nep-mac New Economics Papers
on Macroeconomics
Issue of 2018‒01‒29
eighty papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Did Central Banks apply the right strategies after the financial crisis? By De Koning, Kees
  2. Das Nichts ist Zentralbankgeld. Anmerkungen zu Dirk Ehnts' Buch über Geld und Kredit By Quaas, Georg
  3. Dynamics and Factors of Inflation Convergence in the European Union By Vaclav Broz; Evzen Kocenda
  4. Should we Get rid of the Natural Rate Hypothesis? By Olivier J. Blanchard
  5. Firms’ precautionary savings and employment during a credit crisis By Melcangi, Davide
  6. Dealing with Misspecification in DSGE Models: A Survey By Paccagnini, Alessia
  7. Characterizing the financial cycle: evidence from a frequency domain analysis By Till Strohsal; Christian R. Proaño; Jürgen Wolters
  8. Versatile Forward Guidance: Escaping or Switching? By Gersbach, Hans; Liu, Yulin; Tischhauser, Martin
  9. International Spillovers of (Un)Conventional Monetary Policy: The Effect of the ECB and US Fed on Non-Euro EU Countries By Jan Hajek; Roman Horvath
  10. Financial Intermediation, Capital Accumulation and Crisis Recovery By Gersbach, Hans; Rochet, Jean-Charles; Scheffel, Martin
  11. Optimal automatic stabilizers By McKay, Alisdair; Reis, Ricardo
  12. Tracking the slowdown in long-run GDP growth By Antolin-Diaz, Juan; Drechsel, Thomas; Petrella, Ivan
  13. Monetary Policy Uncertainty and the Response of the Yield Curve to Policy Shocks By Peter Tillmann
  14. The Effects of Quantitative Easing: Taking a Cue from Treasury Auctions By Yuriy Gorodnichenko; Walker Ray
  15. A Macroeconomic Model with Financial Panics By Mark Gertler; Nobuhiro Kiyotaki; Andrea Prestipino
  16. Financial market imperfections and labour market outcomes By Sepahsalari, Alireza
  17. How does monetary policy influence bank lending? Evidence from the market for banks' wholesale funding By Max Breitenlechner; Johann Scharler
  19. Réduction du ratio de dette publique : quels instruments pour quels effets ? By Benjamin Egron
  20. A Structural Analysis of US Entry and Exit Dynamics By Hashmat Khan; Hashmat Khan; Hashmat Khan; Jean-Christophe Poutineau
  21. Money and Monetary Stability in Europe, 1300-1914 By Karaman, Kivanc; Pamuk, Sevket; Yildirim, Secil
  22. Finance and synchronization By Cesa-Bianchi, Ambrogio
  23. Making room for the needy: the credit-reallocation effects of the ECB’s corporate QE By Óscar Arce; Ricardo Gimeno; Sergio Mayordomo
  24. On the mechanics of New-Keynesian models By Rupert, Peter; Šustek, Roman
  25. Moral Hazard Misconceptions: the Case of the Greenspan Put By Gideon Bornstein; Guido Lorenzoni
  26. Global Spillover Effects of US Uncertainty By Bhattarai, Saroj; Chatterjee, Arpita; Park, Woong Yong
  27. A Microfounded Model of Money Demand Under Uncertainty, and some Empirical Evidence By Ingrid Groessl; Artur Tarassow
  28. Fiscal Consolidation Programs and Income Inequality By Brinca, Pedro; Ferreira, Miguel H.; Franco, Francesco; Holter, Hans A.; Malafry, Laurence
  29. On theories and estimation techniques of fiscal multipliers By Sebastian Gechert
  30. The dark corners of the labor market By Sterk, Vincent
  31. Inflation Dynamics in Turkey : A Historical Accounting By A. Hakan Kara; Fethi Ogunc; Cagri Sarikaya
  32. The Price of Capital, Factor Substitutability and Corporate Profits By Philipp Hergovich; Monika Merz
  33. Improving the predictability of commodity prices in US inflation: The role of coffee price By Afees A. Salisu; Raymond Swaray; Idris Adediran
  34. Matching workers By Moen, Espen R.; Yashiv, Eran
  35. Measuring the systemic importance of banks By Georgios Moratis; Plutarchos Sakellaris
  36. Technical Trading Rules and Trading Signals in the Black Market for Foreign Exchange in Sudan By Onour, Ibrahim
  37. Optimal Monetary and Fiscal Policy with Migration in a Currency Union By Pedro, Gomis-Porqueras; Cathy, Zhang
  38. The Shifting Scully Curve: International Evidence from 1870 to 2013 By Livio Di Matteo; Fraser Summerfield
  39. Dynamic efficiency in world economy By Kevin Luo; Tomoko Kinugasa; Kai Kajitani
  40. Friedman's Presidential Address in the Evolution of Macroeconomic Thought By N. Gregory Mankiw; Ricardo Reis
  41. Job displacement risk and severance pay By Cozzi, Marco; Fella, Giulio
  42. EU-wide income inequality in the era of the Great Recession By Peter, Benczur; Zsombor, Cseres-Gergely; Peter, Harasztosi
  43. You are what you eat: The role of oil price in Nigeria inflation forecast By Moses Tule; Afees A. Salisu; Charles Chimeke
  44. Natural Instability of Equilibrium Prices By Dmitry Levando; Maxim Sakharov
  45. Working Paper 01-17 - Public Investment in Belgium - Current State and Economic Impact By Bernadette Biatour; Chantal Kegels; Jan van der Linden; Dirk Verwerft
  46. Clustering regional business cycles By M. D. Gadea-Rivas; Ana Gómez-Loscos; Eduardo Bandrés
  47. Did the bank capital relief induced by the supporting factor enhance SME lending? By Sergio Mayordomo; María Rodríguez-Moreno
  48. The propagation of business sentiment within the European Union By Anja Kukuvec; Harald.Oberhofer
  49. Risks in China’s financial system By Song, Zheng (Michael); Xiong, Wei
  50. The decision to move house and aggregate housing-market dynamics By Ngai, L. Rachel; Sheedy, Kevin D.
  51. Will macroprudential policy counteract monetary policy’s effects on financial stability? By Itai Agur; Maria Demertzis
  52. Reviewing monetary policy frameworks: remarks at a Forum on the Federal Reserve’s Inflation Target, the Hutchins Center on Fiscal and Monetary Policy, the Brookings Institution, Washington, D.C., January 8, 2018 By Rosengren, Eric S.
  53. Growing through chaos in the Matsuyama map via subcritical flip and bistability By Laura Gardini; Iryna Sushko
  54. The Global Multi-Country Model (GM): an Estimated DSGE Model for the Euro Area Countries By Alice, Albonico; Ludovic, Calès; Roberta, Cardani; Olga, Croitorov; Filippo, Ferroni; Massimo, Giovannini; Stefan, Hohberger; Beatrice, Pataracchia; Filippo, Pericoli; Rafal, Raciborski; Marco, Ratto; Werner, Roeger; Lukas, Vogel
  55. Assessment of Current Economic Conditions and Implications for Monetary Policy: an essay, July 13, 2017 By Kaplan, Robert S.
  56. An anatomy of the spanish current account adjustment: the role of permanent and transitory factors By Enrique Moral-Benito; Francesca Viani
  57. L’évolution des dépenses de santé au Maroc : une analyse des déterminants démographiques et macro-économiques By Y. TAMSAMANI, Yasser
  58. Quantitative Easing without Rational Expectations By Dmitriy Sergeyev; Luigi Iovino
  59. Inequality, Frictional Assignment and Home-ownership By Allen Head; Huw Lloyd-Ellis; Derek Stacey
  60. Business capital accumulation and the user cost: is there a heterogeneity bias? By Serena, Fatica
  61. Speculative activity and returns volatility of Chinese major agricultural commodity futures By Martin T. Bohl; Pierre L. Siklos; Claudia Wellenreuther
  62. Investment Responses to Trade Liberalization: Evidence from U.S. Industries and Plants By Justin R. Pierce; Peter K. Schott
  63. Inflation Targeting and Financial Stability: does the quality of institutions matter? By Dimas Mateus Fazio; Thiago Christiano Silva; Benjamin Miranda Tabak; Daniel Oliveira Cajueiro
  64. Exact and inexact decompositions of international price indices By Pål Boug
  65. The "Rajan Hypothesis": a counter-factual experiment By Matteo Coronese; Isabelle Salle
  66. Cyclicality of the R&D Share of Investment in the EU over the Period before and after the Crisis By Roberto Censolo; Caterina Colombo
  67. Industry Effects of Oil Price Shocks: Re-Examination By Jo, Soojin; Karnizova, Lilia; Reza, Abeer
  68. Integration and Disintegration of EMU Government Bond Markets By Leschinski, Christian; Voges, Michelle; Sibbertsen, Philipp
  69. Do The Countries’ Monetary Policies Have Spatial Impact? By Arikan, Cengiz; Yalcin, Yeliz
  70. Why has the U.S. economy stagnated since the Great Recession? By Eo, Yunjong; Morley, James
  71. Spatial Functional Principal Component Analysis with Applications to Brain Image Data By Yingxing Li; Chen Huang; Wolfgang Karl Härdle
  72. Fiscal Implications of the Federal Reserve’s Balance Sheet Normalization By Michele Cavallo; Marco Del Negro; W. Scott Frame; Jamie Grasing; Benjamin A. Malin; Carlo Rosa
  73. Time-Consistently Undominated Policies By Charles Brendon; Martin Ellison
  74. Fiscal Policy, Sovereign Risk, and Unemployment By Pablo Ottonello; Ignacio Presno; Javier Bianchi
  75. Fiscal Rules and Discretion under Self-Enforcement By Halac, Marina; Yared, Pierre
  76. International Evidence on Firm Level Decisions in Response to the Crisis: Shareholders vs. Other Stakeholders* By Allen, Franklin; Carletti, Elena; Grinstein, Yaniv
  77. Working Paper 06-17 - Accrued-to-date pension entitlements in Belgium By Yves Brys
  78. Do Cryptocurrencies and Traditional Asset Classes Influence Each Other? By Josef Kurka
  79. Inequality, Frictional Assignment and Home-Ownership By Allen Head; Huw Lloyd-Ellis; Derek Stacey
  80. The propagation of business sentiment within the European Union By Kukuvec, Anja; Oberhofer, Harald

  1. By: De Koning, Kees
    Abstract: Nearly ten years have past since the last financial crisis occurred, making it easier to reflect on whether the policies applied by the Federal Reserve, the Bank of England and the ECB had the intended effect on restoring economic and financial stability. While stability has in time been restored, it has not been restored for all. Was it a stability action plan for the banking sector, for the financial markets generally or for the collective of individual households? This question matters as the possible solutions are quite different for each sector of an economy. In a previous paper: “Why it makes economic sense to help the have-nots in times of a financial crisis” the author highlighted three interrelated issues. The first one was timing. In the U.S. a (mortgage) borrowers’ crisis occurred in 2003, when the income and house price gap forced new borrowers to accept an amount of a mortgage loan far exceeding their income earnings growth over the period 1996-2003. The second issue was the macro-economic volume of lending. Between 1996-2007 there was a strong correlation between the volume of mortgage lending and the increases in house prices in the U.S. – not wholly surprising. The third issue was that mortgage lending volumes were not kept in line with average income growth over the period 2000-2007, which had already from 2006, resulted in a rapidly increasing level of foreclosure filings, completed foreclosures and home repossessions. By 2007-2008 the resultant financial crisis had occurred. In 2008, the threat to the banking sector forced central banks to come to their rescue. The solutions chosen: Liquidity supply, Quantitative Easing, lowering of interest rates to historical lows, reform of banking supervision, and legal reform in the case of the U.S. in the shape of the Dodd-Frank Act. The banking sector and the financial sector both benefitted from these measures. The collective of individual households did not. They were under tremendous pressure to pay back the mortgage loans, which the U.S. banking sector had so recklessly granted them. The lowest interest rates on record failed to entice them to borrow more. This paper will look at what went wrong, what rescue measures were adopted and examining the position of the collective households and borrowers and will set out the difference between consumer price inflation and house price inflation. The first affects current incomes, the latter the debt position of households.
