nep-mac New Economics Papers
on Macroeconomics
Issue of 2018‒03‒12
105 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Inflation Targeting as a Shock Absorber By Marcel Fratzscher; Christoph Grosse Steffen; Malte Rieth
  2. The Effect of News Shocks and Monetary Policy By Luca Gambetti; Dimitris Korobilis; John D. Tsoukalas; Francesco Zanetti
  3. What Drives Aggregate Investment? Evidence from German Survey Data By Bachmann, Rüdiger; Zorn, Peter
  4. Bubbly Recessions By Biswas, Siddhartha; Hanson, Andrew; Phan, Toan
  5. A model of the federal funds market: yesterday, today, and tomorrow By Afonso, Gara M.; Armenter, Roc; Lester, Benjamin
  6. Inequality and growth: Marxian and post-Keynesian/Kaleckian perspectives on distribution and growth regimes before and after the Great Recession By Hein, Eckhard
  7. Unclogging the Credit Channel: on the Macroeconomics of Banking frictions By Jakucionyte, Egle; van Wijnbergen, Sweder
  8. Liquidity Risk, Credit Risk and the Money Multiplier By Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan
  9. Protectionism and the Business Cycle By Barattieri, Alessandro; Cacciatore, Matteo; Ghironi, Fabio
  10. Monetary policy and the asset risk-taking channel By Angela Abbate; Dominik Thaler
  11. The Optimal Inflation Target and the Natural Rate of Interest By Andrade, Philippe; Galí, Jordi; Lebihan, Hervé; Matheron, Julien
  12. Uncertainty-dependent Effects of Monetary Policy Shocks: A New Keynesian Interpretation By Efrem Castelnuovo; Giovanni Pellegrino
  13. On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint By Debortoli, Davide; Galí, Jordi; Gambetti, Luca
  14. Are Apprenticeships Business Cycle Proof? By Samuel Luethi; Stefan C. Wolter
  15. The Signaling Effect of Raising Inflation By Mengus, Eric; Barthelemy, Jean
  16. Business cycle narratives By Vegard H. Larsen; Leif Anders Thorsrud
  17. Macroeconomic Impact of Basel III: Evidence from a Meta-Analysis By Fidrmuc, Jarko; Lind, Ronja
  18. Regional Consumption Responses and the Aggregate Fiscal Multiplier By Dupor, William D.; Karabarbounis, Marios; Kudlyak, Marianna; Mehkari, M. Saif
  19. High-Frequency Impact of Monetary Policy and Macroeconomic Surprises on US MSAs and Aggregate US Housing Returns and Volatility: A GJR-GARCH Approach By Wendy Nyakabawo; Rangan Gupta; Hardik A. Marfatia
  20. Regional Consumption Responses and the Aggregate Fiscal Multiplier By Dupor, Bill; Karabarbounis, Marios; Kudlyak, Marianna; Mehkari, M. Saif
  21. Credit Booms, Debt Overhang and Secular Stagnation By Gerhard Illing; Yoshiyasu Ono; Matthias Schlegl
  22. Expectation-driven asset price fluctuations under the spirit of capitalism hypothesis: The role of heterogeneity By Lise Clain-Chamosset-Yvrard
  23. Fiscal transfers in a monetary union with sovereign risk By Guilherme Bandeira
  24. Disagreement in consumer inflation expectations By Tomasz Łyziak; Xuguang Sheng
  25. Unconventional fiscal policy By D'Acunto, Francesco; Hoang, Daniel; Weber, Michael
  26. Estimates of Fiscal Multipliers using MEDSEA By Noel Rapa
  27. Employment in Spanish regions: Cost control or growth-enhancing policies? By Roberto Bande; Marika Karanassou
  28. Monetary policy shocks, expectations and information rigidities By Joscha Beckmann; Robert Czudaj
  29. Global Spillover Effects of US Uncertainty By Saroj Bhattarai; Arpita Chatterjee; Woong Yong Park
  30. Financial vs. Policy Uncertainty in Emerging Market Economies By Sangyup Choi; Myungkyu Shim
  31. How do savings of different agents respond to interest rate change? By Michał Gradzewicz
  32. US financial shocks and the distribution of income and consumption in the UK By Haroon Mumtaz; Konstantinos Theodoridis
  33. Pricing Assets in a Perpetual Youth Model By Roger Farmer; Pawel Zabczyk
  34. Firm Expectations and Investment: Evidence from the China-Japan Island Dispute By Cheng Chen; Tatsuro Senga
  35. Debt Sustainability and Welfare along an Optimal Laffer Curve By Xiaoshan Chen; Campbell Leith; Matta Ricci
  36. Central Bank Independence Revisited By Peter Kriesler; G. C. Harcourt; Joseph Halevi
  37. Correlation between Maltese and euro area sovereign bond yields By Reuben Ellul
  38. Forecasting Inflation Uncertainty in the G7 Countries By Mawuli Segnon; Stelios Bekiros; Bernd Wilfling
  39. Ambiguity and the historical equity premium By Fabrice Collard; Sujoy Mukerji
  40. FISS - News- Based Indices on Country Fundamentals: Do They Help Explain Sovereign Credit Spread Fluctuations? By András Fülöp; Zalán Kocsis
  41. Housing Market Dynamics with Search Frictions By Victor Ortego-Marti; Miroslav Gabrovski
  42. Uncertainty Across Volatility Regimes By Giovanni Angelini; Emanuele Bacchiocchi; Giovanni Caggiano; Luca Fanelli
  43. Should the ECB coordinate EMU fiscal policies? By Tatiana Kirsanova; Celsa Machado; Ana Paula Ribeiro
  44. Uncertainty and Economic Activity: A Multi-Country Perspective By Ambrogio Cesa-Bianchi; M. Hashem Pesaran; Alessandro Rebucci
  45. Non-linear effects of government spending shocks in the US. Evidence from state-level data. By Haroon Mumtaz; Laura Sunder-Plassmann
  46. Cameroon; First Review Under the Extended Credit Facility Arrangement Requests for Waiver of Nonobservance of a Performance Criterion and Modification of Performance Criteria-Press Release; Staff Report; Supplementary Information; and Statement by the Executive Director for Cameroon By International Monetary Fund
  47. Sudan; 2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Sudan By International Monetary Fund
  48. Government expenditure ceiling and public debt dynamics in a demand-led macromodel By Rafael S. M. Ribeiro; Gilberto Tadeu Lima
  49. Social Subsidies and Marketization: the role of gender and skill By Robert Duval-Hernandez; Lei Fang; L. Rachel Ngai
  50. How do mortgage refinances affect debt, default, and spending? Evidence from HARP By Abel, Joshua; Fuster, Andreas
  51. Cournot fire sales By Eisenbach, Thomas M.; Phelan, Gregory
  52. Does uncertainty affect real activity? Evidence from state-level By Haroon Mumtaz;
  53. Uncertainty and Economic Activity: A Multi-Country Perspective By Cesa-Bianchi, Ambrogio; Pesaran, M Hashem; Rebucci, Alessandro
  54. Mortality and the business cycle: Evidence from individual and aggregated data By van den Berg, Gerard J.; Gerdtham, Ulf G.; von Hinke, Stephanie; Lindeboom, Maarten; Sundquist, Jan; Lissdaniels, Johannes; Sundquist, Kristina
  55. A Revisit to the Annuity Role of Estate Tax By Monisankar Bishnu; Nick L Guo; Cagri Kumru
  56. An Evaluation of Singular Spectrum Analysis-Based Seasonal Adjustment By Leon, Costas
  57. Firms' Expectations of New Orders, Employment, Costs and Prices: Evidence from Micro Data By Boneva, Lena; Cloyne, James; Weale, Martin; Wieladek, Tomasz
  58. Unmoored expectations and the price puzzle By Anna Florio
  59. Wirtschaftliche Perspektiven für Kroatien By Mario Holzner; Hermine Vidovic
  60. The economic expansion in the US since 2009 and Donald Trump's ambitions to "drain the swamp" By Evans, Trevor
  61. Arab Republic of Egypt; 2017 Article IV Consultation, Second Review Under the Extended Arrangement Under the Extended Fund Facility, and Request for Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for the Arab Republic of Egypt By International Monetary Fund
  62. How Do Firms Adjust to Rises in the Minimum Wage? Survey Evidence fromCentral and Eastern Europe By Katalin Bodnar; Ludmila Fadejeva; Stefania Iordache; Liina Malk; Desislava Paskaleva; Jurga Pesliakaite; Natasa Todorovic Jemec; Peter Toth; Robert Wyszynski
  63. A Democratic Measure of Household Income Growth: Theory and Application to the United Kingdom By Andrew Aitken; Martin Weale
  64. Consumer confidence’s boom and bust in Latin America By Maximo Camacho; Fernando Soto
  65. Can subsidising job-related training reduce inequality? By Konstantinos Angelopoulos; Andrea Benecchi; James Malley
  66. Wealth inequality and externalities from ex ante skill heterogeneity By Konstantinos Angelopoulos; Spyridon Lazarakis; James Malley
  67. The effect of fiscal announcements on interest spreads: Evidence from the Netherlands By Jasper de Jong
  68. La postura fiscal en Colombia a partir de los ajustes a las tarifas impositivas By Clark Granger; Yurany Hernández; Jorge Ramos; Jorge Toro; Héctor Zárate
  69. Decentralization and intra-country transfers in the great recession: the case of EU. By Timothy J. Goodspeed
  70. Optimal Taxes on Capital in the OLG Model with Uninsurable Idiosyncratic Income Risk By Krueger, Dirk; Ludwig, Alexander
  71. Should the Rich be Taxed More? The Fiscal Inequality Coefficient By John Hatgioannides; Marika Karanassou
  72. Listening to the buzz: social media sentiment and retail depositors' trust By Matteo Accornero; Mirko Moscatelli
  73. Exchange Rate Pass-Through in Brazil: a Markov switching estimation for the inflation targeting period (2000-2015) By Fabrizio Almeida Marodin; Marcelo Savino Portugal
  74. Tonga; 2017 Article IV Consultation-Press Release; and the Staff Report for Tonga By International Monetary Fund
  75. La competencia y la eficiencia en la banca colombiana By Astrid Martínez Ortiz; Luis Alberto Zuleta; Martha Misas; Lino Jaramillo
  76. Structural Interpretation of Vector Autoregressions with Incomplete Identification: Revisiting the Role of Oil Supply and Demand Shocks By Christiane Baumeister; James D. Hamilton
  77. Differences in Wealth, Education, and History By Curtis Jr, James E
  78. Do Mincerian wage equations inform how schooling influences productivity? By Christian Groth; Jakub Growiec
  79. Fiscal stability during the great recesion: Putting decentralization design to the test. By Santiago Lago-Peñas; Jorge Martínez-Vázquez; Agnese Sacchi
  80. People's Republic of China-Hong Kong Special Administrative Region; 2017 Article IV Consultation-Press Release; Staff Report; Statement by the Executive Director for People’s Republic of China––Hong Kong Special Administrative Region By International Monetary Fund
  81. Distributional Consequences of Capital Accumulation, Globalisation and Financialisation in the US By Marika Karanassou; Hector Sala
  82. Market Depth, Leverage, and Speculative Bubbles By Zeno Enders; Hendrik Hakenes
  83. Comments on “A Skeptical View of the Impact of the Fed’s Balance Sheet”: remarks at the 2018 U.S. Monetary Policy Forum, New York City By Dudley, William
  84. A New Predictor of U.S. Real Economic Activity: The S&P 500 Option Implied Risk Aversion By Renato Faccini; Eirini Konstantinidi
  85. Islamic Republic of Afghanistan; 2017 Article IV Consultation and Second Review under the Extended Credit Facility Arrangement, and Request for Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for the Islamic Republic of Afghanistan By International Monetary Fund
  86. Republic of Croatia; 2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Croatia By International Monetary Fund
  87. Rwanda; Eighth Review Under the Policy Support Instrument and Request for Extension, and Third Review Under the Standby Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Rwanda By International Monetary Fund
  88. Finland; 2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Finland By International Monetary Fund
  89. Sri Lanka; Third Review under the Extended Arrangement under the Extended Fund Facility and Request for Modification of Performance Criterion-Press Release; Staff Report; and Statement by the Executive Director for Sri Lanka By International Monetary Fund
  90. Cultural Diversity and Employment Growth: Moderating Effect of the Recent Global Financial Crisis By Grillitsch, Markus; Tavassoli, Sam
  91. Uganda; Technical Assistance Report-Monetary and Foreign Exchange Operations, Recapitalization, and Act Revision By International Monetary Fund
  92. Inflation and Growth: A Non-Monotonic Relationship in an Innovation-Driven Economy By Zheng, Zhijie; Huang, Chien-Yu; Yang, Yibai
  93. L'evoluzione del credito alle società non finanziarie e alle famiglie: un'analisi empririca per l'Italia By Stefania Pozzuoli
  94. Kuwait; 2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Kuwait By International Monetary Fund
  95. Republic of Tanzania; Seventh Review Under the Policy Support Instrument-Press Release; Staff Report By International Monetary Fund
  96. Fiscal Policy, as the “Employer of Last Resort”: Impact of MGNREGS on Labour Force Participation Rates in India. By Chakraborty, Lekha; Singh, Yadawendra
  97. Financing Lumpy Adjustment By Christoph Görtz; Plutarchos Sakellaris; John D. Tsoukalas
  98. Private saving. New cross-country evidencebased on bayesian techniques By Ignacio Hernando; Irene Pablos; Daniel Santabárbara; Javier Vallés
  99. Macrodynamic Implications of Employee Profit Sharing as Effort Elicitation Device By Gilberto Tadeu Lima; Jaylson Jair da Silveira
  100. Mass Incarceration and the Underground Economy in America By Brian Sykes; Amanda Geller
  101. Aggregate Consequences of Credit Subsidy Policies: Firm Dynamics and Misallocation By Hwan Jo; Tatsuro Senga
  102. On the Transactions Costs of UK Quantitative Easing By Francis Breedon;
  103. The Geography of Talent: Development Implications and Long-Run Prospects By Michal burzynski; Christoph Deuster; Frédéric Docquier
  104. Misallocation, Markups, and Technology By Bayer, Christian; Meier, Matthias

  1. By: Marcel Fratzscher; Christoph Grosse Steffen; Malte Rieth
    Abstract: We study the characteristics of inflation targeting as a shock absorber, using quarterly data for a large panel of countries. To overcome an endogeneity problem between monetary regimes and the likelihood of crises, we propose to study large natural disasters. We find that inflation targeting improves macroeconomic performance following such exogenous shocks. It lowers inflation, raises output growth, and reduces inflation and growth variability compared to alternative monetary regimes. This performance is mostly due to a different response of monetary policy and fiscal policy under inflation targeting. Finally, we show that only hard but not soft targeting reaps the fruits: deeds, not words, matter for successful monetary stabilization.
