nep-mac New Economics Papers
on Macroeconomics
Issue of 2018‒04‒09
ninety-six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The Optimal Inflation Target and the Natural Rate of Interest By P. Andrade; J. Galí; H. Le Bihan; J. Matheron
  2. Proposals for monetary reform: A critical assessment using the general quantity equation by Wolfgang Stützel By Tarne, Ruben
  3. Central Banks: Evolution and Innovation in Historical Perspective By Michael D. Bordo; Pierre Siklos
  4. Property Tax Shocks and Macroeconomics By François Geerolf; Thomas Grjebine
  5. Interbank Market Turmoils and the Macroeconomy By Kopiec, Pawel
  6. Central Bank Digital Currency And The Future Of Monetary Policy By Michael D. Bordo; Andrew T. Levin
  7. Monetary policy in the grip of a pincer movement By Claudio Borio; Piti Disyatat; Mikael Juselius; Phurichai Rungcharoenkitkul
  8. Is There a Role for Uncertainty in Forecasting Output Growth in OECD Countries? Evidence from a Time Varying Parameter-Panel Vector Autoregressive Model By Goodness C. Aye; Rangan Gupta; Chi Keung Marco Lau; Xin Sheng
  9. Housing boom-bust cycles and asymmetric macroprudential policy By William Gatt
  10. A Lesson from the Great Depression that the Fed Might Have Learned: A Comparison of the 1932 Open Market Purchases with Quantitative Easing By Michael D. Bordo; Arunima Sinha
  11. Could a Higher Inflation Target Enhance Macroeconomic Stability? By José Dorich; Nicholas Labelle; Vadym Lepetyuk; Rhys R. Mendes
  12. 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
  13. Cultural Differences in Monetary Policy Preferences By Adriel Jost
  15. From Productivity Shifts to Economic Growth: Intersectoral Linkage as an Amplifying Factor By Nikolay Chernyshev
  16. The liquidity effect of the Federal Reserve’s balance sheet reduction on short-term interest rates By Brauning, Falk
  17. Deconstructing monetary policy surprises: the role of information shocks By Jarociński, Marek; Karadi, Peter
  18. Monetary Policy in Incomplete Market Models: Theory and Evidence By Kurt Mitman; Iourii Manovskii; Marcus Hagedorn
  19. Public Expenditure Multipliers in recessions. Evidence from the Eurozone. By Andrea Boitani; Salvatore Perdichizzi
  20. Sovereign Bond-Backed Securities: A VAR-for-VaR and Marginal Expected Shortfall Assessment By De Sola Perea, Maite; Dunne, Peter G.; Puhl, Martin; Reininger, Thomas
  21. Are Apprenticeships Business Cycle Proof? By Lüthi, Samuel; Wolter, Stefan C.
  22. The quantification of structural reforms: extending the framework to emerging market economies By Balázs Egert
  23. The Quantification of Structural Reforms: Extending the Framework to Emerging Market Economies By Balazs Egert
  24. Calibration and the estimation of macroeconomic models By Maria Teresa Medeiros Garcia; Vítor Hugo Ferreira Carvalho
  25. Sovereign Default and Monetary Policy Tradeoffs By Bi, Huixin; Leeper, Eric M.; Leith, Campbell
  26. The inflation-growth relationship in SSA inflation targeting countries By Nomahlubi Mavikela; Simba Mhaka; Andrew Phiri
  27. The distributional impact of monetary policy easing in the UK between 2008 and 2014 By Bunn, Philip; Pugh, Alice; Yeates, Chris
  28. An Historical Perspective on the Quest for Financial Stability and the Monetary Policy Regime By Michael D. Bordo
  29. Presidents and the US Economy from 1949 to 2016 By Timothy Kane
  30. The Role of Financial Policy By Roger E A Farmer
  31. Inequality and Real Interest Rates By Lancastre, Manuel
  32. The 2012 diary of consumer payment choice By Greene, Claire; Schuh, Scott; Stavins, Joanna
  33. Republic of Mozambique; 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Mozambique By International Monetary Fund
  34. Pakistan; First Post-Program Monitoring Discussions-Press Release; Staff Report; and Statement by the Executive Director for Pakistan By International Monetary Fund
  35. Asset Prices in a Small Production Network By Francisco RUGE-MURCIA
  36. A minimal moral hazard central stabilisation capacity for the EMU based on world trade By Beetsma, Roel; Cima, Simone; Cimadomo, Jacopo
  37. Monetary Policy Obeying the Taylor Principle Turns Prices Into Strategic Substitutes By Cornand, Camille; Heinemann, Frank
  38. Fiscal Consolidation Programs and Income Inequality By Pedro Brinca; Miguel H. Ferreira; Francesco Franco; Hans A. Holter; Laurence Malafry
  39. Real-time forecasting with macro-finance models in the presence of a zero lower bound By Leo Krippner; Michelle Lewis
  40. Observing and shaping the market: the dilemma of central banks By Romain Baeriswyl; Camille Cornand; Bruno Ziliotto
  41. The Household Fallacy By Roger Farmer; Pawel Zabczyk
  42. Global Banking, Trade, and the International Transmission of the Great Recession By Alexandra Born; Zeno Enders
  43. Business cycles and the balance sheets of the financial and non-financial sectors By Villacorta, Alonso
  44. Morocco; 2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Morocco By International Monetary Fund
  45. Uncertainty and Economic Activity: A Multi-Country Perspective By Ambrogio Cesa-Bianchi; M. Hashem Pesaran; Alessandro Rebucci
  46. Nigeria; 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Nigeria By International Monetary Fund
  47. Credit shocks and the European labour market By Bodnár, Katalin; Fadejeva, Ludmila; Hoeberichts, Marco; Peinado, Mario Izquierdo; Jadeau, Christophe; Viviano, Eliana
  48. Financial Policy By Niepelt, Dirk
  49. Employment Prospects and the Propagation of Fiscal Stimulus By Kopiec, Paweł
  50. Real exchange rate misalignments in the euro area By Michael Fidora; Claire Giordano; Martin Schmitz
  51. Health and Innovation in a Monetary Schumpeterian Growth Model By He, Qichun
  52. Forecasting Deflation Probability in the EA: A Combinatoric Approach By Luca Brugnolini
  53. Central Bank Policy Announcements and Changes in Trading Behavior: Evidence from Bond Futures High Frequency Price Data By Koichiro Kamada; Tetsuo Kurosaki; Ko Miura; Tetsuya Yamada
  54. Wage- versus profit-led growth in the context of globalization and public spending: the political aspects of wage-led recovery By Onaran, Özlem
  55. Global Factors and Trend Inflation By Güneş Kamber; Benjamin Wong
  56. The Brexit as a Forerunner: Monetary Policy, Economic Order and Divergence Forces in the European Union By Sebastian Müller; Gunther Schnabl
  57. Implications of the Expanding Use of Cash for Monetary Policy By Gros, Daniel
  58. Belgium; 2018 Article IV Consultation - Press Release; Staff Report By International Monetary Fund
  59. US Infl ation and Infl ation Uncertainty Over 200 Years By Don Bredin; Stilianos Fountas
  60. Malaysia; 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Malaysia By International Monetary Fund
  61. Determinants of FDI in South Africa: Do macroeconomic variables matter? By Nandipha Dondashe; Andrew Phiri
  62. Crecimiento económico y política fiscal: una revisión crítica de la literatura By Raúl Chamorro Narváez
  63. Technologies of money in the Middle Ages: the 'Principles of Minting' By Volckart, Oliver
  64. The UK (and Western) Productivity Puzzle: Does Arthur Lewis Hold the Key? By Nicholas Oulton
  65. The Granular Origins of Aggregate House Price Volatility By Hull, Isaiah; Olovsson, Conny; Walentin, Karl; Westermark, Andreas
  66. Deliberation in Committees : Theory and Evidence from the FOMC By Alessandro RIBONI; Francisco RUGE-MURCIA
  67. The Costs of Corporate Tax Complexity By Eric Zwick
  68. Fearing the Fed: How Wall Street Reads Main Street By Tzuo Hann Law; Dongho Song; Amir Yaron
  69. Portfolio rebalancing and the transmission of large-scale asset programmes: evidence from the euro area By Albertazzi, Ugo; Becker, Bo; Boucinha, Miguel
  70. A Real-Business-Cycle model with pollution and environmental taxation: the case of Bulgaria By Aleksandar Vasilev
  71. The Estimation of Reaction Functions under Tax Competition By Raffaele Miniaci; Paolo Panteghini; Giulia Rivolta
  72. Payments delay: propagation and punishment By B. Craig; D. Salakhova; M. Saldias
  73. Namibia; Financial System Stability Assessment By International Monetary Fund
  74. New Perspectives on Forecasting Inflation in Emerging Market Economies: An Empirical Assessment By Duncan, Roberto; Martinez-Garcia, Enrique
  75. Age Milestones and Low Interest Rates, an Analytic Approach By Manuel, Lancastre
  76. Los regímenes cambiarios en América Latina By Susana Nudelsman
  77. Demographic Uncertainty and Generational Consumption Risk with Endogenous Human Capital By Emerson, Patrick M.; Knabb, Shawn D.
  78. Fiscal Risk Sharing and Resilience to Shocks: Lessons for the euro area from the US By Alcidi, Cinzia; Thirion, Gilles
  79. Are BRICS Exchange Rates Chaotic? By Vasilios Plakandaras; Rangan Gupta; Luis A. Gil-Alana; Mark E. Wohar
  80. Demand Drives Growth all the Way By Lance Taylor; Duncan Foley; Armon Rezai
  81. "The Job Guarantee: Design, Jobs, and Implementation" By Pavlina R. Tcherneva
  82. 환율변화가 한국기업에 미치는 영향분석과 정책적 시사점: 기업데이터 분석을 중심으로 (The Impact of Exchange Rate Fluctuations on Korean Firms and Its Policy Implications) By Yoon, Deok Ryong; Kim, Hyo Sang
  83. Exchange rate appreciations and corporate risk taking By Sebnem Kalemli-Ozcan; Xiaoxi Liu; Ilhyock Shim
  84. Nivel de riqueza regional, bienestar y desarrollo. By Prada, Albino; Sanchez-Fernandez, Patricio
  85. Financial Disruption and State Dependant Credit Policy By Thibaud Cargoet; Jean-Christophe Poutineau
  86. The Economic Outlook, Monetary Policy, and Some Future Considerations for the Monetary Policy Agenda; 03.26.18; The Julis-Rabinowitz Center for Public Policy and Finance, Princeton University, Princeton, NJ By Mester, Loretta J.
  87. Making International Financial Integration Work for Low-Saving Countries By Eduardo A. Cavallo; Eduardo Fernández-Arias; Matías Marzani
  88. Monetary, fiscal, and financial stability policy tools: are we equipped for the next recession?: remarks at the Tenth Conference of the International Research Forum on Monetary Policy, Washington, D.C., March 23, 2018 By Rosengren, Eric S.
  89. Positive Liquidity Spillovers from Sovereign Bond-Backed Securities By Dunne, Peter G.
  91. Common Banking across Heterogenous Regions By Enzo Dia; Lunan Jiang; Lorenzo Menna; Lin Zhang
  92. The Fed's Discount Window: An Overview of Recent Data By Felix P. , Ackon; Ennis, Huberto M.
  93. A Central Fiscal Stabilization Capacity for the Euro Area By Nathaniel G Arnold; Bergljot B Barkbu; H. Elif Ture; Hou Wang; Jiaxiong Yao
  94. Democracy and government spending By Balamatsias, Pavlos
  95. Bayesian Vector Autoregressions By Silvia Miranda-Agrippino; Giovanni Ricco
  96. The Neapolitan Banks in the Context of Early Modern Public Banks By Velde, Francois R.

  1. By: P. Andrade; J. Galí; H. Le Bihan; J. Matheron
    Abstract: We study how changes in the value of the steady-state real interest rate affect the optimal inflation target, both in the U.S. and the euro area, using an estimated New Keynesian DSGE model that incorporates the zero (or effective) lower bound on the nominal interest rate. We find that this relation is downward sloping, but its slope is not necessarily one-forone: increases in the optimal inflation rate are generally lower than declines in the steadystate real interest rate. Our approach allows us not only to assess the uncertainty surrounding the optimal inflation target, but also to determine the latter while taking into account the parameter uncertainty facing the policy maker, including uncertainty with regard to the determinants of the steady-state real interest rate. We find that in the currently empirically relevant region for the US as well as the euro area, the slope of the curve is close to -0.9. That finding is robust to allowing for parameter uncertainty.
    Keywords: inflation target, effective lower bound.
