconsistency of output dynamics with other cyclical components of production. The ‘output gap’ can be ill-conceived, poorly measured, and inconsistent over time. Persistent losses require more buffers and crisis-avoidance policies, affecting tradeoffs in prudential, macroeconomic, and reserve management policies. The frequency and depth of crises are key determinants of long-term growth and drive a new stylized model of economic development.
    Date: 2017–11–16
  66. By: Costas Lapavitsas; Ivan Mendieta-MuÃ’oz (Department of Economics, SOAS, University of London, UK)
    Abstract: The ratio of financial to non-financial profits in the US economy has increased sharply since the 1970s, the period that is often called the financialisation of capitalism. By developing a two-sector theoretical model the ratio of financial to non-financial profits is shown to depend positively on the net interest margin and the non-interest income of banks, while it depends negatively on the general rate of profit, the non-interest expenses of banks, and the ratio of the capital stock to interest-earning assets. The model was estimated empirically for the post-war period and the results indicate that the ratio has varied mainly with respect to the net interest margin, although non-interest income has also played a significant role. The results confirm that in the course of financialisation the US financial sector has been able to extract rising profits through interest differentials and non-interest income, while the general rate of profit has remained broadly constant.
    Keywords: Rise in financial profits, financialisation, U.S. economy
    JEL: E11 E44 G20
    Date: 2017–10
  67. By: International Monetary Fund
    Abstract: The prolonged political uncertainty has taken a toll on economic growth, with investment suffering because of weak sentiment. With the formation of the new government, policies should now focus on rebuilding fiscal buffers and implementing critical reforms to rekindle growth and give EU accession prospects a new push.
  68. By: Nataliya Karlova (Bank of Russia, Russian Federation); Irina Bogacheva (Bank of Russia, Russian Federation); Elena Puzanova (Bank of Russia, Russian Federation)
    Abstract: Inflation inertia hinders the process of slowing down inflation to meet the target level and thus lowers the effectiveness of monetary policy. Widespread methods of assessing the observed inflation inertia using different models can’t clear up important aspects, such as between-industry analysis based on firm-specific characteristics and, consequently, the speed of response to external shocks in different sectors. The paper investigates the pricing behaviour of firms on the basis of a survey of companies’ conducted by the Bank of Russia. According to the results the main drivers of inflation (price) inertia (or delayed and prolonged response of inflation to shocks) in Russia are backwardlooking (or adaptive) expectations of economic agents, inflexible pricing policy, and wage indexation based on past inflation level. It is important for central banks to understand these processes in order to implement and maintain the effective monetary policy.
    Keywords: price inertia, price-setting behaviour of companies, inflation expectations, Inflexible pricing policy, survey of companies, Russia
    Date: 2017–11
  69. By: Fischer, Marcel; Jensen, Bjarne Astrup
    Abstract: We study the implications of the corporate debt tax shield in a growth economy that taxes household income and firm profits and redistributes tax revenues in an attempt to harmonize the lifetime consumption opportunities of households that differ in their endowments. Our model predicts that the debt tax shield (1) increases the risk-free rate, (2) leads to a higher growth rate of the economy, and (3) increases the degree of disparity in households' lifetime consumption opportunities. We further show that the debt tax shield affects the tradeoff between the goals of achieving a high growth rate of the economy and a low degree of inequality and quantify this tradeoff.
    Keywords: debt tax shield,macroeconomic growth,redistributive tax system
    JEL: E21 E23 G11 H23 H31 H32
    Date: 2017
  70. By: Gylfi Zoega (Aarhus Universitet; University of Iceland); Gylfi Zoega (University of Iceland; Birkbeck, University of London)
    Abstract: How much should society invest in medical care that extends the lives of the older generations? We derive a golden rule for the level of health care expenditures and find that the optimal level of life-extending health care expenditures should increase with rising productivity, increase with the retirement age, and also increase with the population growth rate if a higher growth rate lowers the ratio of retirees to working-age people sufficiently, while the effects of an improvement in medical technology are ambiguous. Moreover, we find that a market economy may be inefficient in terms of the provision of life-extending health care because an individual ignores the effect of his own longevity on the income of others.
    Keywords: Health care expenditures, golden rule, productivity.