    Keywords: Monetary Policy, Central Banks, Monetary Regimes, Dynamic Effects
    JEL: E42 E52 E58
    Date: 2018
  2. By: Luca Gambetti; Dimitris Korobilis; John D. Tsoukalas; Francesco Zanetti
    Abstract: A VAR model estimated on U.S. data before and after 1980 documents systematic differences in the response of short- and long-term interest rates, corporate bond spreads and durable spending to news TFP shocks. Interest rates across the maturity spectrum broadly increase in the pre-1980s and broadly decline in the post-1980s. Corporate bond spreads decline significantly, and durable spending rises significantly in the post-1980 period while the opposite short-run response is observed in the pre-1980 period. Measuring expectations of future monetary policy rates conditional on a news shock suggests that the Federal Reserve has adopted a restrictive stance before the 1980s with the goal of retaining control over inflation while adopting a neutral/accommodative stance in the post-1980 period.
    Keywords: News shocks, Business cycles, VAR models, DSGE models
    JEL: E20 E32 E43 E52
    Date: 2017–09
  3. By: Bachmann, Rüdiger; Zorn, Peter
    Abstract: The ifo Investment Survey asks firms in the German manufacturing sector about the importance of sales, technological factors, finance, return expectations, and macroeconomic policy for their investment activity in a given year. We show that these subjective investment determinants 1) capture economically what their labels suggest, and 2) have strong explanatory power for aggregate manufacturing investment growth fluctuations. In a second step, we use these determinants to identify aggregate demand and aggregate technology shocks and argue that the bulk of the variance of both aggregate manufacturing investment and output growth fluctuations (as much as approximately two thirds in both cases) is explained by aggregate demand shocks. Consistent with neoclassical views, however, technological factors are the most important investment determinant on average.
    Keywords: aggregate demand shocks; investment determinants; investment dynamics; narrative approach; sentiment shocks; survey data
    JEL: D90 D91 E20 E22 E30 E32
    Date: 2018–02
  4. By: Biswas, Siddhartha (University of North Carolina at Chapel Hill); Hanson, Andrew (University of North Carolina at Chapel Hill); Phan, Toan (Federal Reserve Bank of Richmond)
    Abstract: We develop a tractable rational bubbles model with financial frictions, downward nominal wage rigidity, and the zero lower bound. The interaction of financial frictions and nominal rigidities leads to a "bubbly pecuniary externality," where competitive speculation in risky bubbly assets can result in excessive investment booms that precede inefficient busts. The collapse of a large bubble can push the economy into a "secular stagnation" equilibrium, where the zero lower bound and the nominal wage rigidity constraint bind, leading to a persistent and inefficient recession. We evaluate a macroprudential leaning-against-the-bubble policy that balances the trade-off between the booms and busts of bubbles.
    Keywords: recessions; bubbles; secular stagnation
    JEL: E10 E21 E40 E44
    Date: 2018–02–22
  5. By: Afonso, Gara M. (Federal Reserve Bank of New York); Armenter, Roc (Federal Reserve Bank of Philadelphia); Lester, Benjamin (Federal Reserve Bank of Philadelphia)
    Abstract: The landscape of the federal funds market changed drastically in the wake of the Great Recession as large-scale asset purchase programs left depository institutions awash with reserves and new regulations made it more costly for these institutions to lend. As traditional levers for implementing monetary policy became less effective, the Federal Reserve introduced new tools to implement the target range for the federal funds rate, changing this landscape even more. In this paper, we develop a model that is capable of reproducing the main features of the federal funds market, as observed before and after 2008, in a single, unified framework. We use this model to quantitatively evaluate the evolution of interest rates and trading volume in the federal funds market as the supply of aggregate reserves shrinks. We find that these outcomes are highly sensitive to the dynamics of the distribution of reserves across banks.
    Keywords: monetary policy implementation; federal funds market; over-the-counter markets
    JEL: E42 E43 E44 E52 E58
    Date: 2018–02–01
  6. By: Hein, Eckhard
    Abstract: The re-distribution of income from labour to capital, from workers to top-managers, and from low income households to the rich has been an important feature of financedominated capitalism since the early 1980s. After the Great Financial Crisis and the Great Recession in 2007-9, the recovery has been sluggish so far, and this has given rise to a renewed discussion about stagnation tendencies in capitalist economies. In orthodox approaches income distribution only has a restricted role to play, if at all, but the interaction between distribution and growth is at the centre of Marxian and post-Keynesian/Kaleckian approaches when it comes to explaining medium- to long-run trends of economic growth - and stagnation. In this contribution we will thus provide Marxian and Kaleckian assessments of the distribution and growth regimes under finance-dominated capitalism, both before and after the recent crisis. Finally, we also sketch an interpretation of stagnation tendencies in a demand-led endogenous growth model with Kaleckian, Kaldorian and Marxian features.
    Keywords: distribution,growth,financialisation,stagnation,macroeconomic demand and growth regimes,productivity growth,Kaleckian models,Marxian models
    JEL: E11 E21 E22 E25 E60 F43 O40
    Date: 2018
  7. By: Jakucionyte, Egle; van Wijnbergen, Sweder
    Abstract: We explore the consequences of different financial frictions on the corporate and banking level for macroeconomic policy responsiveness to major policy measures. We show that both corporate and bank debt overhang reduce the effectiveness of fiscal policy: multipliers turn negative with debt overhang in either sector. The negative impact of banking frictions on macro outcomes increases when a larger part of working capital is financed through credit in addition to investment. Debt overhang in banks leads to positive NPV loans being rejected; but after banks increase their equity ratio and subsequently engage less in risk shifting behavior, a decline in lending emerges. Thus the macroeconomic response to higher capital requirements depends on which friction is dominant: when there is debt overhang in banks higher capital leads to more, not less loans and is expansionary; while higher capital requirements lower loan volumes and have a recessionary impact when risk shifting is the problem in banks.We trace the differential importance of corporate versus banking debt overhang back to the different approaches followed on each side of the Atlantic in response to the undercapitalization of the banks after the onset of the financial crisis. We similarly trace macrodevelopment differences in the Southern periphery of Europe and the Northern European countries to differences in the problems and policies in their financial sector.
    Keywords: Banking frictions; Capital requirements; Fiscal policy; volatility Shocks
    JEL: E44 E58 E62 G18 G21
    Date: 2018–02
  8. By: Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan
    Abstract: Before the financial crisis there was a significant, negative relationship between the money multiplier and the risk free rate; post-crisis it was significant and positive. We develop a model where banksíreserves mitigate not only liquidity risk, but also default/credit risk. When default risk dominates, the model predicts a positive relationship between the risk free rate and the money multiplier. When liquidity risk dominates, that relationship is negative. We suggest reduced liquidity risk, from QE and remunerated reserves, helps explain the multiplier data. The model's implications linking the stock market and the money multiplier are also deduced and verified.
    Keywords: quidity risk; credit risk; excess reserves; US money multiplier, remuneration of reserves
    JEL: E40 E44 E50 E51
    Date: 2017–07
  9. By: Barattieri, Alessandro; Cacciatore, Matteo; Ghironi, Fabio
    Abstract: We study the consequences of protectionism for macroeconomic fluctuations. First, using high-frequency trade policy data, we present fresh evidence on the dynamic effects of temporary trade barriers. Estimates from country-level and panel VARs show that protectionism acts as a supply shock, causing output to fall and inflation to rise in the short run. Moreover, protectionism has at best a small positive effect on the trade balance. Second, we build a small open economy model with firm heterogeneity, endogenous selection into trade, and nominal rigidity to study the channels through which protectionism affects aggregate fluctuations. The model successfully reproduces the VAR evidence and highlights the importance of aggregate investment dynamics and micro-level reallocations for the contractionary effects of tariffs. We then use the model to study scenarios where temporary trade barriers have been advocated as potentially beneficial, including recessions with binding constraints on monetary policy easing or in the presence of a fixed exchange rate. Our main conclusion is that, in all the scenarios we consider, protectionism is not an effective tool for macroeconomic stimulus and/or to promote rebalancing of external accounts.
    Keywords: inflation; liquidity trap; macroeconomic dynamics; protectionism; tariffs
    JEL: E31 E52 F13 F41
    Date: 2018–02
  10. By: Angela Abbate (Swiss National Bank); Dominik Thaler (Banco de España)
    Abstract: How important is the risk-taking channel for monetary policy? To answer this question, we develop and estimate a quantitative monetary DSGE model where banks choose excessively risky investments, due to an agency problem which distorts banks’ incentives. As the real interest rate declines, these distortions become more important and excessive risk taking increases, lowering the efficiency of investment. We show that this novel transmission channel generates a new and quantitatively significant monetary policy trade-off between inflation and real interest rate stabilization: it is optimal for the central bank to tolerate greater inflation volatility in exchange for lower risk taking.
    Keywords: bank risk, monetary policy, DSGE models
    JEL: E12 E44 E58
    Date: 2018–02
  11. By: Andrade, Philippe; Galí, Jordi; Lebihan, Hervé; Matheron, Julien
    Abstract: We study how changes in the value of the steady-state real interest rate affect the optimal inflation target, both in the U.S. and the euro area, using an estimated New Keynesian DSGE model that incorporates the zero (or effective) lower bound on the nominal interest rate. We find that this relation is downward sloping, but its slope is not necessarily one-for-one: increases in the optimal inflation rate are generally lower than declines in the steady-state real interest rate. Our approach allows us not only to assess the uncertainty surrounding the optimal inflation target, but also to determine the latter while taking into account the parameter uncertainty facing the policy maker, including uncertainty with regard to the determinants of the steady-state real interest rate. We find that in the currently empirically relevant region for the US as well as the euro area, the slope of the curve is close to -0.9. That finding is robust to allowing for parameter uncertainty.
    Keywords: effective lower bound; inflation target
    JEL: E31 E52 E58
    Date: 2018–02
  12. By: Efrem Castelnuovo; Giovanni Pellegrino
    Abstract: We estimate a nonlinear VAR model to study the real effects of monetary policy shocks in regimes characterized by high vs. low macroeconomic uncertainty. We find unexpected monetary policy moves to exert a substantially milder impact in presence of high uncertainty. We then exploit the set of impulse responses coming from the nonlinear VAR framework to estimate a medium-scale new-Keynesian DSGE model with a minimum-distance approach. The DSGE model is shown to be able to replicate the VAR evidence in both regimes thanks to different estimates of some crucial structural parameters. In particular, we identify a steeper new-Keynesian Phillips curve as the key factor behind the DSGE model’s ability to replicate the milder macroeconomic responses to a monetary policy shock estimated with our VAR in presence of high uncertainty. A version of the model featuring firm-specific capital is shown to be associated to estimates of the price frequency which are in line with some recent evidence based on micro data.
    Keywords: monetary policy shocks, uncertainty, Threshold VAR, medium scale DSGE framework, minimum-distance estimation
    JEL: C22 E32 E52
    Date: 2017
  13. By: Debortoli, Davide; Galí, Jordi; Gambetti, Luca
    Abstract: We estimate a time-varying structural VAR that describes the dynamic responses of a number of U.S. macro variables to different identified shocks. We find no significant changes in the estimated responses over the period when the federal funds rate attained the zero lower bound (ZLB). This result is consistent with the hypothesis of "perfect substitutability" between conventional and unconventional monetary policies. Montecarlo simulations based on artificial time series generated from a standard New Keynesian model point to the validity of our empirical approach to detect the changes in equilibrium dynamics associated with ZLB episodes.
    Keywords: liquidity trap; regime changes; time-varying structural vector-autoregressive models; unconventional monetary policies
    JEL: E44 E52
    Date: 2018–02
  14. By: Samuel Luethi (University of Bern); Stefan C. Wolter (University of Bern, Swiss Coordination Centre for Research in Education, CESifo & IZA)
    Abstract: Although there is evidence that apprenticeship training can ease the transition of youth into the labour market and thereby reduce youth unemployment, many policy makers fear that firms will cut their apprenticeship expenditures during economic crises, thus exacerbating the problem of youth unemployment. Using recent panel data of Swiss cantons and dynamic regression models, we examine the relationship between new apprenticeships and the business cycle. The empirical results suggest that economic shocks induce a rather small, pro-cyclical immediate response in the apprenticeship market. However, within a year after the shock, firms compensate for their immediate reaction, with the result that no permanent effect is observable.
    Keywords: Apprenticeship Training, VET, Education, Business Cycle, Error Correction Model
    JEL: E24 E32 I21 J18 J44
    Date: 2018–02
  15. By: Mengus, Eric; Barthelemy, Jean
    Abstract: This paper argues that central bankers should temporarily raise inflation when anticipating liquidity traps to signal their credibility to forward guidance policies. As stable inflation in normal times either stems from central banker's credibility, e.g. through reputation, or from his aversion to inflation, the private sector is unable to infer the central banker's type from observing stable inflation, jeopardizing the efficiency of forward guidance policy. We show that this signaling motive can justify temporary deviations of inflation from target well above 2% but also that the low inflation volatility during the Great Moderation was insufficient to ensure fully efficient forward guidance when needed.
    Keywords: Forward Guidance; Inflation; Signaling
    JEL: E31 E52 E65
    Date: 2016–07–01
  16. By: Vegard H. Larsen (BI Norwegian Business School and Norges Bank (Central Bank of Norway)); Leif Anders Thorsrud (BI Norwegian Business School and Norges Bank (Central Bank of Norway))
    Abstract: This article quantifies the epidemiology of media narratives relevant to business cycles in the US, Japan, and Europe (euro area). We do so by first constructing daily business cycle indexes computed on the basis of the news topics the media writes about. At a broad level, the most in uential news narratives are shown to be associated with general macroeconomic developments, finance, and (geo-)politics. However, a large set of narratives contributes to our index estimates across time, especially in times of expansion. In times of trouble, narratives associated with economic uctuations become more sparse. Likewise, we show that narratives do go viral, but mostly so when growth is low. While narratives interact in complicated ways, we document that some are clearly associated with economic fundamentals. Other narratives, on the other hand, show no such relationship, and are likely better explained by classical work capturing the market's animal spirits.