    Keywords: financial crisis,bank rescues, U.S. mortgage borrowing levels 1996-2016, median nominal income growth 1996-2016, the house price-income gap, liquidity support scheme for households
    JEL: E32 E44 E58 E6
    Date: 2017–11–15
  2. By: Quaas, Georg
    Abstract: The importance of liquidity for banks and even for nation states has been demonstrated once more by the last series of global crises, of which the repercussions still are being felt ten years later. It is a common understanding that a shortage of liquidity leads to insolvency. Under the auspices of central banks and a two-level monetary system, the connection between lost liquidity and insolvency could be cut. If central banks are lenders of last resort, they are capable of removing any problem of illiquidity and insolvency. This is a thesis propagated by Dirk H. Ehnts (2016), who presents a monetary theory beyond the one we find in textbooks. Ehnts extends his super-optimistic view even to states that can – according to him – solve any crisis if they are allowed to enhance their spending. In his theoretical approach to monetary theory, Ehnts puts the examination of balance sheets in the center of his deliberations. The whole body of arguments can be found in his book, “Money and Credit,” which is written in German, as is this analysis of the new perspective to modern money. It results in a list of more than forty flaws - wrong assertions, inherent contradictions and unfounded consequences. The main problems of the balance sheet-centered analysis are these: (i.) Balance sheets are identities. They cannot inform us about causal relations and action sequences. It is an illusion to hope that balance sheets can highlight the functioning of the monetary system. Ehnts’ book is filled with statements that are not consequences of his balance sheets, but untested hypotheses being presented as plausible claims about reality. (ii.) The balance sheet approach is masking the legal dimension of financial interactions. For instance, in credit agreements it is accepted by the debtor to pay back the sum. Otherwise, he or she faces a compulsory execution. According to Ehnts, only one thing happens: the creditor loses his or her claim. (iii.) The theoretical conception ignores the role of the collateral, which is a limiting factor to central bank money and serves as an anchor to stabilize its value. High quality securities are scarce and therefore real money cannot be delivered unlimited in size. (iv.) The subject matter of a credit is not specified correctly in the theoretical framework. According to the author, it can even be jelly babies. But it is money emitted by central banks. No complete explanation of the creation of money by central banks can be found in the whole book. The availability of central bank money is an ignored prerequisite to the creation of money by commercial banks. If money could be created out of nothing, like it is claimed, no bankruptcy would have ever happened. The rationale of Ehnts’ policy advice has as many holes as Swiss cheese. It is not the base upon which serious policy recommendations can be built.
    Keywords: monetary theory, monetary policy, creation of money
    JEL: E44 E50
    Date: 2017–11–17
  3. By: Vaclav Broz (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic); Evzen Kocenda (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; CESifo, Munich; IOS, Regensburg)
    Abstract: We provide comprehensive evidence of the widespread occurrence of inflation convergence between all countries of the European Union from 1999 to 2016. We also show that convergence was more inclusive in the years after the global financial crisis—including the European sovereign debt crisis and the period of zero lower bound—and that price-stabilityoriented monetary strategies might have in fact facilitated this convergence. Our results are robust with respect to the use of three inflation benchmarks (the cross-sectional average, the inflation target of the European Central Bank, and the Maastricht criterion), structural breaks, and a core inflation measure. Our main findings imply that further enlargement of the euro area is feasible from the perspective of the convergence of inflation rates between the countries of the European Union.
    Keywords: inflation convergence, European Union, global financial crisis, zero lower bound, monetary strategy
    JEL: C32 E31 E58 G01 K33
    Date: 2017–11
  4. By: Olivier J. Blanchard
    Abstract: 50 years ago, Milton Friedman articulated the natural rate hypothesis. It was composed of two sub-hypotheses: First, the natural rate of unemployment is independent of monetary policy. Second, there is no long-run trade-off between the deviation of unemployment from the natural rate and inflation. Both propositions have been challenged. The paper reviews the arguments and the macro and micro evidence against each. It concludes that, in each case, the evidence is suggestive, but not conclusive. Policy makers should keep the natural rate hypothesis as their null hypothesis, but keep an open mind and put some weight on the alternatives.
    JEL: E30 E31 E32 E52
    Date: 2017–11
  5. By: Melcangi, Davide
    Abstract: Can the macroeconomic effects of credit supply shocks be large even in an economy in which the share of credit-constrained firms is small? I address this question using a model with firm heterogeneity, in which the interaction between real and financial frictions gives rise to precautionary cash holdings. Using UK firm-level balance sheet data, I show that firms hoarded cash relative to their assets during the last recession, and cash-intensive firms cut their workforces by less. A quantitative version of the model, disciplined by these data, generates similar dynamics in response to a tightening of firms’ credit conditions. The simulated economy experiences a sizeable fall in aggregate employment and prolonged substitution from capital to cash. Most of the aggregate dynamics are driven by unconstrained firms, pre-emptively responding to changes in credit conditions, in anticipation of future idiosyncratic productivity shocks. The model’s ability to generate predictions in line with the data crucially relies on this precautionary channel.
    Keywords: financial frictions; precautionary savings; employment; heterogeneous firms
    JEL: E44 G32 L25
    Date: 2016–03–07
  6. By: Paccagnini, Alessia
    Abstract: Dynamic Stochastic General Equilibrium (DSGE) models are the main tool used in Academia and in Central Banks to evaluate the business cycle for policy and forecasting analyses. Despite the recent advances in improving the fit of DSGE models to the data, the misspecification issue still remains. The aim of this survey is to shed light on the different forms of misspecification in DSGE modeling and how the researcher can identify the sources. In addition, some remedies to face with misspecification are discussed.
    Keywords: DSGE Models, Misspecification, Estimation, Bayesian Estimation
    JEL: C1 C11 C5 E0 E5 E50 E58 E60
    Date: 2017–11–24
  7. By: Till Strohsal; Christian R. Proaño; Jürgen Wolters
    Abstract: This paper introduces parametric spectrum estimation to the analysis of financial cycles. Our contribution is to formally test properties of financial cycles and to characterize their international interaction in the frequency domain. Existing work argues that the financial cycle is considerably longer in duration and larger in amplitude than the business cycle and that its distinguishing features became more pronounced over time. Also, a global cycle, being driven by US monetary policy, is said to be behind national financial cycles. We provide strong statistical evidence for the US and slightly weaker evidence for the UK validating the hypothesized features of the national financial cycle. In Germany, however, the financial cycle is much less visible. Similarly, a US-driven global financial cycle significantly affects national cycles in the UK but not in Germany.
    Keywords: Financial Cycle, Business Cycle, Indirect Spectrum Estimation, Bootstrapping Inference.
    JEL: C22 E32 E44
    Date: 2017
  8. By: Gersbach, Hans; Liu, Yulin; Tischhauser, Martin
    Abstract: We examine how forward guidance should be designed when an economy faces negative natural real interest-rate shocks and subsequent supply shocks. Besides a standard approach for forward guidance, we introduce two flexible designs: escaping and switching. With escaping forward guidance, the central banker commits to low interest rates in the presence of negative natural real interest-rate shocks, contingent on a self-chosen inflation rate threshold. With switching forward guidance, the central banker can switch from interest-rate forecasts to inflation forecasts any time in order to stabilize supply shocks. We show that for small and large natural real interest-rate shocks, escaping forward guidance is preferable to any of the other approaches, while switching forward guidance is optimal for intermediate natural real interest-rate shocks. Furthermore, with the polynomial chaos expansion method, we show that our findings are globally robust to parameter uncertainty. In addition, using Sobol' Indices, we identify the structural parameters with the greatest effect on the results.
    Keywords: central banks; forward guidance; global robustness; polynomial chaos expansion; Sobol' Indices; transparency; zero lower bound
    JEL: E31 E49 E52 E58
    Date: 2018–01
  9. By: Jan Hajek (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic); Roman Horvath (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: We estimate a global vector autoregression model to examine the effects of euro area and US monetary policy stances, together with the effect of euro area consumer prices, on economic activity and prices in non-euro EU countries using monthly data from 2001-2016. Along with some standard macroeconomic variables, our model contains measures of the shadow monetary policy rate to address the zero lower bound and the implementation of unconventional monetary policy by the European Central Bank and US Federal Reserve. We find that these monetary shocks have the expected qualitative effects but their magnitude differs across countries, with Southeastern EU economies being less affected than their peers in Central Europe. Euro area monetary shocks have greater effects than those that emanate from the US. We also find certain evidence that the effects of unconventional monetary policy measures are weaker than those of conventional measures. The spillovers of euro area price shocks to non-euro EU countries are limited, suggesting that the law of one price materializes slowly.
