nep-mac New Economics Papers
on Macroeconomics
Issue of 2018‒01‒22
121 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Monetary policy transmission in an open economy:new data and evidence from the United Kingdom By Cesa-Bianchi, Ambrogio; Thwaites, Gregory; Vicondoa, Alejandro
  2. Macroeconomic fluctuations with HANK & SAM: an analytical approach By Bracke, Philippe; Tenreyro, Silvana
  3. Ambiguity, monetary policy and trend inflation By Masolo, Riccardo M.; Monti, Francesca
  4. Are Negative Nominal Interest Rates Expansionary? By Gauti B. Eggertsson; Ragnar E. Juelsrud; Ella Getz Wold
  5. Firm-Level Political Risk: Measurement and Effects By Tarek A. Hassan; Stephan Hollander; Laurence van Lent; Ahmed Tahoun
  6. The macroeconomic effects of Government asset purchases: evidence from postwar US housing credit policy By Fieldhouse, Andrew; Mertens, Karel; Ravn, Morten O.
  7. Default cycles By Cui, Wei; Kaas, Leo
  8. Frictional Coordination By George-Marios Angeletos
  9. PIIGS in the Euro area: An empirical DSGE model By Alice Albonico; Alessia Paccagnini; Patrizio Tirelli
  10. Quantitative Easing and the “New Normal” in Monetary Policy By Michael T. Kiley
  11. The rise of services and balanced growth in theory and data By Leon-Ledesma, Miguel; Moro, Alessio
  12. New Keynesian NAIRU and the Okun Law: An application for Colombia By J. Sebastián Amador-Torres
  13. Financial Development, Growth, and Crisis: Is There a Trade-Off? By Norman Loayza; Amine Ouazad; Romain Ranciere
  14. Distribution, wealth and demand regimes in historical perspective. USA, UK, France and Germany, 1855-2010 By Stockhammer, Engelbert; Rabinovich, Joel; Reddy, Niall
  15. On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint By Davide Debortoli; Jordi Galí; Luca Gambetti
  16. On the empirical (ir)relevance of the zero lower bound constraint By Davide Debortoli; Jordi Galí; Luca Gambetti
  17. Synchronicity of real and financial cycles and structural characteristics in EU countries By Mariarosaria Comunale
  18. Making Discretion in Monetary Policy More Rule-Like By Frederic S. Mishkin
  19. Aggregate hiring and the value of jobs along the business cycle By Yashiv, Eran
  20. Nominal rigidities in debt and product markets By Garriga, Carlos; Kydland, Finn E.; Šustek, Roman
  21. Foreign booms, domestic busts: The global dimension of banking crises By Cesa-Bianchi, Ambrogio; Martin, Fernando Eguren; Thwaites, Gregory
  22. Is fiscal policy more effective in uncertain times or during recessions? By Alloza, Mario
  23. Secular stagnation, rational bubbles, and fiscal policy By Teulings, Coen
  24. Short-Run and Long-Run Effects of Milton Friedman's Presidential Address By Robert E. Hall; Thomas J. Sargent
  25. The Federal Reserve’s implicit inflation target and Macroeconomic dynamics. A SVAR analysis By Mumtaz, Haroon; Theodoridis, Konstantinos
  26. How diabolic is the sovereign-bank loop? The effects of post-default fiscal policies By Diniz, Andre; Guimaraes, Bernardo
  27. Bubbles and Bluffs: Risk Lovers Can Survive Economically By Harashima, Taiji
  28. Investment in productivity and the long-run effect of financial crises on output By de Ridder, Maarten
  29. How Do Central Bank Projections and Forward Guidance Influence Private-Sector Forecasts? By Monica Jain; Christopher S. Sutherland
  30. Fiscal rules, financial stability and optimal currency areas By de Grauwe, Paul; Foresti, Pasquale
  31. Determinants of bank profitability in emerging markets By Emanuel Kohlscheen; Andrés Murcia Pabón; Juan Contreras
  32. Financial Cycles in Credit, Housing and Capital Markets: Evidence from Systemic Economies By Amat Adarov
  33. Time-consistent fiscal policy in a debt crisis By Balke, Neele L.; Ravn, Morten O.
  34. Risk and Monetary Policy in a New Keynesian Model By Mikhail Golosov; David Evans; anmol bhandari
  35. Fiscal federalism in a monetary union: the cooperation pitfall By Hubert Kempf
  36. The Persistence of Financial Distress. By Athreya, Kartik B.; Mustre-del-Rio, Jose; Sanchez, Juan M.
  37. Subprime mortgages and banking in a DSGE model By Martino N. Ricci; Patrizio Tirelli
  38. Survive another day: using changes in the composition of investments to measure the cost of credit constraints By Garicano, Luis; Steinwender, Claudia
  39. Optimal Fiscal-Monetary Policy with Redistribution By Thomas Sargent; Mikhail Golosov; David Evans; anmol bhandari
  40. Rules Versus Discretion: Assessing the Debate Over the Conduct of Monetary Policy By John B. Taylor
  41. Does Monetary Policy Influence Banks' Perception of Risks? By Simona Malovana; Dominika Kolcunova; Vaclav Broz
  42. A Model of the Fed’s View on Inflation By Hasenzagl, Thomas; Pellegrino, Filippo; Reichlin, Lucrezia; Ricco, Giovanni
  43. Working Paper 13-17 - Évaluation de la précision des perspectives à moyen terme du BFP - Une mise à jour By Igor Lebrun
  44. The 2016 Diary of Consumer Payment Choice By Greene, Claire; Schuh, Scott
  45. Step away from the zero lower bound: Small open economies in a world of secular stagnation By Corsetti, Giancarlo; Mavroeidi, Eleonora; Thwaites, Gregory; Wolf, Martin
  46. Climate change and the macro-economy: a critical review By Batten, Sandra
  47. Money circulation and debt circulation: A restatement of quantity theory of money By Xing, Xiaoyun; Xiong, Wanting; Chen, Liujun; Chen, Jiawei; Wang, Yougui; Stanley, H. Eugene
  48. When is foreign exchange intervention effective? Evidence from 33 countries By Fratzscher, Marcel; Gloede, Oliver; Menkhoff, Lukas; Sarno, Lucio; Stoerh, Tobias
  49. Base Erosion and Profit Shifting (BEPS) and the Digital Economy: challenges and issues By DiGabriele, Jim; Ojo, Marianne
  50. Democratic Republic of Timor-Leste; 2017 Article IV Consultation-Press Release and Staff Report By International Monetary Fund
  51. The impact of taxes on income mobility By Alloza, Mario
  52. Endogenous Production Networks By Daron Acemoglu; Pablo D. Azar
  53. Working Paper 12-17 - Évaluation de la précision des prévisions à court terme du BFP - Une mise à jour By Ludovic Dobbelaere; Igor Lebrun
  54. Heterogeneity in the Internationalization of R&D: Implications for Anomalies in Finance and Macroeconomics By Patrick Grüning
  55. Fiscal unions redux By Kehoe, Patrick J.
  56. The Dynamic Relationship Among the Money Market Mutual Funds, the Commercial Paper Market and the Repo Market By Haghani Rizi, Majid; Kishor, N. Kundan
  57. The role of gender in employment polarization By Diniz, Andre; Guimaraes, Bernardo; Petersen Rendall, Michelle
  58. Optimal Time-Consistent Taxation with Default By Karantounias, Anastasios G.
  59. A Tax Plan for Endogenous Innovation By Croce, Mariano; Karantounias, Anastasios G.; Raymond, Stephen; Schmid, Lukas
  60. The real effects of overconfidence and fundamental uncertainty shocks By Ambrocio, Gene
  61. The Rate of Return on Everything, 1870–2015 By Òscar Jordà; Katharina Knoll; Dmitry Kuvshinov; Moritz Schularick; Alan M. Taylor
  62. Geringe Dynamik im Inlandsgeschäft: Deutschlands Pharmaindustrie 2016/2017 By Diel, Anastasia; Kirchhoff, Jasmina
  63. Georgia; First Review under the Extended Fund Facility and Request for Modification of Performance Criteria-Press Release; and Staff Report By International Monetary Fund
  64. Egypt’s Government Spending Multiplier: Its Size and Determinants By Sara B. Alnashar
  65. The Effects of Land Markets on Resource Allocation and Agricultural Productivity By Chaoran Chen; Diego Restuccia; Raül Santaeulàlia-Llopis
  66. Mauritius; Staff Report for the 2017 Article IV Consultation-Press Release and Staff Report By International Monetary Fund
  67. Dynamic Connectedness of Uncertainty across Developed Economies: A Time-Varying Approach By David Gabauer; Vasilios Plakandaras; Rangan Gupta; Nikolaos Antonakakis
  68. Comment on "external and public debt crises" By Reis, Ricardo
  69. The transmission of monetary policy shocks By Miranda-Agrippino, Silvia; Ricco, Giovanni
  70. Considering alternative monetary policy frameworks: an inflation range with an adjustable inflation target: remarks at the Money, Models, & Digital Innovation Conference, Global Interdependence Center, San Diego, California January 12, 2018 By Rosengren, Eric S.
  71. International Credit Supply Shocks By Cesa-Bianchi, Ambrogio; Ferrero, Andrea; Rebucci, Alessandro
  72. Estimating Unequal Gains across U.S. Consumers with Supplier Trade Data By Colin Hottman; Ryan Monarch
  73. Credit Risk, Excess Reserves and Monetary Policy: The Deposits Channel By Bratsiotis, George
  74. Does Size Matter? Bailouts with Large and Small Banks By Eduardo Dávila; Ansgar Walther
  75. Incorporating Macro-Financial Linkages into Forecasts Using Financial Conditions Indices: The Case of France By Piyabha Kongsamut; Christian Mumssen; Anne-Charlotte Paret; Thierry Tressel
  76. An Equilibrium Theory of Determinate Nominal Exchange Rates, Current Accounts and Asset Flows By Marcus Hagedorn
  77. What's News in International Business Cycles By Daniele Siena
  78. The importance of periodicity in modelling infectious disease outbreaks By George Verikios
  79. Structural Interpretation of Vector Autoregressions with Incomplete Identification: Revisiting the Role of Oil Supply and Demand Shocks By Christiane J.S. Baumeister; James D. Hamilton
  80. The Fiscal Multiplier By Kurt Mitman; Iourii Manovskii; Marcus Hagedorn
  81. Impact of public and private sector external debt on economic growth By Jorge Silva
  82. Default Cycles By Leo Kaas; Wei Cui
  83. Mexico; Arrangement Under the Flexible Credit Line and Cancellation of Current Arrangement-Press Release and Staff Report By International Monetary Fund
  84. Unconventional monetary policy and the portfolio choice of international mutual funds By Cenedese, Gino; Elard, Ilaf
  85. Maldives; 2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Maldives By International Monetary Fund
  86. Unemployment Insurance Union By Marius Clemens; Guillaume Claveres
  87. Is inflation default? The role of information in debt crises By Bassetto, Marco; Galli, Carlo
  88. The macroeconomic shock with the highest price of risk By Pintor, Gabor
  89. Pegging the Interest Rate on Bank Reserves By Diba Behzad; Olivier Loisel
  90. Does Credit Market Integration Amplify the Transmission of Real Business Cycle During Financial Crisis? By Kyunghun Kim; Ju Hyun Pyun; Jiyoun An
  91. Rwanda; Request for Extensions of the Standby Credit Facility Arrangement and the Policy Support Instrument-Press Release and Staff Report By International Monetary Fund
  92. Macroeconomic Indicator Forecasting with Deep Neural Networks By Cook, Thomas R.; Smalter Hall, Aaron
  93. Overconfidence, Subjective Perception, and Pricing Behavior By Benigno, Pierpaolo; Karantounias, Anastasios G.
  94. Implications of Macroeconomic Volatility in the Euro Area By Niko Hauzenberger; Maximilian B\"ock; Michael Pfarrhofer; Anna Stelzer; Gregor Zens
  95. Debt Service: The Painful Legacy of Credit Booms By Mikael Juselius; Anton Korinek; Mathias Drehmann
  96. Ignorance, Uncertainty, and Strategic Consumption-Portfolio Decisions By Luo, Yulei; Nie, Jun; Wang, Haijun
  97. Exploring the Linkage between Corruption and Economic Development in Case of Selected Developing and Developed Nations By Audi, Marc; Ali, Amjad
  98. Unconventional Monetary Policy in a Small Open Economy By Margaux MacDonald; Michał Ksawery Popiel
  99. Structural Reforms, Growth and Inequality: An Overview of Theory, Measurement and Evidence By Campos, Nauro F; De Grauwe, Paul; Ji, Yuemei
  100. Firm Dynamics and Pricing under Customer Capital Accumulation By Pau Roldan; Sophia Gilbukh
  101. Tradability and Productivity Growth Differentials Across EU Member States By Klaus S. Friesenbichler; Christian Glocker
  102. Temporary Price Changes, Inflation Regimes and the Propagation of Monetary Shocks By Fernando Alvarez; Francesco Lippi
  103. Counterfactual Equivalence in Macroeconomics By Martin Beraja
  104. Intermediation as Rent Extraction By Maryam Farboodi; Gregor Jarosch; Guido Menzio
  105. Can Macroprudential Measures Make Cross-Border Lending More Resilient? Lessons from the Taper Tantrum By Elod Takats; Judit Temesvary
  106. Quel avenir du dinar tunisien face à l'euro ? Prévision avec le modèle ARIMA By GRITLI, Mohamed Ilyes
  107. Geographic Cross-Sectional Fiscal Multipliers: What Have We Learned? By Gabriel Chodorow-Reich
  108. The Determinants Of Public Debt In The Euro Area: A Panel ARDL Approach By Chirwa, Themba G; Odhiambo, Nicholas M.
  109. Welfare in Slovakia and the EU — an alternative to GDP per capita By Brocek, Frantisek; Lalinsky, Tibor
  110. Bailey's measure of the welfare costs of inflation as a general-equilibrium measure By Cysne, Rubens Penha
  111. Inflation By Argandoña, Antonio
  112. A Theory of Discount Rates By Francois Geerolf
  113. A new year, a new you? Heterogeneity and self-control in food purchases By Cherchye, Laurens; De Rock, Bram; Griffith, Rachel; O'Connell, Martin; Smith, Kate; Vermeulen, Frederic
  114. Djibouti’s Quest for Inclusive Growth By Alexei P Kireyev
  115. Consumer Demand for Credit Card Services By Alexandrov, Alexei; Bedre-Defolie, Özlem; Grodzicki, Daniel
  116. Structural Transformation of Occupation Employment By Georg Duernecker; Berthold Herrendorf
  117. The Leading Premium By Tatyana Marchuk; Christian Schlag; Mariano Croce
  118. Funding quantitative easing to target inflation By Reis, Ricardo
  119. News and narratives in financial systems: exploiting big data for systemic risk assessment By Nyman, Rickard; Kapadia, Sujit; Tuckett, David; Gregory, David; Ormerod, Paul; Smith, Robert
  120. 2D discontinuous piecewise linear map: Emergence of fashion cycles By Laura Gardini; Iryna Sushko; Kiminori Matsuyama
  121. Effects of payment instruments on unhealthy purchases By Frank van der Horst; Jelle Miedema; Daniël Schreij; Martijn Meeter

  1. By: Cesa-Bianchi, Ambrogio; Thwaites, Gregory; Vicondoa, Alejandro
    Abstract: This paper constructs a new series of monetary policy surprises for the United Kingdom and estimates their effects on macroeconomic and financial variables, employing a high-frequency identification procedure. First, using local projections methods, we find that monetary policy has persistent effects on real interest rates and breakeven inflation. Second, employing our series of surprises as an instrument in a SVAR, we show that monetary policy affects economic activity, prices, the exchange rate, exports, and imports. Finally, we implement a test of overidentifying restrictions, which exploits the availability of the narrative series of monetary policy shocks computed by Cloyne and Huertgen (2014), and find no evidence that either set of shocks contains any ‘endogenous’ response to macroeconomic variables.