    Keywords: Business cycles, Narratives, Dynamic Factor Model (DFM), Latent Dirichlet Allocation (LDA)
    JEL: E32 N10
    Date: 2018–02–23
  17. By: Fidrmuc, Jarko; Lind, Ronja
    Abstract: We present a meta-analysis of the impact of higher capital requirements imposed by regulatory reforms on the macroeconomic activity (Basel III). The empirical evidence derived from a unique dataset of 48 primary studies indicates that there is a negative, albeit moderate GDP level effect in response to a change in the capital ratio. Meta-regression results suggest that the estimates reported in the literature tend to be systematically influenced by a selected set of study characteristics, such as econometric specifications, the authors’ affiliations, and the underlying financial system. Finally, we document a significant positive publication bias.
    Keywords: Meta-analysis,publication bias,banking,loans,capital requirements,Basel III
    JEL: E51 E44 G28
    Date: 2017
  18. By: Dupor, William D. (Federal Reserve Bank of St. Louis); Karabarbounis, Marios (Federal Reserve Bank of Richmond); Kudlyak, Marianna (Federal Reserve Bank of San Francisco); Mehkari, M. Saif (University of Richmond)
    Abstract: We use regional variation in the American Recovery and Reinvestment Act (2009-2012) to analyze the effect of government spending on consumer spending. Our consumption data come from household-level retail purchases in Nielsen and auto purchases from Equifax credit balances. We estimate that a $1 increase in county-level government spending increases consumer spending by $0.18. We translate the regional consumption responses to an aggregate fiscal multiplier using a multi-region, New Keynesian model with heterogeneous agents and incomplete markets. Our model successfully generates the estimated positive local multiplier, a result that distinguishes our incomplete markets model from models with complete markets. The aggregate consumption multiplier is 0.4, which implies an output multiplier higher than one. The aggregate consumption multiplier is almost twice the local estimate because trade linkages propagate government spending across regions.
    Keywords: Consumer Spending; Fiscal Multiplier; Regional Variation; Heterogeneous Agents.
    JEL: E21 E62 H31 H71
    Date: 2018–02–20
  19. By: Wendy Nyakabawo (Department of Economics, University of Pretoria, Pretoria, South Africa); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Hardik A. Marfatia (Department of Economics, Northeastern Illinois University, Chicago, USA)
    Abstract: This paper explores the impact of monetary policy and macroeconomic surprises on the U.S housing market returns and volatility at the Metropolitan Statistical Area (MSA) and aggregate level using a Glosten–Jagannathan-Runkle generalized autoregressive conditional heteroscedasticity (GJR-GARCH) model. Using daily data and sampling periods which cover both the conventional and unconventional monetary policy periods, empirical results show that monetary policy surprises have a greater impact on the volatility of housing market returns across time with particularly pronounced effect during the conventional monetary policy period. We also show that macroeconomic surprises do not have a significant impact on housing returns for most MSAs for the full sample, conventional and unconventional monetary policy periods
    Keywords: Monetary policy and macroeconomic surprises, Asymmetric GARCH, Housing market returns and volatility
    JEL: C32 E32 E44 E52 R31
    Date: 2018–03
  20. By: Dupor, Bill (Federal Reserve Bank of St. Louis); Karabarbounis, Marios (Federal Reserve Bank of Richmond); Kudlyak, Marianna (Federal Reserve Bank of San Francisco); Mehkari, M. Saif (University of Richmond)
    Abstract: We use regional variation in the American Recovery and Reinvestment Act (2009-2012) to analyze the effect of government spending on consumer spending. Our consumption data come from household-level retail purchases in Nielsen and auto purchases from Equifax credit balances. We estimate that a $1 increase in county-level government spending increases consumer spending by $0.18. We translate the regional consumption responses to an aggregate fiscal multiplier using a multi-region, New Keynesian model with heterogeneous agents and incomplete markets. Our model successfully generates the estimated positive local multiplier, a result that distinguishes our incomplete markets model from models with complete markets. The aggregate consumption multiplier is 0.4, which implies an output multiplier higher than one. The aggregate consumption multiplier is almost twice the local estimate because trade linkages propagate government spending across regions.
    JEL: E21 E62 H31 H71
    Date: 2018–02–20
  21. By: Gerhard Illing; Yoshiyasu Ono; Matthias Schlegl
    Abstract: Why do advanced economies fall into prolonged periods of economic stagnation, particularly in the aftermath of credit booms? We present a model of persistent aggregate demand shortage based on strong liquidity preferences of households, in which we incorporate financial imperfections to study the interactions between debt, liquidity and asset prices. We show that financially more deregulated economies are more likely to experience persistent stagnation. In the short run, credit booms can mask this structural aggregate demand deficiency. However, the resulting debt overhang permanently depresses spending in the long run since deleveraging becomes self-defeating because of debt deflation. These findings are in line with the macroeconomic developments in Japan during its lost decades and other advanced economies before and during the Great Recession.
    Keywords: secular stagnation, aggregate demand deficiency, liquidity preferences, financial frictions. leverage
    JEL: E41
    Date: 2017
  22. By: Lise Clain-Chamosset-Yvrard (Univ Lyon, Université Lumière Lyon 2, GATE L-SE UMR 5824, F-69130 Ecully, France)
    Abstract: In this paper, I study how heterogeneity amongst agents affects the occurrence of expectation-driven asset price fluctuations in a pure exchange economy à la Lucas, with infinitely-lived households, under the hypothesis of spirit of capitalism. I consider heterogeneous households in terms of preferences, endowments and initial wealth, and capture the spirit of capitalism through preferences for wealth. Preferences for wealth are the key element of this paper in a twofold aspect. First, they explain the occurrence of asset price fluctuations driven by self-fulfilling changes in expectations. Second, heterogeneity in endowments affects asset price level and dynamics only if preferences are heterogeneous. For instance, if agents with the strongest spirit of capitalism are also the rich in terms of endowments, heterogeneity in endowments heightens the asset price level in the long run, and destabilizes by enlarging the range of parameter values for which expectation-driven asset price fluctuations occur.
    Keywords: Asset pricing model, Spirit of Capitalism, Heterogeneity, Expectation-driven fluctuations
    JEL: C62 E21 E32
    Date: 2018
  23. By: Guilherme Bandeira (Banco de España)
    Abstract: This paper investigates the welfare and economic stabilization properties of a fiscal transfers scheme between members of a monetary union subject to sovereign spread shocks. The scheme, which consists of cross-country transfer rules triggered when sovereign spreads widen, is incorporated in a two-country model with financial frictions. In particular, banks hold government bonds in their portfolios, being exposed to sovereign risk. When this increases, a drop bank’s equity value forces them to contract credit and to raise lending rates at the same time as they retain funds to build up their net worth. I show that, when domestic fiscal policy is not distortionary, fiscal transfers improve welfare and macroeconomic stability. This is because fiscal transfers can reduce banks’ exposure to government debt, freeing credit supply to the private sector. On the contrary, when domestic fiscal policy is distortionary, fiscal transfers cause welfare losses, despite stabilizing the economy. This result arises because the distortions caused by funding the scheme outweigh the positive effects of fiscal transfers in smoothing the adjustment of the economy hit by the shock.
    Keywords: sovereign risk, banks, monetary union, fiscal transfers
    JEL: E62 F41 F42
    Date: 2018–02
  24. By: Tomasz Łyziak (Narodowy Bank Polski); Xuguang Sheng (American University)
    Abstract: We posit that consumers form expectations about inflation by combining two sources of information: their beliefs from shopping experience and news about inflation they learn from experts. Disagreement among consumers in our model comes from four sources: (i) consumers’ divergent prior beliefs, (ii) heterogeneity in their propensities to learn from experts, (iii) experts’ different views about future inflation, and (iv) difference in mean expectations between consumers and experts. By carefully matching the datasets from the Michigan Survey of Consumers with the Survey of Professional Forecasters, we find that inflation expectations between households and experts differ substantially and persistently from each other, and households pay close attention to salient price changes, while experts respond more to monetary policy and macro indicators. Our empirical estimates imply economically significant degrees of information rigidity and these estimates vary substantially across households. This significant heterogeneity poses a great challenge for the canonical sticky-information model that assumes a single rate of information acquisition and for noisy-information model in which all agents place the same weight on new information received.
    Keywords: Consumers, Disagreement, Inflation Expectation, Noisy Information, Sticky Information
    JEL: E32 E52
    Date: 2018
  25. By: D'Acunto, Francesco; Hoang, Daniel; Weber, Michael
    Abstract: Macroeconomists often prefer monetary policy to fiscal policy as a tool to stabilize business cycles. Fiscal policy is typically only effective with a lag, and results in permanent deficits with higher nominal interest rates and distortionary taxes. In addition, a high marginal propensity to save out of temporary tax cuts might result in low fiscal multipliers with empirical estimates often below 1 (see Ramey (2011b) and Barro and Redlick (2011)). The zero lower bound on nominal interest rates, however, constrains the effectiveness of monetary policy during liquidity traps. Large stocks of sovereign debt limit the scope of fiscal stimulus, and inflated central bank balance sheets constrain asset-purchase programs as forms of unconventional monetary policy. The unclear effectiveness of several measures of monetary policy - both conventional and unconventional - after the 2008-2009 Financial Crisis calls for alternative mechanisms to increase aggregate demand and hence promote growth. This issue is especially relevant for several major developed economies that, years after the end of the Great Recession in the United States, are still experiencing sluggish growth. In particular, southern European countries are still facing the contractionary effects of the austerity measures they implemented to abate their debt-to-GDP ratios during the Euro sovereign-debt crisis. Many economists argue structural reforms are necessary to improve the competitiveness of these countries in the long run, but promoting a short-run increase in aggregate demand to jump start the economy is also a compelling objective for policy makers. The conundrum the Euro area has faced since the start of the Great Recession is to generate inflation and ultimately stimulate consumption and economic growth in a setting in which traditional monetary policy measures were not viable and governments could not generate growth with fiscal stimulus because of their large debt-to-GDP ratios. This challenge was so compelling that in his Marjolin lecture on February 4, 2016, the president of the European Central Bank, Mario Draghi, asserted that "there are forces in the global economy that are conspiring to hold inflation down." (Draghi, 2016).
    Date: 2018
  26. By: Noel Rapa (Central Bank of Malta)
    Abstract: This paper documents the fiscal extension to MEDSEA, the Central Bank of Malta DSGE model. The model contains a relatively rich fiscal sector. Decisions made by the agents in the model are affected by distortionary taxes on labour income, capital income and consumption. On the expenditure side, the model distinguishes between public sector expenditure on final goods and services, public investment, public employment as well as transfers to households. The model is used to assess the size of fiscal multipliers in a very open and small open economy such as Malta. Both transitory and permanent shocks are considered. It also allows for changes in the instrument used to finance the change in fiscal policy.
    JEL: E62 H63
    Date: 2017
  27. By: Roberto Bande (Universidade de Santiago de Compostela); Marika Karanassou (Queen Mary University of London)
    Abstract: Spain provides an extreme case of unemployment rate oscillations (8.3% in 2007, 26.1% in 2013, 19.6% in 2016) in parallel with cute regional persistance in labour market outcomes - the sets of relatively high and low unemployment regions have not changed in decades. Since generic labour market reforms have been fruitless in this respect, we explore whether such groups of regions react differently to key drivers of employment and wage setting. We find that the low income (high unemployment) regions are more reactive to capital accumulation, and thus to a growth strategy based on estimulating investment. In turn, the high income (low employment) ones are more sensitive to the wage-productivity gap, and thus to the strategy that keeps unit labour costs (ULC) low. Such patterns call for more region-specific policies and discard standard labour market reforms as a unique toolto manage the unemployment rate problem. Further, to the extent that investment serves both at fostering capital accumulation and labour productivity (which, in turn, reduces the ULC), regionally-targeted soft credit lines and capital taxes could be helpful in breaking regional sluggishness.
    Keywords: Employment, Wage setting, Labour income share, Capital stock
    JEL: R11 E24 E22 J23 J31
    Date: 2017–09–15
  28. By: Joscha Beckmann (University of Duisburg-Essen, Department of Economics); Robert Czudaj
    Abstract: This paper contributes to the literature by assessing expectation effects from monetary policy for the G7 economies. We consider a sample period running from 1995M1 to 2016M6 based on a panel VAR framework, which accounts for international spillovers and time-variation. Relying on a broad set of expectation data from Consensus Economics, we start by analyzing whether monetary policy has changed the degree of information rigidity after the emergence of the subprime crisis. We proceed by estimating potential effects of interest rate changes on expectations, disagreements and forecast errors. We find strong evidence for information rigidities and identify higher forecast errors by professionals after monetary policy shocks. Our results suggest that the international transmission of monetary policy shocks introduces noisy information and partly increases disagreement among forecasters.
    Keywords: Bayesian econometrics, expectations, information rigidity, monetary policy, panel VAR
    JEL: E31 E52
    Date: 2018–02
  29. By: Saroj Bhattarai (University of Texas at Austin); Arpita Chatterjee (UNSW Business School, UNSW); Woong Yong Park (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.
    Keywords: US Uncertainty, Emerging Market Economies, Small Open Economy Model, Capital Flows, Country Spread
    JEL: C33 E44 E52 E58 F32 F41
    Date: 2017–11
  30. By: Sangyup Choi (Yonsei University); Myungkyu Shim (Sogang University)
    Abstract: While the negative effect of uncertainty shocks on the economy is well-known, little is known about the extent to which these e ects di er across the measures of uncertainty, especially in emerging market economies. Using the newly available economic policy uncertainty index from six emerging market economies (Brazil, Chile, China, India, Korea, and Russia), we compare the impact of financial uncertainty shocks|measured by stock market volatility|and that of policy uncertainty shocks on the economy. We find that nancial uncertainty shocks have much larger and more significant impact on output than policy uncertainty shocks, except for China where the government has direct controls over financial markets. While our finding differs from the previous finding that policy uncertainty has no smaller effects on economic activity than nancial uncertainty in advanced economies, it is consistent with the recent emphasis on nancial frictions as a propagation mechanism of uncertainty shocks.
