nep-mac New Economics Papers
on Macroeconomics
Issue of 2018‒09‒03
139 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Transmission of Monetary Policy in Times of High Household Debt By Youngju Kim; Hyunjoon Lim
  2. Fixed investment in Russia in 2017 By Izryadnova Olga
  3. Russia’s Monetary Policy in 2017 By Bozhechkova Alexandra; Trunin Pavel; Knobel Alexander; Kiyutsevskaya Anna
  4. Mortgage Credit: Lending and Borrowing Constraints in a DSGE Model By Elmer Sánchez León
  5. A Search-Based Neoclassical Model of Capital Reallocation By Dong, Feng; Wang, Pengfei; Wen, Yi
  6. Nonlinear Policy Behavior, Multiple Equilibria and Debt-Deflation Attractors By Piergallini, Alessandro
  7. Phillips Curve Relationship in India: Evidence from State-Level Analysis By Behera, Harendra; Wahi, Garima; Kapur, Muneesh
  8. Money as an Inflationary Phenomenon By Markus Pasche
  9. Sweden's Fiscal Framework and Monetary Policy By Eric M. Leeper
  10. The Effect of Interest Rates on Economic Growth By Drobyshevsky Sergey; Bozhechkova Alexandra; Trunin Pavel; Sinelnikova-Muryleva Elena
  11. Tight Money-Tight Credit: Coordination Failure in the Conduct of Monetary and Financial Policies By Julio Carrillo; Enrique G. Mendoza; Victoria Nuguer; Jessica Roldan-Pena
  12. Fundamentals News, Global Liquidity and Macroprudential Policy* By Enrique G. Mendoza; Javier Bianchi; Chenxin Liu
  13. HEADING FOR LOW DOLLARIZATION By Lissovolik, Yaroslav; Kuznetsov, Aleksei; Berdigulova, Aigul
  14. "Australian Government Bonds' Nominal Yields: An Empirical Analysis" By Tanweer Akram; Anupam Das
  15. Decentralization and Overborrowing in a Fiscal Federation By Guo, Si; Pei, Yun; Xie, Zoe
  16. EDB COUNTRIES: ECONOMIC OUTLOOK IMPROVES By Lissovolik, Yaroslav; Kuznetsov, Aleksei; Berdigulova, Aigul
  17. Financial Frictions, Financial Shocks, and Aggregate Volatility By Cristina Fuentes-Albero
  18. State Dependence in Labor Market Fluctuations: Evidence, Theory, and Policy Implications By Carlo Pizzinelli; Francesco Zanetti; Konstantinos Theodoridis
  19. EDB COUNTRIES: TARGETING LOWER INFLATION By Lissovolik, Yaroslav; Kuznetsov, Aleksei; Berdigulova, Aigul
  20. Financial Deepening in a Two-Sector Endogenous Growth Model with Productivity Heterogeneity By Nguyen, Quoc Hung
  21. Asset Price Learning and Optimal Monetary Policy By Colin Caines; Fabian Winkler
  22. Sluggish Forecasts By Monica Jain
  23. The quest for global monetary policy coordination By Bruni, Franco; Siaba Serrate, José; Villafranca, Antonio
  24. Oil, Equities, and the Zero Lower Bound By Deepa Dhume Datta; Benjamin K. Johannsen; Hannah Kwon; Robert J. Vigfusson
  25. The Fallacy of Fiscal Discipline By Canofari, Paolo; Piergallini, Alessandro; Piersanti, Giovanni
  26. EDB ECONOMIES: POSITIVE TRENDS IN MUTUAL TRADE By Lissovolik, Yaroslav; Kuznetsov, Aleksei; Berdigulova, Aigul
  27. Fiscal Implications of the Federal Reserve's Balance Sheet Normalization By Cavallo, Michele; Del Negro, Marco; Frame, W. Scott; Grasing, Jamie; Malin, Benjamin A.; Rosa, Carlo
  28. Unconventional Monetary Policy and Risk-Taking: Evidence from Agency Mortgage REITs By Frame, W. Scott; Steiner, Eva
  29. Republic of Serbia; Request for a 30-Month Policy Coordination Instrument-Press Release; Staff Report; and Statement by the Executive Director for Serbia By International Monetary Fund
  30. The transmission of international shocks to CIS economies : A Global VAR approach By Faryna, Oleksandr; Simola, Heli
  31. The Welfare Cost of Inflation Revisited: The Role of Financial Innovation and Household Heterogeneity By Shutao Cao; Césaire A. Meh; José-Víctor Ríos-Rull; Yaz Terajima