    JEL: E6 E2 I1
    Date: 2017–10
  71. By: Marco Ranaldi (Paris School of Economics - Université Paris 1 Panthéon-Sorbonne)
    Abstract: We here propose a novel method for the analysis of the distribution of two sources of income across the population. The polarization curve for each income source is defined and compared to the Zero-polarization Curve. The latter provides a benchmark of zero inequality in income composition. We then illustrate the method via an empirical application to the case of Italy
    Keywords: Income Distribution; Lorenz Curve; Polarization curve; Income-Source Polarization
    JEL: C43 E25
    Date: 2017–11
  72. By: Nomatye, Anelisa; Phiri, Andrew
    Abstract: Following the 2007 global financial crisis, the understanding of the relationship between debt and other economic indicators has become crucial for policymakers worldwide. In this study, we investigated the macroeconomic determinants of household debt for the South African economy using macroeconomic variables such as GDP growth, consumption, interest rates, inflation, housing prices and domestic investments. Our mode of empirical investigation is the quantile regression approach which is applied to quarterly time series data spanning from 2002:q1 to 2016:q4. Our empirical results imply that inflation and consumption are insignificantly related with household debt; GDP growth and house prices are only related with household debt at moderate to high levels of distributions whereas interest rates and investment are related with household debt across all quantile distributions. All-in-all, these empirical findings bear important implications for South African policymakers.
    Keywords: Household debt; Quantile regressions; South Africa.
    JEL: C32 C51 R20
    Date: 2017–12–14
  73. By: Irina Stanga; Razvan Vlahu; Jakob de Haan
    Abstract: Using a newly constructed database for 26 countries over 2000-2014, we analyze cross-country and within-country differences in mortgage arrears. We find that macro-prudential policies (notably regulatory LTV ratios) are significantly negatively associated with the share of mortgage arrears in total residential debt. Our results suggest that better institutions are also associated with lower delinquency rates, both directly and by enhancing the impact of macro-prudential policies and the right to recourse. Moreover, we find that the effect of macro-prudential policies is conditioned by several mortgage market characteristics, like the maturity of loans, interest rate fixity, and tax deductibility of interest payments.
    Keywords: mortgage arrears; macro-prudential regulation; institutions; mortgage market
    JEL: C25 D14 E32 G15
    Date: 2017–12
  74. By: Christopher F Baum (Boston College; DIW Berlin); Mustafa Caglayan (Heriot-Watt University); Bing Xu (Heriot-Watt University)
    Abstract: We examine the effects of uncertainty on the financial sector in a multidimensional context. In our investigation, using a large country-level unbalanced panel dataset, we show that inflation uncertainty reduces availability of private sector credit; harms banks' efficiency and operational performance, evidenced by lower returns and increased reliance on non-interest income activities; and distorts sectoral stability, as liquidity and banks' appetite for risk increases. Our findings, based on the full dataset and country splits, are economically meaningful and provide evidence that uncertainty harms the overall health of the financial sector.
    Keywords: Bank returns, economic significance; efficiency; financial depth; liquidity; non-interest income; profitability; stability; uncertainty
    JEL: C22 C23 D81 E51
    Date: 2017–12–09
  75. By: Budnik, Katarzyna; Bochmann, Paul
    Abstract: How do capital and liquidity buffers affect the evolution of bank loans in periods of financial and economic distress? To answer this question we study the responses of 219 individual banks to aggregate demand, standard and unconventional monetary policy shocks in the euro area between 2007 and 2015. Banks’ responses are derived from a factor-augmented VAR, which relates macroeconomic aggregates to individual bank balance sheet items and interest rates. We find that banks with high capital and liquidity buffers show a more muted response in their lending to adverse real economy shocks. Capital and liquidity buffers also affect bank responses to monetary policy shocks. High bank capitalisation reduces the degree to which banks increase the average duration of loans to the non-financial corporate sector, while high bank liquidity strengthens the positive response to policy easing of both longand short-term loans to the non-financial corporate sector. The latter findings substantiate the relevance of interactions between prudential controls and monetary policy. JEL Classification: E51, E52, G21
    Keywords: capital requirements, liquidity requirements, macroprudential policy, monetary policy
    Date: 2017–12
  76. By: TAKAMIZAWA, Hideyuki
    Abstract: This study proposes a no-arbitrage term structure model that can capture the volatility of interest rates without sacrificing the goodness-of-_t to the cross-section and predictive ability about the level of interest rates. The key feature of the model is the covariance matrix of changes in factors, which is specified as quadratic functions of factors. The quadratic specification can capture intense volatility even with spanned factors, which is not the case for the affine specification. Furthermore, since the quadratic specification guarantees the positive definiteness of the covariance matrix without restricting the sign of factors, it allows for a flexible specification of the physical drift as does the Gaussian term structure model, contributing also to accurate level prediction.
    Keywords: Term structure, Interest rate, Volatility, Affine model, Prediction
    JEL: C58 E43 G12 G17
    Date: 2017–12–09
  77. By: Alberto Naudon; Andrés Pérez
    Abstract: The main objective of this study is to contribute to the public understanding of the inflationtargeting (IT) framework currently being implemented in several leading central banks. We do so by discussing differences in the institutional set up, the decision-making process, and the communication of monetary policy. We analyze these aspects from a conceptual perspective and review them in practice by referring to a set of eleven “small, open” OECD economies as well as four major central banks of the world (Bank of England, Bank of Japan, European Central Bank, & the Federal Reserve). We pay specific attention to recent changes along the multiple dimensions that have, on balance, aimed at further strengthening the IT framework.
