nep-mac New Economics Papers
on Macroeconomics
Issue of 2018‒04‒02
74 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Labour tax reforms, cross-country coordination and the monetary policy stance in the euro area: a structural model-based approach By Jacquinot, Pascal; Lozej, Matija; Pisani, Massimiliano
  2. Overnight index swap market-based measures of monetary policy expectations By Lloyd, Simon
  3. Monetary and macroprudential policies under rules and discretion By Laureys, Lien; Meeks, Roland
  4. Deconstructing Monetary Policy Surprises - The Role of Information Shocks By Jarocinski, Marek; Karadi, Peter
  5. Natural Rate of Interest in Japan -- Measuring its size and identifying drivers based on a DSGE model -- By Yosuke Okazaki; Nao Sudo
  6. Sticky Expectations and Consumption Dynamics By Christopher D. Carroll; Edmund Crawley; Jiri Slacalek; Kiichi Tokuoka; Matthew N. White
  7. Prices and Inflation when Government Bonds are Net Wealth By Hagedorn, Marcus
  8. Fiscal Policy, Wages, and Jobs in the U.S. By Hyeongwoo Kim
  9. Targeting financial stress as opposed to the exchange rate By Raputsoane, Leroi
  10. A General Equilibrium Appraisal of Capital Shortfall By E. Jondeau; J-G. Sahuc
  11. Monetary policy reaction function pre and post the global financial crisis By Raputsoane, Leroi
  12. Tight money - tight credit: coordination failure in the conduct of monetary and financial policies By Carrillo, Julio A.; Mendoza, Enrique G.; Nuguer, Victoria; Roldán-Peña, Jessica
  13. Business investment, cost of capital and uncertainty in the United Kingdom — evidence from firm-level analysis By Melolinna, Marko; Tatomir, Srdan; Miller, Helen
  14. The Implication of Monetary and Fiscal Policy Interactions for the Price Levels: the Fiscal Theory of the Price Level Revisited By Assadi, Marzieh
  15. The Cyclicality Of Fiscal Policy In Bolivia By Darwin Ugarte Ontiveros
  16. Does the structural budget balance guide fiscal policy pro-cyclically? Evidence from the Finnish Great Depression of the 1990s By Kuusi, Tero
  17. Unobserved Components with Stochastic Volatility in U.S. Inflation: Estimation and Signal Extraction By Mengheng Li; Siem Jan (S.J.) Koopman
  18. Financial cycles in euro area economies: A cross-country perspective By Kunovac, Davor; Mandler, Martin; Scharnagl, Michael
  19. Imperfect Governance and Price Stickiness in Emerging Economies By Zouhair Aït Benhamou
  20. Plotting interest rates: The FOMC's projections and the economy By Gerlach, Stefan; Stuart, Rebecca
  21. Transmission of Uncertainty Shocks: Learning from Heterogeneous Responses on a Panel of EU Countries By Peter Claeys; Borek Vasicek
  22. Efectos de la dolarización parcial sobre la política monetaria en un modelo semi estructural de proyecciones macroeconómicas para el Uruguay By Lourdes Güenaga
  23. Bolivianization And Effectiveness Of The Monetary Policy By Osmar Jasan Bolívar Rosales
  24. Rules Verus Discretion: Assessing the Debate Over the Conduct of Monetary Policy By John B. Taylor
  25. Economic and Policy Uncertainty: Export Dynamics and the Value of Agreements By Jeronimo Carballo; Kyle Handley; Nuno Limão
  26. Inquiry on the Transmission of U.S. Aggregate Shocks to Mexico: A SVAR Approach By Julio Carrillo
  27. The Role Of Aggregate Demand And Resource Distribution Policies In The Elusive Search For High Economic Growth Rates; A Bayesian Estimation Of The Kaleckian Model Of Growth In Bolivia, 1990-2015 By Luis Alberto Arce Catacora; David Quiroz Sillo; José Alberto Villegas Gómez
  28. Paul van Zeeland and the first decade of the US Federal Reserve System : The analysis from a European central banker who was a student of Kemmerer By Ivo Maes; Rebeca Gomez Betancourt
  29. Towards a more comprehensive assessment of fiscal space By Hoi Wai Jackie Cheng; Ingo Pitterle
  30. The Household Fallacy By Farmer, Roger E A; Zabczyk, Pawel
  31. Inflation Anchoring and Growth: Evidence from Sectoral Data By Sangyup Choi; Davide Furceri; Prakash Loungani
  32. Fiscal Forward Guidance:A Case for Selective Transparency By Fujiwara, Ippei; Waki, Yuichiro
  33. Dynamic Analysis of Budget Policy Rules in Japan By Koichi Futagami; Kunihiko Konishi
  34. Inflación Subyacente en la República Dominicana: Medición y Evaluación By Jiménez Polanco, Miguel Alejandro; Ramírez de Leon, Francisco Alberto
  35. An Endogenous Mechanism of Business Cycles By Dimitri Kroujiline; Maxim Gusev; Dmitry Ushanov; Sergey V. Sharov; Boris Govorkov
  36. Are the Risk Weights of Banks in the Czech Republic Procyclical? Evidence from Wavelet Analysis By Vaclav Broz; Lukas Pfeifer; Dominika Kolcunova
  37. Financialising the state : recent developments in fiscal and monetary policy By Ewa Karwowski; Marcos Centurion-Vicencio
  38. Keynes on the Sequencing of Economic Policy: Recovery and Reform in 1933 By Sebastian Edwards
  39. Interbank Network Disruptions and The Real Economy By Dasha Safonova
  40. EU-wide income inequality in the era of the Great Recession By Peter Benczur; Zsombor Cseres-Gergely; Peter Harasztosi
  41. Credit markets, Limited commitment and Optimal monetary policy By Francesca Carapella
  42. Paraguay: Is Good Macro Policy Enough to Ensure Adequate Resilience to Adverse External Shocks? How Does It Compare to Other Emerging Markets? By Liliana Rojas-Suarez
  43. Did U.S. Consumers Respond to the 2014–2015 Oil Price Shock? Evidence from the Consumer Expenditure Survey By Patrick Alexander; Louis Poirier
  44. Is there a trade-off between free capital mobility, financial stability and fiscal policy flexibility in the EMU? By Canale, Rosaria Rita; de Grauwe, Paul; Foresti, Pasquale; Napolitano, Oreste
  45. Implementing Macroprudential Policy in NiGEM By Oriol Carreras; E Philip Davis; Ian Hurst; Iana Liadze; Rebecca Piggott; James Warren
  46. Economic Fluctuations in Sub-Saharan Africa By Giovanni Melina; Rafael A Portillo
  47. Rethinking financial stability By Aikman, David; Haldane, Andrew; Hinterschweiger, Marc; Kapadia, Sujit
  48. Alternatives For Reserve Balances And The Fed's Balance Sheet In The Future By John B. Taylor
  49. Quantitative easing and preferred habitat investors in the euro area bond market By Martijn Boermans; Robert Vermeulen
  50. Business Cycle Measurement in India. By Pandey, Radhika; Patnaik, Ila; Shah, Ajay
  51. Estimating a Nonlinear New Keynesian Model with a Zero Lower Bound for Japan By Hirokuni Iiboshi; Mototsugu Shintani; Kozo Ueda
  52. Secular Stagnation and Inequality By Gauti Eggertsson; Neil Mehrotra
  53. Adverse Selection, Risk Sharing and Business Cycles By Marcelo Veracierto
  54. Longer-term Yield Decomposition: An Analysis of the Czech Government Yield Curve By Adam Kucera; Michal Dvorak; Lubos Komarek; Zlatuse Komarkova
  55. Large Recessions in an Overlapping Generations with Unemployment By Aubhik Khan
  56. Economic Crisis, Mortality and Health Status. A New Perspective By Vincenzo Atella; Federico Belotti; Joanna Kopinska; Alessandro Palma; Andrea Piano Mortari
  57. How much does book value data tell us about systemic risk and its interactions with the macroeconomy? A Luxembourg empirical evaluation By Xisong Jin
  58. Macroprudential FX Regulations: Shifting the Snowbanks of FX Vulnerability? By Ahnert, Toni; Forbes, Kristin; Friedrich, Christian; Reinhardt, Dennis
  59. Informationally Sticky Nominal Wages By Jennifer La'O; Luigi Iovino
  60. Recurrent Bubbles, Economic Fluctuations, and Growth By Pablo A. Guerron-Quintana; Tomohiro Hirano; Ryo Jinnai
  61. International Risk Management in BREXIT and Policy Options By Paul J.J. Welfens
  62. Mortgages: estimating default correlation and forecasting default risk By Neumann, Tobias
  63. How Well Do Economists Forecast Recessions? By Zidong An; João Tovar Jalles; Prakash Loungani
  64. The Great Recession’s Biggest Losers: The euro area’s jobless By Kilhoffer, Zachary; Beblavý, Miroslav
  65. How to Check Integrity of Fiscal Data By Pokar D Khemani; Benoit Wiest
  66. Unit Labour Costs and the Dynamics of Output and Unemployment in the Southern European Crisis Countries By Juan Carlos Cuestas; Karsten Staehr; Javier Ordóñez
  67. Is There a Phillips Curve? A Full Information Partial Equilibrium Approach By Roberto Piazza
  68. The Effect of Financial Market Integration on Monetary Policy and Long-term Interest Rate in Korea and Its Policy Implications By Kim, Kyunghun; Kim, Soyoung; Yang, Da Young; Kang, Eunjung
  69. A theory of disasters and long-run growth By Hiroaki Sakamoto; Ken-Ichi Akao
  70. Optimal Dynamic Fiscal Policy with Endogenous Debt Limits By Yongyang Cai; Simon Scheidegger; Sevin Yeltekin; Philipp Renner; Kenneth Judd
  71. A European Monetary Fund: Why and how? By Gros, Daniel; Mayer, Thomas
  72. Macroprudential Stress Tests: A Reduced-Form Approach to Quantifying Systemic Risk Losses By Zineddine Alla; Raphael A Espinoza; Qiaoluan H. Li; Miguel A. Segoviano Basurto
  73. A Term Structure Model for Dividends and Interest Rates By Damir Filipovi\'c; Sander Willems
  74. Revisiting Forecasting of Recessions via Dynamic Probit for Time Series by Kauppi and Saikkonen (2008) By Byeong U. Park; Leopold Simar; Valentin Zelenyuk

  1. By: Jacquinot, Pascal; Lozej, Matija; Pisani, Massimiliano
    Abstract: We evaluate the effects of permanently reducing labour tax rates in the euro area (EA) by simulating a large-scale open economy dynamic general equilibrium model. The model features the EA as a monetary union, split in two regions (Home and the rest of the EA - REA), the US, and the rest of the world, region-specific labour markets with search and matching frictions, and public employment. Our results are as follows. First, a permanent reduction in labour tax rates in the Home region would have stimulating effects on domestic economic activity and employment. Second, reducing labour tax rates simultaneously in both Home and REA would have additional expansionary effects on the Home region. Third, in the short run the expansionary effects on the EA economy of a EA-wide tax reduction are enhanced if the EA monetary policy is accommodative. JEL Classification: E24, E32, E52, E62, F45
    Keywords: DSGE models, labour taxes, monetary union, open-economy macroeconomics, unemployment
    Date: 2018–02
  2. By: Lloyd, Simon (Bank of England)
    Abstract: I assess the use of overnight indexed swap (OIS) rates as measures of monetary policy expectations. I find that one to twelve-month US OIS rates provide measures of investors’ interest rate expectations that are comparable to those from corresponding-horizon federal funds futures rates, which have regularly been used as financial market-based measures of US interest rate expectations. More generally, I find that one to 24-month US, euro-zone and Japanese OIS rates and one to 18-month UK OIS rates tend to accurately measure expectations of future short-term interest rates. Motivated by these results, researchers can look to OIS rates as globally comparable measures of monetary policy expectations.