    Keywords: International spillovers, monetary policy, global VAR, shadow rate
    JEL: E52 E58
    Date: 2017–09
  10. By: Gersbach, Hans; Rochet, Jean-Charles; Scheffel, Martin
    Abstract: This paper integrates banks into a two-sector neoclassical growth model to account for the fact that a fraction of firms relies on banks to finance their investments. There are four major contributions to the literature: First, although banks’ leverage amplifies shocks, the endogenous response of leverage to shocks is an automatic stabilizer that improves the resilience of the economy. In particular, financial and labor market institutions are essential factors that determine the strength of this automatic stabilization. Second, there is a mix of publicly financed bank re-capitalization, dividend payout restrictions, and consumption taxes that stimulates a Pareto-improving rapid build-up of bank equity and accelerates economic recovery after a slump in the banking sector. Third, the model replicates typical patterns of financing over the business cycle: procyclical bank leverage, procyclical bank lending, and countercyclical bond financing. Fourth, the framework preserves its analytical tractability wherefore it can serve as a macro-banking module that can be easily integrated into more complex economic environments.
    Keywords: Financial intermediation; capital accumulation; banking crisis; macroeconomic shocks; business cycles; bust-boom cycles; managing recoveries
    JEL: E21 E32 G21 G28
    Date: 2018–01
  11. By: McKay, Alisdair; Reis, Ricardo
    Abstract: Should the generosity of unemployment benefits and the progressivity of income taxes depend on the presence of business cycles? This paper proposes a tractable model where there is a role for social insurance against uninsurable shocks to income and unemployment, as well as inefficient business cycles driven by aggregate shocks through matching frictions and nominal rigidities. We derive an augmented Baily-Chetty formula showing that the optimal generosity and progressivity depend on a macroeconomic stabilization term. Using a series of analytical examples, we show that this term typically pushes for an increase in generosity and progressivity as long as slack is more responsive to social programs in recessions. A calibration to the U.S. economy shows that taking concerns for macroeconomic stabilization into account raises the optimal unemployment benefits replacement rate by 13 percentage points but has a negligible impact on the optimal progressivity of the income tax. More generally, the role of social insurance programs as automatic stabilizers affects their optimal design.
    Keywords: Counter-cyclical fiscal policy; Redistribution; Distortionary taxes.
    JEL: E62 H21 H30
    Date: 2016–06–29
  12. By: Antolin-Diaz, Juan; Drechsel, Thomas; Petrella, Ivan
    Abstract: Using a dynamic factor model that allows for changes in both the longrun growth rate of output and the volatility of business cycles, we document a significant decline in long-run output growth in the United States. Our evidence supports the view that most of this slowdown occurred prior to the Great Recession. We show how to use the model to decompose changes in long-run growth into its underlying drivers. At low frequencies, a decline in the growth rate of labor productivity appears to be behind the recent slowdown in GDP growth for both the US and other advanced economies. When applied to realtime data, the proposed model is capable of detecting shifts in long-run growth in a timely and reliable manner.
    Keywords: Long-run growth; Business cycles; Productivity; Dynamic factor models; Real-time data
    JEL: C32 E23 E32 O47
    Date: 2016–01–25
  13. By: Peter Tillmann (Philipps-University Marburg)
    Abstract: This paper studies the non-linear response of the term structure of interest rates to monetary policy shocks. We show that uncertainty about monetary policy changes the way the term structure responds to monetary policy. A policy tightening leads to a significantly smaller increase in long-term bond yields if policy uncertainty is high at the time of the shock. We also look at the decomposition of bond yields into expectations about policy and the term premium. The weaker response of yields is driven by the fall in term premia, which fall even more if uncertainty about policy is high. These findings are robust to the measurement of monetary policy uncertainty and the definition of the monetary policy shock. We argue that short-term uncertainty about monetary policy tends to make yields of longer maturities relatively more attractive. As a consequence, investors demand lower term premia. This intuition is supported by the fact that long-term monetary policy uncertainty leads to opposite effects with term premia increasing even more after a policy shock.
    Keywords: Monetary policy uncertainty, term structure, term premium, unconventional monetary policy, local projections
    JEL: E43 E58 G12
    Date: 2017
  14. By: Yuriy Gorodnichenko; Walker Ray
    Abstract: To understand the effects of large-scale asset purchase programs recently implemented by central banks, we study how markets absorb large demand shocks for risk-free debt. Using high-frequency identification, we exploit the structure of the primary market for U.S. Treasuries to isolate demand shocks. These shocks are sizable, leading to large movements in Treasury yields and impacting corporate borrowing rates. Informed by a calibrated “preferred habitat” model of the term structure, we test for “local” demand effects and find evidence consistent with theoretical predictions. Crucially, this local effect is strongest when the risk-bearing capacity of arbitrageurs is low. Our estimates are consistent with the view that quantitative easing worked mainly via market segmentation, with a potentially limited role for other channels.
    JEL: E43 E44 E52
    Date: 2017–12
  15. By: Mark Gertler; Nobuhiro Kiyotaki; Andrea Prestipino
    Abstract: This paper incorporates banks and banking panics within a conventional macroeconomic framework to analyze the dynamics of a financial crisis of the kind recently experienced. We are particularly interested in characterizing the sudden and discrete nature of the banking panics as well as the circumstances that makes an economy vulnerable to such panics in some instances but not in others. Having a conventional macroeconomic model allows us to study the channels by which the crisis affects real activity and the effects of policies in containing crises.
    JEL: E0 E44
    Date: 2017–12
  16. By: Sepahsalari, Alireza
    Abstract: This paper investigates the importance of credit market frictions on labour market outcomes. I build a tractable search and matching model of the labour market with firm dynamics and heterogeneity in productivity and size. Firms produce output using labour, which they hire in a frictional market modelled by a directed search approach, and capital which they rent period-by-period. First, I show that the interaction of search and financial frictions slows down the reallocation of labour and capital from low productivity to high productivity firms and therefore prolongs the recession following a financial shock. Second, I find that the credit tightening reduces the net employment of large and productive firms more than small and unproductive firms, consistent with recent empirical findings.Third, I find that the introduction of financial frictions enhances the ability of the model to explain the fluctuation and persistence observed in output and labour market flows during the great recession. In fact, the model can account for 50% of the increase in unemployment during the 2008-2010 recession.
    Keywords: labour market frictions; collateral constraints; financial shocks.
    JEL: E24 E44
    Date: 2016–01–10
  17. By: Max Breitenlechner; Johann Scharler
    Abstract: We study the transmission of monetary policy shocks to loan volumes using a structural VAR. To disentangle different transmission channels, we use aggregated data from the market for large certificates of deposits and apply a sign restrictions approach. We find that although the standard bank lending channel as well as the recently formulated risk-pricing channel (Disyatat, 2011; Kishan and Opiela, 2012) contribute to the transmission of policy shocks, the effects associated with the risk-pricing channel are quantitatively stronger. Our results also show that policy shocks give rise to non-negligible effects on loan demand.
    Keywords: bank lending channel, risk-pricing channel, external finance premium, structural vector autoregression, sign restrictions
    JEL: C32 E44 E52
    Date: 2018–01
  18. By: Giovanni Scarano
    Abstract: Economic crises are a recurrent topic in Marx’s works, but nowhere does he deal with this subject in a systematic way. Nevertheless, we do find many considerations that are consistent with a systematic and complete view of crises as dialectical moments in the movement of capitalist economies. According to Marx, the ultimate cause of all actual crises is always the contradiction between subjective and objective goals in the capitalist mode of production. But in the real world there are several direct causes of economic crises, each of which can randomly prevail over the others to trigger the phenomenon. However, the different causes are random only in prevailing as prime mover, not in terms of their presence or absence. The paper deals with the reconstruction of Marx’s dialectical view of economic and financial crises, analysing many passages in Capital and Theories of Surplus-Value, but especially in Economic Manuscripts of 1857-58 (Grundrisse).
    Keywords: economic crisis, financial crisis, business cycles, dialectics, Marxian economics.
    JEL: B14 E32 E44 B51
    Date: 2018–01
  19. By: Benjamin Egron
    Abstract: In the wake of the economic crisis in 2007-2008, european sovereign debt showed a large increase.As a consequence, the possibility of starting a stabilization or a reduction of public debt ratio hasbecome a critical issue for the coming years to restore fiscal sustainability and to ensure compliancewith the european treaties. Against this background, the identification of the most appropriatepolicies to reduce public debt ratio represents a major economic issue, especially in times of loweconomic growth. The purpose of this article is to assess the ability of different fiscal policies instrumentsto reduce public debt ratio. From a methodological point of view, we estimate, based onFrench data, a non-linear model (Threshold VAR) including the main determinants of public debtratio : public spending, tax revenues, GDP and price index. The threshold VAR model allows usto distinguish economic expansion from economic recession and therefore to take into account thevariability of the multipliers over time. We couple the TVAR model with the public debt accountingequation in order to "transfer" the effect of a shock from a endogeneous variable to public debtratio. We then show that a cut in public spending can result in an increase in the public debtratio in the short term, moreover this effect is significantly higher in recession times. Inversely, anincrease in tax revenues lead to a decrease in the public debt ratio, in the short term, whatever theconsidered regime.
    Keywords: Public debt, fiscal consolidation, multipliers, fiscal policy.
    JEL: H63 H68 E61 E62
    Date: 2018
  20. By: Hashmat Khan (Department of Economics, Carleton University); Hashmat Khan (Department of Economics, Carleton University); Hashmat Khan (Department of Economics, Carleton University); Jean-Christophe Poutineau (Université de Rennes I)
    Abstract: We report empirical evidence indicating that US business formation has recently turned more volatile, procyclical and persistent due to changes in exit dynamics. To study these stylized facts, we estimate a DSGE model with endogenous entry and exit. Business units feature heterogeneous productivity and they shut down if the present value of expected future dividends falls below the current liquidation value. The estimation results imply structural changes in US exit dynamics after 2007: the semi-elasticity of the exit rate to critical productivity has increased and the average plant-level productivity has decreased.
    Keywords: Endogenous entry and exit, DSGE models, US business cycles
    JEL: E20 E32
  21. By: Karaman, Kivanc; Pamuk, Sevket; Yildirim, Secil
    Abstract: This paper investigates the determinants of monetary stability in Europe from the late medieval era until World War I. Through this period, the nominal anchor for monetary policy was the silver/gold equivalent of the monetary unit. States, however, frequently abandoned this anchor, some depreciating their monetary units against silver/gold less than 10 times and others more than 10,000 times between 1500 and 1914. To document patterns of monetary stability and put alternative theories of stability to test, we compile a new data set of silver/gold equivalents of monetary units for all major European states. We find strong support for political and fiscal theories arguing that states with weak executive constraints and intermediate levels of fiscal capacity had less stable monetary units. In contrast, the empirical support for monetary theories emphasizing the mechanics of the monetary system is weak. These findings support the primacy of political and fiscal factors over mechanical factors for monetary stability.
