nep-mac New Economics Papers
on Macroeconomics
Issue of 2018‒04‒30
76 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Accounting for Busines Cycles in Canada: II. The Role of Money By Accolley, Delali
  2. The paradox of global thrift By Luca Fornaro; Federica Romei
  3. Forward Guidance By Marcus Hagedorn; Jinfeng Luo; Iourii Manovskii; Kurt Mitman
  4. Asset Pledgeability and Endogenously Leveraged Bubbles By Bengui, Julien; Phan, Toan
  5. Optimal Trend Inflation By Klaus Adam; Henning Weber
  6. Matching frictions, credit reallocation and macroeconomic activity: how harmful are financial crises? By Emanuele Ciola; EDOARDO GAFFEO; Mauro Gallegati
  7. Monetary policy rule under inflation targeting: the case of Mongolia By Taguchi, Hiroyuki
  8. Real wage effects of Japan's monetary policy By Latsos, Sophia
  9. Labour Market Transitions, Shocks and Institutions in Turbulent Times: A Cross-Country Analysis By Bachmann, Ronald; Felder, Rahel
  10. Structural Change and Aggregate Employment Fluctuations in China and the US By Wen Yao; Xiaodong Zhu
  11. Optimal monetary policy under bounded rationality By Benchimol, Jonathan; Bounader, Lahcen
  12. Exchange Rate Misalignment, Capital Flows, and Optimal Monetary Policy Trade-offs By Corsetti, Giancarlo; Dedola, Luca; Leduc, Sylvain
  13. (Real-)Time Is Money By Christian Pfister
  14. Revision of the Consumption Activity Index to Address the 2008 SNA and Improve Accuracy By Akihiro Kanafuji; Rina Mandokoro; Naoya Kato; Tomohiro Sugo
  15. Sovereign credit risk and exchange rates: Evidence from CDS quanto spreads By Augustin, Patrick; Chernov, Mikhail; Song, Dongho
  16. Sovereign Credit Risk and Exchange Rates: Evidence from CDS Quanto Spreads By Patrick Augustin; Mikhail Chernov; Dongho Song
  17. Regressive Welfare Effects of Housing Bubbles By Graczyk, Andrew; Phan, Toan
  18. An historical perspective on financial stability and monetary policy regimes: A case for caution in central banks current obsession with financial stability By Michael D. Bordo
  19. Hedger of Last Resort: Evidence from Brazilian FX Interventions, Local Credit and Global Financial Cycles By Barbone Gonzalez, Rodrigo; Khametshin, Dmitry; Peydró, José Luis; Polo, Andrea
  20. The Role of Institutions in Determining the Cyclical Behavior of Fiscal Policy By Wirginia Doryñ; Micha³ Mackiewicz; Dorota Wawrzyniak
  21. Credit Constraints, House Prices, and the Impact of Life Cycle Dynamics By Aaron Hedlund
  22. The Near Term Growth Impact of the Tax Cuts and Jobs Act By Mertens, Karel
  23. On real interest rates, tariff policy, exchange rates and the ZLB By van Wijnbergen, Sweder
  24. The effect of financial development on economic growth: a meta-analysis By Michiel Bijlsma; Clemens Kool; Marielle Non
  25. The Private Production of Safe Assets By Perignon, Christophe; Vuillemey, Guillaume; Kacperczyk, Marcin T.
  26. The Impact of House Price Shocks on the Savings of Dutch Homeowners and Renters By Michiel Bijlsma; Remco Mocking
  27. Policy Conflicts and Inflation Targeting: The Role of Credit Markets By Woon Gyu Choi; David Cook
  28. Jamaica; 2018 Article IV Consultation, Third Review Under the Stand-By Arrangement and Request for Modification of Performance Criteria-Press Release and Staff Report By International Monetary Fund
  29. The Lack of Wage Growth and the Falling NAIRU By David N F Bell; David G Blanchflower
  30. Is the consumption-income ratio stationary in African countries? Evidence from new time series tests that allow for structural breaks By Solarin, Sakiru Adebola; Shahbaz, Muhammad; Stewart, Chris
  31. Corporate governance, tax evasion and business cycles By Gilbert Mbaraa; Ryszard Kokoszczyński
  32. ESBies: safety in the tranches By Brunnermeier, Markus K.; Langfield, Sam; Pagano, Marco; Reis, Ricardo; Van Nieuwerburgh, Stijn; Vayanos, Dimitri
  33. A New Indicator for Describing Bull and Bear Markets By German Forero-Laverde
  34. Time-Consistent Consumption Taxation By Sarolta Laczo; Raffaele Rossi
  35. Detecting Co-Movements in Noncausal Time Series By Gianluca Cubadda; Alain Hecq; Sean Telg
  36. Countercyclical capital regulation in a small open economy DSGE model By Lozej, Matija; Onorante, Luca; Rannenberg, Ansgar
  37. Rent creation and sharing: new measures and impacts on TFP By Gilbert Cette; Jimmy Lopez; Jacques Mairesse
  38. Evidences empiriques sur la formation de l'équilibre du marché du travail : cas des pays de l'OCDE By Adama Zerbo
  39. An Estimated DSGE Model to Analyze Housing Market Policies in Hong Kong SAR By Pau Rabanal
  40. Supply-side policy and economic growth: A case study of the UK By Minford, Lucy; Meenagh, David
  41. Endogenous Separations, Wage Rigidities and Unemployment Volatility By Carlsson, Mikael; Westermark, Andreas
  42. Republic of San Marino; 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of San Marino By International Monetary Fund
  43. Sweat Equity in U.S. Private Business By Anmol Bhandari; Ellen R. McGrattan
  44. The New View on Fiscal Policy and its Implications for the European Monetary Union By Atanas Pekanov
  45. Beauty contests and the term structure By Ellison, Martin; Tischbirek, Andreas
  46. Nivel de riqueza regional, bienestar y desarrollo. By Prada, Albino; Sanchez-Fernandez, Patricio
  47. The option value of vacant land and the optimal timing of city extensions By Lange, Rutger-Jan; Teulings, Coen N
  48. On Welfare Effects of Increasing Retirement Age By Makarski, Krzysztof; Tyrowicz, Joanna
  49. Bank lending standards over the cycle: the role of firms’ productivity and credit risk By Gabriel Jiménez; Enrique Moral-Benito; Raquel Vegas
  50. Equitable Redistribution without Taxation: A lesson from East Asian Miracle countries By Arifur Rahman
  51. The Lack of Wage Growth and the Falling NAIRU By David N.F. Bell; David G. Blanchflower
  52. New Perspectives on the Decline of US Manufacturing Employment By Fort, Teresa C; Pierce, Justin; Schott, Peter K.
  53. International monetary policy coordination in a new Keynesian model with NICE features By Jean-Christophe Poutineau; Gauthier Vermandel
  54. Firm Performance and Macro Forecast Accuracy By Mari Tanaka; Nicholas Bloom; Maiko Koga; Haruko Kato
  55. Declining Search Frictions, Unemployment and Growth By Paolo Martellini; Guido Menzio
  56. R2 bounds for predictive models: what univariate properties tell us about multivariate predictability By Stephen Wright; James Mitchell; Donald Robertson
  57. A new approach for detecting shifts in forecast accuracy By Chiu, Ching-Wai (Jeremy); hayes, simon; kapetanios, george; Theodoridis, Konstantinos
  58. Quantity and Quality Measures of Financial Development: Implications for Macroeconomic Performance By Hiro Ito; Masahiro Kawai
  59. Environmental Policy, Full-Employment Models, and Employment: A Critical Analysis By Marc A. C. Hafstead; Roberton C. Williams III; Yunguang Chen
  61. Using Massive Online Choice Experiments to Measure Changes in Well-being By Erik Brynjolfsson; Felix Eggers; Avinash Gannamaneni
  62. The Aggregate and Distributional Effects of Financial Globalization: Evidence from Macro and Sectoral Data By Davide Furceri; Prakash Loungani; Jonathan David Ostry
  63. The Impact of the Dodd-Frank Act on Small Business By Michael D. Bordo; John V. Duca
  64. The Unintended Composition Effect of the Subnational Government Fiscal Rules: The Case of Italian Municipalities By Fiorenza Venturini
  65. The banking systems of Germany, the UK and Spain form a spatial perspective: The Spanish case By Gärtner, Stefan; Fernández, Jorge
  66. Will the 21st Century Be an Asian Century?: A Global Perspective By Masahiro Kawai
  67. Assessing the Automated Imputation of Missing and Erroneous Survey Data: A Simulation-Based Approach By Larkin Terrie
  68. Lao People’s Democratic Republic; 2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Lao People’s Democratic Republic By International Monetary Fund
  69. On Barriers to Technology Adoption, Appropriate Technology and Deep Integration (with implications for the European Union) By Jean Mercenier; Ebru Voyvoda
  70. From the horse’s mouth: surveying responses to stress by banks and insurers By Brinkhoff, Jeroen; Langfield, Sam; Weeken, Olaf
  71. Fiscal Commitment and Sovereign Default Risk By Siming Liu; Hewei Shen
  72. The Napoleonic Wars: A Watershed in Spanish History? By Leandro Prados de la Escosura; Carlos Santiago-Caballero
  73. Thou Shalt Not Breach: The Impact on Sovereign Spreads of Noncomplying with the EU Fiscal Rules By Federico Diaz Kalan; Adina Popescu; Julien Reynaud
  74. Monthly Report No. 10/2017 By Mahdi Ghodsi; Julia Grübler; Doris Hanzl-Weiss; Roman Römisch
  75. Technology and the Nature of Active Citizenship: The case of Botswana By Molefe B. Phirinyane
  76. Amateurs Crowds & Professional Entrepreneurs as Platform Complementors By Kevin J. Boudreau

  1. By: Accolley, Delali
    Abstract: I have explained business cycles in Canada focusing on the role of money. To do that, I have used both empirical and theoretical models. The empirical investigations include performing causality tests and computing impulse responses based on structural and co-integrated vector autoregressive models. The theoretical models consist of RBC and new-Keynesian models. Some of these theoretical models are: the inflation tax, the inflation and tax code, the sticky price, and the financial accelerator models. The empirical models indicate monetary disturbances are instrumental in business cycle fluctuations but do not necessarily cause them. The theoretical models also point out that monetary disturbances contribute to business cycle fluctuations but not as much as technological change. Some channels through which they propagate are: nominal capital gain tax, price stickiness, and deteriorating financial conditions. Price stickiness turns out to play a major r
    Keywords: Business Cycles, Macroeconomics, Monetary Policy, Sticky Prices, Vector Autoregression, Vector Error Correction.