    Keywords: Federal funds futures; overnight indexed swaps; monetary policy expectations
    JEL: E43 E44 E52
    Date: 2018–03–01
  3. By: Laureys, Lien (Bank of England); Meeks, Roland (Bank of England)
    Abstract: We study the policy design problem faced by central banks with both monetary and macroprudential objectives. We find that a time-consistent policy is often superior to a widely studied class of simple monetary and macroprudential rules. Better outcomes result when interest rates adjust to macroprudential policy in an augmented monetary policy rule.
    Keywords: Monetary policy; macroprudential policy; DSGE models
    JEL: E44 E52 G28
    Date: 2017–12–21
  4. By: Jarocinski, Marek; Karadi, Peter
    Abstract: Central bank announcements simultaneously convey information about monetary policy and the central bank's assessment of the economic outlook. This paper disentangles these two components and studies their effect on the economy using a structural vector autoregression estimated on both US and euro area data. It relies on the information inherent in high-frequency comovement of interest rates and stock prices around policy announcements: a surprise policy tightening raises interest rates and reduces stock prices, while the complementary positive central bank information shock raises both. These two shocks have intuitive and very different effects on the economy. Ignoring the central bank information shocks biases the inference on monetary policy non-neutrality. We make this point formally and offer an interpretation of the central bank information shock using a New Keynesian macroeconomic model with financial frictions.
    Keywords: Central Bank Private Information; High-Frequency Identification; Monetary Policy Shock; structural VAR
    JEL: E32 E52 E58
    Date: 2018–03
  5. By: Yosuke Okazaki (Bank of Japan); Nao Sudo (Bank of Japan)
    Abstract: In this paper, we explore the level and determinants of the natural rate of interest in Japan. To this end, we construct a DSGE model that is specifically designed to address potential drivers of the natural rate that are considered important in previous studies, and estimate the model using Japan's data from 1980 to 2017. Our findings are summarized in the following three points. First, the natural rate has shown a secular decline over time, from 400 basis points in the 1980s, to 30 basis points in the last five years. The decline has been mostly attributed to changes in neutral technology. Changes in investment-specific technology, working-age population, and demand factors have also contributed to the decline, but the quantitative impacts have been small. Second, a secular decline and the quantitative importance of neutral technology are also seen when considering the expected future natural rates over a long horizon, indicating that changes in the natural rate have been perceived as persistent rather than temporal changes over the course of history. Third, in the banking crisis starting in the 1990s, financial factors stood out as an important driver that depressed the natural rate. Their contribution holds second place, after changes in neutral technology, when comparing potential drivers by the size of their contribution to variations in the natural rate. Our results suggest the need to monitor the financial intermediation function, as well as the path of neutral technology when analyzing developments in the natural rate.
    Keywords: Natural Rate of Interest; Monetary Policy Implementation; DSGE Model
    JEL: E32 E43 E44 E52
    Date: 2018–03–14
  6. By: Christopher D. Carroll; Edmund Crawley; Jiri Slacalek; Kiichi Tokuoka; Matthew N. White
    Abstract: Macroeconomic models often invoke consumption “habits” to explain the substantial persistence of aggregate consumption growth. But a large literature has found no evidence of habits in microeconomic datasets that measure the behavior of individual households. We show that the apparent conflict can be explained by a model in which consumers have accurate knowledge of their personal circumstances but ‘sticky expectations’ about the macroeconomy. In our model, the persistence of aggregate consumption growth reflects consumers’ imperfect attention to aggregate shocks. Our proposed degree of (macro) inattention has negligible utility costs, because aggregate shocks constitute only a tiny proportion of the uncertainty that consumers face.
    JEL: D83 D84 E21 E32
    Date: 2018–03
  7. By: Hagedorn, Marcus
    Abstract: In this paper I show that models in which government bonds are net wealth - that is, their value exceeds that of tax liabilities (Barro, 1974) - offer a new perspective on several issues in monetary economics. First and foremost, prices and inflation are jointly and uniquely determined by fiscal and monetary policy. In contrast to the conventional view, the long-run inflation rate here is, in the absence of output growth, and even when monetary policy operates an interest rate rule with a different inflation target, equal to the growth rate of nominal fiscal variables, which are controlled by fiscal policy. This novel theory also offers a different perspective on the fiscal and monetary transmission mechanism, policies at the zero-lower bound, U.S. inflation history, recent attempts to stimulate inflation in the Euro area and several puzzles which arise in New Keyensian models during a liquidity trap. To derive my findings, I first use a reduced form approach in which households derive utility from holding bonds. I prove how and for which policy rules the price level is globally determinate, then showing that the reduced form results carry over to a Bewley-Imrohoroglu-Huggett-Aiyagari heterogenous agent incomplete market model.
    Keywords: Fiscal Multiplier; Fiscal policy; incomplete markets; inflation; monetary policy; Policy Coordination; Price Level Determinacy; Ricardian Equivalence; zero lower bound
    JEL: D52 E31 E43 E52 E62 E63
    Date: 2018–03
  8. By: Hyeongwoo Kim
    Abstract: This paper empirically investigates the fiscal policy effects on labor market conditions, employing an array of structural vector autoregressive models for the post-war U.S. data from 1960:I to 2017:II. Fiscal spending shocks increase jobs in the government sector at the cost of private sector jobs, resulting in net losses to the total employment. Private wages increase insignificantly in the short-run, while government wages rise significantly and persistently in response to the fiscal shock. Consequently, the wage gap across the two sectors widens in response to the fiscal shock. The wage shock yields significantly positive responses of corporate profits in the long-run as it enhances productivity, which supports wage-led growth models. On the other hand, I report negligible in-sample and out-of-sample predictive contents for private jobs and wages from corporate profits, meaning that there's virtually no evidence of the trickle-down effect, which is essential for profit-led growth models.
    Keywords: Government Spending; Labor Market Condition; Trickle-Down Effect; Profit-Led Growth; Wage-Led Growth; Out-of-Sample Forecast
    JEL: E24 E52 E62
    Date: 2018–03
  9. By: Raputsoane, Leroi
    Abstract: This paper analyses the role of monetary policy in targeting financial stress as opposed to the exchange rate in South Africa. This is achieved by augmenting the central bank’s monetary policy reaction function with the composite indicator of financial stress and the nominal bilateral exchange rate between the US dollar and the South African rand. The results show that the monetary authority adopts an accommodative monetary policy stance in the face of financially stressful economic conditions. The paper further finds a statistical insignificant as well as negligible reaction of the nominal bilateral foreign exchange rate to the changes in the monetary policy interest rate. The paper concludes that, although evidence exists that the monetary policy interest rate in South Africa has reacted to both the indicator of financial stress and the nominal bilateral foreign exchange rate, the impact of such a reaction seems to be more significant on the indicator financial stress as opposed to the exchange rate.
    Keywords: Monetary policy, Financial stress, Foreign exchange rate
    JEL: C11 E43 E58 F31
    Date: 2018–02–28
  10. By: E. Jondeau; J-G. Sahuc
    Abstract: We quantify the capital shortfall that results from a global financial crisis by using a macrofinance dynamic stochastic general equilibrium model that captures the interactions between the financial and real sectors of the economy. We show that a crisis similar to that observed in 2008 generates a capital shortfall (or stressed expected loss, SEL) equal to 2.8% of euro-area GDP, which corresponds to approximately 250 billion euros. We also find that using a cycle-dependent capital ratio that combines concern for both credit growth and SEL has a positive effect on output growth while mitigating the excessive risk taking of the banking system. Finally, our estimates confirm that most of the variability of the macroeconomic and financial variables at business cycle frequencies is due to investment and risk shocks.
    Keywords: capital shortfall, systemic risk, leverage, financial system, euro area, DSGE model.
    JEL: E32 E44 G01 G21
    Date: 2018
  11. By: Raputsoane, Leroi
    Abstract: This paper analyses the monetary policy reaction function pre and post the recent global financial crisis in South Africa. This is achieved by comparing the reaction function of the the monetary policy interest rate to changes in the target variables that comprise the inflation rate, output gap and financial stress index pre and post the recent global financial crisis. The results show a negligible reaction of the monetary policy to changes in inflation in the pre and post the recent global financial crisis period. The results further show a relatively loose monetary policy stance during the financially stressful economic conditions in the pre and post the recent global financial crisis period. Most importantly, the results show that the reaction of monetary policy to changes in the target variables pre the recent global financial crisis period has not changed significantly compared to post the recent global financial crisis period. Therefore the paper concludes that there is no material difference in the conduct of monetary policy by the monetary authority in South Africa pre and post the recent global financial crisis.