  32. Does Capital Flow More to High Tobin's Q Industries? By Lee, Dong; Shin, Hyun-Han; Stulz, Rene M.
  33. The Dollar Ahead of FOMC Target Rate Changes By Karnaukh, Nina
  34. Cameroon; 2018 Article IV Consultation, Second Review Under the Extended Credit Facility Arrangement Requests for Waivers of Nonobservance of Performance Criteria and Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Cameroon By International Monetary Fund
  35. The Near-Term Forward Yield Spread as a Leading Indicator : A Less Distorted Mirror By Eric Engstrom; Steven A. Sharpe
  36. EDB ECONOMIES: IN SEARCH OF NEW GROWTH DRIVERS By Lissovolik, Yaroslav; Kuznetsov, Aleksei; Berdigulova, Aigul
  37. Inequality, Business Cycles, and Monetary-Fiscal Policy By Anmol Bhandari; David Evans; Mikhail Golosov; Thomas J. Sargent
  38. Effects of financial crises on productivity, capital and employment By Oulton, Nicholas; Sebastiá-Barriel, María
  39. RECOVERY IN TRADE BETWEEN THE EDB COUNTRIES By Lissovolik, Yaroslav; Kuznetsov, Aleksei; Berdigulova, Aigul
  40. A Comment on Oulton, "The UK Productivity Puzzle: Does Arthur Lewis Hold the Key?" By Bill Martin; Centre for Business Research
  41. Índice de precios de inmuebles: un enfoque hedónico By Fernando Mundaca; Elmer Sánchez León
  42. International Spillovers of Monetary Policy : Conventional Policy vs. Quantitative Easing By Stephanie E. Curcuru; Steven B. Kamin; Canlin Li; Marius del Giudice Rodriguez
  43. Intermediation as Rent Extraction By Maryam Farboodi; Gregor Jarosch; Guido Menzio
  44. Macroeconomic Implications of Modeling the Internal Revenue Code in a Heterogeneous-Agent Framework By Moore, Rachel; Pecoraro, Brandon
  45. Global Effective Lower Bound and Unconventional Monetary Policy By Jing Cynthia Wu; Ji Zhang
  46. Inflation News and Euro Area Inflation Expectations By Juan Angel Garcia; Sebastian Werner
  47. The Double Crisis: In What Sense A Regional Problem? By Betsy Donald; Mia Gray; Centre for Business Research
  48. Financial Openness, Bank Capital Flows, and the Effectiveness of Macroprudential Policies By Hao Jin; Chen Xiong
  49. Robust inference in structural VARs with long-run restrictions By Chevillon, Guillaume; Mavroeidis, Sophocles; Zhan, Zhaoguo
  50. On the Macroeconomic Consequences of Over-Optimism By Paul Beaudry; Tim Willems
  51. Russian industrial enterprises in 2017 (on business surveys’ findings) By Tsukhlo Sergey
  52. Romania; 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Romania By International Monetary Fund
  53. Inflation Expectations in India: Learning from Household Tendency Surveys By Abhiman Das; Kajal Lahiri; Yongchen Zhao
  54. Cycles of Credit Expansion and Misallocation: The Good, The Bad and The Ugly By Feng Dong; Zhiwei XU
  55. The Real Meaning of the real Bills Doctrine By Sproul, Michael
  56. Enhancing central bank communications with behavioural insights By Bholat, David; Broughton, Nida; Parker, Alice; Ter Meer, Janna; Walczak, Eryk
  57. Portfolio Rebalancing in General Equilibrium By Miles S. Kimball; Matthew D. Shapiro; Tyler Shumway; Jing Zhang
  58. Monetary Policy and Macroeconomic Stability Revisited By Yasuo Hirose; Takushi Kurozumi; Willem Van Zandweghe
  59. Systematic Monetary Policy and the Macroeconomic Effects of Shifts in Loan-to-Value Ratios By Ruediger Bachmann; Sebastian Rueth
  60. The Scarring Effect of Asymmetric Business Cycles By Domenico Ferraro; Giuseppe Fiori
  61. A Shadow Rate or a Quadratic Policy Rule? The Best Way to Enforce the Zero Lower Bound in the United States By Martin M. Andreasen; Andrew C. Meldrum
  62. Republic of Madagascar; Third Review Under the Extended Credit Facility and Request for Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Republic of Madagascar By International Monetary Fund
  63. Forward Guidance and Heterogeneous Beliefs By Andrade, Philippe; Gaballo, Gaetano; Mengus, Eric; Mojon, Benoît
  64. When Short-Time Work Works By Cahuc, Pierre; Kramarz, Francis; Nevoux, Sandra
  65. Changes in Monetary Regimes and the Identification of Monetary Policy Shocks: Narrative Evidence from Canada By Julien Champagne; Rodrigo Sekkel
  66. Fitting Okun's law for the Swazi Kingdom: Will a nonlinear specification do? By Phiri, Andrew
  67. The Big Bang: Stock Market Capitalization in the Long Run By Dmitry Kuvshinov; Kaspar Zimmermann
  68. Multinational Profit Shifting and Measures throughout Economic Accounts By Jennifer Bruner; Dylan G. Rassier; Kim J. Ruhl
  69. Welfare economic foundation of hoarding loss by money circulation optimization By Miura, Shinji
  70. An Experimental Comparison of Two Exchange Mechanisms, An Asset Market versus a Credit Market By Enrica Carbone; John Hey; Tibor Neugebauer
  71. Macroeconomic Implications of Asset Prices By Mikhail Golosov; Thomas Winberry
  72. Forecasting with Dynamic Panel Data Models By Laura Liu; Hyungsik Moon; Frank Schorfheide
  73. Bubbly Recessions By Toan Phan; Andrew Hanson; Siddhartha Biswas
  74. What Drives the Distributional Dynamics of Client Interest Rates on Consumer Loans in the Czech Republic? A Bank-level Analysis By Vaclav Broz; Michal Hlavacek
  75. Central Bank Communication and Monetary Policy Surprises in Chile By Andrea Pescatori
  76. Kaldor and Piketty's Facts: the Rise of Monopoly Power in the United States By Gauti Eggertsson; Jacob Robbins
  77. Fragile New Economy: The Rise of Intangible Capital and Financial Instability By Ye Li
  78. Trend Inflation and Inflation Compensation By Juan Angel Garcia; Aubrey Poon