    Keywords: Financial uncertainty, Policy uncertainty, Emerging market economies, Financial frictions, Vector Autoregressions, Local projections
    JEL: E20 E32
    Date: 2018–03
  31. By: Michał Gradzewicz (Narodowy Bank Polski and Warsaw School of Economics)
    Abstract: The theory underlying the relation between savings and interest rates concerns the household sector, but in modern economies the household sector is not the main source of savings in the economy. Using the SVAR methodology, we try to identify the responsiveness of different sectors’ savings to interest rate changes. We focus on Poland and generalize results for other European economies. We found that responsiveness of savings to interest rate is diversified. In most of analyzed countries household savings rise after an interest rate increase, but simultaneously corporate savings fall, indicating negative conditional correlation between households’ and corporates’ savings. Moreover, the direction of responses of general government and foreign savings are diverse (although the former usually declines after an interest rate increase) and does not seem to be correlated with factors like membership in currency union or the level of debt. We also try to check whether “crowding-out” effects exist and conclude it only applies in the case of government savings crowding out household savings.
    Keywords: Savings, Interest rate, Sectoral analysis, SVAR
    JEL: E21 E43 E52 C32
    Date: 2018
  32. By: Haroon Mumtaz (Queen Mary University of London); Konstantinos Theodoridis (Cardiff Business School)
    Abstract: We show that US financial shocks have an impact on the distribution of UK income and consumption. Households with higher income and higher levels of consumption are affected more by this shock than households located towards the lower end of these distributions. An estimated multiple agent DSGE model suggests that the heterogeneity in the household responses can be explained by the different levels of access to financial markets. We find that this heterogeneity magnifies the effect of this shock on aggregate output.
    Keywords: FAVAR, DSGE model, Financial Shock
    JEL: D31 E32 E44
    Date: 2018–01–29
  33. By: Roger Farmer; Pawel Zabczyk
    Abstract: We refer to the idea that government must ‘tighten its belt’ as a necessary policy response to higher indebtedness as the household fallacy. We provide a reason to be skeptical of this claim that holds even if the economy always operates at full employment and all markets clear. Our argument rests on the fact that, in an overlapping-generations (OLG) model, changes in government debt cause changes in the real interest rate that redistribute the burden of repayment across generations. We do not rely on the assumption that the equilibrium is dynamically inefficient, and our argument holds in a version of the OLG model where the real interest rate is always positive.
    Keywords: deficit, austerity, government budget
    JEL: E0 H62
    Date: 2018–03
  34. By: Cheng Chen (Department of Statistics, London School of Economics); Tatsuro Senga (Queen Mary University of London)
    Abstract: How do real-time expectations affect firms’ economic decisions? We provide evidence by using a dataset on Japanese multinational firms’ sales forecasts and exploring an unexpected escalation of a territorial dispute between China and Japan in 2012. Our estimation substantiates that, after the escalation of the dispute, affiliates of Japanese multinational firms in China experienced a sharp but temporary decline in total sales relative to affiliates in other countries and a more persistent decline in investment. Moreover, the territorial dispute has led to persistent pessimism in these firms’ expectations about future sales, which can explain 60% of the overall decline in investment.
    Keywords: forecasts, pessimistic expectations, geopolitical events, investment
    JEL: E22 E32 D84 F51
    Date: 2017–10–14
  35. By: Xiaoshan Chen; Campbell Leith; Matta Ricci
    Abstract: A recent literature on sovereign debt sustainability (see Trabandt and Uhlig (2011) and Mendoza et al. (2014)) has produced Laffer curve calculations for Eurozone countries. These calculations have been car- ried out mainly in a quasi-static fashion by considering policy experi- ments where individual tax rates are permanently set at a new value while keeping all others constant. However, such fiscal policy design disregards complementarities among tax instruments as well as the po- tential for altering tax rates during the transition to the steady-state in a manner which exploits expectations. Our paper addresses this issue by considering policy experiments where fiscal policy is set op- timally and fiscal instruments are jointly varied along the transition to steady-state. Through the Ramsey problem we map the maximum amount of tax revenues a government can further raise to the welfare costs of the associated tax distortions. We label this relation as the ‘optimal Laffer curve’. We show that tax revenue and welfare gains relative to the policy experiments examined by the previous literature are dramatic.
    Keywords: Laffer Curve, Optimal Policy, Fiscal Sustainability, Fis- cal Limit, Fiscal Consolidations
    JEL: E62 H30 H60
    Date: 2018–01
  36. By: Peter Kriesler (School of Economics, UNSW Business School, UNSW); G. C. Harcourt (School of Economics, UNSW Business School, UNSW); Joseph Halevi (University of sydney)
    Abstract: In major advanced economies, including Australia, independent central banks have become established institutions. Yet there are reasons why the sustained presence of such an institution in a democratic society should be challenged. This paper considers the arguments usually advanced for central bank independence, and the underlying arguments for a failure of democracy including the standard argument based on the importance of central bank credibility. This argument depends crucially on the role of inflationary expectations on the actual inflation rate. We question whether the standard story is really relevant – and, if not, then independence depends on the argument that politicians may not always act in the best long-term interests of their constituencies but bankers are more likely to. We show that this is a questionable assumption. The post Wold War 2 development of Europe and the emergence of the European Central Bank is examined to illustrate our underlying proposition that Central bank independence is not the result of economic argument, but of political ones leading to suboptimal economic results.
    Keywords: Central bank independence, democracy, European Central Bank, inflation, inflationary expectations
    JEL: E58 E50 G20
    Date: 2018–01
  37. By: Reuben Ellul (Central Bank of Malta)
    Abstract: This paper investigates correlation in Malta government stock (MGS) yields and assesses correlation between these yields and those of Malta’s major euro area partners. Correlation coefficients are found to be high, indicating the existence of a long-run relationship in the setting of MGS yields with short-term deviations. The analysis also includes an MGARCH-DCC(1,1) system based on spreads over the German ten-year bond, which are modelled for eleven euro area countries. Dynamic conditional correlations (DCCs) confirm that Maltese ten-year bond yields tend to be broadly insulated from event specific volatility in other countries’ yields. Simple ‘benchmark’ regressions are estimated over the period 2007 – 2016, allowing the comparison of actual ten-year bond yields with composite equation outputs. The benchmarked yields based on euro area bonds track consistently actual MGS yields, while from mid-2015 onwards, MGS yields follow closely a benchmark derived on the basis of underlying economic fundamentals.
    JEL: E43 E44 E63
    Date: 2017
  38. By: Mawuli Segnon; Stelios Bekiros; Bernd Wilfling
    Abstract: There is substantial evidence that inflation rates are characterized by long memory and nonlinearities. In this paper, we introduce a long-memory Smooth Transition AutoRegressive Fractionally Integrated Moving Average-Markov Switching Multifractal specification [STARFIMA(p; d; q)-MSM(k)] for modeling and forecasting inflation uncertainty. We first provide the statistical properties of the process and investigate the finite-sample properties of the maximum likelihood estimators through simulation. Second, we evaluate the out-of-sample forecast performance of the model in forecasting inflation uncertainty in the G7 countries. Our empirical analysis demonstrates the superiority of the new model over the alternative STARFIMA(p; d; q)-GARCH-type models in forecasting inflation uncertainty.
    Keywords: Inflation uncertainty, Smooth transition, Multifractal processes, GARCH processes
    JEL: C22 E31
    Date: 2018–03
  39. By: Fabrice Collard (Department of Economics, University of Bern); Sujoy Mukerji (Queen Mary University of London)
    Abstract: This paper assessed the quantitative impact of ambiguity on historically observed financial asset returns and growth rates. The single agent, in a dynamic exchange economy, treats the conditional uncertainty about the consumption and dividends next period as ambiguous. We calibrate the agent's ambiguity aversion to match only the first moment of the risk-free rate in data and measure the uncertainty each period conditional on the actual, observed histroy of (U.S.) macroeconomic growth outcomes. Ambiguity aversion accentuates the conditional uncertainty endogenously in a dynamic way, depending on the history; e.g., it increases during recessions. We show the model implied time series of asset returns substantially match the first and second conditional moments of observed return dynamics. In particular, we find the time-series properties of our mdoel generated equity premium, which may be regarded as an index measure of revealed uncertainty, relates closely to those of the macroeconomic uncertainty indices developed recently in Jurado, Ludvigson, and Ng (2015) and Carriero, Clark, and Marcellino (2017).
    Keywords: Ambiguity aversion, Asset pricing, Equity premium puzzle, Time-varying uncertainty, Uncertainty shocks
    JEL: G12 E21 D81 C63
    Date: 2017–09–15
  40. By: András Fülöp (ESSEC Business School); Zalán Kocsis (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: This paper revisits the discussion about the role that fundamentals play in asset prices using sovereign credit spread data. We augment the standard macroeconomic proxy set by text-based measures of country and global fundamentals from a database of Reuters news articles between 2007 and 2016. We use a novel methodology that matches fundamental topic expressions and directly links them to tonality and geography information within the text. Our approach resolves several problems of extant text mining methods. We verify that our news indices capture fundamental information within news articles and are uncorrelated with measures of liquidity and investor sentiment. These news indices explain a large part of sovereign credit spread changes not captured by traditional fundamental proxies and thus support a significantly larger role for fundamentals. This additional information derives primarily from omitted expectations and concerns about global fundamentals. We also show that a large part of the covariance between the VIX index and sovereign spreads is related to these global fundamentals.
    Keywords: Financial media, textual data, regular expressions, sovereign credit risk.
    JEL: C8 E44 F34 G1 H63
    Date: 2018
  41. By: Victor Ortego-Marti (Department of Economics, University of California Riverside); Miroslav Gabrovski (UC Riverside)
    Abstract: This paper develops a business cycle model of the housing market with search frictions and entry of both buyers and sellers. The housing market exhibits a well-established cyclical component, which features three stylized facts: prices move in the same direction as sales and the number of houses for sale, but opposite to the time it takes to sell a house. These stylized facts imply that in the data vacancies and the number of buyers are positively correlated, i.e. that the Beveridge Curve is upward sloping. A baseline search and matching model of the housing market is unable to match these stylized facts because it inherently generates a downward sloping Beveridge Curve. With free entry of both buyers and sellers, our model reproduces the positive correlation between prices, sales, and housing vacancies, and matches the stylized facts qualitatively and quantitatively.
    Keywords: Housing market; business cycles; search and matching; Beveridge Curve
    JEL: E2 E32 R21 R31
    Date: 2018–03
  42. By: Giovanni Angelini; Emanuele Bacchiocchi; Giovanni Caggiano; Luca Fanelli
    Abstract: We propose a new non-recursive identification scheme for uncertainty shocks, which exploits breaks in the unconditional volatility of macroeconomic variables. Such identification approach allows us to simultaneously address two major questions in the empirical literature on uncertainty: (i) Does the relationship between uncertainty and economic activity change across macroeconomic regimes? (ii) Is uncertainty a major cause or effect (or both) of decline in economic activity? Empirical results based on a small-scale VAR with US monthly data for the period 1960-2015 suggest that (i) the effects of uncertainty shocks are regime-dependent, and (ii) uncertainty is an exogenous source of decline of economic activity, rather than an endogenous response to it.
    Keywords: heteroscedasticity, identification, non-recursive SVAR, uncertainty shocks, volatility regime
    JEL: C32 C51 E44 G01
    Date: 2017
  43. By: Tatiana Kirsanova; Celsa Machado; Ana Paula Ribeiro
    Abstract: In a monetary union where fiscal authorities act strategical ly fiscal cooperation is unlikely to emerge as an equilibrium. Even when the cooperative outco me is the best for a national fiscal authority, it is either not a Nash equilibrium, or only one of several Nash equilibria. The monetary authority may have an important coordinating role ; however, the Pareto-preferred equilibrium will not necessarily involve cooperation.
    Keywords: Monetary and Fiscal Policy Coordination, Monetary Union
    JEL: E52 E61 E63
    Date: 2017–11
  44. By: Ambrogio Cesa-Bianchi; M. Hashem Pesaran; Alessandro Rebucci
    Abstract: Measures of economic uncertainty are countercyclical, but economic theory does not provide definite guidance on the direction of causation between uncertainty and the business cycle. This paper proposes a new multi-country approach to the analysis of the interaction between uncertainty and economic activity, without a priori restricting the direction of causality. We develop a multi-country version of the Lucas tree model with time-varying volatility and show that in addition to common technology shocks that affect output growth, higher-order moments of technology shocks are also required to explain the cross country variations of the realized volatility of equity concerns. Using this theoretical insight, two common factors, a ‘real’ and a ‘financial’ one, are identified in the empirical analysis assuming different patterns of cross-country correlations of country-specific innovations to real GDP growth and realized stock market volatility. We then quantify the absolute and the relative importance of the common factor shocks as well as country-specific volatility and GDP growth shocks. The paper highlights three main empirical findings. First, it is shown that most of the unconditional correlation between volatility and growth can be accounted for by the real common factor, which is proportional to world growth in our empirical model and linked to the risk-free rate. Second, the share of volatility forecast error variance explained by the real common factor and by country-specific growth shocks amounts to less than 5 percent. Third, shocks to the common financial factor explain about 10 percent of the growth forecast error variance, but when such shocks occur, their negative impact on growth is large and persistent. In contrast, country-specific volatility shocks account for less than 1-2 percent of the growth forecast error variance.
    JEL: E44 F44 G12 G15
    Date: 2018–02
  45. By: Haroon Mumtaz (Queen Mary University of London); Laura Sunder-Plassmann (University of Copenhagen)
    Abstract: This paper uses state-level data to estimate the effect of federal defense spending shocks on state real activity. We nd moderately strong evidence that for the average state the fiscal multiplier is larger during recessions. However, there is substantial heterogeneity across the cross-section. The degree of non-linearity in the effect of spending shocks is larger in states that are subject to a higher degree of financial frictions and lower labour market rigidity. In contrast states with a prevalence of mining and agricultural industries tend to have multipliers that are more similar across business cycle phases.