    Keywords: Monetary policy, Financial stress, Foreign exchange rate
    JEL: C11 E43 E58 F31
    Date: 2018–02–28
  12. By: Carrillo, Julio A.; Mendoza, Enrique G.; Nuguer, Victoria; Roldán-Peña, Jessica
    Abstract: Quantitative analysis of a New Keynesian model with the Bernanke-Gertler accelerator and risk shocks shows that violations of Tinbergen’s Rule and strategic interaction between policymaking authorities undermine significantly the effectiveness of monetary and financial policies. Separate monetary and financial policy rules, with the latter subsidizing lenders to encourage lending when credit spreads rise, produce higher welfare and smoother business cycles than a monetary rule augmented with credit spreads. The latter yields a tight money-tight credit regime in which the interest rate responds too much to inflation and not enough to adverse credit conditions. Reaction curves for the choice of policy-rule elasticity that minimizes each authority’s loss function given the other authority’s elasticity are nonlinear, reflecting shifts from strategic substitutes to complements in setting policy-rule parameters. The Nash equilibrium is significantly inferior to the Cooperative equilibrium, both are inferior to a first-best outcome that maximizes welfare, and both produce tight money-tight credit regimes. JEL Classification: E44, E52, E58
    Keywords: financial frictions, financial policy, monetary policy
    Date: 2018–02
  13. By: Melolinna, Marko (Bank of England); Tatomir, Srdan (Bank of England); Miller, Helen (Institute for Fiscal Studies)
    Abstract: We use new firm-level estimates of the cost of capital and uncertainty to study the drivers of UK business investment in a neoclassical investment model. We construct firm-specific measures of the cost of capital and uncertainty and use new UK survey data to estimate firm-specific investment hurdle rates. There is substantial variation in the cost of capital and uncertainty faced by firms and we find both matter for investment. Firm heterogeneity might help explain the difference in firms’ investment paths shortly after the Great Recession. This suggests that, while common shocks, that is, aggregate uncertainty matters, it is also important to capture firm-specific uncertainty to better explain investment dynamics. Overall, between 2000 and 2015 investment responded relatively sluggishly to the cost of capital and more sharply to uncertainty, especially after the financial crisis. There are implications for monetary and macroeconomic policy. The relative importance of measures that alleviate uncertainty compared to changes in monetary policy rates could be larger than generally recognised.
    Keywords: Investment; micro data; panel regression; hurdle rates; cost of capital; uncertainty
    JEL: C23 D22 E22 E44
    Date: 2018–03–02
  14. By: Assadi, Marzieh
    Abstract: This paper aims to contribute to the empirical literature on the interaction between monetary and fiscal policy. We consider the impact of monetary and fiscal policy shocks on inflation and output dynamics using a Time-Varying Parameter Factor-Augmented VAR (TVP-FAVAR). In baseline results from a linear model, including fiscal policy in the factors has implications for the impact of monetary policy shocks on inflation. This can be explained with the generated positive wealth effects. Moreover, results from our TVPFAVAR indicate that price puzzles from monetary policy shocks are more accentuated during particular regimes. For example, under coordination of Fiscal-Active with Monetary-Passive policy during the Burns and Volcker regime of 1970s and 1980s inflation rise in response to a contractionary monetary policy shock. Likewise the baseline model, the underlying mechanism can be explained through the wealth effect channel. Finally, the results of a fiscal expansionary policy provide support for the non-Ricardian view on fiscal policy within both the linear and non-linear FAVAR model.
    Keywords: Monetary and Fiscal Policy Interaction; Ricardian Equivalence; Price Puzzle; TVPFAVAR
    JEL: E61 E62 E63 E65
    Date: 2017–10–01
  15. By: Darwin Ugarte Ontiveros (Ministerio de Economía y Finanzas Públicas)
    Abstract: This paper analyzes the performance of fiscal policy in Bolivia in years 2003-2015. To this end, the structural fiscal balance and the fiscal impulse are calculated with the aim of characterizing the expansive or contractive nature thereof and determining whether the fiscal policy in recent years has been procyclical or countercyclical relative to evolution of the economic cycle. The findings suggest that the fiscal policy in Bolivia was contractive over years 2003 to 2008 and expansive in the period 2009-2015. Moreover, compared to the economic cycle the fiscal policy was countercyclical from 2003 to 2012, procyclical in 2013 and 2014 and countercyclical in 2015. These results are maintained when using information from the Non-Financial Public Sector (NFPS) or of the Treasury, different classifications of the fiscal accounts or when approximating the non-hydrocarbons fiscal balance. Additionally, the paper highlights the heterodox nature of Bolivia’s fiscal policy and identifies public investment as a countercyclical fiscal policy instrument.
    Keywords: Structural Fiscal Balance, Fiscal Impulse, Cyclicality of the Fiscal Policy
    JEL: H61 E62 E32
    Date: 2016–07
  16. By: Kuusi, Tero
    Abstract: In this article, I evaluate the challenges related to the European Commission’s output gap method of calculating the structural budgetary position, and assess its bottom-up alternatives in the EU’s fiscal framework using the Finnish data for the years 1984-2014. The results reinforce the impression of the limited capacity of the output gap method to predict cyclical changes in real time and suggest that using the output gap method to steer fiscal policy tends to lead to a procyclical policy (stimulus in upturns and austerity in downturns). The bottom-up assessment methods that are based on discretionary fiscal policy measures appear to work better, and using them to steer the fiscal policy could make the policy more countercyclical.
    Keywords: Structural budget balance, output gap, fiscal stance, discretionary fiscal effort
    JEL: E62 H60
    Date: 2018–02–26
  17. By: Mengheng Li (VU Amsterdam); Siem Jan (S.J.) Koopman (VU Amsterdam; Tinbergen Institute, The Netherlands)
    Abstract: We consider unobserved components time series models where the components are stochastically evolving over time and are subject to stochastic volatility. It enables the disentanglement of dynamic structures in both the mean and the variance of the observed time series. We develop a simulated maximum likelihood estimation method based on importance sampling and assess its performance in a Monte Carlo study. This modelling framework with trend, seasonal and irregular components is applied to quarterly and monthly US inflation in an empirical study. We find that the persistence of quarterly inflation has increased during the 2008 financial crisis while it has recently returned to its pre-crisis level. The extracted volatility pattern for the trend component can be associated with the energy shocks in the 1970s while that for the irregular component responds to the monetary regime changes from the 1980s. The scale of the changes in the seasonal component has been largest during the beginning of the 1990s. We finally present empirical evidence of relative improvements in the accuracies of point and density forecasts for monthly US inflation.
    Keywords: Importance Sampling; Kalman Filter; Monte Carlo Simulation; Stochastic Volatility; Unobserved Components Time Series Model; Inflation
    JEL: C32 C53 E31 E37
    Date: 2018–03–21
  18. By: Kunovac, Davor; Mandler, Martin; Scharnagl, Michael
    Abstract: We study the cross-country dimension of financial cycles for six euro area countries using three different methodologies: principal component analysis, synchronicity and similarity measures and wavelet analysis. We find that equity prices and interest rates display synchronization across countries similar to or exceeding that of real GDP. In contrast, our estimates show much lower cross-country synchronization of credit variables and house prices - bank lending to nonfinancial firms being an exception with relatively large cross-country co-movements. These results are robust across the different estimation methodologies. Concerning time-variation we find evidence for a decline in the extent of co-movements in house prices over time while comovements in the term spread have increased with the introduction of the European monetary union.
    Keywords: financial cycles,band-pass filter,principal components,wavelet analysis
    JEL: C32 C38 E44 E51
    Date: 2018
  19. By: Zouhair Aït Benhamou
    Abstract: Imperfect governance exacerbates macroeconomic fluctuations in emerging economies. We use strategic interactions between public and private goods to link price stickiness and institutional failure. The government as a provider of public goods exhibits agency in its relationship with households, and that yields to welfare losses for the latter. The government also faces a sub-optimal Laffer curve because of its inability to extract taxes. Imperfect governance also has an impact on terms of trade, as it distorts domestic prices in comparison to those of imported goods.
    Keywords: inflation, nominal rigidities, government, agency theory, strategic interactions, Phillips curve
    JEL: E31 E62 H41 P16
    Date: 2018
  20. By: Gerlach, Stefan; Stuart, Rebecca
    Abstract: The FOMC's "dot plots" contain members' views regarding what federal funds rate will be necessary in the end of this and the coming years for the FOMC to achieve its statutory objectives. The dots can be interpreted as instantaneous forward rates. We fit a curve, which is characterised by four parameters, through them and study how it moves with the economy. We find that the level of the federal funds rate the month before the FOMC meeting, the unemployment rate and (updated) estimates by Laubach and Williams (2003) of the natural real interest rate shape the curves.
    Keywords: Federal Reserve; interest rate expectations; monetary policy
    JEL: E52 E58
    Date: 2018–03
  21. By: Peter Claeys; Borek Vasicek
    Abstract: Numerous recent studies, starting with Bloom (2009), highlight the impact of varying uncertainty levels on economic activity. These studies mostly focus on individual countries, and cross-country evidence is scarce. In this paper, we use a set of (panel) BVAR models to study the effect of uncertainty shocks on economic developments in EU Member States. We explicitly distinguish between domestic, common and global uncertainty shocks and employ new proxies of uncertainty. The domestic uncertainty indicators are derived from the Business and Consumer Surveys administered by the European Commission. The common EU-wide uncertainty is subsequently derived by means of a factor model. Finally, the global uncertainty indicator - inspired by Jurado et al. (2015) - is extracted as a common factor from a broad set of forecast indicators that are not driven by the business cycle. The results suggest that real output in EU countries drops after spikes in uncertainty, mainly as a result of lower investment. Unlike for the U.S., there is little evidence of activity overshooting following this initial fall. The responses to uncertainty shocks vary across Member States. These differences can be attributed not mainly to different shock sizes, but rather to cross-country structural characteristics. Member States with more flexible labour markets and product markets seem to weather uncertainty shocks better. Likewise, a higher manufacturing share and higher economic diversification help dampen the impact of uncertainty shocks. The role of economic openness is more ambiguous.
    Keywords: Bayesian VAR, economic activity, uncertainty
    JEL: E32 G12 G35
    Date: 2017–12
  22. By: Lourdes Güenaga
    Abstract: En este trabajo se analizan los cambios que se producen sobre los mecanismos de transmisión de la política monetaria en un contexto de dolarización parcial para la economía uruguaya. Para esto se utiliza un modelo semi estructural con fundamentos neokeynesianos con mercado de dinero y regla de McCallum, en el que se incorpora la dolarización, en la demanda agregada a través de créditos en dólares y el efecto hoja de balance, y en la demanda de dinero vía el dólar como instrumento que compite con el peso. En particular, se estudian los efectos sobre los mecanismos de transmisión con distintas combinaciones de valores calibrados de coeficientes que funcionan como proxies de los diferentes efectos de la dolarización y luego se realiza una estimación Bayesiana de los mismos. Finalmente, se analizan los efectos con el modelo estimado, donde se encuentra que la dolarización afecta a los mecanismos de transmisión, de modo que, un shock de política monetaria contractivo genera una caída de producto mayor con un menor efecto sobre los precios, por lo que el ratio de sacrificio sería mayor en presencia de dolarización. Sin embargo, cabe destacar que la dolarización no limitaría el potencial rol estabilizador del ciclo económico de la política monetaria.