    JEL: E31 E32 E37 E52
    Date: 2018–03–25
  2. By: Luca Fornaro; Federica Romei
    Abstract: This paper describes a paradox of global thrift. Consider a world in which interest rates are low and monetary policy cannot stabilize the economy because it is frequently constrained by the zero lower bound. Now imagine that governments complement monetary policy with prudential financial and fiscal policies, because they perceive that limiting private and public borrowing during booms will help stabilize the economy by reducing the risk of financial crises and by creating space for fiscal interventions during busts. We show that these policies, while effective from the perspective of individual countries, might backfire if applied on a global scale. In a financially integrated world, in fact, prudential policies generate a rise in the global supply of savings, or equivalently a drop in global aggregate demand. In turn, weaker global aggregate demand depresses output in countries whose monetary policy is constrained by the zero lower bound. Due to this effect, the world might paradoxically experience a fall in output and welfare following the implementation of well-intended prudential policies.
    Keywords: Liquidity traps, zero lower bound, capital flows, fi scal policies, macroprudential policies, current account policies, aggregate demand externalities, international cooperation.
    JEL: E32 E44 E52 F41 F42
    Date: 2016–12
  3. By: Marcus Hagedorn; Jinfeng Luo; Iourii Manovskii; Kurt Mitman
    Abstract: We assess the power of forward guidance—promises about future interest rates—as a monetary tool in a liquidity trap using a quantitative incomplete-markets model. Our results suggest the effects of forward guidance are negligible. A commitment to keep future nominal interest rates low for a few quarters—although macro indicators suggest otherwise—has only trivial effects on current output and employment. We explain theoretically why in complete markets models forward guidance is powerful—generating a “forward guidance puzzle”—and why this puzzle disappears in our model. We also clarify theoretically ambiguous conclusions from previous research about the effectiveness of forward guidance in incomplete and complete markets models.
    JEL: E21 E30 E52 E58 E62
    Date: 2018–04
  4. By: Bengui, Julien (Université de Montréal); Phan, Toan (Federal Reserve Bank of Richmond)
    Abstract: We develop a simple model of defaultable debt and rational bubbles in the price of an asset, which can be pledged as collateral in a competitive credit pool. When the asset pledgeability is low, the down payment is high, and bubble investment is unleveraged, as in a standard rational bubble model. When the pledgeability is high, the down payment is low, making it easier for leveraged borrowers to invest in the bubbly asset. As loans are packaged together into a competitive pool, the pricing of individual default risk may facilitate risk-taking. In equilibrium, credit-constrained borrowers may optimally choose a risky leveraged investment strategy – borrow to invest in the bubbly asset and default if the bubble bursts. The model predicts joint boom-bust cycles in asset prices and securitized credit.
    Keywords: rational bubbles; collateral; credit pool; household debt; equilibrium default
    JEL: E12 E24 E44 G01
    Date: 2018–04–19
  5. By: Klaus Adam; Henning Weber
    Abstract: Sticky price models featuring heterogeneous firms and systematic firm-level productivity trends deliver radically different predictions for the optimal inflation rate than their popular homogenous-firm counterparts: (1) the optimal steady-state inflation rate generically differs from zero and (2) inflation optimally responds to productivity disturbances. We show this by aggregating a heterogenous-firm model with sticky prices in closed form. Using firm-level data from the U.S. Census Bureau, we estimate the historically optimal inflation path for the U.S. economy. In the year 1977, the optimal inflation rate stood at 1.5%, but subsequently declined to around 1.0% in the year 2015. Inflation rates up to twice these numbers can be rationalized if one considers product demand elasticities more in line with the trade literature or if one considers firms that (partially) index prices to lagged inflation rates
    Keywords: optimal inflation rate, sticky prices, firm heterogeneity
    JEL: E52 E31 E32
    Date: 2018–04
  6. By: Emanuele Ciola; EDOARDO GAFFEO; Mauro Gallegati
    Abstract: This paper develops a macroeconomic model of real- nancial market interactions in which the credit and the business cycles reinforce each other according to a bidirectional causal relationship. We do so in the context of a computational agent-based framework, where the channelling of funds from savers to investors occurring through intermediaries is a ected by information frictions. Since banks compete in both the deposit and the loan markets, the whole dynamics is driven by endogenous uctuations in the size of the intermediaries balance sheet. We use the model to show that nancial crisis are particularly harmful when hitting in phase with a real recession, and that when this occurs the loss in real output is permanent.
    Keywords: Agent-based model, matching frictions, banking, nancial crises
    JEL: E32 E37 G01
    Date: 2018
  7. By: Taguchi, Hiroyuki
    Abstract: This article aims to review the monetary policy rule under inflation targeting framework focusing on Mongolia. The empirical analysis estimates the policy reaction function to see if the inflation targeting has been linked with a monetary policy rule emphasizing on inflation stabilization since its adoption in 2007. The study contributes to the literature by examining the linkage between Mongolian monetary policy rule and inflation targeting directly and thoroughly for the first time and also by taking into account a recent progress in the inflation targeting framework toward forward-looking mode. The main findings were: the Mongolian current monetary policy rule under inflation targeting is characterized as inflation-responsive rule with forward-looking manner (one quarter ahead); the inflation responsiveness is, however, weak enough to be pro-cyclical to inflation pressure; and the rule is also responsive to exchange rate due to the “fear of floating”, which weakens the policy reaction to inflation and output gap.
    Keywords: Monetary policy rule, Inflation targeting, The Bank of Mongolia, Policy reaction function, and Fear of floating
    JEL: E52 E58 O53
    Date: 2018–04
  8. By: Latsos, Sophia
    Abstract: This paper examines real wage effects of monetary policy in Japan, particularly during the past two decades of monetary easing. The literature generally attributes real wage trends to structural factors that influence the nominal wage components, such as the disappearance of downward nominal wage rigidity. The contribution of this paper is twofold. First, it offers a theoretical framework for the transmission of monetary policy shocks to real wages, emphasizing the responsiveness of labor productivity growth to monetary expansion. Secondly, it alludes to the significance of real wage effects of monetary policy for optimal policy design.
    Keywords: Japanese monetary policy,Bank of Japan,monetary easing,policy effects,real wages,monetary transmission channels
    JEL: E52 E58 E24
    Date: 2018
  9. By: Bachmann, Ronald (RWI); Felder, Rahel (Ruhr University Bochum)
    Abstract: This paper analyses the impact of the business cycle on labour market dynamics in EU member states and the US during the first decade of the 21st century. Using unique measures of labour market flows constructed from worker-level micro data, we examine to what extent macro shocks were transmitted to national labour markets. We apply the approach by Blanchard and Wolfers (2000) to analyse the role of the interaction of macroeconomic shocks and labour market institutions for worker transitions in order to explain cross-country differences in labour market reactions in a period including the Great Recession. Our results suggest a significant influence of trade unions in channelling macroeconomic shocks. Specifically, union density moderates these impacts over the business cycle, i.e. countries with stronger trade unions experience weaker reactions of the unemployment rate and of worker transitions.
    Keywords: worker flows, labour market dynamics, institutions, Great Recession
    JEL: J6 E24 E32
    Date: 2018–03
  10. By: Wen Yao; Xiaodong Zhu
    Abstract: The correlation between the cyclical components of aggregate employment and GDP is highly positive in the US, but close to zero in China. We argue that the difference in the size of the agricultural sector is the reason for the difference in employment-output correlation. We construct a simple two-sector growth model with productivity shocks and non-homothetic preferences and show that the model can simultaneously account for the long-run structural change and short-run employment fluctuations at sector level and in the aggregate for both economies.
    Keywords: Structural Change, Non-homothetic Preferences, Labor Reallocation, Aggregate Fluctuations
    JEL: E24 E32 O41
    Date: 2018–04–14
  11. By: Benchimol, Jonathan; Bounader, Lahcen
    Abstract: Optimal monetary policy under discretion, commitment, and optimal simple rules regimes is analyzed through a behavioral New Keynesian model. Flexible price level targeting dominates under discretion; flexible inflation targeting dominates under commitment; and strict price level targeting dominates when using optimal simple rules. The optimality of a particular regime is found to be independent of bounded rationality and only regime 's stabilizing properties condition its hierarchy. For every targeting regime, the policymaker 's knowledge of agents' myopia is decisive in terms of policy reactions. Welfare evaluation of different targeting regimes reveals that bounded rationality is not necessarily associated with decreased welfare. Several forms of economic inattention can increase welfare.
    JEL: C53 E37 E52 D01 D11
    Date: 2018–04–19
  12. By: Corsetti, Giancarlo; Dedola, Luca; Leduc, Sylvain
    Abstract: What determines the optimal monetary trade-off between internal objectives (inflation, and output gap) and external objectives (competitiveness and trade imbalances) when inefficient capital flows cause exchange rate misalignment and distort current account positions? We characterize this trade-off analytically, using the workhorse model of modern monetary theory in open economies under incomplete markets–where inefficient capital flows and exchange rate misalignments can arise independently of nominal distortions. We derive a quadratic approximation of the utility-based global policy loss function under fairly general assumptions on preferences and openness, and solve for the optimal targeting rules under co- operation. We show that, in economies with a low degree of exchange rate pass-through, the optimal response to inefficient capital inflows associated with real appreciation is contractionary, above and beyond the natural rate: the optimal policy curbs excessive demand at the cost of exacerbating currency overvaluation. In contrast, a high degree of pass-through, and/or low trade elasticities, warrants expansionary policies that lean against exchange rate appreciation and competitive losses, at the cost of inefficient inflation.
    Keywords: asset markets and risk sharing; Currency misalignments; exchange rate pass-through; international policy cooperation; optimal targeting rules; trade imbalances
    JEL: E44 E52 E61 F41 F42
    Date: 2018–04
  13. By: Christian Pfister
    Abstract: In the age of high-frequency trading in financial markets and faster payment services in account-to-account (A2A) transactions of bank retail customers, it may seem odd that the shortest maturity that is traded in the money market is overnight. This situation reflects policies implemented by central banks, which provide banks with free intraday liquidity. Such policies are difficult to ground in theory and have limitations which central banks could remedy by conducting real-time monetary policies. The article details how, following that decision, central banks could adapt some features of their monetary policy operational frameworks and of their real-time gross settlement systems. In any case, the potential benefits of such a move should be carefully weighed against the costs for the central banks, financial intermediaries and society.