    Keywords: Fiscal policy shocks, non-linearity, structural VAR
    JEL: C32 E62 R12
    Date: 2017–11–26
  46. By: International Monetary Fund
    Abstract: Cameroon’s performance under the three-year ECF-supported program approved in June has been satisfactory, with the fiscal and external adjustments contributing to the rebuilding of buffers. Growth in 2017–18 is expected to be somewhat weaker than anticipated in the program, declining to 3.7 percent in 2017 owing to lower oil production and tepid demand, with a recovery to 4.2 percent in 2018. The medium-term outlook remains positive, boosted by the coming on stream of large energy and transport infrastructure projects.
    Keywords: Cameroon;Sub-Saharan Africa;
    Date: 2018–01–16
  47. By: International Monetary Fund
    Abstract: After 20 years, longstanding U.S. sanctions on trade and financial flows were revoked in October 2017, considering Sudan’s progress in cessation of hostilities in internal conflicts, improved cooperation on regional stability and counterterrorism, and improved humanitarian access. However, Sudan remains on the U.S. list of State Sponsors of Terrorism (SSTL), blocking progress towards badly needed debt relief. Arrears to the Fund are large (SDR 966.3 million). Economic conditions have been challenging since the secession of South Sudan in 2011, and the associated loss of the bulk of oil exports. Loose fiscal and monetary policies are fueling high inflation and could increase external imbalances over the medium term. Reserves remain very low and external financing relies on support from Gulf states.
    Keywords: Sudan;Middle East;
    Date: 2017–12–11
  48. By: Rafael S. M. Ribeiro (Federal University of Minas Gerais); Gilberto Tadeu Lima (University of São Paulo)
    Abstract: This article explores some aspects of the debate about the efficacy of a fiscal rule that sets a government expenditure ceiling for the stabilisation of the public debt-to-output ratio. We develop a demand-led macromodel that assumes a closed economy operating with excess capacity and show that a fiscal rule that sets a limit for government spending, excluding the payment of interests, may not ensure a non-explosive trajectory of the public debt-to-output ratio. Our model allows us to map out different outcomes in terms of the stabilisation of the public debt stemming from the process of fiscal consolidation and conclude that the commitment of the fiscal authority to comply with the ceiling by cutting government spending is less likely to stabilise the public debt-to-output ratio in economies enduring excessively high interest rates accompanied by more regressive taxation systems. Our model also suggests that a more progressive tax structure may increase the likelihood of public debt stabilisation in the long run.
    Keywords: Fiscal policy, expenditure ceiling, growth, public debt stability, income distribution.
    JEL: E62 O40 C01 C02
    Date: 2018–01
  49. By: Robert Duval-Hernandez (Economics Research Centre (CypERC) University of Cyprus; Centro de Investigación y Docencia Económicas (CIDE); Institute of Labor Economics (IZA)); Lei Fang (Economic Research Department Federal Reserve Bank of Atlanta); L. Rachel Ngai (Economics Department London School of Economics (LSE); Centre for Economic Policy Research (CEPR); Centre for Macroeconomics (CFM))
    Abstract: This paper decomposes the differences in aggregate market hours between US and Europe across gender-skill groups and finds that low-skilled women are the biggest contributors to aggregate differences, with the exception of Nordic countries. We develop a model to account for the gender-skill differences in market hours across countries. Taxes, which reduce market hours in favor of leisure and home production, explain a substantial fraction of the differences in hours for Southern and Central European countries. Subsidized family care, which reduces home hours of women in favor of market hours, explains the different pattern of hours in Nordic countries. Low-skilled women are more responsive to policy because of their comparative advantage in producing home services and the corresponding market substitutes.
    Keywords: Cross-country differences in market hours, Home production, Subsidies on family care
    JEL: E24 E62 J22
    Date: 2018–02
  50. By: Abel, Joshua (Harvard University); Fuster, Andreas (Federal Reserve Bank of New York)
    Abstract: We use quasi-random access to the Home Affordable Refinance Program (HARP) to identify the causal effect of refinancing a mortgage on borrower balance sheet outcomes. We find that on average, refinancing into a lower-rate mortgage reduced borrowers' default rates on mortgages and nonmortgage debts by about 40 percent and 25 percent, respectively. Refinancing also caused borrowers to expand their use of debt instruments, such as auto loans, home equity lines of credit (HELOCs), and other consumer debts that are proxies for spending. All told, refinancing led to a net increase in debt equal to about 20 percent of the savings on mortgage payments. This number combines increases (new debts) of about 60 percent of the mortgage savings and decreases (paydowns) of about 40 percent of those savings. Borrowers with low FICO scores or low levels of unused revolving credit grow their auto and HELOC debt more strongly after a refinance but also reduce their bank card balances by more. Finally, we show that take-up of the refinancing opportunity was strongest among borrowers that were in a relatively better financial position to begin with.
    Keywords: mortgages; refinancing; monetary policy transmission; heterogeneity; HARP
    JEL: D14 E21 G21
    Date: 2018–02–01
  51. By: Eisenbach, Thomas M. (Federal Reserve Bank of New York); Phelan, Gregory (Williams College)
    Abstract: In standard Walrasian macro-finance models, pecuniary externalities such as fire sales lead to overinvestment in illiquid assets or underprovision of liquidity. We investigate whether imperfect competition (Cournot) improves welfare through internalizing the externality and find that this is far from guaranteed. In a standard model of liquidity shocks, when liquidity is sufficiently scarce, Cournot competition leads to even less liquidity than the Walrasian equilibrium. In a standard model of productivity shocks, the Cournot equilibrium overcorrects for the fire-sale externality and holds less capital than socially efficient. Implications for welfare and regulation therefore depend highly on the nature of the shocks and the competitiveness of the industry considered.
    Keywords: liquidity; fire sales; overinvestment; financial regulation; macroprudential regulation
    JEL: D43 D62 E44 G18 G21
    Date: 2018–02–01
  52. By: Haroon Mumtaz (Queen Mary University of London);
    Abstract: We use variation in the effect of US-wide or global uncertainty on state-level uncertainty to identify the impact of this shock on real activity. We nd that increases in uncertainty do have an adverse impact on real income, employment and unemployment. Thus, uncertainty shocks can be a source of economic fluctuations.
    Keywords: Uncertainty shocks, Instrumental variables, US states
    JEL: C15 C32 E32
    Date: 2017–12–25
  53. By: Cesa-Bianchi, Ambrogio; Pesaran, M Hashem; Rebucci, Alessandro
    Abstract: Measures of economic uncertainty are countercyclical, but economic theory does not provide definite guidance on the direction of causation between uncertainty and the business cycle. This paper proposes a new multi-country approach to the analysis of the interaction between uncertainty and economic activity, without a priori restricting the direction of causality. We develop a multi-country version of the Lucas tree model with time-varying volatility and show that in addition to common technology shocks that affect output growth, higher-order moments of technology shocks are also required to explain the cross country variations of realized volatility. Using this theoretical insight, two common factors, a `real' and a `financial' one, are identified in the empirical analysis assuming different patterns of cross-country correlations of country-specific innovations to real GDP growth and realized stock market volatility. We then quantify the absolute and the relative importance of the common factor shocks as well as country-specific volatility and GDP growth shocks. The paper highlights three main empirical findings. First, it is shown that most of the unconditional correlation between volatility and growth can be accounted for by the real common factor, which is proportional to world growth in our empirical model and linked to the risk-free rate. Second, the share of volatility forecast error variance explained by the real common factor and by country-specific growth shocks amounts to less than 5 percent. Third, shocks to the common financial factor explain about 10 percent of the growth forecast error variance, but when such shocks occur, their negative impact on growth is large and persistent. In contrast, country-specific volatility shocks account for less than 1-2 percent of the growth forecast error variance.
    Keywords: Business cycle; Common Factors; identification; Multi-Country; Real and Financial Global Shocks; uncertainty; Volatility.
    JEL: E44 F44 G15
    Date: 2018–02
  54. By: van den Berg, Gerard J. (Department of Economics, University of Bristol; IFAU); Gerdtham, Ulf G. (Health Economics Unit, Department of Clinical Sciences, Malmö, Lund University; Department of Economics, Lund University; Centre fo Economic Demography, Lund University); von Hinke, Stephanie (Department of Economics, University of Bristol); Lindeboom, Maarten (School of Business and Economics, Lund University); Sundquist, Jan (Faculty of Medicine, Lund University); Lissdaniels, Johannes (Health Economics Unit, Dept. of Clinical Sciences, Lund University; Swedish Agency for Health and Care Services Analysis); Sundquist, Kristina (Faculty of Medicine, Lund University)
    Abstract: There has been much interest recently in the relationship between economic conditions and mortality, with some studies showing that mortality is pro-cyclical, while others find the opposite. Some suggest that the aggregation level of analysis (e.g. individual vs. regional) matters. We use both individual and aggregated data on a sample of 20-64 year-old Swedish men from 1993 to 2007. Our results show that the association between the business cycle and mortality does not depend on the level of analysis: the sign and magnitude of the parameter estimates are similar at the individual level and the aggregate (county) level; both showing pro-cyclical mortality.
    Keywords: Death; recession; Health; unemployment; income; aggregation
    JEL: E30 I10 I12
    Date: 2017–12–29
  55. By: Monisankar Bishnu; Nick L Guo; Cagri Kumru
    Abstract: This paper finds that previous conclusions that a uniform lump-sum estate tax could provide annuity income were reached by not including the bequest income that households receive. We argue that since agents leave behind bequest, they should also receive bequest income from their parents. Moreover, the differential timing and sizes of bequest income will generate unequal wealth effects even with the actuarially fair annuity markets. To restore the first best allocations, the government has to adopt an estate tax regime that is no longer uniform: the estate would depend on both the timing and sizes of bequests that households receive. Thus the uniform estate tax no longer bears the annuity role. The paper reemphasizes the importance of accounting for bequest income received by households in any model that discusses intergenerational transfers and related policies.
    Keywords: Estate Tax, Annuity; Social Security
    JEL: E62 H21
    Date: 2018–02
  56. By: Leon, Costas
    Abstract: In this paper, the Singular Spectrum Analysis (SSA) is presented and applied in the US air traffic emplacements for the period Jan. 1954 – Sept. 2011. I decompose the US air traffic emplacements in trend, cycle, seasonal and noise components. In turn, I apply several spectral criteria in order to evaluate the SSA as a seasonal adjustment filter. SSA detects, beyond trend, strong cycles and seasonal components and leaves as a residual a GARCH process. SSA performs quite well as a seasonal adjustment mechanism in the case of the GARCH process but it performs even better in the case of a simulated white noise process. SSA is a serious candidate in economics in dealing with filtering, denoising, smoothing and seasonal adjustment.
    Keywords: Singular Spectrum Analysis, Seasonal Adjustment, Spectral Analysis, Economic Time Series, Air Traffic Emplacements.
    JEL: C10 C50 E3 E37
    Date: 2018–02–15
  57. By: Boneva, Lena; Cloyne, James; Weale, Martin; Wieladek, Tomasz
    Abstract: Firms' expectations play a central role in forward-looking macroeconomic models, but little is known empirically about how these are formed or whether they matter. Using a novel panel data set of firms' expectations about new orders, employment, unit costs, prices and wage rates for the United Kingdom, we document a range of stylized facts about the properties of firms' expectations and their relationship with recent pricing decisions. Expected future price and wage growth are influenced by firm-specific and aggregate factors. Price expectations are more correlated with cost and inflation indicators, wage expectations are more correlated with activity indicators. Expectations of new orders are influenced by aggregate conditions, while expected employment and unit costs seem to be influenced more by firm-specific factors. We also provide micro evidence to support the idea that actual price movements are influenced by expected future price movements, although firms' expectations do not seem to be fully rational.
    Keywords: Firm expectations; pricing setting; rationality; survey data; inflation expectations
    JEL: C23 C26 E31
    Date: 2018–02
  58. By: Anna Florio (Department of Management, Economics and Industrial Engineering, Politecnico di Milano)
    Abstract: We explore the possibility that the price puzzle - the positive response of prices to a negative monetary policy shock- arises in the presence of unmoored expectations. Looking at the pre-Great Recession period, employing a VAR analysis, we compare the behavior of prices after a monetary policy shock in countries with clearly defined nominal anchors (Canada, New Zealand, Sweden, United Kingdom, Switzerland and EMU) to their behavior in countries that, at that time, did not possess any such anchor (Japan and United States). While in this last group we find evidence of a price puzzle, in the first, starting from the period when this anchor was set, we do not find such a perverse dynamic. We argue that those countries characterised by clearly defined nominal anchors, having anchored inflation expectations, have managed to rule out the persistent increase in the price level.
    Keywords: VAR, Price Puzzle, Monetary Policy Shocks.
    Date: 2018–03
  59. By: Mario Holzner (The Vienna Institute for International Economic Studies, wiiw); Hermine Vidovic (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: This publication is available in German language only. For a brief English summary see further below. Eine Analyse der kroatischen Wirtschaft und abgeleitete Politikempfehlungen auf nationaler und EU-Ebene Ziel der Studie ist die Ausarbeitung von Politikempfehlungen, die dabei helfen sollen, die kroatische Wirtschaft positiv zu stimulieren und der Bevölkerung im Land eine langfristige Perspektive zu geben. Dabei soll insbesondere analysiert werden, welchen Beitrag Österreich und die EU zur Abfederung etwaiger Effekte auf den kroatischen und österreichischen Arbeitsmarkt leisten können, die bei Auslaufen der Übergangsregelungen für die Beschäftigung von kroatischen Arbeitskräften in Österreich, die bis längstens 30.06.2020 in Anspruch genommen werden können, zu erwarten sind. English Summary Economic Prospects for Croatia An Analysis of the Croatian Economy and Resulting Policy Recommendations at National and EU Level The aim of the study is to develop policy recommendations that are supportive of providing a positive stimulus to the Croatian economy and offering a long-term perspective to the population in the country. In particular, it is analysed which contributions Austria and the EU can make to mitigate potential negative effects that may arise upon the expiration (by 30 June 2020 at the latest) of the transitional arrangements for employing Croatian citizens in Austria.