    Keywords: Política Monetaria, Dolarización, Modelos Neokeynesianos
    JEL: C51 E51 E52 E58
    Date: 2017–12
  23. By: Osmar Jasan Bolívar Rosales (Ministerio de Economía y Finanzas Públicas)
    Abstract: This research paper examines whether the expansion of the degree of bolivianization of the financial system has implications in terms of a greater effectiveness of the monetary policy. In this regard, an estimation is made of the function associated to the liquidity of the financial system, as the operational objective of the Central Bank of Bolivia’s monetary policy. The explanatory variables considered are the interactions between the instruments of the monetary policy, which are the Open Market Operations and the monetary regulation rate, with bolivianization of the financial system. The incorporation of these interaction variables approximates the variable effects of each instrument on liquidity control of the financial system for each specific value of the bolivianization in the period covered by the analysis. In addition, a Structural VAR is estimated which interrelates bolivianization and the variables making up the instruments, transmission mechanisms and the target variables of the monetary policy, with the aim of analyzing the implications of the effects of the bolivianization on the monetary policy transmission.
    Keywords: Bolivianization, Monetary Policy
    JEL: C10 E52 E58
    Date: 2016–07
  24. By: John B. Taylor
    Abstract: This paper reviews the state of the debate over rules versus discretion in monetary policy, focusing on the role of economic research in this debate. It shows that proposals for policy rules are largely based on empirical research using economic models. The models demonstrate the advantages of a systematic approach to monetary policy, though proposed rules have changed and generally improved over time. Rules derived from research help central bankers formulate monetary policy as they operate in domestic financial markets and the global monetary system. However, the line of demarcation between rules and discretion is difficult to establish in practice which makes contrasting the two approaches difficult. History shows that research on policy rules has had an impact on the practice of central banking. Economic research also shows that while central bank independence is crucial for good monetary policy making, it has not been enough to prevent swings away from rules-based policy, implying that policy-makers might consider enhanced reporting about how rules are used in monetary policy. The paper also shows that during the past year there has been an increased focus on policy rules in implementing monetary policy in the United States.
    Keywords: Â
    JEL: E52 E58 F33
    Date: 2018–02
  25. By: Jeronimo Carballo; Kyle Handley; Nuno Limão
    Abstract: We examine the interaction of economic and policy uncertainty in a dynamic, heterogeneous firms model. Uncertainty about foreign income, trade protection and their interaction dampens export investment. This can be mitigated by trade agreements, which are particularly valuable in periods of increased demand volatility. We use firm data to establish new facts about U.S. export dynamics in 2003-2011 and estimate the model. We find a significant role for uncertainty in explaining the trade collapse in the 2008 crisis and partial recovery in its aftermath. Consistent with the model predictions, we find that the negative effects worked (1) through the extensive margin, (2) in destinations without preferential agreements with the U.S. (accounting for over half its trade) and (3) in industries with higher potential protection. U.S. exports to non-preferential markets would have been 6.5% higher under an agreement—equivalent to an 8% foreign GDP increase. These findings highlight and quantify the value of international policy commitments through agreements that mitigate uncertainty, particularly during downturns.
    JEL: E02 E3 E61 F02 F1 F14 F15 F55
    Date: 2018–03
  26. By: Julio Carrillo (Banco de Mexico)
    Abstract: We study the transmission of U.S. macro shocks to the Mexican economy. We use a SVAR model to identify, using sign and zero restrictions, six aggregate disturbances originated in the U.S., such as changes in economic policy uncertainty, total factor productivity (TFP), aggregate demand, cost-push shocks, and two types of monetary policy shocks. We then document how these foreign shocks propagated to Mexico over the period 2002Q1-2016Q2. We find that U.S. aggregate shocks may explain up to 78% of output fluctuations in Mexico in the long run, and around 60% of core inflation volatility. Further, our results suggest that shocks to U.S. aggregate demand are the more important foreign disturbances affecting Mexican output. In contrast, uncertainty shocks to U.S. economic policy explain little of Mexican output volatility, even if economic activity seemed to respond to this shock in both countries. Our evidence suggests that the economic policy uncertainty shock was mainly absorbed by the nominal exchange rate, explaining around 20% of its fluctuations.
    Date: 2017
  27. By: Luis Alberto Arce Catacora (Ministerio de Economía y Finanzas Públicas); David Quiroz Sillo (Ministerio de Economía y Finanzas Públicas); José Alberto Villegas Gómez (ILADES)
    Abstract: Can aggregate demand policies bring about economic growth in the long term? What is the impact of a better resource distribution on long-term economic growth in Bolivia? These questions are analyzed within the framework of a Kaleckian model of economic growth to make an empirical study of the relationships between the aggregate demand, distribution and growth. For estimating the structural behavior equations of the prevailing regimes in the Bolivian economy, Bayesian methods were used. The conclusions are that the Bolivian economy displays a wage-led demand regime and an overall contractive regime in the profit share (i.e. when the benefits in the profit share increase, economic growth goes down), and therefore a better resource distribution. When the aggregate demand increases, long-term economic growth will be greater. The results show that a decrease of 1% in the profit share, which increases the annual wage of the workers by approximately BOB 268.4, will lead to an annual aggregate output increase of 0,57%.
    Keywords: Growth, Distribution, Demand-Driven Accumulation Regime, Productivity Regime, Endogenous Technological Change, Bayesian Analysis
    JEL: E11 E22 C11
    Date: 2016–07
  28. By: Ivo Maes (National Bank of Belgium and Robert Triffin Chair, Université catholique de Louvain and ICHEC Brussels Management School, Boulevard de Berlaimont 14, 1000 Brussels, Belgium); Rebeca Gomez Betancourt (University of Lyon 2. Triangle-ISH)
    Abstract: The establishment of a central bank occurred at very different moments in the process of economic integration in the United States and the European Union. In this paper, we go into the first years of the Federal Reserve System through the lens of Paul van Zeeland’s PhD dissertation. Paul van Zeeland (1893-1973) became the first Head of the Economics Service of the National Bank of Belgium in 1921, after his studies in Princeton with Edwin Walter Kemmerer. There are clear similarities in their analyses of the Federal Reserve System, for instance in their adherence to the gold standard and the real bills doctrine as well as in their emphasis on the elasticity of the money supply. Moreover, they shared a view - with hindsight a rather naïve view - that with the Fed in place, financial crises would be a distant memory. However, there were also important differences. So, van Zeeland, like several other economists as Warburg, accorded greater significance to the discount market (a key factor for the international role of the dollar) and to a stronger centralization of the Fed (which would be taken up in the 1935 Banking Act). Moreover, very specific for van Zeeland is the importance given to the Fed's independence from the State (an element related to his continental European background and Belgium's experience of monetary financing during the war).
    Keywords: van Zeeland, Kemmerer, Federal Reserve System, financial crisis, banking reform
    JEL: A11 B1 E58 F02 N23
    Date: 2018–03
  29. By: Hoi Wai Jackie Cheng; Ingo Pitterle
    Abstract: The prolonged sluggishness in the world economy since the global financial crisis has led to growing calls for a reorientation of macroeconomic policies toward more supportive fiscal measures. Such calls inevitably invite the question of how much fiscal space governments actually have. This paper provides a systematic review of the most popular definitions and measures of fiscal space. It examines the evolution of fiscal space measures and discusses the pros and cons of each measure. It then outlines several key factors that could help to further strengthen existing approaches and allow a more comprehensive assessment of fiscal space. By illustrating how different measures paint considerably different pictures of an economy’s fiscal space, the paper underscores the need to use a dashboard of indicators.
    Keywords: Fiscal space; quantitative measures of fiscal space; debt sustainability
    JEL: C82 E62 H60 H63
    Date: 2018–01
  30. By: Farmer, Roger E A; Zabczyk, Pawel
    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.
    JEL: E0 H62
    Date: 2018–03
  31. By: Sangyup Choi; Davide Furceri; Prakash Loungani
    Abstract: Central bankers often assert that low inflation and anchoring of inflation expectations are good for economic growth (Bernanke 2007, Plosser 2007). We test this claim using panel data on sectoral growth for 22 manufacturing industries for 36 advanced and emerging market economies over the period 1990-2014. Inflation anchoring in each country is measured as the response of inflation expectations to inflation surprises (Levin et al., 2004). We find that credit constrained industries—those characterized by high external financial dependence and R&D intensity and low asset tangibility—tend to grow faster in countries with well-anchored inflation expectations. The results are robust to controlling for the interaction between these characteristics and a broad set of macroeconomic variables over the sample period, such as financial development, inflation, the size of government, overall economic growth, monetary policy counter-cyclicality and the level of inflation. Importantly, the results suggest that it is inflation anchoring and not the level of inflation per se that has a significant effect on average industry growth. Finally, the results are robust to IV techniques, using as instruments indicators of monetary policy transparency and independence.
    Date: 2018–03–02
  32. By: Fujiwara, Ippei; Waki, Yuichiro
    Abstract: Should the fiscal authority use forward guidance to reduce future policy uncertainty perceived by private agents? Using dynamic general equilibrium models, we examine the welfare effects of announcing future fiscal policy shocks and show that selective transparency is desirable — announcing future policy shocks that are distortionary can be detrimental to ex ante social welfare, whereas announcing non-distortionary shocks generally improves welfare. Sizable welfare gains are found with constructive ambiguity regarding the timing of a tax increase in a realistic fiscal consolidation scenario. However, being secretive about distortionary shocks is time inconsistent, and welfare loss from communication may be unavoidable.
    Keywords: news shock, fiscal policy, private information, communication, forward guidance
    JEL: D82 E62 H20 E30
    Date: 2018–03
  33. By: Koichi Futagami (Graduate School of Economics, Osaka University); Kunihiko Konishi (Institute of Economic Research, Kyoto University)
    Abstract: We construct an endogenous growth model with public capital and endogenous labor supply and examine quantitatively the welfare effects of fiscal consolidation on the Japanese economy. We consider two modes of fiscal consolidation: the adjustment to a new lower target of the debt-to-GDP and deficit-to-GDP ratios. We find that the debt and deficit reduction rules based only on government consumption and investment expenditure cuts improve households' welfare. This improvement in households' welfare becomes large as the speed of fiscal consolidation rises. Further, reductions in the target debt-to-GDP or deficit-to-GDP ratio generate larger welfare gains. We also discuss the welfare effects of fiscal consolidation with tax increases and transfer payment decreases.