    JEL: E31 E52 E58
    Date: 2018
  2. By: Tarne, Ruben
    Abstract: Europe is still suffering from the turmoil created by the Great Financial Crisis. Finding solutions to the danger of new financial crises is an important criterion for a stable European Union. Proponents of the Sovereign Money System (SMS) identify the ability of private banks to create money as the main contributor to the outbreak of financial crisis. Hence, they want to put the control of the monetary base into the hands of a public institution. This paper will investigate whether the strategy of setting the monetary base - in a SMS - is grounded in realistic assumptions. They claim that the velocity for "real" transactions is stable and therefore, a "workable" link from money base to economic activity can be established. Yet, this claim stands on the shaky assumption that "payment traditions" are unchanging and the dubious concept of "velocity of circulation". Post-Keynesians have criticised the latter, but have not contributed an alternative concept of the relationship between the level of economic activity and the means of payment necessary to achieve it. This, however, would help clarify the critique of a monetary policy strategy, which tries to set the monetary base in the SMS environment, as it would illuminate the specific assumptions that need to hold in order for a link between economic activity and the money supply to be stable. Already in 1957, Stützel tried to establish a relationship - based on balance mechanics - between economic activity and changes in means of payment that was free of the limitations of the equation of exchange. The paper will reformulate Stützel's equation and clarify it with the help of stock-flow consistent Taccounts in order to apply it to the SMS. In doing so, it becomes obvious that the connection between economic activity and changes in means of payment is quite unpredictable. For a stable relationship, a lot of very specific, unrealistic assumptions need to hold. Therefore, the setting of an "optimal" amount of the monetary base in the SMS is, apart from many other of the SMS' problems, not realistic. Stützel's "general quantity equation" provides a clear relationship between money and economic activity that could help the existing endogenous money theory to be more precise in that regard.
    Keywords: Sovereign Money,Balance mechanics,Stock-flow consistency,Demand for money,Money supply,Financial crises
    JEL: E41 E42 E51 E58 G01
    Date: 2018
  3. By: Michael D. Bordo; Pierre Siklos
    Abstract: Central banks have evolved for close to four centuries. This paper argues that for two centuries central banks caught up to the strategies followed by the leading central banks of the era; the Bank of England in the eighteenth and nineteenth centuries and the Federal Reserve in the twentieth century. It also argues that, by the late 20th century, small open economies were more prone to adopt a new policy regime when the old one no longer served its purpose whereas large, less open, and systemically important economies were more reluctant to embrace new approaches to monetary policy. Our study blends the quantitative with narrative explanations of the evolution of central banks. We begin by providing an overview of the evolution of monetary policy regimes taking note of the changing role of financial stability over time. We then provide some background to an analysis that aims, via econometric means, to quantify the similarities and idiosyncrasies of the ten central banks and the extent to which they represent a network of sorts where, in effect, some central banks learn from others.
    Keywords: monetamonetary policy regimes, inflation, small open economies
    JEL: E02 E31 E32 E42 E58
    Date: 2017–05
  4. By: François Geerolf; Thomas Grjebine
    Abstract: We study the macroeconomic effects of aggregate tax changes using more than 100 property tax changes in advanced economies identified through the narrative record, and a structural VAR approach. Both methodologies lead to very similar estimates of tax multipliers that are higher than 2. The motivation behind using property taxes is threefold. First, property taxes are in theory the least distortive of all taxes, which allows to interpret our tax multipliers in terms of disposable income effects, and not in terms of supply or incentive effects. Second, the base for property taxes is not contemporaneously affected by GDP, unlike other major tax revenues, which considerably eases inference both in the narrative and in the structural VAR approaches. Third, the effects of property tax changes inform more broadly on the consequences of policies shifting the user cost of owner-occupied housing (including monetary policy). It casts a new light on a growing literature investigating the links between housing and macroeconomics: our results suggest that house prices have a much more muted impact on macroeconomic aggregates than was previously believed.
    Keywords: Multipliers;Consumption;User cost of housing
    JEL: E32 E62 H20 N12
    Date: 2018–03
  5. By: Kopiec, Pawel
    Abstract: This paper studies the macroeconomic consequences of interbank market disruptions caused by higher counterparty risk. I propose a novel, dynamic model of banking sector where banks trade liquidity in the frictional OTC market à la Afonso and Lagos (2015) that features counterparty risk. The model is then embedded into an otherwise standard New Keynesian framework to analyze the macroeconomic impact of interbank market turmoils: economy suffers from a prolonged slump and deflationary pressure during such episodes. I use the model to analyze the effectiveness of two policy measures: rise in the supply of central bank reserves and interbank market guarantees in mitigating the adverse effects of those disruptions.
    Keywords: Financial crisis, Interbank market, Policy intervention, OTC market
    JEL: E44 E58 G21
    Date: 2018–03–07
  6. By: Michael D. Bordo; Andrew T. Levin
    Abstract: We consider how a central bank digital currency (CBDC) can transform all aspects of the monetary system and facilitate the systematic and transparent conduct of monetary policy. Drawing on a very long strand of literature in monetary economics, we find a compelling rationale for establishing a CBDC that serves as a stable unit of account, a practically costless medium of exchange, and a secure store of value. In particular, the CBDC should be universally accessible and interest-bearing, and the central bank should adjust its interest rate to foster true price stability.
    Keywords: monetary policy frameworks, payment technologies, simple rules.
    JEL: B12 B13 B22 E42 E52 E58 E63
    Date: 2017–04
  7. By: Claudio Borio; Piti Disyatat; Mikael Juselius; Phurichai Rungcharoenkitkul
    Abstract: Monetary policy has been in the grip of a pincer movement, caught between growing financial cycles, on the one hand, and an inflation process that has become quite insensitive to domestic slack, on the other. This two-pronged attack has laid bare some of the limitations of prevailing monetary policy frameworks, particularly in the analytical notions that have guided much of its practice. We argue that the natural rate of interest as a guidepost for monetary policy has a couple of limitations: the concept, as traditionally conceived, neglects the state of the financial cycle in the definition of equilibrium; in addition, it underestimates the role that monetary policy regimes may play in persistent real interest rate movements. These limitations may expose monetary policy to blindsiding by the collateral damage that comes from an unhinged financial cycle. We propose a more balanced approach that recognises the difficulties monetary policy has in fine-tuning inflation and responds more systematically to the financial cycle.
    Keywords: monetary policy, financial stability, financial cycle, natural interest rate, inflation
    JEL: E32 E40 E44 E50 E52
    Date: 2018–03
  8. By: Goodness C. Aye (Department of Economics, University of Pretoria, Pretoria, South Africa.); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Chi Keung Marco Lau (Huddersfield Business School, University of Huddersfield, Huddersfield, UK); Xin Sheng (Huddersfield Business School, University of Huddersfield, Huddersfield, UK)
    Abstract: This paper uses a time varying parameter-panel vector autoregressive (TVP-PVAR) model to analyze the role played by domestic and US news-based measures of uncertainty in forecasting the growth of industrial production of twelve Organisation for Economic Co-operation and Development (OECD) countries. Based on a monthly out-of-sample period of 2009:06 to 2017:05, given an in-sample of 2003:03 to 2009:05, there are only 46 percent of cases where domestic uncertainty can improve the forecast of output growth relative to a baseline monetary TVP-PVAR model, which includes inflation, interest rate and nominal exchange rate growth, besides output growth. Moreover, including US uncertainty does not necessarily improve the forecasting performance of output growth from the TVP-PVAR model which includes only the domestic uncertainty along with the baseline variables. So, in general, while uncertainty is important in predicting the future path of output growth in the twelve advanced economies considered, a forecaster can do better in majority of the instances by just considering the information from standard macroeconomic variables.
    Keywords: Economic Uncertainty, Output Growth, Time Varying Parameter, Panel Vector Autoregressions, OECD Countries
    JEL: C33 C53 E32 E37 E60
    Date: 2018–03
  9. By: William Gatt (Central Bank of Malta)
    Abstract: Macroprudential policy is pre-emptive, aimed at preventing crises. Empirical evidence hints at the existence of asymmetric policy in booms and recessions. This paper uses a New Keynesian model with a financial friction on mortgage borrowing and collateral to show what implications this asymmetry might have on the economy. The main source of fluctuations is a bubble in the housing market, which causes house prices and credit to deviate from their fundamental values, leading to a boom and bust cycle. The main macroprudential tool is the regulatory loan to value (LTV) ratio. The author finds that while the asymmetric policy dampens the boom phase, it introduces more volatility in the economy by exacerbating the correction that follows. The higher the asymmetry in the policy response, the more volatile the economy is relative to one in which policy reacts symmetrically.
    JEL: C61 E32 E44 E61 R21
    Date: 2018
  10. By: Michael D. Bordo; Arunima Sinha
    Abstract: We examine the first QE program through the lens of an open-market operation under- taken by the Federal Reserve in 1932, at the height of the Great Depression. This program entailed large purchases of medium- and long-term securities over a four-month period. There were no prior announcements about the size or composition of the operation, how long it would be put in place, and the program ended abruptly. We use the narrative record to conduct an event study analysis of the operation. To do this, we construct a dataset of weekly-level Treasury holdings of the Federal Reserve in 1932, and the daily term structure of yields obtained from newspaper quotes. The event study indicates that the 1932 pro- gram dramatically lowered medium- and long-term Treasury yields; the declines in Treasury Notes and Bonds around the start of the operation were as large as 128 and 42 basis points respectively. A significant proportion of this decline in yields is attributed to the portfolio composition effect. We then use a segmented markets model to analyze the channel through which the open-market purchases affected the economy, namely portfolio rebalancing and signaling effects. Quarterly data from 1920-32 is used to estimate the model with Bayesian methods. We find that the significant degree of financial market segmentation in this period made the historical open market purchase operation more effective than QE in stimulating output growth. Additionally, if the Federal Reserve had continued its operations in 1932, and used the announcement strategy of the QE operation, the upturn in economic activity during the Great Depression could have been achieved sooner.
    Keywords: Â
    JEL: E43 E44 E58
    Date: 2016–10
  11. By: José Dorich; Nicholas Labelle; Vadym Lepetyuk; Rhys R. Mendes
    Abstract: Recent international experience with the effective lower bound on nominal interest rates has rekindled interest in the benefits of inflation targets above 2 per cent. We evaluate whether an increase in the inflation target to 3 or 4 per cent could improve macroeconomic stability in the Canadian economy. We find that the magnitude of the benefits hinges critically on two elements: (i) the availability and effectiveness of unconventional monetary policy (UMP) tools at the effective lower bound and (ii) the level of the real neutral interest rate. In particular, we show that when the real neutral rate is in line with the central tendency of estimates, raising the inflation target yields some improvement in macroeconomic outcomes. There are only modest gains if effective UMP tools are available. In contrast, with a deeply negative real neutral rate, a higher inflation target substantially improves macroeconomic stability regardless of UMP.
    Keywords: Economic models, Inflation targets, Monetary policy framework
    JEL: E32 E37 E43 E52
    Date: 2018
  12. By: Jacquinot, Pascal (European Central Bank); Lozej, Matija (Central Bank of Ireland); Pisani, Massimiliano (Bank of Italy)
    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.
    Keywords: DSGE models, labour taxes, unemployment, monetary union, open-economy macroeconomics
    JEL: E24 E32 E52 E62
    Date: 2018–02
  13. By: Adriel Jost
    Abstract: The monetary policy preferences of a population are often explained by the country’s economic history. Based on Swiss data, this paper indicates that while different language groups may share the economic history, they demonstrate distinct monetary policy preferences. This suggests that distinct monetary policy preferences among the populations of different countries may be determined by not only their economic histories but also their distinct cultural backgrounds.
    Keywords: Inflation preferences, Culture, Monetary policy
    JEL: D01 E31 E52 E58 Z13
    Date: 2018
  14. By: Hanna O. Sakhno (National Research University Higher School of Economics)
    Abstract: After the recent global financial crisis, central banks in advanced and developing economies found themselves unable to stick to their mandate goal of price stability by resorting to traditional instruments of monetary policy. When key interest rates approached the zero bound, the need to develop a new toolkit of liquidity provision arose. Central banks embarked on numerous non-standard monetary policy measures aimed at ensuring financial stability and restoring economic growth. Communication has become an effective auxiliary instrument of economic policy, and markets started paying precise attention to the way central bankers report information regarding the future path of monetary policy. The purpose of this paper is to provide an overview of recent trends and developments in central bank communication strategies. By resorting to the existing literature, we analyze the origins of central bank communication and the evolution of its role in time. We also study the main instruments of communication strategies of large central banks. In the final part of the study, we investigate the communication strategy of the US Federal Reserve and the way it may cause spillovers to fragile markets abroad. We outline at least three major channels of international policy transmission: through stocks, bonds and exchange rates fluctuations
    Keywords: central bank communication, unconventional monetary policy, international spillovers, the Federal Reserve.
