nep-mac New Economics Papers
on Macroeconomics
Issue of 2018‒05‒28
sixty-four papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Interest Rate Rules, Forward Guidance Rules and the Zero Lower Bound on Nominal Interest Rates in a Cost Channel Economy By Lasitha R.C. Pathberiya
  2. Could a higher inflation target enhance macroeconomic stability? By José Dorich; Nicholas Labelle St-Pierre; Vadym Lepetyuk; Rhys Mendes
  3. Do we really know that US monetary policy was destabilizing in the 1970s? By Qazi Haque; Nicolas Groshenny; Mark Weder
  4. Lending Relationships and Labor Market Dynamics By Finkelstein Shapiroy, Alan; Olivero, Maria
  5. Jobless Recovery, Liquidity Trap, Tight Monetary Policy and the Cost Channel By Lasitha R.C. Pathberiya
  6. Export Boom and Economic Performance: Bolivia 2004-2015 By Loza, Melissa; Morales, Juan Antonio
  7. ‘New Normal’ or ‘New Orthodoxy’? Elements of a Central Banking Framework for the After-Crisis By Christian Pfister, Natacha Valla
  8. International Credit Markets and Global Business Cycles By Patrick A. Pintus; Yi Wen; Xiaochuan Xing
  9. Corporate Profit Taxes, Capital Expenditure and Real Wages: The analytics behind a contentious debate By Buiter, Willem H.; Sibert, Anne
  10. Central bank digital currencies - design principles and balance sheet implications By Kumhof, Michael; Noone, Clare
  11. Procyclical Finance: The Money View By Li, Ye
  12. Broadening narrow money: monetary policy with a central bank digital currency By Meaning, Jack; Dyson, Ben; Barker, James; Clayton, Emily
  13. Central Bank information and the effects of monetary shocks By Paul Hubert
  14. he Natural Rate of Interest: Information Derived from a Shadow Rate Model By Viktors Ajevskis
  15. The cross-border credit channel and lending standards surveys By Andrew Filardo; Pierre Siklos
  16. Vietnam's Low National Competitiveness: Causes, Implications and Suggestions for Improvement By Phuong, Le Quoc
  17. The non-linear nature of country risk and its implications for DSGE models By Michal Brzoza-Brzezina; Jacek Kotlowski
  18. Business Cycles, Credit Cycles, and Bank Holdings of Sovereign Bonds: Historical Evidence for Italy 1861-2013 By Silvana Bartoletto; Bruno Chiarini; Elisabetta Marzano; Paolo Piselli
  19. The global component of inflation volatility By Andrea Carriero; Francesco Corsello; Massimiliano Marcellino
  20. The enduring link between demography and inflation By Mikael Juselius; Előd Takáts
  21. ECB monetary policy and the euro exchange rate By Martina Cecioni
  22. Google It Up! A Google Trends-Based Uncertainty Index for the United States and Australia By Efrem Castelnuovo; Trung Duc Tran
  23. The deterioration of the public spending mix during the global financial crisis: Insights from new indicators By Debra Bloch; Jean-Marc Fournier
  24. The Macrodynamics of Sorting between Workers and Firms By Jeremy Lise; Jean-Marc Robin
  25. The Changing Structure of Government Spending By Moro, Alessio; Rachedi, Omar
  26. Financial and price stability in emerging markets: the role of the interest rate By Lorenzo Menna; Martin Tobal
  27. A time series model of interest rates with the effective lower bound By Benjamin K Johannsen; Elmar Mertens
  28. Can Reinvestment Risk Explain the Dividend and Bond Term Structures? By Goncalves, Andrei
  29. Inference in Structural Vector Autoregressions When the Identifying Assumptions are Not Fully Believed: Re-evaluating the Role of Monetary Policy in Economic Fluctuations By Baumeister, Christiane; Hamilton, James
  30. No Pain, No Gain. Multinational Banks in the Business Cycle By Cao, Qingqing; Minetti, Raoul; Olivero, Maria
  31. The Dynamic Effects of Personal and Corporate Income Tax Changes in the United States: Reply to Jentsch and Lunsford By Mertens, Karel; Ravn, Morten O.
  32. Thirlwall Law: Validity of the Law in Nigeria By Adesete, Ahmed; Osinloye, Adelanfe; Abolade, Modupeoluwa; Nwachukwu, Christian; Onyejeaka, Emmanuel; Ojo, Dolapo; Ogungbemi, Tosin; Phillips, Martins
  33. Investment attraction, competition and growth; theoretical perspective in the context of Africa By Senzu, Emmanuel Tweneboah
  34. The drivers of household indebtedness re-considered: an empirical evaluation of competing macroeconomic arguments on the determinants of household indebtedness in OECD countries By Glenn Lauren Moore
  35. The Bahamas; 2018 Article IV Consultation-Press Release and Staff Report By International Monetary Fund
  36. Natural interest rates in the U.S., Canada and Mexico By Kan Chen; Nathaniel Karp
  37. Money growth targeting and indeterminacy in small open economies By Kevin x.d. Huang; Qinglai Meng; Jianpo Xue
  38. The Finance Uncertainty Multiplier By Alfaro, Ivan; Bloom, Nicholas; Lin, Xiaoji
  39. Aggregation, Capital Heterogeneity, and the Investment CAPM By Goncalves, Andrei; Xue, Chen; Zhang, Lu
  40. Kann Karl Marx die Finanzkrise 2007/08 erklären? Eine Einordnung seiner Geld- und Kredittheorie By Neuberger, Doris
  41. Macroeconomic Uncertainty and the Comovement in Buying versus Renting in the United States By Goodness C. Aye; Rangan Gupta
  42. Are European bond markets overshooting? By Paul Hubert; Jérôme Creel; Christophe Blot; Fabien Labondance
  43. Firms’ investments during two crises By Antonio De Socio; Enrico Sette
  45. Effects of asset purchases and financial stability measures on term premia in the euro area By Richhild Moessner
  46. On the Transmission Mechanism of Country-Specific and International Economic Uncertainty Spillovers: Evidence from a TVP-VAR Connectedness Decomposition Approach By David Gabauer; Rangan Gupta
  47. Macro-financial linkages: the role of liquidity dependence By Alexey Ponomarenko; Anna Rozhkova; Sergei Seleznev
  48. Malawi; 2018 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility By International Monetary Fund
  49. Equilibrium Real Interest Rates for the BRICS Countries By Jens Klose
  50. Community currency, local currency, negotiable voucher and others: a theoretical attempt to classify money substitutes into a system By József Varga; Gábor Sárdi; Tamás Kovács
  51. Macro Aspects of Housing By Leung, Charles Ka Yui; Ng, Joe Cho Yiu
  52. Identifying the Main Determinants of Consumer Price Growth in the Russian Economy Under the Inflation Targeting Policy By Korishchenko, Konstantin; Pilnik, Nikolay; Ivanova, Maria
  53. Keynes: ley de Say y demanda de dinero. By Barón Ortegón, Brayan Alexander
  54. The (Un)Demand for Money in Canada By Geoffrey Dunbar; Casey Jones
  55. A Practical Viewpoint on Financial System Resiliency and Monetary Policy; 05.18.18; Third Annual ECB Macroprudential Policy and Research Conference, European Central Bank, Frankfurt, Germany By Mester, Loretta J.
  56. Thermodynamic structure of a macroeconomic model By Takuma Tanaka
  57. Channels of US monetary policy spillovers to international bond markets By Elias Albagli; Luis Ceballos; Sebastián Claro; Damian Romero
  58. Intertopic Distances as Leading Indicators By Melody Y. Huang; Randall R. Rojas; Patrick D. Convery
  59. Perpetual growth, distribution, and robots By Nomaler, Onder; Verspagen, Bart
  60. Le risque bancaire en zone euro By Christophe Blot; Paul Hubert
  61. Shocks propagation across the futures term structure : evidence from crude oil prices By Delphine Lautier; Franck Raynaud; Michel Robe
  62. De la expansión a la austeridad: los retos y riesgos del cambio radical de política fiscal en Brasil By Rodrigo Octávio Orair; Sergio Wulff Gobetti
  63. Western Balkans EU Accession: Is the 2025 Target Date Realistic? By Richard Grieveson; Julia Grübler; Mario Holzner
  64. Bad Investments and Missed Opportunities? Postwar Capital Flows to Asia and Latin America By Ohanian, Lee E.; Restrepo-Echavarria, Paulina; Wright, Mark L. J.