  79. Structural Change and Aggregate Employment Fluctuations in China and the US By Wen Yao; Xiaodong Zhu
  80. Affordable Housing and Cyclical Fluctuations: The Malaysian Property Market By Ferlito, Carmelo
  81. Global Market Power By Jan De Loecker; Jan Eeckhout
  82. Bank solvency risk and funding cost interactions in a small open economy: evidence from Korea By Iñaki Aldasoro; Kyounghoon Park
  83. The Macroeconomic and Distributional Implications of Fiscal Consolidations in Low-income Countries By Adrian Peralta-Alva; Marina Mendes Tavares; Xin Tang; Xuan Tam
  84. Interest Rate Spreads and Forward Guidance By Christian Bredemeier; Andreas Schabert; Christoph Kaufmann
  85. Forward Guidance By Marcus Hagedorn; Iourii Manovskii; Jinfeng Luo; Kurt Mitman
  86. Russia’s banking sector in 2017 By Khromov Mikhail
  87. The Heterogeneous Effects of Government Spending : It’s All About Taxes By Axelle Ferrière; Gaston Navarro
  88. France; 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for France By International Monetary Fund
  89. Rethinking prices and markets underlying price-competitiveness indicators By Alberto Felettigh; Claire Giordano
  90. The Role of Monetary Policy Uncertainty in Predicting Equity Market Volatility of the United Kingdom: Evidence from over 150 Years of Data By Rangan Gupta; Mark E. Wohar
  91. Revisiting the Finance-Inequality Nexus in a Panel of African Countries By Meniago, Christelle; Asongu, Simplice
  92. Fiscal Rules as Bargaining Chips By Facundo Piguillem; Alessandro Riboni
  93. The Economic Consequences of Labor Market Regulations By Jesus Fernandez-Villaverde
  94. Financial stability, monetary policy and the payment intermediary share By Moritz Lenel; Martin Schneider; Monika Piazzesi
  95. A Contagion through Exposure to Foreign Banks during the Global Financial Crisis By Park, Cyn-Young; Shin, Kwanho
  96. Political and Institutional Determinants of Fiscal Policy Persistence in West Africa By Umoh, O. J.; Onye, Kenneth U.; Atan, Johnson A.
  97. Capital Flows and Financial Stability in Emerging Economies By Baum, Christopher F.; Pundit, Madhavi; Ramayandi, Arief
  98. The labour-augmented K+S model: a laboratory for the analysis of institutional and policy regimes By Dosi, G.; Pereira, M. C.; Roventini, A.; Virgillito, M. E.
  99. El Salvador; 2018 Article IV Consultation-Press Release; Staff Report and Statement by the Executive Director for El Salvador By International Monetary Fund
  100. Government Spending and the Term Structure of Interest Rates in a DSGE Model By Ales Marsal
  101. Understanding HANK: Insights from a PRANK By Sushant Acharya; Keshav Dogra
  102. Colombia; Arrangement Under the Flexible Credit Line and Cancellation of Current Arrangement-Press Release and Staff Report By International Monetary Fund
  103. Is Unemployment on Steroids in Advanced Economies? By Gabriel Di Bella; Francesco Grigoli; Francisco Ramirez
  104. Export boom, employment bust? The paradox of Indonesia's displaced workers, 2000-14 By Shrestha, Rashesh; Coxhead, Ian
  105. Compliance with the Corporate Governance Code: are there any improvements By Polezhaeva Natalia
  106. The Phillips Curve: Price Levels or Real Exchange Rates? By Francois Geerolf
  107. Guinea; First Review of the Arrangement Under the Three-Year Extended Credit Facility, Financing Assurances Review, and Request for Modification and for Waivers of Nonobservance of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Guinea By International Monetary Fund
  108. Financial Shocks Propagation and International Trade Linkages By Sihao Chen
  109. Slovak Republic; 2018 Article IV Consultation-Press Release; Staff Report and Statement by the Executive Director for the Slovak Republic By International Monetary Fund
  110. Tokenomics: Dynamic Adoption and Valuation By Cong, Lin William; Li, Ye; Wang, Neng
  111. The Impact of Government Spending on GDP in a Remitting Country By Al-Abri, Almukhtar; Genc, Ismail H.; Naufal, George S
  112. Estimates of Potential Output and the Neutral Rate for the U.S. Economy By Ali Alichi; Rania A. Al-Mashat; Hayk Avetisyan; Jaromir Benes; Olivier Bizimana; Aram Butavyan; Robert Ford; Narek Ghazaryan; Vahagn Grigoryan; Mane Harutyunyan; Anahit Hovhannisyan; Edgar Hovhannisyan; Hayk Karapetyan; Mariam Kharaishvili; Douglas Laxton; Akaki Liqokeli; Karolina Matikyan; Gevorg Minasyan; Shalva Mkhatrishvili; Armen Nurbekyan; Andrei Orlov; Babken Pashinyan; Garik Petrosyan; Yekaterina Rezepina; Aleksandr Shirkhanyan; Tamta Sopromadze; Lusine Torosyan; Erik Vardanyan; Hou Wang; Jiaxiong Yao
  113. Grenada; 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Grenada By International Monetary Fund
  114. House Prices, Home Equity, and Personal Debt Composition By Jieying Li; Xin Zhang
  115. From NY to LA: A Look at the Wage Phillips Curve Using Cross-Geographical Data By Sylvain Leduc; Daniel Wilson
  116. Debt, Defaults and Dogma: politics and the dynamics of sovereign debt markets By Johnny Cotoc; Alok Johri; Cesar Sosa-Padilla
  117. The dynamic relationship between Financial Development and the Energy Demand in North Cyprus: Evidence from ARDL Bounds and Combine Cointegration Tests By Tursoy, Turgut
  118. Financing Green Growth By Gregor Semieniuk; Mariana Mazzucato
  119. About Local Projection Impulse Responde Function Reliability By Luca Brugnolini