    JEL: E42 E52 E58
    Date: 2018
  15. By: Nikolay Chernyshev (University of St Andrews)
    Abstract: This paper documents the presence of a positive link between the intensity of using intermediates by a country’s industries and its economic growth. We explain the finding by advancing a framework of endogenous growth in an economy with interconnected industries, whereby sectoral productivity growth is amplified by the interconnection, and the degree of amplification grows in the strength of sectoral connections. We use the framework to derive the optimal growth-enhancing structure of an economy, which is when all industries source their intermediates from a single sector (the star network) characterised by the largest concentration potential – a novel indicator which captures how fast is a sector’s productivity growth and how much it itself relies on intermediates.
    Keywords: Economic growth, input-output linkage, production networks
    JEL: D57 E21 E23 E32 L13
    Date: 2018–03–15
  16. By: Brauning, Falk (Federal Reserve Bank of Boston)
    Abstract: I examine the impact of the Federal Reserve’s balance sheet reduction on short-term interest rates emanating from the declining supply of reserve balances. Using an exogenous shift in the supply of reserves, I estimate that by January 2019, when the Fed will have reduced its portfolio by $500 billion, the overnight repurchase agreement (repo) spread (relative to the lower bound of the federal funds target range) will be 10 basis points higher and the fed funds spread will be 2 basis points higher than in October 2017, all else being equal. I also find that a declining supply of reserve balances reduces recourse to the Fed’s overnight reverse repo (RRP) facility, which might initially dampen the tightening effects on short-term rates of the Fed’s balance sheet reduction.
    Keywords: monetary policy; interest rates; liquidity effect; Federal Reserve balance sheet
    JEL: E42 E43 E52 G21
    Date: 2017–10–01
  17. By: Jarociński, 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. 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. JEL Classification: E32, E52, E58
    Keywords: central bank private information, event study, high-frequency identification, monetary policy shock, structural VAR
    Date: 2018–02
  18. By: Kurt Mitman (Stockholm University); Iourii Manovskii (University of Pennsylvania); Marcus Hagedorn (University of Oslo)
    Abstract: How does the economy respond to a change in government policy or to a macroeconomic shock? The equilibrium impact of a change in policy will depend on two crucial elements. First, the direct effect effect of that policy on the macroeconomy, for example, the increase in demand induced by an increase in government spending. Second, the indirect effect of the policy because of the response of private households. To quantify the effects of policies, requires understanding the strength of the interaction between direct and indirect effects of policies. In order to do so requires a structural framework that includes nominal rigidities, which operationalize an aggregate demand channel, and matches household-level consumption behavior in response to changes in policy. While direct evidence on micro consumption behavior is readily available, the size of nominal rigidities (and thus the strength of the demand block) can generally only be estimated structurally. Thus, we estimate the model containing both price rigidities and observed micro consumption behavior, providing the first estimates of the strength of the aggregate demand channel that explicitly take into account the indirect effects of policy. This enables us to provide new answers about the efficacy of fiscal and monetary policy. To accomplish this goal, we proceed in two steps. First, we revisit the classic question how the economy respond to a change in monetary policy and in technology. Second, we use this evidence to estimate an incomplete markets (Bewley-Imrohoroglu-Huggett-Aiyagari) model with prices rigidities (as in the New Keynesian literature). Incomplete markets allow the model to match the rich joint distribution of income, earnings and wealth. Further, such heterogeneity is crucial in generating a realistic distribution of MPCs. The price rigidities ensure that the model has a meaningful demand channel operating.\footnote{There is a growing literature which incorporates nominal rigidities into incomplete markets models, for example Oh and Reis (2012), Guerrieri and Lorenzoni (2015), Gornemann et al. (2012), Kaplan et al. (2016), Auclert (2016) and Lutticke (2015), McKay and Reis (2016), McKay et al. (2015), Bayer et al. (2015) , Ravn and Sterk (2013) and Den Haan et al. (2015).} The first step of our analysis and the first contribution of the paper is to document the response of the economy to a monetary and technology shocks. The key implication of recognizing the potential importance of market incompleteness is that the response to, e.g., monetary policy crucially depends on the conduct of fiscal policy. In the extreme, fiscal policy can eliminate any differences in the response to monetary policy between models with complete and incomplete markets if it offsets the distributional consequences of monetary policy. That is, theoretically, an appropriately designed transfer scheme between heterogeneous households can render the aggregate consumption, hours and output response identical between the two economies. More generally, the direct effect of monetary policy plus the indirect induced effect on fiscal policy together determine the total effect of a change in monetary policy. Consequently, understanding of the response of the economy to monetary and technology shocks also requires to measure the response of fiscal policy to shocks. To this end, in addition to measuring the impact of shocks on variables such as output, prices, inflation ,.. we study the joint response of fiscal variables such as government spending, debt, revenue, etc. Changes in fiscal variables, e.g. an increase in government debt or spending, affect the distribution of income and aggregate outcomes in incomplete markets in contrast to complete markers where they do not not matter. This explains why the response of fiscal policy has been largely ignored by the existing literature on complete markets NK models.\footnote{Sterk and Tenreyro (2016) also emphasize the importance of fiscal policy (in their case government debt) for the transmission mechanism of monetary policy, in a flexible price model with heterogeneous agents.} Having measured impulse responses to monetary and technology shocks in the data, including the responses of fiscal variables, we use them in the second part of the paper as targets to estimate a New Keynesian incomplete markets model. This is important since one cannot just import the parameters estimated using a complete markets model. The reason is not only abstract and theoretical but very concrete. As explained above, fiscal policy might respond to, e.g., a technology shock and thus lead to a different price path in the model. For example, we find in post-1983 US data that government spending increases in response to a positive technology shock. Therefore, the total price response is a combination of the response to the technology shock and to the increase in spending. The first leads to a price decrease whereas the latter leads to a price increase. Depending on the relative strength of the two responses, the total response might be a price increase, decrease or no response at all. This has obvious consequences for the estimation of the degree of price rigidities. For example, suppose that prices do not respond at all to a positive technology shock. Viewed through the lens of a complete markets model, this would be interpreted as a very high degree of price rigidities. View through the lens of an incomplete markets model where spending is increased simultaneously, this would be consistent with very flexible prices. Prices do not change because it is not optimal to do so. Interestingly, while prices and spending increase in response to a positive technology shock in post-1983 US data, in the earlier period prices fall. We find, consistent with Clarida et al. (2000), that the interest rate rule has changed around the 1980s. Beyond this, we also find a switch in fiscal policy. We finally ask whether the assumption on financial markets matter for the economy's response to a monetary policy results and find that the answer depends on the conduct of fiscal policy. As discussed above, fiscal policy can (theoretically) eliminate any differences in the response to monetary policy between models with complete and incomplete markets if it offsets the distributional consequences of monetary policy. The direct effect of monetary policy plus the indirect induced effect on fiscal policy together determine the total effect of a change in monetary policy. However, whether fiscal policy is offsetting is ultimately an empirical question of how fiscal policy responds to monetary policy. Our results allow us to answer this question for post WWII data and we find that it matters.
    Date: 2017
  19. By: Andrea Boitani (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Salvatore Perdichizzi
    Abstract: During the sovereign debt crisis, many Euro countries have deployed \austerity packages" implementing structural reforms and cutting government spending. Such policies should have led to an initial decline in GDP followed by recovery and a reduction of the debt to gdp ratio. Key to this outcome is the size and sign of expenditure multipliers when the economy is in a recession. We estimate, for the Eurozone countries, expenditure multipliers in recession and expansion using the linear projection approach and forecast errors to identify exogenous expenditure shocks. The empirical evidence suggests that, in a recession, an increase in government spending will be e ective in boosting aggregate demand, crowding-in private consumption in the shortto- medium run, without raising the debt to gdp ratio but rather decreasing it. The opposite applies in expansions. Estimates also show that expenditure multipliers, in a recession, are larger in high debt/defict countries than in low debt/deficit countries. In a recession, fiscal consolidation based on expenditure cuts would have both short and medium run contractionary effects.
    Keywords: Expenditure multipliers, State-dependent scal policy, Fiscal consolidation.
    JEL: E32 E62
    Date: 2018–03
  20. By: De Sola Perea, Maite (National Bank of Belgium); Dunne, Peter G. (Central Bank of Ireland); Puhl, Martin (Oesterreichishe Nationalbank); Reininger, Thomas (Oesterreichishe Nationalbank)
    Abstract: Brunnermeier et al., (2017) propose a securitisation solution for the bank-sovereign doom-loop. This shields senior tranche investors from actual defaults but whether it stabilises flight-to-safety panics is unclear. We apply dynamic VaR and Marginal Expected Shortfall methods to assess whether real-time risks to investors are attenuated by holding sovereign bond-backed securities. Price dynamics are derived using a Monte Carlo method. We find that holders of the senior tranche would be as safe as holders of German bunds. Mezzanine risk exposure would be moderate. The junior tranche experiences less severe shocks than high-risk sovereigns. The proposal significantly reduces destabilising market dynamics.
    Keywords: Safe Assets, Sovereign Bonds, Value-at-Risk, Spillover, CAViaR, Co-Dependence
    JEL: E43 E44 E52 E53 G12 G14
    Date: 2018–02
  21. By: Lüthi, Samuel (University of Bern); Wolter, Stefan C. (University of Bern)
    Abstract: Although there is evidence that apprenticeship training can ease the transition of youth into the labour market and thereby reduce youth unemployment, many policy makers fear that firms will cut their apprenticeship expenditures during economic crises, thus exacerbating the problem of youth unemployment. Using recent panel data of Swiss cantons and dynamic regression models, we examine the relationship between new apprenticeships and the business cycle. The empirical results suggest that economic shocks induce a rather small, pro-cyclical immediate response in the apprenticeship market. However, within a year after the shock, firms compensate for their immediate reaction, with the result that no permanent effect is observable.
    Keywords: apprenticeship training, VET, education, business cycle, error correction model
    JEL: E24 E32 I21 J18 J44
    Date: 2018–02
  22. By: Balázs Egert
    Abstract: This paper estimates and quantifies the impact of structural reforms on per capita income for a large set of OECD and non-OECD countries. The findings suggest that the quality of institutions matters to a large extent for economic outcomes. More competition-friendly regulations, as measured by the OECDs’ Product Market Regulation (PMR) indicator improve economic outcomes. Lower barriers to foreign trade and investment help MFP. Lower barriers to entry and less pervasive state control of businesses boost the capital stock and the employment rate. No robust link between labour market regulation and MFP and capital deepening could be established. But looser labour market regulation is found to go hand in hand with higher employment rates. The paper shows that countries at different level of economic development face different policy impacts. Furthermore, PMR effects depend on the level of labour market regulations.
    Keywords: structural reforms, product markets, labour markets, regulation, institutions, simulation, multi-factor productivity, investment, employment, per capita impact, OECD, emerging market economies, developing countries.
    JEL: D24 E17 E22 E24 J08
    Date: 2018
  23. By: Balazs Egert
    Abstract: This paper estimates and quantifies the impact of structural reforms on per capita income for a large set of OECD and non-OECD countries. The findings suggest that the quality of institutions matters to a large extent for economic outcomes. More competition-friendly regulations, as measured by the OECDs’ Product Market Regulation (PMR) indicator improve economic outcomes. Lower barriers to foreign trade and investment help MFP. Lower barriers to entry and less pervasive state control of businesses boost the capital stock and the employment rate. No robust link between labour market regulation and MFP and capital deepening could be established. But looser labour market regulation is found to go hand in hand with higher employment rates. The paper shows that countries at different level of economic development face different policy impacts. Furthermore, PMR effects depend on the level of labour market regulations.
    Keywords: structural reforms, product markets, labour markets, regulation, institutions, simulation, multi-factor productivity, investment, employment, per capital impact, OECD, emerging market economies, developing countries
    JEL: D24 E17 E22 E24 J08
    Date: 2018
  24. By: Maria Teresa Medeiros Garcia; Vítor Hugo Ferreira Carvalho
    Abstract: The appearance of negative bond yields presents significant challenges for the fixed income markets, which mainly concern related forecasting models. The Nelson-Siegel-Svensson model (NSS) is one of the models that is most frequently used by central banks to estimate the term structure of interest rates. The objective of this study is to evaluate the application of the NSS model to fit the yield curve of a set of 20 countries, the majority from the Eurozone, which registered negative sovereign bond yields. We conclude that the model adjusted well for all countries’ yield curves, although no changes or constraints were introduced. In addition, a comparison was carried out between market instantaneous interest rate and the interest rate for the very distant future, which the model can predict, with good results for the instantaneous interest rate. An evaluation of the possible behaviour of shared debt securities (i.e. Eurobonds) was also analysed. In conclusion, the NSS model seems to remain a valuable, easy to use, and adaptable tool, to fit negative yield curves, for monetary policy institutions and market players alike.