    Keywords: Monetary policy transmission; external instrument; high-frequency identification; structural VAR; local projections.
    JEL: E31 E32 E43 E44 E52 E58
    Date: 2016–08–02
  2. By: Bracke, Philippe; Tenreyro, Silvana
    Abstract: New Keynesian models with unemployment and incomplete markets are rapidly becoming a new workhorse model in macroeconomics. Such models typically require heavy computational methods which may obscure intuition and overlook equilibria. We present a tractable version which can be characterized analytically. Our results highlight that ñdue the interaction between incomplete markets, sticky prices and endogenous unemployment risk ñproductivity shocks may have radically di§erent e§ects than in traditional NK models, that the Taylor principle may fail, and that pessimistic beliefs may be self-fulÖlling and move the economy into temporary episodes of low demand and high unemployment, as well as into a long-lasting ìunemployment trapî. At the Zero Lower Bound, the presence of endogenous unemployment risk can create ináation and overturn paradoxical properties of the model. We further study Önancial asset prices and show that non-negligible risk premia emerge.
    Keywords: Sticky prices; incomplete asset markets; matching frictions; multiple equilibria; amplication
    JEL: E10 E21 E24 E30 E52
    Date: 2016–10
  3. By: Masolo, Riccardo M.; Monti, Francesca
    Abstract: Allowing for ambiguity, or Knightian uncertainty, about the behavior of the policymaker helps explain the evolution of trend inflation in the US in a simple new-Keynesian model, without resorting to exogenous changes in the inflation target. Using Blue Chip survey data to gauge the degree of private sector confidence, our model helps reconcile the difference between target inflation and the inflation trend measured in the data. We also show how, in the presence of ambiguity, it is optimal for policymakers to lean against the private sectors pessimistic expectations.
    Keywords: Ambiguity aversion; monetary policy; trend inflation
    JEL: D84 E31 E43 E52 E58
    Date: 2017–02–06
  4. By: Gauti B. Eggertsson; Ragnar E. Juelsrud; Ella Getz Wold
    Abstract: Following the crisis of 2008 several central banks engaged in a radical new policy experiment by setting negative policy rates. Using aggregate and bank-level data, we document a collapse in pass-through to deposit and lending rates once the policy rate turns negative. Motivated by these empirical facts, we construct a macro-model with a banking sector that links together policy rates, deposit rates and lending rates. Once the policy rates turns negative the usual transmission mechanism of monetary policy breaks down. Moreover, because a negative interest rate on reserves reduces bank profits, the total effect on aggregate output can be contractionary.
    JEL: E3 E30 E31 E32 E4 E41 E42 E43 E5 E50 E52 E58 E65
    Date: 2017–11
  5. By: Tarek A. Hassan; Stephan Hollander; Laurence van Lent; Ahmed Tahoun
    Abstract: We adapt simple tools from computational linguistics to construct a new measure of political risk faced by individual US firms: the share of their quarterly earnings conference calls that they devote to political risks. We validate our measure by showing that it correctly identifies calls containing extensive conversations on risks that are political in nature, that it varies intuitively over time and across sectors, and that it correlates with the firm's actions and stock market volatility in a manner that is highly indicative of political risk. Firms exposed to political risk retrench hiring and investment and actively lobby and donate to politicians. Interestingly, we find that the incidence of political risk across firms is far more heterogeneous and volatile than previously thought. The vast majority of the variation in our measure is at the firm-level rather than at the aggregate or sector-level, in the sense that it is neither captured by time fixed effects and the interaction of sector and time fixed effects, nor by heterogeneous exposure of individual firms to aggregate political risk. The dispersion of this firm-level political risk increases significantly at times with high aggregate political risk. Decomposing our measure of political risk by topic, we find that firms that devote more time to discussing risks associated with a given political topic tend to increase lobbying on that topic, but not on other topics, in the following quarter.
    JEL: D8 E22 E24 E32 E6 G18 G32 G38 H32
    Date: 2017–11
  6. By: Fieldhouse, Andrew; Mertens, Karel; Ravn, Morten O.
    Abstract: We document the portfolio activity of federal housing agencies and provide evidence on its impact on mortgage markets and the economy. Through a narrative analysis, we identify historical policy changes leading to expansions or contractions in agency mortgage holdings. Based on those regulatory events that we classify as unrelated to short-run cyclical or credit market shocks, we find that an increase in mortgage purchases by the agencies boosts mortgage lending and lowers mortgage rates. Agency purchases influence prices in other asset markets and stimulate residential investment. Using information in GSE stock prices to construct an alternative instrument for agency purchasing activity yields very similar results as our benchmark narrative identification approach.
    Keywords: Credit Policy; Monetary Policy; Mortgage Credit; Residential Investment; Government Sponsored Entreprises
    JEL: E44 E52 G28 N22 R38
    Date: 2017–01–26
  7. By: Cui, Wei; Kaas, Leo
    Abstract: Recessions are often accompanied by spikes of corporate default and prolonged declines of business credit. This paper argues that credit and default cycles are the outcomes of variations in self-fulfilling beliefs about credit market conditions. We develop a tractable macroeconomic model in which leverage ratios and interest spreads are determined in optimal credit contracts that reflect the expected default risk of borrowing firms. We calibrate the model to evaluate the impact of sunspots and fundamental shocks on the credit market and on output dynamics. Self-fulfilling changes in credit market expectations trigger sizable reactions in default rates and generate endogenously persistent credit and output cycles. All credit market shocks together account for about 50% of the variation of U.S. output growth during 1982–2015.
    Keywords: Firm default; Financing constraints; Credit Spreads; Sunspots growth; population.
    JEL: E22 E32 E44 G12
    Date: 2017–05
  8. By: George-Marios Angeletos
    Abstract: The notion that business cycles are driven by demand shocks is subtle. I first review the conceptual and empirical challenges faced when trying to accommodate this notion in modern, micro-founded, general-equilibrium models. I next review my own research, which sheds new light on the observed business cycles by relaxing the common-knowledge restrictions of such models. My work shifts the focus from nominal rigidity to frictional coordination. It makes room for forces akin to animal spirits even when the equilibrium is unique. It allows demand shocks to generate realistic business cycles even when nominal rigidity is absent or undone by appropriate monetary policy. And it modifies the general-equilibrium predictions of workhorse macroeconomic models in manners that seem both conceptually appealing and empirically relevant.
    JEL: E1 E3 E5 E62
    Date: 2017–12
  9. By: Alice Albonico; Alessia Paccagnini; Patrizio Tirelli
    Keywords: PIIGS, Euro crisis, two-country DSGE, Bayesian estimation
    JEL: E32 E21 C13 C32 C11 E37
    Date: 2017–10
  10. By: Michael T. Kiley
    Abstract: Interest rates may remain low and fall to their effective lower bound (ELB) often. As a result, quantitative easing (QE), in which central banks expand their balance sheet to lower long-term interest rates, may complement policy approaches focused on adjustments in short-term interest rates. Simulation results using a large-scale model (FRB/US) suggest that QE does not improve economic performance if the steady-state interest rate is high, confirming that such policies were not advantageous from 1960 to 2007. However, QE can offset a significant portion of the adverse effects of the ELB when the equilibrium real interest rate is low. These improvements in economic performance exceed those associated with moderate increases in the inflation target. Active QE is primarily required when nominal interest rates are near the ELB, pointing to benefits within the model from QE as a secondary tool while relying on short-term interest rates as the primary tool.
    Keywords: Interest rates ; Macroeconomic models ; Monetary policy
    JEL: E52 E47 E37
    Date: 2018–01–17
  11. By: Leon-Ledesma, Miguel; Moro, Alessio
    Abstract: When measured using NIPA conventions, a two-sector model of balanced growth and structural transformation can account for the mildly declining GDP growth rate, increasing share of services, and increasing real investment/GDP ratio observed in the post-war U.S. economy. These changes induce a decline of 36% in the marginal product of capital and of 5.4% in the real interest rate. By retaining the U.S. calibration, the process of structural transformation can also account, per-se, for cross-country differences in real investment/GDP ratios, which are comparable to those displayed by the U.S. along its growth path.
    Keywords: Structural transformation; productivity of capital; two-sector model.
    JEL: E22 E24 E31 O41
    Date: 2017–04–05
  12. By: J. Sebastián Amador-Torres (Banco de la República de Colombia)
    Abstract: This paper proposes new monthly estimates for the non-accelerating inflation rate of unemployment (NAIRU) and the output gap for Colombia. These rely on a New Keynesian small open economy model following González et al (2013), augmented by an Okun’s Law equation. The resulting output gap closely follows the business cycle, as identified by other estimates currently employed by the central bank. The unemployment gap is negatively correlated to the output gap, in a magnitude consistent with simple Okun Law’s estimations. Unlike previous works, this paper presents shocks decompositions, which allow for some economic interpretation of the unemployment dynamics in terms of macroeconomic shocks. This framework might be well suited to evaluate the effects of monetary policy on the labor market, as suggested by an evaluation of forecasting accuracy. Classification JEL: E23, E24, E27, E32.
    Keywords: NAIRU, unemployment, output gap, New Keynesian model, monetary policy, emerging economy, monthly data.
    Date: 2018–11
  13. By: Norman Loayza (The World Bank); Amine Ouazad (HEC Montreal); Romain Ranciere (University of Southern California)
    Abstract: This paper reviews the evolving literature that links financial development, financial crises, and economic growth in the past 20 years. The initial disconnect—with one literature focusing on the effect of financial deepening on long-run growth and another studying its impact on volatility and crisis—has given way to a more nuanced approach that analyzes the two phenomena in an integrated framework. The main finding of this literature is that financial deepening leads to a trade-off between higher economic growth and higher crisis risk; and its main conclusion is that, for at least middle-income countries, the positive growth effects outweigh the negative crisis risk impact. This balanced view has been revisited recently for advanced economies, where an emerging and controversial literature supports the notion of "too much finance," suggesting that there might be a threshold beyond which financial depth becomes detrimental for economic growth by crowding out other productive activities and misallocating resources. Nevertheless, the growth/crisis trade-off is alive and strong for a large share of the world economy. Recognizing the intrinsic trade-offs of financial development can provide a useful framework to design policies targeting financial deepening, diversity, and inclusion. In particular, acknowledging the trade-offs can highlight the need for complementary policies to mitigate the risks, from financial macroprudential policies to monetary policy frameworks that monitor the growth of credit and asset prices.
    Keywords: Finance, Financial Deepening, Development, Growth, Productivity, Crisis, Volatility, Risk, Macroprudential Policies
    JEL: E44 O40 G00 G01 G32 H12
    Date: 2017–12
  14. By: Stockhammer, Engelbert (Kingston University London); Rabinovich, Joel (Université Paris-13); Reddy, Niall (New York University)
    Abstract: Most empirical macroeconomic research limited to the period since World War II. This paper analyses the effects of changes in income distribution and in private wealth on consumption and investment covering a period from as early as 1855 until 2010 for the UK, France, Germany and USA, based on the dataset of Piketty and Zucman (2014). We contribute to the post-Keynesian debate on the nature of demand regimes, mainstream analyses of wealth effects and the financialisation debate. We find that overall domestic demand has been wage-led in the USA, UK and Germany. Total investment responds positively to higher wage shares, which is driven by residential investment. For corporate investment alone, we find a negative relation. Wealth effects are found to be positive and significant for consumption in the USA and UK, but weaker in France and Germany. Investment is negatively affected by private wealth in the USA and the UK, but positively in France and Germany.
    Keywords: historical macroeconomics; demand regimes; Bhaduri-Marglin model; wealth effects; financialisation
    JEL: B50 E11 E12 E20 E21 N10
    Date: 2017–11–09
  15. By: Davide Debortoli; Jordi Galí; Luca Gambetti
    Abstract: We estimate a time-varying structural VAR that describes the dynamic responses of a number of U.S. macro variables to different identified shocks. We find no significant changes in the estimated responses over the period when the federal funds rate attained the zero lower bound (ZLB). This result is consistent with the hypothesis of "perfect substitutability" between conventional and unconventional monetary policies. Montecarlo simulations based on artificial time series generated from a standard New Keynesian model point to the validity of our empirical approach to detect the changes in equilibrium dynamics associated with ZLB episodes.
    Keywords: regime changes, liquidity trap, unconventional monetary policies, time-varying structural vector-autoregressive models
    JEL: E44 E52
    Date: 2018–01
  16. By: Davide Debortoli; Jordi Galí; Luca Gambetti
    Abstract: We estimate a time-varying structural VAR that describes the dynamic responses of a number of U.S. macro variables to different identified shocks. We find no significant changes in the estimated responses over the period when the federal funds rate attained the zero lower bound (ZLB). This result is consistent with the hypothesis of "perfect substitutability" between conventional and unconventional monetary policies. Montecarlo simulations based on artificial time series generated from a standard New Keynesian model point to the validity of our empirical approach to detect the changes in equilibrium dynamics associated with ZLB episodes.
