nep-mac New Economics Papers
on Macroeconomics
Issue of 2018‒08‒13
108 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Quantitative or qualitative forward guidance: Does it matter? By Gunda-Alexandra Detmers; Özer Karagedikli; Richhild Moessner
  2. Monetary Policy Lessons from the Greenbook By Michael T. Belongia; Peter N. Ireland
  3. Has inflation targeting become less credible? By Nathan Sussman; Osnat Zohar
  4. Bank Lending Standards, Loan Demand, and the Macroeconomy: Evidence from the Emerging Market Bank Loan Officer Survey By Sangyup Choi
  5. Fiscal Policy Shocks and Stock Prices in the United State By Mumtaz, Haroon; Theodoridis, Konstantinos
  6. Estimating a nonlinear new Keynesian model with the zero lower bound for Japan By Hirokuni Iiboshi; Mototsugu Shintani; Kozo Ueda
  7. Theory of catallactics, misapplication in monetary policy in developing economies and consequences By Tweneboah Senzu, Emmanuel
  8. From Taylor's Rule to Bernanke's Temporary Price Level Targeting By James Hebden; J. David Lopez-Salido
  9. Income Inequality, Financial Crises, and Monetary Policy By Isabel Cairo; Jae W. Sim
  10. Análisis del canal del crédito en presencia de racionamiento: Evidencia para Centroamérica y la República Dominicana By Jiménez Polanco, Miguel Alejandro; Ramírez de Leon, Francisco Alberto
  11. Euro Area unemployment insurance at the time of zero nominal interest rates By Guillaume Claveres; Jan Stráský
  12. A General Equilibrium Appraisal of Capital Shortfall By Eric Jondeau; Jean-Guillaume Sahuc
  13. Empirical assessment of alternative structural methods for identifying cyclical systemic risk in Europe By Jorge E. Galán; Javier Mencía
  14. NKPC-Based Inflation Forecasts with a Time-Varying Trend By Stephen McKnight; Alexander Mihailov; Fabio Rumler
  15. Central Bank Swap Lines By Saleem Bahaj; Ricardo Reis
  16. Inflation Risk Premia, Yield Volatility and Macro Factors By Andrea Berardi; Alberto Plazzi
  17. Risk Management-Driven Policy Rate Gap By Giovanni Caggiano; Efrem Castelnuovo; Gabriela Nodari
  18. Wealth Preference and Rational Bubbles By Jean-Baptiste Michau; Yoshiyasu Ono; Matthias Schlegl
  19. Stochastic discounting and the transmission of money supply shocks By Jaccard, Ivan
  20. Financial Intermediation, Capital Accumulation and Crisis Recovery By Hans Gersbach; Jean-Charles Rochet; Martin Scheffel
  21. How Do Expectations About the Macroeconomy Affect Personal Expectations and Behavior? By Christopher Roth; Johannes Wohlfart
  22. News-driven uncertainty fluctuations By Song, Dongho; Tang, Jenny
  23. Stabilising the Euro Area through unemployment benefits re-insurance scheme By Guillaume Claveres; Jan Stráský
  24. Attenuating the Forward Guidance Puzzle : Implications for Optimal Monetary Policy By Taisuke Nakata; Ryota Ogaki; Sebastian Schmidt; Paul Yoo
  25. The Forcasting Performance of Dynamic Factor Models with Vintage Data By Di Bonaventura, Luca; Forni, Mario; Pattarin, Francesco
  26. Fiscal implications of the ECB's public sector purchase programme (PSPP) By Lehment, Harmen
  27. Labor Market Dynamics in Developing Economies: the Role of Subsistence Consumption By SANGYUP CHOI; MYUNGKYU SHIM
  28. An Intermediation-Based Model of Exchange Rates By Semyon Malamud; Andreas Schrimpf
  29. Identification with external instruments in structural VARs under partial invertibility By Silvia Miranda Agrippino; Giovanni Ricco
  30. The financial transmission of housing bubbles: evidence from Spain By Alberto Martín; Enrique Moral-Benito; Tom Schmitz
  31. Speed Limit Policy and Liquidity Traps By Taisuke Nakata; Sebastian Schmidt; Paul Yoo
  32. The Rise and Fall of the Natural Interest Rate By Gabriele Fiorentini; Alessandro Galesi; Gabriel Pérez-Quirós; Enrique Sentana
  33. inflation-growth nexus in Botswana: Can lower inflation really spur growth in the country? By Mothuti, Gosego; Phiri, Andrew
  34. The rise and fall of the natural interest rate By Gabriele Fiorentini; Alessandro Galesi; Gabriel Pérez-Quirós; Enrique Sentana
  35. Imperfect Credibility versus No Credibility of Optimal Monetary Policy By Jean-Bernard Chatelain; Kirsten Ralf
  36. An Assessment of Association between Natural Resources Agglomeration and Unemployment in Pakistan By Ali, Amjad; Zulfiqar, Kalsoom
  37. An Improved LM Curve By Hiermeyer, Martin
  38. The likelihood of effective lower bound events By Michal Franta
  39. Of Gold and Paper Money By Jagjit S. Chadha
  40. Banks’ Trading after the Lehman Crisis – The Role of Unconventional Monetary Policy By Isabel Schnabel; Johannes Tischer
  41. Life below zero: bank lending under negative policy rates By Heider, Florian; Saidi, Farzad; Schepens, Glenn
  42. Limits to government debt sustainability in middle-income countries By Jean-Marc Fournier; Manuel Bétin
  43. Stabilizing an Unstable Complex Economy By Isabelle Salle; Pascal Seppecher
  44. The Shocks Matter: Improving our Estimates of Exchange Rate Pass-Through By Forbes, Kristin; Hjortsoe, Ida; Nenova, Tsvetelina
  45. A Macroeconomic Approach to the Term Premium By Emanuel Kopp; Peter D. Williams
  46. EMU reform and resilience in a re-dimensioned EU By Bongardt, Annette; Torres, Francisco
  47. International spillovers of quantitative easing By Kolasa, Marcin; Wesołowski, Grzegorz
  48. Intermittent Price Changes in Production Plants: Empirical Evidence Using Monthly Data By Øivind Anti Nilsen; Magne Vange
  49. Measuring risks to UK financial stability By Aikman, David; Bridges, Jonathan; Burgess, Stephen; Galletly, Richard; Levina, Iren; O'Neill, Cian; Varadi, Alexandra
  50. Cash in Circulation and the Shadow Economy: An Empirical Investigation for Euro Area Countries and Beyond By Franz Seitz; Hans-Eggert Reimers; Friedrich Schneider
  51. Existence, multiplicity and dynamic complexity in an OLG model with fiscal policy and debt By Lorenzo, Cerboni Baiardi; Ahmad, Naimzada;
  52. Analysis of shock transmissions to a small open emerging economy using a SVARMA model By Raghavan, Mala; Athanasopoulos, George
  53. Fitting Okun's law for the Swazi Kingdom: Will a nonlinear specification do? By Andrew Phiri
  54. Enhanced Fiscal Integration in the EMU? Proceedings of the joint workshop, organised by the European Commission, the European Stability Mechanism and the German Council of Economic Experts on 19 September 2017 By Ralph Schmitt-Nilson
  55. A Simple Algorithm for Solving Ramsey Optimal Policy with Exogenous Forcing Variables By Jean-Bernard Chatelain; Kirsten Ralf
  56. Asymmetry and Multiscale Dynamics in Macroeconomic Time Series Analysis By Habimana, Olivier
  57. Working Paper – WP/18/04- Monetary Policy Credibility and Exchange Rate Pass-Through in South Africa By Alain Kabundi; Montfort Mlachila
  58. Including unpaid household activities: An estimate of its impact on macro-economic indicators in the G7 economies and the way forward By Peter van de Ven; Jorrit Zwijnenburg; Matthew De Queljoe
  59. The Macroeconomic Effects of Fiscal Consolidation in Emerging Economies: Evidence from Latin America By Yan Carriere-Swallow; Antonio David; Daniel Leigh
  60. The Effects of Weather Shocks on Economic Activity: What are the Channels of Impact? By Sebastian Acevedo Mejia; Mico Mrkaic; Natalija Novta; Evgenia Pugacheva; Petia Topalova
  61. Macroprudential Modeling Based on Spin Dynamics in a Supply Chain Network By IKEDA Yuichi; YOSHIKAWA Hiroshi
  62. Caught in the Cycle: Economic Conditions at Enrollment and Labor Market Outcomes of College Graduates By Alena Bicakova; Guido Matias Cortes; Jacopo Mazza
  63. The International Transmission of Monetary Policy By Claudia M. Buch; Matthieu Bussière; Linda Goldberg; Robert Hills
  64. Short Term Inflation Determinants in Barbados By Gregorio Impavido
  65. Workers' reciprocity and the (ir)relevance of wage cyclicality for the volatility of job creation By Marco Fongoni
  66. Negative interest rates in Switzerland: what have we learned? By Jean-Pierre Danthine
  67. Engineering Crises: Favoritism and Strategic Fiscal Indiscipline By Gilles Saint-Paul; Davide Ticchi; Andrea Vindigni
  68. The Joint Distribution of Wealth and Income Risk: Evidence from Bern By Matthias Krapf
  69. Financing Ventures By Jeremy Greenwood; Pengfei Han; Juan M. Sanchez
  70. Jean-Michel Grandmont A forthcoming mind By Laurent Linnemer; Michael Visser
  71. How Costly Are Markups? By Chris Edmond; Virgiliu Midrigan; Daniel Yi Xu
  72. Aspects of economic governance in the Euro area: restoring internal and external balances By Christodoulakis, Nicos
  73. The Economic Limits of Bitcoin and the Blockchain By Eric Budish
  74. Sistem anggaran berbasis kinerja pada APBN di Indonesia perspektif ekonomi Islam By Jaelani, Aan
  75. Caught in the Cycle: Economic Conditions at Enrollment and Labor Market Outcomes of College Graduates By Alena Bicakova; Guido Matias Cortes; Jacopo Mazza
  76. Exchange Rate Pass-through to Domestic Prices in Thailand, 2000-2017 By Jiranyakul, Komain
  77. Monetary Policy and Inflation Dynamics in ASEAN Economies By Geraldine Dany-Knedlik; Juan Angel Garcia
  78. Toward a New Microfounded Macroeconomics in the Wake of the Crisis By Eugenio Caverzasi; Alberto Russo
  79. Fiscal Rules as Bargaining Chips By Facundo Piguillem; Alessandro Riboni
  80. Credit Supply and Housing Speculation By Atif Mian; Amir Sufi
  81. Transition drivers and crisis signaling in stock markets By Spelta, Alessandro; Pecora, Nicolò; Flori, Andrea; Pammolli, Fabio
  82. The Macroeconomic and Distributional Implications of Fiscal Consolidations in Low-income Countries By Adrian Peralta-Alva; Marina Mendes Tavares; Xuan S. Tam; Xin Tang
  83. Time-Dependency in Producers' Price Adjustments: Evidence from Micro Panel Data By Øivind Anti Nilsen; Per Marius Pettersen; Joakim Bratlie
  84. Revisiting the central bank's lender of last resort function By Joost Bats; Jan Willem van den End; John Thoolen
  85. Sovereign defaults: Evidence on the importance of government effectiveness By Jean-Marc Fournier; Manuel Bétin
  86. Outside the Box: Unconventional Monetary Policy in the Great Recession and Beyond By Kenneth N. Kuttner
  87. Why Has Economic Growth Slowed When Innovation Appears To Be Accelerating? By Gordon, Robert J
  88. Wealth inequality in the long run: A Schumpeterian growth perspective By Jakob B. Madsen; Antonio Minniti; Francesco Venturini
  89. I offer a macroeconomic perspective on the "Reserves for All" (RFA) proposal to let the general public use electronic central bank money. After distinguishing RFA from cryptocurrencies and relating the proposal to discussions about narrow banking and the abolition of cash I propose an equivalence result according to which a marginal substitution of outside for inside money does not affect macroeconomic outcomes. I identify key conditions on bank and government (central bank) incentives for equivalence and argue that these conditions likely are violated, implying that RFA would change macroeconomic outcomes. I also relate my analysis to common arguments in the discussion about RFA and point to inconsistencies and open questions. By Dirk Niepelt
  90. UK regional nowcasting using a mixed frequency vector autoregressive model By Gary Koop; Stuart McIntyre; James Mitchell
  91. El crecimiento del gasto del gobierno en Colombia: Una revisión empírica trimestral desde 1995 hasta 2017 de la hipótesis de Wagner By Juan Pablo Iglesias Ruano
  92. What Drives Output Volatility? The Role of Demographics and Government Size Revisited By Martin Iseringhausen; Hauke Vierke
  93. How Sensitive is Regional Poverty Measurement in Latin America to the Value of the Poverty Line? By Andrés Castañeda; Santiago Garriga; Leonardo Gasparini; Leonardo Lucchetti; Daniel Valderrama
  94. Effect of corporate governance on cost of equity before and after international financial reporting standard implementation By Chandra, Situmeang; Erlina, Erlina; Maksum, Azhar; Supriana, Tavi
  95. CAP and Monetary Policy By Carl Duisberg
  96. Macroeconomic Imbalances and the Euro Zone. Alternative Views By Roberto Tamborini
  97. Does Monetary Policy Impact Market Integration? Evidence from Developed and Emerging Markets By Matteo Burzoni; Frank Riedel; H. Mete Soner
  98. Clustering Macroeconomic Time Series By Iwo Augusty\'nski; Pawe{\l} Lasko\'s-Grabowski
  99. The banking systems of Germany, the UK and Spain form a spatial perspective: The German case By Flögel, Franz; Gärtner, Stefan
  100. The banking systems of Germany, the UK and Spain form a spatial perspective: The UK case By Flögel, Franz; Gärtner, Stefan
  101. Bitcoin Bubble Trouble By Jerome L Kreuser; Didier Sornette
  102. An Open Economy Quarterly Projection Model for Sri Lanka By Chandranath Amarasekara; Rahul Anand; Kithsiri Ehelepola; Hemantha Ekanayake; Vishuddhi Jayawickrema; Sujeetha Jegajeevan; Csaba Kober; Tharindi Nugawela; Sergey Plotnikov; Adam Remo; Poongothai Venuganan; Rasika Yatigammana
  103. MPC Heterogeneity and Household Balance Sheets By Andreas Fagereng; Martin B. Holm; Gisle James Natvik
  104. Apologia Pro Vita Sua:The Vanishing of the White Whale in the Mists By Martin Shubik
  105. Bringing Tax Avoiders to Light: Moral Framing and Shaming in a Public Goods Experiment By Tsikas, Stefanos A.; Wagener, Andreas
  106. Heterogeneous Effects of Unconventional Monetary Policy on Loan Demand and Supply. Insights from the Bank Lending Survey By Martin Guth
  107. Does time-variation matter in the stochastic volatility components for G7 stock returns By Afees A. Salisu; Ahamuefula Ephraim Ogbonna
  108. Determinants of U.S. Business Investment By Emanuel Kopp

  1. By: Gunda-Alexandra Detmers; Özer Karagedikli; Richhild Moessner
    Abstract: Is publishing central bank projections of the policy rate a better way of managing market expectations than with written statements, and does it lead to overreactions by markets? To answer this, we use a quasi-experiment from the policy announcements of the Reserve Bank of New Zealand (RBNZ). Every monetary policy decision by the RBNZ is accompanied by a written statement about the state of the economy and the policy outlook, but only every second decision is accompanied by a published interest rate forecast. We exploit this difference in the information accompanying decisions to study the relative influences of qualitative and quantitative forward guidance. We find that the information releases have significant effects on asset prices regardless of the nature of the communication (quantitative or qualitative). Announcements that include an interest rate projection lead to very similar market reactions across the yield curve as announcements that only include written statements. This control-treatment approach suggests that earlier studies may overstate the effects of publishing interest rate forecasts on market prices: it is not only the interest rate forecasts that markets react to, as they seem to infer similar forward guidance from written statements. We interpret our results as implying that central bank communication is important, but that the exact form of that communication is less critical. Our results also suggest that market participants understand the conditional nature of the RBNZ interest rate forecasts, and that concerns that markets read these forecasts as binding promises are unwarranted.