  1. By: Lasitha R.C. Pathberiya (Central Bank of Sri Lanka; School of Economics, The University of Queensland)
    Abstract: The main aim of this study is to examine the behaviour of main macroeconomic variables under some interest rate rules and a forward guidance rule in a cost channel economy1 in the presence of the ZLB. The ZLB is considered as an occasionally binding constraint. Interest rate rules are represented by Taylor-type truncated rules (TTR) while the forward guidance (FG) rule is an endogenous threshold-based rule. Under TTRs, first, the cost channel economy is more likely to fall into a liquidity trap and remain longer compared to the no-cost channel economy. Second, the risky steady state of a cost channel economy has more deflation bias than a no-cost channel economy. Third, the welfare loss is higher when uncertainty is high and it is appreciably higher in cost channel economies. Under the FG rule, compared to the TTR, the following results hold, irrespective of the cost channel: First, an appropriate FG rule can avoid deflation bias while strict FG leads to an inflation bias. Second, the FG rule reduces the frequency of liquidity-trapped recessions. Third, the depth of the recession under the FG rule is lower. The existence of the cost channel amplifies the inflation bias under the FG rule. The findings of this study suggest that if a cost channel was present in an economy, the transmission of monetary policy may be different from that in a no-cost channel economy in the presence of the ZLB. Additionally, if agents expect future recessions, achieving the inflation target is more challenging in cost channel economies. Therefore, central banks should pay careful attention to the cost channel of monetary policy when they set policies under such economic conditions. Further, this study finds that the endogenous FG rule improves welfare compared to the interest rules considered.
    Keywords: cost channel of monetary policy, zero rates on interest rates, interest rate rules, forward guidance rules, inflation bias, deflation bias
    JEL: E31 E32 E43 E52 E58
  2. By: José Dorich; Nicholas Labelle St-Pierre; Vadym Lepetyuk; Rhys Mendes
    Abstract: Recent international experience with the effective lower bound on nominal interest rates has rekindled interest in the benefits of inflation targets above 2 per cent. We evaluate whether an increase in the inflation target to 3 or 4 per cent could improve macroeconomic stability in the Canadian economy. We find that the magnitude of the benefits hinges critically on two elements: (i) the availability and effectiveness of unconventional monetary policy (UMP) tools at the effective lower bound, and, (ii) the level of the real neutral interest rate. In particular, we show that when the real neutral rate is in line with the central tendency of estimates, raising the inflation target yields some improvement in macroeconomic outcomes. There are only modest gains if effective UMP tools are available. In contrast, with a deeply negative real neutral rate, a higher inflation target substantially improves macroeconomic stability regardless of UMP.
    Keywords: inflation target, effective lower bound, unconventional monetary policy, quantitative easing, forward guidance
    JEL: E32 E37 E43 E52
    Date: 2018–05
  3. By: Qazi Haque; Nicolas Groshenny; Mark Weder
    Abstract: In this paper we examine whether or not monetary policy was a source of instability during the Great Inflation. We focus on a number of attributes that we see relevant for any analysis of the 1970s: cost-push or oil price shocks, positive trend inflation as well as real wage rigidity. We turn our artificial sticky-price economy into a Bayesian model and find that the U.S. economy during the 1970s is best characterized by a high degree of real wage rigidity. Oil price shocks thus created a trade-off between inflation and output-gap stabilization. Faced with this dilemma, the Federal Reserve reacted aggressively to inflation but hardly at all to the output gap, thereby inducing stability, i.e. determinacy.
    Keywords: Monetary policy, Great Inflation, Cost-push shocks, Trend inflation, Sequential Monte Carlo algorithm
    JEL: E32 E52 E58
    Date: 2018–05
  4. By: Finkelstein Shapiroy, Alan (Tufts Unversity); Olivero, Maria (Drexel University)
    Abstract: Standard models with search frictions in labor markets face limitations in replicating the empirical volatility of unemployment and market tightness in the U.S. In this paper we study the importance of endogenous labor force participation amid credit market disruptions in a labor search model with bank lending relationships. In response to both aggregate productivity and financial shocks that replicate the empirical volatility of labor force participation and volatility and cyclicality of credit spreads, the model produces more than 75 percent of the volatility of unemployment and 90 percent of the volatility of market tightness in the data. The interaction between endogenous participation in labor markets, and long-lasting lending relationships that quantitatively generate the cyclical behavior of credit spreads gives rise to sharper vacancy fluctuations amid financial shocks and plays a key role in replicating the data. In addition, we document a negative link between measures of credit-market distress and labor force participation alongside a positive link between measures of credit-market distress and unemployment. Moreover, we illustrate the policy importance of accounting for labor force participation by analyzing the effects of countercyclical credit subsidies. Only when labor force participation is an endogenous choice does this policy represent an effective stabilization tool.
    Keywords: unemployment; endogenous labor force participation; financial shocks; deep habits in credit markets; lending relationships
    JEL: E24 E32 E44
    Date: 2018–05–07
  5. By: Lasitha R.C. Pathberiya (Central Bank of Sri Lanka; School of Economics, The University of Queensland)
    Abstract: In this study, I examine the robustness of an unconventional monetary policy in a cost channel economy. The unconventional monetary policy proposed by Schmitt-Grohé and Uribe (2017, American Economic Journal: Macroeconomics, SGU henceforth), recommends a tight monetary policy during a liquidity-trapped recession to stimulate the economy and to avoid jobless recovery. The results of my study show that the existence of the cost channel implies that the SGU policy induces sharp initial contractions in the employment rate and the growth rate, and a sharp increase in inflation following a negative confidence shock. Welfare is lower in cost channel economies compared to no-cost channel economies due to the SGU policy recommendation. Two alternative interest rate-based exit policies are also examined. The Overshoot interest rate policy, irrespective of the presence of the cost channel, is superior to the SGU policy with regard to welfare. The Staggered policy has lower immediate pain in the cost channel economy compared to the SGU policy or the Overshoot policy. However, welfare-wise, the Staggered policy is inferior to the other two policies examined in both economies considered.
    Keywords: cost channel of monetary policy, zero rates on interest rates, liquidity trap, jobless recovery, downward nominal wage rigidity, Taylor rule
    JEL: E31 E32 E52 E58
    Date: 2018–05–14
  6. By: Loza, Melissa (Universidad Privada Boliviana); Morales, Juan Antonio (IISEC, Universidad Católica Boliviana)
    Abstract: The supercycle of high commodity prices has had profound impacts on the Bolivian economy. We have investigated the relations of commodity prices with the main indicators of macroeconomic performance. We have found significant ties in our statistical analysis. An important question that we address concerns the consequences of the transitory export boom on the long term rate of growth of the economy. Also, given the importance of fiscal linkages with windfall income, we examined the procyclality of public expenditures based on an analysis of correlations of the cyclical components. We find positive but weak correlations. With export booms, consumption increases but also saving rates. Savings have been invested in foreign assets and, to a large extent, in construction. We find that commodity prices and per capita value added in the construction sector are co-integrated, suggesting a long term relationship. Also we looked into the real linkages of the hydrocarbons sector with other sectors of the economy through an Input-Output analysis. Finally, we have conducted a set of simulations, with a small Computable General Equilibrium Model adapted to the Bolivian conditions, to trace the domestic price and quantity effects of the commodity price increases.
    Keywords: price supercycle; transitory trade shocks; fiscal effects; procyclality; Bolivian economy;
    JEL: C32 C67 C68 E60 E62
    Date: 2018–05–21
  7. By: Christian Pfister, Natacha Valla
    Abstract: Two different approaches to central banking in the aftermath of the crisis are contrasted. In the first one, labelled ‘New Normal’, the monetary policy strategy is broadened to encompass such objectives as financial stability or full employment. Furthermore, the inflation target is raised and large scale asset purchases (LSAPs) are retained as a standard instrument for implementing monetary policy. In the second approach, which we label ‘New Orthodoxy’, central banks keep the same objectives but interest rates can be brought to unprecedented negative levels, thus making LSAPs possibly unnecessary. The role of central banks in preserving financial stability is also explicitly recognized, both by themselves and by society, making their contribution to this task more effective and transparent.
    Keywords: Central banks, Monetary policy, Financial stability
    JEL: E42 E43 E50 E52 E58
    Date: 2018
  8. By: Patrick A. Pintus (CNRS-InSHS and Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE); Yi Wen (Federal Reserve Bank of St. Louis & Tsinghua University); Xiaochuan Xing (Department of Economics, Yale University)
    Abstract: This paper stresses a new channel through which global financial linkages contribute to the co-movement in economic activity across countries. We show in a two-country setting with borrowing constraints that international credit markets are subject to self-fulfilling variations in the world real interest rate. Those expectation-driven changes in the borrowing cost in turn act as global shocks that induce strong cross-country co-movements in both financial and real variables (such as asset prices, GDP, consumption, investment and employment). When firms around the world benefit from unexpectedly low debt repayments, they borrow and invest more, which leads to excessive supply of collateral and of loanable funds at a low interest rate, thus fueling a boom in both home and foreign economies. As a consequence, business cycles are synchronized internationally. Such a stylized model thus offers one way to rationalize both the existence of a world business-cycle component, documented by recent empirical studies through dynamic factor analysis, and the factor’s intimate link to global financial markets.