    Keywords: Regime changes, liquidity trap, unconventional monetary policies, time-varying structural vector-autoregressive models.
    JEL: E44 E52
    Date: 2018–01
  17. By: Mariarosaria Comunale (Bank of Lithuania)
    Abstract: In this paper, we examine the relationships between real, credit and house price cycles, by using a synchronicity index, and structural characteristics and macroeconomic variables of 17 EU countries. We find that the cycles between credit variables and the real cycle with the property or equity prices cycles seem relatively well synchronised. Credit and GDP fluctuations seem to be less synchronised, mostly because credit volumes tend to lag the real cycle by several quarters. The high rates of private homeownership tend to be associated with larger cycles in GDP, credit, and house prices. Higher Loan-To-Value ratios, seen as a proxy of borrowing constraints, and a higher percentage of flexible rate mortgages, could also indicate that a country is more sensitive to shocks and possibly increase pro-cyclicality and increase cycle volatility. Finally, the pro-cyclicality of the credit and housing market to the GDP cycle can be linked to the fluctuation in current accounts and their misalignments with respect to the theoretical equilibrium value. The synchronicity and the cycles of credit may also be considered for signaling recessions.
    Keywords: cycles, synchronicity, housing market, credit, European Union
    JEL: E32 E44 F36
    Date: 2017–08–18
  18. By: Frederic S. Mishkin
    Abstract: This paper argues that the rules versus discretion debate has been miscast because a central bank does not have to choose only between adopting a policy rule versus pure discretion, both of which have serious shortcomings. Rather it can choose a constrained discretionary regime that has rule-like attributes. Monetary policy discretion can be made more rule-like, by 1) adopting a nominal anchor such as an inflation target, and 2) communication of a monetary policy reaction process, especially through data-based forward guidance, in which the monetary policy authorities describe how the future policy path will change as economic circumstances change.
    JEL: E5 E52 E58
    Date: 2017–12
  19. By: Yashiv, Eran
    Abstract: U.S. CPS data indicate that in recessions firms actually increase their hiring rates from the pools of the unemployed and out of the labor force. Why so? The paper provides an explanation by studying the optimal recruiting behavior of the representative firm. The model combines labor frictions, of the search and matching type, with capital frictions, of the q-model type. Optimal firm behavior is a function of the value of jobs, i.e., the expected present value of the marginal worker to the firm. These are estimated to be counter-cyclical, the underlying reason being the dynamic behavior of the labor share of GDP. The counter-cyclicality of hiring rates and job values, which may appear counter-intuitive, is shown to be consistent with well-known business cycle facts. The analysis emphasizes the difference between current labor productivity and the wider, forwardlooking concept of job values. The paper explains the high volatility of firm recruiting behavior, as well as the reduction over time in labor market fluidity in the U.S., using the same estimated model. Part of the explanation has to do with job values and another part with the interaction of hiring and investment costs, both determinants having been typically overlooked.
    Keywords: counter-cyclical job values; business cycles; aggregate hiring; ; vacancies; labor market frictions; capital market frictions; volatility; labor market fluidity
    JEL: E24 E32
    Date: 2016–11–14
  20. By: Garriga, Carlos; Kydland, Finn E.; Šustek, Roman
    Abstract: Standard models used for monetary policy analysis rely on sticky prices. Recently, the literature started to explore also nominal debt contracts. Focusing on mortgages, this paper compares the two channels of transmission within a common framework. The sticky price channel is dominant when shocks to the policy interest rate are temporary, the mortgage channel is important when the shocks are persistent. The first channel has significant aggregate effects but small redistributive effects. The opposite holds for the second channel. Using yield curve data decomposed into temporary and persistent components, the redistributive and aggregate consequences are found to be quantitatively comparable.
    JEL: E32 E52 G21 R21
    Date: 2016–08–23
  21. By: Cesa-Bianchi, Ambrogio; Martin, Fernando Eguren; Thwaites, Gregory
    Abstract: This paper provides novel empirical evidence showing that foreign financial developments are a powerful predictor of domestic banking crises. Using a new data set for 38 advanced and emerging economies over 1970-2011, we show that credit growth in the rest of the world has a large positive effect on the probability of banking crises taking place at home, even when controlling for domestic credit growth. Our results suggest that this effect is larger for financially open economies, and is consistent with transmission via cross-border capital flows and market sentiment. Direct contagion from foreign crises plays an important role, but does not account for the whole effect.
    Keywords: Financial Crises; Global Credit Cycle; Banking; Financial Stability; Sentiment.
    JEL: E32 E44 E52
    Date: 2017–01–24
  22. By: Alloza, Mario
    Abstract: This paper estimates the impact of government spending shocks on economic activity during periods of high and low uncertainty and during periods of boom and recession. We find that government spending shocks have larger impacts on output in booms than in recessions and larger impacts during tranquil times than during uncertain times. The results suggest that confidence plays an important role in explaining this differential impact.
    Keywords: fiscal policy; vector autoregressions; uncertainty.
    JEL: C32 E32 E62
    Date: 2016–10–04
  23. By: Teulings, Coen
    Abstract: It is well known that rational bubbles can be sustained in balanced growth path of a deterministic economy when the return to capital r is equal to the growth rate g. When there is a lack of stores of value, bubbles can implement an e¢ cient allocation. This paper considers a world where r áuctuates over time due to shocks to the marginal productivity of capital. Then, bubbles further e¢ ciency, though they cannot implement Örst best. While bubbles can only be sustained when r = g in a deterministic economy, r > g "on average" in a stochastic economy. Fiscal policy improves welfare by adding an extra asset. Where only the elderly contribute to shifting resources between investment and consumption in a bubbly economy, Öscal policy allows part of that burden to be shifted to the young. Contrary to common wisdom, trade in bubbly assets implements intergenerational transfers, while Öscal policy implements intragenerational transfers. Hence, while bubbles and Öscal policy are perfect substitutes in the deterministic economy, Öscal policy dominates bubbles in a stochastic economy. For plausible parameter values, a higher degree of dynamic ine¢ ciency should lead to a higher sovereign debt.
    Keywords: rational bubbles; fiscal policy; secular stagnation
    JEL: E44 E62
    Date: 2016–07–22
  24. By: Robert E. Hall; Thomas J. Sargent
    Abstract: The immediate effect of Friedman's 1968 AEA presidential address on the economics profession was the introduction of an adaptive term in the Phillips curve that shifted the curve, as Friedman proposed, based on expected inflation. Initial formulations suggested that the shift was less than point-for-point, but later thinking, based on the emerging idea of rational expectations, together with the experience of the 1970s, came to agree with Friedman that the shift was by the full amount. The profession also recognized that Friedman's point was deeper---real outcomes are invariant to the monetary policy rule, not just to the trend in inflation. The presidential address made an important contribution to the conduct of monetary policy around the world. It ushered in low and stable inflation rates in all advanced countries, and in many less advanced ones.
    JEL: E31 E52 E61
    Date: 2017–12
  25. By: Mumtaz, Haroon (Queen Mary University); Theodoridis, Konstantinos (Cardiff Business School)
    Abstract: This paper identi?es shocks to the Federal Reserve?s in?ation target as VAR innovations that make the largest contribution to future movements in long-horizon in?ation expectations. The effectiveness of this scheme is documented via Monte-Carlo experiments. The estimated impulse responses indicate that a positive shock to the target is associated with a large increase in in?ation and long-term interest rates in the US and the industrialised world. Target shocks are estimated to be a vital factor behind the increase in in?ation during the pre-1980 period and are an important driver of the decline in long-term interest rates over the last two decades. transmission.
    Keywords: SVAR, DSGE model, in?ation target. International
    JEL: C5 E1 E5 E6
  26. By: Diniz, Andre; Guimaraes, Bernardo
    Abstract: The deleterious effect of debt restructuring on banks’ balance sheets and, consequently, on the economy as a whole has been a key policy issue. This paper studies how post-default fiscal policy interacts with this sovereign-bank loop and shape the response of a model economy. Calibration of the model matches characteristics of the Greek economy at the time of the Bond Exchange. Debt restructuring in place of higher lump-sum taxation or non-productive government spending harms the economy even if no other cost of default is considered. However, the sovereign-debt loop is less costly to the economy than increases in labour or capital taxes to service debt. Even so, if fiscal policy is too responsive, a crowding-out effect inhibits the recovery of capital markets, hence a more conservative fiscal stance is desirable. Thus how diabolic the post-default sovereign-bank loop is depends to a large extent on the way fiscal policy responds
    Keywords: financial frictions; fiscal policy; sovereign default; sovereign-bank loop.
    JEL: E32 E62 F34 H63
    Date: 2017–01
  27. By: Harashima, Taiji
    Abstract: In economics, risk lovers have been generally ignored, most likely because it has generally been thought that they cannot survive economically. In this paper, I examine the possibility that risk lovers can exist continuously in the framework of an economic growth model. A bubble-like phenomenon (a so-called “bubble economy”) can be generated if risk lovers undertake a very risky financial “bluff”—for example, if they purposely raise some important asset prices. I conclude that because risk-loving and risk-averse households can coexist at a state of sustainable heterogeneity, risk lovers can exist continuously in an economy. Therefore, it is likely that a bluff will be undertaken by risk lovers and a bubble-like phenomenon can be generated.
    Keywords: Risk lover; Bluff; Bubble; Sustainable heterogeneity; Risk averse
    JEL: D81 E32 E44 G11
    Date: 2018–01–05
  28. By: de Ridder, Maarten
    Abstract: This paper analyzes the channels through which financial crises exert long-term negative effects on output. Recent models suggest that a shortfall in productivity-enhancing invest- ments temporarily slows technological progress, creating a gap between pre-crisis trend and actual GDP. This hypothesis is tested using a linked lender-borrower dataset on 519 U.S. corporations responsible for 54% of industrial research and development. Exploiting quasi-experimental variation in firm-level exposure to the 2008-9 financial crisis, I show that tight credit reduced investments in productivity-enhancement, and has significantly slowed down output growth between 2010 and 2015. A partial-equilibrium aggregation exercise suggests output would be 12% higher today if productivity-enhancing investments had grown at pre-crisis rates.
    Keywords: Financial crises; endogenous growth; innovation; business cycles
    JEL: E32 E44 O30 O47
    Date: 2016–09–30
  29. By: Monica Jain; Christopher S. Sutherland
    Abstract: We construct a 23-country panel data set to consider the effect of central bank projections and forward guidance on private-sector forecast disagreement. We find that central bank projections and forward guidance matter mainly for private-sector forecast disagreement surrounding upcoming policy rate decisions and matter less for private-sector macroeconomic forecasts. Further, neither central banks’ provision of policy rate path projections nor their choice of policy rate assumption used in their macroeconomic projections appear to matter much for private-sector forecast disagreement.
    Keywords: Central bank research, Inflation targets, Monetary Policy, Monetary policy communications, Transmission of monetary policy
    JEL: D83 E37 E52 E58
    Date: 2018
  30. By: de Grauwe, Paul; Foresti, Pasquale
    Abstract: In this paper we suggest that Eurozone countries face a policy trade-off between: (1) a common rule imposing co-movements in fiscal policy; (2) financial stability; (3) financial integration. We provide empirical evidence documenting the existence of such a trade-off in the period characterized by the financial crisis and by the sovereign debt crisis. Then, we conclude that the intense fiscal rules that have been introduced in the Eurozone after the emergence of the debt crisis can reduce the capacity of national governments to deal with asymmetric shocks and can be incompatible with either free capital mobility and/or financial stability.
    Keywords: fiscal policy rules; Eurozone; financial stability; policy objectives; optimal currency areas
    JEL: E61 E62 F3
    Date: 2016–08–01
  31. By: Emanuel Kohlscheen; Andrés Murcia Pabón; Juan Contreras
    Abstract: We analyse key determinants of bank profitability based on the evolution of balance sheets of 534 banks from 19 emerging market economies. We find that higher long-term interest rates tend to boost profitability, while higher short-term rates reduce profits by raising funding costs. We also find that in normal times credit growth tends to be more important for bank profitability than GDP growth. The financial cycle thus appears to predict bank profitability better than the business cycle. We also show that increases in sovereign risk premia reduce bank profits in a significant way, underscoring the role of credible fiscal frameworks in supporting the overall financial stability.
    Keywords: bank profitability, credit, risk premia, emerging markets, interest rates
    JEL: E32 E43 G21
    Date: 2018–01
  32. By: Amat Adarov (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: The study estimates aggregate financial cycles and segment-specific cycles for credit, equity, bond and housing markets of the USA, the UK, Germany and Japan over the period 1960-2015 using dynamic factor models with state-space techniques based on a range of variables conveying market price, quantity and risk dynamics. The analysis reveals a highly persistent and recurring nature of financial cycles reflecting the build-up of financial imbalances in each segment with an estimated average cycle duration of about ten years. The significant co-movements and spillovers that we find among many of the segment-specific cycles suggest that well-diversified financial systems are prone to the risks associated with the mutual amplification of nominal shocks via linkages between financial market segments, which needs to be taken into account in the design of policies addressing asset bubbles and financial imbalances.
    Keywords: financial cycles, asset bubbles, financial stability, housing prices, equity, debt securities, credit, capital markets, spillovers, Kalman filter, factor models
    JEL: E44 E50 F37 G15
    Date: 2017–12
  33. By: Balke, Neele L.; Ravn, Morten O.
    Abstract: We analyze time-consistent fiscal policy in a sovereign debt model. We consider a production economy that incorporates feedback from policy to output through employment, features inequality though unemployment, and in which the government lacks a commitment technology. The government’s optimal policies play off wedges due to the lack of lumpsum taxes and the distortions that taxes and transfers introduce on employment. Lack of commitment matters during a debt crises – episodes where the price of debt reacts elastically to the issuance of new debt. In normal times, the government sets procyclical taxes, transfers and public goods provision but in crisis times it is optimal to implement austerity policies which minimize the distortions deriving from default premia. Could a third party provide a commitment technology, austerity is no longer optimal.