    Keywords: Monetary policy, forward guidance, interest rate forecasts.
    JEL: E43 E44 E52 E58 G12
    Date: 2018–08
  2. By: Michael T. Belongia (University of Mississippi); Peter N. Ireland (Boston College)
    Abstract: From 1987 through 2012, the Federal Open Market Committee appears to have set its federal funds rate target with reference to Greenbook forecasts of the output gap and inflation and to have made further adjustments to the funds rate as those forecasts were revised. If viewed in the context of the Taylor (1993) Rule, discretionary departures from the settings prescribed by a Greenbook forecast-based version of the rule consistently presage business cycle turning points. Similarly, estimates from an interest rate rule with time-varying parameters imply that, around such turning points, the FOMC responds less vigorously to information contained in Greenbook forecasts about the changing state of the economy. These results suggest possible gains from closer adherence to a rule with constant parameters. Other statistical properties of Greenbook forecasts also point to an overlooked role for monetary aggregates, particularly Divisia monetary aggregates, in the Federal Reserve's forecasting process and subsequent monetary policy decisions made by the FOMC.
    Keywords: Greenbook forecasts, Taylor Rule, Time-varying parameters, Divisia monetary aggregates
    JEL: E31 E32 E37 E43 E47 E51 E52 E58 E65
    Date: 2018–07–01
  3. By: Nathan Sussman; Osnat Zohar
    Abstract: Beginning with the global financial crisis (2008) the correlation between crude oil prices and medium-term and forward inflation expectations increased leading to fears of their un-anchoring. Using the first principal component of commodity prices as a measure for global aggregate demand, we decompose nominal oil prices to a global demand factor and remaining factors. Using a Phillips Curve framework we find a structural change after the collapse of Lehman Brothers when inflation expectations reacted more strongly to global aggregate demand conditions embedded in oil prices. Within this framework we cannot reject the hypothesis that expectations remained anchored.
    Keywords: inflation targeting, inflation expectations, monetary policy, oil prices, anchoring, credibility
    JEL: E52 E58 E31 E32
    Date: 2018–06
  4. By: Sangyup Choi (Yonsei University)
    Abstract: Despite renewed interest spurred by the global financial crisis, identifying a bank loan supply shock from demand-side factors remains challenging. While existing sigh-restriction studies often rely on the bank lending rate and the loan volume to identify a loan supply shock, they implicitly assume that the observed interest rate always equates supply and demand for loans. Using bank loan officer survey from eight emerging market economies (EMEs), I document a distinct cyclical pattern of bank lending standards and loan demand in the EMEs from that in the U.S. or the Euro area. Using quarterly Korean data, I demonstrate that a conventional sign-restriction approach could result in a misguided interpretation of credit slowdown when credit rationing or non-price lending terms exist. To resolve this issue, I propose an alternative identifying scheme by exploiting the information from bank loan officer survey and find that a negative loan supply shock has a strong adverse effect on output, followed by a decline in inflation and the policy rate.
    Keywords: Bank loan officer survey, Sign-restriction VARs, Bank lending shocks, Emerging market economies, Credit market imperfections
    JEL: E32 E44 E51
    Date: 2018–07
  5. By: Mumtaz, Haroon (Queen Mary University); Theodoridis, Konstantinos (Cardiff Business School)
    Abstract: This paper uses a range of structural VARs to show that the response of US stock prices to fiscal shocks changed in 1980. Over the period 1955-1979 an expansionary spending or revenue shock was associated with modestly higher stock prices. After 1980, along with a decline in the fiscal multiplier, the response of stock prices to the same shock became negative. We use an estimated DSGE model to show that this change is consistent with a switch from an economy characterised by a more active fiscal policy and passive monetary policy to one where fiscal policy was passive and the central bank acted aggressively in response to inflationary shocks.
    Keywords: Fiscal policy shocks, Stock prices, VAR, DSGE.
    JEL: C5 E1 E5 E6
    Date: 2018–08
  6. By: Hirokuni Iiboshi; Mototsugu Shintani; Kozo Ueda
    Abstract: We estimate a small-scale nonlinear DSGE model with the zero lower bound (ZLB) of the nominal interest rate for Japan, where the ZLB has constrained the country’s monetary policy for a considerably long period. We employ the time iteration with linear interpolation method to solve equilibrium and then estimate the model by using the Sequential Monte Carlo Squared method. Results of estimation suggest that (1) the Bank of Japan has been conducting monetary policy that depends on the lagged notional interest rate rather than the lagged actual interest rate and that (2) the estimated series of the natural rate of interest moves very closely to those based on the model without the ZLB.
    Keywords: Bayesian inference, DSGE model, Particle filter, SMC
    JEL: C11 C13 C61 C63 E31 E43 E52
    Date: 2018–08
  7. By: Tweneboah Senzu, Emmanuel
    Abstract: The paper strive to solve, a specific macroeconomic error that emerge in the dispensing of the monetary policy by the Central Banks of Africa. As a result unable to address the desired economic growth monetarily, when quality fiscal policy is consolidated. It therefore propound a model assumed to be effective in ensuring a realistic health status of an economy, very friendly to developing countries as a theoretical prospective.
    Keywords: monetary economics, monetary policy, fiscal policy, macroeconomics, development theory
    JEL: E2 E5 E52 E58
    Date: 2018–06–27
  8. By: James Hebden; J. David Lopez-Salido
    Abstract: Bernanke's strategies for integrating forward guidance into conventional instrument rules anticipate that effective lower bound (ELB) episodes may become part a regular occurrence and that monetary policy should recognize this likelihood (Bernanke (2017a); Bernanke (2017b)). Bernanke's first proposal is a form of flexible temporary price level targeting (TPLT), in which a lower-for-longer policy path is prescribed through a “shadow rate”. This shadow rate accounts for cumulative shortfalls in inflation and output relative to exogenous trends, and the policy rate is kept at the ELB until the joint shortfall is made up. Bernanke's second proposal adds only the cumulative inflation shortfall since the beginning of an ELB episode directly to an otherwise standard Taylor rule. This cumulative shortfall in inflation from the 2 percent objective can be restated in terms of deviations of the price level from a price level target that increases at 2 percent annually. We evaluate the performance of these strategies, which we call Bernanke's TPLT rules, using a small version of the FRB/US model. We then optimize these rules, computing efficient policy frontiers that trace out the best (minimum) obtainable combinations of output and inflation volatility given the effective lower bound constraint on the policy rate. The results suggest that Bernanke's rules give better macroeconomic outcomes than most of the other rules considered in the literature (including Taylor (1993) and Taylor (1999)) by stabilizing inflation and unemployment during severe recessions. Under these TPLT strategies, when the policy rate is made more responsive to shortfalls in inflation, the the likelihood of below-target inflation occurring alongside high unemployment rates decreases. However, the probability of an overheated economy, with temporarily above-target inflation and low unemployment rate, increases.
    Keywords: Taylor rule ; History-dependent policy ; Price level targeting ; Zero lower bound
    JEL: E32 E52 E58
    Date: 2018–07–19
  9. By: Isabel Cairo; Jae W. Sim
    Abstract: We construct a general equilibrium model in which income inequality results in insufficient aggregate demand, deflation pressure, and excessive credit growth by allocating income to agents featuring low marginal propensity to consume, and if excessive, can lead to an endogenous financial crisis. This economy generates distributions for equilibrium prices and quantities that are highly skewed to the downside due to financial crises and the liquidity trap. Consequently, symmetric monetary policy rules designed to minimize fluctuations around fixed means become inefficient. A simultaneous reduction in inflation volatility and mean unemployment rate is feasible when an asymmetric policy rule is adopted.
    Keywords: Monetary policy ; Credit ; Financial crises ; Income inequality
    JEL: E32 E44 E52 G01
    Date: 2018–07–19
  10. By: Jiménez Polanco, Miguel Alejandro; Ramírez de Leon, Francisco Alberto
    Abstract: This paper analyses the determinants of private credit and its link with monetary policy, for the economies of Central America and the Dominican Republic (CADR), during the period 2006 - 2017. Using disequilibrium models, we estimate supply and demand functions in order to characterize episodes of credit crunches. We find evidence of credit rationing for the economies under study in the aforementioned period, with the exception of Guatemala. Additionally, taking into consideration this evidence, we inquire about the existence of a transmission mechanism of the monetary policy through the credit channel for each one of the CADR economies. In particular, by incorporating the information regarding the demand and supply of private credit, we verify that a contractionary monetary policy shock reduces the amount of available credit (supply) in the economy, in parallel with the contraction of Gross Domestic Product and inflation. These results relating to the credit channel are observed for all the economies considered, with the exception of Costa Rica.
    Keywords: Private Credit, Rationing, Credit Crunches, Transmission Mechanisms, Monetary Policy, Central America, Dominican Republic
    JEL: E44 E51 E52 G21
    Date: 2018–01–01
  11. By: Guillaume Claveres; Jan Stráský
    Abstract: The discussion about a fiscal stabilisation capacity as a way of providing more fiscal integration in the euro area has strengthened in the aftermath of the European sovereign debt crisis. Among the instruments that can be used for temporary macroeconomic stabilisation in the presence of both asymmetric and area-wide shocks, a euro area unemployment insurance scheme has attracted increased attention. We build a two-region DSGE model with supply, demand and labour market frictions and introduce in it an area-wide unemployment insurance scheme that is entitled to borrow in financial markets. The model is calibrated to the euro area core and periphery data. For a country-specific negative demand shock hitting the periphery, we find the scheme to reduce the drop in Periphery output by about one fifth and the drop in union output by about a third. The scheme is effective when some households are cut from financial markets, and even more so when the national government also loses market access.
    Keywords: fiscal union, search and matching, Unemployment insurance, zero lower bound
    JEL: E32 E52 E63 J65
    Date: 2018–08–03
  12. By: Eric Jondeau (University of Lausanne and Swiss Finance Institute); Jean-Guillaume Sahuc (Banque de France, Université Paris Ouest - Nanterre, and La Défense - EconomiX)
    Abstract: We quantify the capital shortfall that results from a global financial crisis by using a macro-finance dynamic stochastic general equilibrium model that captures the interactions between the financial and real sectors of the economy. We show that a crisis similar to that observed in 2008 generates a capital shortfall (or stressed expected loss, SEL) equal to 2.8% of euro-area GDP, which corresponds to approximately 250 billion euros. We also find that using a cycle-dependent capital ratio that combines concern for both credit growth and SEL has a positive effect on output growth while mitigating the excessive risk taking of the banking system. Finally, our estimates confirm that most of the variability of the macroeconomic and financial variables at business cycle frequencies is due to investment and risk shocks.
    Keywords: Capital Shortfall, Systemic Risk, Leverage, Financial system, Euro Area, DSGE Model
    JEL: E32 E44 G01 G21
    Date: 2018–02
  13. By: Jorge E. Galán (Banco de España); Javier Mencía (Banco de España)
    Abstract: The credit-to-GDP gap, as proposed by the Basel methodology, has become the reference measure for the activation of the Countercyclical Capital Buffer (CCyB) due to its simplicity and good predictive power for future systemic crises. However, it presents several shortcomings that could lead to suboptimal decisions in many countries if it were used as an automatic rule for the activation of the CCyB. We study to what extent the purely statistical nature of the Basel methodology is responsible for these undesired effects by considering potential complementary credit gap measures that incorporate economic fundamentals. Specifically, we analyse the performance of two alternative (semi-) structural models that may account for these factors. We assess the proposed measures using time series data from the 70’s for six European countries and compare them to the Basel gap. We find that the proposed models provide more accurate early warning signals of the build-up of cyclical systemic risk than the Basel gap, as well as lower upward and downward biases after rapid changes in fundamentals. Nonetheless, results evidence heterogeneity in the ability from different models and specifications across countries to forewarn about future crises. This result evidences the differences in the financial cycles and their drivers across countries, and shows the importance in macroprudential policy of considering flexible approaches that adapt to national specificities.
    Keywords: Credit imbalances, cyclical systemic risk, early-warning models, macroprudential policy, model-based indicators.
    JEL: C32 E32 E58 G01 G28
    Date: 2018–08
  14. By: Stephen McKnight (El Colegio de México); Alexander Mihailov (University of Reading); Fabio Rumler (Oesterreichische Nationalbank)
    Abstract: Does theory aid inflation forecasting? This paper develops a forecasting procedure based upon a generalized New Keynesian Phillips Curve that in- corporates time-varying trend inflation. Using quarterly data for the Euro Area and the United States over the period 1970-2015, we decompose infla- tion into trend and cyclical components and generate theory-implied predic- tions for both, which are recombined to obtain an overall inflation forecast. We find that our forecasting procedure outperforms in predictive accuracy the conventional random walk benchmark at all horizons considered (up to 20 quarters). Moreover, it also outperforms quantitatively the agnos- tic Atkeson-Ohanian (2001) benchmark that previous studies have found dificult to beat.