    Keywords: world interest rate, international co-movement, self-fulfilling equilibria
    JEL: E21 E22 E32 E44 E63
    Date: 2018–05
  9. By: Buiter, Willem H.; Sibert, Anne
    Abstract: The recent reduction in the US corporate profit tax rate from 35 percent to 21 percent has triggered renewed interest in the impact of a cut in the corporate tax rate on capital accumulation and real wages. This theoretical contribution demonstrates that the familiar proposition that a cut in the corporate profit tax rate boosts the capital intensity of production and the real wage is sensitive to a number of key assumptions. Even when the real interest rate is exogenously given, full deductibility of capital expenditure from the corporate profit tax base will result in no impact of a corporate profit tax rate cut on the incentive to invest. Adding deductibility of interest can result in a negative effect on the capital intensity of production of a corporate profit tax rate cut. When the real interest rate is endogenous, we use the "perpetual youth" OLG model to demonstrate that the effects on consumption demand of a corporate profit tax cut will reduce the impact on capital intensity of a corporate profit tax cut if the tax cut is funded by higher lump-sum taxes on "permanent income" households. We have not been able to find examples where the capital intensity impact is reversed. Alternative funding rules (e.g. lower public consumption purchases) and the introduction of "Keynesian" consumers could lead to a larger positive effect on capital intensity from a cut in the corporate profit tax rate.
    Keywords: corporate profit tax; expensing; capital expenditure; OLG model.; Public Finance; taxation
    JEL: E21 E22 E62 E63 H2 H25 H3
    Date: 2018–05
  10. By: Kumhof, Michael (Bank of England); Noone, Clare (Reserve Bank of Australia)
    Abstract: This paper sets out three models of central bank digital currency (CBDC) that differ in the sectors that have access to CBDC. It studies sectoral balance sheet dynamics at the point of an initial CBDC introduction, and of an attempted large-scale run out of bank deposits into CBDC. We find that if the introduction of CBDC follows a set of core principles, bank funding is not necessarily reduced, credit and liquidity provision to the private sector need not contract, and the risk of a system-wide run from bank deposits to CBDC is addressed. The core principles are: (i) CBDC pays an adjustable interest rate. (ii) CBDC and reserves are distinct, and not convertible into each other. (iii) No guaranteed, on-demand convertibility of bank deposits into CBDC at commercial banks (and therefore by implication at the central bank). (iv) The central bank issues CBDC only against eligible securities (principally government securities). The final two principles imply that households and firms can freely trade bank deposits against CBDC in a private market, and that the private market can freely obtain additional CBDC from the central bank, at the posted CBDC interest rate and against eligible securities.
    Keywords: Central bank digital currencies; sectorial balance sheets; monetary systems; financial stability; bank runs
    JEL: E42 E44 E52 E58
    Date: 2018–05–18
  11. By: Li, Ye (Ohio State University)
    Abstract: Banks are important because firms hold their debt ("inside money") as liquidity buffer. Banking crises are costly because the contraction of inside money supply compromises firms' liquidity management and hurts investment. By highlighting the interaction between banks and firms in the money market, this paper offers a theory of procyclical inside money creation and the resulting instability. It sheds light on the cyclicality of bank leverage, and how it affects the frequency and duration of banking crises. Introducing outside money (government debt) to alleviate liquidity shortage can be counterproductive, because its competition with inside money destabilizes the banking sector.
    JEL: E02 E22 E32 E41 E43 E44 E51 E58 E61 E62 G01 G12 G18 G20 G30
    Date: 2017–11
  12. By: Meaning, Jack (Bank of England); Dyson, Ben (Bank of England); Barker, James (University of Exeter); Clayton, Emily (Bank of England)
    Abstract: This paper discusses central bank digital currency (CBDC) and its potential impact on the monetary transmission mechanism. We first offer a general definition of CBDC which should make the concept accessible to a wide range of economists and policy practitioners. We then investigate how CBDC could affect the various stages of transmission, from markets for central bank money to the real economy. We conclude that monetary policy would be able to operate much as it does now, by varying the price or quantity of central bank money, and that transmission may even strengthen for a given change in policy instruments.
    Keywords: Central bank digital currency; money; monetary policy; cryptocurrency
    JEL: E42 E52 E58
    Date: 2018–05–18
  13. By: Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: Does the effect of monetary policy depend on the macroeconomic information released by the central bank? Because differences between central bank’s and private agents’ information sets affect private agents’ interpretation of policy decisions, this paper aims to investigate whether the publication of macroeconomic information by the central bank modifies private responses to monetary policy. We assess the non-linear effects of monetary shocks conditional on the Bank of England’s macroeconomic projections on UK private inflation expectations. We find that inflation projections modify the impact of monetary shocks. When contractionary monetary shocks are interacted with positive (negative) projections, the negative effect of policy on inflation expectations is amplified (reduced). This suggests that providing guidance about central bank future expected inflation helps private agents’ information processing, and therefore changes their response to policy decisions.
    Keywords: Monetary policy; Information processing; Signal extraction; Market based inflation expectations; Central bank projections; Real time forecasts
    JEL: E52 E58
    Date: 2017–08
  14. By: Viktors Ajevskis (Bank of Latvia)
    Abstract: The study proposes an estimation method of the natural rate of interest based on the shadow rate term structure of interest rates model and using information from nominal yields data. For the purpose of comparison and robustness check, different samples for the estimation of the natural rate of interest – three for the euro area and two for the US – are considered. The estimates based on all considered samples show a downturn trend in the estimated natural rates of interest for the euro area. However, since the beginning of 2013, this downward trend has levelled off. Compared to the results obtained by affine models, the shadow rate model produces lower estimates of natural rates of interest. From the beginning of 2013, the dynamics of estimated series of the US natural rate of interest closely follows the series produced by Laubach–Williams. However, before that the series are more divergent. In order to demonstrate the use of the natural rate of interest, we employ the estimated series of the natural rate of interest in the balance-approach version of the Taylor rule. The results imply that, at the end of the sample in July 2017, Taylor rule-suggested policy rates were in line with the actual ECB policy rates.
    Keywords: natural rate of interest, term structure of interest rates, lower bound, non-linear Kalman filter
    JEL: C24 C32 E43 E58 G12
    Date: 2018–04–20
  15. By: Andrew Filardo; Pierre Siklos
    Abstract: This paper argues that a measure of lending conditions - Senior Loan Officer (SLO) surveys - offers important insights into the monetary transmission mechanism. Using a Global VAR (GVAR) and SLO survey data from 16 countries, we document bank lending standards' significant role in explaining the dynamics of domestic credit conditions. Changes in lending attitudes lead to spillovers of financial conditions to other advanced and emerging market economies. We also examine the interaction of unconventional monetary policies (UMPs) and lending attitudes by using an external high frequency instrument. Looking through this lens of UMPs, we see that expansionary monetary policy led to a lowering of domestic credit standards which amplified the impact of the initial monetary stimulus. However, we also find evidence that the need to resort to UMPs also brought about a decline in lending demand, raising questions about whether the signaling channel of monetary policy unintentionally worked at cross purposes by sapping the full effectiveness of these policies. The varied experiences in the United States and euro area draw attention to the relative importance of bank intermediation in determining the strength of the bank lending channel of monetary policy.
    Keywords: global VAR, lending standards and credit conditions, unconventional monetary policies, spillovers
    JEL: F44 F36 F15 E5 E32
    Date: 2018–05
  16. By: Phuong, Le Quoc (Vietnam Industry and Trade Information Center)
    Abstract: The World Economic Forum's (WEF) annual assessment using the Global Competitiveness Index (GCI) since 2006 shows that Vietnam’s national competitiveness has been relatively low. Globally, Vietnam has been in the middle of economies surveyed. Regionally, Vietnam has been in the middle of ASEAN countries. Regarding level of development, before 2015 Vietnam was in stage 1 (factor-driven), which includes ASEAN's less developed countries (Cambodia, Laos and Myanmar). Since 2015 Vietnam has shifted to a transition toward stage 2 (efficiency-driven), which includes Brunei and the Philippines. The country has lagged behind Indonesia and Thailand (in stage 2), Malaysia (in transition to stage 3) and Singapore (in stage 3, innovation-driven). To complement the WEF’s assessment, this study provides some in-depth analyses of main causes of Vietnam's low competitiveness. These are structural problems due to its factor-based growth model, expansionary policies to aid growth, slowly improved business environment, low R&D expenditure, low-quality higher education and under-developed infrastructure. The research also examines implications of these shortcomings for Vietnam. These are low productivity, diminishing GDP growth, middle income trap, macroeconomic instability, low business competitiveness, low technology level, low human capital quality and environmental degradation. Based on the analyses, policy measures are proposed to improve Vietnam’s competitiveness. Major suggestions include structural reforms to change the growth model from factor-based to productivity-based, raising technology level, enhancing human capital quality, improving business environment, ensuring macroeconomic stability, upgrading infrastructure and learning from advanced economies such as Korea.