    Keywords: Time-consistent fiscal policy; sovereign debt; debt crisis; austerity
    JEL: E20 E62 F34 F41
    Date: 2016–11
  34. By: Mikhail Golosov (Princeton University); David Evans (University of Oregon); anmol bhandari (university of minnesota)
    Abstract: Asset pricing data indicates that shocks to the nominal interest rates are primarily reflected in changes in risk premium. In this paper we build a New Keynesian model in which the behavior of interest rates and risk premium is consistent with this observation. We show that monetary shocks affect the real and nominal variables through the novel channel -- when nominal price adjustment is costly, firms need to balance needs to maximize current period profit and minimize future cost of price adjustments. Increase in risk, which follows a decrease in interest rates, increases firm's weight of future costs in inflationary environments, and leads to an increase in inflation, nominal and real marginal costs and output. Effectiveness of monetary policy varies with the state of the economy and generally is low in low inflationary environments. We also show that a number of well-known predictions of New Keynesian models reverses when interest rate shocks affect risk premium.
    Date: 2017
  35. By: Hubert Kempf (Ecole Normale Supérieure Paris Saclay ; CREST)
    Abstract: Fiscal federalism may not be a panacea in a monetary union if it does not address the non-cooperative behaviour between fiscal policymakers. To prove this, we assess the relative merits of a fiscal federalism scheme in a monetary union and intergovernmental fiscal cooperation without such a federal authority. Using a standard macroeconomic model commonly used for policy analysis we show that it is impossible to conclude that one solution is always preferable to the other. The benefits from an extra instrument and a policymaker with union-wide objectives may not compensate the adding of a non-cooperative player to the policy game. This result is sustained when an active monetary policy is introduced in the model or when shocks affect the functioning of the economy. The welfare ranking of these two options depends on the cros-border spillover effects, the objectives of policymakers and the variances of shocks.
    Keywords: Monetary union; fiscal federation; cooperation; policymix
    JEL: E62 E63
  36. By: Athreya, Kartik B.; Mustre-del-Rio, Jose (Federal Reserve Bank of Kansas City); Sanchez, Juan M.
    Abstract: Using recently available proprietary panel data, we show that while many (35%) US consumers experience fi nancial distress at some point in the life cycle, most of the events of nancial distress are primarily concentrated in a much smaller proportion of consumers in persistent trouble. Roughly 10% of consumers are distressed for more than a quarter of the life cycle, and less than 10% of borrowers account for half of all distress events. These facts can be largely accounted for in a straightforward extension of a workhorse model of defaultable debt that accommodates a simple form of heterogeneity in time preference but not otherwise.
    Keywords: Default; Fi nancial distress; Consumer credit; credit card debt
    JEL: D60 E21 E44
    Date: 2017–11–27
  37. By: Martino N. Ricci; Patrizio Tirelli
    Keywords: Housing, Mortgage default, subprime risk, DSGE.
    JEL: E32 R31 G01 E44
    Date: 2017–09
  38. By: Garicano, Luis; Steinwender, Claudia
    Abstract: We introduce a novel empirical strategy to measure the size of credit shocks. Theoretically, we show that credit shocks reduce the value of long-term relative to short-term investments. Empirically, we can therefore compare the reduction of long-term relative to short-term investments within firms, allowing for firm-times-year fixed effects. Using Spanish firm level data, we estimate the credit crunch to be equivalent to an additional tax rate of around 11% on the longest lived capital. To pin down credit constraints as the underlying cause, we apply triple differences strategies using foreign ownership or pre-crisis debt maturity.
    JEL: D24 E22 E32 G31
    Date: 2016–12–01
  39. By: Thomas Sargent (New York University); Mikhail Golosov (Princeton University); David Evans (University of Oregon); anmol bhandari (university of minnesota)
    Abstract: We study business cycles in a heterogeneous agent model with incomplete markets and sticky nominal prices (a modified HANK model (Kaplan et al. (2016))). Optimal fiscal-monetary policy balances gains from “fiscal hedging” against benefits flowing from a countervailing new motive – “redistributional hedging”. A fictitious planner uses inflation to offset adverse shocks to the cross-section distribution of labor earnings. A calibration that imitates how US recessions reshape that cross-section distribution (as documented by Guve- nen et al. (2014)) indicates that substantial welfare benefits come from moving inflation in response to aggregate shocks.
    Date: 2017
  40. By: John B. Taylor
    Abstract: This paper reviews the state of the debate over rules versus discretion in monetary policy, focusing on the role of economic research in this debate. It shows that proposals for policy rules are largely based on empirical research using economic models. The models demonstrate the advantages of a systematic approach to monetary policy, though proposed rules have changed and generally improved over time. Rules derived from research help central bankers formulate monetary policy as they operate in domestic financial markets and the global monetary system. However, the line of demarcation between rules and discretion is difficult to establish in practice which makes contrasting the two approaches difficult. History shows that research on policy rules has had an impact on the practice of central banking. Economic research also shows that while central bank independence is crucial for good monetary policy making, it has not been enough to prevent swings away from rules-based policy, implying that policy-makers might consider enhanced reporting about how rules are used in monetary policy. The paper also shows that during the past year there has been an increased focus on policy rules in implementing monetary policy in the United States.
    JEL: E52 E58 F33
    Date: 2017–12
  41. By: Simona Malovana; Dominika Kolcunova; Vaclav Broz
    Abstract: This paper studies the extent to which monetary policy may affect banks' perception of credit risk and the way banks measure risk under the internal ratings-based approach. Specifically, we analyze the effect of different monetary policy indicators on banks' risk weights for credit risk. We present robust evidence of the existence of the risk-taking channel in the Czech Republic. Further, we show that the recent prolonged period of accommodative monetary policy has been instrumental in establishing this relationship. Finally, we obtain comparable results by extending the analysis to cover all the Visegrad Four countries. The presented findings have important implications for the prudential authority, which should be aware of the possible side-effects of monetary policy on how banks measure risk.
    Keywords: Banks, financial stability, internal ratings-based approach, risk-taking channel
    JEL: E52 E58 G21 G28
    Date: 2017–12
  42. By: Hasenzagl, Thomas (Now-Casting Economics); Pellegrino, Filippo (London School of Economics and Now-Casting Economics); Reichlin, Lucrezia (London Business School, Now-Casting Economics and CEPR); Ricco, Giovanni (University of Warwick and OFCE – SciencesPo)
    Abstract: A view often expressed by the Fed is that three components matter in inflation dynamics : a trend anchored by long run inflation expectations; a cycle connecting nominal and real variables; and oil prices. This paper proposes an econometric structural model of inflation formalising this view. Our findings point to a stable expectational trend, a sizeable and well identified Phillips curve and an oil cycle which, contrary to the standard rational expectation model, affects inflation via expectations without being reflected in the output gap. The latter often overpowers the Phillips curve. In fact, the joint dynamics of the Phillips curve cycle and the oil cycles explain the inflation puzzles of the last ten years.
    Date: 2017
  43. By: Igor Lebrun
    Abstract: This working paper provides an update of a study from 2007 in which the accuracy of the medium-term outlooks for the Belgian economy is assessed. The study is expanded with nine additional editions of the Economic Outlook covering a mixture of pre-crisis, crisis and post-crisis periods.In the framework of the Act of 28 February 2014 on the National Accounts Institute the Scientific Committee for the economic budget has taken note of this study and has issued an opinion on it.
    Keywords: Forecast accuracy, Medium-term projections
    JEL: C53 E6
    Date: 2017–09–30
  44. By: Greene, Claire (Federal Reserve Bank of Boston); Schuh, Scott (Federal Reserve Bank of Boston)
    Abstract: This paper describes key results from the 2016 Diary of Consumer Payment Choice (DCPC), the third in a series of diary surveys that measure payment behavior through the daily recording of U.S. consumers’ spending. In October 2016, consumers paid mostly with cash (31 percent of payments), debit cards (27 percent), and credit cards (18 percent). These instruments accounted for 76 percent of the number of payments, but only 34 percent of the total value of payments, because they tend to be used more for smaller-value payments. Electronic payments accounted for 43 percent of the value of payment but only 14 percent of the number of payments. The average value of a cash transaction was $22, compared to $112 for the average noncash transaction (and $84 for all transactions). The average value of consumers’ holdings of cash on their persons (in pocket, purse, or wallet) was $57, and the median was $24. Given uncertainty about the comparability of point estimates from the 2015 DCPC and the 2016 DCPC, this report includes confidence intervals and probability-based estimates of the changes in consumer payment behavior from 2015 to 2016.
    Keywords: cash; checks; checking accounts; debit cards; credit cards; prepaid cards; electronic payments; payment preferences; Diary of Consumer Payment Choice
    JEL: D12 D14 E42
    Date: 2017–12–01
  45. By: Corsetti, Giancarlo; Mavroeidi, Eleonora; Thwaites, Gregory; Wolf, Martin
    Abstract: We study how small open economies can escape from deflation and unemployment in a situation where the world economy is permanently depressed. Building on the framework of Eggertsson et al. (2016), we show that the transition to full employment and at-target inflation requires real and nominal depreciation of the exchange rate. However, because of adverse income and valuation effects from real depreciation, the escape can be beggar thy self, raising employment but actually lowering welfare. We show that as long as the economy remains financially open, domestic asset supply policies or reducing the effective lower bound on policy rates may be ineffective or even counterproductive. However, closing domestic capital markets does not necessarily enhance the monetary authorities’ ability to rescue the economy from stagnation.
    Keywords: Monetary policy; zero lower bound; deflation; depreciation; beggar-thy-neighbour; capital controls
    JEL: E62 F41
    Date: 2017–05–31
  46. By: Batten, Sandra (Bank of England)
    Abstract: Climatic factors can directly affect economic outcomes such as output, investment and productivity, and understanding the economic consequences of climate change is becoming a necessity not just for climate economists but also for a wider range of economic professionals involved in modelling and forecasting macroeconomic variables. The focus of this review is on the key theoretical and empirical modelling issues in the analysis of the macroeconomic risks deriving from climate change. The paper develops the taxonomy introduced by a number of previous Bank of England studies, which distinguish between physical and transition risks of climate change. The paper then identifies the different channels through which these risks are transmitted to the macro-economy, either through (unpredictable) economic shocks or through predictable, longer-term impacts. The different approaches to modelling these macroeconomic effects are then discussed and assessed in light of the increasing need to routinely monitor and quantify the impact of emerging climate change risks on the economy.
    Keywords: Climate change; global warming; natural disasters; macroeconomic models
    JEL: E10 H23 Q51 Q54 Q56
    Date: 2018–01–12
  47. By: Xing, Xiaoyun; Xiong, Wanting; Chen, Liujun; Chen, Jiawei; Wang, Yougui; Stanley, H. Eugene
    Abstract: Both money and debt are products of credit creation of banks. Money is always circulating among traders by facilitating commodity transactions. In contrast, debt is created by borrowing and annihilated by repayment as it is matured. However, when this creation- annihilation process is mediated by banks which are constrained by a credit capacity, there exists continuous transfer of debt among debtors, which can be defined as debt circulation. This paper presents a multi-agent model in which income determination, credit creation, and credit transaction are integrated. A hypothetical economy composed of a banking system and multiple traders is proposed, in which the traders are allowed to borrow money from the bank once their expenditure cannot be financed by their own funds. In order to demonstrate the circulations of money and debt from the micro view, the authors track the transfer processes of them and collect their holding times respectively. When the traders could afford their expenditures, only money circulation can be observed. However, as they are forced to borrow, the money circulation is accelerated and debt circulation emerges. Both distributions of holding times of money and debt are found to take exponential form due to the random nature of exchanges. The velocity of money circulation is determined by the expending behavior of traders, while the velocity of debt circulation is associated with the repayment behavior of debtors. Consequently, the aggregate income can be decomposed into two parts: one comes from money circulation and the other from debt circulation.
    Keywords: money circulation,debt circulation,holding time distribution,quantity theory of money
    JEL: E51 E27 G21
    Date: 2018
  48. By: Fratzscher, Marcel; Gloede, Oliver; Menkhoff, Lukas; Sarno, Lucio; Stoerh, Tobias
    Abstract: This paper examines foreign exchange intervention based on novel daily data covering 33 countries from 1995 to 2011. We find that intervention is widely used and an effective policy tool, with a success rate in excess of 80 percent under some criteria. The policy works well in terms of smoothing the path of exchange rates, and in stabilizing the exchange rate in countries with narrow band regimes. Moving the level of the exchange rate in flexible regimes requires that some conditions are met, including the use of large volumes and that intervention is made public and supported via communication.
    Keywords: Foreign exchange intervention; exchange rate regimes; effectiveness measures; communication.
    JEL: E58 F31 F33
    Date: 2017–12
  49. By: DiGabriele, Jim; Ojo, Marianne
    Abstract: The digital economy, undoubtedly, has contributed to the immense task of clearly identifying, ascertaining, and accounting for sources, rationales, and audit trails relating to tax transactions. This is not only evident owing to difficulties associated with cross-border transaction regulations which govern different jurisdictions as well as the enforcement of such regulations, but also in respect of risks associated with the present global financial environment – all having generated from the rise in automation, increased and improved sophisticated technologies, globalization, and conglomeration. This chapter not only seeks to highlight the extent, contribution, and significance of the digital economy in respect of those risks associated with base erosion and profit shifting (BEPS) but also amongst other aims and objectives to recommend measures whereby regulations can be better enforced as a means of addressing practices associated with BEPS.
    Keywords: Multilateral Instruments; Joint Audits; Aggressive Tax Planning Schemes; Digital Economy; Transfer Pricing; Global Value Chains; Cross Sectional Services Risks
    JEL: E6 F4 K2 M41
    Date: 2018
  50. By: International Monetary Fund
    Abstract: The near-term growth and inflation outlook remains generally favorable, but the fiscal balance and external position have deteriorated substantially. Adjustment from high dependency on oil revenue and large infrastructure and social development needs pose a significant challenge to a fragile state with weak institutional capacity. Rapid frontloading of public investment risks substantial waste of resources through investment inefficiency. This underscores the need to shift away from frontloading of capital spending, improve public investment management system and ensure sufficient social and economic returns from such investment to safeguard fiscal sustainability.
    Date: 2017–12–07
  51. By: Alloza, Mario
    Abstract: This paper investigates how taxes affect relative mobility in the income distribution in the US. Household panel data drawn from the PSID between 1967 and 1996 is employed to analyse the relationship between marginal tax rates and the probability of staying in the same income decile. Exogenous variation in marginal tax rates is identified by using counterfactual rates based on legislated changes in the tax schedule. I find that higher marginal tax rates reduce income mobility. An increase in one percentage point in marginal tax rates causes a decline of around 0.8% in the probability of changing to a different income decile. Tax reforms that reduce marginal rates by 7 percentage points are estimated to account for around a tenth of the average movements in the income distribution in a year. Additional results suggest that the effect of taxes on income mobility differs according to the level of human capital and that it is particularly significant when considering mobility at the bottom of the distribution.