  120. Guinea- Bissau; Fifth Review Under the Extended Credit Facility Arrangement, Request for Extension and Augmentation of Access, and Financing Assurances Review-Press Release and Staff Report By International Monetary Fund
  121. Mismatch Cycles By Isaac Baley; Ana Figueiredo; Robert Ulbricht
  122. The Six Linkages between Foreign Direct Investment, Domestic Investment, Exports, Imports, Labor Force and Economic Growth: New Empirical and Policy Analysis from Nigeria By Bakari, Sayef; Mabrouki, Mohamed; Othmani, Abdelhafidh
  123. Euro Area Policies; Financial Sector Assessment Program-Technical Note-Systemic Liquidity Management By International Monetary Fund
  124. Equity Return Dispersion and Stock Market Volatility: Evidence from Multivariate Linear and Nonlinear Causality Tests By Riza Demirer; Rangan Gupta; Zhihui Lv; Wing-Keung Wong
  125. Underpricing in the euro area corporate bond market: New evidence from post-crisis regulation and quantitative easing By Rischen, Tobias; Theissen, Erik
  126. Small and medium-sized enterprises in 2016–2017 By Barinova Vera; Zemtsov Tsepan; Tsareva Yulia
  127. A maximum entropy network reconstruction of macroeconomic models By Aur\'elien Hazan
  128. Establishment Size and Wage Inequality: The Roles of Performance Pay and Rent Sharing By Sang-yoon Song
  129. Price and cost competitiveness misalignments of the euro area and of its main economies according to a quarterly BEER model, 1999-2017 By Claire Giordano
  130. Captial Reallocation and Productivity By Russell Cooper; Immo Schott
  131. A Profit-to-Provisioning Approach to Setting the Countercyclical Capital Buffer: The Czech Example By Lukas Pfeifer; Martin Hodula
  132. Monetary Policy Effects on Wage Inequality Between and Within Firms By Christian Moser; Benjamin Wirth; Farzad Saidi
  133. Aggregate Information Dynamics By Kyriakos Chousakos; Gary Gorton; Guillermo Ordonez
  134. Structural Estimation of Dynamic Macroeconomic Models using Higher-Frequency Financial Data By Max Ole Liemen; Michel van der Wel; Olaf Posch
  135. Debt Burdens and the Interest Rate Response to Fiscal Stimulus: Theory and Cross-Country Evidence By Jorge Miranda-Pinto; Daniel Murphy; Eric Young; Kieran Walsh
  136. The Paradox of Pledgeability By Donaldson, Jason; Gromb, Denis; Piacentino, Giorgia
  137. Monetary Policy and Bubbles in US REITs By Petre Caraiani; Adrian Cantemir Călin; Rangan Gupta
  138. Transmission of monetary policy through global banks: whose policy matters? By Stefan Avdjiev; Catherine Koch; Patrick McGuire; Goetz von Peter
  139. Magic mirror in my hand…. how trade mirror statistics can help us detect illegal financial flows By Mario Gara; Michele Giammatteo; Enrico Tosti

  1. By: Youngju Kim (Macroeconomics Team, Economic Research Institute, The Bank of Korea); Hyunjoon Lim (International Economics Team, Economic Research Institute, The Bank of Korea)
    Abstract: This paper explores whether the effectiveness of monetary policy can be affected by the degree of household indebtedness. We take an interacted panel VAR approach using a panel of 28 countries and thereby obtain several interesting findings. That is, the responses of consumption and investment to monetary shocks are stronger in the state of high household debts. Such responses furthermore become larger in a contractionary monetary policy stance rather than in an expansionary one. Finally, we find that the negative impact of contractionary monetary shocks on the real economy is stronger in the countries with a higher share of adjustable rate loans. We conjecture that these findings lend support for the presence of "cash flow channel" with respect to the transmission of contractionary monetary policy.
    Keywords: Household debt, Monetary policy, Interacted panel VAR, Adjustable-rate loans
    JEL: E52 E62 R38
    Date: 2017–12–29
  2. By: Izryadnova Olga (Gaidar Institute for Economic Policy)
    Abstract: The macroeconomic aspect of the investment model is determined by dynamics and structure of major indexes of the real sector and by monetary and financial markets as well as by characteristics of reproduction and usage of principal factors of production economy wide by types of economic activity. This allows not only to assess the investment potential of the economy from the point of view of mobilization of internal development reserves but also to reveal constraints and possibilities for raising the investment attractiveness for the Russian and foreign capital. Institutional environment, norms and rules of regulation the investment activity, development of financial and credit system, risks of changes in social and political, economic, infrastructure and organization and managerial factors represent another feature of the investment model. The investment model being a complex system includes a third aspect – mechanism of interaction of different subjects of the investment process (state sector, corporate sector, households, foreign investors) and investment decision making by economic entities. One should also take into consideration specific features of the investment model depending on time-frame. In short-term perspective, economic growth can be determined by a system of non-capital intensive development factors, in particular, decline in inflation, reduction of costs, and shutdown of inefficient products. In medium- and long-term perspective, the role of investments notably increases due to the need to resolve deep structural issues of modernization of production and raising competitiveness of the economy.