    Keywords: Fiscal consolidation; Endogenous growth; Welfare
    JEL: E62 H54 H60
    Date: 2018–03–12
  34. By: Jiménez Polanco, Miguel Alejandro; Ramírez de Leon, Francisco Alberto
    Abstract: In this paper we compare the official core inflation measure, which is based on the ad hoc exclusion of specific items from the total CPI, against alternatives available in the literature on measurement of trend inflation. The evaluation is done through different criteria that adequate core inflation must display; i.e.: (1) less volatility relative to total inflation, (2) absence of bias related to total inflation and (3) predictive power on medium run inflation. Our results suggest that the official indicator delivers the desired properties. Moreover, it overcomes most of the alternative measures available in the literature.
    Keywords: Inflation, CPI, Core inflation
    JEL: C10 C43
    Date: 2017–12
  35. By: Dimitri Kroujiline; Maxim Gusev; Dmitry Ushanov; Sergey V. Sharov; Boris Govorkov
    Abstract: This paper suggests that business cycles may be a manifestation of coupled economy-market dynamics and describes a mechanism that can generate economic fluctuations consistent with observed business cycles. To this end, we seek to incorporate into the macroeconomic framework a dynamic stock market model based on opinion interactions (Gusev et al., 2015). We derive this model from microfoundations, provide its empirical verification including market return prediction (backtested and live-track), demonstrate that it contains the efficient market as a particular regime and establish a link through which economic models can be attached for the study of economy-market interaction. To examine the key effects, we link this model with a simple economic model (Blanchard, 1981). The coupled system generates nontrivial endogenous dynamics, which exhibit deterministic and stochastic features, producing quasiperiodic fluctuations (business cycles). We also inspect this system's behavior in the phase space. The economy and the market are shown to coevolve dynamically along the path governed by a stochastically-forced dynamical system with two stable equilibria, one where the economy expands and the other where it contracts, resulting in business cycles identified as the coherence resonance phenomenon. Thus, the incorporation of market dynamics into the macroeconomic framework, as presented here, allows the derivation of realistic behaviors in a tractable setting, and so could enhance models applied for policy analysis.
    Date: 2018–03
  36. By: Vaclav Broz; Lukas Pfeifer; Dominika Kolcunova
    Abstract: We analyze the cyclicality of risk weights of banks in the Czech Republic from 2008 to 2016. We differentiate between risk weights under the internal ratings-based and those under the standardized approach, consider both the business cycle and the financial cycle, and employ wavelet coherence as a means of dynamic correlation analysis. Our results indicate that the risk weights of exposures under the internal ratings-based approach, including risk weights related to exposures secured by real estate collateral, are procyclical with respect to the financial cycle. We also show that the effect of changing asset quality on risk weights is present for the internal ratings-based approach, in line with our expectations based on regulatory standards. Our results can be employed for the purposes of decision-making on the activation of supervisory and macroprudential instruments, including the countercyclical capital buffer.
    Keywords: Financial cycle, financial stability, internal ratings-based approach, risk weight
    JEL: C14 E32 G21 G28 K23
    Date: 2017–12
  37. By: Ewa Karwowski (UH - University of Hertfordshire [Hatfield]); Marcos Centurion-Vicencio (CREG - Centre de recherche en économie de Grenoble - UPMF - Université Pierre Mendès France - Grenoble 2 - UGA - Université Grenoble Alpes)
    Abstract: Understanding the nature of state financialisation is crucial to ensure de-financialisation efforts are successful. This paper provides a structured overview of the emerging literature on financialisation and the state. We define financialisation of the state broadly as the changed relationship between the state, understood as sovereign with duties and accountable towards its citizens, and financial markets and practices, in ways that can diminish those duties and reduce accountability. We then argue that there are four ways in which financialisation works in and through public institutions and policies: adoption of financial motives, advancing financial innovation, embracing financial accumulation strategies, and directly financialising the lives of citizens. Organising our review around the two main policy fields of fiscal and monetary policy, four definitions of financialisation in the context of public policy and institutions emerge. When dealing with public expenditure on social provisions financialisation most often refers to the transformation of public services into the basis for actively traded financial assets. In the context of public revenue, financialisation describes the process of creating and deepening secondary markets for public debt, with the state turning into a financial market player. Finally, in the realm of monetary policy financial deregulation is perceived to have paved the way for financialisation, while inflation targeting and the encouragement, or outright pursuit, of market-based short-term liquidity management among financial institutions constitute financialised policies.
    Keywords: state,financialisation , monetary policy , fiscal policy , public policy , financialisation
    Date: 2018–03–02
  38. By: Sebastian Edwards
    Abstract: On December 31 1933, The New York Times published an open letter from John Maynard Keynes to President Franklin D. Roosevelt. In it Keynes encouraged FDR to expand public works through government borrowing. He also criticized FDR’s exchange rate policy, and argued that there was a need for lower long-term interest rates. But perhaps the most interesting feature of this letter is that Keynes made comments on the sequencing and speed of economic policies. He argued that “recovery” policies should precede “reform” measures. In this paper I analyze this particular aspect of the open letter, and I argue that for Keynes exchange rate stability was a key component of what he considered to be the appropriate order of policy. I also provide a comparison between Keynes’s views on sequencing and those developed in the 1980s and 1990s.
    JEL: B21 B22 B26 E31 F31 N12 N22
    Date: 2018–03
  39. By: Dasha Safonova (University of Notre Dame)
    Abstract: Shocks to the structure of the interbank lending network can have important macroeconomic repercussions. This paper examines the impact of the dynamic structure of the interbank lending network on interest rates and investment in the nonfinancial sector. By incorporating a network of bank relationships into a general equilibrium model with monetary policy, I show that the aggregate interest rate increases in response to a shock that destroys a large fraction of bank relationships and decreases in response to a shock that destroys a small fraction of relationships. Moreover, the shape of the interbank network matters for these dynamics: the interest rate is least responsive to the network disruptions if the interbank network is scale-free. Additionally, the amplification and propagation of the network shocks depend on the corridor of the policy rates set by the central bank. In particular, as the difference between the discount rate and the excess reserve rate decreases, the effect of a network disruption on interest rates becomes less significant but more persistent, which in turn leads to a smaller but more prolonged effect on the real sector.
    Date: 2017
  40. By: Peter Benczur (European Commission Joint Research Centre - Finance and Economy Unit B.01); Zsombor Cseres-Gergely (European Commission Joint Research Centre - Finance and Economy Unit B.01); Peter Harasztosi (European Commission Joint Research Centre - Finance and Economy Unit B.01)
    Abstract: This paper uses microdata to look at stylised facts of EU-wide income inequality during the 2006-2013 period. Our contribution is to bring together four elements of the analysis that has appeared only in separation so far. Our analysis is EU-wide, but regionally detailed, looks at the longeset possible term with harmonized survey data, uses inequality indicators sensitive to different parts of the income distribution and shows the contribution of income components to income inequality. Using this, we are able to show how the dynamics of inequality in Europe was shaped by changes on the periphery, in hours worked, in wages and in the structure of households.
    Keywords: income inequality, European Union
    JEL: D31 E24 H31 J31
    Date: 2017–11
  41. By: Francesca Carapella (Federal Reserve Board)
    Abstract: In a dynamic model with credit under limited commitment money can be essential when limited memory weakens the effects of punishment for default. There exist equilibria where both money and credit are used as media of exchange, and default occurs. In this equilibria the Friedman rule is not optimal. Inflation acts to discourage default by raising the cost of holding money, which is primarily held by defaulters. This results in relaxing the limited commitment constraint and raising welfare for all agents, including defaulting ones. The equilibrium is unique if and only if monetary policy and agents' money holdings are chosen sequentially.
    Date: 2017
  42. By: Liliana Rojas-Suarez (Center for Global Development)
    Abstract: This paper assesses the resilience of Paraguay’s economic and financial stability to external shocks. To this end, the paper expands on previous work by Rojas-Suarez (2015) and constructs a resilience indicator that has two dimensions: the first refers to the capacity of an economy to withstand the impact of a shock while the second signals the capacity of national authorities to quickly respond to its adverse effects. By applying the methodology of the resilience indicator to 22 emerging market economies, this paper reaches two main conclusions for Paraguay. The first is that the authorities’ efforts to improve the country’s macroeconomic stance since 2003 have paid off and will continue to do so if a new adverse external shock hits the economy. From the perspective of the second dimension of resilience, just as in the pre-global crisis period, Paraguay is now one of the most resilient countries among emerging markets. The second conclusion is that the first dimension of resilience, the economy’s capacity to withstand the impact of a shock, was not very strong in the pre-global financial crisis period and, relative to other emerging markets, has not improved since then. In the absence of reforms, Paraguay’s relatively weaker performance in structural variables (export concentration, national savings ratio, tax revenue collection, and financial depth) will severely limit the benefits of a strong macroeconomic stance to deal with the adverse effects of external shocks.
    Keywords: Emerging markets, economic resilience, external shocks, Paraguay, convergence, fiscal management, macroeconomic policies, local finance, external position
    JEL: G15 H60 O54
    Date: 2018–03–15
  43. By: Patrick Alexander; Louis Poirier
    Abstract: The impact of oil price shocks on the U.S. economy is a topic of considerable debate. In this paper, we examine the response of U.S. consumers to the 2014–2015 negative oil price shock using representative survey data from the Consumer Expenditure Survey. We propose a difference-in-difference identification strategy based on two factors, vehicle ownership and gasoline reliance, which generate variation in exposure to oil price shocks across consumers. Our findings suggest that exposed consumers significantly increased their spending relative to non-exposed consumers when oil prices fell, and that the average marginal propensity to consume out of gasoline savings was above 1. Across products, we find that consumers increased spending especially on transportation goods and non-essential items.