    Keywords: yield curve; negative bond yields; Eurobonds; Nelson-Siegel-Svensson model
    JEL: C02 C18 E43 E47 G12 G17
    Date: 2018–03
  25. By: Bi, Huixin (Federal Reserve Bank of Kansas City); Leeper, Eric M.; Leith, Campbell
    Abstract: The paper is organized around the following question: when the economy moves from a debt-GDP level where the probability of default is nil to a higher level- the "fiscal limit" where the default probability is non-negligible, how do the effects of routine monetary operations designed to achieve macroeconomic stabilization change?
    Keywords: Fiscal Sustainability; Sovereign Debt Default; Fiscal Limit
    JEL: E30 E62 H30 H60
    Date: 2018–03–12
  26. By: Nomahlubi Mavikela (Department of Economics, Nelson Mandela University); Simba Mhaka (Department of Economics, Nelson Mandela University); Andrew Phiri (Department of Economics, Nelson Mandela University)
    Abstract: This paper investigates the relationship between inflation and economic growth for South Africa and Ghana using quarterly empirical data collected from 2001 to 2016 applied to the quantile regression method. For our full sample estimates we find that inflation is positively related with growth in Ghana at high inflation levels whilst inflation in South Africa exerts its least adverse effects at high inflation levels. However, when particularly focusing on the post-crisis period, we find inflation exerts negative effects at all levels of inflation for both countries with inflation having its least adverse effects at high levels for Ghana and at moderate levels for South Arica. Based on these findings bear important implications for inflation targeting frameworks adopted by Central Banks in both countries.
    Keywords: Inflation, Economic Growth, quantile regression, Inflation targeting; South Africa, Ghana, Sub-Saharan Africa (SSA).
    JEL: C32 C51 E31 E52 O40
    Date: 2018–01
  27. By: Bunn, Philip (Bank of England); Pugh, Alice (Bank of England); Yeates, Chris (Bank of England)
    Abstract: Monetary policy has the potential to affect income and wealth inequality in the short run. This has always been true, but given the unprecedented period of accommodative policy in a number of advanced economies including the UK over the past decade, it has become more important to understand the size and direction of these effects. We use panel data from the ONS Wealth and Assets Survey on households’ characteristics and balance sheet positions to estimate the distributional impacts of UK monetary policy between 2008 and 2014. Our results suggest that the overall effect of monetary policy on standard relative measures of income and wealth inequality has been small. Given the pre-existing disparities in income and wealth, we estimate that the impact on each household varied substantially across the income and wealth distributions in cash terms, but in percentage terms the effects were broadly similar. We estimate that households around retirement age gained the most from the support to wealth, but that support to incomes disproportionately benefited the young. Overall, our results illustrate the importance of taking a broad-based approach to studying the distributional impacts of monetary policy and of considering channels jointly rather than in isolation.
    Keywords: Monetary policy; households; inequality; distributional effects
    JEL: D12 D31 E52 E58
    Date: 2018–03–27
  28. By: Michael D. Bordo
    Abstract: This paper surveys the co-evolution of monetary policy and financial stability for a number of countries across four exchange rate regimes from 1880 to the present. I present historical evidence on the incidence, costs and determinants of financial crises, combined with narratives on some famous financial crises. I then focus on some empirical historical evidence on the relationship between credit booms, asset price booms and serious financial crises. My exploration suggests that financial crises have many causes, including credit driven asset price booms, which have become more prevalent in recent decades, but that in general financial crises are very heterogeneous and hard to categorize. Two key historical examples stand out in the record of serious financial crises which were linked to credit driven asset price booms and busts: the 1920s and 30s and the Global Financial Crisis of 2007-2008. The question that arises is whether these two 'perfect storms' should be grounds for permanent changes in the monetary and financial environment. I raise some doubts.
    Keywords: monetary policy, financial stability, financial crises, credit driven asset price booms
    JEL: E3 E42 G01 N1 N2
    Date: 2017–08
  29. By: Timothy Kane
    Abstract: Does the US economy perform better when the president of the United States is a Democrat or a Republican? This paper explores the economic growth rate during different presidencies using data from 1949 to 2016, and confirms the Democratic-Republican gap while also showing the gap depends entirely on an unrealistic lag structure. The gap disappears and loses significance when lags of four, three, or even two quarters are considered, which is what history and political science recommend is appropriate given the lag between political actions and economic consequences. A superior method of overlapping presidential responsibility for transition periods is presented.
    Keywords: U.S. Presidency, Economic Growth, Political Party
    JEL: D72 E23 E32 E65 N12 N42
    Date: 2017–01
  30. By: Roger E A Farmer
    Abstract: I review the contribution and influence of Milton Friedman’s 1968 presidential address to the American Economic Association. I argue that Friedman’s influence on the practice of central banking was profound and that his argument in favour of monetary rules was responsible for thirty years of low and stable inflation in the period from 1979 through 2009. I present a critique of Friedman’s position that market-economies are self-stabilizing and I describe an alternative reconciliation of Keynesian economics with Walrasian general equilibrium theory from that which is widely accepted today by most neo-classical economists. My interpretation implies that government should intervene actively in financial markets to stabilize economic activity.
    Keywords: Keynesian economics, monetarism, natural rate of unemployment
    JEL: E3 E4
    Date: 2018–03
  31. By: Lancastre, Manuel
    Abstract: We use an overlapping generations New Keynesian model with borrowing constraints and a bequest motive, to show how an increase of income inequality may trigger a permanent reduction of the real interest rate, %, based on the heterogeneity of marginal borrowing and saving rates among household income types. (i) via a contraction of aggregate borrowing, when the marginal borrowing rate of the wealthier is lower than the one of the poorer with respect to income. (ii) We then show how an increase of inequality may trigger an expansion of savings through the channel of a bequest motive where generosity towards the next generation increases endogenously with lifetime income, so that the marginal savings rate of the wealthier is higher than the poorer.
    Keywords: Income Inequality, low interest rates
    JEL: E21 E43
    Date: 2016–10–16
  32. By: Greene, Claire (Federal Reserve Bank of Atlanta); Schuh, Scott (West Virginia University); Stavins, Joanna (Federal Reserve Bank of Boston)
    Abstract: This paper describes the results, content, and methodology of the 2012 Diary of Consumer Payment Choice (DCPC), the first edition of a survey that measures payment behavior through the daily recording of U.S. consumers’ spending by type of payment instrument. A diary makes it possible to collect detailed information on individual payments, including dollar amount, device (if any) used to make the payment (computer, mobile phone, etc.), and payee type (business, person, government). This edition of the DCPC included about 2,500 participants and was conducted in October 2012. During that month, U.S. consumers on average made about two payments per day. For the month, they paid mostly with cash (40 percent of payments) and debit cards (24 percent), followed by credit cards (17 percent). For recurring bill payments, consumers most commonly used electronic payments and checks. Like other payment-value data, the DCPC data show correlations between the choice of payment instrument and the dollar value of expenditure. For example, consumers tend to use cash more often than other instruments for small-value payments. The results of subsequent editions of the DCPC are reported in separate papers.
    Keywords: cash; checks; checking accounts; debit cards; credit cards; prepaid cards; electronic payments; payment preferences; Diary of Consumer Payment Choice
    JEL: D12 D14 E42
    Date: 2018–01–17
  33. By: International Monetary Fund
    Abstract: The fall in commodity prices and adverse weather conditions have adversely affected economic activity. The latter further declined following the disclosure of hidden loans in the spring of 2016 and the ensuing freeze in donor support. While tight monetary policy has helped stabilize the exchange rate and lower inflation since the fall of 2016, an overly loose fiscal policy is crowding out the private sector and resulting in an accumulation of domestic arrears. Public debt is in distress with several external borrowing payments missed. While the actual and projected fiscal deficits remain excessively high, the government has implemented measures to ease spending pressures, such as the elimination of fuel and wheat subsidies and the reduction of civil servants’ allowances and benefits.
    Date: 2018–03–07
  34. By: International Monetary Fund
    Abstract: Economic growth has continued to strengthen. Improved energy supply, investment related to the China-Pakistan Economic Corridor, strong credit growth, and continued investor and consumer confidence, have been underpinning growth, which could reach 5.6 percent this fiscal year within a favorable inflation environment. Yet, macroeconomic stability gains achieved during the 2013–16 EFF have been eroding, putting this outlook at risk. The current account deficit has been quickly widening, reflecting strong domestic demand amid an overvalued exchange rate, fiscal slippages, and an accommodative monetary policy stance. As a result, foreign exchange reserves have been declining, reaching 2.3 months of imports as of mid-February 2018, despite significant external borrowing. Net international reserves have declined from $7.5 billion at the end of the EFF to negative $0.7 billion in mid-February 2018. As a result of fiscal slippages in FY 2016/17, debt-related vulnerabilities have increased.
    Date: 2018–03–14
  35. By: Francisco RUGE-MURCIA
    Abstract: This paper constructs an asset pricing model where heterogeneous sectors interact with each other in a production network as producers and consumers of materials and investment goods. Idiosyncratic sectoral shocks are transmitted through the network with the dynamics being affected by the heterogeneity in production functions and capital adjustment costs. The model is estimated using sectoral and aggregate U.S. data. Results show that 1) shocks to the primary sector account for a substantial part of the equity premium in all sectors because their volatility is much higher than that of shocks to the other sectors, and 2) the model endogenously generates conditional heteroskedasticity despite the fact that shocks are conditional homoskedatic. These results depend crucially on the presence of network effects.
    Keywords: network, input-output, production economy, stock returns, sectoral shocks
    JEL: E44 G12
    Date: 2018
  36. By: Beetsma, Roel; Cima, Simone; Cimadomo, Jacopo
    Abstract: Recent debate has focused on the introduction of a central stabilisation capacity as a completing element of the Economic and Monetary Union. Its main objective would be to contribute cushioning country-specific economic shocks, especially when national fiscal stabilisers are run down. There are two main potential objections to such schemes proposed so far: first, they may lead to moral hazard, i.e. weaken the incentives for sound fiscal policies and structural reforms. Second, they may generate permanent transfers among countries. Here we present a scheme that is relatively free from moral hazard, because the transfers are based on changes in world trade in the various sectors. These changes can be considered as largely exogenous, hence independent from an individual government’s policy; therefore, the scheme is better protected against manipulation. Our scheme works as follows: if a sector is hit by a bad shock at the world market level, then a country with an economic structure that is skewed towards this sector receives a (one-time) transfer from the other countries. The scheme is designed such that the transfers add up to zero each period, hence obviating the need for a borrowing capacity. We show that the transfers generated by our scheme tend to be countercyclical and larger when economies are less diversified. In addition, since transfers are based on temporary changes in world trade, the danger of permanent transfers from one set of countries to the other countries is effectively ruled out. Finally, we show that transfers are quite robust to revisions in the underlying export data. JEL Classification: E32, E62, E63
    Keywords: central fiscal capacity, EMU, exports, moral hazard
    Date: 2018–03
  37. By: Cornand, Camille (University of Lyon); Heinemann, Frank (TU Berlin)
    Abstract: Monetary policy affects the degree of strategic complementarity in firms pricing decisions if it responds to the aggregate price level. In normal times, when monopolistic competitive firms increase their prices, the central bank raises interest rates, which lowers consumption demand and creates an incentive for firms to reduce their prices. Thereby, monetary policy reduces the degree of strategic complementarities among firms pricing decisions and even turns prices into strategic substitutes if the effect of interest rates on demand is sufficiently strong. We show that this condition holds when monetary policy follows the Taylor principle. By contrast, in a liquidity trap where monetary policy is restricted by the zero lower bound, pricing decisions are strategic complements. Our main contribution consists in relating the determinacy and stability of equilibria to strategic substitutability in prices. We discuss the consequences for dynamic adjustment processes and some policy implications.
    Keywords: monopolistic competition; monetary policy rule; pricing decisions; strategic complementarity; strategic substitutability.;
    JEL: E52 C72
    Date: 2018–04–04
  38. By: Pedro Brinca (Center for Economics and Finance at Universidade of Porto, Nova School of Business and Economics, Universidade Nova de Lisboa); Miguel H. Ferreira (Nova School of Business and Economics, Universidade Nova de Lisboa); Francesco Franco (Nova School of Business and Economics, Universidade Nova de Lisboa); Hans A. Holter (Department of Economics, University of Oslo); Laurence Malafry (Department of Economics, Stockholm University)
    Abstract: Following the Great Recession, many European countries implemented fiscal consolidation policies aimed at reducing government debt. Using three independent data sources and three different empirical approaches, we document a strong positive relationship between higher income inequality and stronger recessive impacts of fiscal consolidation programs across time and place. To explain this finding, we develop a life-cycle, overlapping generations economy with uninsurable labor market risk. We calibrate our model to match key characteristics of a number of European economies, including the distribution of wages and wealth, social security, taxes and debt, and study the effects of fiscal consolidation programs. We find that higher income risk induces precautionary savings behavior, which decreases the proportion of credit-constrained agents in the economy. Credit-constrained agents have less elastic labor supply responses to fiscal consolidation achieved through either tax hikes or public spending cuts, and this explains the relationship between income inequality and the impact of fiscal consolidation programs. Our model produces a cross-country correlation between inequality and the fiscal consolidation multipliers, which is quite similar to that in the data.