    Keywords: Russian economy, fixed investment
    JEL: E20 E21 E22 E60
    Date: 2018
  3. By: Bozhechkova Alexandra (Gaidar Institute for Economic Policy); Trunin Pavel (Gaidar Institute for Economic Policy); Knobel Alexander (Gaidar Institute for Economic Policy); Kiyutsevskaya Anna (Gaidar Institute for Economic Policy)
    Abstract: The Bank of Russia eased at slow enough pace its monetary policy in 2017 despite substantial deceleration in inflation, holding that ongoing inflation risks were high, including a possible decline in crude oil prices and capital outflow, upturn in consumer demand, fiscal policy uncertainty, as well as a relatively high and unstable degree of inflation expectations. In 2017, the monetary policy rate was cut by 2.25 percentage points to 7.75 percent per annum as the inflation rate over the same period (same-month-year-ago comparison) was down 2.6 percentage points to 2.5 percent. The Russian central bank cut the key interest rate six times: by 0.25 percentage points on March 27, by 0.5 percentage points on May 2, by 0.25 percentage points on June 19, by 0.5 percentage points on September 18, by 0.25 percentage points on October 30, and by 0.5 percentage points on December 15.
    Keywords: Russian economy, monetary policy, money market, exchange rate, inflation, balance of payments
    JEL: E31 E43 E44 E51 E52 E58
    Date: 2018
  4. By: Elmer Sánchez León (Banco Central de Reserva del Perú)
    Abstract: This paper develops a Dynamic Stochastic General Equilibrium (DSGE) model that evaluates the relative importance of the easing of lending and borrowing constraints in mortgage credit markets for business cycle fluctuations in a small open emerging economy. Credit markets are characterized by partial dollarization and are subject to demand shocks, innovations to stochastic loan-to-value ratios (borrowing constraints) imposed on borrowers, and supply shocks, innovations to stochastic bank capital-to-asset ratios (lending constraints) imposed on financial intermediaries. In addition, the model features a set of real and nominal domestic shocks to demand, productivity, and fiscal and monetary policy, as well as foreign shocks. A historical decomposition conducted on household leverage ratios reveals that these variables’ cyclical dynamics were mainly driven by borrowing constraint shocks or credit demand shifts, while lending constraint shocks played a residual role.
    Keywords: Financial frictions, DSGE model, banking sector
    JEL: E37 E44 E52
    Date: 2018–07
  5. By: Dong, Feng (Antai College of Economics and Management, Shanghai Jiao Tong University, Shanghai, China); Wang, Pengfei (Department of Economics, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong); Wen, Yi (Federal Reserve Bank of St. Louis)
    Abstract: As a form of investment, the importance of capital reallocation between firms has been increasing over time, with the purchase of used capital accounting for 25% to 40% of firms total investment nowadays. Cross- firm reallocation of used capital also exhibits intriguing business-cycle properties, such as (i) the illiquidity of used capital is countercyclical (or the quantity of used capital reallocation across rms is procyclical), (ii) the prices of used capital are procyclical and more so than those of new capital goods, and (iii) the dispersion of firms' TFP or MPK (or the bene t of capital reallocation) is countercyclical. We build a search-based neoclassical model to qualitatively and quantitatively explain these stylized facts. We show that search frictions in the capital market are essential for our empirical success but not sufficient---fi nancial frictions and endogenous movements in the distribution of rm-level TFP (or MPK) and interactions between used-capital investment and new investment are also required to simultaneously explain these stylized facts, especially that prices of used capital are more volatile than that of new investment and the dispersion of firm TFP is countercyclical.
    Keywords: Capital Reallocation; Capital Search; Fragmented Markets; Endogenous Dispersion of rmsTFP; Endogenous Total Factor Productivity; Business Cycles
    JEL: E22 E32 E44 G11
    Date: 2018–08–01
  6. By: Piergallini, Alessandro
    Abstract: This paper analyzes global dynamics in a macroeconomic model where both monetary and fiscal policies are nonlinear, consistent with empirical evidence. Nonlinear monetary policy, in which the nominal interest rate features an increasing marginal reaction to inflation, interacting with nonlinear fiscal policy, in which the primary budget surplus features an increasing marginal reaction to debt, gives rise to four steady-state equilibria. Each steady state exhibits in its neighborhood a pair of 'active'/'passive' monetary/fiscal policies à la Leeper-Woodford, and is typically investigated in isolation within linearized monetary models. We show that, when global nonlinear dynamics are taken into account, such steady states are endogenously connected. In particular, the global dynamics reveals the existence of infinite self-fulfilling paths that originate around the steady states locally displaying either monetary or fiscal 'dominance' — and thus locally delivering equilibrium determinacy — as well as around the unstable steady state with active monetary-fiscal policies, and that converge into an unintended high-debt/low-inflation (possibly deflation) attractor. Such global trajectories — bounded by two heteroclinic orbits connecting the three out-of-the-trap steady states — are, however, obscured if the four monetary-fiscal policy mixes are studied locally and disjointly.
    Keywords: Nonlinear Monetary and Fiscal Policy Behavior; Evolutionary Macroeconomic Modelling; Multiple Equilibria; Global Nonlinear Dynamics; Debt-Deflation Traps.
    JEL: C61 C62 D91 E52 E62 E63
    Date: 2018–02–26
  7. By: Behera, Harendra; Wahi, Garima; Kapur, Muneesh
    Abstract: This paper revisits the issue of determinants of inflation in India in a Phillips curve framework and makes two key contributions in relation to existing studies. First, in the context of the Reserve Bank moving towards a flexible inflation targeting framework based on consumer price index (CPI) inflation, this paper attempts to model dynamics of the CPI inflation. Second, this paper explores the Phillips curve relationship using sub-national data in a panel-approach. The estimates in this paper confirm the presence of a conventional Phillips curve specification, both for core inflation and headline inflation. Excess demand conditions have the expected hardening effect on inflation, with the impact being more on core inflation. Exchange rate movements are also found to have a significant impact on inflation. Overall, the paper’s findings provide support for the role of a countercyclical monetary policy to stabilise inflation and inflation expectations.