    Keywords: income mobility; inequality; marginal tax rate
    JEL: D31 D63 E24 E62 H24 H31
    Date: 2016–10–04
  52. By: Daron Acemoglu; Pablo D. Azar
    Abstract: We develop a tractable model of endogenous production networks. Each one of a number of products can be produced by combining labor and an endogenous subset of the other products as inputs. Different combinations of inputs generate (prespecified) levels of productivity. Markets are “contestable” in the sense that production technologies are available to a large number of potential producers. We establish the existence and uniqueness of an equilibrium with an endogenous production network and provide comparative static results on how prices and endogenous technology choices (and thus the production network) respond to changes in parameters. These results show that improvements in technology (or reductions in distortions) spread throughout the economy via input-output linkages and reduce all prices, and under reasonable restrictions on the menu of production technologies, also lead to a denser production network. Using a dynamic version of the model, we show that the endogenous evolution of the production network could be a powerful force towards sustained economic growth. At the root of this result is the fact that the arrival of a few new products expands the set of technological possibilities of all existing industries by a large amount — that is, if there are n products, the arrival of one more new product increases the combinations of inputs that each existing product can use from 2 n-1 to 2 n , thus enabling significantly more pronounced cost reductions from the choice of optimal technology combinations. These cost reductions then spread to other industries that benefit from lower input prices and are further incentivized to adopt additional inputs.
    JEL: C67 E10 E23 L23 O41
    Date: 2017–12
  53. By: Ludovic Dobbelaere; Igor Lebrun
    Abstract: The Federal Planning Bureau is responsible, within the National Accounts Institute, for producing the macroeconomic forecasts that are used to set up the federal government budget. This working paper presents an update of the ex post assessment of the quality of these forecasts. Compared to the previous working paper devoted to this topic, the sample has been extended by six additional years and the number of evaluated variables has been increased, in particular with series at current prices. Moreover, this paper also examines to what extent the observed forecast errors are due to errors made on exogenous assumptions related to the international environment.
    Keywords: Forecast, post mortem assessment, Economic budget
    JEL: C53 E6
    Date: 2017–09–29
  54. By: Patrick Grüning (Bank of Lithuania & Faculty of Economics, Vilnius University)
    Abstract: Empirical evidence suggests that investments in research and development (R&D) by older and larger firms are more spread out internationally than R&D investments by younger and smaller firms. In this paper, I explore the quantitative implications of this type of heterogeneity by assuming that incumbents, i.e. current monopolists engaging in incremental innovation, have a higher degree of internationalization in their R&D technologies than entrants, i.e. new firms engaging in radical innovation, in a two-country endogenous growth general equilibrium model. In particular, this assumption allows the model to break the perfect correlation between incumbents’ and entrants’ innovation probabilities and to match the empirical counterpart exactly.
    Keywords: Heterogeneous innovation, Technology spillover, Endogenous growth, Creative destruction, International finance
    JEL: E22 F31 G12 O30 O41
    Date: 2017–10–20
  55. By: Kehoe, Patrick J.
    Abstract: Before the advent of sophisticated international Önancial markets, a widely accepted belief was that within a monetary union, a union-wide authority orchestrating Öscal transfers between countries is necessary to provide adequate insurance against country-speciÖc economic áuctuations. A natural question is then: Do sophisticated international Önancial markets obviate the need for such an active union-wide authority? We argue that they do. SpeciÖcally, we show that in a benchmark economy with no international Önancial markets, an activist union-wide authority is necessary to achieve desirable outcomes. With sophisticated Önancial markets, however, such an authority is unnecessary if its only goal is to provide cross-country insurance. Since restricting the set of policy instruments available to member countries does not create a Öscal externality across them, this result holds in a wide variety of settings. Finally, we establish that an activist union-wide authority concerned just with providing insurance across member countries is optimal only when individual countries are either unable or unwilling to pursue desirable policies.
    Keywords: Cross-country externalities; Cross-country insurance; Cross-country transfers; Fiscal externalities; international Önancial markets; International transfers; Optimal currency area
    JEL: E60 E61 F33 F35 F42 G15 G28 G33
    Date: 2017–02
  56. By: Haghani Rizi, Majid; Kishor, N. Kundan
    Abstract: In this paper, we investigate the short-run and the long-run relationship among the financial assets of the money market funds, the commercial paper, and the repurchase agreement markets by undertaking a cointegration analysis of quarterly data over the 1985-2017 period. The evidence suggests that there exists a common long-term cointegrating trend among these three components of the shadow banking system. Any disequilibrium in this long-run relationship among these variables is corrected by movement in the financial assets of the money market funds. The Beveridge-Nelson decomposition from the estimated cointegrating relationship shows that the cyclical component in the money market funds is large and captures the huge swings in these markets during the financial crisis. Our results confirm the narrative evidence presented in Krishnamurthy et al. (2014), who argue that the short-term debt market investment opportunities in the form of the commercial paper and the repo market played a crucial role in the expansion of the balance sheet of the money market funds.
    Keywords: Shadow banking, Money Market Fund, Commercial Paper, Repurchase Agreement, TrendCycle Decomposition, Cointegration
    JEL: E44 G01 G10 G21 G32
    Date: 2017–12–23
  57. By: Diniz, Andre; Guimaraes, Bernardo; Petersen Rendall, Michelle
    Abstract: We document that employment polarization in the 1980-2008 period in the U.S. is largely generated by women. For the latter, employment shares increase both at the bottom and at the top of the skill distribution, generating the typical U-shape polarization graph, while for men employment shares decrease in a similar fashion along the whole skill distribution. We show that a canonical model of skill-biased technological change augmented with a gender dimension, an endogenous market/home labor choice and a multi-sector environment accounts well for gender and overall employment polarization. The model also accounts for the absence of employment polarization during the 1960-1980 period, which is due to the flat behavior of changes in women’s employment shares along the skill distribution, and can reproduce the different evolution of employment shares across decades during the 1980-2008 period. The faster growth of skill-biased technological change since the 1980s accounts for a substantial part of the employment polarization generated by the model.
    Keywords: Job Polarization; Gender; Skill-biased technological change; Home Production.
    JEL: E20 E21 J16
    Date: 2017–01
  58. By: Karantounias, Anastasios G. (Federal Reserve Bank of Atlanta)
    Abstract: We study optimal time-consistent distortionary taxation when the repayment of government debt is not enforceable. The government taxes labor income or issues noncontingent debt in order to finance an exogenous stream of stochastic government expenditures. The government can repudiate its debt subject to some default costs, thereby introducing some state-contingency to debt. We are motivated by the fact that domestic sovereign default is an empirically relevant phenomenon, as Reinhart and Rogoff (2011) demonstrated. Optimal policy is characterized by two opposing incentives: an incentive to postpone taxes by issuing more debt for the future and an incentive to tax more currently in order to avoid punishing default premia. A generalized Euler equation (GEE) captures these two effects and determines the optimal back-loading or front-loading of tax distortions.
    Keywords: labor tax; sovereign default; Markov-perfect equilibrium; time-consistency; generalized Euler equation; long-term debt
    JEL: D52 E43 E62 H21 H63
    Date: 2017–11–01
  59. By: Croce, Mariano (University of North Carolina at Chapel Hill,); Karantounias, Anastasios G. (Federal Reserve Bank of Atlanta); Raymond, Stephen (University of North Carolina at Chapel Hill); Schmid, Lukas (Duke University)
    Abstract: In times when elevated government debt raises concerns about dimmer global growth prospects, we ask: How can the government provide incentives for innovation in a fiscally sustainable way? We address this question by examining the Ramsey problem of finding optimal tax and subsidy schemes in a model in which growth is endogenously sustained by risky innovation. We characterize the shadow value of growth and entry in the innovation sector. We find that a profit tax is required to replicate the first-best in order to balance the externalities associated with innovative activity. At the second-best, the profit tax is designed to optimally respond to growth shocks above and beyond what is prescribed by the standard tax-smoothing incentives in economies with exogenous growth. The interplay of risk and innovation opens a new margin for optimal taxation.
    Keywords: innovation; R&D investment; endogenous growth; government debt; labor tax; subsidy; profit tax
    JEL: E32 E62 H21 H63 O3
    Date: 2017–11–01
  60. 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
  61. By: Òscar Jordà; Katharina Knoll; Dmitry Kuvshinov; Moritz Schularick; Alan M. Taylor
    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 G10 G12 N10
    Date: 2017–12
  62. By: Diel, Anastasia; Kirchhoff, Jasmina
    Abstract: Die pharmazeutische Industrie in Deutschland ist von spezifischen, institutionellen und regulatorischen Rahmenbedingungen geprägt, welche den Handlungs- und Entwicklungsspielraum der Unternehmen vor Ort definieren. Im Gegensatz zu anderen industriellen Branchen wie dem Fahrzeug- oder Maschinenbau ist die ökonomische Entwicklung der Pharmaindustrie weniger vom allgemeinen Konjunkturverlauf abhängig, auch wenn länger andauernde Abschwungphasen durchaus negativ auf die Preisentwicklung der Branchenerzeugnisse wirken können und vice versa. [...]
    JEL: E32 L65
    Date: 2017
  63. By: International Monetary Fund
    Abstract: Recent economic developments. Economic activity has strengthened on the back of stronger growth in main trading partners. Fiscal overperformance and efforts to address structural weaknesses have helped boost confidence. Program status. The 36-month Extended Fund Facility (EFF) approved on April 12 2017, with access of SDR 210.4 million (100 percent of quota), is on track. All end-June 2017 performance criteria (PCs) were met, some with significant margins. All structural benchmarks were also met. Completion of the review will make available the amount of SDR 30 million.
    Date: 2017–12–07
  64. By: Sara B. Alnashar (The World Bank)
    Abstract: Fiscal policy has a potentially significant role in generating real income and stimulating aggregate demand. But under what circumstances does it actually succeed in boosting economic activity? This research paper seeks to explore two questions: (1) To what extent has government spending been ‘effective’ in stimulating aggregate demand in Egypt? And (2) how did the economic policy mix contribute to the effectiveness (or lack thereof) of fiscal policy in Egypt? These questions come at an important juncture, as Egypt is embarking on a program supported by an International Monetary Fund (IMF) Extended-Fund Facility; the cornerstones of which are: Expenditure restructuring and fiscal consolidation, exchange rate liberalization, and structural reforms to boost growth and reduce unemployment. In this paper, we focus on the period (FY2005—FY2016), for which quarterly data on fiscal indicators are available. We analytically and empirically assess the relationship between government spending and real GDP growth, in light of the following factors: The state of the business cycle, the degree of accommodation of monetary policy to changes in fiscal policy, the real exchange rate, and the degree of capital and trade openness. These factors have been identified in the literature as key determinants of the size of the fiscal multiplier.
    Date: 2017–12–14
  65. By: Chaoran Chen; Diego Restuccia; Raül Santaeulàlia-Llopis
    Abstract: We assess the role of land markets on factor misallocation in Ethiopia—where land is owned by the state—by exploiting policy-driven variation in land rentals across time and space arising from a recent land certification reform. Our main finding from detailed micro data is that land rentals significantly reduce misallocation and increase agricultural productivity. These effects are nonlinear across farms—impacting more those farms farther away from their efficient operational scale. The effect of land rentals on productivity is 70 percent larger when controlling for non-market rentals—those with a pre-harvest rental rate of zero. Land rentals significantly increase the adoption of new technologies, especially fertilizer use.
    JEL: E02 O11 O13 O55 Q1
    Date: 2017–11
  66. By: International Monetary Fund
    Abstract: Mauritius is seeking to become a high-income economy within the next ten years. The growth strategy is anchored around an ambitious public investment program and improvements in the business climate. However, fiscal space is limited, and competitiveness bottlenecks are limiting the gains from trade. The macroeconomic outlook is broadly positive. Growth in 2017 is projected at 3.9 percent in 2017, and about 4.0 percent over the medium term. However, the vibrant Global Business Sector faces pressure from international anti-tax avoidance initiatives.
    Date: 2017–12–08
  67. By: David Gabauer (Department of Business and Management, Webster Vienna Private University, Vienna, Austria); Vasilios Plakandaras (Department of Economics, Democritus University of Thrace, Komotini, Greece); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Nikolaos Antonakakis (Department of Business and Management, Webster Vienna Private University, Vienna, Austria)
    Abstract: Economic uncertainty has attracted a significant part of the modern research in economics, proving to be a significant factor for every economy. In this study, we focus on the transmission channel of uncertainty between economies, examining potential spillover effect between the U.S., the E.U., the U.K, Japan and Canada. Within a time-varying framework our empirical results indicate of a significant spillover of uncertainty from the E.U. to the U.S.
    Keywords: Economic policy uncertainty, time-varying model, connectedness index
    JEL: D80 E32 F42
    Date: 2018–01
  68. By: Reis, Ricardo
    JEL: E6
    Date: 2016–06–01
  69. By: Miranda-Agrippino, Silvia; Ricco, Giovanni
    Abstract: Despite years of research, there is still uncertainty around the effects of monetary policy shocks. We reassess the empirical evidence by combining a new identification that accounts for informational rigidities, with a flexible econometric method robust to misspecifications that bridges between VARs and Local Projections. We show that most of the lack of robustness of the results in the extant literature is due to compounding unrealistic assumptions of full information with the use of severely misspecified models. Using our novel methodology, we find that a monetary tightening is unequivocally contractionary, with no evidence of either price or output puzzles.
    Keywords: Monetary Policy; Local Projections; VARs; Expectations; Information Rigidity; Survey Forecasts; External Önancial markets; International transfers; Optimal currency area
    JEL: C32 E52 G14
    Date: 2017–02–28
  70. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: Boston Fed President Eric Rosengren suggested that the Federal Reserve’s monetary policy framework has an opportunity to adapt to the recent experience with prolonged low interest rates.