    Keywords: Fiscal Consolidation, Income Inequality, Fiscal Multipliers, Public Debt, Income Risk
    JEL: E21 E62 H31 H50
    Date: 2017–11
  39. By: Leo Krippner; Michelle Lewis (Reserve Bank of New Zealand)
    Abstract: We investigate the real-time forecasting performance of macro-finance vector auto-regression models, which incorporate macroeconomic data and yield curve component estimates as would have been available at the time of each forecast, for the United States. Our results show a clear benefit from using yield curve information when forecasting macroeconomic variables, both prior to the Global Financial Crisis and continuing into the period where the lower-bound constrained shorter-maturity interest rates. The forecasting gains, relative to traditional macroeconomic models, for inflation and the Federal Funds Rate are generally statistically significant and economically material for the horizons up to the four years that we tested. However, macro-finance models do not improve the real-time forecasts over shorter horizons for capacity utilisation, our variable representing real economic activity. This is in contrast to the related recent macro-finance literature, which establishes such results (as do we) with pseudo real-time, i.e. truncated final-vintage, data. Nevertheless, for longer horizons that are more relevant for central bankers, yield curve information does improve activity forecasts. Overall, our results suggest that the yield curve contains fundamental information about the likely evolution of the macroeconomy. We find less convincing evidence for the reverse direction, which is likely because expectations of macroeconomic variables are already reflected in the yield curve. However, for longer horizons, we find there are still some gains from using macroeconomic variables to forecast the yield curve.
    Date: 2018–03
  40. By: Romain Baeriswyl; Camille Cornand; Bruno Ziliotto
    Abstract: While the central bank observes market activity to assess economic fundamentals, it shapes the market outcome through the conduct of monetary policy. A dilemma arises from this dual role because the more the central bank shapes the market, the more it influences the informational content of market prices. This paper analyses the optimal monetary policy action and disclosure when central bank information is endogenous for three operational frameworks: pure communication, action and communication, and signalling action. Although taking the endogenous nature of central bank information into account calls for less activism from the central bank, full transparency remains optimal when the weight assigned to price dispersion in social welfare takes on its micro-founded value.
    Keywords: Endogenous information, overreaction, central bank communication
    JEL: D82 E52 E58
    Date: 2018
  41. By: Roger Farmer; Pawel Zabczyk
    Abstract: We refer to the idea that government must 'tighten its belt' as a necessary policy response to higher indebtedness as the household fallacy. We provide a reason to be skeptical of this claim that holds even if the economy always operates at full employment and all markets clear. Our argument rests on the fact that, in an overlapping-generations (OLG) model, changes in government debt cause changes in the real interest rate that redistribute the burden of repayment across generations. We do not rely on the assumption that the equilibrium is dynamically inefficient, and our argument holds in a version of the OLG model where the real interest rate is always positive.
    JEL: E0 H62
    Date: 2018–03
  42. By: Alexandra Born; Zeno Enders
    Abstract: The global financial crisis of 2007-2009 spread through different channels from its origin in the United States to large parts of the world. In this paper we explore the financial and the trade channel in a unified framework and quantify their relative importance for this transmission. Specifically, we employ a DSGE model of an open economy with an internationally operating banking sector. We investigate the transmission of the crisis via the collapse of export demand and through losses in the value of cross-border asset holdings. Calibrated to German data, the model predicts the trade channel to be twice as important for the transmission of the crisis than the financial channel. In the UK, the latter dominates due to higher foreign-asset holdings, which, at the same time, serve as an automatic stabilizer in case of plummeting foreign demand. The transmission via the financial channel triggers a much longer-lasting recession relative to the trade channel, resulting in larger cumulated output losses and a prolonged crisis particularly in the UK. Stricter enforcement of bank capital requirements would have deepened the initial slump while simultaneously speeding up the recovery. The effects of higher capital requirements depend on the way banks’ balance sheets adjust to this intervention.
    Keywords: financial crisis, international transmission, international business cycles, global banks
    JEL: F44 F41 E32
    Date: 2018
  43. By: Villacorta, Alonso
    Abstract: I propose and estimate a dynamic model of financial intermediation to study the different roles of the condition of banks’ and firms’ balance sheets in real activity. The net worth of firms determines their borrowing capacity both from households and banks. Banks provide risky loans to multiple firms and use their diversified portfolio as collateral to borrow from households. This intermediation process allows additional funds to flow from households to firms. Banks require net worth for intermediation as they are exposed to aggregate risk. The net worth of banks and firms are both state variables. In normal recessions, firm and bank net worth play the same role, so their sum determines the allocation of capital. During financial crises, shocks to bank net worth have an additional effect beyond that in standard financial frictions’ models. This mechanism works through intermediation and affects activity, even if shocks redistribute net worth from banks to firms. I estimate my model and find that the new mechanism accounts for 40% of the fall in output and 80% of the fall in bank net worth during the Great Recession. Finally, the model is consistent with the different dynamics of the share of bank loans in total firm debt and credit spreads during the recessions of 1990, 2001, and 2008. JEL Classification: E44, E32, G01
    Keywords: balance sheet channel, financial crises, financial frictions, financial markets and the macroeconomy
    Date: 2018–02
  44. By: International Monetary Fund
    Abstract: Growth has recovered and should reach 4.4 percent in 2017, although non-agricultural activity remains subdued. Inflation is low and well-anchored. The fiscal deficit is expected to decline to 3.5 percent in 2017 and public debt is sustainable. The current account deficit is projected to decline moderately and international reserves are at a comfortable level. Job creation has improved, but social tensions have increased in 2017, and much remains to be done to reduce structural unemployment, especially for the young, and to promote higher and more inclusive growth.
    Date: 2018–03–12
  45. By: Ambrogio Cesa-Bianchi; M. Hashem Pesaran; Alessandro Rebucci
    Abstract: Measures of economic uncertainty are countercyclical, but economic theory does not provide definite guidance on the direction of causation between uncertainty and the business cycle. This paper proposes a new multi-country approach to the analysis of the interaction between uncertainty and economic activity, without a priori restricting the direction of causality. We develop a multi-country version of the Lucas tree model with time-varying volatility and show that in addition to common technology shocks that affect output growth, higher-order moments of technology shocks are also required to explain the cross country variations of realized volatility. Using this theoretical insight, two common factors, a ‘real’ and a ‘financial’ one, are identified in the empirical analysis assuming different patterns of cross-country correlations of country-specific innovations to real GDP growth and realized stock market volatility. We then quantify the absolute and the relative importance of the common factor shocks as well as country-specific volatility and GDP growth shocks. The paper highlights three main empirical findings. First, it is shown that most of the unconditional correlation between volatility and growth can be accounted for by the real common factor, which is proportional to world growth in our empirical model and linked to the risk-free rate. Second, the share of volatility forecast error variance explained by the real common factor and by country-specific growth shocks amounts to less than 5 percent. Third, shocks to the common financial factor explain about 10 percent of the growth forecast error variance, but when such shocks occur, their negative impact on growth is large and persistent. In contrast, country-specific volatility shocks account for less than 1-2 percent of the growth forecast error variance.
    Keywords: uncertainty, business cycle, common factors, real and financial global shocks, multi-country, identification, realized volatility
    JEL: E44 F44 G15
    Date: 2018
  46. By: International Monetary Fund
    Abstract: The Nigerian economy is slowly exiting recession but remains vulnerable. Rising oil prices, new foreign exchange (FX) measures, attractive yields on government securities, and a tighter monetary policy have contributed to better FX availability, increased reserves to a four-year high, and contained inflationary pressures. Economic growth in the third quarter of 2017 was positive for the second consecutive quarter, driven mainly by recovering oil production. However, these improvements have not yet boosted non-oil non-agricultural activity, brought inflation closer to the target range, contained banking sector vulnerabilities, or reduced unemployment. A higher fiscal deficit driven by weak revenue mobilization amidst still tight domestic financing conditions has raised bond yields, and crowded out private sector credit.
    Date: 2018–03–07
  47. By: Bodnár, Katalin; Fadejeva, Ludmila; Hoeberichts, Marco; Peinado, Mario Izquierdo; Jadeau, Christophe; Viviano, Eliana
    Abstract: More than five years after the start of the Sovereign debt crisis in Europe, its impact on labour market outcomes is not clear. This paper aims to fill this gap. We use qualitative firm-level data for 24 European countries, collected within the Wage Dynamics Network (WDN) of the ESCB. We first derive a set of indices measuring difficulties in accessing the credit market for the period 2010-13. Second, we provide a description of the relationship between credit difficulties and changes in labour input both along the extensive and the intensive margins as well as on wages. We find strong and significant correlation between credit difficulties and adjustments along both the extensive and the intensive margin. In the presence of credit market difficulties, firms cut wages by reducing the variable part of wages. This evidence suggests that credit shocks can affect not only the real economy, but also nominal variables. JEL Classification: D53, E24, E44, G31, G32
    Keywords: credit difficulties, intensive margin, labour input adjustment
    Date: 2018–01
  48. By: Niepelt, Dirk
    Abstract: This paper reviews theoretical results on financial policy. We use basic accounting identities to illustrate relations between gross assets and liabilities, net debt positions and the appropriation of (primary) budget surplus funds. We then discuss Ramsey policies, answering the question how a committed government may use financial instruments to pursue its objectives. Finally, we discuss additional roles for financial policy that arise as a consequence of political frictions, in particular lack of commitment.
    Keywords: debt; Debt Structure; Financial policy
    JEL: E6 F3 H6
    Date: 2018–02
  49. By: Kopiec, Paweł
    Abstract: I study a novel channel that amplifies the effects of a rise in government purchases. Fiscal stimulus increases aggregate demand and boosts job creation. The latter improves employment prospects by reducing idiosyncratic unemployment risk faced by households. This, in turn, weakens precautionary motives and raises private consumption which strengthens the initial fiscal impulse. To explore the mechanism, I use a model with uninsured idiosyncratic risk, frictional labor market and sticky prices. Quantitative analysis indicates that magnitude of the employment prospects channel is substantial: its elimination implies that crowding out of aggregate consumption associated with higher government expenditures rises by 47%.
    Keywords: Heterogeneous Agents, Frictional Markets, Fiscal Stimulus
    JEL: D30 E62 H23 H30 H31
    Date: 2018–03–07
  50. By: Michael Fidora (European Central Bank); Claire Giordano (Banca d’Italia); Martin Schmitz (European Central Bank)
    Abstract: Building upon a behavioural equilibrium exchange rate (BEER) model, estimated at a quarterly frequency since 1999 on a broad sample of 57 countries, this paper assesses whether both the size and persistence of real effective exchange rate misalignments from the levels implied by economic fundamentals have been affected by the adoption of a single currency. A comparison of real misalignments across different country groupings (euro area, non-euro area, advanced and emerging economies), shows they are smaller in the euro area than in its main trading partners. However, in the euro area real disequilibria are also more persistent, although after the global financial crisis the reactivity of real exchange rates to past misalignments increased, and therefore the persistence decreased. In the absence of the nominal adjustment channel, an improvement in the quality of regulation and institutions is found to reduce the persistence of real exchange rate misalignments, plausibly by removing real rigidities.
    Keywords: Real effective exchange rate, equilibrium exchange rate, monetary union, regulation.
    JEL: E24 E30 F00
    Date: 2018–01
  51. By: He, Qichun
    Abstract: This study explores a novel channel---endogenous health investment---through which monetary policy impacts growth and welfare. We use a scale-invariant Schumpeterian growth model with a cash-in-advance (CIA) constraint on R&D investment. We find that the effect of an increase in the nominal interest rate on long-run growth crucially depends on the form of the CIA constraint. When the CIA constraint does not apply to medical expenditure, long-run growth does not depend on the nominal interest rate. The result remains robust when health capital does not need medical expenditure to produce (i.e., health capital only needs leisure to produce). By contrast, when the CIA constraint applies to medical expenditure, an increase in the nominal interest rate leads to a decrease in R&D and health investment, which in turn reduces the long-run growth rates of technology and output. Nevertheless, welfare is always a decreasing function of the nominal interest rate, and the welfare loss is larger under the CIA constraint on medical expenditure. The results hold up with the health-in-the-utility function (HIU).