    Keywords: Intraday liquidity, Real-time gross settlement systems, Monetary policy, Financial stability
    JEL: E40 E52 E58 G12 G21
    Date: 2018
  14. By: Akihiro Kanafuji (Bank of Japan); Rina Mandokoro (Bank of Japan); Naoya Kato (Bank of Japan); Tomohiro Sugo (Bank of Japan)
    Abstract: In this paper, we explain revisions made to the Consumption Activity Index (CAI) compilation methodology. The revisions aim to address those made to the System of National Accounts in Japan (SNA) which consists of the introduction of the 2008 SNA, a new international statistical standard for National Accounts, as well as the benchmark year revision. First, we update the weights of goods and services in accordance with the revised National Accounts. In calculating these weights, we adopt a methodology based on the Input-Output Table for Japan, instead of one based on demand-side statistics which had been adopted to date. Second, we change the compilation method for durable goods, automobiles and household electrical appliances, and incorporate new source statistics for non-durable goods such as tobacco and services such as financial services, thus improving the accuracy of the index. Owing to these revisions, the revised CAI is consistent with the current Annual Report of National Accounts (ARNA), while maintaining the merits of the original CAI. In addition, the discrepancy between private consumption in the ARNA and those by type as well as the CAI itself decreased.
    Keywords: private consumption; business cycles
    JEL: E21 E32
    Date: 2018–04–20
  15. By: Augustin, Patrick; Chernov, Mikhail; Song, Dongho
    Abstract: Sovereign CDS quanto spreads - the difference between CDS premiums denominated in U.S. dollars and a foreign currency - tell us how financial markets view the interaction between a country's likelihood of default and associated currency devaluations (the twin Ds). A no- arbitrage model applied to the term structure of quanto spreads can isolate the interaction between the twin Ds and gauge the associated risk premiums. We study countries in the Eurozone because their quanto spreads pertain to the same exchange rate and monetary policy, allowing us to link cross-sectional variation in their term structures to cross-country differences in fiscal policies. The ratio of the risk-adjusted to the true default intensities is 2, on average. Conditional on the occurrence default, the true and risk-adjusted 1-week probabilities of devaluation are 4% and 75%, respectively. The risk premium for the euro devaluation in case of default exceeds the regular currency premium by up to 0.4% per week.
    Keywords: contagion; credit default swaps; credit risk; Exchange Rates; Sovereign debt
    JEL: C1 E43 E44 G12 G15
    Date: 2018–04
  16. By: Patrick Augustin; Mikhail Chernov; Dongho Song
    Abstract: Sovereign CDS quanto spreads – the difference between CDS premiums denominated in U.S. dollars and a foreign currency – tell us how financial markets view the interaction between a country's likelihood of default and associated currency devaluations (the twin Ds). A no-arbitrage model applied to the term structure of quanto spreads can isolate the interaction between the twin Ds and gauge the associated risk premiums. We study countries in the Eurozone because their quanto spreads pertain to the same exchange rate and monetary policy, allowing us to link cross-sectional variation in their term structures to cross-country differences in fiscal policies. The ratio of the risk-adjusted to the true default intensities is 2, on average. Conditional on the occurrence default, the true and risk-adjusted 1-week probabilities of devaluation are 4% and 75%, respectively. The risk premium for the euro devaluation in case of default exceeds the regular currency premium by up to 0.4% per week.
    JEL: C1 E43 E44 G12 G15
    Date: 2018–04
  17. By: Graczyk, Andrew (Wake Forest University); Phan, Toan (Federal Reserve Bank of Richmond)
    Abstract: We analyze the welfare effects of asset bubbles in a model with income inequality and financial friction. We show that a bubble that emerges in the value of housing, a durable asset that is fundamentally useful for everyone, has regressive welfare effects. By raising the housing price, the bubble benefits high-income savers but negatively affects low-income borrowers. The key intuition is that, by creating a bubble in the market price, savers' demand for the housing asset for investment purposes imposes a negative externality on borrowers, who only demand the housing asset for utility purposes. The model also implies a feedback loop: high income inequality depresses the interest rates, facilitating the existence of housing bubbles, which in turn have regressive welfare effects.
    Keywords: rational bubble; inequality; housing; financial friction
    JEL: E10 E21 E44
    Date: 2018–04–18
  18. By: Michael D. Bordo (Rutgers University, NBER and Hoover Institution, Stanford University)
    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. Historical evidence is presented on the incidence, costs and determinants of financial crises along with some empirical evidence on the relationship between credit booms, asset price booms and serious financial crises. The results 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.
    Keywords: monetary policy, financial stability, financial crises, credit driven asset price booms
    JEL: E3 E42 G01 N1 N2
    Date: 2017–12–23
  19. By: Barbone Gonzalez, Rodrigo; Khametshin, Dmitry; Peydró, José Luis; Polo, Andrea
    Abstract: We analyze whether the global financial cycle (GFC) affects local credit supply and the real effects, and whether local unconventional policies can attenuate such spillovers. For identification, we exploit GFC shocks, differential bank reliance on global funding, local central bank interventions in FX derivatives, and three matched administrative registers in Brazil: the register of foreign credit flows to domestic banks, the credit register, and the matched employer-employee register. We show that after the announcement of US Quantitative Easing tapering by Bernanke in May 2013, which is associated with massive FX depreciation and increased volatility, domestic banks with larger foreign liabilities reduce the supply of credit to firms, in turn reducing employment. However, these negative effects are attenuated after the Central Bank of Brazil announces a large intervention in the FX derivatives market, which consists in supplying insurance against FX risks - hedger of last resort. In addition to these two subsequent shocks, we also analyze a panel over 2008-2015. Banks with larger foreign liabilities cut credit supply after US Dollar appreciation or after an increase of FX volatility (even for US FX changes with EMs excluding Brazil). Moreover, the FX effects on credit supply and real effects are mitigated after the FX intervention of the central bank, thereby confirming that the policy of hedger of last resort has been effective in decreasing local economy spillovers to global financial conditions. Our results have important implications for international macro-finance models and policy.
    Keywords: Bank credit; central bank; foreign exchange; Hedging; monetary policy
    JEL: E5 F3 G01 G21 G28
    Date: 2018–03
  20. By: Wirginia Doryñ (Faculty of Economics and Sociology, University of Lodz); Micha³ Mackiewicz (Faculty of Economics and Sociology, University of Lodz); Dorota Wawrzyniak (Faculty of Economics and Sociology, University of Lodz)
    Abstract: The literature argues that while developed economies conduct countercyclical fiscal policy, developing countries often revert to procyclical fiscal policies. This, in turn, tends to further destabilise their economies during periods of crisis. This phenomenon is often attributed to fiscal institutions being weaker in less-developed countries. In this paper, we examine the relationship between institutional factors and the conduct of fiscal policy over the business cycle using a worldwide sample of 182 countries over the period 1995–2015. Contrary to most studies, we found robust statistical evidence that anticyclical fiscal policies are run not only by countries with strong institutions but also by those with a weak institutional background. However, the magnitude of the response of fiscal policy to the output gap differs between countries, being much stronger for advanced countries and less pronounced for the developing ones.
    Keywords: procyclical fiscal policy, fiscal institutions
    JEL: E60 E63
    Date: 2018–03–29
  21. By: Aaron Hedlund (University of Missouri-Columbia)
    Abstract: How does the life cycle|namely, mortality risk and the expectation at birth of a rising age-profile of income and assets--impact house price dynamics? This paper investigates how equilibrium house prices respond to a tightening in credit constraints under two different but similarly calibrated models: one an infinite-horizon setting and the other a life-cycle environment. The main conclusion is that house price dynamics are magnified by the presence of life cycle features. Two primary explanations stand out: the distinction between stocks and flows of mortgage debt in the cross-section and the importance of gross housing tenure flows, i.e. churn.
    Keywords: House Prices, Mortgage Debt, Credit Constraints, Life Cycle Models
    JEL: D31 E21 E44 G11 G12 G21 R21 R31
    Date: 2018–04–23
  22. By: Mertens, Karel (Federal Reserve Bank of Dallas)
    Abstract: This note uses existing empirical estimates of the macroeconomic effects of tax changes to project the near term impact of the Tax Cuts and Jobs Act on US GDP growth. Applying recent reduced form estimates of tax multipliers with the projected revenue impact of the Act yields a level of GDP that is predicted to be 1.3% higher by 2020, with most of the growth front-loaded in 2018. Accounting for the composition of the Act in terms of its individual and corporate provisions leads to a similar GDP increase by 2020, but with stronger growth in 2018 and a partial reversal in the following years. Accounting for the impact of TCJA on marginal individual tax rates raises the projected growth impact considerably, while accounting for the distribution of the tax changes across income groups suggests a more delayed positive impact on GDP. These projections are conditional on mean-reverting dynamics of future taxes that are estimated from postwar US data.
    Keywords: Fiscal policy; Taxation; Tax Cuts and Jobs Act
    JEL: E62 H2
    Date: 2018–03–23
  23. By: van Wijnbergen, Sweder
    Abstract: What could be the drivers of low real rates? What are the implications of the Zero Lower Bound for economic policy? To discuss these questions we introduce a full general equilibrium model of the world economy with a simple (2 period) intertemporal structure. The model is simple enough to allow for full analytical solution yet sufficiently complex to allow us to address the impact of anticipated future productivity slow down, aging, structural reform and fiscal policy on real interest rates if markets clear and on aggregate economic activity if they do not because of the ZLB. We extend both the equilibrium model and the ZLB variant to a more-goods-per-period set up with complete specialization to address (real) exchange rate policy and the macroeconomic impact of trade tariffs.
    Keywords: aging; equilibrium real interest rates; import tariffs; productivity change; the ZLB; real exchange rates
    JEL: E62 F13 F40 F41 H30
    Date: 2018–04
  24. By: Michiel Bijlsma (CPB Netherlands Bureau for Economic Policy Analysis); Clemens Kool (CPB Netherlands Bureau for Economic Policy Analysis); Marielle Non (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: The financial crisis has renewed interest in the finance-growth relationship. We analyze the empirical literature and find a moderate positive but decreasing effect of finance on growth. Empirical studies on the finance-growth relationship show a wide range of estimated effects. We perform a meta-analysis on in total 551 estimates from 68 empirical studies that take private credit to GDP as a measure for financial development and distinguish between linear and logarithmic specifications. First, we find evidence of significantly positive publication bias in both the linear and log-linear specifications. This contrasts with findings in two other recent meta-studies, possibly due to a distortion introduced by their transformation procedure. Second, the logarithmic estimates give a robust significantly positive average effect of financial development on economic growth after correction for publication bias. In our preferred specification a 10 percent increase in credit to the private sector increases economic growth with 0.09 percentage points. For the linear estimates, no significant effect of credit to the private sector on economic growth is found on average. Overall, the evidence points to a positive but decreasing effect of financial development on growth.