    Keywords: Vietnam; Competitiveness; Productivity; Growth model
    JEL: D24 E24 E52 E62 N15 O47 O53 O57
    Date: 2018–04–04
  17. By: Michal Brzoza-Brzezina; Jacek Kotlowski
    Abstract: Country risk premia can substantially affect macroeconomic dynamics. We concentrate on one of their most important determinants - a country’s net foreign asset position and - in contrast to the existing research - investigate its nonlinear link to risk premia. The importance of this particular non-linearity is twofold. First, it allows to identify the NFA level above which the elasticity becomes much (possibly dangerously) higher. Second, such a non-linear relationship is a standard ingredient of DSGE models, but its proper calibration/ estimation is missing. Our estimation shows that indeed the link is highly nonlinear and helps to identify the NFA position where the non-linearity kicks in at approximately -70% to -75% of GDP. We also provide a proper calibration of the risk premium - NFA relationship which can be used in DSGE models and demonstrate that its slope matters significantly for economic dynamics in such a model.
    Keywords: Risk premium, PSTR model, open economy DSGE model
    JEL: C23 E43 E44
    Date: 2018–05
  18. By: Silvana Bartoletto (University of Naples, "Parthenope"); Bruno Chiarini (University of Naples, "Parthenope"); Elisabetta Marzano (University of Naples, "Parthenope" and CESifo); Paolo Piselli (Bank of Italy, DG Economics, Statistics and Research)
    Abstract: We propose a joint dating of Italian business and credit cycles on a historical basis by applying a local turning-point dating algorithm to the level of the variables. Along with short cycles corresponding to traditional business cycle fluctuations, we also investigate medium cycles, because there is evidence that financial booms and busts are longer and more persistent than business cycles. After comparing our cycles with the prominent qualitative features of the Italian economy, we carry out some statistical tests for comovement between credit and business cycles and find evidence that credit and business cycles are poorly synchronized, especially in the medium term. Nonetheless, we demonstrate that only for medium-term frequencies the coincidence of financial downturns and economic recessions significantly increases output losses. We do not find evidence that the credit cycle leads the business cycle, both in medium and short-term fluctuations. On the contrary, in the short cycle, we find some evidence that the business cycle leads the credit cycle. Finally, credit and business cycle comovement increases when credit embodies public bonds held by banks, i.e., bank financing to the public sector.
    Keywords: business fluctuations, financial cycle, bank credit, medium-term fluctuations
    JEL: E32 E44 N13 N14
    Date: 2017–11
  19. By: Andrea Carriero (Queen Mary, University of London); Francesco Corsello (Bank of Italy); Massimiliano Marcellino (Bank of Italy)
    Abstract: Global developments play an important role in domestic inflation rates. Previous literature has found that a substantial amount of the variation in a large set of national inflation rates can be explained by a single global factor. However, inflation volatility has been typically neglected, while it is clearly relevant both from a policy point of view and for structural analysis and forecasting purposes. We study the evolution of inflation rates in several countries, using a novel model that allows for commonality in both levels and volatilities, in addition to country-specific components. We find that inflation stochastic volatility is indeed important, and a substantial share of it can be attributed to a global factor that also drives the levels and persistence of inflation. While various phenomena may contribute to global inflation dynamics, it turns out that since the early 1990s, the estimated global factor is correlated with China’s PPI and with oil inflation levels and volatilities. The extent of commonality among core inflation rates and volatilities is substantially smaller than for overall inflation, which leaves scope for national monetary policies.
    Keywords: inflation, volatility, global factors, large datasets, multivariate autoregressive index models, reduced rank regressions, forecasting
    JEL: E31 C32 E37 C53
    Date: 2018–04
  20. By: Mikael Juselius; Előd Takáts
    Abstract: Demographic shifts, such as population ageing, have been suggested as possible explanations for the past decade's low inflation. We exploit cross-country variation in a long panel to identify age structure effects in inflation, controlling for standard monetary factors. A robust relationship emerges that accords with the lifecycle hypothesis. That is, inflationary pressure rises when the share of dependants increases and, conversely, subsides when the share of working age population increases. This relationship accounts for the bulk of trend inflation, for instance, about 7 percentage points of US disinflation since the 1980s. It predicts rising inflation over the coming decades.
    Keywords: demography, ageing, inflation, monetary policy
    JEL: E31 E52 J11
    Date: 2018–05
  21. By: Martina Cecioni (Bank of Italy)
    Abstract: The paper provides empirical evidence on the effects of ECB conventional and unconventional monetary policy on the euro exchange rate, focusing on the period from January 2013 to September 2017. Innovations to conventional and unconventional monetary policies are identified through changes in, respectively, short- and long-term interest rates immediately after Governing Council meetings. Both types of measures contributed to the depreciation of the euro from mid-2014; surprises associated with conventional measures had a stronger and more persistent effect than those associated with unconventional ones. Time-varying estimates of the effects of conventional surprises since 1999 show that the responsiveness of exchange rates to monetary news increased markedly from 2013. State-dependence analysis finds that the exchange rate became more sensitive to monetary policy when the ECB adopted a policy of negative interest rates and when conventional and unconventional monetary surprises moved in the same direction.
    Keywords: unconventional monetary policy, exchange rates, European Central Bank
    JEL: E52 E58 F31
    Date: 2018–04
  22. By: Efrem Castelnuovo (Melbourne Institute: Applied Economic & Social Research, The University of Melbourne; Department of Economics and Management, University of Padova); Trung Duc Tran (Department of Economics, The University of Melbourne)
    Abstract: We develop uncertainty indices for the United States and Australia based on freely accessible, real time Google Trends data. Our Google Trends Uncertainty (GTU) indices are found to be positively correlated to a variety of alternative proxies for uncertainty available for these two countries. VAR investigations document an economically and statistically significant contribution to unemployment dynamics by GTU shocks in the United States. In contrast, the contribution of GTU shocks to unemployment dynamics in Australia is found to be much milder and substantially lower than that of monetary policy shocks.
    Keywords: Google Trends Uncertainty indices, uncertainty shocks, unemployment dynamics, VAR analysis
    JEL: C32 E32 E52
    Date: 2017–10
  23. By: Debra Bloch (OECD); Jean-Marc Fournier (OECD)
    Abstract: New indicators measuring the effects of public spending on inclusive growth have been constructed using recent empirical work by Fournier and Johansson (2016) and a recent public finance dataset (Bloch et al., 2016). A first set of indicators combines information on the mix of public spending. Each spending item share is multiplied with an estimated coefficient from growth and inequality equations to build both a growth and an income distribution component, which is then summed up to an aggregate inclusive growth indicator. The spending mix analysis cannot, however, measure the effectiveness of public spending within individual spending items, which is difficult to observe in a comparable manner across countries. A second set of indicators attempts to at least partly overcome this limitation by including information on the size and perceived effectiveness of governments. The average of the spending mix indicator and the size and effectiveness indicator provides an indicative overall indicator on the effects of public spending on inclusive growth. The analysis suggests that countries with a counter-cyclical fiscal stance typically have a public spending structure that is more supportive of inclusive growth. There is also a striking link between the growth component of the public spending mix indicator and the output gap: the capacity of the public finances to support inclusive growth deteriorated markedly in the countries hardest hit during the recent crisis.
    Keywords: fiscal policy, government size, inclusive growth, public spending
    JEL: D31 E62 H11 H5 H50
    Date: 2018–05–25
  24. By: Jeremy Lise (University College of London); Jean-Marc Robin (Département d'économie)
    Abstract: We develop an equilibrium model of on-the-job search with ex ante heterogeneous workers and firms, aggregate uncertainty, and vacancy creation. The model produces rich dynamics in which the distributions of unemployed workers, vacancies, and worker-firm matches evolve stochastically over time. We prove that the surplus function, which fully characterizes the match value and the mobility decision of workers, does not depend on these distributions. This result means the model is tractable and can be estimated. We illustrate the quantitative implications of the model by fitting to US aggregate labor market data from 1951-2012. The model has rich implications for the cyclical dynamics of the distribution of skills of the unemployed, the distribution of types of vacancies posted, and sorting between heterogeneous workers and firms.
    JEL: E24 E32 J24 J63 J64
    Date: 2017–04
  25. By: Moro, Alessio; Rachedi, Omar
    Abstract: We document that advanced economies experience a secular increase in the share of purchases from the private sector in total government spending, implying that over time governments purchase relatively more private-sector goods, and rely less on own production of value added. We build a calibrated general equilibrium model to show that this secular process can be accounted for by investment-specific technological change. We then use the model to measure the effect of this secular process on the transmission of fiscal policy, and find that (i) it shifts the stimulative effects of government spending towards private economic activity and (ii) it dampens the response of hours - but not of output - to fiscal shocks.
    Keywords: Government Gross Output, Fiscal Multiplier
    JEL: E62 H10 O41
    Date: 2018–05–07
  26. By: Lorenzo Menna; Martin Tobal
    Abstract: The Global Financial Crisis opened a heated debate on whether inflation target regimes must be relaxed and allow for monetary policy to address financial stability concerns. Nonetheless, this debate has focused on the ability of the interest rate to "lean against the wind" and, more generally, on the accumulation of systemic risk arising from the macro-financial challenges faced by advanced economies. This paper extends the debate to emerging markets by developing micro-foundations that allow extending a simplified version of the New-Keynesian credit augmented model of Curdia and Woodford (2016) to a small-open economy scenario, and by subsequently using the same empirical strategy as Ajello et al. (2015) to calibrate the model for Mexico. The results suggest that openness in the capital account, and in particular a strong dependence of domestic financial conditions on capital flows, diminishes the effectiveness of monetary policy to lean against the wind. Indeed, in the open-economy with endogenous financial crises, the optimal policy rate is even below the level that would prevail in the absence of endogenous financial crisis and systemic risk.