    Keywords: Monetary policy; innovation; health; economic growth; welfare
    JEL: E41 I15 O30 O40
    Date: 2018–03
  52. By: Luca Brugnolini (Central Bank of Malta)
    Abstract: This paper assesses and forecasts the probability of deflation in the EA at different horizons using a binomial probit model. The best predictors are selected among more than one-hundred variables adopting a two-step combinatoric approach and exploiting parallel computation in Julia language. The best-selected variables coincide to those standardly included in a small New Keynesian model. Also, the goodness of the models is assessed using three different loss functions: the Mean Absolute Error (MAE), the Root Mean Squared Error (RMSE) and the Area Under the Receiver Operating Characteristics (AUROC). The results are reasonably consistent among the three criteria. Finally, an index averaging the forecasts is computed to assess the probability of being in a deflation state in the next two years. The index shows that having inflation above the 2% level before March 2019 is extremely unlikely.
    JEL: C25 C63 E3 E58
    Date: 2018
  53. By: Koichiro Kamada (Deputy Director-General, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Tetsuo Kurosaki (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Ko Miura (Research and Statistics Department, Bank of Japan (currently, University of Wisconsin-Madison)); Tetsuya Yamada (Director and Senior Economist, Institute for Monetary and Economic Studies (currently, Financial System and Bank Examination Department), Bank of Japan, (E-mail:
    Abstract: We present a theoretical model to explain how financial traders incorporate public and private information into security prices. We explain that the model enables us to simultaneously identify when public information caused surprises and how large an impact it had on the market. By applying the model to the tick-by-tick data on Japanese government bond futures prices, we show that the Bank of Japan fs introduction of quantitative and qualitative monetary easing was one of the most surprising episodes during the period from 2005 to 2016. We also show that the sensitivity to the Bank fs announcements has strengthened since the introduction of the negative interest rate policy, whereas the sensitivity to economic indicators and surveys has weakened substantially.
    Keywords: Central bank announcements, Government bond futures, Herding behavior, Information efficiency, Market microstructure
    JEL: C14 D40 D83 E58 G12 G14
    Date: 2018–03
  54. By: Onaran, Özlem
    Abstract: This paper presents the empirical evidence about the impact of the simultaneous race to the bottom in labour’s share on growth after taking global interactions into account based on the Post-Kaleckian theoretical framework developed by Bhaduri and Marglin (1990). The world economy and large economic areas are likely to be wage-led; and parameter shifts in different periods are unlikely to make a difference in this finding. The effects that can come from a wage-led recovery on growth and hence employment are positive, however they are also modest in magnitude. We then present an alternative scenario based on a policy mix of wage increases and public investment. A coordinated mix of polices in the G20 targeted to increase the share of wages in GDP by 1%-5% in the next 5 years and to raise public investment in social and physical infrastructure by 1% of GDP in each country can create up to 5.84% more growth in G20 countries. The final section addresses the political aspects and barriers to a wage-led recovery.
    Keywords: Wage share; Wage-led growth; Globalization; Public investment;
    JEL: E12 E22 E25
    Date: 2016–10–01
  55. By: Güneş Kamber; Benjamin Wong (Reserve Bank of New Zealand)
    Abstract: Many studies have shown that domestic inflation in different countries tends to behave similarly. One possible explanation for this observation is that domestic inflation dynamics are in part determined by global factors. This implies that central banks need to account for global factors when explaining and predicting inflation. Their importance however depends on whether they have long lasting effects on domestic inflation rates. Using a large macroeconomic dataset, we propose a methodology to decompose inflation into its permanent (trend) and transitory (gap) components. We then quantify the role of domestic and global factors in determining each of these components. We first apply the model to a sample of economies with long-standing inflation targeting regimes. We then extend our analysis to a sample of ten Asian economies to draw comparisons. In our first sample, we find that global factors have a sizeable influence on inflation behaviour. However, this is mainly temporary and appears to reflect movements in commodity prices. The effect of global factors on trend inflation is small. In our second sample, a set of countries with more diverse monetary policy regimes, we find global factors have a much larger role. A possible explanation is that inflation targeting may have reduced the influence of global factors on trend inflation.
    Date: 2018–02
  56. By: Sebastian Müller; Gunther Schnabl
    Abstract: We analyze the effects of the increasingly expansionary monetary policies on the economic order and on the European integration process. We argue that the market orders shaped in postwar Germany and in Margret Thatcher’s United Kingdom have long served as cornerstones for growth, prosperity and social cohesion in Europe. It is shown that the monetary policies of the European Central Bank and the Bank of England have undermined these orders, thereby eroding productivity gains and growth. Combined with negative distribution effects, ultra-loose monetary policies constitute the breeding ground for divergence forces in the European Union as heralded by the Brexit.
    Keywords: European integration, economic order, Walter Eucken, Friedrich August von Hayek, Margret Thatcher, inequality, monetary policy, political polarization, divergence, Brexit
    JEL: B25 E58 E65
    Date: 2018
  57. By: Gros, Daniel
    Abstract: Financial innovation seems to have had little impact on the oldest medium of transaction, namely cash. The ratio of currency in circulation to GDP has increased in most countries, independently of the continuing spread of cashless transactions. Currency is part of the monetary base. Its increase thus leads to an automatic increase in central banks’ balance sheets. This becomes relevant when the size of a central bank’s balance sheet becomes a policy instrument. Taking account of the increase in cash holdings can lead to a different view of the monetary policy stance over longer periods of time. Holding the size of the overall balance sheet constant is equivalent to a gradual exit when currency holdings continue to increase.
    Date: 2017–06
  58. By: International Monetary Fund
    Abstract: The recovery is gaining momentum, with real GDP growth projected to rise to close to 2 percent in 2018. Job growth is picking up and the fiscal position is improving, as past reforms pay off and the recovery strengthens throughout Europe. This favorable economic context is an opportunity to enhance the resilience and long-term growth potential of the Belgian economy.
    Date: 2018–03–08
  59. By: Don Bredin (University College Dublin, Ireland); Stilianos Fountas (Department of Economics, University of Macedonia)
    Abstract: This paper uses historical US infl ation data covering over two centuries, to examine the impact of the establishment of the US Federal Reserve on average US in flation and infl ation uncertainty. We find that the founding of the Fed is associated with higher average US infl ation and lower infl ation uncertainty. Critically, these results are not driven by the post-1980 period, where the Fed policy is characterized by the dual mandate. Other important results are that the Gold Standard period is associated with both lower infl ation and in flation uncertainty, and that banking and stock market crises are a positive determinant of infl ation uncertainty and perhaps infl ation. The two world wars and the US civil war are associated with both higher infl ation and higher infl ation uncertainty. In addition, we find that the central bank has responded to increasing in flation uncertainty in a stabilizing manner in support of the Holland hypothesis.
    Keywords: asymmetric GARCH, recession, infl ation uncertainty.
    JEL: C22 E31
    Date: 2018–04
  60. By: International Monetary Fund
    Abstract: In recent years, the economy has shown resilience and continued to perform well despite external shocks, while fiscal consolidation proceeded. Progress was made toward achieving high income status and improving inclusion. Going forward, striking the right balance in macroeconomic policies is key. There is room for improving forward guidance on economic and financial policies, while implementing the comprehensive structural reforms agenda.
    Date: 2018–03–07
  61. By: Nandipha Dondashe (Department of Economics, Nelson Mandela University); Andrew Phiri (Department of Economics, Nelson Mandela University)
    Abstract: In this study we examine the macroeconomic determinants of FDI for the South African economy using data collected between 1994 and 2016 using the ARDL model for cointegration. The specific macroeconomic determinants which are used in the study are per capita GDP, the inflation rate, government size, real interest rate variable, and terms of trade. With the exception of inflation the remaining macroeconomic determinants employed in the study are positively and significantly related with FDI. However, in the short-run all variables are positively and significantly correlated with FDI. Collectively, these results have important implications for policymakers.
    Keywords: FDI, ARDL cointegration, Financial crisis, South Africa.
    JEL: C13 C22 C51 C52 F21
    Date: 2018–01
  62. By: Raúl Chamorro Narváez
    Keywords: crecimiento económico, política fiscal, gasto público, crecimiento endógeno, restricción presupuestaria del gobierno.Keywords: economic growth, fiscal policy, public expenditure, endogenous growth, governmentbudget constraint
    JEL: O38 O47 O49 H50 E62
    Date: 2017–07–01
  63. By: Volckart, Oliver
    Abstract: The paper discusses which options medieval political authorities had to satisfy the demand for complex currencies. It distinguishes several models, each of which caused problems: A first one, where the basic unit was supplemented by a range of other denominations whose weight and purity where exactly proportional. While this did not take the proportionally larger labour costs involved in the production of small change into account, the second model did: here, small change had an over proportionally high content of base metal. In consequence, the stable numerical ratios between units of the same currency began to shift. The third option involved using gold for high purchasing power coins; a strategy that made currencies vulnerable to changes in the relative market prices of gold and silver. Again, the outcome was a that the numerical ratios between units of the same currency became instable. The paper discusses how political authorities chose between these options, how they supplied their mints with the necessary bullion and how minting was organised.
    Keywords: Medieval monetary policies; mining; minting
    JEL: E42 E52 N13
    Date: 2018–02
  64. By: Nicholas Oulton (Centre for Macroeconomics (CFM); National Institute of Economic and Social Research; Economic Statistics Centre of Excellence)
    Abstract: I propose a new explanation for the UK productivity puzzle. I graft the Lewis (1954) model onto a standard Solow growth model. What I call the neo-Lewis model is identical to the Solow model in good times. But in bad times foreign demand for a country’s exports is constrained below potential supply. This makes labour productivity growth depend negatively on the growth of labour input. I also argue that the neo-Lewis model can explain the fall in TFP growth, in the UK and elsewhere, after 2007. The predictions of the neo-Lewis model are tested on data for 23 advanced countries and also on a larger sample of 52 countries and find support.
    Keywords: Productivity, Slowdown, TFP, Capital, Lewis, Immigration
    JEL: E24 O41 O47 J24 F43 F44
    Date: 2018–03
  65. By: Hull, Isaiah (Research Department, Central Bank of Sweden); Olovsson, Conny (Research Department, Central Bank of Sweden); Walentin, Karl (Research Department, Central Bank of Sweden); Westermark, Andreas (Research Department, Central Bank of Sweden)
    Abstract: We measure the extent to which exposure to microeconomic shocks affects house price volatility. Using a novel dataset of all property transactions in Sweden over the 2009-2017 period, we demonstrate that the following are positively associated with house price growth volatility: 1) manufacturing's sectoral share; 2) employment growth volatility; and 3) exposure to firm-specific shocks. Our findings imply that the decline in manufacturing's share of employment since 1970 could account for a 33% reduction in house price volatility in Sweden. We also compute the volatility declines implied by manufacturing share reductions in the U.S., U.K., and Japan.
    Keywords: Idiosyncratic Shocks; Great Moderation; Real Estate
    JEL: E30 O14 R20
    Date: 2017–12–01
  66. By: Alessandro RIBONI; Francisco RUGE-MURCIA
    Abstract: This paper develops a model of committee decision-making where members of different expertise deliberate and share private information prior to voting. The model predicts that members truthfully reveal their private information and are willing to "change their minds" as a result of deliberation. The predictions of the model are evaluated using data from the Federal Open Market Committee.
    Keywords: deliberation, voting, mind-changes
    JEL: D7 E5
    Date: 2018
  67. By: Eric Zwick
    Abstract: Does tax code complexity alter corporate behavior? This paper investigates this question by focusing on the decision to claim refunds for tax losses. In a sample of 1.2M observations from the population of corporate tax returns, only 37% of eligible firms claim their refund. A simple cost-benefit analysis of the tax loss choice cannot explain low take-up, which motivates an investigation of how tax complexity alters this calculation. A research design exploiting tax preparer switches, deaths, and relocations shows that sophisticated preparers increase the claiming behavior of small and mid-market firms. Tax complexity decreases take-up among large firms through interactions of refund claims with other tax code provisions and with the audit process.
    JEL: D22 D92 E62 H2 H25 H3
    Date: 2018–03
  68. By: Tzuo Hann Law (Boston College); Dongho Song (Boston College); Amir Yaron (University of Pennsylvania)
    Abstract: Using intraday stock returns around macroeconomic news announcements (MNAs), we find strong evidence of persistent, cyclical variation in the stock market's response to MNA surprises. The response is particularly strong coming out of recessions and is gradually attenuated as the economy expands. We show that this cyclical pattern can be explained by a regime-switching model. In the model, we find that the direction and shape of the market's response reflect the evolution of beliefs about the state of the economy and monetary policy. The risk of an interest rate hike can entirely mitigate (and even reverse) the effect of positive MNA surprises on returns. This mechanism is consistent with the data -- positive MNA surprises coincide with negative stock market returns when there is substantial uncertainty over monetary policy.