    JEL: E44 G10 G21 O16 O40
    Date: 2017–01
  25. By: Perignon, Christophe; Vuillemey, Guillaume; Kacperczyk, Marcin T.
    Abstract: Do claims on the private sector serve the role of safe assets? We answer this question using high-frequency panel data on prices and quantities of certificates of deposit (CD) and commercial paper (CP) issued in Europe. We show that only very short-term private securities benefit from a premium for safety. Using several identification strategies, we show that the issuance of short-term CDs, but not of CPs, strongly responds to measures of safety demand. The private production of safe assets is stronger for issuers with high credit worthiness, and breaks down during episodes of market stress. We conclude that even very short-term private assets are sensitive to changes in the information environment and should not be treated as equally safe at all times.
    Keywords: Safe assets; Collateral; Short-term debt; Treasuries
    JEL: E44 G21
    Date: 2017–06–01
  26. By: Michiel Bijlsma (CPB Netherlands Bureau for Economic Policy Analysis); Remco Mocking (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: We study the impact of changes in house prices on savings using administrative panel data on Dutch owner-occupying and renting households over the period 2006-2013. We analyze the immediate response as well as the response aggregated over several years. We find a marginal propensity to save (MPS) out of housing wealth in the short-run between 0 and -0.05, while the long-run effect ranges from -0.02 to -0.13. Younger homeowners consistently respond more strongly both in the short and the long-run, while pre-crisis leverage has a non-homogeneous effect in the short-run and no effect in the long-run. We only find a small, significant, and positive shortrun effect for old renters and no effect for all other groups of renters, suggesting that our results are not driven by common causality.
    JEL: D12 E21 R31
    Date: 2017–04
  27. By: Woon Gyu Choi; David Cook
    Abstract: This paper shows that stabilizing volatility in credit growth often conflicts with price stability: unusual credit expansions often occur when inflation is low relative to goals, and credit slumps often appear when inflation is overshooting. We find that central banks with inflation targeting (IT) are responsive to credit conditions in both advanced economies and emerging-market economies (EMEs). However, EMEs are more sensitive to inflation conditions, responding to credit growth only when consistent with IT. Macroprudential measures are also deployed to address credit growth volatility when orthodox policy moves would be inconsistent with IT, complementing monetary policy.
    Date: 2018–04–06
  28. By: International Monetary Fund
    Abstract: Jamaica is entering its sixth year of economic reform. Through ongoing fiscal consolidation and active debt management, the public debt-to-GDP ratio is on a firm downward path. Macroeconomic stability is entrenched: inflation is well-anchored, the current account deficit has been reduced, foreign exchange reserves are being rebuilt, and supply-side reforms are improving the business environment. Nevertheless, the hoped-for growth dividends from these reforms have not fully materialized, in part due to recurring weather-related shocks and chronically high crime.
    Date: 2018–04–16
  29. By: David N F Bell; David G Blanchflower
    Abstract: There remains a puzzle around the world over why wage growth is so benign given the unemployment rate has returned to pre-recession levels. It is our contention that a considerable part of the explanation is the rise in underemployment which rose in the Great Recession but has not returned to pre-recession levels even though the unemployment rate has. Involuntary part- time employment rose in every advanced country and remains elevated in many in 2018. In the UK we construct the Bell/Blanchflower underemployment index based on reports of whether workers, including full-timers and those who want to be part-time, who say they want to increase or decrease their hours at the going wage rate. If they want to change their hours they report by how many. Prior to 2008 our underemployment rate was below the unemployment rate. Over the period 2001-2017 we find little change in the number of hours of workers who want fewer hours, but a big rise in the numbers wanting more hours. Underemployment reduces wage pressure. We also provide evidence that the UK Phillips Curve has flattened and conclude that the UK NAIRU has shifted down. The underemployment rate likely would need to fall below 3%, compared to its current rate of 4.9% before wage growth is likely to reach pre-recession levels. The UK is a long way from full-employment.
    Keywords: underemployment, wage growth, natural rate of unemployment, Phillips curves
    JEL: J3 E1 E5
    Date: 2018–04
  30. By: Solarin, Sakiru Adebola (Faculty of Business Multimedia University Malaka); Shahbaz, Muhammad (Montpellier Business School); Stewart, Chris (Kingston University London)
    Abstract: This paper examines whether the consumption-income ratio is stationary in 50 African countries. We use the residual augmented least squares (RALS-LM) unit root test that allows for structural breaks developed by Meng et al. (2014). The empirical evidence shows that the consumption-income ratio is stationary around structural breaks in most (44 out of 50) African countries. This is consistent with the predictions of most economic theory. The general finding of mean reversion implies that (policy) shocks are likely to have only temporary effects on the consumption-income ratio in most African countries.
    Keywords: consumption-income ratio; African countries; unit root tests; structural breaks
    JEL: C22 E12 E21
    Date: 2018–04–24
  31. By: Gilbert Mbaraa (Faculty of Economic Sciences, University of Warsaw); Ryszard Kokoszczyński (Faculty of Economic Sciences, University of Warsaw, Narodowy Bank Polski)
    Abstract: We develop an agency model of corporate tax evasion and auditing by a residual claimant government and embed it to a macroeconomic environment characterised by credit constraints. In our economy, tax auditing by the government reduces the information asymmetry between lenders and entrepreneurs with an investment opportunity. Corporate governance quality consequently affects macroeconomic variables; with changes in tax rates, auditing and quality of corporate governance having aggregate effects. We show that changes in the revenue system; tax and audit rates, can directly affect asset prices and inflate the effects of exogenous shocks to the economy.
    Keywords: corporate governance, credit constraints, taxation, asset pricing, tax evasion, agency problem
    JEL: H2 H26 H3 E13 E26 J81
    Date: 2018
  32. By: Brunnermeier, Markus K.; Langfield, Sam; Pagano, Marco; Reis, Ricardo; Van Nieuwerburgh, Stijn; Vayanos, Dimitri
    Abstract: The euro crisis was fuelled by the diabolic loop between sovereign risk and bank risk, coupled with cross-border flight-to-safety capital flows. European Safe Bonds (ESBies), a euro area-wide safe asset without joint liability, would help to resolve these problems. We make three contributions. First, numerical simulations show that ESBies with a subordination level of 30% would be as safe as German bunds and would increase safe asset supply. Second, a model shows how, when and why the two features of ESBies – diversification and seniority – can weaken the diabolic loop and its diffusion across countries. Third, we propose how to create ESBies, starting with limited issuance by public or private-sector entities.
    JEL: E44 G28
    Date: 2017–04
  33. By: German Forero-Laverde (PhDc in Economic History at Universitat de Barcelona)
    Abstract: Abstract We present new short, medium, and long-run indicators to date and characterise expansions and contractions in financial and economic time series. These Bull-Bear Indicators (BBIs) measure the risk-adjusted excess return with respect to average, to different time horizons, expressed in standard deviations. We illustrate the benefits of this measure by describing the boom-bust cycle in the UK stock market between 1922 and 2015. We compare our results with those obtained from frequently used methodologies in the literature and find that our measures contain substantially more information than the usual binary sequences that describe expansions and contractions and allow for a more granular and nuanced description of time series.
    Keywords: Boom-bust cycle; Bull and bear markets; Stock market; Time series analysis; Severity measures; Dating rules
    JEL: C1 C43 E32 G01 G1 N14
    Date: 2018–04
  34. By: Sarolta Laczo (Queen Mary University of London); Raffaele Rossi (University of Manchester, Department of Economics)
    Abstract: We characterise optimal tax policies when the government has access to consumption taxation and cannot credibly commit to future policies. We consider a neoclassical economy where factor income taxation is distortionary within the period, due to endogenous labour and capital utilisation and non-tax-deductibility of depreciation. Contrary to the case where only labour and capital income are taxed, the optimal time-consistent policies with consumption taxation are remarkably similar to their Ramsey counterparts. The welfare gains from commitment are negligible, while they are substantial without consumption taxation. Further, the welfare gains from taxing consumption are much higher without commitment.
    Keywords: fiscal policy, Markov-perfect policies, consumption taxation, variable capital utilisation
    JEL: E62 H21
    Date: 2018–04–12
  35. By: Gianluca Cubadda (DEF and CEIS, University of Rome "Tor Vergata"); Alain Hecq (Maastricht University); Sean Telg (Maastricht University)
    Abstract: This paper introduces the notion of common noncausal features and proposes tools to detect them in multivariate time series models. We argue that the existence of co-movements might not be detected using the conventional stationary vector autoregressive (VAR) model as the common dynamics are present in the noncausal (i.e. forward-looking) component of the series. In particular, we show that the presence of a reduced rank structure allows to identify purely causal and noncausal VAR processes of order two and higher even in the Gaussian likelihood framework. Hence, usual test statistics and canonical correlation analysis can still be applied, where both lags and leads are used as instruments to determine whether the common features are present in either the backward-or forward-looking dynamics of the series. The proposed definitions of co-movements also valid for the mixed causal-noncausal VAR, with the exception that an approximate non-Gaussian maximum likelihood estimator is necessary for these cases. This means however that one loses the benefits of the simple tools proposed in this paper. An empirical analysis on European Brent and U.S. West Texas Intermediate oil prices illustrates the main findings. Whereas we fail to find any short run co-movements in a conventional causal VAR, they are detected in the growth rates of the series when considering a purely noncausal VAR.
    Keywords: causal and noncausal process, common features, vector autoregressive models, oil prices
    JEL: C12 C32 E32
    Date: 2018–04–23
  36. By: Lozej, Matija; Onorante, Luca; Rannenberg, Ansgar
    Abstract: We examine, conditional on structural shocks, the macroeconomic performance of different countercyclical capital buffer (CCyB) rules in small open economy estimated medium scale DSGE. We find that rules based on the credit gap create a trade-off between the stabilization of fluctuations originating in the housing market and fluctuations caused by foreign demand shocks. The trade-off disappears if the regulator targets house prices instead. As a result, the optimal simple CCyB rule depends only on the house price but not the credit gap. Moreover, the optimal simple rule leads to significant welfare gains compared to the no CCyB case. JEL Classification: F41, G21, G28, E32, E44
    Keywords: bank capital, boom-and-bust, countercyclical capital regulation, housing bubbles
    Date: 2018–04
  37. By: Gilbert Cette; Jimmy Lopez; Jacques Mairesse
    Abstract: This analysis proposes new measures of rent creation or (notional) mark-up and workers’ share of rents on cross-country-industry panel data. While the usual measures of mark-up rate implicitly assume perfect labor markets, our approach relaxes this assumption, and takes into account that part of firms’ rent created in an industry is shared with workers to an extent which can vary with their skills. Our results are based on a cross-country-industry panel covering 14 OECD countries and 19 industries over the 1985-2005 period. In a first part of our analysis we draw on OECD indicators of product and labor market (anticompetitive) regulations to test how they are related to our new measures of mark-up and rent-sharing. We find that anti-competitive Non-Manufacturing Regulations (NMR) affect mark-up rates positively, and hence firms’ rent creation and workers’ share of rent, whereas Employment Protection Legislation (EPL) has no impact on rent creation, but boosts workers’ wages per hour. However, we observe that these wage increases are offset by a negative impact from EPL on hours worked per output unit, leading to a non-significant impact of EPL on workers’ share of rents. The effects of EPL for low-skilled workers appear to be more pronounced than those for medium-skilled workers, both being much greater than for highly-skilled workers. In the second part of our analysis, we estimate the impacts of our new measures on Total Factor Productivity (TFP) in the framework of a straightforward regression model. We use the OECD regulations indicators as relevant instrument to take care of endogeneity and to make sure that the resulting estimates assess the proper regulation impacts of rent creation and sharing without being biased by other confounding effects. We find that less competition in the product and labor markets as assessed by our measures of mark-up and workers’ share of rents have both substantial negative impacts on TFP.