    Keywords: Kroatien, Arbeitsmarkt, Wirtschaftsentwicklung, Industrialisierung, Tourismus, Croatia, labour market, economic development, industrialisation, tourism
    JEL: E24 O11 O14
    Date: 2018–03
  60. By: Evans, Trevor
    Abstract: Since the prolonged recession in 1980-82 which laid the basis for the emergence of financeled capitalism in the US there have been four phases of economic expansion. The first three ended with increasingly severe recessions in 1990-91, 2001 and 2007-09. The most recent expansion, which began in mid-2009, has been characterised by relatively low growth and investment has been weaker than in previous expansions. While unemployment has fallen sharply, many of the new jobs have been in low-paid services and the employed rate is below the peak in 2007, with several million workers vanishing from official statistics. While banks have been forced to hold more capital, five giant banks now account for some 50 per cent of the sector's assets. They also run large swathes of the so-called "shadow banking system" that would have collapsed in 2008 without massive state intervention, but which continues to operate as before. The Trump government's much touted investment programme is dependent on mobilising private funding but this has not yet been very forthcoming. And moves to relax the new banking regulations introduced in 2010, while strongly welcomed by the big banks, have been widely criticised. Key indicators of financial tensions are unusually low, but profitability and investment, which usually serve as leading indicators of the business cycle, have begun to decline and this suggests that the current expansion could be approaching an end.
    Keywords: US business cycle,banking sector regulation,employment expansion,low wage growth
    JEL: F44 G18 E24 J31
    Date: 2018
  61. By: International Monetary Fund
    Abstract: Following a build-up of macroeconomic imbalances that had resulted in declining growth, rising debt, and a widening current account deficit, the Egyptian authorities undertook decisive policy actions since the launch of the reform program in November 2016. These efforts are increasingly yielding results in terms of restored market confidence, strengthening growth momentum, a narrowing of budget and current account deficits, and adequate foreign exchange reserves. Sustaining the reform effort will help secure macroeconomic stabilization and unlock Egypt’s potential for higher growth and much needed job creation.
    Date: 2018–01–22
  62. By: Katalin Bodnar (European Central Bank); Ludmila Fadejeva (Bank of Latvia); Stefania Iordache (Banca Nationala a Romaniei,); Liina Malk (Eesti Pank); Desislava Paskaleva (Bulgarian National Bank); Jurga Pesliakaite (Bank of Lithuania); Natasa Todorovic Jemec (Banka Slovenije); Peter Toth (Narodna banka Slovenska,); Robert Wyszynski (Narodowy Bank Polski)
    Abstract: We study the transmission channels for rises in the minimum wage using a unique firm-level dataset from eight Central and Eastern European countries. Representative samples of firms in each country were asked to evaluate the relevance of a wide range of adjustment channels following specific instances of rises in the minimum wage during the recent post-crisis period. The paper adds to the rest of literature by presenting the reactions of firms as a combination of strategies, and evaluates the relative importance of those strategies. Our findings suggest that the most popular adjustment channels are cuts in non-labour costs, rises in product prices, and improvements in productivity. Cuts in employment are less popular and occur mostly through reduced hiring rather than direct layoffs. Our study also provides evidence of potential spillover effects that rises in the minimum wage can have on firms without minimum wage workers.
    Keywords: minimum wage, adjustment channels, firm-level survey
    JEL: D22 E23 J31
    Date: 2017–12–31
  63. By: Andrew Aitken; Martin Weale
    Abstract: This paper develops a price and quantity system of indicators structured round Atkinson's concept of inequality aversion. A democratic indicator of income growth, weighting each household's growth experience equally, is shown to result when Prais' democratic price index is used to deflate the geometric mean of equivalised household income. A welfare interpretation of the democratic indicator of income growth is provided and it is shown that, with heterogeneous but homothetic preferences, the deflator can serve as a common scaling social cost of living index when applied to income as well as to consumption. Application to United Kingdom household data suggests that, over the interval 2005/6-2015/6 democratic real equivalised household income grew by 0.20 per cent per annum while the plutocratic equivalent grew by 0.52 per cent per annum.
    Keywords: Real Income, Inequality Aversion, Welfare Indicator, Cost of Living
    JEL: I31 D12 E21
    Date: 2018–02
  64. By: Maximo Camacho; Fernando Soto
    Abstract: We characterize consumer confidence cycle across LatAm using Markov-switching models. Our findings show that a core group of countries shares a statistical common ground for both confidence’s boom and bust cycle synchronisation. Notably, Argentina and Chile tend to lead consumer mood shifts, playing a leading role in propagating consumer confidence shocks throughout LatAm.
    Keywords: Global , Latin America , Economic Analysis , Working Paper
    JEL: E32 C22 E27
    Date: 2018–02
  65. By: Konstantinos Angelopoulos; Andrea Benecchi; James Malley
    Abstract: A well-established stylised fact is that employer provided job-related training raises productivity and wages. Using UK data, we further find that job-related training is positively related to subsidies aimed at reducing training costs for employers. We also find that there is a positive, albeit quantitatively small, relationship between wage inequality and training in- equality in the UK. Motivated by the above, we explore whether policies to subsidise firms monetary cost of training can improve earnings for the lower skilled and reduce inequality. We achieve this by developing a dynamic gen- eral equilibrium model, featuring skilled and unskilled labour, capital-skill complementarity in production and an endogenous training allocation. Our results suggest that training subsidies for the unskilled have a significant impact on the labour income of unskilled workers. These subsides also in- crease earnings for skilled workers and raise aggregate income with implied lifetime multipliers exceeding unity. Finally, the positive spill over effects to skilled workers imply that training subsidies are not very effective in re- ducing inequality, measured as the distance between skilled and unskilled wages and incomes.
    Keywords: Job-related training, wage and earning inequality, training subsidies
    JEL: E24 J24 J31
    Date: 2017–08
  66. By: Konstantinos Angelopoulos; Spyridon Lazarakis; James Malley
    Abstract: This paper develops an incomplete markets model with state de- pendent (Markovian) stochastic earnings processes and ex ante skill heterogeneity corresponding to being university educated or not . Us- ing the Wealth and Assets Survey for Great Britain, we Önd that the university educated group has higher average wealth, higher earn- ings risk but lower within group wealth inequality. Using estimates of the earnings processes for each group to calibrate the model, we Önd wealth inequality within and between the groups that is consistent with the data. Moreover, the predictions for overall wealth inequality are closer to the data, compared to the benchmark model with ex ante identical households. In this framework, ex ante skill heterogeneity generates a between-group pecuniary externality which in turn leads to the predicted di§erences in wealth inequality between the groups and works as an ampliÖcation mechanism to increase overall wealth inequality.
    Keywords: incomplete markets, education di§erences, pecuniary externalities
    JEL: E21 E25 H23
    Date: 2017–07
  67. By: Jasper de Jong
    Abstract: We estimate the effect of consolidation efforts on investors' perception of government's solvency. To this end, we analyze announcements by Dutch government officials between September 2008 and December 2014 and select those messages that contain relevant new information on the likelihood and substance of consolidation packages. We then scrutinize whether announcements affect the yield spread of Dutch ten year government bonds vis-à-vis German bonds. Our findings indicate that announcements hinting at improvements in the budget balance significantly lowered yield spreads. As most announcements involve events during the negotiation process on consolidation packages rather than the official date of agreement or implementation of these packages, our results illustrate the importance of accurately assessing the news content of messages.
    Keywords: Fiscal policy announcements; Consolidation measures; Interest spreads; Political processes; Global financial crisis
    JEL: E43 E62 G01 G12 H61 H62
    Date: 2018–02
  68. By: Clark Granger (Banco de la República de Colombia); Yurany Hernández (Banco de la República de Colombia); Jorge Ramos (Banco de la República de Colombia); Jorge Toro (Banco de la República de Colombia); Héctor Zárate (Banco de la República de Colombia)
    Abstract: En este trabajo se identifica la postura fiscal del gobierno nacional en Colombia durante el periodo 1970-2017, a partir de los ajustes de las tarifas impositivas de los principales impuestos, los cuales recogen de manera directa las decisiones de la autoridad fiscal, como lo sugieren Vegh y Vuletin (2015). Para el desarrollo de la investigación se toma como referencia la metodología de Strawczynski (2014), quién evalúa empíricamente el caso de Israel mediante técnicas de cointegración, para determinar la relación entre los ciclos de la actividad económica y las variaciones de las tarifas impositivas. Los resultados del ejercicio para Colombia indican que el manejo fiscal ha sido procíclico. La revisión histórica de las reformas tributarias muestra que la mayoría de ellas se aprobaron en fases de desaceleración y solo algunas en ciclos de expansión económica. Sin embargo, la política tributaria no ha respondido únicamente a los ciclos del producto sino a otro tipo de factores como el tamaño del déficit fiscal o las necesidades de financiamiento del gasto. Classification JEL: C32, E32, E62, H20
    Keywords: Postura fiscal, ciclo económico, tarifas impositivas, cointegración.
    Date: 2018–02
  69. By: Timothy J. Goodspeed
    Abstract: The classic arguments of Musgrave (1959) and Oates (1972) are that the redistribution and stabilization functions should be assigned to the federal level of government. The argument is that redistribution is difficult to achieve at lower levels because the public good nature of redistribution and the mobility of individuals and firms. Likewise, stabilization is difficult to achieve because fiscal stimulus of lower levels of government is likely to be underused due to spillover effects and a limited ability to service debt obligations. These arguments suggest that under-provision of redistributive spending should accompany greater decentralization. They also suggest that subnational policies aimed at macroeconomic stabilization are likely to be less effective than national ones, an important issue in an economic crisis. In this paper I examine data on intra-country social protection transfers in the EU before and after the crisis. The results support the classic federalism assignment. For both reasons of redistribution and stabilization, social protection expenditures are best assigned to the central level of government. Regression results indicate that greater decentralization lowers social protection expenditures and a greater vertical fiscal imbalance and greater subnational deficits result in more spending on things other than social protection.
    Keywords: decentralization, transfers, social protection, federalism.
    JEL: H74 H77
    Date: 2018–02
  70. By: Krueger, Dirk; Ludwig, Alexander
    Abstract: We characterize the optimal linear tax on capital in an Overlapping Generations model with two period lived households facing uninsurable idiosyncratic labor income risk. The Ramsey government internalizes the general equilibrium feedback of private precautionary saving. For logarithmic utility our full analytical solution of the Ramsey problem shows that the optimal aggregate saving rate is independent of income risk. The optimal time-invariant tax on capital is increasing in income risk. Its sign depends on the extent of risk and on the Pareto weight of future generations. If the Ramsey tax rate that maximizes steady state utility is positive, then implementing this tax rate permanently generates a Pareto-improving transition even if the initial equilibrium is dynamically efficient. We generalize our results to Epstein-Zin-Weil utility and show that the optimal steady state saving rate is increasing in income risk if and only if the intertemporal elasticity of substitution is smaller than 1.
    Keywords: Idiosyncratic Risk; Overlapping Generations; precautionary saving; Taxation of Capital
    JEL: E21 H21 H31
    Date: 2018–02
  71. By: John Hatgioannides (Cass Business School); Marika Karanassou (Queen Mary University of London)
    Abstract: This paper holistically addresses the effective (relative) income tax contribution of a given income (or, wealth) group. The widely acclaimed standard in public policy is the absolute benefaction of a given income group in filling up the fiscal coffers. Instead, we focus on the ratio of the average income taxrate of an income group divided by the percentage of national income (or wealth) appropriated by the same income group. In turn, we develop the Fiscal Inequality Coefficient which compares the effective percentage income tax payments of pairs of income (or wealth) groups. Using data for the US, we concentrate on pairs such as the Bottom 90% versus Top 10%, Bottom 99% versus Top 1% and Bottom 99.9% versus Top 0.1%. We conclude that policy makers with a strong social conscience should re-evaluate the progressivity of the income tax system and make the richest echelons of the income and wealth distributions pay a fairer and higher tax.
    Keywords: Fiscal policy; progressive income taxation; inequality; effective income tax rate; fiscal inequality coefficient
    JEL: H23 H30 E64
    Date: 2017–09–15
  72. By: Matteo Accornero (Bank of Italy); Mirko Moscatelli (Bank of Italy)
    Abstract: We investigate the relationship between the rumours on Twitter regarding banks and deposits growth. The sentiment expressed in tweets is analysed and employed for the nowcasting of retail deposits. We show that a Twitter-based indicator of sentiment improves the predictions of a standard benchmark model of depositor discipline based on financial data. We further improve the power of the model introducing a Twitter-based indicator of perceived interconnection, that takes into account spillover effects across banks.
    Keywords: bank distress, twitter analytics, sentiment analysis
    JEL: G21 G28 E58
    Date: 2018–02
  73. By: Fabrizio Almeida Marodin; Marcelo Savino Portugal
    Abstract: This paper investigates the nonlinearity of exchange rate pass-through in the Brazilian economy during the floating exchange rate period (2000-2015) using a Markov-switching semi-structural new Keynesian model. We apply the methods proposed by Baele et al. (2015) and a basic new Keynesian model, with the addition of new elements to the AS curve and a new equation for the exchange rate dynamics. We find evidence of two distinct regimes for the exchange rate pass-through and for the volatility of shocks to inflation. Under the so-called “normal” regime, the long-run pass-through to consumer prices inflation is estimated at near zero value, only 0.00057 percentage point given a 1% exchange rate shock. Comparatively, the expected pass-through under a “crisis” regime is of 0.1035 percentage point to inflation, for the same exchange rate shock. The Markov-switching (MS) model outperforms the fixed parameters model according to several comparison criteria. The results allowed us to identify the occurrence of three distinct cycles for the exchange rate pass-through during the inflation targeting period in Brazil
    Date: 2018–02
  74. By: International Monetary Fund
    Abstract: Over recent years, Tonga has enjoyed robust growth and macroeconomic stability, with the construction sector being the main driver of growth. Tonga’s reliance on private and official transfers poses sustainability risks, particularly given the economy’s vulnerability to external shocks and the potentially high costs of natural disasters.