    Date: 2017
  69. By: Albertazzi, Ugo; Becker, Bo; Boucinha, Miguel
    Abstract: Large-scale asset programmes aim to impact the real economy through the financial system. The ECB has focused much of its policies on safe assets. An intended channel of transmission of this type of programme is the “portfolio rebalancing channel”, whereby investors are influenced to shift their investments away from such safe assets towards assets with higher expected returns, including lending to households and firms. We examine the portfolio rebalancing channel around the ECB’s asset purchase program (APP). We exploit cross-sectional heterogeneity in the impact of APP on the valuation of the financial portfolio held by different sectors of the European economy. Overall, our results provide evidence of an active portfolio rebalancing channel. In more vulnerable countries, where macroeconomic unbalances and relatively high risk premia remain, APP was mostly reflected into a rebalancing towards riskier securities. In less vulnerable countries, where constraints on loan demand and supply are less significant, the rebalancing was observed mostly in terms of bank loans. Examining large European banks, we confirm similar geographical differences. JEL Classification: E44, E51, G21
    Keywords: portfolio rebalancing, quantitative easing, search for yield, unconventional monetary policy
    Date: 2018–01
  70. By: Aleksandar Vasilev (Independent researcher)
    Abstract: We introduce an environmental dimension into a real-business-cycle model augmented with a detailed government sector. We calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2016). We investigate the quantitative importance of utility-enhancing environmental quality, and the mechanics of environmental ("carbon") tax on polluting production, as well as the effect of government spending on pollution abatement over the cycle. In particular, a positive shock to pollution emission in the model works like a positive technological shock, but its effect is quantitatively very small. Allowing for pollution as a by-product of production improves the model performance against data, and in addition this ex- tended setup dominates the standard RBC model framework, e.g., Vasilev (2009).
    Keywords: Business cycles, pollution, environmental quality, environmental tax, abatement spending
    JEL: E32 C68 Q2 Q4 Q54 Q58
    Date: 2018–03
  71. By: Raffaele Miniaci; Paolo Panteghini; Giulia Rivolta
    Abstract: Tax competition has long been studied using panel models. According to this approach, each country’s tax rate is assumed to depend on a weighted average of the tax rates applied in the rest of the world, where weights are exogenous. As a consequence, the estimated reaction functions of countries throughout the world have the same sign. This means that all tax rates are either strategic complements or strategic substitutes. Moreover, the intensity of a country’s reaction depends on certain exogenous weights, with a unique proportional factor common across all countries. Our article departs from this standard approach and proposes a VAR model as an alternative estimation strategy. Accordingly, weights are no longer determined exogenously but rather endogenously. As such, we compare and explore the implications of the panel versus the VAR model in terms of structural contemporaneous parameters and impulse response functions. We show that results obtained with a VAR model differ from those obtained from a panel approach. In particular, we find that strategic complementarity between certain countries (with a positive slope of reaction functions) may co-exist with strategic substitutability between other countries (negative slope). Given these results, we can say that a standard panel approach is relatively restrictive and therefore can lead to unreliable estimates, and fail to provide helpful policy recommendations.
    Keywords: tax competition, VAR models, Bayesian methods
    JEL: C54 H25 E62
    Date: 2018
  72. By: B. Craig; D. Salakhova; M. Saldias
    Abstract: We use a unique dataset of transactions from the real-time gross settlement system TARGET2 to analyze the behavior of banks with respect to the settlement of interbank claims. We focus on the time that passes between a payment’s introduction to the system and its settlement, the so-called payment delay. Delays represent the means by which some participants could free ride on the liquidity of others. These delays are important in that they can propagate other delays, thus prompting concerns that they could cause system gridlock. This paper characterizes the delays in the TARGET2 and analyzes whether delays in incoming transactions could cause delays in outgoing transactions. We distinguish between the potentially mechanical pass-through of delays and the reaction of one bank to its delaying counterparty, and we propose a set of instruments to tackle endogeneity issues. We find evidence that delays do propagate downstream; however, in most cases the effect is rather limited. As for delaying strategies on a payment-by-payment basis, contrary to the theoretical literature, the data show only very weak evidence. This conclusion opens a venue for research how banks may rather follow persistent liquidity management routines.
    Keywords: Payment delays, endogenous regressors, liquidity, TARGET2.
    JEL: C26 E42 G21
    Date: 2018
  73. By: International Monetary Fund
    Abstract: Namibia’s financial sector is dominated by four large and heterogenous financial conglomerates, all with close ownership and funding links to South Africa. The Nonbank Financial Institutions (NBFI) sector is comparatively large (around140 percent of Gross Domestic Product (GDP) on net asset basis), in part reflecting a fully funded government pension fund. Asset managers play a central role in connecting institutional investors to financial markets and banks. Macrofinancial vulnerabilities have built up over a period of rapid economic growth and the financial cycle has now turned down. The sovereign debt/GDP ratio has nearly doubled since 2014 which has reinforced the already strong bank-sovereign link. The rapid rise in housing prices and household debt, banks’ large exposure to mortgages, and banks reliance on wholesale funding are sources of concern. A major decline in real estate prices would adversely affect bank capital and profitability. Economic and financial shocks from South Africa are directly transmitted through the common currency and integrated financial markets. The announced increase in the domestic investment requirement risks lowering future returns, reducing portfolio diversification, and exacerbating asset price inflation. Data limitations posed challenges to the risk assessment, particularly for NBFIs.
    Date: 2018–03–15
  74. By: Duncan, Roberto (Ohio University); Martinez-Garcia, Enrique (Federal Reserve Bank of Dallas)
    Abstract: We use a broad-range set of inflation models and pseudo out-of-sample forecasts to assess their predictive ability among 14 emerging market economies (EMEs) at different horizons (1 to 12 quarters ahead) with quarterly data over the period 1980Q1-2016Q4. We find, in general, that a simple arithmetic average of the current and three previous observations (the RW-AO model) consistently outperforms its standard competitors - based on the root mean squared prediction error (RMSPE) and on the accuracy in predicting the direction of change. These include conventional models based on domestic factors, existing open-economy Phillips curve-based specifications, factor-augmented models, and time-varying parameter models. Often, the RMSPE and directional accuracy gains of the RW-AO model are shown to be statistically significant. Our results are robust to forecast combinations, intercept corrections, alternative transformations of the target variable, different lag structures, and additional tests of (conditional) predictability. We argue that the RW-AO model is successful among EMEs because it is a straightforward method to downweight later data, which is a useful strategy when there are unknown structural breaks and model misspecification.
    JEL: E31 F41 F42 F47
    Date: 2018–01–01
  75. By: Manuel, Lancastre
    Abstract: Major age milestones like the age of first job, retirement age, or life expectancy, bounding relevant economic periods in a persons' life, have been changing substantially during the last decades. In parallel real interest rates have been significantly declining in relevant world economies, reaching stable negative levels in some cases. We propose an analytic approach to relate those two phenomena by using an overlapping multi-generations model to find expressions for real interest rate elasticities to age parameters. The model formalizes the mechanisms supporting the relation between interest rates and age, sheds light on the relative importance of each age milestone in explaining changes of real interest rates, and how other factors like elasticity of inter-temporal substitution, population and productivity growth, inter-generational altruism, as well as a social security system, may mitigate or amplify those changes.
    Keywords: Demographics; low interest rates; OLG; age-milestones
    JEL: E40 E43 J10 J11
    Date: 2016–10–10
  76. By: Susana Nudelsman
    Keywords: tipos de cambio, arreglos monetarios internacionales, macroeconomía de economías abiertas, impactos económicos de la globalización. Keywords: exchange rates, international monetary arrangement, macroeconomics of open economies, economic impacts of globalization
    JEL: B22 E42 F02 F43
    Date: 2017–07–01
  77. By: Emerson, Patrick M. (Oregon State University); Knabb, Shawn D. (Western Washington University)
    Abstract: This paper uses a model with overlapping generations to demonstrate that human capital accumulation can potentially attenuate factor price movements in response to birth rate shocks. Specifically, we show that if education spending per child is inversely related to the size of the generation, then there will be less movement in factor prices in response to the relative size of each generation. The degree of this attenuation effect will depend on the effectiveness of education spending in producing human capital. We also demonstrate that this attenuation effect tends to concentrate generational consumption risk around the generation subject to the birth rate shock. In a limiting case, we show that an i.i.d birth rate shock translates into an i.i.d. generational consumption shock. In other words, each generation bears all of the risk associated with their own demographic uncertainty. As a final exercise, we demonstrate that if the tax rate funding education spending varies with the size of the generation rather than education spending per child, then human capital does not influence the dynamic behavior of the economy in response to a birth rate shock.
    Keywords: human capital, consumption risk, factor price movements, fertility shocks
    JEL: J12 E21 I31 J11
    Date: 2018–02
  78. By: Alcidi, Cinzia; Thirion, Gilles
    Abstract: On May 31st, the European Commission issued a reflection paper on the deepening of the Economic and Monetary Union calling for a far-reaching debate on reforms to the economic governance architecture of the euro area. The Commission’s document also states that a fiscal stabilisation function for the euro area could be envisaged in the longer run (2020-25) in addition to the deepening of private risk-sharing mechanisms. The present paper offers a timely contribution to the important debate on the design of a possible fiscal stabilisation function for the euro area by assessing the stabilising effects and the nature of the US federal tax-transfer system to shocks. We question the mainstream argument for a euro area ‘fiscal capacity’, which revolves around the need to “dampen the effects of asymmetric shocks”, and argue that there are important lessons to be derived from US federal fiscal risk-sharing institutions, but that they are not what policymakers typically envisage.
    Date: 2017–05
  79. By: Vasilios Plakandaras (Department of Economics, Democritus University of Thrace, Komotini, Greece); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Luis A. Gil-Alana (Department of Economics, University of Navarra, Spain); Mark E. Wohar (College of Business Administration, University of Nebraska at Omaha USA, and School of Business and Economics, Loughborough University, UK.)
    Abstract: In this paper, we focus on the stochastic (chaotic) attributes of the US dollar-based exchange rates for Brazil, Russia, India, China and South Africa (BRICS) using a long-run monthly dataset covering 1812M01-2017M12, 1814M01-2017M12, 1822M07-2017M12, 1948M08-2017M12, and 1844M01-2017M12, respectively. For our purpose, we consider the Lyapunov exponents, robust to nonlinear and stochastic systems, in both full—samples and in rolling windows. For comparative purposes, we also evaluate a long-run dataset of a developed currency market, namely British pound over the period of 1791M01-2017M12. Our empirical findings detect chaotic behavior only episodically for all countries before the dissolution of the Bretton Woods system, with the exception of the Russian ruble. Overall, our findings suggest that the establishment of the free floating exchange rate system have altered the path of exchange rates removing chaotic dynamics from the phenomenon, and hence, the need for policymakers to intervene in the currency markets for the most important emerging market bloc, should be carefully examined.
    Keywords: Exchange rate, chaos, Lyapunov exponent
    JEL: C46 E52
    Date: 2018–03
  80. By: Lance Taylor; Duncan Foley; Armon Rezai (Schwartz Center for Economic Policy Analysis (SCEPA))
    Abstract: How does effective demand, productivity growth, income, and wealth distributions influence and constrain the economy? Authors use simulations to project the long-run growth rate at 2% per year and that the capitalist share of wealth may rise from about 40% to 70% percent.
    Keywords: economic growth, demand and distribution, effective demand
    JEL: E25 O47
    Date: 2017–10
  81. By: Pavlina R. Tcherneva
    Abstract: The job guarantee (JG) is a public option for jobs. It is a permanent, federally funded, and locally administered program that supplies voluntary employment opportunities on demand for all who are ready and willing to work at a living wage. While it is first and foremost a jobs program, it has the potential to be transformative by advancing the public purpose and improving working conditions, people’s everyday lives, and the economy as a whole. This working paper provides a blueprint for operationalizing the proposal. It addresses frequently asked questions and common concerns. It begins by outlining some of the core propositions in the existing literature that have motivated the JG proposal. These propositions suggest specific design and implementation features. (Some questions are answered in greater detail in appendix III). The paper presents the core objectives and expected benefits of the program, and suggests an institutional structure, funding mechanism, and project design and administration.