    Keywords: Business fluctuations and cycles, Domestic demand and components, Recent economic and financial developments
    JEL: D12 E21 Q43
    Date: 2018
  44. By: Canale, Rosaria Rita; de Grauwe, Paul; Foresti, Pasquale; Napolitano, Oreste
    Abstract: The recent dynamics characterizing the Eurozone economy suggest the existence of a new policy trilemma faced by its member countries. According to this policy trilemma, there is a trade-off between free capital mobility, financial stability and fiscal policy flexibility. In this paper, we analyze the foundations of such a trade-off and, based on the data for 11 Eurozone countries, present an empirical investigation on the existence of the trilemma. The results highlight the existence of the trade-off, with some differences between member countries. The existence of this trilemma in the Eurozone provides arguments for implementing centralized financial supervision together with fiscal and monetary reforms that should strengthen the currency union
    Keywords: EMU; Policy trilemma; Eurozone; Free capital mobility; Fiscal policy; Financial stability; Financial crisis
    JEL: C21 C23 E61 F41
    Date: 2018–12–12
  45. By: Oriol Carreras; E Philip Davis; Ian Hurst; Iana Liadze; Rebecca Piggott; James Warren
    Abstract: In this paper we incorporate a macroprudential policy model within a semi-structural global macroeconomic model, NiGEM. The existing NiGEM model is expanded for the UK, Germany and Italy to include two macroprudential tools: loan-to-value ratios on mortgage lending and variable bank capital adequacy targets. The former has an effect on the economy via its impact on the housing market while the latter acts on the lending spreads of corporate and households. A systemic risk index that tracks the likelihood of the occurrence of a banking crisis is modelled to establish thresholds at which macroprudential policies should be activated by the authorities. We then show counterfactual scenarios, including a historic dynamic simulation of the subprime crisis and the endogenous response of policy thereto, based on the macroprudential block as well as performing a cost-benefit analysis of macroprudential policies. Conclusions are drawn relating to use of this tool for prediction and policy analysis, as well as some of the limitations and potential further research.
    Keywords: macroprudential policy, house prices, credit, systemic risk, macroeconomic modelling
    JEL: E58 G28
    Date: 2018–03
  46. By: Giovanni Melina; Rafael A Portillo
    Abstract: We compare business cycle fluctuations in Sub-Saharan African (SSA) countries vis-à-vis the rest of the world. Our main results are as follows: (i) African economies stand out by their macroeconomic volatility, which is is reflected in the volatility of output and other macro variables; (ii) inflation and output tend to be negatively correlated; (iii) unlike advanced economies and emerging markets (EMs), trade balances and current accounts are acyclical in SSA; (iv) the volatility of consumption and investment relative to GDP is larger than in other countries; (v) the cyclicality of consumption and investment is smaller than in advanced economies and EMs; (vi) there is little comovement between consumption and investment; (vii) consumption and investment are strongly positively correlated with imports.
    Date: 2018–03–05
  47. By: Aikman, David (Bank of England); Haldane, Andrew (Bank of England); Hinterschweiger, Marc (Bank of England); Kapadia, Sujit (European Central Bank)
    Abstract: The global financial crisis has been the prompt for a complete rethink of financial stability and policies for achieving it. Over the course of the better part of a decade, a deep and wide-ranging international regulatory reform effort has been under way, as great as any since the Great Depression. We provide an overview of the state of progress of these reforms, and assess whether they have achieved their objectives and where gaps remain. We find that additional insights gained since the start of the reforms paint an ambiguous picture on whether the current level of bank capital should be higher or lower. Additionally, we present new evidence that a combination of different regulatory metrics can achieve better outcomes in terms of financial stability than reliance on individual constraints in isolation. We discuss in depth several recurring themes of the regulatory framework, such as the appropriate degree of discretion versus rules, the setting of macroprudential objectives, and the choice of policy instruments. We conclude with suggestions for future research and policy, including on models of financial stability, market-based finance, the political economy of financial regulation, and the contribution of the financial system to the economy and to society.
    Keywords: Financial stability; macroprudential policy; Basel III; capital requirements; liquidity requirements
    JEL: G01 G18 G21 G28
    Date: 2018–02–23
  48. By: John B. Taylor
    Abstract: This paper traces the evolution of the Fed's balance sheet in the years since the global financial crisis and presents economic reasons why the eventual size of the balance sheet and level of reserve balances should be such that the interest rate is determined by the demand and supply of reserves—in other words, by market forces—rather than by an administered rate under interest on excess reserves (IOER). The Fed would thus be operating as it did in the years before the crisis. The paper also contrasts this size with a system where the supply of reserves remains above the demand, and the interest rate must be administered through IOER.
    Keywords: Â
    Date: 2018–03
  49. By: Martijn Boermans; Robert Vermeulen
    Abstract: Quantitative easing (QE) aims to lower long term interest rates and stimulate economic growth via the portfolio rebalancing channel. One of the assumptions for QE to work is that there are investors with strong preferences to hold long term bonds, i.e. so called preferred habitat investors. This paper investigates whether the ECB's Public Sector Purchase Programme (PSPP) affected euro area investors' demand for bonds using granular securities holdings data. The results show strong evidence that euro area investors acted as preferred habitat investors. These findings hold across all major euro area investors (banks, insurance companies, pension funds and investment funds). The results suggest that since the sellers of bonds in response to QE in the euro area are different from those that sold to the Fed, BoE and BoJ, policymakers need to pay particular attention to demand by non-euro area investors, especially if the ECB plans to reduce its balance sheet.
    Keywords: quantitative easing; sovereign bonds; European Central Bank; PSPP; securities holdings statistics
    JEL: E58 F42 G11 G15
    Date: 2018–02
  50. By: Pandey, Radhika (National Institute of Public Finance and Policy); Patnaik, Ila (National Institute of Public Finance and Policy); Shah, Ajay (National Institute of Public Finance and Policy)
    Abstract: This paper presents the business cycle chronology for the Indian economy. Two distinct phases are analysed. The pre-1991 period when the cycles were mainly driven by monsoon shocks. The post 1991 phase where we see the emergence of conventional business cycles driven by investment-inventory fluctuations. The paper sheds light on the economic conditions that shaped the nature of cycles in the two phases. The concluding section of the paper presents an overview of the economic conditions post 2012.
    Date: 2018–01
  51. By: Hirokuni Iiboshi; Mototsugu Shintani; Kozo Ueda
    Abstract: We estimate a small-scale macroeconomic model for Japan by taking into account the nonlinearity stemming from the zero lower bound (ZLB) of the nominal interest rate. To this end, we apply the Sequential Monte Carlo Squared method to the case of Japan, where the ZLB has constrained the country's monetary policy for a considerably long period. Employing a nonlinear estimation is crucial to deriving implications for monetary policy. For example, the Bayesian model selection suggests that past experience of recessions reducing the nominal interest rate to zero is carried over to today's monetary policy. However, a nonlinear estimation has little effect on the estimate of the natural rate of interest, which has often been negative since the mid-1990s.
    Date: 2018–03
  52. By: Gauti Eggertsson (Brown University); Neil Mehrotra (Brown University)
    Abstract: This paper analyzes the effect of increasing income inequality on real interest rates and the transmission of monetary policy to demand. Using a quantitative overlapping generations model, we investigate how skill-biased technical change and rising monopoly power in the US since 1980 can account for increases in income inequality, a decline in the labor share, and a decline in the investment to output ratio. We find that rising income inequality due to skill-biased technical change has a sizable effect on the real interest rate and attenuates the effectiveness of monetary policy by reducing the demand effect of a fall in the real interest rate.
    Date: 2017
  53. By: Marcelo Veracierto (Federal Reserve Bank of Chicago)
    Abstract: I consider a real business cycle model in which agents have private information about their stochastic value of leisure. For the case of logarithmic preferences I provide an analytical characterization of the solution to the associated mechanism design problem. Moreover, I show a striking irrelevance result: That the stationary behavior of all aggregate variables are exactly the same in the private information economy as in the full information case. I then introduce a new computational method to show that the irrelevance result holds numerically for more general CRRA preferences.
    Date: 2017
  54. By: Adam Kucera; Michal Dvorak; Lubos Komarek; Zlatuse Komarkova
    Abstract: The term structure of yields is an important source of information on market expectations about future macroeconomic developments and investors' risk perceptions and preferences. This paper presents the methodology used by the Czech National Bank to obtain such information. It describes the decomposition of the Czech government bond yield curve into its components. The evolution of those components is interpreted in relation to the macro-financial environment, as embodied by selected variables. The practical use of the decomposition in estimating and interpreting the responses of the Czech government bond yield curve to macroeconomic and financial shocks is presented using a vector autoregression model.
    Keywords: Affine model, decomposition, government bond, yield curve
    JEL: G11 G12 G23
    Date: 2017–12
  55. By: Aubhik Khan (Ohio State University)
    Abstract: We explore business cycles in quantitative overlapping generations economies where households face earnings risk characterised by the high kurtosis seen in the data, and unemployment risk. The model economy exhibits large inter-generational differences in wealth driven by households' savings over the life-cycle. This substantially increases the inequality of wealth arising from households' response to uninsurable income risk, and reproduces much of the wealth inequality in the data. Solving for equilibrium under aggregate uncertainty, we explore the mechanics of a large recession for both aggregate consumption and investment and the distribution of households. Importantly, our incomplete markets model generates declines in aggregate quantities similar to that seen in the Great Recession. As result, it allows us to evaluate the welfare costs of a large recession in an incomplete markets model consistent with the overall aggregate business cycle. While TFP fell relatively little, in the recent recession, there was a large fall in hours worked. Consistency with these observations, in the model, requires a large, persistent increase in unemployment risk. Overall, the welfare costs of the recession vary by the share of income households derive from capital and labour. Younger workers, with relatively low levels of wealth, suffer most of the large fall in expected earnings. These welfare costs are large, given the persistence of the recession and its large impact on the earnings of finite-lived households. Uninsurable risk and wealth inequality help shape the aggregate response of the economy. Investment falls by more when households face little income risk, holds less precautionary savings, and are more responsive to changes in real interest rates.
    Date: 2017
  56. By: Vincenzo Atella (DEF and CEIS,University of Rome "Tor Vergata"); Federico Belotti (CEIS,University of Rome "Tor Vergata"); Joanna Kopinska (CEIS, University of Rome "Tor Vergata"); Alessandro Palma (CEIS, University of Rome Tor Vergata); Andrea Piano Mortari (CEIS, University of Rome "Tor Vergata")
    Abstract: Since the seminal paper by Ruhm (2000), a large body of literature agrees on the existence of pro-cyclical fluctuation between economy’s performance and mortality, and this evidence has been confirmed also during the Great Recession (GR). In this study we identify a series of important limitations that may have severely affected previous results. For the first time in this literature we use patient level data collected by GPs in Italy, reporting mortality and objectively measured health information on a large representative population sample. We find a clear positive effect of a rise in unemployment on three important morbidity outcomes. The lag-lead analysis confirms the validity of our results, with changes in prevalences following the same dynamics of the unemployment rise since the starting of the economic slowdown. Our study shows also that the effect of unemployment on the total mortality is no longer significant when controlling for the existence of poor health conditions and suggests that the impact of severe economic downturns on population mortality should be reconsidered.