    Keywords: Consumer Price Inflation, Exchange Rate Pass-through, Monetary Policy,Phillips Curve
    JEL: E31 E32 E52 E58
    Date: 2017–07–03
  8. By: Markus Pasche (FSU Jena)
    Abstract: Empirical tests of the quantity theory and particularly the neutrality of money are based on the idea that money growth "explains", to some extent, inflation. Modern macroeconomic theory, however, considers inflation target- ing central banks which use the interest rate as a policy tool, while money is seen as an endogenous outcome of financial intermediation, i.e. credit creation. A simple NKM model with fiat money demonstrates that money growth is tied to inflation, changes of output and interest rate changes. The latter are determined by inflation and output gap if we consider an inflation-targeting central bank. The quantity equation emerges from the macroeconomic trans- mission process but the economic causalities run from output and inflation to money creation. Hence, money growth does not explain inflation. Besides, the result does not require a sophisticated microfoundation of money demand but simply emerges from the transmission process.
    Keywords: quantity equation, endogenous money, New Keynesian Macroeconomics, inflation targeting, money demand
    JEL: E44 E51
    Date: 2018–08–29
  9. By: Eric M. Leeper
    Abstract: Basic economic reasoning tells us that monetary and fiscal policies always interact to jointly determine aggregate demand and the overall level of prices in the economy. This paper interprets Sweden's explicit monetary and fiscal frameworks in light of this reasoning, bringing recent Swedish inflation and interest-rate developments to bear on the interpretations. Theory and evidence raise the question of whether the two policy frameworks are mutually consistent.
    JEL: E31 E52 E62
    Date: 2018–06
  10. By: Drobyshevsky Sergey (Gaidar Institute for Economic Policy); Bozhechkova Alexandra (Gaidar Institute for Economic Policy); Trunin Pavel (Gaidar Institute for Economic Policy); Sinelnikova-Muryleva Elena (RANEPA)
    Abstract: This paper explores the mechanisms, direction and extent to which interest rates can affect economic growth. The authors analyze theoretical concepts and international economic practices in high-interest-rate environments to justify that high nominal and real interest rates may not dampen economic growth if there are mechanisms such as low inflation expectations, economy’s attractiveness to foreign investors, the technological transfer effect, the accumulation of domestic savings. By using a structural vector autoregression (VAR) to evaluate econometrically the effectiveness of the interest rate channel of Bank of Russia’s monetary policy transmission mechanism, the paper provides evidence to suggest that interest rate policy is partially efficient after the global financial crisis.
    Keywords: monetary policy, inflation, inflation expectations, nominal interest rate, real interest rate, economic growth, interest rate channel, SVAR model
    JEL: E20 E31 E52 E58 G15
    Date: 2017
  11. By: Julio Carrillo (Banco de México); Enrique G. Mendoza (Department of Economics, University of Pennsylvania); Victoria Nuguer (IADB); Jessica Roldan-Pena (Banco de México)
    Abstract: Quantitative analysis of a New Keynesian model with the Bernanke-Gertler accelerator and risk shocks shows that violations of Tinbergen’s Rule and strategic interaction between policy-making authorities undermine significantly the effectiveness of monetary and financial policies. Separate monetary and financial policy rules, with the latter subsidizing lenders to encourage lending when credit spreads rise, produce higher welfare and smoother business cycles than a monetary rule augmented with credit spreads. The latter yields a tight money-tight credit regime in which the interest rate responds too much to inflation and not enough to adverse credit conditions. Reaction curves for the choice of policy-rule elasticity that minimizes each authority’s loss function given the other authority’s elasticity are nonlinear, reflecting shifts from strategic substitutes to complements in setting policy-rule parameters. The Nash equilibrium is significantly inferior to the Cooperative equilibrium, both are inferior to a first-best outcome that maximizes welfare, and both produce tight money-tight credit regimes.
    Keywords: Financial Frictions, Monetary Policy, Financial Policy
    JEL: E44 E52 E58
    Date: 2017–02–03
  12. By: Enrique G. Mendoza (Department of Economics, University of Pennsylvania); Javier Bianchi (Federal Reserve Bank of Minneapolis); Chenxin Liu (Department of Economics, UW-Madison)
    Abstract: We study optimal macroprudential policy in a model in which unconventional shocks, in the form of news about future fundamentals and regime changes in world interest rates, interact with collateral constraints in driving the dynamics of financial crises. These shocks strengthen incentives to borrow in good times (i.e. when \good news" about future fundamentals coincide with a low-world-interest-rate regime), thereby increasing vulnerability to crises and enlarging the pecuniary externality due to the collateral constraints. Quantitatively, an optimal schedule of macroprudential debt taxes can lower the frequency and magnitude of financial crises, but the policy is complex because it features significant variation across interest-rate regimes and news realizations.