    Keywords: leaning against the wind, global financial cycle, monetary policy, financial stability
    JEL: E52 F32
    Date: 2018–05
  27. By: Benjamin K Johannsen; Elmar Mertens
    Abstract: Modeling nominal interest rates requires their effective lower bound (ELB) to be taken into account. We propose a flexible time series approach that includes a "shadow rate" - a notional rate identical to the actual nominal rate except when the ELB binds. We apply this approach to a trend-cycle decomposition of interest rates and macroeconomic variables that generates competitive interest-rate forecasts. Our estimates of the real-rate trend have edged down somewhat in recent decades, but not significantly so. We identify monetary policy shocks from shadow-rate surprises and find that they were particularly effective at stimulating economic activity during the ELB period.
    Keywords: shadow rate, effective lower bound, trend real rate, monetary policy shocks, bayesian time series
    JEL: C32 C34 C53 E43 E47
    Date: 2018–04
  28. By: Goncalves, Andrei (Ohio State University)
    Abstract: Contradicting leading asset pricing models, recent evidence indicates the term structure of dividend discount rates is downward sloping despite the typical upward sloping bond yield curve. This paper empirically shows that reinvestment risk explains both the dividend and bond term structures. Intuitively, dividend claims hedge equity reinvestment risk because dividend present values rise as expected returns decline. This hedge is more effective for longer-term dividend claims because they are more sensitive to discount rate variation, resulting in a downward sloping dividend term structure. For bonds, as expected equity returns decline, nominal interest rates rise, and bond prices fall. Consequently, bonds are exposed to equity reinvestment risk, and this exposure increases with duration, giving rise to an upward sloping bond term structure.
    JEL: E32 E43 G11 G12
    Date: 2017–08
  29. By: Baumeister, Christiane; Hamilton, James
    Abstract: Reporting point estimates and error bands for structural vector autoregressions that are only set identified is a very common practice. However, unless the researcher is persuaded on the basis of prior information that some parameter values are more plausible than others, this common practice has no formal justification. When the role and reliability of prior information is defended, Bayesian posterior probabilities can be used to form an inference that incorporates doubts about the identifying assumptions. We illustrate how prior information can be used about both structural coefficients and the impacts of shocks, and propose a new distribution, which we call the asymmetric t distribution, for incorporating prior beliefs about the signs of equilibrium impacts in a nondogmatic way. We apply these methods to a three-variable macroeconomic model and conclude that monetary policy shocks were not the major driver of output, inflation, or interest rates during the Great Moderation.
    Keywords: historical decompositions; impulse-response functions; informative priors; Model uncertainty; monetary policy; set identification; structural vector autoregressions
    JEL: C11 C32 E52
    Date: 2018–05
  30. By: Cao, Qingqing (Michigan State University); Minetti, Raoul (Michigan State University); Olivero, Maria (Drexel University)
    Abstract: We study the role of multinational banks in the propagation of business cycles in host countries. In our economy, multinational banks can transfer liquidity across borders through internal capital markets. However, their scarce knowledge of local firms' collateral hinders their allocation of liquidity to firms. We find that, through the interaction between the "liquidity origination" advantage and the "liquidity allocation" disadvantage, multinational banks can act as a short-run stabilizer in the immediate aftermath of domestic liquidity shocks but be a drag on the subsequent recovery. Structural and cyclical policies can ameliorate the trade-off induced by the presence of multinational banks effective stabilization tool.
    Keywords: Multinational Banks; Macroeconomic Stability; Business Cycle
    JEL: E44
    Date: 2018–02–14
  31. By: Mertens, Karel (Federal Reserve Bank of Dallas); Ravn, Morten O. (University College London)
    Abstract: In this reply to a comment by Jentsch and Lunsford, we show that, when focusing on the relevant impulse responses, the evidence for economic and statistically significant macroeconomic effects of tax changes in Mertens and Ravn (2013) remains present for a range of asymptotically valid inference methods.
    Keywords: Fiscal Policy; structural vector autoregressions; tax shocks
    JEL: C32 E62 H24 H25 H31 H32
    Date: 2018–05–01
  32. By: Adesete, Ahmed; Osinloye, Adelanfe; Abolade, Modupeoluwa; Nwachukwu, Christian; Onyejeaka, Emmanuel; Ojo, Dolapo; Ogungbemi, Tosin; Phillips, Martins
    Abstract: The thirlwall law is also called the balance of payment constraints model. The basic model is anchored on the dynamic Harrod foreign trade multiplier, which is also known as Thirlwall law or the 45 degree rule, developed through the pioneer efforts of Thirlwall (1979). On the assumption of constant relative prices and absence of capital flows, the basic dynamic Harrod foreign trade multiplier postulates that the rate of growth of a country can be predicted by considering the ratio of the rate of growth of a country's exports volume to its income elasticity of demand for imports (that is growth rate of exports volume divided by income elasticity of demand for imports can be used as a basis for predicting a country's growth rate). Thereby this law concludes that the growth rate of a country is balance of payment constrained. The broad objective of this study is to test for validity of Thirlwall law on the Nigeria economy that is to check if this law is applicable to the economy of Nigeria as a whole . The specific objectives of the study are: to check if there is long run balance of payment equilibrium. to examine if Nigeria economic growth is balance of payment constrained. To determine elasticity of import and export of Nigeria. This law has been tested in several countries including developed and developing countries of the world but very few study has been done on it in Nigeria. Therefore, this study seeks to test if the Thirlwall law is relevant to Nigeria economy. This study also aims to fill the knowledge gap in that: is Nigeria balance of payment constrained ? is there a long run balance of payment equilibrium in Nigeria ? what is the elasticity of import and export of Nigeria ? This study employs a recently developed autoregressive distributed lag (ARDL) cointegration procedure by Pesaran and Shin (1999) and Pesaran et al to estimate the import function. The Wald test statistic and graphical plotting of the actual growth rate and predicted growth rate is used as the test for thirlwall hypothesis. Augmented dickey fuller test is used to test for stationarity of the series and variables are differenced in a case of non-stationarity of the series.
    Keywords: Thirlwall law, Autoregressive distributed lag(ARDL), Balance of growth contrained model, balance of payment contrained growth model
    JEL: E0 E1 E6 F4 N0 O4
    Date: 2018–03
  33. By: Senzu, Emmanuel Tweneboah
    Abstract: Examination in both theoretical and empirical perspective deduce that, the major indicators of modern economy growth, depends on the extent of economic financialization, commonly defined as capital stock, industrialization and Technological Advancement. The focus of this paper is to theorize investment attraction mechanism for a national economy in a global competitive arena taking a posteriori perspective of Africa politico-economic climate.
    Keywords: Investment Economics, Growth Economics, Macroeconomics, microeconomics
    JEL: E21 E22 O4 O42
    Date: 2018–05–09
  34. By: Glenn Lauren Moore (Department of Economics, SOAS, University of London, UK)
    Abstract: Household debt is at a record high in most OECD countries and it played a crucial role in the recent financial crisis. Several arguments on the macroeconomic drivers of household debt have been put forward, and most have been empirically tested, albeit in isolation of each other. This paper empirically tests seven competing hypotheses on the macroeconomic determinants of household indebtedness together in one econometric study. Existing arguments suggest that residential house prices, upward movements in the prices of assets demanded by households, the income share of the top 1%, falling wages, the rolling back of the welfare state, the age structure of the population and the short-term interest rate drive household indebtedness. We formulate these arguments as hypotheses and test them for a panel of 13 OECD countries over the period 1993 - 2011 using error correction models. We also investigate whether effects differ in boom and bust phases of the debt and house price cycles. The results show that the most robust macroeconomic determinant of household debt is real residential house prices, and that the phase of the debt and house price cycles plays a role in household debt accumulation.
    Keywords: household debt; house prices; cycles
    JEL: E19 E21 R20
    Date: 2018–05
  35. By: International Monetary Fund
    Abstract: The Bahamian economy has turned the corner. Growth is expected to pick up to 2½ percent in 2018, supported by the completion and opening of the tourist resort Baha Mar and a stronger U.S. economy. But without resolute implementation of structural reforms, medium-term growth would remain subdued. Public debt ratios have improved due to upward revisions to GDP, but fiscal deficits remain above debt-stabilizing levels. Prime Minister Minnis’ administration has committed to tackling fiscal and structural challenges as central tenets of its agenda.
    Date: 2018–05–14
  36. By: Kan Chen; Nathaniel Karp
    Abstract: The natural interest rate, or r-star, has been a critical determinant of monetary policy normalization in the U.S. and other countries. With the U.S. Federal Reserve expected to continue raising interest rates, central banks in other countries will have to balance the spillover effects with their own internal dynamics.