    Keywords: depreciation; fiat standard; fiscal capacity; gold standard; money; price stability; silver standard
    JEL: E31 E42 E52 N13 N43 O23 O43
    Date: 2018–01
  22. By: Cesa-Bianchi, Ambrogio
    Abstract: In the workhorse model of international real business cycles, financial integration exacerbates the cycle asymmetry created by country-specific supply shocks. The prediction is identical in response to purely common shocks in the same model augmented with simple country heterogeneity (e.g., where depreciation rates or factor shares are different across countries). This happens because common shocks have heterogeneous consequences on the marginal products of capital across countries, which triggers international investment. In the data, filtering out common shocks requires therefore allowing for country-specific loadings. We show that finance and synchronization correlate negatively in response to such common shocks, consistent with previous findings. But fi- nance and synchronization correlate non-negatively, almost always positively, in response to purely country-specific shocks.
    Keywords: Stochastic Discount Factor; Vector Autoregression; Shocks; Technology News; Monetary Policy; Cross-section; Stock Returns; Bond Returns
    JEL: E32 F15 F36 G21 G28
    Date: 2016–04–03
  23. By: Óscar Arce (Banco de España); Ricardo Gimeno (Banco de España); Sergio Mayordomo (Banco de España)
    Abstract: We analyse how the European Central Bank’s purchases of corporate bonds under its Corporate Sector Purchase Programme (CSPP) affected the financing of Spanish nonfinancial firms. Our results show that the announcement of the CSPP in March 2016 significantly raised firms’ propensity to issue CSPP-eligible bonds. The flipside was a drop in the demand for bank loans by these firms. This drop in the demand for credit by bondissuers, which are usually large corporations, unchained a positive and significant side effect on the flow of new loans extended to – typically smaller – firms that do not issue bonds. Specifically, we find that around 78% of the drop in loans previously given to bond issuers was redirected to other companies, which led them to raise investment. This reallocation of credit was amplified by the ECB’s Targeted Longer Term Refinancing Operations (TLTRO).
    Keywords: unconventional monetary policy, Corporate Sector Purchase Programme, quantitative easing, portfolio rebalancing
    JEL: E44 E52 E58 G2 G12 G15
    Date: 2017–12
  24. By: Rupert, Peter; Šustek, Roman
    Abstract: The monetary transmission mechanism in New-Keynesian models is put to scrutiny, focusing on the role of capital. We demonstrate that, contrary to a widely held view, the transmission mechanism does not operate through a real interest rate channel. Instead, as a first pass, inflation is determined by Fisherian principles, through current and expected future monetary policy shocks, while output is then pinned down by the New-Keynesian Phillips curve. The real rate largely only reflects consumption smoothing. In fact, declines in output and inflation are consistent with a decline, increase, or no change in the ex-ante real rate.
    Keywords: New-Keynesian models; monetary transmission mechanism; real interest rate channel; capital.
    JEL: E30 E40 E50
    Date: 2016–03–31
  25. By: Gideon Bornstein; Guido Lorenzoni
    Abstract: Policy discussions on financial market regulation tend to assume that whenever a corrective policy is used ex post to ameliorate the effects of a crisis, there are negative side effects in terms of moral hazard ex ante. This paper shows that this is not a general theoretical prediction, focusing on the case of monetary policy interventions ex post. In particular, we show that if the central bank does not intervene by monetary easing following a crisis, this creates an aggregate demand externality that makes borrowing ex ante inefficient. If instead the central bank follows the optimal discretionary policy and intervenes to stabilize asset prices and real activity, we show examples in which the aggregate demand externality disappears, reducing the need for ex ante intervention.
    JEL: E52 E61 G38
    Date: 2017–11
  26. By: Bhattarai, Saroj (University of Texas at Austin); Chatterjee, Arpita (University of New South Wales); Park, Woong Yong (Seoul National University)
    Abstract: We study spillover effects of US uncertainty fluctuations using panel data from fifteen emerging market economies (EMEs). A US uncertainty shock negatively affects EME stock prices and exchange rates, raises EME country spreads, and leads to capital outflows from them. Moreover, it decreases EME output, while increasing their consumer prices and net exports. The negative effects on output, exchange rates, and stock prices are weaker, but the effects on capital and trade flows stronger, for South American countries compared to other EMEs. We present a model of a small open economy that faces an external shock to interpret our findings.
    JEL: C33 E44 E52 E58 F32 F41
    Date: 2017–11–01
  27. By: Ingrid Groessl (Universität Hamburg (University of Hamburg)); Artur Tarassow (Universität Hamburg (University of Hamburg))
    Abstract: In this article we derive a microfounded model of money demand under uncertainty built on intertemporally optimizing risk-averse households. Deriving a complete solution of the optimization problem taking the intertemporal budget constraint into account where linearization procedures in our paper take a risky steady state as benchmark. The solution leads to ambiguous effects w.r.t. to the impact of capital market risk as well as ination risk, which is due to the interplay of substitution and opposing income effects. The econometric results reveal that U.S. households increase their demand for money in response to positive changes in ination risk and capital market risk, respectively, with both effects lasting permanently.
    Keywords: Money Demand, Uncertainty, Inflation Risk, Capital Market Risk, Monetary Policy, Cointegration
    JEL: C22 E41 E51 E58 G11
    Date: 2018–01
  28. By: Brinca, Pedro; Ferreira, Miguel H.; Franco, Francesco; Holter, Hans A.; Malafry, Laurence
    Abstract: Following the Great Recession, many European countries implemented fiscal consolidation policies aimed at reducing government debt. Using three independent data sources and three different empirical approaches, we document a strong positive relationship between higher income inequality and stronger recessive impacts of fiscal consolidation programs across time and place. To explain this finding, we develop a life-cycle, overlapping generations economy with uninsurable labor market risk. We calibrate our model to match key characteristics of a number of European economies, including the distribution of wages and wealth, social security, taxes and debt, and study the effects of fiscal consolidation programs. We find that higher income risk induces precautionary savings behavior, which decreases the proportion of credit-constrained agents in the economy. Credit-constrained agents have less elastic labor supply responses to fiscal consolidation achieved through either tax hikes or public spending cuts, and this explains the relationship between income inequality and the impact of fiscal consolidation programs. Our model produces a cross-country correlation between inequality and the fiscal consolidation multipliers, which is quite similar to that in the data.
    Keywords: Fiscal Consolidation, Income Inequality, Fiscal Multipliers, Public Debt, Income Risk
    JEL: E21 E62 H31 H50
    Date: 2017–11–14
  29. By: Sebastian Gechert
    Abstract: The fiscal multiplier is a condensed key figure of the complex transmission mechanism of fiscal policy into output. I give an overview and systemize the numerous contributions to the theory and measurement of multipliers. The analysis is not confined to a certain model class but is intended to be as inclusive as possible to lay out the relevant channels of influence that have been discussed in the literature, while pointing to some blind spots. I also review the econometric problems when estimating fiscal multipliers and the estimation techniques at hand.
    Keywords: Fiscal multiplier, literature review, history of economic thought
    JEL: B00 E62
    Date: 2017
  30. By: Sterk, Vincent
    Abstract: Standard models predict that episodes of high unemployment are followed by recoveries. This paper shows, by contrast, that a large shock may set the economy on a path towards very high unemployment, with no recovery in sight. First, I estimate a reduced-form model of áows in the U.S. labor market, allowing for the possibility of multiple steady states. Next, I estimate a non-linear search and matching model, in which multiplicity of steady states may arise due to skill losses upon unemployment, following Pissarides (1992). In both cases, estimates imply a stable steady state with around 5 percent unemployment and an unstable one with around 10 percent unemployment. The search and matching model can explain observed job Önding rates remarkably well, due to its strong endogenous persistence mechanism.
    Keywords: unemployment; multiple steady states; non-linear estimation
    JEL: E24 E32 J23
    Date: 2016–01
  31. By: A. Hakan Kara; Fethi Ogunc; Cagri Sarikaya
    Abstract: [EN] This study investigates the key drivers of consumer inflation in Turkey during the inflation targeting period covering 2006-2016. We estimate a reduced-form time-varying parameter (TVP) Phillips curve for core inflation, defined as CPI excluding unprocessed food, alcoholic beverages and tobacco. TVP estimates suggest that there is a clear decline in import price pass-through in recent years whereas pass-through from exchange rates to domestic inflation is relatively stable. Using this setup, we compute the contribution of macro variables such as exchange rate, import prices, output gap and real unit wages to inflation. We document the changes in inflation dynamics over the past decade, particularly focusing on the two distinct episodes of inflation targeting in terms of monetary policy implementation and discuss implications for price stability. Overall, our results suggest that achieving price stability requires a holistic approach embedding both cyclical and structural policies. [TR] Bu calismada Turkiye’de uygulanmakta olan enflasyon hedeflemesi rejiminin 2006-2016 yillarini kapsayan donemi icin enflasyonun temel makro belirleyicileri incelenmektedir. Parametreleri zamana gore degisen bir Phillips egrisi tahmin edilerek elde edilen bulgular, ithalat fiyat geciskenliginin son yillarda azaldigina, doviz kuru geciskenliginin ise goreli olarak daha istikrarli seyrettigine isaret etmektedir. Bu yaklasim kullanilarak, doviz kuru, ithalat fiyatlari, cikti acigi ve reel birim ucret gibi makro degiskenlerin enflasyona katkisi hesaplanmaktadir. Calismada ayni zamanda enflasyon hedeflemesinin iki farkli alt donemi ele alinarak degisen enflasyon dinamikleri irdelenmekte ve politika cikarimlari yapilmaktadir. Bulgularimiz, fiyat istikrarina ulasmak icin konjonkturel ve yapisal politikalarin bir arada ele alindigi butuncul bir yaklasimin onemine isaret etmektedir.
    Date: 2017
  32. By: Philipp Hergovich; Monika Merz
    Abstract: Technical progress has contributed to a steady decline in the relative price of new capital goods and at the same time facilitated the substitutability between phys- ical capital and labor in output production. This paper studies the quantitative implications that these two changes have for the level and the variability of firms' prots, the capital-to-labor ratio, and also for labor market outcomes when profits arise from rents paid to quasi-fixed factors of production. We embed a CES pro- duction function into a model of capital accumulation and competitive search in the labor market, allowing firms to increase their size by hiring multiple workers. We use our model to disentangle the effects of the decline in the relative price of capital and increased factor substitutability. Our analysis identies each of these two changes as important drivers of the empirically observed rise in the capital- to-labor ratio and in the level and variability of firms' prots. Their overall effect on wages, employment, and the labor share of income is inconclusive, since their respective impact on each of these variables goes in the opposite direction.