    Keywords: Financial crises, macroprudential policy, systemic risk, global liquidity, news shocks
    JEL: D62 E32 E44 F32 F41
    Date: 2016–12–05
  13. By: Lissovolik, Yaroslav (Eurasian Development Bank); Kuznetsov, Aleksei (Eurasian Development Bank); Berdigulova, Aigul (Eurasian Development Bank)
    Abstract: The global background for the economic recovery of EDB member states has improved this year, in many ways due to rising oil prices and an improved economic growth outlook in the major centers of the global economy. Against the backdrop of improving regional trends in economic growth and mutual trade, we have revised our GDP growth forecasts for the EDB member states in 2017-2019. The appreciable acceleration of GDP growth in Russia beginning in the 2nd quarter of 2017 along with improvements in both foreign and domestic macroeconomic conditions have prompted an upgrade of our GDP growth forecast for 2017, from 1.4% to 1.7%. The preservation and continued improvement of external conditions for the Russian economy is shifting the balance of risks toward higher growth rates. Improvements in the Russian economic performance have delivered a boost to the economies of other EDB countries: the GDP growth forecasts for 2017 have been upgraded for Belarus, from 1.4% to 1.8%, Kyrgyzstan, from 3.7% to 4.0%, Tajikistan, from 6.2% to 7.2%, and Kazakhstan, from 3.4% to 3.7%. In the longer term, the biggest challenge for the global economy consists of the lingering imbalances that have contributed to crises over the past decade. They primarily include the high levels of inequality both within and among countries. The continuing paradox in the global economy is that the majority of countries that most need economic integration (such as the poorest nations or developing countries without access to the sea) are the most disadvantaged in terms of participation in regional or global economic unions or “clubs”. We focus particular attention on the dedollarization of the economies of EDB member states as yet another factor contributing to improvements in the regional economic environment. The level of dollarization has been declining this year in all EDB member states, in many ways due to the stabilization of exchange rates, lower inflation, improved economic activity and regained trust in the national currencies. Among the EDB member states, the most noticeable reductions in the level of dollarization (measured as the share of foreign currency deposits within the structure of the broad money supply) have been recorded in Belarus, Kazakhstan, and Kyrgyzstan (the level of dollarization was close to 30% by mid-2017 in Kyrgyzstan, Kazakhstan, and Russia). Such positive trends will contribute to a more effective monetary policy in the regional economies, more conducive conditions to support lower inflation, as well as conditions aiding stronger financial stability.
    Keywords: Macroeconomy; Forecasting; Eurasia; EAEU Countries; Economic Growth; Monetary Policy
    JEL: E17 E52 E66 O11
    Date: 2017–12–07
  14. By: Tanweer Akram; Anupam Das
    Abstract: The short-term interest rate is the main driver of the Commonwealth of Australia government bonds' nominal yields. This paper empirically models the dynamics of government bonds' nominal yields using the autoregressive distributed lag (ARDL) approach. Keynes held that the central bank exerts decisive influence on government bond yields because the central bank's policy rate and other monetary policy actions determine the short-term interest rate, which in turn affects long-term government bonds' nominal yields. The models estimated here show that Keynes's conjecture applies in the case of Australian government bonds' nominal yields. Furthermore, the effect of the budget balance ratio on government bond yields is small but statistically significant. However, there is no statistically discernable effect of the debt ratio on government bond yields.
    Keywords: Government Bond Yields; Long-Term Interest Rate; Monetary Policy; Australian Government Bond Market; Commonwealth of Australia
    JEL: E43 E50 E60 G10 G12 O16
    Date: 2018–08
  15. By: Guo, Si (International Monetary Fund); Pei, Yun (University at Buffalo); Xie, Zoe (Federal Reserve Bank of Atlanta)
    Abstract: We build an infinite horizon equilibrium model of fiscal federation, where anticipation of transfers from the central government creates incentives for local governments to overborrow. Absent commitment, the central government over-transfers, which distorts the central-local distribution of resources. Applying the model to fiscal decentralization, we find when decentralization widens local governments’ fiscal gap, borrowings by both local and central governments rise. Quantitatively, fiscal decentralization accounts for from 19 percent to 40 percent of changes in general government debt in Spain during 1988–2006. A macroprudential tax on local borrowing that implements Pareto optimal allocation would reduce debt by 27 percent and raise welfare by 3.75 percent.
    Keywords: fiscal federalism; time-consistent policy; decentralization; public debt
    JEL: E61 E62 H74
    Date: 2018–08–23
  16. By: Lissovolik, Yaroslav (Eurasian Development Bank); Kuznetsov, Aleksei (Eurasian Development Bank); Berdigulova, Aigul (Eurasian Development Bank)
    Abstract: The recovery in global commodity prices as well as the weakening currency imbalances had a positive effect on EDB countries' foreign trade flows. Whereas 1Q 2016 saw falling exports of goods and services in all EDB countries except Armenia, positive growth in exports was demonstrated by all EDB countries this year. Remittances coming off the back of revived economic activity in Russia contributed to improving the current account in Armenia, Kyrgyzstan, and Tajikistan. In Kazakhstan, the rising current account deficit was due to growing dividend payments to direct foreign investors. The recovery in economic activity, accompanied by weakening inflation risks, had a positive impact on the living standards of the population in the region. In 1Q 2017, unlike in the same period last year, real wages started to demonstrate a positive trend in all EDB countries except Kazakhstan, although the rate of decline slowed in that country. The accelerated economic activity in EDB countries in the first half of 2017 led us to revise our GDP outlook for the full year. We raised our Russian GDP forecast by 0.3 pp to 1.4%, which, in its turn, has driven a higher 2017 GDP forecast for Belarus, up 0.1 pp to 1.4%. There were more considerable changes with respect to Kazakhstan and Armenia. The deferred effect of stimulatory fiscal and monetary policy in 2016 amid a quick recovery in remittances was reflected in consumer demand trends in Armenia in 1H 2017. In these circumstances, we raised Armenia's full-year GDP outlook from 2.9% to 5.2%. In this regard, amid the recovery in trade and economic growth rates, Eurasian Economic Union (EAEU) countries are taking further steps aimed at improving economic integration. In particular, in the transport and logistics sphere, quarantinable products will be transported within the territory of the EAEU under standardized rules from 1 July 2017. Uniform domestic tariffs have already been established for cargo transportation by rail for the EAEU. In addition, an important step on the way to further integration was the approval by the presidents of the EAEU countries of a key strategic document - Main Directions and Stages of the Coordinated (Agreed) Transport Policy - in December 2016. Also worth mentioning is further progress in developing the EAEU through building economic alliances - a joint statement was signed in June between the EAEU and the Republic of India on beginning negotiations on a Free Trade Area agreement.