    Keywords: health status, unemployment, mortality, economic crisis, Great Recession
    JEL: I10 E32 J20 Q53
    Date: 2018–02–20
  57. By: Xisong Jin
    Abstract: In order to effciently capture the contribution to the aggregated systemic risk of each financial institution arising from various important balance-sheet items, this study proposes a comprehensive approach of “Mark-to-Systemic-Risk" to integrate book value data of Luxembourg financial institutions into systemic risk measures. It first characterizes systemic risks and risk spillovers in equity returns for 33 Luxembourg banks, 30 European banking groups, and 232 investment funds.1 The forward-looking systemic risk measures delta CoES, Shapley – delta CoES, SRISK and conditional concentration risk are estimated by using a large-scale dynamic grouped t-copula, and their common components are determined by the generalized dynamic factor model. Several important facts are documented during 2009-2016: (1) Measured by delta CoES of equity returns, Luxembourg banks were more sensitive to the adverse events from investment funds compared to European banking groups, and investment funds were more sensitive to the adverse events from banking groups than from Luxembourg banks. (2) Ranked by Shapley - delta CoES values, money market funds had the highest marginal contribution to the total risk of Luxembourg banks while equity funds exhibited the least share of the risk, and the systemic risk contribution of bond funds, mixed funds and hedge funds became more important toward the end of 2016. (3) The macroeconomic determinants of the aggregate systemic risk of banking groups, Luxembourg banks and investment funds, and the marginal contributions from 15 countries to the aggregate systemic risk of Luxemburg banks and their parent banking groups are all different.
    Keywords: _nancial stability; systemic risk; macro-prudential policy; dynamic copulas; value at risk; shapley values; risk spillovers
    JEL: C1 E5 F3 G1
    Date: 2018–02
  58. By: Ahnert, Toni; Forbes, Kristin; Friedrich, Christian; Reinhardt, Dennis
    Abstract: Can macroprudential foreign exchange (FX) regulations on banks reduce the financial and macroeconomic vulnerabilities created by borrowing in foreign currency? To evaluate the effectiveness and unintended consequences of macroprudential FX regulation, we develop a parsimonious model of bank and market lending in domestic and foreign currency and derive four predictions. We confirm these predictions using a rich dataset of macroprudential FX regulations. These empirical tests show that FX regulations: (1) are effective in terms of reducing borrowing in foreign currency by banks; (2) have the unintended consequence of simultaneously causing firms to increase FX debt issuance; (3) reduce the sensitivity of banks to exchange rate movements, but (4) are less effective at reducing the sensitivity of corporates and the broader financial market to exchange rate movements. As a result, FX regulations on banks appear to be successful in mitigating the vulnerability of banks to exchange rate movements and the global financial cycle, but partially shift the snowbank of FX vulnerability to other sectors.
    Keywords: Banking flows; FX regulations; International debt issuance; macroprudential policies
    JEL: F32 F34 G15 G21 G28
    Date: 2018–03
  59. By: Jennifer La'O (Columbia University); Luigi Iovino (Bocconi University)
    Abstract: We study a class of economies in which incomplete information is the source of nominal price, nominal wage, and real frictions. Firms make nominal price-setting and real production decisions under imperfect information about the state of the economy. Workers also make nominal wage-setting decisions under imperfect information. We characterize both optimal fiscal and monetary policy within this class.
    Date: 2017
  60. By: Pablo A. Guerron-Quintana (Boston College and Espol); Tomohiro Hirano (University of Tokyo); Ryo Jinnai (Hitotsubashi University)
    Abstract: We propose a model that generates permanent effects on economic growth following a recession (super hysteresis). Recurrent bubbles are introduced to an otherwise standard infinite-horizon business-cycle model with liquidity scarcity and endogenous productivity. In our setup, bubbles promote growth because they provide liquidity to constrained investors. Bubbles are sustained only when the financial system is under-developed. If the financial development is in an intermediate stage, recurrent bubbles can be harmful in the sense that they decrease the unconditional mean and increase the unconditional volatility of the growth rate relative to the fundamental equilibrium in the same economy. Through the lens of an estimated version of our model fitted to U.S. data, we argue that 1) there is evidence of recurrent bubbles; 2) the Great Moderation results from the collapse of the monetary bubble in the late 1970s; and 3) the burst of the housing bubble is partially responsible for the post-Great Recession dismal recovery of the U.S. economy.
    Date: 2018–03–12
  61. By: Paul J.J. Welfens (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))
    Abstract: BREXIT is a historical step for the UK and the EU27 which could bring a strong Pound deprecation, an increase in risk premiums for British bonds and a transitory rise of financial market volatility plus a long term reduction of economic growth in the UK. Macroprudential supervision thus is a crucial policy challenge for EU28 in the context of BREXIT and the European Systemic Risk Board thus should have a critical role in 2018 and the following years. The IMF’s FSAP as well as the ESRB thus should timely analyze the potential risk of BREXIT and consider adequate policy options to reduce or eliminate risks. As regards the ESRB this requires full cooperation of all EU28 actors in that organization. Moreover, the EU27 faces major problems in terms of prudential supervision after BREXIT since a very large part of EU27 wholesale banking markets are in the UK and thus not regulated by the EU after March 29, 2019. The EU Commission’s competence for EU trade policy as well as international investment treaties gives the EU the opportunity to offer the UK not only a – limited – Free Trade Agreement but an international investment treaty as well, including options for global cooperation. Contract continuity is a dangerous BREXIT challenge for EU-UK negotiations. The influence of US regulation on Europe will increase due to BREXIT. Several policy innovations are proposed.
    Keywords: Macroprudential supervision, Brexit, EU, financial risk, economic policy
    JEL: E5 E58 N14 G32
    Date: 2018–03
  62. By: Neumann, Tobias (Bank of England)
    Abstract: Default correlation is a key driver of credit risk. In the Basel regulatory framework it is measured by the asset value correlation parameter. Though past studies suggest that the parameter is over-calibrated for mortgages — generally the largest asset class on banks’ balance sheets — they do not take into account bias arising from small samples or non-Gaussian risk factors. Adjusting for these biases using a non-Gaussian, non-linear state space model I find that the Basel calibration is appropriate for UK and US mortgages. This model also forecasts mortgage default rates accurately and parsimoniously. The model generates value-at-risk estimates for future mortgage default rates, which can be used to inform stress-testing and macroprudential policy.
    Keywords: Mortgages; bank regulation; credit risk; default correlation; state space model; Basel Committee; stress testing; macroprudential policy
    JEL: G11 G17 G21 G28
    Date: 2018–02–09
  63. By: Zidong An; João Tovar Jalles; Prakash Loungani
    Abstract: We describe the evolution of forecasts in the run-up to recessions. The GDP forecasts cover 63 countries for the years 1992 to 2014. The main finding is that, while forecasters are generally aware that recession years will be different from other years, they miss the magnitude of the recession by a wide margin until the year is almost over. Forecasts during non-recession years are revised slowly; in recession years, the pace of revision picks up but not sufficiently to avoid large forecast errors. Our second finding is that forecasts of the private sector and the official sector are virtually identical; thus, both are equally good at missing recessions. Strong booms are also missed, providing suggestive evidence for Nordhaus’ (1987) view that behavioral factors—the reluctance to absorb either good or bad news—play a role in the evolution of forecasts.
    Date: 2018–03–05
  64. By: Kilhoffer, Zachary; Beblavý, Miroslav
    Abstract: The euro area continues to recover from the Great Recession, with several recent publications offering optimistic assessments of the euro area’s economic performance. The European Commission’s “Employment and Social Developments in Europe 2017” report, for example, praises moderate economic growth and “solid net job creation” in a “job-rich recovery”. While the European Commission acknowledged ongoing challenges such as youth unemployment, it must also be recognised that the euro area’s recovery has been piecemeal. Economic growth is encouraging, but it obscures the unemployed millions who have not tasted the fruits of the recovery. The euro area’s labour market, while posting gains, remains in a worse state than before the Great Recession. Nearly half of the unemployed in the euro area have been jobless for over a year. In contrast with the United States, Japan and other regions hit hard by the crisis, the euro area’s labour market exemplifies the most enduring damage of the Great Recession. This CEPS Policy Insight argues that European lawmakers need to soberly acknowledge the job market’s failures and take targeted action, addressing the regions and demographics for whom the recovery is not working.
    Date: 2017–07
  65. By: Pokar D Khemani; Benoit Wiest
    Abstract: The accuracy and reliability of government accounts and fiscal data is an issue in a number of countries, with significant and persistent discrepancies that can indicate underlying weaknesses in the country’s public financial management system. This note provides guidance on how to detect issues with data quality, perform integrity checks, and reconcile fiscal data from various sources. It discusses the importance of reconciliation to provide reasonable assurance on the quality and reliability of government fiscal data, explores the main reasons for which discrepancies may arise, and explains how to conduct quality checks. The note concludes with recommendations for country teams of concrete steps to ensure data quality.
    Keywords: Sub-Saharan Africa;Nicaragua;Malawi;Fiscal transparency;Public financial management;Western Hemisphere;Fiscal reporting;international standards, government financial statistics, data, data integrity, reconciliation, data quality
    Date: 2016–11–04
  66. By: Juan Carlos Cuestas; Karsten Staehr; Javier Ordóñez
    Abstract: The GIPS countries, the Southern European crisis countries, have seen depressed output dynamics and high unemployment since the outbreak of the global financial crisis. This paper considers the effects of measures that seek to improve competitiveness by reducing real unit labour costs. The results are derived in structural vector autoregressive models for each of the GIPS counties, and for the reference countries Germany and the Netherlands. The responses of output and unemployment to innovations in real unit labour costs are economically and statistically significant for Germany and the Netherlands, whereas the responses are typically small and imprecise estimated for the GIPS countries. The small and uncertain effects raise doubts regarding the efficacy of measures that seek to lower real unit labour costs in the GIPS countries.