    Keywords: product market regulations, labor market regulations, mark-up, rent-sharing, TFP.
    JEL: E22 E24 O30 L50 O43 O47 C23
    Date: 2018
  38. By: Adama Zerbo (GED, Université de Bordeaux)
    Abstract: Ce papier s’est fixé pour objectif de réaliser les évidences empiriques du résultat de la nouvelle représentation macroéconomique du marché du travail. Selon ce cadre théorique, le profit brut réel est le facteur déterminant du mécanisme d’ajustement du marché du travail et, ainsi, de l’emploi. Ainsi, des modèles de panel de long terme et de court terme ont été implémentés sur les données des pays de l’OCDE de 2011 à 2015. Les résultats montrent l’existence de relations positives de court terme et de long terme entre l’emploi et le profit brut. Les élasticités de l’emploi par rapport au profit brut sont estimées à 0,21 pour le court terme et à 0,24 pour le long terme. Par ailleurs, ces résultats montrent qu’il existe une force de rappel à l’équilibre du marché du travail. Le coefficient de cette force de rappel est estimé à -0,66. Alors, ces tests économétriques viennent confirmer que : (i) le profit brut est le facteur déterminant de l’emploi dans le court terme ; (ii) l’équilibre de court terme du marché du travail résulte de la confrontation entre le niveau conventionnel du profit brut imposé par la nécessité de compromis entre les parties et le niveau technique du profit donnée par la courbe de profit brut ; (iii) la nature de l’équilibre du marché du travail à court terme est principalement déterminée par la dynamique des profits bruts ; (v) le niveau de l’emploi d’équilibre peut bien être inférieur à l’offre de travail et, ainsi, l’économie se trouverait dans une situation d’équilibre de sous-emploi. This paper aimed to provide empirical evidence of outcome of the new macroeconomic representation of labor market. According to this theoretical framework, real gross profit is the determining factor in the adjustment mechanism of labor market and thus of employment in short term. Therefore, long-term and short-term panel models were implemented on OECD countries data from 2011 to 2015. The results show the existence of positive short-term and long-term relations between employment and gross profit. Elasticity of employment in relation to gross profit is estimated at 0.21 for short term and 0.24 for long term. Moreover, these results show that there is a restoring force to the equilibrium of labor market. The coefficient of this restoring force is estimated at -0.66. Then, these econometric tests confirm that: (i) gross profit is the determining factor of employment in short term; (ii) equilibrium on labor market results from confrontation between the conventional level of gross profit resulting from the trade-off and the technical level of gross profit given by the gross profit curve; (iii) the nature of short-term labor market equilibrium is mainly determined by the dynamics of gross profits; (v) the level of employment at equilibrium may be lower than labor supply and thus the economy would be in an underemployment equilibriumd.(Full text in french)
    JEL: E24
    Date: 2018–03
  39. By: Pau Rabanal
    Abstract: During the last decade, Hong Kong SAR has experienced a large increase in house prices and credit, prompting the authorities to respond with several rounds of tightening macroprudential rules and increasing stamp duty taxes. This paper provides a Dynamic Stochastic General Equilibrium (DSGE) model for Hong Kong SAR and analyzes the effectiveness of these measures, and finds that they have helped reduce house price appreciation and household leverage. A baseline small open economy real business cycle model is extended by including a housing sector, financial frictions, foreign demand for the domestic housing stock, and is estimated using Bayesian methods and data for Hong Kong SAR between 1996 and 2017. The paper finds that, without these policies, house prices would have been 10.5 percent higher, and the household credit-GDP ratio 14 percent higher.
    Date: 2018–04–13
  40. By: Minford, Lucy (Swansean University); Meenagh, David (Cardiff Business School)
    Abstract: This paper investigates the potential for a causal relationship between certain supply-side policies and UK output and productivity growth between 1970 and 2009. We outline an open economy DSGE model of the UK in which productivity growth is determined by the tax and regulatory environment faced by firms. This model is estimated and tested using simulation-based econometric methods (indirect inference). Using Monte Carlo methods we investigate the power of the test as we apply it, allowing the construction of uncertainty bounds for the structural parameter estimates and hence for the quantitative implications of policy reform in the estimated model. We also test and confirm the modelís identification, thus ensuring that the direction of causality is unambiguously from policy to productivity. The results offer robust empirical evidence that temporary changes in policies underpinning the business environment can have sizeable effects on economic growth over the medium term.
    Keywords: Taxation, Regulation, Labour Market Regulation, Economic Growth, DSGE
    JEL: E02 O4 O43 O5
    Date: 2018–04
  41. By: Carlsson, Mikael (Uppsala University, Nationalekonomiska institutionen); Westermark, Andreas (Research Department, Sveriges Riksbank, Stockholm)
    Abstract: We show that in microdata, as well as in a search and matching model with flexible wages for new hires, wage rigidities of incumbent workers have substantial effects on separations and unemployment volatility. Allowing for an empirically relevant degree of wage rigidities for incumbent workers drives unemployment volatility, as well as the volatility of vacancies and tightness to that in the data. Thus, the degree of wage rigidity for newly hired workers is not a sufficient statistic for determining the effect of wage rigidities on macroeconomic outcomes. This finding affects the interpretation of a large empirical literature on wage rigidities.
    Keywords: Search and matching; Unemployment volatility puzzle; Wage rigidities; Job Destruction
    JEL: E30 J63 J64
    Date: 2018–04–20
  42. By: International Monetary Fund
    Abstract: The economy rebounded in 2016, but there were some signs of slowing momentum amid deepened financial sector uncertainties triggered by a sizable loss at the largest bank and a closure of a small bank in 2017. There is high uncertainty about the budget and the level of public debt as the final cost of banking sector repair will depend on results from the recently initiated update of the Asset Quality Review (AQR). Banking sector legacy issues continue to pose considerable challenges.
    Date: 2018–04–11
  43. By: Anmol Bhandari; Ellen R. McGrattan
    Abstract: In this paper, we first provide evidence that existing measures of business incomes and valuations based on widely-used surveys such as the Survey of Consumer Finances are mismeasured. We then develop a theory disciplined by U.S. national accounts and business census data to measure net incomes and private business sweat equity—which is the value of time to build customer bases, client lists, and other intangible assets. We estimate an aggregate sweat equity value of 0.65 times GDP, with little cross-sectional dispersion in valuations when compared to business net incomes and large cross-sectional dispersion in rates of return. Our estimate of sweat equity is close to the estimate of marketable fixed assets used in production by private businesses, implying a high ratio of intangible to total assets. We use the model to evaluate the impact of greater tax compliance of private businesses and lower tax rates on the net income of both privately held and publicly traded businesses. We find larger sectoral and aggregate effects from the tax policy experiments relative to studies that abstract from private business and, in particular, the accumulation of sweat capital. Finally, we show that our results are robust to including non-pecuniary benefits of business ownership.
    JEL: E13 E22 H25
    Date: 2018–04
  44. By: Atanas Pekanov (WIFO)
    Abstract: The New View on fiscal policy (as coined by Furman 2016) represents a rethinking of the main-stream consensus on the optimal macroeconomic policy mix. It focuses on a reassessment of the relative effectiveness of fiscal policy and its ability to stabilise the economy when monetary policy reaches its limit. This paper aims to present in detail the main principles of the New View as proposed by Furman (2016), to extend them, bring additional theoretical and empirical evidence, as well as concrete policy implications for the architecture of the European Monetary Union. The New View builds upon five core principles: Firstly, fiscal policy is a significant and efficient complement to monetary policy at the zero lower bound on theoretical grounds. Secondly, we take a closer look at the empirical evidence on government spending multipliers in a recession, both in the DSGE and in the VAR literature, and show it points to much higher multipliers than in normal times. Thirdly, we provide evidence to why fiscal space is actually higher than normally perceived in a recession, because fiscal stimuli can pay for themselves by enhancing current growth and potential output. We shortly discuss whether it is not better to have a sustained stimulus rather than a short one and whether enhanced global spillover effects in an environment of insufficient aggregate demand further enhance fiscal policy effectiveness. All of the above arguments point to the welfare enhancing effects of fiscal stimulus during a zero lower bound episode and that an approach, led by the New View, would have delivered better macroeconomic outcomes during the Eurozone crisis. We then discuss what such an approach could mean for a more resilient EMU architecture and for stabilisation mechanisms in the Euro Area.
    Keywords: Macroeconomic stabilisation, Fiscal policy, Zero-lower bound, Business cycle
    Date: 2018–04–20
  45. By: Ellison, Martin; Tischbirek, Andreas
    Abstract: A novel decomposition highlights the scope for information to influence the term structure of interest rates. Based on the law of total covariance, we show that real term premia in macroeconomic models contain a component that depends on covariances of realised stochastic discount factors and a component that depends on covariances of expectations of those stochastic discount factors. The impact of different informational assumptions can then be identified by looking at their effect on the second, expectational, component. If agents have full information about technology in a simple macro-finance model then the conditional covariance of expectations is low, which contributes to the real term premia implied by the model being at least an order of magnitude too small, a result that is unchanged if some components of technology are unobservable or observed with noise. To generate realistic term premia, we draw on the beauty contest literature by differentiating between private and public information and introducing the possibility of strategic complementarities in the formation of expectations. A quantitative version of the model is found to explain a significant proportion of observed term premia when estimated using data on expectations of productivity growth from the Survey of Professional Forecasters.