    Keywords: Tonga;Asia and Pacific;
    Date: 2018–01–17
  75. By: Astrid Martínez Ortiz; Luis Alberto Zuleta; Martha Misas; Lino Jaramillo
    Abstract: "El libro presenta, en primer lugar, un marco teórico y una revisión exhaustiva de la literatura internacional y colombiana acerca de la relación entre concentración y competencia en la banca, así como de los trabajos empíricos que comparan la eficiencia del sector en Colombia con la de otros países. En segundo lugar, Fedesarrollo hace sus propios ejercicios descriptivos y econométricos para aportar al estudio de la dinámica de la competencia, y de los logros y retos de la eficiencia en la prestación de los servicios financieros en Colombia. Del análisis teórico, destacamos la controversia con el paradigma EstructuraConducta- Desempeño el cual defiende la tesis de que la concentración en un mercado se traduce en una menor eficiencia y una reducción del bienestar social. La escuela de Chicago controvierte esa tesis mostrando que la concentración puede ser el resultado de la eficiencia y que se requiere un análisis de la conducta y las estrategias de las entidades grandes y/o conglomerados, y establecer si usan su poder de mercado en contra de los competidores y los consumidores. De forma complementaria, hay que señalar que el sector financiero, debido a la especificidad de sus funciones, tiene barreras a la entrada que le son connaturales. En este informe se evalúa si la industria bancaria en Colombia ha mantenido un nivel razonable de competencia con mejoras en su eficiencia y si ha diversificado los servicios bancarios ofrecidos a los usuarios, además de avanzar en su cobertura poblacional (inclusión financiera). Se analiza el período 1995-2014, el cual incluye un evento de crisis financiera, 1998-2001, y otros dos de expansión de la banca, principalmente privada, que cubren de 1996 a 1997 y de 2002 a 2014, sub-períodos en los que la cartera crece a tasas anuales que superan las del PIB, excepto para 2009, año en que la crisis financiera internacional golpeó con fuerza a la economía colombiana."
    Keywords: Competencia, Competencia Bancaria, Eficiencia en la BancaEstabilidad Financiera, Regulación Bancaria, Servicios Financieros, Sistemas Bancarios, Colombia
    JEL: D41 E50 G20 G21
    Date: 2016–09–30
  76. By: Christiane Baumeister; James D. Hamilton
    Abstract: Traditional approaches to structural vector autoregressions can be viewed as special cases of Bayesian inference arising from very strong prior beliefs. These methods can be generalized with a less restrictive formulation that incorporates uncertainty about the identifying assumptions themselves. We use this approach to revisit the importance of shocks to oil supply and demand. Supply disruptions turn out to be a bigger factor in historical oil price movements and inventory accumulation a smaller factor than implied by earlier estimates. Supply shocks lead to a reduction in global economic activity after a significant lag, whereas shocks to oil demand do not.
    Keywords: oil prices, vector autoregressions, sign restrictions, Bayesian inference, measurement error
    JEL: Q43 C32 E32
    Date: 2017
  77. By: Curtis Jr, James E
    Abstract: ABSTRACT An understanding of the freedoms (or the lack of freedoms) and their economic consequences on early black Americans provides an informative understanding to the freedoms (or the lack of freedoms), and their economic consequences on other, modern ethnic groups. James Curtis Jr (2017) investigates the link between the social asymmetry and economic asymmetry among early blacks and whites in the United States of America. For the empirical study, James Curtis Jr (2017) uses cross-sectional variables from the Integrated Public Use Microdata Sample (IPUMS), developed informative conditional ratios, and employed least squares statistical analyses. FINDINGS This study finds that economic differences among ethnic groups, as measured by differences between early blacks and whites, are intertwined with asymmetrical freedoms, leading to statistically insignificant returns to education, as measured by literacy. One might conclude that the individual’s basic protection of life, liberty, and the pursuit of happiness must proceed any expectations of measured returns to schooling, particularly among individuals in disenfranchised groups. Furthermore, one might propose education policy such that modern higher education investment programs prioritize education entrepreneurs and/or state/social planners with academic research familiarity of differences in wealth. This research is a revision of November 2002, November 2010 and January 2012 working papers. Copyright 2017. James Edward Curtis, Jr. is the President & Research Economist of The James Edward Curtis Jr Education Foundation, Correspond with James Edward Curtis, Jr. at PO Box 3126, Washington, District of Columbia 20010, or phone (202) 739-1962, email Learn more at
    Keywords: Education, History, Wealth
    JEL: C81 E21 I24 N00
    Date: 2017–09–22
  78. By: Christian Groth (University of Copenhagen); Jakub Growiec (Narodowy Bank Polski and SGH Warsaw School of Economics)
    Abstract: We study the links between the Mincerian wage equation (the cross-sectional relationship between wages and years of schooling) and the human capital production function (the causal effect of schooling on labor productivity). Based on a stylized Mincerian general equilibrium model with imperfect substitutability across skill types and ex ante identical workers, we demonstrate that the mechanism of compensating wage differentials renders the Mincerian wage equation uninformative for the human capital production function. Proper identification of the human capital production function should take into account the equilibrium allocation of individuals across skill types.
    Keywords: Mincerian wage equation, human capital production function, skill distribution, compensating wage differentials, golden rule of skill formation
    JEL: E24 J24
    Date: 2018
  79. By: Santiago Lago-Peñas; Jorge Martínez-Vázquez; Agnese Sacchi
    Abstract: There is a longstanding debate in the economics literature on whether fiscally decentralized countries are inherently more fiscally unstable. The Great Recession provides a fertile testing ground for analyzing how the degree of decentralization does actually affect countries’ ability to implement fiscal stabilization policies in response to macroeconomic shocks. We provide an empirical analysis aiming at disentangling the roles played by decentralization design itself and several recently introduced budgetary institutions such as subnational borrowing rules and fiscal responsibility laws on country’s fiscal stability. We use OECD countries’ data since 1995, which includes both a boom period of worldwide economic growth and the Great Recession. Our main finding is that well-designed decentralized systems are not destabilizing. But, in addition, sub-national fiscal and borrowing rules should be at work to improve the overall fiscal stability performance of decentralized countries.
    Keywords: sub-national governments, political decentralization, fiscal stability, public deficit.
    JEL: H70 H72 H77
    Date: 2018–02
  80. By: International Monetary Fund
    Abstract: Growth bottomed out and economic activity has gathered momentum since the second half of 2016 and over the course of 2017, in line with the global economic recovery. The macroeconomic outlook has improved and a robust recovery is expected to continue. Nevertheless, the outlook faces multiple challenges, both external and domestic, including from tighter global financial conditions, possible bumps in Mainland China’s ongoing transition, a retreat from cross-border integration, a potential adjustment following the current housing boom, as well as long-term challenges from rapid population aging.
    Keywords: Hong Kong Special Administrative Region of China;Asia and Pacific;
    Date: 2018–01–22
  81. By: Marika Karanassou (Queen Mary University of London); Hector Sala (Departament d'Economia Aplicada (UAB), IZA Fellow, Institute for the Study of Labor (Bonn))
    Abstract: In this paper we examine the dynamic contributions of capital accumulation, globalisation, and financialisation to the functional-personal income distribution in the US over the 1968-2014 period. We show that the labour share is affected negatively by personal inequality, capital intensity and trade, while the Gini statistic is fueled by the falling labour share and increasing financial assets and financial payments. Using counterfactual simulations, we show that trade is the most stable and unidirectional factor driving the labour share down since the eighties, and financialisation equally relevant in the eighties, but innocuous in the 1990s. We also document the growing relevance of capital accumulation and globalisation in driving personal inequality, although financialisation is the most important factor in absolute terms. In the post-Great Recession years of tense socioeconomic conditions, looking at income distribution through the lens of the wage-productivity gap could enlighten economic policy.
    Keywords: Income distribution, labour share, wage gap, inequality, capital intensity, globalisation, financialisation
    JEL: D33 E25
    Date: 2017–09–15
  82. By: Zeno Enders; Hendrik Hakenes
    Abstract: We develop a model of rational bubbles based on leverage and the assumption of an imprecisely known maximum market size. In a bubble, traders push the asset price above its fundamental value in a dynamic way, driven by rational expectations about future price developments. At a previously unknown date, the bubble will endogenously burst. Households’ decision to lend to traders with limited liability in a bubble is endogenous. Bubbles reduce welfare of future investors. We provide general conditions for the possibility of bubbles depending on uncertainty about market size, traders’ degree of leverage and the risk-free rate. This allows us to discuss several policy measures. Capital requirements and a correctly implemented Tobin tax can prevent bubbles. Implemented incorrectly, however, these measures may create the possibility of bubbles and can reduce welfare.
    Keywords: bubbles, rational expectations, market size, liquidity, financial crises, leveraged investment, capital structure
    JEL: E44 G01 G12
    Date: 2017
  83. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks at the 2018 U.S. Monetary Policy Forum, New York City.
    Keywords: large-scale asset purchase (LSAP); zero lower bound; LSAPs; forward guidance; mortgage-backed securities (MBS); Treasury securities; balance sheet normalization; caps; event studies; long-term bond yields; bond term premia
    Date: 2018–02–23
  84. By: Renato Faccini (Queen Mary University of London); Eirini Konstantinidi (Alliance Manchester Business School - Accounting and Finance division)
    Abstract: We propose a new predictor of U.S. real economic activity (REA), namely the representative investor’s implied relative risk aversion (IRRA) extracted from S&P 500 option prices. IRRA is forward-looking and hence, it is expected to be related to future economic conditions. We document that U.S. IRRA predicts U.S. REA both in- and out-of-sample once we control for well-known REA predictors and take into account their persistence. An increase (decrease) in IRRA predicts a decrease (increase) in REA. We extend the empirical analysis by extracting IRRA from the South Korea, UK, Japanese and German index option markets. We find that South Korea IRRA predicts the South Korea REA both in- and out-of-sample, as expected given the high liquidity of its index option market. We show that a parsimonious yet flexible production economy model calibrated to the U.S. economy can explain the documented negative relation between risk aversion and future economic growth.
    Keywords: Option prices, Risk aversion, Risk-neutral moments, Real Economic Activity, Production economy model
    JEL: E44 G13 G17
    Date: 2018–01
  85. By: International Monetary Fund
    Abstract: Context: Despite the sharp drawdown of NATO troops in 2014 and the deteriorated security situation, the National Unity Government (NUG) is making good progress in economic reforms and growth has picked up modestly. The coming electoral cycle is expected to usher in a period of political uncertainty, leading to a more difficult environment for reform implementation. The donor community continues to actively support Afghanistan, as demonstrated by the successful donor conference in October 2016, while the U.S. government recently reaffirmed its continued military support. Outlook and risks: The baseline scenario envisages growth at 2.5 to 3 percent in 2017– 18, too low to prevent unemployment from rising further. Inflation is expected to be modest, and buffers should remain comfortable. The outlook is subject to significant downside risks, including a possible further deterioration in the security environment, a shortfall in grants, or stalled reforms. The key upside risk is lasting peace, which would boost inclusive growth.
    Keywords: Middle East;Afghanistan, Islamic Republic of;
    Date: 2017–12–14
  86. By: International Monetary Fund
    Abstract: Near-term growth prospects are favorable, supported by strong tourism and private consumption, and a significantly improved fiscal position and external environment. The economy is operating close to potential. Growth is expected to decelerate if enduring structural constraints are not addressed. The largest private company, Agrokor, has been facing a financial crisis and put under caretaker management. The impact of this crisis on the economy has been contained thus far. Risks to the outlook are two sided, with downside risks dominating over the medium term. The pace of structural reform implementation has been slow and additional delays constitute a downside risk.
    Keywords: Europe;Croatia;
    Date: 2018–01–16
  87. By: International Monetary Fund
    Abstract: Rwanda’s economy continues to perform well. Growth in 2016 and the first half of 2017 was weaker than projected, but was higher than regional averages and is projected to recover over 2017–19. Inflation is projected to remain below the central bank’s 5 percent medium term target. Rwanda’s adjustment program, based on exchange rate flexibility, public spending restraint, and prudent monetary policy, has served to reverse external imbalances and steadily rebuild international reserve buffers. Program performance is on track, with all continuous and end-June 2017 quantitative assessment/performance criteria met, as well as most indicative targets and structural benchmarks. Building on its successes to date, the government is crafting new medium-term development strategies, with a view to attaining upper middle income status by 2035. It is hoped that Rwanda’s participation in the G-20 “Compact with Africa” initiative can leverage additional private investment to help realize these objectives.
    Keywords: Sub-Saharan Africa;Rwanda;
    Date: 2018–01–18
  88. By: International Monetary Fund
    Abstract: A recovery that began in 2015 continues to gather momentum. But the prolonged downturn revealed structural weaknesses, and the economy will face further pressures, including from adverse demographics and technological change. The focus of this report is therefore on policies to increase resilience, employment, and growth.
    Keywords: Europe;Finland;
    Date: 2017–12–13
  89. By: International Monetary Fund
    Abstract: Macro stabilization and two major tax reforms were the key outcomes of the first half of the program. Sri Lanka is pursuing a 3-year reform program with IMF support under the extended arrangement under the Extended Fund Facility (EFF) since June 2016. Performance has been broadly on track regarding fiscal consolidation, revenue mobilization, monetary policy management, and reserves accumulation. The government legislated in 2016 the VAT amendments which increased VAT rates and narrowed exemptions. The program’s landmark reform, the new Inland Revenue Act, was legislated in October 2017 and will be implemented in April 2018. Consistent with the objectives of the EFF-supported program, the authorities announced a new farreaching economic plan titled Vision 2025 in September 2017.
  90. By: Grillitsch, Markus (Department of Human Geography, Lund University); Tavassoli, Sam (RMIT)
    Abstract: This paper analyses the effect of cultural diversity on employment growth, considering the recent Global Financial Crisis (GFC) as a moderating factor. In doing so, we developed competing hypotheses based on Blau’s theory of heterogeneity versus an alternative perspective which combines the resource-based view (RBV) with social identity theory (SIT). We empirically test such theories using a unique longitudinal dataset comprising the population of all firms in Sweden between 2003 and 2012. We find support for the latter hypothesis, i.e. the relationship between cultural diversity and employment growth is inverted U-shape, which is even more pronounced during/after the GFC. We discussed the implication of findings for other contexts.
    Keywords: Cultural diversity; firm performance; Global Financial Crisis (GFC)
    JEL: E24 G01 M14 M51
    Date: 2018–02–27
  91. By: International Monetary Fund
    Abstract: The BOU has been successful in guiding core inflation close to target in recent years in line with its Inflation Targeting Lite (ITL) monetary framework adopted in mid-2011. The experience since then demonstrates that the BOU has been committed to maintain Uganda’s floating exchange rate regime and to conduct monetary operations aiming at firmly anchoring inflation expectations by using the seven-day REPO to steer the seven-day interbank rate as close as possible to the central bank policy rate (CBR). Despite ensuring low inflation, the presence of sizable precautionary and involuntary reserves and excessive short-end volatility has weakened the transmission mechanism. The key challenge remains to enhance monetary and fiscal policy coordination and to ensure that institutional and operational arrangements are robust and conducive to efficient monetary operations framework.