    Keywords: Working Paper , Global Economy , USA , Global , Mexico
    JEL: E42 E60 G15
    Date: 2018–05
  37. By: Kevin x.d. Huang (Vanderbilt University); Qinglai Meng (Oregon State University); Jianpo Xue (Renmin University of China)
    Abstract: In a closed economy setting a cash-in-advance monetary economy under money growth targeting is prone to self-fulfilling expectations and beliefs-driven fluctuations. This paper shows that such extrinsic instability is less of a problem in a small open economy integrated in the world goods and financial markets. This is because endogenous terms-of-trade movements associated with global goods trade and cross-border capital flows and endogenous international asset price adjustments associated with global financial transaction serve as an endogenous stabilizer to reduce the likelihood of sunspot equilibria. We find that for empirically reasonable parametrization of the small open economy sunspot beliefs are unlikely to become self-fulfilled.
    Keywords: self-fulfilling expectations; indeterminacy; saddle-path stability; money growth targeting; small open economy
    JEL: E3 F4
    Date: 2018–05–19
  38. By: Alfaro, Ivan (BI Norwegian Business School); Bloom, Nicholas (Stanford University); Lin, Xiaoji (Ohio State University)
    Abstract: We show how real and financial frictions amplify the impact of uncertainty shocks. We start by building a model with real frictions, and show how adding financial frictions roughly doubles the negative impact of uncertainty shocks. The reason is higher uncertainty alongside financial frictions induces the standard negative real-options effects on the demand for capital and labor, but also leads firms to hoard cash against future shocks, further reducing investment and hiring. We then test the model using a panel of US firms and a novel instrumentation strategy for uncertainty exploiting differential firm exposure to exchange rate and factor price volatility. Consistent with the model we find that higher uncertainty reduces firms' investment, hiring, while increasing their cash holdings and cutting their dividend payouts, particularly for financially constrained firms. This highlights why in periods with greater financial frictions--like during the global-financial-crisis--uncertainty can be particularly damaging.
    JEL: D22 E23 E44 G32
    Date: 2017–12
  39. By: Goncalves, Andrei (Ohio State University); Xue, Chen (University of Cincinnati); Zhang, Lu (Ohio State University)
    Abstract: This paper provides a careful treatment of aggregation, and to a lesser extent, capital heterogeneity in the investment CAPM. Firm-level investment returns are constructed from firm-level variables, and then aggregated to the portfolio level to match with portfolio-level stock returns. Current assets form a separate production input besides physical capital. The model fits well the value, momentum, investment, and profitability premiums simultaneously, and partially explains the positive stock-investment return correlations, the procyclical and short-term dynamics of the momentum and profitability premiums, as well as the countercyclical and long-term dynamics of the value and investment premiums. However, the model fails to explain momentum crashes.
    JEL: D21 D92 E22 E44 G12 G14 G31 G32 G34
    Date: 2017–12
  40. By: Neuberger, Doris
    Abstract: Der ökonomische Mainstream steht seit Ausbruch der Finanzkrise 2007/08 vermehrt unter Kritik, hatten doch nur wenige Fachwissenschaftler die Krise vorhergesehen. In der entstandenen Debatte über Ausrichtung und Methoden in der Volkswirtschaftslehre wird auch eine Rückbesinnung auf nationalökonomische Klassiker gefordert, die der Mainstream aus den Lehrbüchern weitgehend getilgt hat. Hätte Karl Marx eine bessere Prognose zur Finanzkrise gestellt? Seine Geld- und Kredittheorie erschließt sich insbesondere aus der Lektüre des dritten Bandes des "Kapital", den Ökonomischen Manuskripten dazu (1863-1865) und den Londoner Heften (1850-1853). Der vorliegende Beitrag rekonstruiert diese aus dem Blickwinkel der herrschenden Ökonomik. In Aspekten wie Wesen und Erscheinungsformen des Geldes, Endogenität und Neutralität des Geldes, Rolle von Krediten, Zinsen und Krisen zeigt sich, dass Marx insbesondere durch seine Analysen zum Kreditgeld die Finanzkrise besser erklären kann als der ökonomische Mainstream. Es handelt sich dabei um eine Krise der Überakkumulation von Geldkapital, die weder einzigartig noch auf das Versagen einzelner Marktakteure zurückzuführen ist. Solche Krisen entstehen unweigerlich aus einem fundamentalen Widerspruch des kapitalistischen Wirtschaftssystems, wonach das endogene Kreditgeld zugleich Triebfeder der Produktion aber auch der Überproduktion und Überspekulation ist.
    Keywords: Finanzkrise,Geldfunktionen,Geldkapital,Kreditgeld,Verbriefung,Kapitalismus,financial crisis,money functions,money capital,credit money,securitization,capitalism
    JEL: B14 E1 E4 E5 G01
    Date: 2018
  41. By: Goodness C. Aye (Department of Economics, University of Pretoria, Pretoria, South Africa); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa)
    Abstract: This paper characterizes the sources of the comovement in the U.S metropolitan buy-rent growth rate. The analysis is based on quarterly buy-rent indices from 1982:Q1 to 2016:Q4. To this end, we used the dynamic factor model to decompose the index into national and local factors. The national component contributed more to the variation in the buy-rent indices relative to the local component with variance decomposition values of 72% and 27% respectively albeit this varied across the cities. We further examined the sensitivity of the national buy-rent factor to macroeconomic uncertainty. Our full sample results show that uncertainty has a significant negative effect on the buy-rent behavior thus favouring buying a home as a wealth accumulation channel relative to renting a similar home. The results from the recursive estimation further confirmed a dominant negative relationship with fewer periods of positive relationship. The implications of these findings are drawn.
    Keywords: Buy-rent choice, consumer behavior, dynamic latent factor model, development, economic uncertainty
    JEL: C32 C38 E21 E30 R31
    Date: 2018–05
  42. By: Paul Hubert (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Christophe Blot (Observatoire français des conjonctures économiques); Fabien Labondance (Observatoire français des conjonctures économiques)
    Abstract: The recent rise in Eurozone long-term interest rates could jeopardize the on-going recovery if interest rates went beyond what the fundamentals require. We investigate possible overshooting after identifying the main determinants of long-term interest rates in the Eurozone and in some of its Member States since 1999. We include four categories of fundamentals (macroeconomic, financial, expectations, international). We find that monetary variables, spillovers from US financial markets, expectations and sovereign risks are the main determinants of long-term interest rates in the Eurozone. The empirical model has a very good fit and does not identify recent overshooting. The observed rise since August 2016 is attributed to two factors. The first one is the increase in US long-term interest rates after the reversal in the Fed’s monetary stance. The second factor stems from the political tensions in France, Italy or Spain which generated higher perceived political risk. While the former factor might continue to drive Eurozone interest rates up, the second one might have receded with the results of the French presidential elections and drive interest rates down.
    Keywords: European bond markets
    JEL: E5
    Date: 2017–05
  43. By: Antonio De Socio (Bank of Italy); Enrico Sette (Bank of Italy)
    Abstract: We study the drivers of investment in Italy during the global financial crisis and the sovereign debt crisis. We focus on the effect of leverage while controlling for the role of other drivers: expected demand, profitability, access to credit and uncertainty. As firm-level leverage may be correlated with its unobservable characteristics, we employ instrumental variables estimation, using the median leverage of firms in the same industry and size decile as an instrument. We find that an increase in leverage equal to the interquartile range (about 30 percentage points) is associated with a lower investment rate of 1.9 and 1.4 percentage points (36 and 41 per cent of its mean) during each crisis. We also find that expected demand growth has a strong positive association with investments, whereas this relation holds for profitability only during the sovereign debt crisis. In contrast, credit rationing and uncertainty have a negative, although more limited, effect. Overall, ex-ante high firm indebtedness has been an important driver of the lower investment rate over the last decade.
    Keywords: investment, leverage, crisis
    JEL: E22 G31 G01
    Date: 2018–04
  44. By: Djula Borozan (Faculty of Economics in Osijek, Josip Juraj Strossmayer University of Osijek)
    Abstract: Evolution of total final energy consumption in the European Union (EU) exhibits a mild decreasing tendency over the last two decades. Though, it has recently become more volatile due to the economic recession that adversely and unevenly hit energy consumption in most EU countries and their energy end-use sectors. Eurostat?s data unveils the considerable differences that exist in finale energy consumption across the ?old? and post-transition EU countries as well as the major energy end-user sectors. Using random effects panel model, this paper aims to estimate the effect of the Great Recession and the membership status (?old? vs. post-transition groups) on final energy consumption in the major energy end-user sectors for the period 1998 ? 2015. The empirical evidence indicates statistically significant impact of both predictors on final energy consumption of households/services and industry. However, the impact is not uniform which raises several important questions regarding their behavior and reaction to the recession. Since the recession reduced the wealth and income of the European households, it seems that they are not prone to invest in more energy-efficient appliances, technologies and innovations in tough economic times. In contrast, such behavior is a precondition for survival and future growth of industry.