    Date: 2018–01–12
  71. By: Cesa-Bianchi, Ambrogio; Ferrero, Andrea; Rebucci, Alessandro
    Abstract: House prices and exchange rates can potentially amplify the expansionary effect of capital inflows by inflating the value of collateral. We first set up a model of collateralized borrowing in domestic and foreign currency with international financial intermediation in which a change in leverage of global intermediaries leads to an international credit supply increase. In this environment, we illustrate how house price increases and exchange rates appreciations contribute to fueling the boom by inflating the value of collateral. We then document empirically, in a Panel VAR model for 50 advanced and emerging countries estimated with quarterly data from 1985 to 2012, that an increase in the leverage of US Broker-Dealers also leads to an increase in cross-border credit flows, a house price and consumption boom, a real exchange rate appreciation and a current account deterioration consistent with the transmission in the model. Finally, we study the sensitivity of the consumption and asset price response to such a shock and show that country differences are associated with the level of the maximum loan-to-value ratio and the share of foreign currency denominated credit.
    Keywords: Capital Flows; Credit Supply Shock; Cross-border claims; Exchange Rates; House Prices; International Financial Intermediation.; leverage
    JEL: C32 E44 F44
    Date: 2017–12
  72. By: Colin Hottman; Ryan Monarch
    Abstract: Using supplier-level trade data, we estimate the effect on consumer welfare from changes in U.S. imports both in the aggregate and for different household income groups from 1998 to 2014. To do this, we use consumer preferences which feature non-homotheticity both within sectors and across sectors. After structurally estimating the parameters of the model, using the universe of U.S. goods imports, we construct import price indexes in which a variety is defined as a foreign establishment producing an HS10 product that is exported to the United States. We find that lower income households experienced the most import price inflation, while higher income households experienced the least import price inflation during our time period. Thus, we do not find evidence that the consumption channel has mitigated the distributional effects of trade that have occurred through the nominal income channel in the United States over the past two decades.
    Keywords: Import price index ; Non-homotheticity ; Real income inequality ; Product variety ; Markups
    JEL: D12 E31 F14
    Date: 2018–01–17
  73. By: Bratsiotis, George
    Abstract: This paper examines the role of the precautionary demand for liquidity and the interest on reserves as two potential determinants of the deposits channel that can help explain the role of monetary policy, particularly at the near zero-bound. At high levels of precautionary liquidity hoarding the optimal policy response of a Taylor rule is shown to indicate a zero weight on inflation. This is a determinate outcome, despite the violation of the Taylor Principle, because of the effect that the demand for liquidity has on the deposit rate which determines the intertemporal choices of households. Similarly, through its effect on the deposits channel the interest on reserves can act as the main monetary policy tool that can provide determinacy and replace the Taylor rule. This result holds at the zero-bound and it is independent of precautionary demand for liquidity, or fiscal theory of the price level properties.
    Keywords: Deposits channel,zero-bound monetary policy,excess reserves,credit risk,welfare,required reserve ratio,interest on reserves,balance sheet channel,DSGE models
    Date: 2017
  74. By: Eduardo Dávila; Ansgar Walther
    Abstract: We explore how large and small banks make funding decisions when the government provides system-wide bailouts to the financial sector. We show that bank size, purely on strategic grounds, is a key determinant of banks' leverage choices, even when bailout policies treat large and small banks symmetrically. Large banks always take on more leverage than small banks because they internalize that their decisions directly affect the government's optimal bailout policy. In equilibrium, small banks also choose strictly higher borrowing when large banks are present, since banks' leverage choices are strategic complements. Overall, the presence of large banks increases aggregate leverage and the magnitude of bailouts. The optimal ex-ante regulation features size-dependent policies that disproportionally restrict the leverage choices of large banks. A quantitative assessment of our model implies that an increase in the share of assets held by the five largest banks from 50% to 70% is associated with a 3.5 percentage point increase in aggregate debt-to-asset ratios (from 90.1% to 93.6%). Under the optimal policy, large banks face a “size tax” of 40 basis points (0.4%) per dollar of debt issued.
    JEL: E61 G21 G28
    Date: 2017–12
  75. By: Piyabha Kongsamut; Christian Mumssen; Anne-Charlotte Paret; Thierry Tressel
    Abstract: How can information on financial conditions be used to better understand macroeconomic developments and improve macroeconomic projections? We investigate this question for France by constructing country-specific financial conditions indices (FCIs) that are tailored to movements in GDP, investment, private consumption and exports respectively. We rely on a VAR approach to estimate the weights of the financial components of each FCI, including equity market returns (which turn out having a relatively strong weight across all FCIs), private sector risk premiums, long-term interest rates, and banks’ credit standards. We find that the tailored FCIs are useful as leading indicators of GDP, investment, and exports, and as a contemporaneous indicator of private consumption. Credit volumes turn out to be lagging indicators of growth. The indices inform us on macro-financial linkages in France and are used to improve the accuracy of quarterly forecasting models and high-frequency “nowcast” models. We show that FCI-augmented models could have significantly improved forecasts during and after the global financial crisis.
    Date: 2017–12–01
  76. By: Marcus Hagedorn (University of Oslo)
    Abstract: In standard open economy macro-models, where monetary policy in each country works through setting nominal interest rates, only the expected change but not the level of the nominal exchange rates is determinate. In contrast to this standard result (Kareken+Wallace (1981), in this paper I show determinacy of the level in a large class of heterogenous agents incomplete markets models with aggregate risk. I then characterize the determinants of the nominal exchange rate: assets held by a country, the net foreign asset position, the nominal interest rate and productivity. I also show whether a change in one of the determinants leads to a depreciation or an appreciation. The incompleteness of markets implies that temporary shocks affect the long-run world distribution of assets and exchange rates with interesting feedback effects on the current exchange rate. The determinacy result also enables the researcher to answer many question in open economy macroeconomics within a coherent equilibrium model. I discuss some of these questions, such as how international asset flows affect exchange rates, how a country can divorce itself from these flows and how a country can manage its exchange rate. The model also implies that a country with an exchange rate peg and free asset mobility faces a tetralemma and not a trilemma as it not only loses monetary but also fiscal policy independence. This suggest a new way to think about fiscal coordination in a monetary union as a response to within union asset flows. I also provide some empirical evidence consistent with the theoretical predictions.
    Date: 2017
  77. By: Daniele Siena (Banque de France)
    Abstract: The role of news shocks in international business cycles is first evaluated using a structural factor-augmented VAR model (FAVAR). An international FAVAR model is shown to be necessary to recover the correct news shocks in open economies, except the US, without incurring in the ‘non-fundamentalness’ problem. Then, a standard two-country, two-good real business cycle model, featuring news shocks, investment adjustment costs and variable wealth elasticity of the labor supply is used to match and explain the empirical evidence. News shocks are only marginal drivers of international business cycles synchronization.
    Date: 2017
  78. By: George Verikios
    Keywords: Computable general equilibrium, infectious diseases, pandemic influenza, periodicity, trade linkages
    JEL: E32 C68 I18 F15
    Date: 2017–11
  79. By: Christiane J.S. Baumeister; James D. Hamilton
    Abstract: Traditional approaches to structural vector autoregressions can be viewed as special cases of Bayesian inference arising from very strong prior beliefs. These methods can be generalized with a less restrictive formulation that incorporates uncertainty about the identifying assumptions themselves. We use this approach to revisit the importance of shocks to oil supply and demand. Supply disruptions turn out to be a bigger factor in historical oil price movements and inventory accumulation a smaller factor than implied by earlier estimates. Supply shocks lead to a reduction in global economic activity after a significant lag, whereas shocks to oil demand do not.
    JEL: C32 E32 Q43
    Date: 2017–12
  80. By: Kurt Mitman (Stockholm University); Iourii Manovskii (University of Pennsylvania); Marcus Hagedorn (University of Oslo)
    Abstract: This paper studies the size of the fiscal multiplier in a model with incomplete markets and rigid prices and wages. Allowing for incomplete markets instead of complete markets---the prevalent assumption in the literature---comes with two advantages. First, the incomplete markets model delivers a realistic distribution of the marginal propensity to consume across the population, whereas all households counterfactually behave according to the permanent income hypothesis if markets are complete. Second, in our model the response of prices, output, consumption and employment is uniquely determined by fiscal policy for any monetary policy including the zero-lower bound (ZLB) as opposed to most of the previous literature, where an infinite number of equilibria exists, leaving the researcher to arbitrarily pick one. Our preliminary findings indicate that the impact multiplier is quite large between 2 and 3 depending on whether tax or deficit financing is used and increase to values above 3 in a liquidity trap.
    Date: 2017
  81. By: Jorge Silva
    Abstract: We assess the effect of the Portuguese external debt of the private and public sectors on economic growth for the period 1999-2014. We study the channels through which external debt may affect economic growth: demand, supply and external accounts.Regarding aggregate demand, we evaluated private saving, public investment in volume and real GDP per person employed. The external debt of the public sector showed some evidence of having a detrimental influence on private saving, but a favourable effect on public investment in volume. The gross external debt of the private sector positively influenced public investment. Concerning aggregate supply, we analysed the production function per person employed in the private sector. Private external debt positively affected the gross value added in volume per person employed. Public external debt negatively impacted the gross value added in volume per person employed and the total factor productivity. Regarding external accounts, the private external debt affected the primary income account, though it had a low coefficient.
    Keywords: external debt, economic growth, public sector, private sector, Portugal
    JEL: C22 E44 F34 G15 H63
    Date: 2018–01
  82. By: Leo Kaas (University of Konstanz); Wei Cui (University College London)
    Abstract: Corporate default rates are counter-cyclical and are often accompanied by declines of business credit over prolonged episodes. This paper develops a tractable macroeconomic model in which persistent credit and default cycles are the outcome of variations in self-fulfilling beliefs about credit market conditions. Interest spreads and leverage ratios are determined in optimal credit contracts that reflect the expected default risk of borrowing firms. Next to sunspot shocks, the model also features shocks to recovery rates and to financial intermediation costs. We calibrate the model to evaluate the impact of these different financial shocks on the credit market and on output dynamics. Self-fulfilling changes in credit market expectations trigger sizable reactions in default rates and generate endogenously persistent credit and output cycles. All credit market shocks together account for over 50% of the variation of U.S. GDP growth during 1982-2015.
    Date: 2017
  83. By: International Monetary Fund
    Abstract: Mexico’s economy has exhibited resilience in the face of a complex external environment. The authorities have responded appropriately to the recent external shocks and demonstrated their commitment to macroeconomic stability. They also remain committed to maintaining prudent policies going forward. Nevertheless, Mexico’s strong trade and financial links to the global economy, and in particular the United States, make it susceptible to changes in investor sentiment.
    Keywords: Western Hemisphere;Mexico;
    Date: 2017–11–30
  84. By: Cenedese, Gino (Bank of England); Elard, Ilaf (Shanghai University of International Business and Economics)
    Abstract: Unconventional monetary policy (UMP) by the US Federal Reserve, Bank of England, Bank of Japan, and European Central Bank affects the geographical portfolio choice of international mutual fund managers. UMP prompts managers of mutual funds to rebalance their portfolios away from the country conducting UMP, and increase their geographical allocation to other developed markets; there is little evidence of rebalancing towards emerging markets. The international spillover effects from UMP announcement surprises are of small economic magnitude, in contrast to the effects of actual UMP operations in the form of large-scale asset purchases (LSAPs). The results imply that while not contributing to QE-induced capital flows to emerging markets, mutual fund managers play a role in the transmission of unconventional monetary policy, in particular LSAPs, across developed markets.
    Keywords: Unconventional monetary policy; portfolio rebalancing; international spillovers; asset allocation; mutual funds
    JEL: F30 G11 G15 G23
    Date: 2018–01–18
  85. By: International Monetary Fund
    Abstract: Maldives’ economic growth has been highly volatile, driven primarily by a high-end tourism industry. The economy improved marginally in 2016–17 on a recovery in tourism and construction but continues to face large and growing fiscal and external imbalances. Going forward, Maldives’ main challenge is to manage a surge in infrastructure investment which has the potential of transforming the economy but also creating risks from high and rising public debt. The rapid debt buildup, a widening current account deficit, and low international reserves leave the Maldives inherently vulnerable under this constellation of risks and reduced policy space.
    Date: 2017–12–01
  86. By: Marius Clemens (German Institute for Economic Research (DIW Berlin)); Guillaume Claveres (Universite Paris 1 Pantheon-Sorbonne)
    Abstract: A European unemployment insurance scheme has gained increased attention as a new and ambitious common fiscal instrument which could be used for temporary cross-country transfers. Part of the national stabilizers composing unemployment insurance schemes would be transferred to the central level. Unemployed are then insured by both layers. When a country is hit by an asymmetric shock, it would receive positive net transfers from the central fund in the form of reduced taxes and increased benefits, providing risk-sharing for the whole union. We build a two-country DSGE model with supply, demand and labor market shocks in order to capture the recent national insurance system and the unemployment insurance union (UIU) design. The model is calibrated to the euro area core and periphery data and matches the empirically observed cyclicality of the net replacement rate, the wage and unemployment dynamics. This baseline scenario is then compared to a optimal unemployment insurance union with passive and active benefit policies. For all underlying shocks, we find that the UIU reduces the fluctuation of consumption and unemployment while it increases the fluctuation of the trade balance. In case of a positive domestic government spending shock the UIU reduces the negative crowding out effect on private consumption and investment. The model will be used to analyze the effects of national and supranational benefit policies on labour market patterns and welfare.
    Date: 2017
  87. By: Bassetto, Marco; Galli, Carlo
    Abstract: We consider a two-period Bayesian trading game where in each period informed agents decide whether to buy an asset (“government debt”) after observing an idiosyncratic signal about the prospects of default. While second-period buyers only need to forecast default, first-period buyers pass the asset to the new agents in the secondary market, and thus need to form beliefs about the price that will prevail at that stage. We provide conditions such that coarser information in the hands of second-period agents makes the price of debt more resilient to bad shocks not only in the last period, but in the first one as well. We use this model to study the consequences of issuing debt denominated in domestic vs. foreign currency: we interpret the former as subject to inflation risk and the latter as subject to default risk, with inflation driven by the information of a less-sophisticated group of agents endowed with less precise information, and default by the information of sophisticated bond traders. Our results can be used to account for the behavior of debt prices across countries following the 2008 financial crisis, and also provide a theory of “original sin.”
    Keywords: growth; population.
    JEL: E22
    Date: 2017–04–26
  88. By: Pintor, Gabor
    Abstract: There is a tight empirical link between the determinants of the cross-section of risk premia and selected structural shocks identified by macroeconomists. To show this, I propose an orthogonalisation method that approximates the stochastic discount factor with VAR innovations. When applying the method to the HML-SMBindustry portfolios, the obtained λ-shock closely resembles (up to 85% correlation) monetary policy and technology news shocks studied by macroeconomists. Results are similar for bond returns and across the US and UK.