    Date: 2017–12
  78. By: Jiunn Wang (Durham Business School); Laura Marsiliani (Durham Business School); Thomas Renstrom (Durham Business School)
    Abstract: This paper explores how tax reforms with taxes on unhealthy commodities impact consumer behaviours and welfare when individual health is endogenised. We employ a dynamic general equilibrium model which includes both goods and health sectors. Although unhealthy commodities provide utility, they pose a detrimental effect on health. The analytical results show that the introduction of taxes on unhealthy commodities does not have direct effects on health in the steady state. However, based on our simulation results, with a revenue-neutral tax reform where labour income taxes are adjusted, the introduction of taxes on unhealthy commodities improves both health and welfare, but reduces leisure in the long run. On the other hand, a tax reform where capital income taxes are adjusted contributes to even higher welfare as both health and leisure improve. Our analysis may inform policy making decisions on taxation of unhealthy commodities when government can adjust pre-existing taxes
    Keywords: Unhealthy commodities taxation, endogenous health, tax reform
    JEL: D91 E20 H20 I18
    Date: 2017–12
  79. By: Koen van der Veer; Anouk Levels; Claudia Lambert; Luis Molestina Vivar; Christian Weistroffer; Raymond Chaudron; René de Sousa van Stralen
    Abstract: This joint ECB-DNB Occasional Study aims to inform the ongoing discussions about an EU-level framework for operationalising macroprudential leverage limits for alternative investment funds (AIFs). It builds on, and extends, the analysis of an ECB-DNB special feature article published in the ECB's Financial Stability Review in November 2016. First, this Occasional Study presents new EU-level evidence suggesting that leveraged funds exhibit stronger sensitivity of investor outflows to bad past performance than unleveraged funds, which has the potential to exacerbate systemic risk. Second, it devises a framework for assessing financial stability risks from leverage in investment funds. This is applied to leveraged AIFs managed by asset managers in the Netherlands using Alternative Investment Fund Managers Directive (AIFMD) data for the two-year period from the first quarter of 2015 to the fourth quarter of 2016. Third, it discusses the potential effectiveness and efficiency of various designs for macroprudential leverage limits. To this end, it builds on the findings for the Dutch AIF sector and suggests design options for further exploration at EU level. Beyond assessing financial stability risks from leverage in the Dutch AIF sector, the case study aims to show how equivalent information on AIFs at the European level - which will be made available to the European Securities Markets Authority (ESMA) and the European Systemic Risk Board (ESRB) in the coming years - could be used when developing an EU-level framework for operationalising macroprudential leverage limits.
    Date: 2017–11
  80. By: Richard Blundell (Institute for Fiscal Studies and IFS and UCL); Jack Britton (Institute for Fiscal Studies); Monica Costa Dias (Institute for Fiscal Studies and Institute for Fiscal Studies); Eric French (Institute for Fiscal Studies and IFS and UCL)
    Abstract: Estimates of the effect of health on employment differ signi cantly from study to study due to differences in method, data, institutional background and health measure. We assess the importance of these differences using a unifi ed framework to interpret and contrast estimates of the impact of health on employment based on various measures of health and estimation procedures. This is done for the US and England. We fi nd that subjective and objective health measures, as well as subjective measures instrumented by objective measures produce similar estimates if a sufficiently large number of objective measures is used. Reducing the number of objective measures used compromises their ability to capture work capacity and biases estimates downwards. Failure to account for initial conditions leads to an overstatement of the effect of health on employment. We also find that a carefully constructed single index of subjective health yields estimates that are very similar to those obtained with multiple measures. Overall, declines in health can explain between 3% and 15% of the decline in employment between ages 50 and 70. These effects are larger among high-school dropouts and tend to drop with education; they are also larger in the US than in England. Finally, cognition has little added explanatory power once we also control for health, suggesting that cognition is not a key driver of employment at these ages.
    Keywords: Health, cognition, labor supply, retirement
    JEL: I10 J26 E24
    Date: 2017–08–25
  81. By: Diewert, W, Erwin; Feenstra, Robert
    Abstract: A major challenge facing statistical agencies is the problem of adjusting price and quantity indexes for changes in the availability of commodities. This problem arises in the scanner data context as products in a commodity stratum appear and disappear in retail outlets. Hicks suggested a reservation price methodology for dealing with this problem in the context of the economic approach to index number theory. Feenstra and Hausman suggested specific methods for implementing the Hicksian approach. The present paper evaluates these approaches and suggests some alternative approaches to the estimation of reservation prices. The various approaches are implemented using some scanner data on frozen juice products that are available online.
    Keywords: Hicksian reservation prices, virtual prices, Laspeyres, Paasche, Fisher, Törnqvist and Sato-Vartia price indexes
    JEL: C33 C43 C81 D11 D60 E31
    Date: 2017–12–19

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