    Keywords: Yield curve; Term premia; Information friction; Beauty contest; Asset pricing
    JEL: E40 E43 G12
    Date: 2018–02
  46. 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
  47. By: Lange, Rutger-Jan; Teulings, Coen N
    Abstract: Classic real options theory rests on two debatable assumptions: projects require a fixed investment and generate cash flows that follow a random walk. Relaxing both assumptions leads to radically different conclusions regarding the optimal timing of investment. We model investment using a Stone-Geary production function (Leontief and Cobb-Douglas are special cases) and growth as a mean-reverting Brownian motion. The solution method for this option valuation problem is non-trivial because the state space is two dimensional (level of the cash flow and its growth). For Leontief, the optimal policy is intuitive; the moment of investment involves a trade-off between the level of the cash ow and its growth. For Cobb-Douglas, in contrast, the optimal moment of investment depends only on the growth. More surprisingly, investment should be delayed when growth is high. This conclusion persists in the general Stone-Geary case. Applied to urban real estate, this suggests that up to 20% of cities should delay new construction because of high growth. The option value of vacant land may represent 60% of the value of new construction. High prices of vacant land may thus result from rational investor behavior rather than regulatory inefficiency. Our analysis should be widely applicable, for example to investment in high-growth companies.
    Keywords: mean-reverting growth; real estate construction; real options
    JEL: D81 E22 R11 R30
    Date: 2018–04
  48. By: Makarski, Krzysztof (Warsaw School of Economics); Tyrowicz, Joanna (University of Warsaw)
    Abstract: We develop an OLG model with realistic assumptions about longevity to analyze the welfare effects of raising the retirement age. We look at a scenario where an economy has a pay-as-you-go defined benefit scheme and compare it to a scenario with defined contribution schemes (funded or notional). We show that, initially, in both types of pension system schemes the majority of welfare effects comes from adjustments in taxes and/or prices. After the transition period, welfare effects are predominantly generated by the preference for smoothing inherent in many widely used models. We also show that although incentives differ between defined benefit and defined contribution systems, the welfare effects are of comparable magnitude under both schemes. We provide an explanation for this counter-intuitive result.
    Keywords: longevity, PAYG, retirement age, pension system reform, welfare
    JEL: C68 E21 J11 H55
    Date: 2018–03
  49. By: Gabriel Jiménez (Banco de España); Enrique Moral-Benito (Banco de España); Raquel Vegas (Banco de España)
    Abstract: We show that bank lending standards are influenced by macroeconomic conditions. We use monthly data from the Banco de España Central Credit Register, which allow us to monitor all loan applications made by non-financial firms to non-current banks from 2002 to 2015. To test the pro-cyclicality of banks’ appetite for risk, we investigate how two firm characteristics (ex-ante credit risk and productivity) interacting with two macroeconomic indicators (business cycle and the monetary policy stance) affect the probability of granting a loan. In order to enhance identification we account for unobserved heterogeneity by means of firm and banktime fixed effects. Our findings indicate that banks soften their credit standards during booms or when monetary policy is loose to harden them during busts or when short-term interest rates increase. This pattern is especially relevant in the case of firms’ productivity, which might partly explain the dismal evolution of aggregate productivity in Spain during the pre-crisis period. Finally, we also find that these results are more pronounced among less capitalized, less liquid and more profitable banks.
    Keywords: productivity, credit risk, bank supply, lending standards
    JEL: G21 E51 D24 O47
    Date: 2018–04
  50. By: Arifur Rahman
    Abstract: Does uncertainty of labor earning over the life-time increase income inequality? – This paper finds that there is a direct positive relationship between life-time uncertainty and income inequality. Earlier studies single out the effect of uncertainty to pin point the effects of predictable factors (i.e. education, family background, etc.), whereas the uncertainty is treated as uncontrollable factor. This paper finds that, the degree of earning uncertainty is predictable to a large extent, which is one of the corner-stones of life cycle models with stochastic earnings. Therefore, the uncontrollable uncertainty can be influenced by policy decisions. The EAM countries have set examples of such policies and have shown that despite their rapid economic growth, inequality has been decreased in those countries. The degree of earning uncertainty can be reduced by creating more jobs in less volatile Dependent Employment. In other words, by giving a worker higher opportunity to find a less volatile job, earning uncertainty can be reduced. And reduced earning uncertainty eventually results in reduced income inequality.
    Keywords: Inequality, Redistribution
    JEL: D33 E24
    Date: 2018–01
  51. By: David N.F. Bell; David G. Blanchflower
    Abstract: There remains a puzzle around the world over why wage growth is so benign given the unemployment rate has returned to pre-recession levels. It is our contention that a considerable part of the explanation is the rise in underemployment which rose in the Great Recession but has not returned to pre-recession levels even though the unemployment rate has. Involuntary part-time employment rose in every advanced country and remains elevated in many in 2018. In the UK we construct the Bell/Blanchflower underemployment index based on reports of whether workers, including full-timers and those who want to be part-time, who say they want to increase or decrease their hours at the going wage rate. If they want to change their hours they report by how many. Prior to 2008 our underemployment rate was below the unemployment rate. Over the period 2001-2017 we find little change in the number of hours of workers who want fewer hours, but a big rise in the numbers wanting more hours. Underemployment reduces wage pressure. We also provide evidence that the UK Phillips Curve has flattened and conclude that the UK NAIRU has shifted down. The underemployment rate likely would need to fall below 3%, compared to its current rate of 4.9% before wage growth is likely to reach pre-recession levels. The UK is a long way from full-employment.
    JEL: E5 J01
    Date: 2018–04
  52. By: Fort, Teresa C; Pierce, Justin; Schott, Peter K.
    Abstract: We use relatively unexplored dimensions of US microdata to examine how US manufacturing employment has evolved across industries, firms, establishments, and regions from 1977 to 2012. We show that these data provide support for both trade-and technology-based explanations of the overall decline of employment over this period, while also highlighting the difficulties of estimating an overall contribution for each mechanism. Toward that end, we discuss how further analysis of these trends might yield sharper insights.
    Keywords: technology; Trade; US manufacturing employment
    JEL: E24 J6
    Date: 2018–04
  53. By: 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); Gauthier Vermandel (LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine)
    Abstract: This paper provides a static two country new Keynesian model to teach two related questions in international macroeconomics: the international transmission of unilateral monetary policy decisions and the gains coming from the coordination monetary rules. We concentrate on “normal times” and use a thoroughly graphical approach to analyze the questions at hands. In this setting monetary policy is conducted using interest rates rules and economic integration between nations does not necessarily create the case for the coordination of monetary policy. In particular, we show that the conduct of optimal national monetary policies does not make any difference with the coordination of national policies, as this creates a situation where the international monetary system operates “Near an International Cooperative Equilibrium”.
    Keywords: monetary policy,New Keynesian macroeconomics,international macroeconomics,economic policy,optimal interest rate rules,A20,E10,E50,F41
    Date: 2018
  54. By: Mari Tanaka (Hitotsubashi University, Graduate School of Economics); Nicholas Bloom (Stanford University, Department of Economics); Maiko Koga (Bank of Japan); Haruko Kato (Bank of Japan)
    Abstract: Ever since Keyenes' famous quote about animal spirits, there has been an interest in linking firms' expectations and actions. But the empirical evidence on this is scarce because of the lack of firm panel data on expectations and outcomes. In this paper, we combine a unique survey of Japanese firms' GDP forecasts with their accounting data for 27 years for over 1,000 large Japanese firms. We find four main results. First, we find that firms' GDP forecasts are positively and significantly associated with firms' input choices, such as investment and employment, and with firm's sales, even after controlling for year and firm fixed effects. These results are stronger for cyclical firms, suggesting a firm's input decision is particularly dependent on its manager's forecasts when its demand is more sensitive to the macro economy. Second, both optimistic and pessimistic forecast errors lower profitability because it is costly to have too much or too little capacity. Third, while over optimistic forecasts lower measured productivity, over pessimistic forecasts do not tend to have an impact on productivity. Finally, larger and more cyclical firms make more accurate forecasts, presumably reflecting the higher return from accurate forecasts. More productive, older, and bank owned firms also make more accurate forecasts, suggesting that forecasting ability is also linked to management ability, experience and governance. Collectively, this highlights the importance of firms' forecasting ability for micro and macro performance.
    Keywords: Forecast; investment; employment; productivity
    JEL: D22 D84
    Date: 2018–04–17
  55. By: Paolo Martellini; Guido Menzio
    Abstract: Over the last century, unemployment, vacancy, job-finding and job-loss rates as well as the Beveridge curve have no trend. Yet, the last century has seen the development and diffusion of many information technologies—such as telephones, fax machines, computers, the Internet—which presumably have increased the efficiency of search in the labor market. We explain this phenomenon using a textbook search-theoretic model of the labor market. We show that there exists an equilibrium in which unemployment, vacancies, job-finding and job-loss rates are constant while the search technology improves over time if and only if firm-worker matches are heterogeneous in quality, the distribution of match qualities is Pareto, and the quality of a match is observed before the start of the employment relationship. Under these conditions, improvements in search lead to an increase in the rate at which workers meet firms and to a proportional decline in the probability that the quality of a firm-worker match is acceptable leading to a constant job-finding rate, unemployment, etc... Interestingly, under the same conditions, unemployment, vacancies, job-finding and job-loss rates are independent of the size of the labor market even in the presence of increasing returns to scale in search. While declining search frictions do not lower unemployment, they contribute to growth. The magnitude of the contribution depends on the thickness of the tail of the Pareto distribution. We present a simple strategy to measure the decline in search frictions and its contribution to growth. A rudimentary implementation of this strategy suggests that the decline in search frictions has been substantial, it has been caused by both improvements in the search technology and increasing returns to scale in the search process, and it has had a non-negligible impact on growth.
    JEL: E24 O40 R11
    Date: 2018–04
  56. By: Stephen Wright (Birkbeck, University of London); James Mitchell (Warwick Business School); Donald Robertson (University of Cambridge)
    Abstract: A longstanding puzzle in macroeconomic forecasting has been that a wide variety of multivariate models have struggled to out-predict univariate models consistently. We seek an explanation for this puzzle in terms of population properties. We derive bounds for the predictive R2 of the true, but unknown, multivariate model from univariate ARMA parameters alone. These bounds can be quite tight, implying little forecasting gain even if we knew the true multivariate model. We illustrate using CPI inflation data and the Eurozone in a specification motivated by a preferred-habitat model to test for monetary policy transmission domestically and internationally. Our findings suggest an impact of monetary policy on variance processes only and provides evidence for an international channel of monetary transmission on both money and capital markets. This is, to our knowledge, the first attempt to use search-engine data in the context of monetary policy.
    Keywords: attention, internet search, Google, monetary policy, ECB, FED, international financial markets, macro-finance, sovereign bonds, international finance, bond markets, preferred habitat models.