    Keywords: time-varying trend, generalized New Keynesian Phillips Curve, inflation dynamics, inflation forecasts, predictive accuracy
    JEL: C53 D43 E31 E37 F41 F47
    Date: 2018–07
  15. By: Saleem Bahaj; Ricardo Reis
    Abstract: Swap lines between advanced-economy central banks are a new important part of the global financial architecture. This paper analyses their monetary policy effects from three perspectives. First, from the perspective of the central banks, it shows that the swap line mimics discount-window credit from the source central bank to the recipient-country banks using the recipient central bank as the bearer of the credit risk. Second, from the perspective of the transmission of monetary policy, it shows that the swap-line rate puts a ceiling on deviations from covered interest parity, and finds evidence for it in the data. Third, from the perspective of the macroeconomic effects of policy, it shows that the swap line ex ante encourages inflows from recipient-country banks into assets denominated in the source-country’s currency by reducing the ex post funding risk. We find support for these predictions using difference-in-difference empirical strategies that exploit the fact that only some currencies saw changes in the terms of their dollar swap line, only some bonds in banks’ investments are exposed to dollar funding risk, only some dollar bonds are significantly traded by foreign banks, and only some banks have a significant U.S. presence.
    Keywords: liquidity facilities, currency basis, bond portfolio flows
    JEL: E44 F33 G15
    Date: 2018
  16. By: Andrea Berardi (Ca Foscari University of Venice); Alberto Plazzi (University of Lugano and Swiss Finance Institute)
    Abstract: We incorporate a latent stochastic volatility factor and macroeconomic expectations in an affine model for the term structure of nominal and real rates. We estimate the model over 1999-2016 on U.S. data for nominal and TIPS yields, the realized and implied volatility of T-bonds and survey forecasts of GDP growth and inflation. We find relatively stable inflation risk premia averaging at 40bps at the long-end, and which are strongly related to the volatility factor and conditional mean of output growth. We also document real risk premia that turn negative in the post-crisis period, and a non-negligible variance risk premium.
    Keywords: Term Structure, Inflation Risk Premia, TIPS, Yield Volatility, Macro Factors
    JEL: G12 E43 E44 C58
    Date: 2018–01
  17. By: Giovanni Caggiano (University of Padova); Efrem Castelnuovo (University of Padova); Gabriela Nodari (Reserve Bank of Australia)
    Abstract: We employ real-time data available to the US monetary policy makers to estimate a Taylor rule augmented with a measure of financial uncertainty over the period 1969-2008. We find evidence in favor of a systematic response to financial uncertainty over and above that to expected inflation, output gap, and output growth. However, this evidence regards the Greenspan-Bernanke period only. Focusing on this period, the "risk-management" approach is found to be responsible for monetary policy easings for up to 75 basis points of the federal funds rate.
    Keywords: Risk management-driven policy rate gap, uncertainty, monetary policy, Taylor rules, real-time data
    JEL: C2 E4 E5
    Date: 2018–07
  18. By: Jean-Baptiste Michau; Yoshiyasu Ono; Matthias Schlegl
    Abstract: We consider a neoclassical economy where households derive utility from holding wealth. We show that, under some conditions, there can be rational bubbles. Hence, we provide a microfoundation for bubbles that relies on a frictionless infinite-horizon economy without any heterogeneity across households. While our bubbly equilibria are very similar to those obtained by Tirole (1985) in an overlapping generation economy, the underlying economics is different. Turning to public debt, we show that Ponzi schemes can be sustainable. Hence, in general, the limit on the accumulation of public debt by the government is not given by its no-Ponzi condi-tion but, instead, by the representative household’s transversality condition. The Ricardian equivalence must hold in any of our equilibria. Finally, in the presence of money, the real equilibrium structure of the economy remains unchanged. We carefully investigate the effects of helicopter drops of money on the possibility of Ponzi schemes and of speculative hyperinflation or deflation.
    Keywords: Ponzi scheme, rational bubble, wealth preference
    JEL: E13 E44 G12
    Date: 2018
  19. By: Jaccard, Ivan
    Abstract: This paper studies the effects of money supply shocks in a general equilibrium model that reproduces a term premium of the magnitude observed in the data. In an environment where financial frictions are the main source of monetary non-neutrality, I find that money supply shocks are less effective at stimulating inflation in recessions than in expansions. In terms of quantitative magnitude, the impact effect on inflation of a money supply shock is about half as large during recessions than during booms. This state dependence is essentially due to the time-variation in stochastic discounting that is needed to match the data. JEL Classification: E31, E44, E58
    Keywords: bond premium puzzle, euro zone economy, financial frictions, time-varying risk aversion
    Date: 2018–08
  20. By: Hans Gersbach (ETH Zurich, IZA Institute of Labor Economics, CESifo (Center for Economic Studies and Ifo Institute), and Centre for Economic Policy Research (CEPR)); Jean-Charles Rochet (University of Zurich, University of Toulouse I, and Swiss Finance Institute); Martin Scheffel (University of Cologne)
    Abstract: This paper integrates banks into a two-sector neoclassical growth model to account for the fact that a fraction of firms relies on banks to finance their investments. There are four major contributions to the literature. First, although banks’ leverage amplifies shocks, the endogenous response of leverage to shocks is an automatic stabilizer that improves the resilience of the economy. In particular, financial and labor market institutions are essential factors that determine the strength of this automatic stabilization. Second, there is a mix of publicly financed bank re-capitalization, dividend payout restrictions, and consumption taxes that stimulates a Pareto-improving rapid build-up of bank equity and accelerates economic recovery after a slump in the banking sector. Third, the model replicates typical patterns of financing over the business cycle: procyclical bank leverage, procyclical bank lending, and countercyclical bond financing. Fourth, the framework preserves its analytical tractability wherefore it can serve as a macro-banking module that can be easily integrated into more complex economic environments.
    Keywords: Financial Intermediation, Capital Accumulation, Banking Crisis, Macroeconomic Shocks, Business Cycles, Bust-Boom Cycles, Managing Recoveries
    JEL: E21 E32 F44 G21 G28
    Date: 2018–01
  21. By: Christopher Roth; Johannes Wohlfart
    Abstract: Using a representative online panel from the US, we examine how individuals’ macroeconomic expectations causally affect their personal economic prospects and their behavior. To exogenously vary respondents’ expectations we provide them with different professional forecasts about the likelihood of a recession. Respondents update their aggregate economic outlook in response to the forecasts, extrapolate to expectations about their personal economic circumstances and adjust their consumption behavior and stock purchases. Extrapolation to expectations about personal unemployment is driven by individuals with higher exposure to macroeconomic risk, consistent with sticky information models in which people are inattentive, but understand how the economy works.
    Keywords: expectation formation, information, updating, aggregate uncertainty, macroeconomic conditions
    JEL: D12 D14 D83 D84 E32 G11
    Date: 2018
  22. By: Song, Dongho (Boston College); Tang, Jenny (Federal Reserve Bank of Boston)
    Abstract: We embed a news shock, a noisy indicator of the future state, in a two-state Markov-switching growth model. Our framework, combined with parameter learning, features rich history-dependent uncertainty dynamics. We show that bad news that arrives during a prolonged economic boom can trigger a “Minsky moment”—a sudden collapse in asset values. The effect is greatly amplified when agents have a preference for early resolution of uncertainty. We leverage survey recession probability forecasts to solve a sequential learning problem and estimate the full posterior distribution of model primitives. We identify historical periods in which uncertainty and risk premia were elevated because of news shocks.
    Keywords: Bayesian learning; discrete environment; Minsky moment; news shocks; recursive utility; risk premium; survey forecasts; uncertainty
    JEL: C11 E32 E37 G12
    Date: 2018–01–01
  23. By: Guillaume Claveres; Jan Stráský
    Abstract: The paper examines the possible design and macroeconomic stabilisation properties of a euro area unemployment benefits re-insurance scheme using annual historical data from 2000 to 2016. The scheme we propose is similar in some aspects to the recent proposals, including the IMF’s paper on the central fiscal capacity, while preserving important re-insurance characteristics, such as experience rating and caps on cumulative balances. Counterfactual simulations for individual euro area countries suggest that the scheme, at the cost of average annual contributions of 0.17% of national GDP, could have (i) provided additional macroeconomic stabilisation in the financial crisis of 2009-2013, both at the euro area level and at the level of individual countries hit by the crisis, and (ii) avoided permanent transfers among countries.
    Keywords: fiscal integration, Macroeconomic stabilisation, risk-sharing, transfer scheme
    JEL: E61 E62 F42 H87
    Date: 2018–08–03
  24. By: Taisuke Nakata; Ryota Ogaki; Sebastian Schmidt; Paul Yoo
    Abstract: We examine the implications of less powerful forward guidance for optimal policy using a sticky-price model with an effective lower bound (ELB) on nominal interest rates as well as a discounted Euler equation and Phillips curve. When the private-sector agents discount future economic conditions more in making their decisions today, an announced cut in future interest rates becomes less effective in stimulating current economic activity. While the implication of such discounting for optimal policy depends on its degree, we find that, under a wide range of plausible degrees of discounting, it is optimal for the central bank to compensate for the reduced effect of a future rate cut by keeping the policy rate at the ELB for longer.
    Keywords: Discounted euler equation ; Discounted phillips curve ; Effective lower bound ; Forward guidance ; Optimal policy
    JEL: E52 E58 E61
    Date: 2018–07–19
  25. By: Di Bonaventura, Luca; Forni, Mario; Pattarin, Francesco
    Abstract: We present a comparative analysis of the forecasting performance of two dynamic factor models, the Stock and Watson (2002a, b) model and the Forni, Hallin, Lippi and Reichlin (2005) model, based on vintage data. Our dataset contains 107 monthly US "first release" macroeconomic and financial vintage time series, spanning the 1996:12 to 2017:6 period with monthly periodicity, extracted from the Bloomberg database†. We compute real-time one-month-ahead forecasts with both models for four key macroeconomic variables: the month-on-month change in industrial production, the unemployment rate, the core consumer price index and the ISM Purchasing Managers' Index. First, we find that both the Stock and Watson and the Forni, Hallin, Lippi and Reichlin models outperform simple autoregressions for industrial production, unemployment rate and consumer prices, but that only the first model does so for the PMI. Second, we find that neither models always outperform the other. While Forni, Hallin, Lippi and Reichlin's beats Stock and Watson's in forecasting industrial production and consumer prices, the opposite happens for the unemployment rate and the PMI.
    Keywords: Dynamic factor models; First release data; Forecasting; Forecasting Performance; Vintage data
    JEL: C01 C32 C52 C53 E27 E37
    Date: 2018–07
  26. By: Lehment, Harmen
    Abstract: The large Public Sector Purchase Programme (PSPP) which the ECB started in 2015 on the basis of monetary policy purposes, had major side-effects on fiscal policy. One concerns the programme's uncommon seigniorage effects. We find that the PSPP not only led to partly negative seigniorage gains, but also produced super-seigniorage gains resulting from negative interest rates on the excess reserves which have been created by the programme. Another effect of the PSPP is its interference with fiscal debt management, thereby making fiscal budgets more vulnerable to changes in short-term interest rates. We also find that the experience with the PSPP suggests that fiscal policy should prepare for a greater role in fighting future recessions.
    Keywords: central bank asset purchases,seigniorage gains,debt management,monetary-fiscal cooperation
    JEL: E5 E6 H6
    Date: 2018
  27. By: SANGYUP CHOI (Yonsei University); MYUNGKYU SHIM (Sogang University)
    Abstract: Motivated by the recent empirical evidence on a strong negative relationship between the income level and hours worked across countries (Bick, Fuchs-Schundeln, and Lagakos (2018)), this paper establishes new stylized facts on labor market dynamics in developing economies. First, the response of hours worked (and employment) to a permanent technology shock- identified by a structural VAR model with long-run restrictions- is smaller in developing economies than in advanced economies. Second, the level of income per capita is strongly and robustly associated with the relative variability of hours worked and consumption to output across countries. We build a simple RBC model augmented with subsistence consumption to explain the set of new empirical findings. The minimal departure from a standard RBC model allows us to account for the salient features of business cycle fluctuations in developing economies, including their distinct labor market dynamics.
    Keywords: Business cycles; Developing economies; Subsistence consumption; Labor market dynamics; Long-run restrictions
    JEL: E21 E32 F44 J20
    Date: 2018–08
  28. By: Semyon Malamud (Ecole Polytechnique Federale de Lausanne, Centre for Economic Policy Research (CEPR), and Swiss Finance Institute); Andreas Schrimpf (Bank for International Settlements (BIS))
    Abstract: We develop a general equilibrium model of decentralized international financial markets. In our model, financial intermediaries bargain with their customers and extract endogenous rents for providing access to foreign claims. The behavior of intermediaries, by tilting state prices, generates a non-linear risk structure in exchange rates. We use this risk structure to explicitly derive (i) a link between monetary and stabilization policies and safe haven properties of exchange rates; (ii) the global monetary spillover matrix; and (iii) deviations from covered interest rate parity (CIP), and show how all these effects depend on expectations about future monetary and stabilization policies.
    Keywords: exchange rates, dollar, covered interest parity deviations, currency skew, currency crashes
    JEL: E44 E52 F31 F33 G13 G15 G23
    Date: 2018–03
  29. By: Silvia Miranda Agrippino (Bank of England); Giovanni Ricco (Observatoire français des conjonctures économiques)
    Abstract: This paper discusses the conditions for indentification with external instruments in Structural VARs under partial invertibility. We observe that in this case the shocks of interest and their effects can be recovered using an external instrument, provided that a condition of limited lag exogeneity holds. This condition is weaker than that required for LP-IV, and allows for recoverability of impact effects also une VAR misspecification. We assess our claims in a simulated environment, and provide an emirical application to the relevant cas of identification of monetary policy shocks.
    Keywords: Identification with external instruments; Structural VAR; Invertibility; Monetary Policy Shocks
    JEL: C3 C32 E30 E52
    Date: 2018–07
  30. By: Alberto Martín (Crei, universitat pompeu fabra and Barcelona GSE); Enrique Moral-Benito (Banco de España); Tom Schmitz (Bocconi university and IGIER)
    Abstract: What are the effects of a housing bubble on the rest of the economy? We show that if firms and banks face collateral constraints, a housing bubble initially raises credit demand by housing firms while leaving credit supply unaffected. It therefore crowds out credit to non-housing firms. If time passes and the bubble lasts, however, housing firms eventually pay back their higher loans. This leads to an increase in banks’ net worth and thus to an expansion in their supply of credit to all firms: crowding-out gives way to crowding-in. These predictions are confirmed by empirical evidence from the recent Spanish housing bubble. In the early years of the bubble, non-housing firms reduced their credit from banks that were more exposed to the bubble, and firms that were more exposed to these banks had lower credit and output growth. In its last years, these effects were reversed.