    JEL: E24 G32 J64
    Date: 2018–01
  33. By: Afees A. Salisu (Centre for Econometric and Allied Research, University of Ibadan); Raymond Swaray (Economics Subject Group, University of Hull Business, University of Hull, Cottingham Road, UK); Idris Adediran (Department of Economics, Obafemi Awolowo University, Nigeria.)
    Abstract: In this paper, we set forth to answer the research question: can coffee price predict US inflation? Motivated by the importance of coffee to Americans and the significance of the coffee subsector to the US economy, we pursue three notable innovations. First, we augment the traditional Phillips curve model with coffee price as a predictor and show that the resulting model outperforms the traditional variant in both in-sample and out-of-sample predictability of US inflation. Second, we justify the need to account for the inherent statistical features in the predictor as well as make a case for the superiority of Westerlund and Narayan (WN) estimator especially in the in-sample predictive model. These answer the research question in the affirmative with strong evidence that coffee price indeed serves as a good predictor, along with economic activity, for US inflation. These further challenge the position of Stock and Watson (1999, 2007, 2008) and establish that economic models can outperform statistical models for forecasting inflation.
    Keywords: OECD; US, Phillips curve, Coffee price, Inflation forecasts, Forecast evaluation
    JEL: C53 E31 E37
    Date: 2018–01
  34. By: Moen, Espen R.; Yashiv, Eran
    Abstract: This paper studies the matching of workers within the firm when the productivity of workers depends on how well they match with their co-workers. The firm acts as a coordinating device and derives value from this role. It is shown that a worker's contribution to firm value changes over time in a non-trivial way as co-workers are replaced by new workers. The paper derives optimal hiring and replacement policies, including an optimal stopping rule, and characterizes the resulting equilibrium in terms of worker flows, firm output and the distribution of firm values. Simulations of the model reveal a rich pattern of worker turnover dynamics and their connections to the resulting firm values distribution. The paper stresses the role of horizontal differences in worker productivity, which are different from vertical, assortative matching issues. It derives the rent from organizational capital, with worker complementarities playing a key role. We compare the model to match-specific productivity models and explore the essential differences, with the emphasis laid on worker interactions and complementarities.
    JEL: D23 E23 E24 J24
    Date: 2016–05–12
  35. By: Georgios Moratis (Athens University of Economics and Business); Plutarchos Sakellaris (Athens University of Economics and Business)
    Abstract: We measure the systemic importance of all banks that issue publicly traded CDS contracts among the world’s biggest 150. Systemic importance is captured by the intensity of spillovers of daily CDS movements. Our new empirical tool uses Bayesian VAR to address the dimensionality problem and identifies banks that may trigger instability in the global financial system. For the period January 2008 to June 2017, we find the following: A bank’s systemic importance is not adequately captured by its size. European banks have been the main source of global systemic risk with strong interconnections to US banks. For the global system, we identify periods of increased interconnections among banks, during which systemic and idiosyncratic shocks are propagated more intensely via the network. Using principal components analysis, we identify a single dominant factor associated with fluctuations in CDS spreads. Individual banks’ exposure to this factor is related to their government’s ability to support them and to their retail orientation but not to their size.
    JEL: E30 E50 E58 E60
    Date: 2017–12
  36. By: Onour, Ibrahim
    Abstract: This paper aims to assess the level of departure of the actual black market rate from its real level. Our finding indicate divergence of the actual black market rate from the real level, ranging from 7% in October 2016 to about 38% in November 2017. This result imply 38% of the foreign exchange price in the black market rate in November 2017 was due to manipulative trading strategies exerted by a few powerful traders in the market. The study concludes that in the very short term to curb increasing depreciation of the domestic currency rate in the black market, it is essential to control domestic liquidity expansion, and raise the cost (risk) of dealing in the black market by imposing higher penalty cost on dealers in this market.
    Keywords: Black Market;Foreign exchange; Technical trading; Volatility; Sudan.
    JEL: E51 E52
    Date: 2018–01–02
  37. By: Pedro, Gomis-Porqueras; Cathy, Zhang
    Abstract: We develop an open economy model of a currency union with frictional goods markets and costly migration to study optimal monetary and fiscal policy for the union. Households finance consump- tion with a common currency and can migrate across regions given regional differences in goods market characteristics and microstructure. Equilibrium is generically inefficient due to regional spillovers from migration. While monetary policy alone cannot correct this distortion, fiscal policy can help by taxing or subsidizing at the regional level. When households of only one region can migrate, optimal policy entails a deviation from the Friedman rule and a production subsidy (tax) if there is underinvestment (overinvestment) in migration. Optimal policy when households from both region can migrate is the Friedman rule and zero taxes in both regions.
    Keywords: currency unions, costly migration, search frictions, optimal monetary and fiscal policy
    JEL: D8 E4
    Date: 2018–01–07
  38. By: Livio Di Matteo (Department of Economics, Lakehead University, Canada); Fraser Summerfield (Rimini Centre for Economic Analysis; Department of Economics, St Francis Xavier University, Canada)
    Abstract: Scully curve predictions for growth-maximizing public sector size are estimated using panel data covering 17 industrialized nations from 1870-2013. Fixed-effects regression models find that government expenditure to GDP ratios between 27-32% are growth maximizing. The economic growth maximizing size shifted over time ranging from 9% pre-WWI to 25% Post WWII with less precise estimates suggesting 30% during inter-war years. A flattening out of the Scully curve occurs after the mid 1970s with the exception of the Nordic countries, which drive up government size considerably. As well, IV estimates of the Scully relationship suggest that the Scully curve may be subject to some reverse causality.
    Keywords: Scully Curve, Public Sector Size, Economic Growth
    JEL: E62 H50
    Date: 2018–01
  39. By: Kevin Luo (Graduate School of Economics, Kobe University); Tomoko Kinugasa (Graduate School of Economics, Kobe University); Kai Kajitani (Graduate School of Economics, Kobe University)
    Abstract: This study re-estimates dynamic efficiency based on the AMSZ (1989) criterion by exploiting the largest dataset assembled to date. It reveals that major economies conform to a similar “U-shaped curve†in their evolution of capital accumulation; that is, a period of decreasing efficiency followed by one of increasing efficiency. It also indicates that nations are not necessarily dynamically efficient if statistical bias is considered. As a prime example, China today is unquestionably in a serious state of dynamic inefficiency. The study discusses the theoretical limitations of AMSZ (1989), and calls for new breakthroughs in efficiency criteria.
    Keywords: Dynamic efficiency; Capital over-accumulation; Cash-flow criterion; Interest rates; Pareto optimality
    JEL: E22 E43 O57
    Date: 2018–01
  40. By: N. Gregory Mankiw; Ricardo Reis
    Abstract: This essay discusses the role of Milton Friedman’s presidential address to the American Economic Association, which was given a half century ago and helped set the stage for modern macroeconomics. We discuss where macroeconomics was before the address, what insights Friedman offered, where researchers and central bankers stand today on these issues, and (most speculatively) where we may be heading in the future.
    JEL: E5
    Date: 2017–11
  41. By: Cozzi, Marco; Fella, Giulio
    Abstract: This paper studies the matching of workers within the firm when the productivity of workers depends on how well they match with their co-workers. The firm acts as a coordinating device and derives value from this role. It is shown that a worker's contribution to firm value changes over time in a non-trivial way as co-workers are replaced by new workers. The paper derives optimal hiring and replacement policies, including an optimal stopping rule, and characterizes the resulting equilibrium in terms of worker flows, firm output and the distribution of firm values. Simulations of the model reveal a rich pattern of worker turnover dynamics and their connections to the resulting firm values distribution. The paper stresses the role of horizontal differences in worker productivity, which are different from vertical, assortative matching issues. It derives the rent from organizational capital, with worker complementarities playing a key role. We compare the model to match-specific productivity models and explore the essential differences, with the emphasis laid on worker interactions and complementarities.
    JEL: D52 E24 J65
    Date: 2016
  42. By: Peter, Benczur (European Commission – JRC); Zsombor, Cseres-Gergely (European Commission - JRC); Peter, Harasztosi (European Commission - JRC)
    Abstract: This paper uses European micro-data to look at stylised facts of EU-wide income inequality during the 2006-2013 period. Our contribution is to bring together four elements of the analysis that has appeared only in separation so far. Our analysis is EU-wide, but regionally detailed, looks at the longest possible term with harmonized survey data, uses inequality indicators sensitive to different parts of the income distribution and shows the contribution of different income components to income inequality. To our knowledge, this is the first attempt to produce stylised facts with these features at the same time, which, we believe is important in order to ask and answer questions related to the welfare of the people of the EU as a whole. We also take great care of rendering our work as homogeneous and transparent as possible. Because of this, we believe that the evidence we provide can be a starting point to a line of research on EU-wide income inequality.
    Keywords: income inequality; European Union
    JEL: D31 E24 H31 J31
    Date: 2017–12
  43. By: Moses Tule (Monetary Policy Department, Central Bank of Nigeria Abuja); Afees A. Salisu (Centre for Econometric and Allied Research, University of Ibadan); Charles Chimeke (Monetary Policy Department, Central Bank of Nigeria Abuja)
    Abstract: In this study, we propose a supply-side augmented Phillips curve for the Nigerian economy, which significantly enhances its inflation forecasts. We argue for the role of oil price as a good proxy for the supply side of inflation given the structure of the Nigerian economy, which essentially relies on oil revenue. Thus, we compare the forecast results of the oil-based augmented Phillips curve with the traditional variant, as well as time series models such as ARIMA and ARFIMA. We also test for any probable asymmetric response of Nigeria inflation forecast to oil price changes. The forecast analyses are conducted for both in-sample and out-of-sample periods using alternative forecast measures. We also consider alternative estimators such as Lewellen (2004) [LW hereafter] and Westerlund and Narayan (2012, 2015) [WN hereafter] estimators which account for relevant statistical properties of the predictors and their results are compared with the standard OLS estimator. The results suggest that the choice of estimator does matter for accurate inflation forecast for Nigeria, whether for in-sample or out-of-sample forecast and the WN estimator is preferred particularly when compared with OLS estimator. Secondly, the augmented model outperforms its traditional version, as well as time series models for both forecast samples. However, oil price asymmetries become evident when large samples are used. Our results are robust to alternative oil price proxies and forecast measures.