    JEL: C22 C32 C53 E37
    Date: 2018–04
  57. By: Chiu, Ching-Wai (Jeremy) (Bank of England); hayes, simon (Bank of England); kapetanios, george (Kings College); Theodoridis, Konstantinos (Cardiff University)
    Abstract: Forecasts play a critical role at inflation-targeting central banks, such as the Bank of England. Breaks in the forecast performance of a model can potentially incur important policy costs. Commonly used statistical procedures, however, implicitly put a lot of weight on type I errors (or false positives), which result in a relatively low power of tests to identify forecast breakdowns in small samples. We develop a procedure which aims at capturing the policy cost of missing a break. We use data-based rules to find the test size that optimally trades off the costs associated with false positives with those that can result from a break going undetected for too long. In so doing, we also explicitly study forecast errors as a multivariate system. The covariance between forecast errors for different series, though often overlooked in the forecasting literature, not only enables us to consider testing in a multivariate setting but also increases the test power. As a result, we can tailor the choice of the critical values for each series not only to the in-sample properties of each series but also to how the series for forecast errors covary.
    Keywords: Forecast breaks; statistical decision making; central banking
    JEL: C53 E47 E58
    Date: 2018–04–13
  58. By: Hiro Ito (Portland State University); Masahiro Kawai (Economic Research Institute for Northeast Asia (ERINA))
    Abstract: Financial development is often measured by financial depth such as the stock of private credit and market capitalization as a share of GDP. Such a measure focuses on the quantity aspect of financial development. In this paper, we propose measures that capture both the quantity and quality aspects of financial market development. For quantity measures, we construct a composite index with multiple variables which gauge the size and depth of the banking, equity, bond, and insurance markets. For quality measures, we create a composite index that reflects the degree of financial market diversity, liquidity and efficiency, and the institutional environment. The last factor captures the development of legal systems and institutions, human capital, and information and telecommunications infrastructure. We find that the quantity and quality measures are highly correlated with each another for advanced economies and Asian emerging market economies, but not for other economies. The disaggregated components of the quality measures suggest that it is the level of legal and institutional development that differentiates advanced economies from emerging and developing economies in terms of the quality measures. Compared to advanced economies, emerging and developing economies tend to have low levels of market diversity, liquidity, and efficiency. Our simple regression analysis shows that the quality measure of financial development has a positive effect on output growth and negative effects on output volatility and inflation for the sample of emerging and developing economies with relatively high-quality financial development. We also observe that a higher level of financial development, particularly in terms of quality, tends to lead to greater financial openness, and that greater financial openness tends to be associated with low growth, high growth volatility and high inflation for emerging and developing economies with low quality measures of financial development, while such undesirable impacts of financial openness can be mitigated by raising the quality of financial development.
    Keywords: financial development, financial liberalization, financial openness
    JEL: E44 G2 O16
  59. By: Marc A. C. Hafstead; Roberton C. Williams III; Yunguang Chen
    Abstract: This paper assesses the use of full-employment computable-general equilibrium (CGE) models to predict the labor-market effects of environmental policy. Specifically, it compares the predictions of a standard full-employment CGE model with those of a new search-CGE model with labor-search frictions and resulting unemployment (but that is otherwise identical to the full-employment model). The search-CGE captures key labor market details, including a distinction between the extensive margin of labor demand (the number of employees) and the intensive margin (the number of hours each employee works). We find that some key results are robust across the two models, such as the reallocation of labor across sectors in response to a carbon tax and the overall change in total labor demand. However, the full-employment model seriously overestimates the economy-wide net change in the number of jobs (by a factor of more than 2.5 for a carbon tax with revenues returned lump-sum to households, and by a factor of almost 3.5 when carbon tax revenues are used to reduce payroll taxes).
    JEL: E24 H23 J64 Q52 Q58
    Date: 2018–04
  60. By: Wolfgang Britz; Roberto Roson
    Abstract: We motivate and detail the newly developed G-RDEM recursive-dynamic Computable General Equilibrium model as a tool for long-term counterfactual analysis and baseline generation from given GDP and population projections. It encompasses an AIDADS demand system with non-linear Engel curves, debt accumulation from foreign saving and introduces sector specific productivity changes, endogenous aggregate saving rates, as well as time-varying input-output coefficients. Parameters for these relationships are econometrically estimated or taken from published work. The core of the model is derived from the GTAP standard model and seamlessly incorporated into the modular and flexible CGEBox modelling platform. Accordingly, it can be applied with various other extensions such as GTAP-AEZ, GTAP-Water or a regional breakdown for Europe to 280 NUTS2 regions. G-RDEM maintains the flexible aggregation from the GTAP data base. It is open source, encoded in GAMS and can be steered by a Graphical User Interface, which also encompasses a tool to analyse results with tables, graphs and maps. Existing GDP and population projections for the Socio-Economic Pathways 1-5 can be directly incorporated for baseline construction. A comparison of the generated long-term structural composition of the economy against a simple recursive-dynamic variant, using the basic CDE demand system of the standard GTAP model, uniform productivity growth, fixed saving rates and technology parameters, and no debt accumulation shows that G-RDEM brings about much more plausible results, as well as a more realistic, internally consistent representation of the economic structure in a hypothetical future.
    Keywords: Computable General Equilibrium models; Long-run economic scenarios; Structural change.
    JEL: C68 C82 C88 D58 E17 F43 O11 O40
    Date: 2018
  61. By: Erik Brynjolfsson; Felix Eggers; Avinash Gannamaneni
    Abstract: GDP and derived metrics (e.g., productivity) have been central to understanding economic progress and well-being. In principle, the change in consumer surplus (compensating expenditure) provides a superior, and more direct, measure of the change in well-being, especially for digital goods, but in practice, it has been difficult to measure. We explore the potential of massive online choice experiments to measure consumers’ willingness to accept compensation for losing access to various digital goods and thereby estimate the consumer surplus generated from these goods. We test the robustness of the approach and benchmark it against established methods, including incentive compatible choice experiments that require participants to give up Facebook for a certain period in exchange for compensation. The proposed choice experiments show convergent validity and are massively scalable. Our results indicate that digital goods have created large gains in well-being that are missed by conventional measures of GDP and productivity. By periodically querying a large, representative sample of goods and services, including those which are not priced in existing markets, changes in consumer surplus and other new measures of well-being derived from these online choice experiments have the potential for providing cost-effective supplements to existing national income and product accounts.
    JEL: E01 O0 O4
    Date: 2018–04
  62. By: Davide Furceri; Prakash Loungani; Jonathan David Ostry
    Abstract: We take a fresh look at the aggregate and distributional effects of policies to liberalize international capital flows—financial globalization. Both country- and industry-level results suggest that such policies have led on average to limited output gains while contributing to significant increases in inequality—that is, they pose an equity–efficiency trade-off. Behind this average lies considerable heterogeneity in effects depending on country characteristics. Liberalization increases output in countries with high financial depth and those that avoid financial crises, while distributional effects are more pronounced in countries with low financial depth and inclusion and where liberalization is followed by a crisis. Difference-indifference estimates using sectoral data suggest that liberalization episodes reduce the share of labor income, particularly for industries with higher external financial dependence, those with a higher natural propensity to use layoffs to adjust to idiosyncratic shocks, and those with a higher elasticity of substitution between capital and labor. The sectoral results underpin a causal interpretation of the findings using macro data.
    Date: 2018–04–06
  63. By: Michael D. Bordo; John V. Duca
    Abstract: There are concerns that the Dodd-Frank Act (DFA) has impeded small business lending. By increasing the fixed regulatory compliance requirements needed to make business loans and operate a bank, the DFA disproportionately reduced the incentives for all banks to make very modest loans and reduced the viability of small banks, whose small-business share of C&I loans is generally much higher than that of larger banks. Despite an economic recovery, the small loan share of C&I loans at large banks and banks with $300 or more million in assets has fallen by 9 percentage points since the DFA was passed in 2010, with the magnitude of the decline twice as large at small banks. Controlling for cyclical effects and bank size, we find that these declines in the small loan share of C&I loans are almost all statistically attributed to the change in regulatory regime. Examining Federal Reserve survey data, we find evidence that the DFA prompted a relative tightening of bank credit standards on C&I loans to small versus large firms, consistent with the DFA inducing a decline in small business lending through loan supply effects. We also empirically model the pace of business formation, finding that it had downshifted around the time when the DFA and the Sarbanes-Oxley Act were announced. Timing patterns suggest that business formation has more recently ticked higher, coinciding with efforts to provide regulatory relief to smaller banks via modifying rules implementing the DFA. The upturn contrasts with the impact of the Sarbanes-Oxley Act, which appears to persistently restrain business formation.
    JEL: E40 E50 G21
    Date: 2018–04
  64. By: Fiorenza Venturini (Università di Roma - La Sapienza)
    Abstract: Although numerical fiscal rules may be introduced to achieve several objectives, to date the maintenance of fiscal sustainability is their predominant goal. This is particularly true at subnational level; maintaining fiscal discipline in a decentralized setting is challenging and subnational government fiscal rules are considered one of the most valid solutions to the problem. While theoretical and empirical literature has mainly focused on their effectiveness in containing subnational deficit and/or debt, little attention has been paid to the possible trade–offs and side effects of the rules on the composition of subnational expenditure. The aim of this paper is to fill this gap by exploiting the case of Italian municipalities, which have been subject for fifteen years (1999–2015) to a set of rules called Domestic Stability Pact. The Italian DSP framework – imposing rules only on municipalities above a population threshold (5,000 inhabitants) – allows us to implement a quasi– experimental technique to investigate the unintended composition effects of the rules. A difference–in–discontinuities design permits to find rigorous empirical evidence that the switching in 2007 to rules which are more binding in terms of fiscal discipline leads to a recomposition of municipal expenditure against investment spending. The analysis is then integrated by evaluating the impact of the rules on six categories of investment expenditure. Investment in human capital and infrastructure seems to be the most affected.
    Keywords: fiscal rules, local expenditure, local spending composition, investment spending
    JEL: E62 H72 H77 R53
    Date: 2018–04
  65. By: Gärtner, Stefan; Fernández, Jorge
    Abstract: When looking at the Spanish banking market through a German lens, the differences between the banking markets in these countries and between decentralised and centralised systems with regard to the SME-credit decision-making process become obvious. Despite our hypotheses that Spanish savings banks were similar to German savings banks until the crisis, or at least until liberalisation and before the break-up of the regional principle, we came to the conclusion that they were never as significant as savings banks in Germany, at least not for SME finance. Notwithstanding recent initiatives to create a common European market and to integrate diverse national banking systems, the European financial system remains spatially complex and uneven, particularly with respect to the degree of geographical concentration. Whereas decentralisation increased in Germany, especially during the financial crisis, the rather decentralised Spanish banking system has become more and more centralised. This development has tended to fuel the financial crisis even further in Spain. In Spain, however, whereas most savings banks, which already operated nationally, were finally privatised due to their heavy losses in the crisis, regional savings banks in Germany further increased their market share in firm financing.