    Keywords: Uganda;Sub-Saharan Africa;
    Date: 2018–01–16
  92. By: Zheng, Zhijie; Huang, Chien-Yu; Yang, Yibai
    Abstract: This paper investigates the effects of monetary policy on long-run economic growth via different cash-in-advance constraints on R&D in a Schumpeterian growth model with vertical and horizontal innovation. The relationship between inflation and growth is contingent on the relative extents of CIA constraints and diminishing returns to two types of innovation. The model can generate a mixed (monotonic or non-monotonic) relationship between inflation and growth, given that the relative strength of monetary effects on growth between different CIA constraints and that of R&D-labor-reallocation effects between different diminishing returns vary with the nominal interest rate. In the empirically relevant case where horizontal R&D suffers from greater diminishing returns than vertical R&D, inflation and growth can exhibit an inverted-U relationship when the CIA constraint on horizontal R&D is sufficiently larger than that on vertical R&D. Finally, the model is calibrated to the US economy, and we find that the growth-maximizing rate of inflation is around 2.8%, which is closely consistent with recent empirical estimates.
    Keywords: Inflation; Endogenous growth; CIA constraint on R&D
    JEL: E41 O30 O40
    Date: 2018–02–21
  93. By: Stefania Pozzuoli
    Abstract: In questo lavoro si analizza la dinamica del credito bancario al settore privato, dal ‘99 (ovvero dall'entrata in vigore dell'euro) al 2015. Si cerca di comprendere quali sono le variabili che spiegano il credito e che maggiormente ne condizionano l’evoluzione, capire le relazioni che intercorrono tra le variabili identificate e valutare gli impatti dei vari shock delle variabili/componenti del mercato del credito sui prestiti erogati. Con l'aiuto di un modello Vettoriale Autoregressivo (VAR) si individuano le variabili che maggiormente contribuiscono alla spiegazione del credito e alle relazioni esistenti, giungendo alla specificazione di quattro distinti modelli di previsione sia per le imprese non finanziarie che per le famiglie (per l’acquisto di abitazioni e per il credito al consumo e gli altri finanziamenti).Mediante tali modelli si elaborano previsioni e valutano le capacità previsive. Inoltre con l’ausilio della funzione di risposta agli impulsi si sono osservati gli impatti dei vari shock delle componenti del mercato del credito sui prestiti.
    Keywords: VAR, Previsioni, Credito
    JEL: C53 E47 E51
    Date: 2018–02
  94. By: International Monetary Fund
    Abstract: Kuwait is facing “lower-for-longer” oil prices from a position of strength, owing to large financial buffers, low debt, and a sound financial sector. Nonetheless, lower oil prices have weakened fiscal and external positions and generated large fiscal financing needs. The key challenge for the authorities is to accelerate reforms that underpin fiscal consolidation, while creating incentives for private initiative and investment and fostering job creation for nationals.
    Keywords: Kuwait;Middle East;
    Date: 2018–01–26
  95. By: International Monetary Fund
    Abstract: Tanzania’s economic program supported by the 2014–18 PSI has been marked by relatively strong macroeconomic performance, but uneven implementation of structural reforms. Recent economic performance has been mixed. Although GDP data point to continued strong growth, other high frequency data indicate a weakening of economic activity. Tax revenue collections are lower than expected and credit growth has stagnated reflecting in part banks’ rising nonperforming loans (NPLs). Inflation remains moderate, and international reserves have increased substantially.
    Keywords: Sub-Saharan Africa;Tanzania;
    Date: 2018–01–16
  96. By: Chakraborty, Lekha (National Institute of Public Finance and Policy); Singh, Yadawendra (National Institute of Public Finance and Policy)
    Abstract: We examine the impact of conditional fiscal transfers on public employment across gender in India taking the case of the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). The MGNREGS, as an “employer of last resort” fiscal policy, is a direct employment transfer, which guarantees to provide 100 days of paid work opportunities at a predetermined wage for public works in India through a self-selection criterion. Using unit record data of the latest 68th round of NSS Employment-Unemployment survey, we examined gender differential impacts of MGNREGS on labour force participation rates across States in India. The unit of analysis in our paper is not ‘household’, but is one step ahead to capture the intra-household level of participating behaviour in the economic activity. The results, based on the survey enumerating 2,80,763 individuals in rural areas, revealed that there is a striking heterogeneity in the gender impacts of job guarantee programme across States of India. The probit estimates showed that MGNREGS job card holder’s labour force participation rates were higher than the non-card holders and the result was more pronounced for women. The analysis of the time-use patterns and the unpaid care economy statistics of job guarantee card holders obtained from the unit records also shows that augmenting public investment in care economy infrastructure is significant for the job guarantee programme to function at its full potential in India.
    Keywords: job guarantee ; fiscal policy ; gender ; care economy ; labour force participation rate
    JEL: C15 C67 D33 E24 J48
    Date: 2018–02
  97. By: Christoph Görtz; Plutarchos Sakellaris; John D. Tsoukalas
    Abstract: We Study how firms finance Lumpy adjustment in capital, employment and inventories. We analyse U.S. firm data from Compustat covering 1971-2013. Lumpy expansion and contraction episodes in firms' productive assets are important in accounting for movements in macroecnomic and financial aggregate variables. Firms use primarily cash balances and debt in order to expand or contract capacity, but these margins are not perfect substitutes. Cash balances play a preparatory role rising (falling) temporarily prior to lumpy positive (negative) adjustment. Debt is also important as firms de-leverage (increase leverage) prior to lumpy positive (negative) adjustment and then slowly increase leverage (deleverage) often several years after the event. Small and large firms differ in their use of external equity to finance Lumpy events. During Lumpy adjustment profitability and leverage are positively correlated.
    Keywords: Lumpy firm adjustment, Event study, Leverage, Debt, Cash, Financing.
    JEL: G30 G32 E32
    Date: 2017–04
  98. By: Ignacio Hernando (Banco de España); Irene Pablos (European Central Bank); Daniel Santabárbara (Banco de España); Javier Vallés (Banco de España)
    Abstract: The existing literature exhibits high uncertainty over the theoretical and empirical determinants of private world saving. This paper reports new evidence on the drivers of private saving by applying Bayesian techniques, using data from the world’s 35 largest economies in the period 1980-2012. After reviewing the main theories of consumption and saving decisions, and discussing the potential effects of different determinants, we specify a general model that incorporates the most commonly used factors in the literature, considering the potential endogeneity of some of the regressors. The Bayesian Model Averaging (BMA) approach summarises the information embedded in all combinations of the explanatory variables considered by averaging each specification according to its likelihood. We find that in the medium term private credit to GDP ratio, the government surplus to GDP ratio, the terms of trade, life expectancy and the old-age dependency ratio are key determinants of cross-country private saving behaviour. Lastly, we assess the long-term effect of expected demographic changes in private saving globally.
    Keywords: consumption, saving, national saving, private saving, household saving, Bayesian model averaging, model uncertainty
    JEL: C11 C23 E21 H30
    Date: 2018–01
  99. By: Gilberto Tadeu Lima; Jaylson Jair da Silveira
    Abstract: We devise a growth model where the distribution of factor income is affected by the possibility of profit sharing with workers. Firms choose periodically to compensate workers with only a real base wage or a share of profits in addition to this real base wage as alternative effort-elicitation strategies. As validated by empirical evidence, labor productivity is higher in profit-sharing firms than in non-sharing firms. The frequency distribution of effort-elicitation strategies and labor productivity across firms are co-evolutionarily time-varying, which then affects the dynamics of the distribution of income between profits and wages and therefore the savings-determined growth rate. Heterogeneity in effort-elicitation strategies across firms (and hence earnings inequality across workers) can be a stable long-run equilibrium. In such a polymorphic equilibrium, the frequency of profit-sharing firms varies positively (negatively) with the real base wage (profit-sharing coefficient). As shown analytically and with numerical simulations, the micro- and macrodynamics of the economy are crucially affected by the profit-sharing coefficient and the real base wage as bifurcation parameters.
    Keywords: Profit sharing; evolutionary dynamics; economic growth; income distribution.
    JEL: E11 E25 J33 O41
    Date: 2018–03–05
  100. By: Brian Sykes (University of California-Irvine); Amanda Geller (New York University)
    Abstract: With more than 850,000 people returning home from prisons and jails annually during an era of decarceration, understanding the labor market opportunities available to formerly incarcerated people is important for public policy. Yet, the mark of a criminal record has profound impacts on the employment and wage trajectories of disadvantaged men. Correspondence and audit studies routinely find that low-wage, secondary sector employers actively discriminate against those with criminal records, even when firms say they are open to hiring the formerly incarcerated. In this paper, we investigate whether the underground economy provides employment opportunities for men with criminal histories. Specifically, we assess whether formerly incarcerated men are more likely than their never-incarcerated counterparts to work in the underground economy, and how macroeconomic conditions shape the likelihood of working in the informal economy. We find that formerly incarcerated men are indeed more likely to work underground; however, the extent to which the macroeconomy shapes their odds of employment in either the formal or underground economies is significantly different for incarcerated men than their never-incarcerated counterparts. Our results have implications for understanding patterns of employment and wage mobility among disadvantaged men.
    Keywords: incarceration, dual labor markets, employment stratification, underground economy, informal economy
    JEL: K42 D63 E26
    Date: 2017
  101. By: Hwan Jo (National University of Singapore); Tatsuro Senga (Queen Mary University of London)
    Abstract: Government policies that attempt to alleviate credit constraints faced by small and young firms are widely adopted across countries. We study the aggregate impact of such targeted credit subsidies in a heterogeneous firm model with collateral constraints and endogenous entry and exit. A defining feature of our model is a non-Gaussian process of firm-level productivity, which allows us to capture the skewed firm size distribution seen in the Business Dynamics Statistics (BDS). We compare the welfare and aggregate productivity implications of our non-Gaussian process to those of a standard AR(1) process. While credit subsidies resolve misallocation of resources and enhance aggregate productivity, increased factor prices, in equilibrium, reduce the number of firms in production, which in turn depresses aggregate productivity. We show that the latter indirect general equilibrium effects dominate the former direct productivity gains in a model with the standard AR(1) process, as compared to our non-Gaussian process, under which both welfare and aggregate productivity increase by subsidy policies.
    Keywords: misallocation, collateral constraints, firm dynamics, firm size
    JEL: E22 G32 O16
    Date: 2017–11–16
  102. By: Francis Breedon (Queen Mary University of London);
    Abstract: Most quantitative easing programmes primarily involve central banks acquiring government liabilities in return for central bank reserves. In all cases this process is undertaken by purchasing these liabilities from private sector intermediaries rather than directly from the government. This paper estimates the cost of this round-trip transaction – government issuance of liabilities and central bank purchases of those liabilities in the secondary market – for the UK. I estimate that this cost amounts to about 0.5% of the total value of QE (over £1.8 billion in my sample). I also find some evidence that this figure is inflated by the unusual design of UK QE operations.
    Keywords: Quantitative Easing, Auctions, Government Bonds
    JEL: G12 E58
    Date: 2018–01–11
  103. By: Michal burzynski (University of Luxembourg, CREA); Christoph Deuster (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and Universidade Nova de Lisboa, Portugal); Frédéric Docquier (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES), National Fund for Scientific Research (FNRS), Belgium and Université d'Auvergne, FERDI, France)
    Abstract: This paper characterizes the recent evolution of the geographic distribution of talent, and studies its implications for development inequality. Assuming the continuation of recent educational and immigration policies, it produces integrated projections of income, population, urbanization and human capital for the 21st century. To do so, we develop and parameterize a two-sector, two-class, world economy model that endogenizes education decisions, population growth, labor mobility, and income disparities across countries and across regions/sectors (agriculture vs. nonagriculture). We find that the geography of talent matters for global inequality, whatever the size of technological externalities. Low access to education and the sectoral allocation of talent have substantial impacts on inequality, while the effect of international migration is small. We conclude that policies targeting access to all levels of education and sustainable urban development are vital to reduce demographic pressures and global inequality in the long term.
    Keywords: human capital, migration, urbanization, growth, inequality
    JEL: E24 J24 O15
    Date: 2018–02–20
  104. By: Bayer, Christian; Meier, Matthias
    Abstract: Hsieh and Klenow (2009) quantifies aggregate TFP losses from misallocation through factor productivity dispersions and finds misallocation important in explaining international TFP differences. Using micro data from Chile, Colombia, Indonesia, and Germany, we document that dispersion in factor productivities is driven by dispersion in technology and markup. Relative to Germany, misallocation losses for the developing economies are explained to 1/3 by larger technology and to 2/3 by larger markup dispersion. Finally, we show that increased competition reduces technology dispersions but can cause larger markup dispersions as does more innovation. Hence, looking at markup dispersions alone might be misleading.
    Keywords: Competition; Development; Misallocation; productivity
    JEL: D24 E23 O47
    Date: 2018–02
  105. By: Abdullah Gulcu (Department of Economics, Middle East Technical University, Ankara, Turkey); Dilem Yildirim (Department of Economics, Middle East Technical University, Ankara, Turkey)
    Abstract: This study aims to explore the empirical validity of the real interest rate parity (RIP) hypothesis for East Asian countries using Japan as the base country. To this end, we employ the recently proposed unit root tests of Christopoulos and Leon-Ledesma (2010) that account for both multiple smooth structural breaks of unknown form and nonlinear mean reversion in the series. Our empirical results uncover overwhelming evidences in favor of the RIP hypothesis for the whole countries in our sample. More specifically, through a Fourier approximation, it is observed that all real interest rate differentials display a mean reverting behavior around an infrequently smooth-breaking mean, with the breaks being in accordance with the financial reforms and economic crises witnessed by the countries. Moreover, the degree of mean reversion appears to vary nonlinearly with the size of real interest rate appreciations and depreciations.
    Keywords: Real Interest Rate Parity, Financial Integration, Nonlinearity, Smooth Structural Breaks, East Asian Countries
    JEL: C22 E40 F36 F40 G01
    Date: 2018–02

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