    Keywords: OECD; Nigeria, Phillips curve, Oil price, Inflation forecasts, Forecast evaluation
    JEL: C53 E31 E37
    Date: 2018–01
  44. By: Dmitry Levando (National Research University Higher School of Economics, Moscow, Russia); Maxim Sakharov (Bauman Mstu, Moscow, Russia)
    Abstract: We develop a theory of market fluctuations caused by strategic trade with complete information and without outside shocks. The constructed general equilibrium duopoly is a strategic market game with infinite strategies and multiple mixed strategies equilibria. First order conditions (FOC) of the game are the ill-posed problems (Hadamard, 1909), but every equilibrium mixed strategy can be only approximated. This imposes restrictions on convergence of common beliefs of players about actions of each other, existence of rational expectations and a price discovery property of the market, although the market is informationally efficient (Fama, 1970). We suggest a modification of Tikhonov regularization to construct pseudo-solutions. All endogenous variables of the model are exposed to unremovable instabilities, ‘natural instabilities’, specific to parameters of a chosen approximation. Our result is also related to existence of common knowledge, sun-spot equilibrium, and noise trade.
    Keywords: Strategic market games, ill-posed problems, common knowledge, rational expectations, efficient market, price fluctuations
    JEL: C68 C61 C72 D59 E31 E32 G14
    Date: 2018
  45. By: Bernadette Biatour; Chantal Kegels; Jan van der Linden; Dirk Verwerft
    Abstract: Belgian government investment, and specifically the part spent on infrastructure, is relatively low both in historical terms and compared to neighbouring countries. A simulation with the European Commission's Quest III model suggests that increasing government investment permanently by 0.5% of GDP leads to a growth in GDP, private consumption and private investment. The impact of alternative financing mechanisms is compared. Finally, a budget neutral shift of investment in favour of infrastructure is found to yield significant benefits in terms of GDP and its main components already in the medium run.
    Keywords: Public investment, Infrastructure, Public finance, General equilibrium, Simulation
    JEL: E27 E62 H54
    Date: 2017–01–26
  46. By: M. D. Gadea-Rivas (UNIVERSITY OF ZARAGOZA); Ana Gómez-Loscos (Banco de España); Eduardo Bandrés (UNIVERSITY OF ZARAGOZA)
    Abstract: The aim of this paper is to show the usefulness of Finite Mixture Markov Models (FMMMs) for regional analysis. FMMMs combine clustering techniques and Markov Switching models, providing a powerful methodological framework to jointly obtain business cycle datings and clusters of regions that share similar business cycle characteristics. An illustration with European regional data shows the sound performance of the proposed method.
    Keywords: business cycles, clusters, regions, finite mixture Markov models
    JEL: C22 C32 E32 R11
    Date: 2017–12
  47. By: Sergio Mayordomo (Banco de España); María Rodríguez-Moreno (Banco de España)
    Abstract: The introduction of the SME Supporting Factor (SF) allows banks to reduce capital requirements for credit risk on exposures to SME. This means that banks can free up capital resources that can be redeployed in the form of new loans. Our study documents that the SF alleviates credit rationing for medium-sized firms that are eligible for the application of the SF but not for micro/small firms. These results suggest that European banks were aware of this policy measure and optimized both their regulatory capital and their credit exposures by granting loans to the medium-sized firms, which are safer than micro/small firms.
    Keywords: SME, credit access, supporting factor, bank lending
    JEL: E51 E58 G21
    Date: 2017–12
  48. By: Anja Kukuvec (Department of Economics, Vienna University of Economics and Business); Harald.Oberhofer (Department of Economics, Vienna University of Economics and Business)
    Abstract: This paper empirically investigates the propagation of business sentiment within the European Union (EU) and adds to the literature on shock absorption via a common market's real economy. To this end, we combine EU-wide official business sentiment indicators with world input-output (IO) data and information on indirect wage costs. Econometrically, we model interdependencies in economic activities via IO-linkages and apply space-time models. The resulting evidence provides indication for the existence of substantial spillovers in business sentiment formation. Accordingly, and highlighted by the estimated impacts of changes in indirect labor costs, policy reforms aiming at increasing the resilience of the European single market need to take these spillovers into account in order to increase its effectiveness.
    Keywords: Business sentiment, propagation, economic fluctuations, input-output linkages, networks, space-time model, policy reforms
    JEL: C33 D84 E32 J32 L14
    Date: 2018–01
  49. By: Song, Zheng (Michael); Xiong, Wei
    Abstract: Motivated by growing concerns about the risks and instability of China’s financial system, this article reviews several commonly perceived financial risks and discusses their roots in China’s politico-economic institutions. We emphasize the need to evaluate these risks within China’s unique economic and financial systems, in which the state and non-state sectors coexist and the financial system serves as a key tool of the government to fund its economic policies. Overall, we argue that: (1) financial crisis is unlikely to happen in the near future, and (2) the ultimate risk lies with China’s economic growth, as a vicious circle of distortions in the financial system lowers the efficiency of capital allocation and economic growth and will eventually exacerbate financial risks in the long run.
    JEL: E02 G01
    Date: 2018–01–17
  50. By: Ngai, L. Rachel; Sheedy, Kevin D.
    Abstract: Using data on house sales and inventories, this paper shows that housing-market dynamics are driven mainly by listings and less so by transaction speed, thus the decision to move house is key to understanding the housing market. The paper builds a model where moving house is essentially an investment in match quality, implying that moving depends on macroeconomic developments and housing-market conditions. The endogeneity of moving means there is a cleansing effect — those at the bottom of the match quality distribution move first — which generates overshooting in aggregate variables. The model is applied to the 1995–2004 housingmarket boom.
    Keywords: housing market; search and matching; endogenous moving; match quality investment.
    JEL: D83 E22 R31
    Date: 2016–06–29
  51. By: Itai Agur; Maria Demertzis
    Abstract: How does monetary policy impact upon macroprudential regulation? This paper models monetary policy’s transmission to bank risk taking, and its interaction with a regulator’s optimization problem. The regulator uses its macroprudential tool, a leverage ratio, to maintain financial stability, while taking account of the impact on credit provision. A change in the monetary policy rate tilts the regulator’s entire trade-off. The authors show that the regulator allows interest rate changes to partly “pass through” to bank soundness by not neutralizing the risk-taking channel of monetary policy. Thus, monetary policy affects financial stability, even in the presence of macroprudential regulation
    Date: 2018–01
  52. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: Eric Rosengren's panel remarks were delivered at The Brookings Institute event, “Should the Fed stick with the 2 percent inflation target or rethink it?”
    Date: 2018–01–08
  53. 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)
    Abstract: Recent publications reconsider the growth model proposed by Matsuyama ("Growing through cycles"), also called M-map, presenting new interpretation of the model as well as new results on its dynamic behaviors. The goal of the present paper is to give the rigorous proof of some results which were remaining open, related to the dynamics of this model. We prove that in the whole parameter range of interest an attracting 2-cycle appears via border collision bifurcation, we give the explicit flip bifurcation value of the 2-cycle proving that it is always of subcritical type. This leads to bistability related to coexistence of an attracting 2-cycle with attracting 4-cyclic chaotic intervals. We give the conditions related to the sharp transition to chaos, proving that the cascade of stable cycles of even periods cannot occur. The parameter range in which repelling cycles of odd period exist is further investigated, giving an explicit boundary, as well as its relation to the non existence of cycles of period three.
    Keywords: Endogenous growth models, Matsuyama map, Piecewise smooth map, Subcritical flip bifurcation, Border collision bifurcation, Skew tent map as a normal form.
    JEL: O41 E32 C62 C61 D90
    Date: 2018
  54. By: Alice, Albonico (Università degli Studi di Milano-Bicocca); Ludovic, Calès (European Commission – JRC); Roberta, Cardani (European Commission - JRC); Olga, Croitorov (European Commission - JRC); Filippo, Ferroni (Federal Reserve Bank of Chicago); Massimo, Giovannini (European Commission - JRC); Stefan, Hohberger (European Commission - JRC); Beatrice, Pataracchia (European Commission - JRC); Filippo, Pericoli (European Commission - JRC); Rafal, Raciborski (Vistula University); Marco, Ratto (European Commission - JRC); Werner, Roeger (European Commission); Lukas, Vogel (European Commission)
    Abstract: This paper presents the European Commission's Global Multi-country model (the GM model). The GM model is an estimated multi-country DSGE model, developed by the European Commission, that can be used for spillover analysis, forecasting and medium term projections. Its development is jointly performed by the Joint Research Centre and DG ECFIN. Since the GM model is developed to be flexible under different country configurations,we present the GM model in its configuration designed for EMU-countries (GM3-EMU), which has been estimated for the four largest European economies (Germany, France, Italy and Spain). We analyse business cycle properties, present the model fit and provide a quantitative assessment of the relative importance that supply, demand and international shocks as well as discretionary policy interventions had in explaining the cyclical patterns observed in each country since the establishment of the EMU.
    Keywords: DSGE; Bayesian estimation; EMU; Business cycle; Model fit; Cross-country comparison
    JEL: C51 E31
    Date: 2017–12
  55. By: Kaplan, Robert S. (Federal Reserve Bank of Dallas)
    Date: 2017–07–13
  56. By: Enrique Moral-Benito (Banco de España); Francesca Viani (Banco de España)
    Abstract: This paper aims to identify how much of the recent current account adjustment in Spain can be explained by cyclical factors. For this purpose, we consider the cross-country regressions in the IMF’s External Balance Assessment (EBA) methodology but allowing for country-specific slopes and intercepts. The good fit of these regressions implies negligible residuals for most countries, and, as a result, the positive analysis of current account decompositions provides a more informative assessment of the external balance drivers. According to our findings, around 60% of the 12 pp. adjustment of the Spanish external imbalance over the 2008-2015 period can be explained by transitory factors such as the output gap, the oil balance, and the financial cycle. The remaining 40% is explained by factors such as the cyclically-adjusted fiscal consolidation, population aging, lower growth expectations, or competitiveness gains, which can all be considered as more permanent phenomena.
    Keywords: current account, global imbalances
    JEL: F21 F32 F41
    Date: 2017–10
  57. By: Y. TAMSAMANI, Yasser
    Abstract: Morocco’s healthcare expenditures regime growth has been in decline since 2010. The average annual growth rate went from 7.9% over the period of 1996 to 2009 to 4.4% in the recent years. The objective of this paper is to identify the demographic and macroeconomic determinants that shape healthcare expenditures behavior in Morocco, and to evaluate their respective contributions to the shift observed in the trajectory of healthcare expenditures growth. On the one hand, results show that the combined demographic factors of population growth and demographic transition account for a 14% growth rate decline in healthcare expenditures. On the other hand, the evaluation of macroeconomic determinants based on econometric modeling, shows that the income elasticity of healthcare expenditures is less than a unit ranging from 0.5 to 0.8. It also yields a positive price semi-elasticity with an estimated value of 0.02, and a 0.01 (-0.01) sensitivity coefficient to the variation of the weight of public (versus private) funding in total healthcare expenditures. Therefore, as of 2010 the contributing factors to the slowing down in healthcare expenditures growth can be presented as follows: 45% is due to declining healthcare relative prices, 20 % is due to a shrinking share of public funding, and 11% is due to a decelerating economic growth. The estimated models’ residual contains the remainder (10%) shares of contributions.