    Keywords: Job Guarantee; Unemployment; Full Employment; Living Wage; Policy Design
    JEL: D6 E2 E6 H1 H3 H4 H5 J2 J3 J4
    Date: 2018–03
  82. By: Yoon, Deok Ryong (Korea Institute for International Economic Policy); Kim, Hyo Sang (Korea Institute for International Economic Policy)
    Abstract: The exchange rate is one of the most influential factors in the economy in Korea as Korea highly depend on the external sector. In an economy that is highly dependent on the foreign countries, changes in exchange rates affect imports and exports and cause changes in growth and income. Also, it affects the price level, the competitiveness of enterprises, and the level of employment. In this study, we investigated the effects of exchange rate not only on macroeconomic analysis but also extended to a micro analysis by using the firm-level data. It may contribute to more accurate and efficient policy responses by combining macroeconomic policy with microeconomic analysis. 우리나라 거시경제변수 가운데 경제 전반에 가장 많은 영향을 미치는 것은 환율이다. 가장 직접적으로는 무엇보다 우리나라의 대외의존도가 높기 때문이다. 대외의존도가 높은 경제에서 환율변화는 수출입에 영향을 미쳐서 성장과 소득의 변화를 야기한다. 뿐만 아니라 물가수준, 기업의 경쟁력, 고용수준 등에 까지 영향을 미치게 된다. 본 연구에서는 그동안 거시경제 중심으로 진행되어온 환율의 영향과 대응방안에 관한 연구를 기업데이터를 활용하여 미시적 분석으로 그 연구범위를 확대하였다. 이를 통해 거시경제적 정책대응과 더불어 미시적 정책대응을 결합할 수 있어서 더 적확하고 효율적인 정책대응의 모색에 기여하기 위해서이다.
    Keywords: Exchange Rate; Korean Firms
    Date: 2017–11–30
  83. By: Sebnem Kalemli-Ozcan; Xiaoxi Liu; Ilhyock Shim
    Abstract: We test the risk taking channel of exchange rate appreciations using firm-level data from private and public firms in ten Asian emerging market economies during 2002-2015. Since foreign currency (FX) debt at the firm level is not observed for the Asian economies, we approximate the FX debt of a given firm by assuming that any given firm will hold a constant share of its total debt in foreign currency, where this share is given by the firm's country's share of FX liabilities in total liabilities. We measure risk taking by firm leverage. We show that firms with a higher volume of FX debt before the exchange rate appreciates, increase their leverage relatively more after the appreciation. Our results imply that more indebted firms become even more leveraged after exchange rate appreciations.
    Keywords: capital flows, exchange rates, FX borrowing, firm heterogeneity, firm leverage
    JEL: E0 F0 F1
    Date: 2018–03
  84. By: Prada, Albino; Sanchez-Fernandez, Patricio
    Abstract: In this paper an analysis of the level of wealth of the Spanish regions is made, taking from the results of the Social Welfare Index carried out by the Valencian Institute of Economic Research (IVIE) and the BBVA Foundation. For this purpose, this indicator is compared with two other synthetic indicators of development and well-being. The results allow us to verify the differences in transformation of wealth into development between the different regions.
    Keywords: Synthetic indicators, wealth, welfare, development, Social Welfare Index, Spain
    JEL: E01 H53 I31
    Date: 2018–03
  85. By: Thibaud Cargoet (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - CNRS - Centre National de la Recherche Scientifique); Jean-Christophe Poutineau (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper analyses how long credit policy measures should last to restore a normal function-ning of the loan market. We build a DSGE model where financial intermediaries and non financial agents face balance sheet constraints. Our results are two. First, we find that a credit policy has an intertemporal effect as it smoothes the negative shock along a greater number of periods. It dampens the inital negative consequences of financial shocks at the expense of a higherlength of the uncoventional period. Second, accounting for the joint effect of shocks on the length of the starurated period and on the fluctuation of activity in the transitory period back to the steady state situation, we find that the positive effect of this policy requires some qualification. For the benchmark calibration, conducting such a policy affects activity positively. However, for a high value of firm's leverage we find that unconventional monetary policy can be counterproductive. Ignoring credit policy will generate higher short run losses in activity but the transition to the steady state would be quicker, implying lower short run activity losses than those encountered with a credit policy where the transition to the steady state would last longer.
    Keywords: Financial Frictions,Financial Accelerator,DSGE model
    Date: 2018–01
  86. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Abstract: Today, I’ll discuss my views on the outlook for the economy and monetary policy and make a few remarks on two future issues for the monetary policy agenda. I believe it’s important for Fed policymakers to explain the rationale for their policy decisions to the public, so I am looking forward to taking your questions after my remarks. Before I continue, I should remind everyone that the views I’ll present today are my own and not necessarily those of the Federal Reserve System or my colleagues on the Federal Open Market Committee.
    Date: 2018–03–26
  87. By: Eduardo A. Cavallo; Eduardo Fernández-Arias; Matías Marzani
    Abstract: Deeper financial integration is expected to enable low-saving countries to increase domestic investment but also to increase crisis risks by facilitating the accumulation of risky foreign liabilities. This paper explores the connections between financial integration, investment and crisis risk to assess this tradeoff. It confirms expectations but also finds that the accumulation of safe foreign assets that financial integration brings is an important risk offset that in many cases even eliminates the risk factor from the tradeoff altogether. Furthermore, it shows that the risk features of assets and liabilities depend on their type. Ultimately, whether international financial integration is in fact a reliable remedy for individual countries critically depends on the portfolio composition of their foreign assets and liabilities.
    Keywords: Macroeconomics
    JEL: G15 F32 G01 H63 F34 E44
    Date: 2017–07
  88. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: Speaking in Washington, D.C., Boston Fed President Eric Rosengren suggested that policymakers should view financial stability tools more holistically, and assess the ability to utilize fiscal, monetary, and financial stability policy tools to respond to a hypothetical adverse shock.
    Date: 2018–03–23
  89. By: Dunne, Peter G. (Central Bank of Ireland)
    Abstract: There are competing arguments about the likely effects of Sovereign Bond-Backed Securitisation on the liquidity of sovereign bond markets. By analysing hedging and diversification opportunities, this paper shows that positive liquidity spillovers would dominate or at least constrain the extent of any negative effects. This relies on dealers using Sovereign Bond-Backed Securities (SBBS) as instruments to hedge inventory risk and it assumes that they diversify their activities widely across euro area sovereign markets. Through a simple arbitrage relation, the existence of low-cost hedging and diversification opportunities limits the divergence of bid-ask spreads between national and SBBS markets. This is demonstrated using estimated SBBS yields (`a la Sch¨onbucher (2003)).
    Keywords: Safe Assets, Securitisation, Dealer Behaviour, Liquidity Bid-Ask Spread
    JEL: E44 G12 G24 C53 C58
    Date: 2018–02
  90. By: Brecht Boone; Ewoud Quaghebeur (-)
    Abstract: We explore the transitional dynamics in an Overlapping Generations framework with and without heuristic switching. Agents use simple heuristics to forecast the interest rate and the real wage. The fraction of agents using a specific heuristic depends on its relative forecasting performance. In the absence of heuristic switching, the results indicate that there is a lot of variation in the transitional dynamics over different parameter values and heuristics. They might even oscillate or diverge. Including heuristic switching has two advantages. First, it decreases the variation in the transitional dynamics significantly. Second, it has a stabilising effect on oscillating or diverging transitional dynamics.
    Keywords: Heuristic Switching, Heterogeneous Agents, Fiscal Policy, Transitional Dynamics, Overlapping Generations
    JEL: D83 D84 E60
    Date: 2018–01
  91. By: Enzo Dia; Lunan Jiang; Lorenzo Menna; Lin Zhang (Universita degli Studi di Milano Bicocca ; Center for Financial Development and Stability at Henan University, Kaifeng, Henan; Banco de Mexico)
    Abstract: We document the existence of a substantial dispersion of interest margins charged by commercial banks among Chinese provinces, and we build a parsimonious dynamic stochastic general equilibrium model featuring both banking and production sectors that we calibrate at both the national and provincial level. Our model can explain a considerable share of the interest margin charged in different provinces, and we find support for the hypothesis that Chinese banks adopt a similar technology across different provinces. Since in the case of Chinese provinces differences in wages are substantial, the adoption of a national technology implies an inefficient industrial structure for the banking industry. The adoption of a common nationwide technology generates also a stronger response of the rate on loans to productivity shocks than would be the case if banks adopted different technologies in different provinces, and the capability of banks to smooth regional idiosyncratic productivity shock hitting firms declines substantially.
    Keywords: Interest margins, market segmentation, Chinese economy
    JEL: E1
  92. By: Felix P. , Ackon (Federal Reserve Bank of Richmond); Ennis, Huberto M. (Federal Reserve Bank of Richmond)
    Abstract: From July 2010 until June 2015, the Federal Reserve made over 16,000 loans to financial institutions through the discount window. Recent regulations mandate the release of detailed information about individual loans two years after their occurrence. We study the newly available loan data and uncover the main patterns that broadly describe activity at the Fed’s discount window in recent years.
    Keywords: discount window;
    Date: 2018–03–23
  93. By: Nathaniel G Arnold; Bergljot B Barkbu; H. Elif Ture; Hou Wang; Jiaxiong Yao
    Abstract: This note outlines a concrete proposal for a euro area central fiscal capacity (CFC) that could help smooth both country-specific and common shocks. Specifically, it proposes a macroeconomic stabilization fund financed by annual contributions from countries that are used to build up assets in good times and make transfers to countries in bad times, as well as a borrowing capacity in case an exceptionally large shock exhausts the fund’s assets. To address moral hazard risks, transfers from the CFC—beyond a country’s own net contributions—would be conditional on compliance with the EU fiscal rules. The note also discusses several features aimed at avoiding permanent transfers between countries and making the CFC function as automatically as possible—to limit the scope for disputes over its operation—both of which are important points to make it politically acceptable.
    Keywords: Euro Area;Fiscal policy;Euro Area; Fiscal Integration; Macroeconomic Stabilization; Central fiscal capacity; Fiscal policy; Macroeconomic policy mix; Fiscal union;
    Date: 2018–03–26
  94. By: Balamatsias, Pavlos
    Abstract: In this paper, we argue that democracies positively affect government expenditure. We hypothesize that democracies produce more public goods for their citizens because they are better at using tax revenues, while autocracies misappropriate taxes. We empirically test the validity of this argument using data on 61 countries from 1993 to 2012. The explanatory variable used is a dichotomous measure of democracy, but we alter our analysis from earlier research by assuming that democracy is not an exogenous variable based on the theory of Huntington (1991) and the methodology of Acemoglu, Naidu, Restpero and Robinson (2014) and Balamatsias (2017a) about regional democratization waves. According to this theory, democratization occurs in regional waves; consequently, diffusion of demand for or discontent with a political system is easier to happen in countries in the same area due to socio-political and historical similarities. This measure shows us that demand for or discontent with a political system in a geographical area influences the power of a country’s political regime and its effect on government policies. Our results using a number of estimations and robustness tests show us that regional democratization waves positively correlate with democracy. Furthermore, our main 2SLS regression as well as our OLS, fixed effects and GMM estimations show us that democracy increases production of public goods and services and education spending. When controlling for a smaller dataset, without African and Middle-eastern countries our first-stage results remain the same and the positive effect of democracy on government spending is now quantitatively bigger suggesting wealthier democracies produce more public goods and services when compared to poorer ones. This hypothesis is further substantiated when we use a sample consisting of non-OECD countries and find that democracy has no effect on government spending. Our results show that democracies where large segments of the population belong in the middle-income class, vote in favour of these policies because they can utilize government spending to increase production and output, lower inequality and attract foreign capital, unlike poorer democracies.
    Keywords: Democracy, Political development, Regional democratization waves, Fiscal policy, Government expenditures
    JEL: E62 H5 P16
    Date: 2018–03–06
  95. By: Silvia Miranda-Agrippino (Bank of England; Centre for Macroeconomics (CFM)); Giovanni Ricco (OFCE SciencesPo; University of Warwick)
    Abstract: This article reviews Bayesian inference methods for Vector Autoregression models, commonly used priors for economic and financial variables, and applications to structural analysis and forecasting.
    Keywords: Bayesian inference, Vector Autoregression models, BVAR, SVAR, forecasting
    JEL: C30 C32 E00
    Date: 2018–03
  96. By: Velde, Francois R. (Federal Reserve Bank of Chicago)
    Abstract: I examine the Neapolitan public banks, a group of non-profit institutions that emerged in the late sixteenth century, in the context of the early public banks that existed elsewhere in early modern Europe. In terms of size and stability they compare well with their peers, in spite of a difficult political and economic environment. They were also remarkably financially advanced for their time. Their success is likely due to their ownership structure, governance, and well managed relationship with the monarchical authorities.
    Keywords: Central bank; public banks; Naples (Italy)
    JEL: E58 N13
    Date: 2018–03–11

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