    Keywords: housing bubble, credit, investment, financial frictions, financial transmission, Spain
    JEL: E32 E44 G21
    Date: 2018–07
  31. By: Taisuke Nakata; Sebastian Schmidt; Paul Yoo
    Abstract: The zero lower bound (ZLB) constraint on interest rates makes speed limit policies (SLPs)---policies aimed at stabilizing the output growth---less effective. Away from the ZLB, the history dependence induced by a concern for output growth stabilization improves the inflation-output tradeoff for a discretionary central bank. However, in the aftermath of a deep recession with a binding ZLB, a central bank with an objective for output growth stabilization aims to engineer a more gradual increase in output than under the standard discretionary policy. The anticipation of a more restrained recovery exacerbates the declines in inflation and output when the lower bound is binding.
    Keywords: Liquidity traps ; Markov-perfect equilibrium ; Speed limit policy ; Zero lower bound
    JEL: E52 E61
    Date: 2018–07–19
  32. By: Gabriele Fiorentini (Università di Firenze, Italy; Rimini Centre for Economic Analysis); Alessandro Galesi (Banco de España, Spain); Gabriel Pérez-Quirós (Banco de España, Spain); Enrique Sentana (CEMFI, Spain)
    Abstract: We document a rise and fall of the natural interest rate (r^*) for several advanced economies, which starts increasing in the 1960’s and peaks around the end of the 1980’s. We reach this conclusion after showing that the Laubach and Williams (2003) model cannot estimate r^* accurately when either the IS curve or the Phillips curve is flat. In those empirically relevant situations, a local level specification for the observed interest rate can precisely estimate r^*. An estimated Panel ECM suggests that the temporary demographic effect of the young baby-boomers mostly accounts for the rise and fall.
    Keywords: Natural rate of interest, Kalman filter, Observability, Demographics
    JEL: E43 E52 C32
    Date: 2018–07
  33. By: Mothuti, Gosego; Phiri, Andrew
    Abstract: Does inflation affect economic growth in Botswana over the short-run and long-run? In applying bounds procedure for modelling ARDL cointegation effects applied to empirical data collected between 1975 and 2016 we find that this hypothesis does not hold true for Botswana as inflation is found to be insignificantly related with economic growth over both the short and long-run. Our growth equation estimates point to exports (positive), government size (negative) and an Pula/Dollar exchange rate (negative) as being significantly correlated with steady-state GDP growth. Further empirical exercises show that an appreciated Pula/dollar exchange rate increases inflation whilst bearing no effect on economic growth. Conversely, a depreciated Pula/Dollar exchange simultaneously decreases inflation and economic growth for the Botswana economy. Policymakers should be this aware that attainment of lower inflation rates which occurs through a depreciated Pula/Dollar currency will only retard economic growth.
    Keywords: Inflation; Economic growth; Exchange rates; Bank of Botswana; Nonlinear autoregressive distributive lag (N-ARDL) model.
    JEL: C13 C32 C52 E31 F43
    Date: 2018–06–20
  34. By: Gabriele Fiorentini (Università di Firenze); Alessandro Galesi (Banco de España); Gabriel Pérez-Quirós (Banco de España); Enrique Sentana (CEMFI)
    Abstract: We document a rise and fall of the natural interest rate (r*) for several advanced economies, which starts increasing in the 1960’s and peaks around the end of the 1980’s. We reach this conclusion after showing that the Laubach and Williams (2003) model cannot estimate r* accurately when either the IS curve or the Phillips curve is fl at. In those empirically relevant situations, a local level specifi cation for the observed interest rate can precisely estimate r*. An estimated Panel ECM suggests that the temporary demographic effect of the young baby-boomers mostly accounts for the rise and fall.
    Keywords: natural rate of interest, Kalman fi lter, observability, demographics.
    JEL: E43 E52 C32
    Date: 2018–07
  35. By: Jean-Bernard Chatelain (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)
    Abstract: When the probability of not reneging commitment of optimal monetary policy under quasi-commitment tends to zero, the limit of this equilibrium is qualitatively and quantitatively different from the discretion equilibrium assuming a zero probability of not reneging commitment for the classic example of the new-Keynesian Phillips curve. The impulse response functions and welfare are different. The policy rule parameter have opposite signs. The inflation auto-correlation parameter crosses a saddlenode bifurcation when to near-zero to zero probability of not reneging commitment. These results are obtained for all values of the elasticity of substitution between goods in monopolistic competition which enters in the welfare loss function and in the slope of the new-Keynesian Phillips curve.
    Keywords: Ramsey optimal policy under imperfact commitment,zero-credibility policy,Impulse response function,Welfare,New-Keynesian Phillips curve, zero-,credibility policy, Impulse response function, Welfare, New-Keynesian Phillips,curve
    Date: 2018–07
  36. By: Ali, Amjad; Zulfiqar, Kalsoom
    Abstract: Mostly economists believe that due to nonexistence of agglomeration economies, there are less chances of employment spatial distribution in an economy. Following the strands of previous literature about agglomeration special impacts, this study has uplifted the curtain from some interesting realities. This study has examined the association unemployment between natural resources agglomeration in Pakistan from 1980 to 2016. For measuring natural resources agglomeration, an index has been constructed based on coal production, oil production, forest area and agricultural land as percentage of total land area. The study has utilized autoregressive distributed lag (ARDL) method of co-integration. The results show that natural resources agglomeration, secondary school enrollment, foreign direct investment and inflation has negative and significant impact on unemployment in Pakistan. The results reveal that population is putting positive impact on unemployment in Pakistan. The study finds that natural resources agglomeration is an important factor for reducing unemployment in Pakistan. There are some other factors for agglomeration economies, i.e. local economic policies, natural resources availability and amount of manpower for employment spatial distribution in Pakistan. So efforts are needed on mega scale for exploration, proper usage and functioning of natural resources in Pakistan.
    Keywords: unemployment, natural resources, inflation, foreign direct investment
    JEL: E24 N50 P24
    Date: 2018–04
  37. By: Hiermeyer, Martin
    Abstract: Over the last decades, the LM curve has largely disap-peared from research and, to some extent, also from teach-ing. Because of its well-known weaknesses, the LM curve is now frequently replaced with an interest rate rule. The paper suggests an improved LM curve which gets rid of the weaknesses of the LM curve, but retains the LM curve’s strength of including money, and even expands upon this strength.
    Keywords: Fiscal policy; monetary policy;
    JEL: E52 E62
    Date: 2018–06–28
  38. By: Michal Franta
    Abstract: This paper provides estimates of the probability of an economy hitting its effective lower bound (ELB) on the nominal interest rate and of the expected duration of such an event for eight advanced economies. To that end, a mean-adjusted panel vector autoregression with static interdependencies and the possibility of regime change is estimated. The simulation procedure produces ELB risk estimates for both the short term, where the current phase of the business cycle plays an important role, and the medium term, where the occurrence of an ELB situation is determined mainly by the equilibrium values of macroeconomic variables. The paper also discusses the ELB event probability estimates with respect to previous approaches used in the literature.
    Keywords: effective lower bound, ELB risk, mean adjustment, panel VAR, regime change
    JEL: E37 E52 C11
    Date: 2018–06
  39. By: Jagjit S. Chadha (Centre for Macroeconomics (CFM); National Institute of Economic and Social Research (NIESR))
    Abstract: We consider the role of money as a means of payment, store of value and medium of exchange. I outline a number of quantitative and qualitative experiences of monetary management. Successful regimes have sprung up in a variety of surprising places, and been sustained with state (centralised) interventions. Although the link between state and money, and its standard of identity and account may be clear, particularly in earlier stages of economic development, the extent to which the state is widely felt to hold responsibility for 'sound money' is less clear in modern democracies, where there are many other public responsibilities implying on going trade-offs.
    Keywords: Money, Gold standard, Paper money, Samuelson
    JEL: B22 E02 E31
    Date: 2018–07
  40. By: Isabel Schnabel; Johannes Tischer
    Abstract: Based on a unique trade-level dataset, we analyze the proprietary trading reaction of German banks to the Lehman collapse and the subsequent unconventional monetary policy measures in 2008. After the Lehman collapse, we observe that market liquidity tightened. However, there is no evidence of broad-based fire sales in the German banking sector. Instead, we observe a flight to liquidity. The European Central Bank’s unconventional measures had a strong impact on banks’ trading behavior by inducing shifts towards eligible securities and reducing pressure on market liquidity. This suggests that the unconventional measures helped stabilizing the financial system after the Lehman collapse.
    Keywords: Proprietary trading, fire sales, flight to liquidity, Lehman crisis, market liquidity, unconventional monetary policy
    JEL: E44 E50 G01 G11 G21
    Date: 2018–08
  41. By: Heider, Florian; Saidi, Farzad; Schepens, Glenn
    Abstract: We show that negative policy rates affect the supply of bank credit in a novel way. Banks are reluctant to pass on negative rates to depositors, which increases the funding cost of high-deposit banks, and reduces their net worth, relative to low-deposit banks. As a consequence, the introduction of negative policy rates by the European Central Bank in mid-2014 leads to more risk taking and less lending by euro-area banks with greater reliance on deposit funding. Our results suggest that negative rates are less accommodative, and could pose a risk to financial stability, if lending is done by high-deposit banks. JEL Classification: E44, E52, E58, G20, G21
    Keywords: bank balance-sheet channel, bank risk-taking channel, deposits, negative interest rates, zero lower bound
    Date: 2018–08
  42. By: Jean-Marc Fournier; Manuel Bétin
    Abstract: This paper investigates the effect of structural characteristics on debt limits of middle income countries. Two equations relate the probability of default to the interest rate. First, the probability of default is estimated with a logit model. Second, the assumption of non-arbitrage opportunity on the sovereign bond market relates the interest rate, the probability of default and the recovery rate. This model leads to three situations: a single and stable solution at low debt, multiple equilibria with stable and unstable solutions at intermediate debt, and a single solution with dissuasively high risk-premium beyond a debt threshold: this defines the debt limit. It reflects the empirical evidence on default determinants: it increases with perceived government effectiveness, the export to GDP ratio and the expected recovery rate and decreases with the commodity export to GDP ratio, the size of growth shocks, the share of defaults in neighbouring countries, the risk-free rate and investors’ risk aversion. Debt limits are highly sensitive to the expected recovery rate, reflecting the importance of credibility. The multiple equilibria case illustrates the risk of self-fulfilling crises: interest rate shocks can trigger the default below the debt limit.
    Keywords: debt limit, government effectiveness, institutions, public debt, sovereign default
    JEL: E62 F34 H63
    Date: 2018–07–26
  43. By: Isabelle Salle (Utrecht School of Economics - Utrecht University [Utrecht]); Pascal Seppecher (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper analyzes a range of alternative specifications of the interest rate policy rule within a macroeconomic, stock-flow consistent, agent-based model. In this model, firms' leverage strategies evolve under the selection pressure of market competition. The resulting process of collective adaptation generates endogenous booms and busts along credit cycles. As feedback loops on aggregate demand affect the goods and the labor markets, the real and the financial sides of the economy are closely interconnected. The baseline scenario is able to qualitatively reproduce a wide range of stylized facts, and to match quantitative orders of magnitude of the main economic indicators. We find that, despite the implementation of credit and balance sheet related prudential policies, the emerging dynamics feature strong instability. Targeting movements in the net worth of firms help dampen the credit cycles, and simultaneously reduce financial and macroeconomic volatility, but does not eliminate the occurrence of financial crises along with high costs in terms of unemployment.
    Keywords: Agent-based modeling, Credit cycles, Monetary and Macroprudential policies, Leaning against the wind
    Date: 2017–05–25
  44. By: Forbes, Kristin; Hjortsoe, Ida; Nenova, Tsvetelina
    Abstract: A major challenge for monetary policy is predicting how exchange rate movements will impact inflation. We propose a new focus: directly incorporating the underlying shocks that cause exchange rate fluctuations when evaluating how these fluctuations "pass through" to import and consumer prices. A standard open-economy model shows that the relationship between exchange rates and prices depends on the shocks which cause the exchange rate to move. We build on this to develop a structural Vector Autoregression (SVAR) framework for a small open economy and apply it to the UK. We show that prices respond differently to exchange rate movements based on what caused the movements. For example, exchange rate pass-through is low in response to domestic demand shocks and relatively high in response to domestic monetary policy shocks. This framework can improve our ability to estimate how pass-through can change over short periods of time. For example, it can explain why sterling's post-crisis depreciation caused a sharper increase in prices than expected, while the effect of sterling's 2013-15 appreciation was more muted. We also apply this framework to forecast the extent of pass-through from sterling's sharp depreciation corresponding to the UK's vote to leave the European Union.
    Keywords: consumer prices; exchange rate pass-through; import prices; inflation; vector autoregressions
    JEL: E31 F3 F41
    Date: 2018–07
  45. By: Emanuel Kopp; Peter D. Williams
    Abstract: In recent years, term premia have been very low and sometimes even negative. Now, with the United States economy growing above potential, inflationary pressures are on the rise. Term premia are very sensitive to the expected future path of growth, inflation, and monetary policy, and an inflation surprise could require monetary policy to tighten faster than anticipated, inducing to a sudden decompression of term and other risk premia, thus tightening financial conditions. This paper proposes a semi-structural dynamic term structure model augmented with macroeconomic factors to include cyclical dynamics with a focus on medium- to long-run forecasts. Our results clearly show that a macroeconomic approach is warranted: While term premium estimates are in line with those from other studies, we provide (i) plausible, stable estimates of expected long-term interest rates and (ii) forecasts of short- and long-term interest rates as well as cyclical macroeconomic variables that are stunningly close to those generated from large-scale macroeconomic models.
    Date: 2018–06–15
  46. By: Bongardt, Annette; Torres, Francisco
    Abstract: Although significant progress has been made in various areas since the eruption of the financial and sovereign debt crises, EMU governance is still incomplete today. The incompleteness of EMU governance, notably in its economic sphere, leaves EMU vulnerable to adverse market and to political-economy pressures. This paper argues that the EU exit of the UK, which had negotiated an opt-out from the common currency already at Maastricht, may allow for more homogeneous preferences regarding the additional requirements on the economic union as to sustain monetary union. To that end it could facilitate decision-making and contribute to the completion of the governance of EMU, whose relevance as the core of the EU integration project Brexit has come to reinforce. The resilience of the Eurozone however continues to hinge importantly on the creation of adjustment capacity and ownership of reform at the member state level, for which it is important to have a cohesive approach to the completion of EMU and a less negative narrative on EU integration at the domestic levels.