    Keywords: Healthcare expenditures, demography, macroeconomic determinants, elasticities, Morocco
    JEL: H51 I12 I15 I18
    Date: 2017–05–19
  58. By: Dmitriy Sergeyev (Bocconi University); Luigi Iovino (Bocconi University)
    Abstract: We study the effects of risky assets purchases financed by issuance of riskless debt by the government (quantitative easing) in a model with nominal frictions but without rational expectations. We use the concept of reflective equilibrium that converges to the rational expectations equilibrium in the limit. This equilibrium notion rationalizes the idea that it is difficult to change expectations about economic outcomes even if it is easy to shift expectations about the policy. Without additional assumptions about non-pecuniary demand for safe assets or segmentation of assets markets, we find that in the reflective equilibrium quantitative easing policy increases the price of risky assets and stimulates output, while it is neutral in the rational expectations equilibrium.
    Date: 2017
  59. By: Allen Head (Queen's University); Huw Lloyd-Ellis (Queen's University); Derek Stacey (Ryerson University)
    Abstract: A theory of the distribution of housing tenure in a city is developed. Heterogeneous houses are built by a competitive development industry and either rented competitively or sold to households which differ in their income and sort over housing types through a directed search process. In the absence of either financial or supply restrictions, higher income households are more likely to own and lower quality housing is more likely to be rented. The composition of the housing stock and the rate of home-ownership depend on the distribution of income, the age of the population and construction costs. When calibrated to match average features of housing markets within U.S. cities, observed differences in these variables account well for the variation observed across cities in home-ownership and the price-rent ratio. A policy designed to improve housing affordability significantly raises home-ownership among lower income households while lowering the quality supplied to high income households.
    Keywords: House prices, liquidity, search, income inequality
    JEL: R31 D31 E21
    Date: 2018–01
  60. By: Serena, Fatica (European Commission – JRC)
    Abstract: Empirical models of capital accumulation estimated on aggregate data series are based on the assumption that capital asset types respond in the same way to cost variables. Likewise, aggregate models do not consider potential heterogeneity in investment behaviour originating on the demand side for capital, e.g. at the sector level. We show that the underlying assumption of homogeneity may indeed lead to misspecification of standard aggregate investment models. Using data from 23 sectors in 10 OECD countries over the period 1984-2007, we adopt a fully disaggregated approach – by asset types and sectors – to estimate the responsiveness of investment to the tax-adjusted user cost of capital. While accounting for the different sources of heterogeneity, we find that fixed capital accumulation is significantly affected by changes in the user cost. However, the estimated substitution elasticities are smaller than one - the benchmark value under a Cobb-Douglas production function. We do not find robust evidence that the long run substitution elasticities are statistically different across asset types.
    Keywords: capital accumulation; user cost of capital; corporate taxation; panel data
    JEL: E22 H25 C33
    Date: 2017–12
  61. By: Martin T. Bohl; Pierre L. Siklos; Claudia Wellenreuther
    Abstract: Chinese futures markets for agricultural commodities are among the fastest growing futures markets in the world and trading behaviour in those markets is perceived as highly speculative. Therefore, we empirically investigate whether speculative activity in Chinese futures markets for agricultural commodities destabilizes futures returns. To capture speculative activity a speculation and a hedging ratio are used. Applying GARCH models, we first analyse the influence of both ratios on the conditional volatility of eight heavily traded Chinese futures contracts. Additionally, VAR models in conjunction with Granger causality tests, impulse-response analyses and variance decompositions are used to obtain insight into the lead-lag relationship between speculative activity and returns volatility. For most of the commodities, we find a positive influence of the speculation ratio on conditional volatility. The results relying on the hedging ratio are inconclusive.
    Keywords: Speculation Ratio, Returns Volatility, Chinese Futures Markets, Agricultural Commodities
    JEL: E44 F30 G12 G13 G15
    Date: 2018–01
  62. By: Justin R. Pierce; Peter K. Schott
    Abstract: This paper examines the effect of a change in U.S. trade policy on the domestic investment of U.S. manufacturers. Using a difference-in-differences identification strategy, we find that industries more exposed to reductions in import tariff uncertainty exhibit relative declines in investment after the change in trade policy. Within industries, we find that this relationship is concentrated among establishments with low initial levels of labor productivity, capital intensity and skill intensity. Plants with high initial levels of skill intensity, by contrast, exhibit relative increases in investment with exposure. We also find evidence that establishments' investment activity is smoother following the policy change.
    JEL: E22 F1 F13 F14 F4
    Date: 2017–11
  63. By: Dimas Mateus Fazio; Thiago Christiano Silva; Benjamin Miranda Tabak; Daniel Oliveira Cajueiro
    Abstract: Inflation targeting (IT) has recently been seen as one of the main causes of the authorities' unresponsiveness to the build up of financial imbalances during the recent financial crisis. We take data from banks from 66 countries for the period of 1998-2014 and compare how institutional quality as perceived by the national population impacts financial stability in countries that adopted IT with those that did not. We find that, while banks from IT countries with high quality of institutions do not have their stability significantly enhanced by this policy (the ``paradox of credibility''), countries with average levels of quality of institutions seem to benefit from it. In addition, in the estimations, IT and financial stability are negatively associated in countries with low levels of institutional quality, which is consistent with the fact that governments must have at least some trust of their population in order to conduct effective economic policies. This inverted U-shaped relationship between IT and financial stability as function of the institutional quality reflects the two opposing views in the literature regarding this topic
    Date: 2018–01
  64. By: Pål Boug (Statistics Norway)
    Abstract: Decompositions of international price indices are usually inexact in the sense that the underlying aggregator formula is not exactly reproduced. In this paper, we compare analytically the exact and inexact decompositions of international price indices, paying particular attention to the bias in aggregate inflation occurring from using the first order Taylor series approximation and not the quadratic approximation lemma to a geometric average of price levels. Our calculations, using the Norwegian clothing industry as an illustration, reveal that the bias in aggregate inflation over the sample period of 1997−2016 is quite substantial and as high as 0.5 percentage points in some years. We therefore conclude that the quadratic approximation lemma should be used in practise to exactly reproduce the underlying aggregator formula.
    Keywords: International price indices; exact and inexact decompositions; first and second order Taylor series approximation; quadratic approximation lemma; bias in aggregate inflation
    JEL: C43 E31 F14
    Date: 2017–11
  65. By: Matteo Coronese; Isabelle Salle
    Abstract: We integrate a centralized wage bargaining process into an otherwise standard DSGE model with a financial accelerator to simulate distributional shocks in the presence of financial instability. Our framework provides a counterfactual analysis of the effects of the observed decrease in the labor share when no concomitant rise in households' credit offsets the adverse effect on consumption. The result is a prolonged under-consumption recession that outweighs the initial boost in investment.
    Keywords: Income inequality; Distributional shocks; Under-consumption
    Date: 2018–01–11
  66. By: Roberto Censolo; Caterina Colombo
    Abstract: In this paper we investigate the co-movements between the R&D share of total investment and GDP growth in different EU areas over the period 1999-2014. Our empirical analysis shows that only core countries display a common counter-cyclical mechanism leading to an increased share of R&D over prolonged downturns. The lack of any counter-cyclical pattern of R&D share over the evolution of GDP growth in periphery countries makes this area highly vulnerable to persistent recessions, with potentially harmful consequences for longer term growth. For recent EU members the evidence of R&D share pro-cyclicality should be evaluated in the light of the catching-up process still at work in this area. Our analysis suggests that any successful EU innovation policy should not disregard the potential divergence in R&D performance due to the dispersion of the counter-cyclical properties of the share of productivity enhancing activities in the different EU areas.
    Keywords: R&D investment; cyclicality; European Union; economic crisis
    JEL: O52 O30 E32
    Date: 2017–12–27
  67. By: Jo, Soojin (Federal Reserve Bank of Dallas); Karnizova, Lilia (University of Ottawa); Reza, Abeer (Bank of Canada)
    Abstract: Sectoral responses to oil price shocks help determine how these shocks are transmitted through the economy. Textbook treatments of oil price shocks often emphasize negative supply effects on oil importing countries. By contrast, the seminal contribution of Lee and Ni (2002) has shown that almost all U.S. industries experience oil price shocks largely through a reduction in their respective demands. Only industries with very high oil intensities face a supply-driven reduction. In this paper, we re-examine this seminal findings using two additional decades of data. Further, we apply updated empirical methods, including structural factor-augmented vector autoregressions, that take into account how industries are linked among themselves and with the remainder of the macro-economy. Our results confirm the original finding of Lee and Ni that demand effects of oil price shocks dominate in all but a handful of U.S. industries.
    Keywords: oil price shocks; SVAR; FAVAR; industry supply and demand
    JEL: E30 Q43
    Date: 2017–07–31
  68. By: Leschinski, Christian; Voges, Michelle; Sibbertsen, Philipp
    Abstract: This paper analyzes market integration among long term government bonds in the Eurozone since the inception of the Euro in 1999. While it is commonly assumed that markets for EMU government bonds were closely integrated prior to the EMU debt crisis, we find that there is significant time variation in their relationship. There are periods of integration and disintegration, and differences between core and periphery countries can be observed long before the EMU debt crisis. To obtain insights into the sources of the observed time variation, we analyze the dependence on variables related to market sentiment, risk and risk aversion. The drivers of market integration are found to be similar to those for the well documented flight-to-quality effects from stocks to bonds, suggesting that in times of crisis investors do not only shift their portfolios from stocks to bonds, but there is also a stronger differentiation between more and less risky bonds. The persistence of these differentials leads to the conclusion that (at least in times of crisis) the pricing of EMU government bonds implied the possibility of macroeconomic and fiscal divergence between the EMU countries.