    Keywords: Great Recession, final energy consumption, energy end-user sectors, random effects panel analysis
    JEL: C33 E32 Q43
    Date: 2018–04
  45. By: Richhild Moessner
    Abstract: We study the effects of the announcements of ECB asset purchases and of financial stability measures in the euro area on ten-year government bond term premia in eleven euro area countries in the wake of the global financial crisis and the euro area sovereign debt crisis. We find that the term premia of euro area countries with higher sovereign risk, as measured by sovereign CDS spreads, decreased more in response to the announcements of asset purchases and financial stability measures. Term premia of countries with the lowest sovereign risk either increased as in Germany, or were not significantly affected or fell slightly, as in the Netherlands and Finland.
    Keywords: monetary policy, asset purchases, financial stability, term premia
    JEL: E58 G15
    Date: 2018–05
  46. By: David Gabauer (Department of Business and Management, Webster Vienna Private University, Vienna, Austria); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa)
    Abstract: We investigate the internal and external categorical economic policy uncertainty (EPU) spillovers between the US and Japan using a novel extension of the TVP-VAR connectedness approach of Antonakakis and Gabauer (2017). The decomposition of our approach gives us insights about the dynamics with and without international spillovers which has essential policy implications. Our results suggest that monetary policy uncertainty is the main driver, followed by uncertainties associated with fiscal, currency market and trade policies. Furthermore, we find that the Fukushima Daiichi accident can be interpreted as a negative trade shock that spread internationally.
    Keywords: Dynamic Connectedness, TVP-VAR, Spillover Decomposition
    JEL: C32 C50 F42
    Date: 2018–05
  47. By: Alexey Ponomarenko; Anna Rozhkova; Sergei Seleznev
    Abstract: We estimate a panel Bayesian vector autoregression model for a cross-section of seven advanced European economies and produce out-of-sample forecasts of GDP conditionally on observed developments of interest rates and credit. We show that, by using a smooth transition version of the model and allowing the parameters to vary across economies conditionally on their liquidity dependence (i.e. dependence on the availability of funding from external sources), it is possible to improve the accuracy of the forecasts. We conclude that the degree of liquidity dependence is likely to be among the important predictors of heterogeneity in macro-financial linkages across countries.
    Keywords: liquidity dependence, macro-financial linkages, Smooth Transition Bayesian VAR
    JEL: G2 O16 C32
    Date: 2018–04
  48. By: International Monetary Fund
    Abstract: Malawi’s economy has made progress in achieving macroeconomic stabilization following two years of severe drought and lingering consequences of corruption scandals. However higher, more inclusive, and resilient growth is needed to tackle pervasive poverty. The government is committed to achieving this goal while maintaining medium-term debt sustainability, as reflected in the Malawi Growth and Development Strategy III for 2018–23.
    Date: 2018–05–09
  49. By: Jens Klose (THM Business School)
    Abstract: The equilibrium real interest rate is one of the most discussed variables in economics, although it is unobservable. While it has been estimated with respect to various developed countries, this paper is the first to estimate it for five developing countries - the BRICS countries. To do so the most widely used model in this respect - the Laubach and Williams model - is used. Moreover, the results are compared to the actual real interest rate to give an indication whether e.g. monetary policy was too tight or too loose in certain periods. The results indicate that we indeed have substantial differences between the actual and the equilibrium real interest rate going either way. While for China and India monetary policy tends to be too loose in many periods, thus boosting economic growth even further, the reverse seems to be true with respect to Brazil especially in the late 1990s and the beginning of the 2000s. In Russia and South Africa the actual real rate is mainly in line with the equilibrium one, thus monetary policy is neither to loose nor too tight.
    Keywords: equilibrium real interest rate, BRICS, state-space-models
    JEL: E43 C32
    Date: 2018
  50. By: József Varga (Kaposvár University, Faculty of Economics); Gábor Sárdi (Kaposvár University, Faculty of Economics); Tamás Kovács (University of Sopron Alexandre Lamfalussy Faculty of Economics)
    Abstract: In our study we tried to group money substitutes including complementary currencies known as "community currencies? in particular pursuing a new kind of approach. This objective was supported by the question whether there is a structuring principle according to which we can make groups of the different types of currencies and money substitutes in a structured manner. We have substantial and continuously developing literature of community currencies. However, as we know there are not many publications and studies about their classification. It is true that several authors and organizations have tried to make categories of currencies that exist besides legal currencies or that can be operated (e.g. Lietaer, Kennedy, Regiogelde. V Cooperation, Utterguggenberger Institution, Blanc, Bode, Boonstra and his colleagues, Greco, Mertignoni), but our opinion is that they are incomplete.On the one hand the aspects of classification developed in literature do not put the criteria of the classification into the whole monetary system and the currency system, on the other hand the main goal of certain criteria was not to create a structured system but to classify and to categorise the unique trials of money substitutes on the basis of some criteria. In our study we try to fill the two gaps above placing the certain types of money substitutes into a single system and a conceptual scheme.
    Keywords: community currency, money substitutes, classification
    JEL: E40 E42 R51
    Date: 2018–04
  51. By: Leung, Charles Ka Yui (City University of Hong Kong); Ng, Joe Cho Yiu (City University of Hong Kong)
    Abstract: This paper aims to achieve two objectives. First, we demonstrate that with respect to business cycle frequency (Burns and Mitchell, 1946), there was a general decrease in the association between macroeconomic variables (MV) and housing market variables (HMV) following the global financial crisis (GFC). However, there are macro-finance variables that exhibited a strong association with the HMV following the GFC. For the medium-term business cycle frequency (Comin and Gertler, 2006), we find that while some correlations exhibit the same change as the business cycle counterparts, others do not. These “new stylized facts” suggest that a reconsideration and refinement of existing “macro-housing” theories would be appropriate. We also provide a review of the recent literature, which may enhance our understanding of the evolving macro-housing-finance linkage.
    Keywords: Stylized facts; macro-housing-finance linkage; global financial crisis; business cycle frequency; housing market variables
    JEL: E30 G10 R30
    Date: 2018–05–01
  52. By: Korishchenko, Konstantin (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Pilnik, Nikolay (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Ivanova, Maria (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: The econometric model of inflation formation depending on the dynamics of the main factors is used as a research tool. According to the presented model, the main generators of volatility are the volatility of oil prices and the policy regime of course management.
    Keywords: consumer inflation, inflation targeting, volatility, currency corridor, gold reserves
    Date: 2018–04
  53. By: Barón Ortegón, Brayan Alexander
    Abstract: In this bibliographic review, the Keynes‘main arguments against the Say’s law are gathered, this law was thought to be a special case of a broader and general theory and therefore more powerful as economic policy is concerned. These insights are vital, to understand Keynesian economics and its subsequent contributions in economic theory and economic policy.
    Keywords: Keynes,Say's Law, Economic theory, demand for money, uncertainty,
    JEL: B0 B2 B22 B31 E12
    Date: 2017–05–14
  54. By: Geoffrey Dunbar; Casey Jones
    Abstract: A novel dataset from the Bank of Canada is used to estimate the deposit functions for banknotes in Canada for three denominations: $1,000, $100 and $50. The broad flavour of the empirical findings is that denominations are different monies, and the structural estimates identify the underlying sources of the non-neutrality. There is evidence of large and significant deposit costs for the highest-value denomination, the $1,000 banknote, but insignificant costs for the $100 and $50 denominations. The results imply that the interest rate elasticity of deposit is positive for the $1,000 but negative for the $100 and the $50. Third, 5 percent of the $1,000, 30 percent of the $100 and 22 percent of the $50 banknotes ever issued by the Bank of Canada do not circulate through financial institutions (in Canada). Finally, we find evidence that the Lehman Brothers crisis increased the deposit probability by a factor of 2–3 for the $1,000 banknote for a majority of the population in Canada.
    Keywords: Bank notes, Econometric and statistical methods
    JEL: E41 C31 C36
    Date: 2018
  55. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Abstract: The work being undertaken at the ECB, other central banks, and universities has increased our knowledge and understanding about the interlinkages between the macroeconomy and financial systems. It has been nine years since the financial crisis, and the global economy has improved substantially over that time. In the U.S., the economy is near both of our monetary policy goals of maximum employment and price stability, and the outlook is one of the most favorable we have seen in a long time. As we move further from the crisis, one lesson can never be lost: the importance of maintaining a resilient financial system for a healthy economy. Today, I’ll spend my time discussing monetary policy and macroprudential policy from the practical perspective of a U.S. monetary policymaker. Research informs our policy decisions, but at the end of the day, decisions have to be made in a world that doesn’t match our models and without full information. Research can be elegant, practice rarely is, but when we are setting policy, effectiveness is what we strive for. Before I continue, I should note that the views I’ll present are my own and not necessarily those of the Federal Reserve System or my colleagues on the Federal Open Market Committee.
    Date: 2018–05–18
  56. By: Takuma Tanaka (Faculty of Data Science, Shiga University)
    Abstract: This paper reports a novel mathematical structure of economic models with rational agents. Taking a cash-in-advance (CIA) model as an example, I show that macroscopic conservation and irreversibility laws, which are similar to those in thermodynamics, hold for the model. These properties allow for defining internal energy, Helmholtz free energy, entropy, and temperature. Thermodynamic relations among these quantities are also proven for the model. Possible extensions to and implications for macroeconomic models are discussed.