    Keywords: Brexit; Institutional Reform; EU Economic Governance; EMU Resilience and Sustainability.
    JEL: E42 E61 E65
    Date: 2016–12–01
  47. By: Kolasa, Marcin; Wesołowski, Grzegorz
    Abstract: This paper develops a two-country model with asset market segmentation to investigate the effects of quantitative easing implemented by the major central banks on a typical small open economy that follows independent monetary policy. The model is able to replicate the key empirical facts on emerging countries’ response to large scale asset purchases conducted abroad, including inflow of capital to local sovereign bond markets and an increase in international comovement of term premia. According to our simulations, quantitative easing abroad boosts domestic demand in the small economy, but undermines its international competitiveness and depresses aggregate output, at least in the short run. This is in contrast to conventional monetary easing in the large economy, which has positive spillovers to output in other countries. We also find that limiting these spillovers might require policies that affect directly international capital flows, like imposing capital controls or mimicking quantitative easing abroad by purchasing local long-term bonds. JEL Classification: E44, E52, F41
    Keywords: bond market segmentation, international spillovers, quantitative easing, term premia
    Date: 2018–07
  48. By: Øivind Anti Nilsen; Magne Vange
    Abstract: The price-setting behaviour of manufacturing plants is examined using a large panel of monthly surveyed plant- and product-specific prices. The sample shows a high frequency of zero changes, relatively small price changes, and a strong seasonal price-change pattern. The intermittent feature of price changes is modelled with thresholds which are smaller in January, and a quadratic loss function associated with the distance from the target price. The findings show statistically significant pricing thresholds, which are only two-thirds in January, and partial adjustment parameters implying that 60% of the deviation between the target price and the current price is closed each month.
    Keywords: price setting, micro data, simulated method of moments
    JEL: E30 E31 E37
    Date: 2018
  49. By: Aikman, David (Bank of England); Bridges, Jonathan (Bank of England); Burgess, Stephen (Bank of England); Galletly, Richard (Bank of England); Levina, Iren (Bank of England); O'Neill, Cian (Bank of England); Varadi, Alexandra (Bank of England)
    Abstract: We present a framework for measuring the evolution of risks to financial stability over the financial cycle, which we apply to the United Kingdom. We identify 29 indicators of financial stability risk, drawing from the literature on early warning indicators of banking crises. We normalise and aggregate these indicators to produce three composite measures, capturing: leverage in the private nonfinancial sector, including the level and growth of household and corporate debt, as well as the United Kingdom’s external debt; asset valuations in residential and commercial property markets, and in government and corporate bond and equity markets; and credit terms facing household and corporate borrowers. We assess these composite measures relative to their historical distributions. And we present preliminary evidence for how they influence downside risks to economic growth and different horizons. The measures provide an intuitive description of the evolution of the financial cycle of the past three decades. And they could lend themselves to simple communication, both with macroprudential policymakers and the wider public.
    Keywords: Macroprudential policy; financial crises; financial stability; early warning indicators; countercyclical capital buffers; data visualisation
    JEL: E44 G01 G10 G28
    Date: 2018–07–20
  50. By: Franz Seitz; Hans-Eggert Reimers; Friedrich Schneider
    Abstract: We analyze the net issues of the national euro area central banks in relation to the dynamics of the shadow economy within a panel cointegration framework. Besides the total net issues, we distinguish between large, medium and small euro banknotes and take due account of other determinants of cash demand. We find a significant and positive relationship between the net issues and the size of the shadow economy only for medium notes. And this result seems to be driven by the smaller euro area countries. The use of large and small denominations is obviously not driven by the shadow economy. For comparison purposes, we also present panel results for eight non-euro area countries (Australia, Canada, Japan, Norway, Sweden, Switzerland, UK, US). For these countries, we are not able to establish an economically meaningful and statistically significant cash demand equation including the shadow economy.
    Keywords: banknotes, net issues, shadow economy, cash demand function, panel cointegration
    JEL: C23 E41 E58
    Date: 2018
  51. By: Lorenzo, Cerboni Baiardi; Ahmad, Naimzada;
    Abstract: We consider the overlapping generation model formulated in Dioikitopoulos (2018) that tackles the problem of fiscal policy rules for debt sustainability, allowing for the presence of debt bubbles. The author gives conditions for sustainability achievement in terms of debt and capital control channels, taking into account initial conditions. Our mathematical analysis improves his study and reveals a wider spectrum of possible economic outcomes that might sometimes be opposed to the conclusions to which Dioikitopoulos (2018) comes. In detail, we reconsider the role of fiscal policy prescriptions, implemented by means of debt and capital responsiveness parameters, in determining the existence and multiplicity of stationary states. We also deepen the influence of policy parameters on local stability properties, highlighting the possible occurrence of two bifurcation scenarios and the consequent emergence of periodic and complex dynamics. Moreover, we review the role of fiscal policies in changing the fate of incoming economic scenarios and in preventing non sustainable paths from occurring.
    Keywords: fiscal sustainability, fiscal rules, bond financed deficit, local stability, bifurcations, basins of attraction, dynamic complexities
    JEL: C6 E6 H6 H30
    Date: 2018–07–28
  52. By: Raghavan, Mala (Tasmanian School of Business & Economics, University of Tasmania); Athanasopoulos, George (Monash University)
    Abstract: Using a parsimonious structural vector autoregressive moving average (SVARMA) model, we analyse the transmission of foreign and domestic shocks to a small open emerging economy under di erent policy regimes. Narrower con dence bands around the SVARMA responses compared to the SVAR responses, advocate the suitability of this framework for analysing the propagation of economic shocks over time. Malaysia is an interesting small open economy that has experienced an ongoing process of economic transition and development. The Malaysian government imposed exchange rate and capital control measures following the 1997 Asian nancial crisis. Historical and variance decompositions highlight Malaysia's high exposure to foreign shocks. The effects of these shocks change over time under di erent policy regimes. During the pegged exchange rate period, Malaysian monetary policymakers experienced some breathing space to focus on maintaining price and output stability. In the post-pegged period, Malaysia's exposure to foreign shocks increased and in recent times are largely driven by world commodity price and global activity shocks.
    Keywords: SVARMA models, Open Economy Macroeconomics, ASEAN, Shock transmissions
    JEL: C32 F41 E52
    Date: 2018
  53. By: Andrew Phiri (Department of Economics, Nelson Mandela University)
    Abstract: Despite Okun’s law being hailed one of the most fundamental pieces within macroeconomic policy paradigm, empirical evidence existing for the Kingdom of Swaziland remains virtually non-existent. Our study fills this void/hiatus in the literature by examining Okun’s law for the Swazi Kingdom by using the nonlinear autoregressive distributive lag (N-ARDL) model applied to data collected over 1991 to 2017. To ensure robustness of our empirical analysis, we further apply the Corbae-Oularis (C-O) filter to extract the gap variables required for empirical estimates. Remarkably, we find strong evidence for nonlinear Okun’s trade-off between unemployment and output growth in Swaziland with this trade-off being stronger during recessionary periods compared to expansionary periods. Much-needed policy enlightenment is drawn for Swazi authorities from our findings.
    Keywords: Okun’s law, Nonlinear autoregressive distributive lag (N-ARDL) model, Swaziland, Sub-Saharan African (SSA) country, Corbae-Oularis filter.
    JEL: C22 C32 E24 O40
    Date: 2018–08
  54. By: Ralph Schmitt-Nilson
    Abstract: This volume presents the proceedings of the workshop organised by the Directorate-General for Economic and Financial Affairs (ECFIN) jointly with the European Stability Mechanism (ESM) and the German Council of Economic Experts (GCEE) on 19 September 2017 in Brussels. The workshop aimed at raising awareness about the fiscal policy architecture in Europe and its potential future developments and contributing to the expert debate on these issues. It consisted of two sessions with two panels each. Short presentations of expert or research contributions were followed by a debate with the audience. The first session was devoted to a review of the European experience with fiscal policy coordination and governance, including perspectives on the euro area fiscal stance. The second session focused on fiscal risk sharing and stabilisation in the euro area. It explored different options of a fiscal stabilisation function and their design.
    JEL: E61 E62 H60 H50
    Date: 2018–07
  55. By: Jean-Bernard Chatelain (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)
    Abstract: This algorithm extends Ljungqvist and Sargent (2012) algorithm of Stackelberg dynamic game to the case of dynamic stochastic general equilibrium models including exogenous forcing variables. It is based Anderson, Hansen, McGrattan, Sargent (1996) discounted augmented linear quadratic regulator. It adds an intermediate step in solving a Sylvester equation. Forward-looking variables are also optimally anchored on forcing variables. This simple algorithm calls for already programmed routines for Ricatti, Sylvester and Inverse matrix in Matlab and Scilab. A final step using a change of basis vector computes a vector auto regressive representation including Ramsey optimal policy rule function of lagged observable variables, when the exogenous forcing variables are not observable. C61, C62, C73, E47, E52, E61, E63.
    Keywords: augmented linear quadratic regulator,Ramsey optimal policy,Stackelberg dynamic game,algorithm,forcing variables
    Date: 2017–08–26
  56. By: Habimana, Olivier
    Abstract: This thesis consists of three independent articles preceded by an introductory chapter. The first two articles focus on exchange rate dynamics in emerging market and developing economies, taking into account nonlinearities and asymmetries which are relevant for these countries and are potentially due to (i) transaction costs and other market frictions, and (ii) official intervention in the foreign exchange market. The third article is devoted to the analysis of the effects of monetary policy at different time horizons. The first article evaluates the purchasing power parity (PPP) theory in a panel of Sub-Saharan African countries. Unit root tests that are based on exponential smooth transition autoregressive (ESTAR) models are applied to account for nonlinearities and asymmetries in real exchange rate adjustment towards its equilibrium (mean) value. The results indicate empirical support for the PPP theory. The second article examines the relationship between current account adjustment and exchange rate flexibility in a panel of emerging market and developing economies. The purpose of this article is to (i) obtain a measure of exchange rate flexibility that considers autoregressive conditional heteroscedasticity and possible asymmetric responses of the exchange rate to shocks, and (ii) apply suitable dynamic panel data estimators to investigate this relationship. The results indicate that more flexible exchange rates are associated with faster current account adjustment. By means of wavelets the third article investigates the liquidity effect and the long-run neutrality of money at detailed timescales using time series data for Sweden and the US. The results indicate a significant liquidity effect at horizons of one to four years, but there is no evidence of monetary neutrality.
    Keywords: asymmetry, multiscale, time series, wavelets
    JEL: C15 C22 C23 E52 E6 F41 G1
    Date: 2018–06–19
  57. By: Alain Kabundi; Montfort Mlachila
    Abstract: This paper investigates the key factors that explain the documented decline in the exchange rate pass-through in South Africa over the past two decades, which coincides with the adoption of the inflation-targeting regime. The paper conjectures, in line with the literature, that this outcome is largely due to improved monetary policy credibility. To do this, it first documents the factors that explain monetary policy credibility. Using the standard deviation of individual inflation forecasts as a measure of monetary policy credibility, its shows that the latter is negatively affected by the level of inflation itself, monetary policy uncertainty, and a measure of the unobserved stochastic volatility of inflation. The second phase proceeds by analyzing the determinants of the pass-through using the monetary policy credibility index derived from the first phase. The paper confirms the remarkable achievement that, despite the many shocks that the economy has witnessed, the declining pass-through is indeed explained by the improving monetary policy credibility.
    Date: 2018–08–01
  58. By: Peter van de Ven (OECD); Jorrit Zwijnenburg (OECD); Matthew De Queljoe (OECD)
    Abstract: The System of National Accounts, which provides information on important macroeconomic indicators such as Gross Domestic Product (GDP), household disposable income and final consumption, typically excludes the value of unpaid household activities. Exceptions are made for the production of goods for own final consumption (e.g. subsistence farming), the services from owner-occupied dwellings, and the production from employment of paid domestic staff, but the output from unpaid domestic and personal services, such as the preparation of meals, taking care of children, cleaning, repairs, volunteering, etc., is all excluded. This report deals with the impact of including unpaid household activities on macro-economic aggregates for G7-countries. It builds upon earlier work by Ahmad and Koh (2011) and van de Ven and Zwijnenburg (2016). The report starts off with discussing the pros and cons of including unpaid household activities, or more specifically, the reasons why these activities are currently excluded from the macro-economic aggregates that can be derived from the framework of national accounts. It then discusses how estimates can be compiled using statistics from time use surveys and other available information. Here, also some of the complexities related to the approximate valuation of unpaid household activities are being addressed. Subsequently, results are presented for the level estimates of GDP as well as for economic growth when including the value of unpaid household activities for the G7 economies. The report concludes with a number of recommendations on the way forward, also touching upon some of the (potential) policy implications of the work on valuing unpaid household activities.
    Keywords: households, national accounts, satellite accounts, time use, unpaid work
    JEL: C82 D13 E01 J22
    Date: 2018–07–28
  59. By: Yan Carriere-Swallow; Antonio David; Daniel Leigh
    Abstract: We estimate the short-term effects of fiscal consolidation on economic activity in 14 countries in Latin America and the Caribbean. We examine contemporaneous policy documents to identify changes in fiscal policy motivated by a desire to reduce the budget deficit and not by responding to prospective economic conditions. Based on this narrative dataset, our estimates suggest that fiscal consolidation has contractionary effects on GDP, consistent with a multiplier of 0.9. We find these effects to be close to those in OECD countries based on a similarly constructed dataset (Devries and others, 2011). We also find similar estimation results for the two groups of economies for the effect of fiscal consolidation on the external current account balance, providing support for the twin deficits hypothesis.
    Date: 2018–06–13
  60. By: Sebastian Acevedo Mejia; Mico Mrkaic; Natalija Novta; Evgenia Pugacheva; Petia Topalova
    Abstract: Global temperatures have increased at an unprecedented pace in the past 40 years. This paper finds that increases in temperature have uneven macroeconomic effects, with adverse consequences concentrated in countries with hot climates, such as most low-income countries. In these countries, a rise in temperature lowers per capita output, in both the short and medium term, through a wide array of channels: reduced agricultural output, suppressed productivity of workers exposed to heat, slower investment, and poorer health. In an unmitigated climate change scenario, and under very conservative assumptions, model simulations suggest the projected rise in temperature would imply a loss of around 9 percent of output for a representative low-income country by 2100.