    Date: 2018–03–22
  67. By: Roberto Piazza
    Abstract: Empirical tests of the New Keynesian Phillips Curve have provided results often inconsistent with microeconomic evidence. To overcome the pitfalls of standard estimations on aggregate data, a Full Information Partial Equilibrium approach is developed to exploit sectoral level data. A model featuring sectoral NKPCs subject to a rich set of shocks is constructed. Necessary and sufficient conditions on the structural parameters are provided to allow sectoral idiosyncratic components to be linearly extracted. Estimation biases are corrected using the model's restrictions on the partial equilibrium propagation of idiosyncratic shocks. An application to the US, Japan and the UK rejects the purely forward looking, labor cost-based NKPC.
    Date: 2018–03–09
  68. By: Kim, Kyunghun (Korea Institute for International Economic Policy); Kim, Soyoung (Seoul National University); Yang, Da Young (Korea Institute for International Economic Policy); Kang, Eunjung (Korea Institute for International Economic Policy)
    Abstract: Financial market integration mitigates production shocks that occur in a country by pooling the risk through portfolio diversification and this contributes to consumption smoothing for life-time utility maximization. Financial market integration also contributes to economic growth by supplying capital to developing countries via the integrated financial market. However, the integrated financial market also serves as a transition channel where the financial shock which originated from the center country spreads to its neighboring economies. In the event of a financial crisis, there is a potential risk of capital flight from neighboring countries to the financial center, meaning that many countries in the integrated financial market have an economic structure that is vulnerable to external shocks. As the uncertainties in the international financial market increased significantly during the financial crisis, financial variables such as asset prices, leverage, credit growth, and capital flows in many countries were heavily affected by global financial market sentiments rather than their own monetary policies. This is evidence supporting that many countries in the global financial market have constrained monetary policies. In this report, we try to understand how monetary policy is constrained in the context of the international financial market, from which we can derive relevant policy implications. To this end we analyze how monetary policies are restricted by introducing the concept of monetary policy independence.
    Keywords: Financial Market Integration; Monetary Policy
    Date: 2018–03–09
  69. By: Hiroaki Sakamoto; Ken-Ichi Akao
    Abstract: This paper develops a general framework that can be used to analyze the longterm relationship between disasters and economic growth. We first establish the basic existence and equivalence results. We then apply the framework to an endogenous growth model to consider the influence of disasters on the long-term equilibrium and the transition phase. The result shows that while experiencing disasters may lower the average growth rate of the affected countries, there exist various channels through which the risk of disasters and long-term economic performance are positively correlated. This finding reconciles the apparently contradictory evidence in recent empirical studies. Our result also suggests that care should be taken with the interpretation of disaster-driven economic growth because many of the channels identified are accompanied by a welfare decline.
    Keywords: disasters; dynamic optimization; long-term growth; endogenous growth; aggregate uncertainty
    JEL: O41 O44 C61
  70. By: Yongyang Cai (Ohio State University); Simon Scheidegger (University of Zürich); Sevin Yeltekin (Carnegie Mellon University); Philipp Renner (Lancaster University); Kenneth Judd (Stanford University)
    Abstract: Since the financial crisis of 2008 and increased government debt levels worldwide, fiscal austerity has been a focal point in public debates. Central to these debates is the natural debt limit, i.e. the level of public debt that's sustainable in the long run, and the design of fiscal policy that is consistent with that limit. In much of the earlier work on dynamic fiscal policy, governments are not allowed to lend, and the upper limit on debt is determined in an ad-hoc manner Aiyagari et. al (2002)'s (AMSS) seminal paper on fiscal policy in incomplete markets relaxed the lending assumption and revisited earlier work of Barro (1979) and Lucas and Stokey (1983) to study the implications on tax policy. Their results implied that taxes should roughly follow a random walk. They also presented examples where the long-run tax rate is zero, and any spending is financed out of its asset income (i.e., government holds debt of the people). However, their approach had some weaknesses. First, it imposed an artificial limit on government debt and therefore did not address the question of a natural debt limit. Second, it assumed, as much of the literature prior to it did, government spending to be exogenous. We relax the assumptions on debt and spending, and we use computational methods that do not rely only on local optimality. While we focus on the models examined in AMSS, we present a framework that can address fiscal policy issues in a self-consistent manner. In particular, we derive the endogenous limits on debt and allow for endogenous government spending. Our approach involves recasting the policy problem as an infinite horizon dynamic programming problem. The government's value function may not be concave and it can also very high curvature, particularly as debt approaches its endogenous limit. In dynamic taxation problems, the government's problem is a mathematical program with complementary constraints (MPCC). We explicitly use the MPCC formulation, which is essential in order to do the necessary global optimization analysis of the government's problem. Our MPCC approach uses the computational algorithms that were developed only in the past twenty years, and allows us to solve the problem reliably and accurately. Using our combination of computational tools and more general economic assumptions, we re-address questions regarding optimal taxation and debt management in a more realistic setup. These tools allow us to determine debt limits implied by assumptions on the primitives of the economic environment and to assess how the level of debt affects both tax policy and general economic performance, and the time series properties of tax rates and debt levels. Our results show that under the more general framework of endogenous government debt limits and spending has substantially different implications than earlier analyses have suggested. First, the behavior of optimal policy is, over long horizons (e.g., 1000 years), is much more complex than simpler models imply. In particular, the long-run distribution of debt is multimodal, and the long-run level of debt is history-dependent. If initial debt is low enough and government spending is not hit with large shocks, then the government will accumulate a "war chest" which allows long-run tax rates to be zero. However, if, in the same model, initial debt is high and/or the government gets hit with a long series of bad spending shocks, then debt will rise to a high level and will not fall even if the government is not hit with bad spending shocks. In the second case, governments with large debt levels will avoid default by reducing spending and use taxes to finance a persistently high debt. We examine the case of fixed government spending and find that the results are dramatically affected. In particular, we illustrate a case where if spending shocks are of moderate size (less than US historical experience) no positive level of debt is feasible. That is, if a government begins with positive debt then there is a sequence of spending shocks such that there is no feasible tax and borrowing policy to finance those expenditures. In such cases, exogenous spending assumptions imply that governments must have their endowed war chests in the beginning and cannot with probability one build up its war chest. These examples illustrate clearly that any analysis of fiscal policy that wants examine historical fiscal policy must consider making spending flexible. The application of our methodology is not limited to optimal tax problems. Optimal macroeconomic policy problems, as well as social insurance design typically involve solving high-dimensional dynamic programming problems. Solving such problems is a complicated, but very important task, as the policy recommendations depend crucially on the accuracy of the numerical results. In much of the optimal macroeconomic policy and social insurance literature, accuracy of the numerical solutions is unclear. Additionally, most solution approaches ignore feasibility issues and impose ad-hoc limits on state variables such as government debt. An accurate approach to solving dynamic policy models requires the ability to handle the high-dimensional nature of the problems as well as the unknown, feasible state space. The methodology offered in this paper can be used for computing high-dimensional dynamic policy problems with unknown state spaces.
    Date: 2017
  71. By: Gros, Daniel; Mayer, Thomas
    Abstract: As early as 2010, at the outset of the sovereign debt crisis, Daniel Gros and Thomas Mayer argued that Europe needed a European Monetary Fund (EMF). In the meantime, the European Stability Mechanism (ESM) has been created, which performs the function of an EMF. It was critical in containing the cost of the crisis and four of its five country programmes have been a success. But the case of Greece shows that one needs to be prepared for failure as well. They propose in this paper to keep the ESM essentially as it is, but would empower it to set conditions on countries receiving its financial support. Such support would have a limit, however, to prevent situations in which the ESM would ‘own’ a country. The authors conceive of the ESM/EMF literally as a financial stability mechanism, whose main function is to ensure that a bailout is no longer “alternativlos”, as Chancellor Angela Merkel used to say. In 2010, the rescue of Greece was presented as TINA (There Is No Alternative) because the stability of the financial system of the entire euro area appeared to be in danger. With financial stability guaranteed by the ESM/EMF in combination with the Banking Union, default becomes an alternative that should be considered dispassionately. Whether the debt of a country is sustainable is rarely known with certainty beforehand. Accordingly, they argue that it is proper that the Union, in the ‘spirit of solidarity’, initially gives a country the benefit of the doubt and provides financial support for an adjustment programme, but caution that the exposure should be limited. If the programme goes awry, the ESM/EMF could be of great help, as it could provide bridge financing to soften the cost of default.
    Keywords: European Monetary Fund; European Stability Mechanism; EMU reform; debt restructuring in EMU; EMU exit
    Date: 2017–12
  72. By: Zineddine Alla; Raphael A Espinoza; Qiaoluan H. Li; Miguel A. Segoviano Basurto
    Abstract: We present a novel approach that incorporates individual entity stress testing and losses from systemic risk effects (SE losses) into macroprudential stress testing. SE losses are measured using a reduced-form model to value financial entity assets, conditional on macroeconomic stress and the distress of other entities in the system. This valuation is made possible by a multivariate density which characterizes the asset values of the financial entities making up the system. In this paper this density is estimated using CIMDO, a statistical approach, which infers densities that are consistent with entities’ probabilities of default, which in this case are estimated using market-based data. Hence, SE losses capture the effects of interconnectedness structures that are consistent with markets’ perceptions of risk. We then show how SE losses can be decomposed into the likelihood of distress and the magnitude of losses, thereby quantifying the contribution of specific entities to systemic contagion. To illustrate the approach, we quantify SE losses due to Lehman Brothers’ default.
    Date: 2018–03–09
  73. By: Damir Filipovi\'c; Sander Willems
    Abstract: Over the last decade, dividends have become a standalone asset class instead of a mere side product of an equity investment. We introduce a framework based on polynomial jump-diffusions to jointly price the term structures of dividends and interest rates. Prices for dividend futures, bonds, and the dividend paying stock are given in closed form. We present an efficient moment based approximation method for option pricing. In a calibration exercise we show that a parsimonious model specification has a good fit with Euribor interest rate swaps and swaptions, Euro Stoxx 50 index dividend futures and dividend futures options, and Euro Stoxx 50 index options.
    Date: 2018–03
  74. By: Byeong U. Park; Leopold Simar; Valentin Zelenyuk (CEPA - School of Economics, The University of Queensland)
    Abstract: In this work we first replicate the results of fully parametric dynamic probit model for forecasting US recessions from Kauppi and Saikkonen (2008) (which is in the spirit of Estrella and Mishkin (1995, 1998) and Dueker (1997)) and then contrast them to results from non-parametric local-likelihood dynamic probit model for the same data.
    Date: 2017–06

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