    Keywords: EMU Debt Crisis; Flight-to-quality; Fractional Cointegration; Market Integration; Yield Spreads
    JEL: G01 C32 C14 C58 E43
    Date: 2018–01
  69. By: Arikan, Cengiz; Yalcin, Yeliz
    Abstract: Nowadays, not land border but economic cooperation and borders determine the neighborhood and closeness by globalization. No doubt, any economic event happens in any country affects other partners more and less according to economic relationship in globalization process. The desire of measuring of this interaction make occur spatial econometrics. Initially, in spatial models take into account land borders. Subsequently, studies about spatial econometric models allow economic interactions and relationships. After the global economic crises in 2008 Central Banks have started to vary monetary policy tool to ensure economic and financial stability. It is estimated that which tool will be implemented by following the policies of the central banks in which they are closely related. The spatial effect of monetary policy can be not only geographical but also economic or social. Different spatial models have set up to examine whether any spatial effect on monetary policy. Unlike other studies in this study not only geographic weight matrix but also economic weight matrix have been used in the spatial models. Different weight matrix models results have been compared and construed. Our preliminary findings reveal that there is a spatial effect on monetary policy between OECD, EU and G-20 countries. And also, economic weight matrix effect is more than geographic weight matrix.
    Keywords: Monetary Policy, Spatial Model, Spatial Impact, Econometrics
    JEL: C01 C51 E52
    Date: 2017–12–21
  70. By: Eo, Yunjong; Morley, James
    Abstract: Related to the idea of secular stagnation, the level and growth of U.S. real GDP have been much lower than would have been projected prior to the Great Recession. We investigate whether this stagnation is due to particularly large permanent effects of the Great Recession, a large and persistent negative output gap following the recession, or slower trend growth. Using a new Markov-switching time series model that allows a given recession and its recovery to be either U or L shaped and accounts for possible structural breaks in trend growth, we find the Great Recession was U shaped and the economy fully recovered from it by 2014. Instead, the relatively low level and growth of output appears to be driven by a reduction in trend growth that began in 2006 prior to the onset of the Great Recession. Our results help explain a lack of deflation in recent years without having to rely on a change in the slope of the Phillips Curve.
    Keywords: Secular stagnation; The Great Recession; output gap; Markov switching; Phillips Curve
    Date: 2017
  71. By: Yingxing Li; Chen Huang; Wolfgang Karl Härdle
    Abstract: This paper considers a fast and effective algorithm for conducting functional principle component analysis with multivariate factors. Compared with the univariate case, our approach could be more powerful in revealing spatial connections or extracting important features in images. To facilitate fast computation, we connect Singular Value Decomposition with penalized smoothing and avoid estimating a huge dimensional covariance operator. Under regularity assumptions, the results indicate that we may enjoy the optimal convergence rate by employing the smoothness assumption inherent to functional objects. We apply our method on the analysis of brain image data. Our extracted factors provide excellent recovery of the risk related regions of interests in human brain and the estimated loadings are very informative in revealing the individual risk attitude.
    Keywords: Principal Component Analysis; Penalized Smoothing; Asymptotics; functional Magnetic Resonance Imaging fMRI
    JEL: C13 C20 E37
    Date: 2017–08
  72. By: Michele Cavallo; Marco Del Negro; W. Scott Frame; Jamie Grasing; Benjamin A. Malin; Carlo Rosa
    Abstract: This Note summarizes analysis conducted in our recent FEDS working paper that seeks to understand the fiscal implications of the Federal Reserve's balance sheet normalization program.
    Date: 2018–01–09
  73. By: Charles Brendon (Centre for Economic Policy Research (CEPR); Centre for Macroeconomics (CFM); Faculty of Economics University of Cambridge); Martin Ellison (Centre for Economic Policy Research (CEPR); Centre for Macroeconomics (CFM); Department of Economics Oxford University)
    Abstract: This paper proposes and characterises a new normative solution concept for Kydland and Prescott problems, allowing for a commitment device. A policy choice is dominated if either (a) an alternative exists that is superior to it in a time-consistent subdomain of the constraint set, or (b) an alternative exists that Pareto-dominates it over time. Policies may be time-consistently undominated where time-consistent optimality is not possible. We derive necessary and sucient conditions for this to be true, and show that these are equivalent to a straightforward but signicant change to the first-order conditions that apply under Ramsey policy. Time-consistently undominated policies are an order of magnitude simpler than Ramsey choice, whilst retaining normative appeal. This is illustrated across a range of examples.
    Keywords: Tim consistency, Undominated policy, Ramsey policy
    JEL: D02 E61
    Date: 2018–01
  74. By: Pablo Ottonello (University of Michigan); Ignacio Presno (Federal Reserve Board); Javier Bianchi (Federal Reserve Bank of Minneapolis)
    Abstract: How should fiscal policy be conducted in the presence of default risk? We address this question using a sovereign default model with downward wage rigidity. An increase in government spending during a recession stimulates economic activity and reduces unemployment. Because the government lacks commitment to future debt repayments, expansionary fiscal policy increases sovereign spreads making the fiscal stimulus less desirable. We analyze the optimal fiscal policy and study quantitatively whether austerity or stimulus is optimal during an economic slump.
    Date: 2017
  75. By: Halac, Marina; Yared, Pierre
    Abstract: We study a fiscal policy model in which the government is present-biased towards public spending. Society chooses a fiscal rule to trade off the benefit of committing the government to not overspend against the benefit of granting it flexibility to react to privately observed shocks to the value of spending. Unlike prior work, we characterize rules that are self-enforcing: the government must prefer to comply with the rule rather than face the punishment that follows a breach, where any such punishment must also be self-enforcing. We show that the optimal rule is a maximally enforced deficit limit, which, if violated, leads to the worst punishment for the government. We provide a necessary and sufficient condition for the government to violate the deficit limit following sufficiently high shocks. Punishment takes the form of temporary overspending, after which the optimal rule is restored.
    Keywords: deficit bias; Fiscal policy; private information; Self-Enforcing Rules
    JEL: C73 D02 D82 E6 H1 P16
    Date: 2018–01
  76. By: Allen, Franklin; Carletti, Elena; Grinstein, Yaniv
    Abstract: The relationship between changes in GDP and unemployment during the 2008 financial crisis differed significantly from previous experiences and across countries. We study firm-level decisions in France, Germany, Japan, the UK, and the US. We find significant differences between the response of US and non-US firms. US firms significantly decreased their production costs relative to firms in other countries. They have also reduced debt, reduced dividend payout, and increased their cash holdings compared to firms in other countries. The differences are, in general, explained by differences in financial leverage. However, financial leverage does not explain differences between production decisions in German and U.S. firms and between Japanese and US firms. We argue that differences in firm governance between US firms and firms in Germany and Japan drive these responses. US firms are more prone to cut labor costs and reduce leverage compared to German firms and Japanese firms in order to achieve larger profits and a larger cash-cushion in the short-run.
    Keywords: corporate governance; firm-level decisions; Okun's law
    JEL: E30 G01 G32 G34
    Date: 2018–01
  77. By: Yves Brys
    Abstract: Supplementary table 29, “Accrued-to-date pension entitlements in social insurance” for Belgium will be published for the first time in 2017. This table covers the pension schemes in social insurance: statutory pensions and occupational pensions, whether they are funded or not. Table 29 shows the pensions entitlements on an accrued-to-date basis. These are present values of the pension entitlements of the retired population and the part of pension entitlements that is already accrued by the future beneficiaries. As such, accrued-to-date liabilities do not represent public debt and are not an indicator of the fiscal or financial sustainability of the pension systems and are only appropriate for national accounts purposes. Accrued-to-date liabilities should only be interpreted as an asset from the households in national accounts' terminology. An assessment of the sustainability of the pension systems can be found in the reports of the Ageing Working Group or the Belgian Study Commission for Ageing.
    Keywords: National accounts, Table 29, Supplementary table, Accrued-to-date liabilities, Pension entitlements, Eurostat
    JEL: C83 E01
    Date: 2017–05–31
  78. By: Josef Kurka (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Pod Vodarenskou Vezi 4, 182 00, Prague, Czech Republic)
    Abstract: Large stream of literature studies interconnectedness among various assets that are relevant in current global markets. Transmission of shocks between cryptocurrencies and traditional asset classes is, however, not understood at all, but should not be ignored due to increasing influence of cryptocurrencies in recent years. In this paper, we study how shocks between the most liquid representatives of the traditional asset classes including commodities, foreign exchange, stocks, financials, and cryptocurrencies are being transmitted. Generally, we document very low level of connectedness between the main cryptocurrency and other studied assets. The only exception is gold which receives substantial amount of shocks from cryptocurrency market. Our findings are important since we show that cryptocurrencies play role in global markets, and the results could also be useful in portfolio diversification schemes. Moreover, we find significant positive asymmetry in spillovers between the studied assets, which is in contradiction to previous studies conducted on assets from a single asset class.
    Keywords: cryptocurrencies, volatility, connectedness, asymmetric effects, realized semivariance
    JEL: C38 C58 E49
    Date: 2017–12
  79. By: Allen Head (Department of Economics, Queen's University, Kingston, Canada); Huw Lloyd-Ellis (Department of Economics, Queen's University, Kingston, Canada); Derek Stacey (Department of Economics, Ryerson University, Toronto, Canada)
    Abstract: A theory of the distribution of housing tenure in a city is developed. Heterogeneous houses are built by a competitive development industry and either rented competitively or sold to households which differ in their income and sort over housing types through a directed search process. In the absence of either financial or supply restrictions, higher income households are more likely to own and lower quality housing is more likely to be rented. The composition of the housing stock and the rate of home-ownership depend on the distribution of income, the age of the population and construction costs. When calibrated to match average features of housing markets within U.S. cities, observed differences in these variables account well for the variation observed across cities in home-ownership and the price-rent ratio. A policy designed to improve housing affordability significantly raises home-ownership among lower income households while lowering the quality supplied to high income households.
    Keywords: House Prices, Liquidity, Search, Income Inequality
    JEL: E30 R31 R10
    Date: 2018–01
  80. By: Kukuvec, Anja; Oberhofer, Harald
    Abstract: This paper empirically investigates the propagation of business sentiment within the European Union (EU) and adds to the literature on shock absorption via a common market's real economy. To this end, we combine EU-wide official business sentiment indicators with world input-output (IO) data and information on indirect wage costs. Econometrically, we model interdependencies in economic activities via IO-linkages and apply space-time models. The resulting evidence provides indication for the existence of substantial spillovers in business sentiment formation. Accordingly, and highlighted by the estimated impacts of changes in indirect labor costs, policy reforms aiming at increasing the resilience of the European single market need to take these spillovers into account in order to increase its effectiveness.
    Keywords: Business sentiment, propagation, economic fluctuations, input-output linkages, networks, space-time model, policy reforms
    Date: 2018

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