    Keywords: CIA model; land; thermodynamics; irreversibility
    JEL: E37
    Date: 2018–05
  57. By: Elias Albagli; Luis Ceballos; Sebastián Claro; Damian Romero
    Abstract: We document significant US monetary policy (MP) spillovers to international bond markets. Our methodology identifies US MP shocks as the change in short-term treasury yields within a narrow window around FOMC meetings, and traces their effects on international bond yields using panel regressions. We emphasize three main results. First, US MP spillovers to long-term yields have increased substantially after the global financial crisis. Second, spillovers are large compared to the effects of other events, and at least as large as the effects of domestic MP after 2008. Third, spillovers work through different channels, concentrated in risk neutral rates (expectations of future MP rates) for developed countries, but predominantly on term premia in emerging markets. In interpreting these findings, we provide evidence consistent with an exchange rate channel, according to which foreign central banks face a tradeoff between narrowing MP rate differentials, or experiencing currency movements against the US dollar. Developed countries adjust in a manner consistent with freely floating regimes, responding partially with risk neutral rates, and partially through currency adjustments. Emerging countries display patterns consistent with FX interventions, which cushion the response of exchange rates but reinforce capital flows and their effects in bond yields through movements in term premia. Our results suggest that the endogenous effects of FXI on long-term yields should be added into the standard cost-benefit analysis of such policies.
    Keywords: monetary policy spillovers, risk neutral rates, term premia
    JEL: E43 G12 G15
    Date: 2018–05
  58. By: Melody Y. Huang; Randall R. Rojas; Patrick D. Convery
    Abstract: We use a topic modeling algorithm and sentiment scoring methods to construct a novel metric to use as a leading indicator in recession prediction models. We hypothesize that due to non-instantaneous information flows, the inclusion of such a sentiment indicator derived purely from unstructured news data will improve our capabilities to forecast future recessions. We go on to show that the use of this proposed metric, even when included with consumer survey data, helps improve model performance significantly. This metric, in combination with consumer survey data, S&P 500 returns, and the yield curve, produces forecasts that significantly outperform models of higher complexity, containing traditional economic indicators.
    Date: 2018–05
  59. By: Nomaler, Onder (ECIS, TU Eindhoven); Verspagen, Bart (UNU-MERIT, Maastricht University)
    Abstract: The current literature on the economic effects of machine learning, robotisation and artificial intelligence suggests that there may be an upcoming wave of substitution of human labour by machines (including software). We take this as a reason to rethink the traditional ways in which technological change has been represented in economic models. In doing so, we contribute to the recent literature on so-called perpetual growth, i.e., growth of per capita income without technological progress. When technology embodied in capital goods are sufficiently advanced, per capita growth becomes possible with a non-progressing state of technology. We present a simple Solow-like growth model that incorporates these ideas. The model predicts a rising wage rate but declining share of wage income in the steady state growth path. We present simulation experiments on several policy options to combat the inequality that results from this, including a universal basic income as well as an option in which workers become owners of "robots".
    Keywords: perpetual economic growth, economic effects of robots, income distribution
    JEL: O15 O41 O33 E25 P17
    Date: 2018–05–23
  60. By: Christophe Blot (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: Cet article analyse les cycles du crédit et de l'activité bancaire dans la zone euro. La politique monétaire accommodante de la BCE soulève des interrogations concernant les risques induits d’instabilité bancaire. Les résultats ne suggèrent ni boom de crédit ni contraction excessive sur la période récente. Si la dynamique du crédit est orientée plus favorablement par rapport à sa tendance en France et en Allemagne, le cycle ne témoigne pas d’une hausse excessive. L’Espagne constitue un cas particulier puisqu’elle se distingue par la faiblesse du crédit rapporté au PIB, alors que l’encours de crédit rapporté aux capitaux et réserves du système bancaire se situe à un niveau historiquement élevé, suggérant une prise de risque excessive.
    Keywords: crédit; politique monétaire; cycles; effet de levier
    JEL: E5
    Date: 2017–06
  61. By: Delphine Lautier (DRM - Dauphine Recherches en Management - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique); Franck Raynaud (Lausanne university - Lausanne university); Michel Robe (University of Illinois - university of Illinois)
    Abstract: To what extent are futures prices interconnected across the maturity curve? Where in the term structure do price shocks originate, and which maturities do they reach? We propose an approach based on information theory to study these cross-maturity linkages and the extent to which connectedness is impacted by market events. We introduce the concepts of backward and forward information flows, and a novel type of directed graph, to investigate the propagation of price shocks across the WTI term structure. Using daily data, we show that the mutual information shared by contracts with different maturities increases substantially starting in 2004, falls back sharply in 2011-2014, and recovers thereafter. Our findings point to a puzzling re-segmentation by maturity of the WTI market in 2012-2014. We document that, on average, short-dated futures emit more information than do backdated contracts. Importantly, however, we also show that significant amounts of information flow backwards along the maturity curve -- almost always from intermediate maturities, but at times even from far-dated contracts. These backward flows are especially strong and far-reaching amid the 2007-2008 oil price boom/bust.
    Keywords: Mutual information,Market integration,Shocks propagation,Information flows,Directed graphs,Term structure,Futures,Crude oil,WTI
    Date: 2017–11
  62. By: Rodrigo Octávio Orair (IPC-IG); Sergio Wulff Gobetti (IPC-IG)
    Abstract: "Brasil, en el periodo después de la gran crisis financiera del 2007-2008, presenta un caso de estudios irresistibles sobre las interacciones entre la política fiscal y los ciclos comerciales. El país es notable no solo por ser uno de los pocos que respondieron relativamente bien durante las etapas más agudas de la crisis, manteniendo su dinamismo a través del periodo 2007-2010, pero también por la velocidad de su deterioro económico y fiscal durante el bajón económico del 2011-2014, y la recesión subsecuente del 2015-2016. El contraste en el desempeño es espantoso cuando se observa la disminución en el crecimiento del producto interno bruto (PIB), el cual se redujo a la mitad de 4.6 por ciento anual durante el 2007-2010 ? cifra que posicionaba a Brasil cercano al tercio superior de países con mejores desempeños globales ? a 2.3 por ciento anual durante el 2011-2014, lo cual posicionó al país junto al bajo tercio de países, y finalmente culminó con un colapso acumulado de -7.2 por ciento de PIB en los años 2015-2016, la peor recesión en la historia del país". (...)
    Keywords: Expansión, austeridad, retos, riesgos, cambio, radical, política fiscal, Brasil
    Date: 2017–08
  63. By: Richard Grieveson (The Vienna Institute for International Economic Studies, wiiw); Julia Grübler (The Vienna Institute for International Economic Studies, wiiw); Mario Holzner (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: The European Commission has set a target date of 2025 for Western Balkan EU accession, while also outlining a broader new strategy which includes Brussels taking a more active role in solving political disputes in the region, and upgrading infrastructure as part of the Berlin Process. We welcome these moves economic underdevelopment in the region is closely tied to political fractures. Aside from resolving political conflicts, improved governance in the region will also be necessary. In terms of meeting economic accession criteria, the region faces a host of challenges, but we believe that a focus on upgrading infrastructure and developing a much bigger and more competitive industrial base should be the priorities. While the economic influence of third parties in the region is not as significant as often portrayed, this is not guaranteed to last, particularly in the case of China, which is set to increase its economic presence in the Western Balkans in the coming years. Even if the region takes a great leap forward towards the EU, there are other barriers in the way which could also hold back accession. Nevertheless, while the 2025 target represents a highly ambitious best-case scenario, it could serve as a powerful incentive for countries in the region to speed up their reform agendas. We do not completely rule out at least Montenegro and Serbia joining the bloc by 2025 or shortly thereafter.
    Keywords: integration, governance, economic growth, competitiveness, industrialisation, infrastructure, economic policy, Western Balkans, EU
    JEL: E60 F15 F21 F43 H54 O11 O14 O18 O20 O24
    Date: 2018–05
  64. By: Ohanian, Lee E. (Federal Reserve Bank of Minneapolis); Restrepo-Echavarria, Paulina (Federal Reserve Bank of St Louis); Wright, Mark L. J. (Federal Reserve Bank of Minneapolis)
    Abstract: After World War II, international capital flowed into slow-growing Latin America rather than fast-growing Asia. This is surprising as, everything else equal, fast growth should imply high capital returns. This paper develops a capital flow accounting framework to quantify the role of different factor market distortions in producing these patterns. Surprisingly, we find that distortions in labor markets — rather than domestic or international capital markets — account for the bulk of these flows. Labor market distortions that indirectly depress investment incentives by lowering equilibrium labor supply explain two-thirds of observed flows, while improvement in these distortions over time accounts for much of Asia’s rapid growth.
    Keywords: Capital flows; Labor markets; Domestic capital markets; International capital markets
    JEL: E21 F21 F41 J20
    Date: 2018–05–14

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