    Date: 2018–06–13
  61. By: IKEDA Yuichi; YOSHIKAWA Hiroshi
    Abstract: The economic crisis of 2008 showed that conventional microprudential policy to ensure the soundness of individual banks was not sufficient, and prudential regulations to cover the whole financial sector were desired. Such regulations attract increasing attention, and policy related to those regulations is called macroprudential policy, which aims to reduce systemic risk in the whole financial sector by regulating the relationship between the financial sector and the real economy. In this paper, using a spin network model, we study channels of distress propagation from the financial sector to the real economy through the supply chain network in Japan from 1980 to 2015 and discuss good indicators for macroprudential policy. First, an estimation of the exogenous shocks acting on the communities of real economy in the supply chain network provides us evidence of the channels of distress propagation from the financial sector to the real economy through the supply chain network. Furthermore, causal networks between exogenous shocks and macroeconomic variables clarified the characteristics of the lead–lag relationship between exogenous shocks and macroeconomic variables as the bubble burst. In summary, monitoring temporal changes of exogenous shocks and the causal relationship among the exogenous shocks and macroeconomic variables will provide good indicators for macroprudential policy.
    Date: 2018–07
  62. By: Alena Bicakova; Guido Matias Cortes; Jacopo Mazza
    Keywords: business cycle; higher education; cohort effects;
    JEL: I23 J24 J31 E32
    Date: 2018–07
  63. By: Claudia M. Buch; Matthieu Bussière; Linda Goldberg; Robert Hills
    Abstract: This paper presents the novel results from an internationally coordinated project by the International Banking Research Network (IBRN) on the cross-border transmission of conventional and unconventional monetary policy through banks. Teams from seventeen countries use confidential micro-banking data for the years 2000 through 2015 to explore the international transmission of monetary policies of the U.S., euro area, Japan, and United Kingdom. Two other studies use international data with different degrees of granularity. International spillovers into lending to the private sector do occur, especially for U.S. policies, and bank-specific heterogeneity influences the magnitudes of transmission. The effects are supportive of the international bank lending channel and the portfolio channel of monetary policy transmission. They also show that the frictions that banks face matter; in particular, foreign currency funding and hedging considerations can be a key source of heterogeneity. The forms of bank balance sheet heterogeneity that differentiate spillovers across banks are not uniform across countries. International spillovers into lending can be large for some banks, even while the average international spillovers of policies into nonbank lending generally are not large.
    Keywords: monetary policy, international spillovers, cross-border transmission, global bank, global financial cycle
    JEL: E52 F30 F40 G15 G21
    Date: 2018
  64. By: Gregorio Impavido
    Abstract: Inflation in Barbados is mainly imported. But how are external shocks transmitted to the domestic economy? Shouldn’t there be also a domestic component, albeit very small, given the presence of capital controls? We focus on short term dynamics and contribute to the existing literature in three ways: (i) we identify the process with which inflation expectations are likely to be formed in Barbados; (ii) we add forward looking inflation expectations as one of the main channels through which external monetary shocks are transmitted to the economy; and (iii) we measure the importance of domestic shocks. We find that due to the peg, forward-looking inflation expectations in the reserve currency country are an important component of the inflation expectation process in Barbados and that they are a key channel in the international monetary transmission mechanism. Domestic factors, mainly monetary shocks, also matter given the limited degree of monetary autonomy provided by capital controls.
    Keywords: Central banks and their policies;Exchange rate pegs;Western Hemisphere;Inflation;Monetary transmission mechanism;Oil prices;Barbados;monetary transmission, pegged exchange rate, capital controls
    Date: 2018–06–13
  65. By: Marco Fongoni (Department of Economics, University of Strathclyde)
    Abstract: In the last two decades advances in the theory of labour market fluctuations have emphasised the role of new hires' wage rigidity - rather than wage rigidity of existing workers - to explain the large volatility of unemployment observed in the data. However, recent evidence suggests that wages paid to newly hired workers are substantially pro-cyclical. By considering the effect that wage changes can have on workers' effort, and therefore on output, this paper provides two novel theoretical results. First, it is shown that the anticipation by firms of the effort response of new hires to wage changes can amplify the magnitude of shocks to the extent that, in contrast with the existing literature, the cyclicality of the hiring wage becomes irrelevant for their decision to hire new workers, and hence for the volatility of job creation. Second, it is shown that firms' expectation of existing workers' downward wage rigidity - and the anticipation of their negative reciprocity response to future wage cuts - does matter for the expected value of posting a new vacancy, and under certain conditions it may even reduce firms' incentive to hire.
    Keywords: reciprocity, wage cyclicality, job creation, unemployment volatility
    JEL: E24 D91 J41 J64
    Date: 2018–07
  66. By: Jean-Pierre Danthine (CEPR - Center for Economic Policy Research - CEPR, UNIL - Université de Lausanne, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)
    Abstract: The Swiss National Bank has introduced negative interest rates of minus 75bp in mid-January 2015. Large exemptions on commercial bank holdings at the SNB result in the average rate being significantly less negative than the marginal rate. With this constellation the policy transmission to the real economy is asymmetric. It fully satisfies the needs of a SOE in search of a negative interest differential, not those of an economy aiming at a 'classical' monetary stimulus at the zero bound. While the Swiss design would make it possible to impose rates that are significantly more negative with modest complementary features, the unpopularity of negative rates makes it likely that the ambition to totally free monetary policy of the ZLB will be thwarted by democratic realities in the near future.
    Keywords: safe haven currency,negative interest rates,paper currency hoarding
    Date: 2017–07
  67. By: Gilles Saint-Paul (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics, New York University Abu Dhabi); Davide Ticchi (Marche Polytechnic University); Andrea Vindigni (University of Genova)
    Abstract: If people understand that some macroeconomic policies are unsustainable, why would they vote for them in the .first place? We develop a political economy theory of the endogenous emergence of fiscal crises, based on the idea that the adjustment mechanism to a crisis favors some social groups, that may be induced ex-ante to vote in favor of policies that are more likely to lead to a crisis. People are entitled to a certain level of a publicly provided good, which may be rationed in times of crises. After voting on that level, society votes on the extend to which it will be financed by debt. Under bad enough macro shocks, a crisis arises: taxes are set at their maximum but despite that some agents do not get their entitlement. Some social groups do better in this rationing process than others. We show that public debt .which makes crises more likely .is higher, as is the probability of a crisis, the greater the level of favoritism. If the favored group is important enough to be pivotal when society votes on the entitlement level, favoritism also leads to greater public expenditure. We show that the favored group may strategically favor a weaker state in order to make crises more frequent. Finally, the decisive voter when choosing expenditure may be different from the one when voting on debt. In such a case, constitutional limits on debt may raise the utility of all the poor, relative to the equilibrium outcome absent such limits.
    Keywords: Public Debt,In- equality,Political Economy,Fiscal Crises,Favoritism,Entitlements,State Capacity
    Date: 2017–09
  68. By: Matthias Krapf
    Abstract: Using detailed tax data from the Swiss canton of Bern, I examine how changes in wealth are related to income risk. I find that only among elderly individuals high kurtosis of income risk may be positively correlated with wealth accumulation. Additionally, I document that a substantial share of taxpayers have negative net wealth. While wealth and income are positively correlated for positive net wealth taxpayers, this correlation is negative for negative net wealth taxpayers. These negative net wealth investors experience sharp increases in wealth and income in subsequent periods. Finally, wealth risk is more dispersed than income risk.
    JEL: D14 D31 E21
    Date: 2018
  69. By: Jeremy Greenwood; Pengfei Han; Juan M. Sanchez
    Abstract: The relationship between venture capital and growth is examined using an endogenous growth model incorporating dynamic contracts between entrepreneurs and venture capitalists. At each stage of financing, venture capitalists evaluate the viability of startups. If viable, venture capitalists provide funding for the next stage. The success of a project depends on the amount of funding. The model is confronted with stylized facts about venture capital; viz., statistics by funding round concerning the success rates, failure rates, investment rates, equity shares, and IPO values. Raising capital gains taxation reduces growth and welfare.
    JEL: E13 E22 G24 L26 O16 O31 O40
    Date: 2018–07
  70. By: Laurent Linnemer (CREST; ENSAE); Michael Visser (CREST; ENSAE; CNRS; CRED)
    Abstract: This profile of Jean-Michel Grandmont is based on several interviews we had with him between September 2016 and April 2017. The interviews took place at our CREST offices, located at that time in Malakoff, just south of Paris. The objective of the profile is twofold. First, we trace the career of this highly influential mathematical economist who made seminal contributions to the fields of monetary economics, temporary equilibrium, business cycle theory, and aggregation of individual behavior. Second, we show how Grandmont and his colleagues contributed to changing the French landscape of economic research.
    Keywords: General Equilibrium, Money, Nonlinear Dynamics
    JEL: B31 D5 D7 E3
    Date: 2018–05–17
  71. By: Chris Edmond; Virgiliu Midrigan; Daniel Yi Xu
    Abstract: We study the welfare costs of markups in a dynamic model with heterogeneous firms and endogenously variable markups. We find that the welfare costs of markups are large. We decompose the costs of markups into three channels: (i) an aggregate markup that acts like a uniform output tax, (ii) misallocation of factors of production, and (iii) an inefficiently low rate of entry. We find that the aggregate markup accounts for about two-thirds of the costs, misallocation accounts for about one-third, and the costs due to inefficient entry are negligible. We evaluate simple policies aimed at reducing the costs of markups. Subsidizing entry is not an effective tool in our model: while more competition reduces individual firms' markups it also reallocates market shares towards larger firms and the net effect is that the aggregate markup hardly changes. Size-dependent policies aimed at reducing concentration can reduce the aggregate markup but have the side effect of greatly increasing misallocation and reducing aggregate productivity.
    JEL: D04 E02 L1 O4
    Date: 2018–07
  72. By: Christodoulakis, Nicos
    Abstract: The Economic Governance for the Euro Area is envisaged to be both an overseeing framework that enables the timely identification of oncoming trouble, as well as a correction mechanism that puts an economy hit by major shocks back in order. The paper discusses the relevance of prevention and correction mechanisms, and finds that exclusively focusing fiscal policy on debt sustainability may be misleading for all and more harmful to the weaker economies in particular, unless internal and external imbalances are taken into account. The fiscal rule should be designed so as to be compatible with debt sustainability in the medium run but also allowed to respond to short term output and current account fluctuations. The micro-management of fiscal components with regards to political feasibility and social equity is also discussed.
    Keywords: euro area; public debt; fiscal policy; external balance
    JEL: E63 F15 H63
    Date: 2016–12–03
  73. By: Eric Budish
    Abstract: The amount of computational power devoted to anonymous, decentralized blockchains such as Bitcoin's must simultaneously satisfy two conditions in equilibrium: (1) a zero-profit condition among miners, who engage in a rent-seeking competition for the prize associated with adding the next block to the chain; and (2) an incentive compatibility condition on the system's vulnerability to a “majority attack”, namely that the computational costs of such an attack must exceed the benefits. Together, these two equations imply that (3) the recurring, “flow”, payments to miners for running the blockchain must be large relative to the one-off, “stock”, benefits of attacking it. This is very expensive! The constraint is softer (i.e., stock versus stock) if both (i) the mining technology used to run the blockchain is both scarce and non-repurposable, and (ii) any majority attack is a “sabotage” in that it causes a collapse in the economic value of the blockchain; however, reliance on non-repurposable technology for security and vulnerability to sabotage each raise their own concerns, and point to specific collapse scenarios. In particular, the model suggests that Bitcoin would be majority attacked if it became sufficiently economically important — e.g., if it became a “store of value” akin to gold — which suggests that there are intrinsic economic limits to how economically important it can become in the first place.
    JEL: A1 D00 D53 E4 E42 G1 G12 G2 L99
    Date: 2018–06
  74. By: Jaelani, Aan
    Abstract: This article reviews the state budget with a performance-based financial system in Indonesia, which previously implemented a balanced financial system. By using qualitative method and content analysis approach in understanding the theory and document of the financial system in Indonesia. This paper concludes that performance-based financial system in Indonesia provides a new direction in more transparent and accountable financial management for development activities in realizing community welfare
    Keywords: budgetary reform, performance-based finance, State Budget, Islamic economics
    JEL: E62 H21 H53 P48
    Date: 2018–06–01
  75. By: Alena Bicakova (CERGE-EI, Czech Republic); Guido Matias Cortes (York University, Canada; Rimini Centre for Economic Analysis); Jacopo Mazza (University of Essex, UK)
    Abstract: We find robust evidence that cohorts of graduates who enter college during worse economic times earn higher average wages than those who enter during better times. This difference is not explained by differences in economic conditions at the time of college graduation, changes in field of study composition, or changes in selection into occupations or industries. Cohorts who start college in bad times are not more positively selected based on their high-school outcomes, but they graduate with higher college grades, and earn higher wages conditional on their grades. Our results suggest that these cohorts exert more effort during their studies.
    Keywords: Business Cycle, Higher Education, Cohort Effects
    JEL: I23 J24 J31 E32
    Date: 2018–07
  76. By: Jiranyakul, Komain
    Abstract: This paper explores the degree of exchange rate pass-through to domestic prices in Thailand using quarterly data from 2000Q1 to 2017Q4. Johansen cointegration tests are employed in the analysis. The degree of exchange rate pass-through is found to be partial and modest. The stable pass-through effect in the long-run is found for import price index. The findings give some implications for risk perception by firms and investors regarding the future inflationary environment of the country.
    Keywords: Exchange rate, domestic prices, cointegration
    JEL: C22 E31 F31
    Date: 2018–06
  77. By: Geraldine Dany-Knedlik; Juan Angel Garcia
    Abstract: This paper investigates the evolution of inflation dynamics in the five largest ASEAN countries between 1997 and 2017. To account for changes in the monetary policy frameworks since the Asian Financial Crisis (AFC), the analysis is based on country-specific Phillips curves allowing for time-varying parameters. The paper finds evidence of a higher degree of forward-looking dynamics and a better anchoring of inflation expectations, consistent with the improvements in monetary policy frameworks in the region. In contrast, the quantitative impact of cyclical fluctuations and import prices has gradually diminished over time.