    Keywords: comparing banking systems,SME finance in Germany,SME finance in Spain,savings and cooperative banks,decentralised vs. centralised banking
    JEL: D43 E21 G01 G21 G38 R12
    Date: 2018
  66. By: Masahiro Kawai (Economic Research Institute for Northeast Asia (ERINA))
    Abstract: This paper discusses the issue of whether the 21st century will be an gAsian century. h According to a study commissioned by the Asian Development Bank, Asia 2050: Realizing the Asian Century, Asian countries will keep growing and eventually account for more than half of global GDP by 2050. The study, however, cautions that developing Asia may fall into the gmiddle-income trap h where growth stagnates due to the lack of productivity growth. This paper provides baseline projections for the world economy up to 2050 and argues that the gAsian century h scenario may be interpreted as one of the high growth cases for the model, and Asia may face the risk of stagnation due to the middle-income trap and/or gAsian conflict h resulting from political, security, and military tensions in Asia. The paper argues that in order to realise an gAsian century, h developing Asia needs to focus on technological progress, inclusive growth, environmental sustainability, institutional and governance quality, and regional cooperation and integration. It also points to possible global governance structures which are alternatives to an Asia-centric world, such as those of a gChina century, h gAmerican century 2.0, h gG-2, h gG-0, h and a gmulti-polar h world. As the two major powers in this region, China and Japan need to cooperate with each other to maintain regional peace and security, and help realise the gAsian century. h The paper concludes that even when the gAsian century h arrives and Asia dominates the world in terms of economic size, it does not necessarily mean that Asia will dominate the world politically, institutionally, militarily, or in soft power. The 21st century will likely be a gmulti-polar h world where the traditional powers of the West (the United States and European Union countries), Japan, and new rising powers (China, India, and other major emerging economies) collectively manage global economic and political affairs.
    Keywords: Asian century, Asian stagnation, middle-income trap, multi-polar world, China-Japan cooperation
    JEL: E01 F01 F02 F55 O40
    Date: 2017–10
  67. By: Larkin Terrie (Bureau of Economic Analysis)
    Abstract: Paper presented at the 2018 Federal Committee on Statistical Methodology (FCSM) Research and Policy Conference
    JEL: E60
    Date: 2018–03
  68. By: International Monetary Fund
    Abstract: Growth remains robust, supported by electricity exports, construction and services. Inflation is contained as food prices have fallen. High public debt and fiscal deficits pose a key risk, while negative macrofinancial feedbacks through the banking system could propagate external shocks. The authorities are moving to implement reforms consistent with past advice, including the integration of the Sustainable Development Goals (SDGs) in their 5-year plan, but further reforms are needed.
    Date: 2018–03–23
  69. By: Jean Mercenier (Department of Economics, Université Panthéon-Assas, and CIRED, Paris, France); Ebru Voyvoda (Department of Economics, Middle East Technical University, Ankara, Turkey)
    Abstract: Based on two strands of research, namely 'barriers to technology adoption' and 'appropriate technology', we propose a formal reappraisal of 'deep integration', a broad concept often used in trade policy discussions. We then evaluate the 2004-7 EU enlargement wave utilizing this operational reappraisal. More specifically, we first estimate, using 2007 data, total labor productivity (TLP) in the 27 EU member states, and show that in all but a few sectors, new member states clearly stand below the lower envelope technology frontier of the older members in their use of skilled and unskilled labor. We interpret this as being the result of past barriers to technology adoption that are likely to be removed by the integration process into the EU, with these new counties' TLP shifting to the incumbent members' lower envelope. We then explore the potential effects on all 27 EU member states of this 'deep integration' experiment using a calibrated intertemporal multisectoral general equilibrium model. Our main finding is that, for most parameter configurations, workers' welfare in incumbent member countries is not negatively impacted despite the rather drastic improvement in competitiveness experienced by new members.
    Keywords: Barriers to technology adoption, appropriate technology, technological upgrading, deep integration, European integration, calibrated general equilibrium
    JEL: D58 E23 F12 J31 O14 R13
    Date: 2018–04
  70. By: Brinkhoff, Jeroen; Langfield, Sam; Weeken, Olaf
    Abstract: Existing stress tests do not capture feedback loops between individual institutions and the financial system. To identify feedback loops, the European Systemic Risk Board has developed macroprudential surveys that ask banks and insurers how they would behave in a macroeconomic stress scenario. In a pilot application of these surveys, we find evidence of herding behaviour in the banking sector, notably concerning credit retrenchment. Results show that the consequences can be large, potentially undoing the initial effects of banks’ remedial actions by worsening their solvency position. In contrast, insurers’ responses to the survey provide little evidence of herding in response to macroeconomic stress. These results highlight the usefulness of macroprudential surveys in identifying feedback loops. JEL Classification: E30, E44, G10, G18, G21, G22, G28
    Keywords: financial instability, macroprudential, stress tests, surveys
    Date: 2018–04
  71. By: Siming Liu (Indiana University); Hewei Shen (Indiana University)
    Abstract: This paper studies the effects of fiscal policy commitment in countries that suffer sovereign default risk. Since a government does not incorporate the effect of their taxation decisions on past bond prices, a time-inconsistency problem arises, resulting in too many defaults and too few fiscal adjustments. We show that a fiscal commitment device can mitigate the government’s default incentives and improve their borrowing opportunities. Moreover, instead of committing to a single tax rate, introducing a commitment device that depends on economic conditions can further reduce default risk while preserving the contingency of a pro-cyclical fiscal policy.
    Keywords: overeign default risk; Pro-cyclical fiscal policy; Time-inconsistency; Fiscal commitment; Fiscal austerity
    Date: 2018–04
  72. By: Leandro Prados de la Escosura (Universidad Carlos III and CEPR); Carlos Santiago-Caballero (Universidad Carlos III)
    Abstract: The Napoleonic Wars had dramatic consequences for Spain’s economy. The Peninsular War had higher demographic impact than any other military conflict, including civil wars, in the modern era. Farmers suffered confiscation of their crops and destruction of their main capital asset, livestock. The shrinking demand, the disruption of international and domestic trade, and the shortage of inputs hampered industry and services. The loss of the American colonies, a by-product of the French invasion, seriously harmed absolutism. In the long run, however, the Napoleonic Wars triggered the dismantling of Ancien Régime institutions and interest groups. Freed from their constraints, the country started a long and painful transition towards the liberal society. The Napoleonic Wars may be deemed, then, a watershed in Spanish history.
    Keywords: Napoleonic Wars, Peninsular War, Spain, Institutional Change, Growth
    JEL: E02 F54 N13 N43
    Date: 2018–04
  73. By: Federico Diaz Kalan; Adina Popescu; Julien Reynaud
    Abstract: There is evidence that fiscal rules, in particular well-designed rules, are associated with lower sovereign spreads. However, the impact of noncompliance with fiscal rules on spreads has not been examined in the literature. This paper estimates the effect of the Excessive Deficit Procedure (EDP) on sovereign spreads of European Union member states. Based on a sample including the 28 European Union countries over the period 1999 to 2016, sovereign spreads of countries placed under an EDP are found to be on average higher compared to countries that are not under an EDP. The interpretation of this result is not straight-forward as different channels may be at play, in particular those related with the credibility and the design of the EU fiscal framework. The specification accounts for typical macroeconomic, fiscal, and financial determinants of sovereign spreads, the System Generalized Method of Moments estimator is used to control for endogeneity, and results are robust to a range of checks on variables and estimators.
    Date: 2018–04–13
  74. By: Mahdi Ghodsi (The Vienna Institute for International Economic Studies, wiiw); Julia Grübler (The Vienna Institute for International Economic Studies, wiiw); Doris Hanzl-Weiss (The Vienna Institute for International Economic Studies, wiiw); Roman Römisch (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Graph of the month Regional GDP per capita in the EU, 2014 (p. 1) Opinion corner What are the potential consequences of decertifying the nuclear deal with Iran by US President Trump? (by Mahdi Ghodsi, pp. 2-5) Austria’s economic geography position in Europe (by Roman Römisch; pp. 6-12) Visit thy neighbour Compositional trends in the Austrian tourism sector (by Julia Grübler; pp. 13‑17) Economic relations between Austria and Slovakia (by Doris Hanzl-Weiss; pp. 18-23) Recommended reading (p. 24) Statistical Annex Monthly and quarterly statistics for Central, East and Southeast Europe (pp. 25-46)
    Keywords: regions, regional GDP, regional growth, Iran, nuclear deal, President Trump, economic geography, Austrian tourism, tourism, net tourism export, trade, FDI, global value chains, backward and forward linkages
    Date: 2017–10
  75. By: Molefe B. Phirinyane (Botswana Institute for Development Policy Analysis)
    Abstract: The use of technology in citizen participation has grown phenomenally in developed countries, but is emergent in most developing countries. Accessibility and the functionality of information and communication technologies such as telephone, cellular phone and internet have profound effect on citizen participation in politics, policy making and implementation. This study applies a case study methodology to understand the relationship between technology and the nature of active citizen participation in developing countries, using Botswana as a case example. The penetration and use of the information and communication technologies in politics and the policy-making process in Botswana remains low. Botswana first laid in place the policy, legal and institutional frameworks to guide its development of ICTs in her governance system. The country has since made significant gains on providing ICT infrastructure countrywide, and reducing the costs associated with accessing these where available. The country has registered improvements on all indicators on Technological readiness, further strengthening the country’s path on the adoption ICTs in its governance process. The findings suggest that countries should take the responsibility for, and be committed to, creating a conducive environment for the ICT industry to thrive while not losing focus of the ultimate objective of citizen participation.
    Keywords: Botswana, citizen participation, e-government, Information and Communication Technologies.
    JEL: E32 R10
    Date: 2016–10
  76. By: Kevin J. Boudreau
    Abstract: Platforms often have “crowds” of amateurs working on them as complementors, in other cases professional entrepreneurs—or both. What can a platform owner do to implement these outcomes? I document evidence on mobile app developers showing that just small, incremental changes in platform design—related to the bare minimum costs required to build an app and factors affecting non-pecuniary payoffs—can lead the “bottom-to-fall-out” of the market to amateurs. Where the bottom-falls-out, there is a flood of lowest-quality developers who nonetheless are long-lived on the platform and engage in relatively high development activity. I find no evidence that amateurs crowd-out development activity of top developers in this context. Moreover, the bottom-falling-out is associated with the generation of significantly greater numbers of highest-quality products. I discuss several interpretations.
    JEL: D04 E26 J4 L1 L8 O3
    Date: 2018–04

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