    Keywords: Stochastic Discount Factor; Vector Autoregression; Shocks; Technology News; Monetary Policy; Cross-section; Stock Returns; Bond Returns
    JEL: C32 G12
    Date: 2017–04–04
  89. By: Diba Behzad (Department of Economics; Georgetown University); Olivier Loisel (CREST; ENSAE)
    Abstract: We develop a model of monetary policy with a small departure from the basic New Keynesian (NK) model. In this model, the central bank can set the interest rate on bank reserves and the nominal stock of bank reserves independently, because these reserves reduce the costs of banking (i.e., have a convenience yield). The model delivers local-equilibrium determinacy under a permanent interest-rate peg. Consequently, it does not share the puzzling and paradoxical implications of the basic NK model under a temporary peg (e.g., in the context of a liquidity trap). More specifically, it offers a resolution of the \forward guidance puzzle," a related puzzle about scal multipliers, and the \paradox of exibility," even for an arbitrarily small departure from the basic NK model (i.e., arbitrarily small banking costs and convenience yield of reserves).
  90. By: Kyunghun Kim (KIEP); Ju Hyun Pyun (Korea University); Jiyoun An (Kyung Hee University)
    Abstract: This study explores the role of cross-border (short-term and long-term) debt holdings in the transmission of the crisis shock to international real business cycle. We first provide a simple two-country DSGE model which distinguishes two transmission channels of real business cycle in credit markets: i) balance sheet effect operating in the short-term debt market owing to roll-over risk and ii) efficient allocation of investment working through the long-term debt market. Consistent with the model’s prediction, our empirical analysis using country-pair data for 57 countries during 2001–2013 shows the heterogeneous roles of short-term and long-term debt integration during financial crises. Short-term debt integration among developed countries drives the results of business cycle synchronization during the crises, whereas long term debt holdings by emerging and developing countries cushioned the transmission of the real business cycle.
    Date: 2017
  91. By: International Monetary Fund
    Abstract: Program performance is on track. All continuous and end-June 2017 quantitative assessment/performance criteria were met, as were almost all indicative targets. Most structural benchmarks have already been met or are in progress. At the time of the review in January 2018, the authorities are likely to request an additional extension of the PSI for Rwanda until end-2018, to allow additional time to consider successor program engagement. Thus, forward-looking quantitative targets and structural reforms will be set out in the program documents, to be issued before end-2017.
    Keywords: Sub-Saharan Africa;Rwanda;
    Date: 2017–11–30
  92. By: Cook, Thomas R. (Federal Reserve Bank of Kansas City); Smalter Hall, Aaron (Federal Reserve Bank of Kansas City)
    Abstract: Economic policymaking relies upon accurate forecasts of economic conditions. Current methods for unconditional forecasting are dominated by inherently linear models {{p}} that exhibit model dependence and have high data demands. {{p}} We explore deep neural networks as an {{p}} opportunity to improve upon forecast accuracy with limited data and while remaining agnostic as to {{p}} functional form. We focus on predicting civilian unemployment using models based on four different neural network architectures. Each of these models outperforms bench- mark models at short time horizons. One model, based on an Encoder Decoder architecture outperforms benchmark models at every forecast horizon (up to four quarters).
    Keywords: Neural networks; Forecasting; Macroeconomic indicators
    JEL: C14 C45 C53
    Date: 2017–09–29
  93. By: Benigno, Pierpaolo (LUISS Guido Carli and Einaudi Institute of Economics and Finance); Karantounias, Anastasios G. (Federal Reserve Bank of Atlanta)
    Abstract: We study the implications of overconfidence for price setting in a monopolistic competition setup with incomplete information. Our price-setters overestimate their abilities to infer aggregate shocks from private signals. The fraction of uninformed firms is endogenous; firms can obtain information by paying a fixed cost. We find two results: (1) overconfident firms are less inclined to acquire information, and (2) prices might exhibit excess volatility driven by nonfundamental noise. We explore the empirical predictions of our model for idiosyncratic price volatility.
    Keywords: overconfidence; imperfect common knowledge; information acquisition; inflation volatility
    JEL: D4 D8 E3
    Date: 2017–11–01
  94. By: Niko Hauzenberger; Maximilian B\"ock; Michael Pfarrhofer; Anna Stelzer; Gregor Zens
    Abstract: In this paper, we estimate a Bayesian vector autoregressive (VAR) model with factor stochastic volatility in the error term to assess the effects of an uncertainty shock in the Euro area (EA). This allows us to incorporate uncertainty directly into the econometric framework and treat it as a latent quantity. Only a limited number of papers estimates impacts of uncertainty and macroeconomic consequences jointly, and most literature in this sphere is based on single countries. We analyze the special case of a shock restricted to the Euro area, whose countries are highly related by definition. Among other variables, we find significant results of a decrease in real activity measured by GDP in most Euro area countries over a period of roughly a year following an uncertainty shock.
    Date: 2018–01
  95. By: Mikael Juselius (Bank of FInland); Anton Korinek (Johns Hopkins University); Mathias Drehmann (Bank for International Settlements)
    Abstract: This paper documents the main channel through which credit booms affect real economic activity in the future. As a matter of simple accounting, credit booms generate a predictable increase in future debt service that transfers spending power from borrowers to lenders. We document this dynamic pattern in a panel of 17 countries from 1980 to 2015 and identify a robust lead-lag relationship of about 3 years between the peak of credit booms and the peak in debt service. We develop a method to decompose what fraction of future real effects of credit booms is explained by debt service and show that debt service almost fully accounts for several puzzling findings in the recent empirical literature: that high growth in credit predicts low output growth in the future, deeper recessions, and a greater likelihood of financial crises. Explicitly accounting for debt service not only sheds light on the channel behind these findings but also generates stronger empirical relationships. We hope that our results will provide useful guidance for future efforts to model credit cycles.
    Date: 2017
  96. By: Luo, Yulei; Nie, Jun (Federal Reserve Bank of Kansas City); Wang, Haijun
    Abstract: This paper constructs a recursive utility version of a canonical Merton (1971) model with uninsurable labor income and unknown income growth to study how the interaction between two types of uncertainty due to ignorance affects strategic consumption-portfolio rules and precautionary savings. Specifically, after solving the model explicitly, we theoretically and quantitatively explore (i) how these ignorance-induced uncertainties interact with intertemporal substitution, risk aversion, and the correlation between the equity return and labor income, and (ii) how they jointly affect strategic asset allocation, precautionary savings, and the equilibrium asset returns. Furthermore, we use data to test our model’s predictions on the relationship between ignorance and asset allocation and quantitatively show that the interaction between the two types of uncertainty is the key to explain the data. Finally, we find that the welfare costs of ignorance can be very large.
    Keywords: Ignorance; Unknown Income Growth; Induced Uncertainty; Strategic Asset Allocation
    JEL: C61 D81 E21
    Date: 2017–11–01
  97. By: Audi, Marc; Ali, Amjad
    Abstract: Corruption is like an epidemic that has the power to destroy a country’s socio-economic, financial, human and political environment. It has severe consequences in developing countries. This study has examined the impact of existing human, political, financial and economic factors on corruption for a set of panel countries. The data from 1995 to 2004 is used to serve this purpose. For examining the stationarity of the variables, Levin- Lin-Chu (2002), Fisher-ADF and Fisher-PP tests are applied. Pedroni Residual based Co-integration and FMOLS by Phillips and Hansen (1990) test has been used for examining the co-integration among the variables of the model. The speed of adjustment and short-run relationship has been tested through VECM. The estimated results show that exports, GDP per capita and political stability have a negative impact on corruption whereas imports, financial development, human development index, bureaucracy, democracy and rule of law have a positive relationship with corruption. The simplified procedures of import and export will help reducing the practice of bribes and corruption. The governments should take steps not only to increase the income, but also to improve the people’s standard of living. There should be improvements in the political system. Democracy is also helpful to get rid of corruption.
    Keywords: Corruption, Economic Development Financial Development, Human Development,
    JEL: D73 E44 O15
    Date: 2017–01
  98. By: Margaux MacDonald; Michał Ksawery Popiel
    Abstract: This paper investigates the effects of unconventional monetary policy in a small open economy. Using recently proposed shadow interest rates to capture unconventional monetary policy at the zero lower bound (ZLB) we estimate a Bayesian structural vector autoregressive model for Canada - a useful case where foreign shocks can be proxied by U.S. variables alone. We find that, during the ZLB period, Canadian unconventional monetary policy increased output (measured by industrial production) by 0.013 percent per month on average while US unconventional monetary policy raised Canadian output by 0.127 percent per month on average. Our results demonstrate the effectiveness of domestic unconventional monetary policy and the strong positive spillover effects that foreign unconventional monetary policies can have in a small open economy.
    Date: 2017–12–01
  99. By: Campos, Nauro F (Brunel University); De Grauwe, Paul; Ji, Yuemei (University College London)
    Abstract: This chapter provides a critical overview of the state of the art in the economics literature on structural reforms. It takes stock of theoretical developments, measurement efforts and of the econometric evidence. We start with a simple theoretical framework for the relationship between structural reforms, economic growth and income inequality. We argue that whether structural reforms have a positive or negative impact depends on various factors. The type of reform, timing, sequence and political constraints play crucial roles in determining the effectiveness of reforms on economic growth and income inequality. We conclude by proposing a 7-point agenda for future research.
    Keywords: structural reforms, income inequality, economic growth
    JEL: E65
    Date: 2017–11
  100. By: Pau Roldan (New York University); Sophia Gilbukh (NYU Stern)
    Abstract: What is the relationship between the rate at which firms accumulate their stock of demand over time and the prices that they set for their products? This paper analyzes the implications of cus- tomer capital accumulation for firms’ pricing behavior and firm dynamics. We build an analytically tractable directed search model of the product market in which firms are ex-post heterogeneous in their customer base and commit to the prices they post. The model features dynamic contracts with endogenous customer reallocation, endogenous entry and exit of firms, and allows for an exact characterization of the firm distribution. Price rigidity at the firm level emerges as an equilibrium outcome, and there is price dispersion in the cross-section because firms of different sizes use differ- ent pricing strategies to strike a balance between attracting new customers and retaining incumbent ones. We show that our mechanism can generate realistic firm dynamics, a right-skewed firm size distribution, and size- and age-dependent markups which are in line with the data.
    Date: 2017
  101. By: Klaus S. Friesenbichler (WIFO); Christian Glocker (WIFO)
    Abstract: This study examines the lack of convergence among EU countries from a structural perspective. We apply the tradable-non-tradable framework (T-NT) to evaluate the heterogeneity in labour productivity before and after the great recession. We find that, across all countries, non-tradables were less relevant for aggregate productivity. The low productivity growth in peripheral EU countries was accompanied by a specific structural change pattern: there was a sharp production increase of non-tradables before the crisis relative to other EU countries. For most peripheral countries concerns about unfavourable sector structures remain, implying a continuation of unsustainable growth patterns. This has implications for the European Commission's macroeconomic imbalance procedures, since it allows identifying patterns of real divergence on a disaggregated level. Finally, we identify a link between sectoral growth asymmetries and the quality of domestic governance institutions. Especially differences in the legal system help to explain the observed productivity growth differentials.
    Keywords: Tradability, Labour Productivity, Growth, Institutions, EU, Imbalance
    Date: 2018–01–08
  102. By: Fernando Alvarez (University of Chicago); Francesco Lippi (University of Sassari and EIEF)
    Abstract: We analyze a sticky price model where firms choose a price plan, namely a set of two prices. Changing the plan entails a “menu cost”, but either price in the plan can be charged at any point in time. We analytically solve for the optimal policy and for the output response to a monetary shock. The setup rationalizes the coexistence of many price changes, most of which are temporary, with a modest flexibility of the aggregate price level. We present evidence consistent with the model implications using CPI data for Argentina across a wide range of inflation rates.
    Date: 2018
  103. By: Martin Beraja (MIT and Princeton University)
    Abstract: Counterfactuals in structural models are the leading paradigm for analyzing policy rule changes because they are immune to Lucas Critique. However, they are less credible whenever they lack robustness to variations in primitives across models, which is typically hard to check. Relatedly, researchers building models have to make difficult choices regarding which mechanisms are relevant for analyzing particular policy rules. I propose a novel method to tackle these and other problems in macroeconomics. It rests on the insight that many models which are well approximated by a linear representation are both observationally equivalent under a benchmark policy and yield an identical counterfactual equilibrium under an alternative policy. Characterizing a set of models that satisfy this principle of Counterfactual Equivalence simply requires describing whether their equilibrium equations satisfy a number of linear restrictions. I illustrate various applications of this principle, including: (1) quantifying how fiscal unions contribute to regional stabilization by constructing a counterfactual US economy without fiscal integration, (2) analyzing which micro-foundations are relevant when studying unemployment benefits policy in search models of the labor market, and (3) showing how to falsify a set of counterfactually equivalent models using observed policy experiments.
    Date: 2017
  104. By: Maryam Farboodi; Gregor Jarosch; Guido Menzio
    Abstract: We propose a theory of intermediation as rent extraction, and explore its implications for the extent of intermediation, welfare and policy. A frictional asset market is populated by agents who are heterogeneous with respect to their bargaining skills, as some can commit to take-it-or-leave-it offers and others cannot. In equilibrium, agents with commitment power act as intermediaries and those without act as final users. Agents with commitment trade on behalf of agents without commitment to extract more rents from third parties. If agents can invest in a commitment technology, there are multiple equilibria differing in the fraction of intermediaries. Equilibria with more intermediaries have lower welfare and any equilibrium with intermediation is inefficient. Intermediation grows as trading frictions become small and during times when interest rates are low. A simple transaction tax can restore efficiency by eliminating any scope for bargaining.
    JEL: D40
    Date: 2017–12
  105. By: Elod Takats; Judit Temesvary
    Abstract: We study the effect of macroprudential measures on cross-border lending during the taper tantrum, which saw a strong slowdown of cross-border bank lending to some jurisdictions. We use a novel dataset combining the BIS Stage 1 enhanced banking statistics on bilateral cross-border lending flows with the IBRN’s macroprudential database. Our results suggest that macroprudential measures implemented in borrowers’ host countries prior to the taper tantrum significantly reduced the negative effect of the tantrum on cross-border lending growth. The shock-mitigating effect of host country macroprudential rules are present both in lending to banks and non-banks, and are strongest for lending flows to borrowers in advanced economies and to the non-bank sector in general. Source (lending) banking system measures do not affect bilateral lending flows, nor do they enhance the effect of host country macroprudential measures. Our results imply that policymakers may consider applying macroprudential tools to mitigate international shock transmission through cross-border bank lending.