    Date: 2018–06–21
  78. By: Eugenio Caverzasi; Alberto Russo
    Abstract: The Great Recession that followed the financial crisis of 2007 is not only the largest economic crisis after the Great Depression of the 1930s, it also signals a crisis of economics as a discipline. This is not only the consequence of the inadequacy of mainstream macroeconomics, and specically the DSGE workhorse model, to forecast such a huge event, or at least to detect the worrying tendencies towards it. Even more relevant is the choice to explicitly avoid the modelling of large crises (that for someone is a motivation for not attacking pre-crisis DSGE models focused on the analysis of small deviations from the steady-state), so denying the intrinsic nature of capitalism, a system that necessarily proceeds through cycles and (extended) crises. The replies of the DSGE approach to critics have led to extensions regarding for instance the role of financial frictions, heterogeneous agents, and bounded rationality (though typically in the form of quasi-rational expectations). The alternative paradigm of Agent-Based Macroeconomics can take into account all these elements at once within an evolutionary modelling framework based on heterogeneity and interaction, so capable to endogenously reproduce complex dynamics, from small fluctuations to large crises, due to innovation and industrial dynamics, rising inequality and financial instability, and so on. The integration between Agent-Based Macroeconomics and the (post-Keynesian) Stock-Flow Consistent approach represents a promising way for the future development of this research field.
    Date: 2018–08–01
  79. By: Facundo Piguillem (Einaudi Institute for Economics and Finance (EIEF)); Alessandro Riboni (CREST)
    Abstract: Most fiscal rules can be overridden by consensus. We show that this does not make them ine ectual. Since fiscal rules determine the outside option in case of disagreement, the opposition uses them as "bargaining chips" to obtain spending concessions. This political bargain reduces the debt accumulation problem. We analyze various rules and show that when political polarization is high, a government shutdown maximizes the opposition's bargaining power and leads to a sizeable debt reduction. When polarization is low, a balanced budget is preferable. Mandatory spending eliminates debt accumulation by removing political risk. However, it generates persistent static ineffciencies.
    Keywords: fiscal rules, government debt, legislative bargaining, political polarization, government shutdown, mandatory spending
    JEL: H2 H6 D72
    Date: 2018–03–08
  80. By: Atif Mian; Amir Sufi
    Abstract: Credit supply expansion fuels housing speculation, generating a boom and bust in house prices. U.S. zip codes more exposed to the 2003 acceleration of the private label mortgage securitization (PLS) market witnessed a sudden and large increase in mortgage originations and house prices from 2003 to 2006, followed by a collapse in house prices from 2006 to 2010. During the boom, cities with higher PLS-market exposure were more likely to see a large increase in house prices despite substantial new construction; these cities experienced a severe bust after 2006. Most of the marginal home-buyers brought into the housing market by the acceleration of the PLS market were short-term buyers or ``flippers.'' These marginal buyers had lower credit scores and higher ex post default rates. Speculation by such home-buyers contributed to a large rise in transaction volume from 2003 to 2006, and helped trigger the mortgage default crisis in 2007.
    JEL: E44 G01 G12 G2 R21 R31
    Date: 2018–07
  81. By: Spelta, Alessandro; Pecora, Nicolò; Flori, Andrea; Pammolli, Fabio
    Abstract: The present paper introduces an up-to-date methodology to detect Early Warning Signals of critical transitions, that manifest when distress stages in financial markets are about to take place. As a first step, we demonstrate that a high-dimensional dynamical system can be formulated in a simpler form but in an abstract phase space. Then we detect its approaching towards a critical transition by means of a set of observable variables that exhibit some particular statistical features. We name these variables the Leading Temporal Module. The impactful change in the properties of this group reflects the transition of the system from a normal to a distress state. Starting from these observations we develop an early warning indicator for determining the proximity of a financial crisis. The proposed measure is model free and the application to three different stock markets, together with the comparison with alternative systemic risk measures, highlights the usefulness in signaling upcoming distress phases. Computational results establish that the methodology we propose is effective and it may constitute a relevant decision support mechanism for macro prudential policies.
    Keywords: Financial Crisis, Early Warning Signals, Critical Transition, Leading Temporal Module
    JEL: C02 C53 E37 G01 G17
    Date: 2018–07–23
  82. By: Adrian Peralta-Alva; Marina Mendes Tavares; Xuan S. Tam; Xin Tang
    Abstract: We quantitatively investigate the macroeconomic and distributional impacts of fiscal consolidations in low-income countries (LICs) through value added tax (VAT), personal income tax (PIT), and corporate income tax (CIT). We extend the standard heterogeneous agents incomplete markets model by including multiple sectors and rural-urban distinction to capture salient features of LICs. We find that overall, VAT has the least efficiency costs but is highly regressive, while PIT impacts the economy in the opposite way with CIT staying in between. Cash transfers targeting rural households mitigate the negative distributional impacts of VAT most effectively, while public investment leads to little redistribution.
    Date: 2018–06–13
  83. By: Øivind Anti Nilsen; Per Marius Pettersen; Joakim Bratlie
    Abstract: Existing micro evidence of firms’ price changes tends to show a downward sloping hazard rate – the longer the price of a product has remained the same, the less likely it is that the price will change. Using a panel of Norwegian plant- and product-specific prices, we also find a downward sloping hazard when applying a Kaplan–Meier model. After having controlled for both observed and unobserved characteristics, we find flat hazards with spikes in the first and twelfth months. This suggests time-dependent price-setting by at least some of the producers. The spike after 12 months might be explained by seasonal demand effects, but also by the pricing season effect related to information acquisition and processing, negotiation and signing of price contracts. The revealed price adjustment pattern is at odds with the predictions of the Calvo model, a central element in many dynamic stochastic general equilibrium models, as this assumes constant frequencies of price adjustments over time. Our empirical findings instead point to a modified Calvo model where firms in some periods experience lower menu costs. Finally, the empirical findings may have implications for the effectiveness of monetary policy interventions.
    Keywords: price-setting, micro data
    JEL: E31 D22 C41
    Date: 2018
  84. By: Joost Bats; Jan Willem van den End; John Thoolen
    Abstract: During the global financial crisis which started in 2007 (henceforth: crisis), central banks provided extended liquidity support, both to individual institutions and financial markets more broadly. These measures were taken as part of the lender of last resort (LOLR) function of the central bank, which can be activated in response to various kinds of liquidity risk. In times of systemic liquidity stress, when markets do not function properly and liquidity buffers fall short, a larger intermediary role of the central bank is warranted. Extended liquidity supply by the central bank can then underpin the intermediary function of the financial system to ensure the continuation of critical economic processes. In a systemic crisis, supporting financial stability is tantamount to safeguarding the monetary transmission process and thus, ultimately, also ensuring price stability.
    Date: 2018–07
  85. By: Jean-Marc Fournier; Manuel Bétin
    Abstract: This paper provides robust empirical evidence that government effectiveness is a key determinant of sovereign defaults. Government effectiveness is measured by a broad-based perception index of the Worldwide Governance Indicators database (WGI) disseminated by the World Bank. Public debt and sovereign default data cover both external and internal government debt. In a systematic and demanding robustness check with any possible sub-sample of a large set of control variables, the effect of government effectiveness is almost always robust. In addition, the effects of the five other main indicators of the WGI database on default risk are also investigated, showing that the rule of law, regulatory quality, control of corruption and voice and accountability are also robustly linked with default risk. Regressions with the mortality of settlers as an instrument indicate a causal effect from government effectiveness to sovereign default.
    Keywords: government effectiveness, institutions, public debt, sovereign default
    JEL: E62 F34 H63
    Date: 2018–07–26
  86. By: Kenneth N. Kuttner (Williams College)
    Abstract: This paper provides an overview of unconventional monetary policy as implemented by the U.S. Federal Reserve after the global financial crisis. First, it reviews the key features of the Fed’s Quantitative Easing and Forward Guidance policies. Second, it discusses the mechanisms through which the two policies may have affected financial markets, institutions, and the overall economy. Third, it surveys the evidence on the policies’ financial and economic impacts. Fourth, it considers some of the policies’ unintended side effects. The paper concludes with some thoughts on how unconventional monetary policy might be used in the future.
    Date: 2018–08
  87. By: Gordon, Robert J
    Abstract: U. S. economic growth slowed by more than half from 3.2 percent per year during 1970-2006 to only 1.4 percent during 2006-16, and this decline was divided equally between slower growth in hours of work and slower growth in output per hour. In explaining slower growth in hours, particular emphasis is placed on the slower secular rise of life expectancy in the U.S. compared to other developed countries. Further contributions to slowing growth are made by a decline in the population share of both legal and illegal immigration and a turnaround from rising to declining labor force participation. Causes of declining productivity growth begin with the slowdown in the rate of increase of educational attainment. Why did productivity growth decline after 2006 despite an increase in the rate at which new U.S. patents were issued in 2006-16 compared to earlier decades? Part of the slowdown is attributed to the maturity of the IT revolution, which also helps to explain the trajectory of the college wage premium. Aspects of the productivity growth slowdown include the declining productivity of research workers, diminishing returns to drug innovation, and the evolutionary rather than revolutionary impact of robots and artificial intelligence.
    Keywords: Economic Growth; Immigration; Innovation; labor force participation; Mortality; productivity
    JEL: D24 E24
    Date: 2018–07
  88. By: Jakob B. Madsen; Antonio Minniti; Francesco Venturini
    Abstract: This paper extends Piketty’s analysis of the wealth-income ratio used as a proxy for wealth inequality, to allow for innovation. Drawing on a Schumpeterian (R&D-based) growth model that incorporates both tangible and intangible capital and using historical data for 21 OECD countries, we find the wealth-income ratio to be significantly and positively related to R&D intensity and the fixed capital investment ratio, but negatively related to income growth. Accounting for the innovation-induced counteracting growth-effect on the wealth-income ratio, we show that the net effect of R&D on wealth inequality is positive.
    Keywords: Wealth-income Ratio, Piketty's Second Law, Schumpeterian Growth.
    JEL: D30 E10 E20 O30 O40
    Date: 2018–07
  89. By: Dirk Niepelt
    Date: 2018–07
  90. By: Gary Koop (University of Strathclyde); Stuart McIntyre (University of Strathclyde); James Mitchell (University of Warwick)
    Abstract: Data on Gross Value Added (GVA) are currently only available at the annual frequency for the UK regions and are released with significant delay. Regional policymakers would benefit from more frequent and timely data. The goal of this paper is to provide these. We use a mixed frequency Vector Autoregression (VAR) to provide, each quarter, nowcasts (i.e. forecasts of current GVA which is as yet unknown due to release delays) of annual GVA growth for the UK regions. The information we use to update our regional nowcasts comes from GVA growth for the UK as a whole as this is released in a more timely and frequent (quarterly) fashion. To improve our nowcasts we use entropic tilting methods to exploit the restriction that UK GVA growth is a weighted average of GVA growth for the UK regions. In this paper, we develop the econometric methodology and test it in the context of a real time nowcasting exercise.
    Keywords: Regional growth, nowcasting, mixed frequency
    JEL: C22 C52 C53 E01 R1
    Date: 2018–07
  91. By: Juan Pablo Iglesias Ruano
    Abstract: Con base en los datos trimestrales de Colombia para el período de 1995 a 2017, se busca efectuar una revisión empírica actualizada sobre la relación entre el crecimiento del gasto del gobierno y el crecimiento de la economía colombiana, para probar que el enfoque de la hipótesis de Wagner es válido al explicar el crecimiento del tamaño del gobierno colombiano. Esta revisión empírica se llevará a cabo, a través de la metodología de cointegración presentada en el trabajo de Pesaran, M. H., Shin, Y., y Smith, R. J. (2001), a partir de modelos Autorregresivos de Distribución de Rezagos (ARDL por sus siglas en ingles). Los resultados indican que la hipótesis de Wagner es aceptada, esto implica que la relación positiva entre ambas variables se ha mantenido estable a través de seis periodos presidenciales en Colombia.
    Keywords: Política Fiscal; Finanzas Públicas; Ley de Wagner; Gasto del Gobierno Nacional Central; CrecimientoEconómico; Técnicas de Cointegración a través de Modelos ARDL; Colombia.
    JEL: E62 H50 C22
    Date: 2018–04–16
  92. By: Martin Iseringhausen; Hauke Vierke
    Abstract: This paper studies the determinants of output volatility in a panel of 22 OECD countries. In contrast to the existing literature, we avoid ad hoc estimates of volatility based on rolling windows, and we account for possible non-stationarity of the data. Specifically, output volatility is estimated by means of an unobserved components model where the volatility series is the outcome of both macroeconomic determinants and a latent integrated process. A Bayesian model selection is performed to test for the presence of the nonstationary component. The results point to demographics and government size as important determinants of macroeconomic (in)stability. In particular, a larger share of prime-age workers is associated with lower output volatility, while higher public expenditure increases volatility.
    JEL: I00
    Date: 2018–01
  93. By: Andrés Castañeda (World Bank); Santiago Garriga (Paris School of Economics - École des hautes études en sciences sociales); Leonardo Gasparini (CEDLAS-FCE-UNLP and CONICET); Leonardo Lucchetti (World Bank); Daniel Valderrama (Georgetown University – Department of Economics)
    Abstract: This paper contributes to the methodological literature on the estimation of international poverty lines for Latin America based on the official poverty lines chosen by the Latin American governments and commonly used in the public debate. The paper exploits a comprehensive data set of 86 up-to-date official extreme and total urban poverty lines across 18 countries in Latin America, as well as the recently updated values of the national purchasing power parity conversion factors from the 2011 International Comparison Program, and a set of harmonized household surveys. By using 3 and 6 US dollars per person a day at 2011 PPP as the extreme and total poverty lines for Latin America, this paper illustrates the sensitiveness of poverty rates to changes of the values of the poverty lines as a result of the recent update of the PPP values, the period of reference, and the relative cost of living across the countries in the region. The poverty lines with the 2011 PPP values lead to an increase in total poverty rates in Latin America when compared to the 2005 PPP values, while they leave the extreme poverty rate unaffected. In general, country-specific poverty rankings remain fairly stable to the values of the poverty lines selected.
    JEL: I3 I32 D6 E31 F01
    Date: 2018–08
  94. By: Chandra, Situmeang; Erlina, Erlina; Maksum, Azhar; Supriana, Tavi
    Abstract: The ability to compete between companies at the time of intercompany production efficiency is no longer a differentiator, the determinant of competitiveness includes the aspect of funding to be one of the determinants of competitiveness. One of the company's competitiveness capabilities is determined by the capital cost or the discount rate used in evaluating a project. The higher the cost of capital will be the lower the competitiveness of the company. There are many factors that determine the cost of a company's capital, but this research focuses only on the aspects of Corporate Governance (CG). Investors will assume that the risk in companies that have good CG quality will be smaller than companies that do not have good CG quality. On the other hand, IFRS implementation has a variety of purposes including improving the implementation of CG in a company, so it is theoretically suspected that IFRS implementation will increase CG's influence on CoE. The approach used is to study the capability of the linear regression model formed and to conduct a comparative analysis among regression models established by data from manufacturing companies listed on the Indonesia Stock Exchange during 2007-2011 as data prior to IFRS implementation and 2012-2015 for data after IFRS implementation. Based on the results of data processing obtained evidence that Corporate Governance negatively affect the Cost of Equity (CoE). This contradicts the theory because the better the CG value of a firm the CoE will be to decrease. When compared to the period before and after IFRS implementation, there is no evidence of a relationship between CG and CoE.