    Keywords: Diff-in-diff analysis ; Taper tantrum ; Cross-border claims ; Macroprudential policy
    JEL: F34 F42 G21 G38
    Date: 2017–12–18
  106. By: GRITLI, Mohamed Ilyes
    Abstract: Summary: The European Union absorbs nearly 75% of Tunisian exports and represents about 50% of Tunisian imports, which explains the important weight of the euro in the Tunisian dinar anchor basket. Thus, the purpose of this article is to predict short-term exchange rate fluctuations EUR/TND, using the ARIMA model (0,1,1). The results show that a unit of euro will be exchanged for 3.05126 dinars (model without break) and for 3.22409 dinars (model with rupture), by October 2018. This suggests that the degree of depreciation of the dinar will depend on the policy pursued by the Central Bank of Tunisia.
    Keywords: Mots clés : EUR, DNT, taux de change, prévision, ARIMA
    JEL: C32 C53 F31
    Date: 2018–01–15
  107. By: Gabriel Chodorow-Reich (Harvard University)
    Abstract: A geographic cross-sectional fiscal multiplier measures the effect of an increase in spending in one region in a monetary union. Empirical studies of such multipliers have proliferated in recent years. I review this research and find a cross-study mean cross-sectional output multiplier of about 2. Economic theory of how to map these multipliers into a national multiplier has also advanced. Drawing on the theoretical literature, I discuss conditions under which the cross-sectional multiplier can provide a rough lower bound for the closed economy deficit-financed constrained monetary policy multiplier. Putting these elements together, the cross-sectional evidence suggests a national multiplier of about 1.7 or above, larger than that found in most studies based on time series evidence. I conclude by offering suggestions for future research on cross-sectional multipliers.
    Date: 2017
  108. By: Chirwa, Themba G; Odhiambo, Nicholas M.
    Abstract: This study investigates the determinants of public debt in the EURO area that are either debt-reducing or debt-creating using panel data from 10 European Countries. Using a panel ARDL approach, the study results show that though the real interest rate ??? economic growth differential in debt dynamics can be used to show whether debt is explosive or non-explosive, we find the speed of adjustment to be a good predictor. The study results also reveal that while economic growth is debt-reducing mainly in the short-run, the real exchange rate, investment, population growth are debt-reducing in the long run. Similarly, though the real interest rate is debt-creating both in the short- and long-run, government consumption is debt-creating in the long run while the relationship is mixed in the short-run and differentiated across groups. These results have important policy implications for the European Union. They include the need to continue having differentiated Medium-Term Budgetary Objectives implemented across member states that focus on fiscal sustainability as well as take into account all factors that may be debt-creating or debt-reducing. Furthermore, there is need for European authorities to implement strategies that would encourage lower or stable long-term interest rates as a strategy to reduce the accumulation of public debt in the future.
    Keywords: Euro Area; Panel ARDL Models; Cointegration; Public Debt
    Date: 2018–01–11
  109. By: Brocek, Frantisek; Lalinsky, Tibor
    Abstract: GDP per capita is used as the basic measure of economic development and prosperity across the world. However, it is a limited measure of living standards, focussed on capturing changes in economic output per person and neglecting many things central to quality of life. Several alternative approaches to assessing quality of life have been proposed such as the OECD Better Life Index (2017), the UN Human Development Index (HDI), or Gross National Happiness. One notable contribution is the consumption equivalent welfare measure introduced by Jones and Klenow (2016). Our results from using this measure suggest that the quality of life in most EU countries is higher than suggested by GDP per capita relative to the U.S. The primary reasons for this are that, particularly compared to the U.S., countries in the EU tend to have lower income inequality and longer life expectancy. Implementing this measure for Slovakia, our results indicate that relative welfare is approximately 10 percentage points higher in Slovakia than GDP per capita would suggest. In the medium run, consumption equivalent welfare in Slovakia grew faster than income from pre-crisis levels. Improvements in the quality of living in Slovakia over time have been driven by an increase in life expectancy and consumption, as well as consistently low levels of income inequality. Nevertheless, living standards in Slovakia are still low in comparison to advanced EU economies and the U.S. Lower life expectancy, which reflects the quality of health of the population, accounts for most of the difference in welfare in comparison to these advanced economies.
    Keywords: Welfare, Consumption, Inequality, Life Expectancy, Leisure, Slovakia, EU, Convergence
    JEL: I15 I31 O11 O52 O57
    Date: 2017–11–07
  110. By: Cysne, Rubens Penha
    Abstract: Lucas (2000) has shown that Bailey’s formula for the welfare costs of inflation can be regarded as an approximation to the general-equilibrium measures that emerge from the Sidrauski and the shopping-time models. In this paper we show that Bailey’s measure can be exactly obtained in the Sidrauski general-equilibrium framework under the assumption of quasilinear preferences. The result, based on whether or not wealth effects are incorporated into the analysis, is also helpful in clarifying why Lucas’ measure derived from the Sidrauski model turns out to be an upper bound to Bailey’s. Two examples are used to illustrate the main conclusions.
    Date: 2017
  111. By: Argandoña, Antonio (IESE Business School)
    Abstract: This is an entry for the second edition of Sage's Encyclopedia of Business Ethics and Society. It is a brief explanation of inflation, its causes and its consequences. Inflation has important economic, political, social and ethical implications for countries, especially because it affects the standard of living and distribution of income among citizens. The entry also discusses how inflation can be reduced and touches upon the issue of deflation.
    Keywords: Inflation; Prices; Income distribution; Monetary policy; Ethics
    Date: 2016–11–09
  112. By: Francois Geerolf (University of California, Los Angeles)
    Abstract: This paper provides a new qualitative intuition for the existence of discount rates in asset pricing. In a class of models with financial frictions, discount rates arise across securities with similar cash flows, as apparent failures of the law of one price, whenever capital providers are heterogeneous in efficiency. The theory is shown to be a candidate explanation for some cross-sectional and time series anomalies. Discount rates vary across assets and over time, for reasons unrelated to curvature in utility functions. Although some implications are similar, this theory is different from intermediary and margin based asset pricing: for example, spreads are positive, even with only risk-neutral agents, or on securities with deterministic cash flows. Finally, macroeconomic implications of the theory for investment and employment are discussed.
    Date: 2017
  113. By: Cherchye, Laurens; De Rock, Bram; Griffith, Rachel; O'Connell, Martin; Smith, Kate; Vermeulen, Frederic
    Abstract: We document considerable within-person (over time) variation in diet quality that is not fully explained by responses to fluctuations in the economic environment. We propose a two-selves model that provides a structural interpretation to this variation, in which food choices are a compromise between a healthy and an unhealthy self, each with well-behaved preferences. We show that the data are consistent with this model using revealed preference methods. The extent of self-control problems is higher among younger and lower income consumers, though this is overstated if we do not control for responses to fluctuations in the economic environment. Our results are intuitively related to stated attitudes on self-control.
    Keywords: revealed preferences; Self-Control; Two-selves model
    JEL: C14 D12 D90 I12
    Date: 2017–12
  114. By: Alexei P Kireyev
    Abstract: The paper reviews Djibouti’s macroeconomic reforms aimed at achieving middle-income status as envisaged in Vision Djibouti 2035, the authorities’ development strategy. In this context, the paper reviews policy options available to the authorities in three critical reform areas: translating the investment boom into strong and inclusive growth to reduce poverty and unemployment; fiscal policy to support growth while preserving debt sustainability; and the important role of the business climate in growth acceleration.
    Date: 2017–12–05
  115. By: Alexandrov, Alexei; Bedre-Defolie, Özlem; Grodzicki, Daniel
    Abstract: We estimate how demand for credit card transacting, borrowing, and late payment responds to the interest rate and late payment fee. We find that lower rates increase borrowing and lower fees increase late payments. Prime cardholders demand for all services is decreasing in any price. In contrast, subprime cardholders borrow less when fees drop, a response consistent with models of limited attention. We calculate that a 2 percentage point rise in the Federal Funds rate decreases borrowing by 16 percent, or $130 billion, that this effect is greater in higher income communities, and that it exhibits geographic agglomeration.
    Date: 2017–12
  116. By: Georg Duernecker (University of Mannheim); Berthold Herrendorf (Arizona State University)
    Abstract: We provide evidence on structural transformation from censuses covering three quarters of the world population. As countries develop, the standard patterns of labor reallocation hold for broad categories of both industries ("sectors") and occupations while the employment shares of the service occupations rise in all sectors. We propose a model of structural transformation with sectors and occupations that is consistent with these patterns. The key ingredient of our model is uneven, occupation-specific technological progress. We show that our model is useful for predicting changes in the occupation composition and for understanding why sectoral labor productivity growth has slowed.
    Date: 2017
  117. By: Tatyana Marchuk (Goethe University Frankfurt); Christian Schlag (Goethe University); Mariano Croce (University of North Carolina at Chapel H)
    Abstract: In this paper, we compute conditional measures of lead-lag relationships between GDP growth and industry-level cash-flow growth in the US. Results show that firms in leading industries pay an average annualized return 4% higher than that of firms in lagging industries. The difference in the returns of leading and lagging firms is priced in the cross section of equity returns, even after we adjust for the Fama-French three-factor model. This finding can be rationalized in a model in which (a) agents price growth news shocks, and (b) leading industries provide valuable resolution of uncertainty about the growth prospects of lagging industries.
    Date: 2017
  118. By: Reis, Ricardo
    Abstract: The study of quantitative easing (QE) policies has so far focussed on which assets the central bank should buy, and on how it can pursue its targets for real and financial stability. This paper emphasizes instead the funding of QE by central bank liabilities, with an eye on achieving the inflation target. Looking backwards, it shows evidence that post-QE1, the U.S. banking sector became saturated with reserves, so the central bank can control the size of the balance sheet independently of its interest-rate policy. Using options data for U.S. inflation, it shows that while QE1 had an e↵ect on expected inflation, further rounds of QE did not. Looking forward, it estimates the feasibility of keeping the liabilities of the central bank at a high level in terms of a solvency upper bound. Finally, it argues that the central bank’s interest-rate policy is not out of ammunition when it comes to targeting inflation, since there are radical proposals on the composition of its liabilities, their maturity and the way to remunerate them that could be employed.
    JEL: J1
    Date: 2016–09
  119. By: Nyman, Rickard (University College London, Centre for the Study of Decision-Making Uncertainty); Kapadia, Sujit (Bank of England); Tuckett, David (University College London, Centre for the Study of Decision-Making Uncertainty); Gregory, David (Bank of England); Ormerod, Paul (University College London, Centre for the Study of Decision-Making Uncertainty); Smith, Robert (University College London, Centre for the Study of Decision-Making Uncertainty)
    Abstract: This paper applies algorithmic analysis to large amounts of financial market text-based data to assess how narratives and sentiment play a role in driving developments in the financial system. We find that changes in the emotional content in market narratives are highly correlated across data sources. They show clearly the formation (and subsequent collapse) of very high levels of sentiment — high excitement relative to anxiety — prior to the global financial crisis. Our metrics also have predictive power for other commonly used measures of sentiment and volatility and appear to influence economic and financial variables. And we develop a new methodology that attempts to capture the emergence of narrative topic consensus which gives an intuitive representation of increasing homogeneity of beliefs prior to the crisis. With increasing consensus around narratives high in excitement and lacking anxiety likely to be an important warning sign of impending financial system distress, the quantitative metrics we develop may complement other indicators and analysis in helping to gauge systemic risk.
    Keywords: Systemic risk; text mining; big data; sentiment; uncertainty; narratives; forecasting; early warning indicators
    JEL: C53 D83 E32 G01 G17
    Date: 2018–01–05
  120. By: Laura Gardini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo"); Iryna Sushko (Institute of Mathematics, NASU, and Kyiv School of Economics, Ukraine); Kiminori Matsuyama (Department of Economics, Northwestern University, USA)
    Abstract: We consider a discrete-time version of the continuous-time fashion cycle model introduced in Matsuyama, 1992. Its dynamics are de ned by a 2D discontinuous piecewise linear map depending on three parameters. In the parameter space of the map periodicity regions associated with attracting cycles of di¤erent periods are organized in the period adding and period incrementing bifurcation structures. The boundaries of all the periodicity regions related to border collision bifurcations are obtained analytically in explicit form. We show the existence of several partially overlapping period incrementing structures, that is a novelty for the considered class of maps. Moreover, we show that if the time-delay in the discrete time formulation of the model shrinks to zero, the number of period incrementing structures tends to in nity and the dynamics of the discrete time fashion cycle model converges to those of continuous-time fashion cycle model.
    Keywords: Fashion cycle model, 2D discontinuous piecewise linear map, Border collision bifurcation, Period adding bifurcation structure, Period incrementing bifurcation structure
    Date: 2017
  121. By: Frank van der Horst; Jelle Miedema; Daniël Schreij; Martijn Meeter
    Abstract: In this online replication study we investigate if the pain of paying in cash - as opposed to paying by cards - can curb impulsive urges to purchase unhealthy or 'vice' products. This effect was found by Thomas et al (2011) when comparing the payment instruments cash and credit card. We investigate whether these results also hold in the Netherlands, where the dominant payment methods are cash and debit card. In total, 2,213 participants bought on average 12.3% more unhealthy supermarket products when paying with cards compared to cash. Participants who paid with cards bought more products in general (5.1%), however, the difference for healthy or 'virtue' products was not significant. The pattern of the mean scores per payment instrument indicate that paying with cards has a specific effect on vice purchases, but this study does not have the statistical power to show that convincingly. A regression analysis shows that the number of purchases of vice products is partly explained by paying with cards. Other explanatory variables are impulsivity, seduceability, gender, age, education and conscious eating behaviour. Pain of paying did not differ by payment instrument, but was larger for participants that paid with their usual means of payment, either debit card or cash. The present study contributes to the literature of so-called "pay cash, eat less trash" - studies, as it shows that the use of cash limits overall spending and purchases of vice products.
    Keywords: payment instruments; consumer behaviour; virtual reality study; pain of paying
    JEL: D12 D14 D18 D83 I12 E58 Z13

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