    Keywords: Corporate Governance; Cost of Equity; IFRS
    JEL: D53 E44 F34 H63
    Date: 2018–02
  95. By: Carl Duisberg
    Abstract: Despite the importance of CAP-related agricultural market regulation mechanisms within Europe, the agricultural sectors in European countries retain a degree of sensitivity to macroeconomic activity and policies. This reality now raises the question of the effects to be expected from the implementation of the single monetary policy on these agricultural sectors within the Monetary Union.
    Date: 2018–07
  96. By: Roberto Tamborini
    Abstract: Macroeconomic imbalances (MI) play a prominent role in the "consensus narrative" of the crisis of the Euro Zone (EZ). Accordingly, the package of governance reforms undertaken by the EZ countries amid the crisis includes the Macroeconomic Imbalances Procedure (MIP) to be enacted by the Commission. The whole approach has raised various critical and alternative views. These are examined distinguishing between the "domestic" and "external" dimension of MI, and the controversial issues are identified with reference to the MI relevance, their causes and connections with the crisis, and their policy implications.
    Date: 2018
  97. By: Matteo Burzoni (ETH Zurich); Frank Riedel (Bielefeld University); H. Mete Soner (ETH Zurich)
    Abstract: We reconsider the microeconomic foundations of financial economics under Knightian Uncertainty. In a general framework, we discuss the absence of arbitrage, its relation to economic viability, and the existence of suitable nonlinear pricing expectations. Classical financial markets under risk and no ambiguity are contained as special cases, including various forms of the Efficient Market Hypothesis. For Knightian uncertainty, our approach unifies recent versions of the Fundamental Theorem of Asset Pricing under a common framework.
    Keywords: Robust Finance, No Arbitrage, Viability, Knightian Uncertainty
    JEL: D53 G10
    Date: 2018–01
  98. By: Iwo Augusty\'nski; Pawe{\l} Lasko\'s-Grabowski
    Abstract: The data mining technique of time series clustering is well established in many fields. However, as an unsupervised learning method, it requires making choices that are nontrivially influenced by the nature of the data involved. The aim of this paper is to verify usefulness of the time series clustering method for macroeconomics research, and to develop the most suitable methodology. By extensively testing various possibilities, we arrive at a choice of a dissimilarity measure (compression-based dissimilarity measure, or CDM) which is particularly suitable for clustering macroeconomic variables. We check that the results are stable in time and reflect large-scale phenomena such as crises. We also successfully apply our findings to analysis of national economies, specifically to identyfing their structural relations.
    Date: 2018–07
  99. By: Flögel, Franz; Gärtner, Stefan
    Abstract: A comparison of the German banking system with that of the United Kingdom (UK) and Spain shows Germany to be decentralised not only regarding the distribution of banks, but also its financial and political system more generally. Decentralised banks, which are predominantly regional savings banks and cooperative banks in Germany, nearly account for most lending to business and have extended lending at the expense of centralised banks (such as the four big banks, for example). Federalism and strong redistribution mechanisms between the regions support decentralised banking in Germany. Furthermore, close cooperation in their banking groups is shown to allow decentralised banks to realise economies of scale and develop superior techniques for retail banking, like bank-ICT and rating systems. The detailed comparison of a savings bank with a big bank suggests that shorter (functional) distances allow regional banks to consider soft information easily and reliably when lending to SMEs. Short-distance lending not only reduces the financial constraints of (financially distressed) SMEs, but can also be profitable for banks as they are able to realise higher interest earnings in business with informationally opaque enterprises. However, decentralised banking is also under threat in Germany due to tightening (more complex) banking regulations and the continuing low interest rate environment. Therefore, decentralised banks need to cut costs, which is why they have merged to larger units and closed branches in recent years. Furthermore, they have tried to increase fee earnings at the risk of disintermediation. This paper identifies two dilemmas of these cost-cutting strategies. First, disintermediation challenges regional savings-investment cycles and thus regional independency. Second, mergers, branch closures and the standardisation of processes endanger local decision-making authority and hence short-distance lending. As the detailed comparison make clear, the ability of regional banks to decide on credit at a short distance enables profitable lending to informationally opaque SMEs, meaning SMEs that appear to be very risky on the basis of hard information, by utilising soft information. Accordingly, short distance tends to be a key competitive advantage of regional banks, especially in a low interest rate environment. Cost-cutting measures must be conducted with full awareness of this advantage. With respect to lending to SMEs, branch closures may be less critical than mergers and standardisation because most branches are not involved in lending to SMEs anyway.
    Keywords: comparing banking systems,SME finance in Germany,savings and cooperative banks,decentralised vs. centralised banking
    JEL: D43 E21 G01 G21 G38 R12
    Date: 2018
  100. By: Flögel, Franz; Gärtner, Stefan
    Abstract: As expected, this comparison of the German and the UK banking systems shows substantial differences between the countries. In the UK, savings banks disappeared long ago and other regional banks have never become important in lending to business. Instead, the five large commercial banks dominate business lending. Hardly any short-distance lenders still currently exist in the UK according to our qualitative distance classification of banks and other financial providers for small firms. The closure of the very last local savings bank in 2017 marks the preliminary end of traditional regional banking in the UK and indicates that the financial crisis indirectly challenges small and regional banks disproportionally. This is because the low interest rate environment and more complex banking regulations affect small and regional banks more, making it almost impossible for small standalone banks to survive. Problems in small firm finance have been discussed in the UK at least since the 1990s and government support has been given to community development financial institutions and credit unions in order to close the financial gap for small firms. Due to the financial crisis, access to finance has become increasingly difficult for small businesses, especially in remote regions, so the debate on how to reinvent local banking (and hence how to improve access to finance) has gathered momentum. Three options are under discussion. The first is to create in one stroke a regional and public banking group with a substantial market share by restructuring the Royal Bank of Scotland into a network of local and public banks. The second is to recreate regional banks on an entirely new basis with the help of a new association that would provide economies of scale and knowledge in order to enable local people to create their local banks. The third is to establish local banking by upscaling other financial providers, such as credit unions and responsible finance providers. Whether any of these options are realistic is difficult to say right now. One additional option that could improve SME finance are the so-called challenger banks, a type of bank unknown in Germany. These banks differ in terms of ownership, business model and regional market orientation, yet our findings suggest that they tend to operate on a more decentralised (short-distance) business model than large commercial banks.
    Keywords: comparing banking systems,SME finance in the UK,decentralised vs. centralised banking
    JEL: D43 E21 G01 G21 G38 R12
    Date: 2018
  101. By: Jerome L Kreuser (ETH Zurich); Didier Sornette (ETH Zürich and Swiss Finance Institute)
    Abstract: We present a dynamic Rational Expectations (RE) bubble model of prices with the intention to evaluate it on optimal investment strategies applied to Bitcoin. Our bubble model is defined as a geometric Brownian motion combined with separate crash (and rally) discrete jump distributions associated with positive (and negative) bubbles. The RE condition implies that the excess risk premium of the risky asset exposed to crashes is an increasing function of the amplitude of the expected crash, which itself grows with the bubble mispricing: hence, the larger the bubble price, the larger its subsequent growth rate. We use the RE condition to estimate the real-time crash probability dynamically through an accelerating probability function depending on the increasing expected return. We examine the optimal investment problem in the context of the bubble model by obtaining an analytic expression for maximizing the expected log of wealth (Kelly criterion) for the risky asset and a risk-free asset. Using our bubble model on Bitcoin from 8-Jul-2013 until 19-Dec-2017 would have generated a CAGR of 140% with a maximum drawdown of 69% giving a Calmar Ratio of 2.03. It would have moved out of Bitcoin gradually since 25-Apr-2017 to be completely out on 19-Dec-2017, three days before the crash. The outperformance of the Efficient Portfolio over just investing in Bitcoin was 265%, accomplished over 117 rebalances from 08-Jul- 2013 to 20-Dec-2017. This strategy could thus afford a cost of 2.27% at each rebalancing period and still outperform investing only in Bitcoin.
    Keywords: bitcoin, financial bubbles, efficient crashes, positive feedback, rational expectation, Kelly
    JEL: C53 E47 G01 G17
    Date: 2018–03
  102. By: Chandranath Amarasekara; Rahul Anand; Kithsiri Ehelepola; Hemantha Ekanayake; Vishuddhi Jayawickrema; Sujeetha Jegajeevan; Csaba Kober; Tharindi Nugawela; Sergey Plotnikov; Adam Remo; Poongothai Venuganan; Rasika Yatigammana
    Abstract: This study documents a semi-structural model developed for Sri Lanka. This model, extended with a fiscal sector block, is expected to serve as a core forecasting model in the process of the Central Bank of Sri Lanka’s move towards flexible inflation targeting. The model includes a forward-looking endogenous interest rate and foreign exchange rate policy rules allowing for flexible change in policy behavior. It is a gap model that allows for simultaneous identification of business cycle position and long-term equilibrium. The model was first calibrated and then its data-fit was improved using Bayesian estimation technique with relatively tight priors.
    Date: 2018–06–25
  103. By: Andreas Fagereng; Martin B. Holm; Gisle James Natvik
    Abstract: We use sizeable lottery prizes in Norwegian administrative panel data to characterize households’ marginal propensities to consume (MPCs). Our main contribution is to document how MPCs vary with household characteristics and prize size, and how lottery prizes are spent and saved over time. We find that spending spikes in the year of winning, and reverts to normal within 5 years. Controlling for all items on households’ balance sheets and characteristics such as education and income, it is the amount won, age and liquid assets that vary systematically with MPCs. Low-liquidity winners of the smallest prizes (around USD 1,500) are estimated to spend all within the year of winning. The same estimate for high-liquidity winners of large prizes (USD 8,300-150,000) is slightly below one half. While the consumption responses we find are high, their systematic relations with observables point toward well-understood mechanisms from existing theory and should be useful to quantify structural models.
    Keywords: marginal propensity to consume, household heterogeneity, income shocks
    JEL: D12 D14 D91 E21
    Date: 2018
  104. By: Martin Shubik (Cowles Foundation, Yale University)
    Abstract: There are many analogies among fortune hunting in business, politics, and science. The prime task of the gold digger was to go to the Klondikes, find the right mine and mine the richest veins. This task requires motivation, sense of purpose and ability. Techniques and equipment must be developed. Fortune hunting in New England was provided at one time by hunting for whales. One went to a great whalers’ station such as New Bedford and joined the whale hunters. The hunt in academic research is similar. A single-minded passion is called for. These notes here are the wrap-up comments containing some terminal observations of mine on a hunt for a theory money and financial institutions.
    Keywords: Game Theory, Money, Financial Institutions
    JEL: A11 B2 E4
    Date: 2018–07
  105. By: Tsikas, Stefanos A.; Wagener, Andreas
    Abstract: With a series of public goods games in a 2x2-design, we analyze two channels that might moderate social dilemmas and increase cooperation without using pecuniary incentives: moral framing and shaming. Cooperation increases when non-contributing to a public good is framed as morally debatable and socially harmful tax avoidance. However, cooperation is only durable when free-riders are "shamed" by disclosing their misdemeanor. We find shaming effects to be strong enough to make appeals to morality redundant for participants' decisions.
    Keywords: shaming; framing; tax avoidance; public goods experiment
    JEL: E62 H26 H30
    Date: 2018–07
  106. By: Martin Guth
    Abstract: This paper analyzes the bank lending channel and the heterogeneous effects on the euro area, providing evidence that the channel is indeed working. The analysis of the transmission mechanism is based on structural impulse responses to an unconventional monetary policy shock on bank loans. The Bank Lending Survey (BLS) is exploited in order to get insights on developments of loan demand and supply. The contribution of this paper is to use country-specific data to analyze the consequences of unconventional monetary policy, instead of taking an aggregate stance by using euro area data. This approach provides a deeper understanding of the bank lending channel and its effects. That is, an expansionary monetary policy shock leads to an increase in loan demand, supply and output growth. A small north-south disparity between the countries can be observed.
    Date: 2018–07
  107. By: Afees A. Salisu (Department for Management of Science and Technology Development, Ton Duc Thang University, Ho Chi Minh City, Vietnam Faculty of Business Administration, Ton Duc Thang University, Ho Chi Minh City, Vietnam Centre for Econometric and Allied Research, University of Ibadan); Ahamuefula Ephraim Ogbonna (Centre for Econometric and Allied Research, University of Ibadan Department of Statistics, University of Ibadan, Ibadan, Nigeria)
    Abstract: This study empirically tests for time variation in the stochastic volatility (SV) components for the G7 stock returns. The time variation in both trend and transitory components of the SV is tested separately and jointly using the unobserved component model and following the approach developed by Chan (2018). Consequently, the computed Bayes factor obtained from the SavageDickey density ratio, which circumvents the computation of marginal likelihood, is used to adjudge the performance of each restricted time varying stochastic volatility model without the trend and transitory components against the unrestricted model that allows for same. The empirical evidence supports time variation in the transitory component of SV while the trend component is found to be relatively constant over time. These empirical estimates are not sensitive to data frequency.
    Keywords: Bayesian; Bayes factor; Transitory component; Trend component; Unobserved Component Model
    JEL: C11 C32 C53 E37 G17
    Date: 2018–07
  108. By: Emanuel Kopp
    Abstract: U.S. business investment has taken a serious toll during the global financial crisis and also in the recovery phase investment did not pick up as expected. What is surprising is that the alleged investment slowdown happened at a time of record corporate profits and retained earnings, highly supportive financial conditions, improved sentiment, rising equity valuations, and strong labor markets—factors established in supporting business investment. Applying accelerator models and Bayesian Model Averaging, this paper discusses the extent to which U.S. business investment has been unusual. Results suggest that cautious expectations of future aggregate demand growth explain most of the weakness in investment, and that the oil and gas sector accounts for a considerable portion of the investment slump. Consequently, the behavior of U.S. business investment in recent years has not been unusual once these factors are taken into account. Also, there is very little evidence for uncertainty holding back investment, or that firms’ financial measures "crowded out" capital expenditure.
    Date: 2018–06–15

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