    Keywords: Macroeconomy; Forecasting; Eurasia; EAEU Countries; Economic Growth; Monetary Policy
    JEL: E17 E52 E66 O11
    Date: 2017–08–24
  17. By: Cristina Fuentes-Albero
    Abstract: The Great Moderation in the U.S. economy was accompanied by a widespread increase in the volatility of financial variables. We explore the sources of the divergent patterns in volatilities by estimating a model with time-varying financial rigidities subject to structural breaks in the size of the exogenous processes and two institutional characteristics: the coefficients in the monetary policy rule and the severity of the financial rigidity at the steady state. To do so, we generalize the estimation methodology developed by Curdia and Finocchiaro (2013). Institutional changes are key in accounting for the volatility slowdown in real and nominal variables and in shaping the transmission mechanism of financial shocks. Our model accounts for the increase in the volatility of financial variables through larger financial shocks, but the vulnerability of the economy to these shocks is significantly alleviated by the estimated changes in institutions.
    Keywords: Changes in cyclical volatilities ; Financial frictions ; Financial shocks ; Structural breaks ; Bayesian methods
    JEL: E32 E44 C11 C13
    Date: 2018–08–07
  18. By: Carlo Pizzinelli; Francesco Zanetti; Konstantinos Theodoridis
    Abstract: This paper documents state dependence in labor market fluctuations. Using a Threshold Vector-Autoregression model, we establish that the unemployment rate, the job separation rate and the job ï¬ nding rate exhibit a larger response to productivity shocks during periods with low aggregate productivity. A Diamond-Mortensen-Pissarides model with endogenous job separation and on-the-job search replicates these empirical regularities well. The transition rates into and out of employment embed state dependence through the interaction of reservation productivity levels and the distribution of match-speciï¬ c idiosyncratic productivity. State dependence implies that the effect of labor market reforms is different across phases of the business cycle. A permanent removal of layoff taxes is welfare enhancing in the long run, but it involves distinct short-run costs depending on the initial state of the economy. The welfare gain of a tax removal implemented in a low-productivity state is 4.9 percent larger than the same reform enacted in a state with high aggregate productivity.
    Keywords: Search and Matching Models, State Dependence in Business Cycles, Threshold Vector Autoregression
    JEL: E24 E32 J64 C11
    Date: 2018–08–01
  19. By: Lissovolik, Yaroslav (Eurasian Development Bank); Kuznetsov, Aleksei (Eurasian Development Bank); Berdigulova, Aigul (Eurasian Development Bank)
    Abstract: The beginning of the last year proved to be challenging for the EBD Member States: with oil prices plummeting, both financial markets and exchange rates were highly volatile. Nevertheless, as of the year’s end, the countries of the region saw exchange rates stabilize, and, in a number of cases, their national currencies strengthened considerably. Similarly, inflation in the EBD countries reached its historic minimum of 5.8% at the end of 2016 as compared to 12.8% in late 2015. In 2017, the most probable scenario is continued inertial recovery in the EDB Member States and inflation decreasing as external conditions stabilize. We project a 0.9% growth of the EDB economies, with a further 1.5% acceleration in 2018-2019. And there remain opportunities for reducing inflation that we expect to decrease from 5.8% at the end of 2016 to 4.7% in 2017. Limited demand, stabilized exchange rates and capital flows and a conservative monetary policy in most countries of the region will support the continued downward inflation trend. In 2017, the budget sector will be the main macroeconomic challenge for the EDB countries, given the growth in debt of the countries of the region (Belarus and Kazakhstan), reduced State budget reserves (the Russian Federation) and sizeable budget gaps in 2016 (Armenia and Kyrgyzstan). The oil output reduction agreement reached with the OPEC countries in 2016 was an important event for the region’s major economies and generated a considerable recovery of petroleum prices. The 2017 focus will now be on the OPEC countries’ ability to adhere to their quotas/obligations; historically, the OPEC countries have had great difficulty in observing discipline. Still, the agreement itself mitigates somewhat the risks of a sudden and large-scale fall of oil prices similar to their decline in late 2015 and early 2016. In the field of economic policy, the EAEU countries are just beginning to fully utilize, in the last few years, the potential of regionalism; for now, the agreement between the Eurasian Economic Union Member States and Vietnam, that took effect in 2016, can be recognized as one such achievement. Nevertheless, with the EAEU becoming more active internationally, 2017 may become the year of the EAEU’s breakthrough towards a more diversified system of trade alliances; here the Eurasian Economic Union’s negotiations with such countries as South Korea, Singapore and Israel will be of key importance.
    Keywords: Macroeconomy; Forecasting; Eurasia; EAEU Countries; Economic Growth; Monetary Policy
    JEL: E17 E52 E66 O11
    Date: 2017–01–17
  20. By: Nguyen, Quoc Hung
    Abstract: We develop a tractable two-sector endogenous growth model in which heterogeneous entrepreneurs face borrowing constraints and the government collects tax to fund public eduction. This model is isomorphic to a Uzawa-Lucas model and there exists a balanced-growth path equilibrium in which the growth rate depends on the financial deepening level. We show that the policy tax rate exerts inverted U-shaped effects on the growth rate. Additionally, at the optimal policy tax rates the model's predictions are consistent with correlational regularities documented from 35 OECD countries with regards to financial deepening, factor accumulation and working hours.
    Keywords: Heterogeneity; Financial Deepening; Endogenous Growth
    JEL: E10 E22 E44 O16
    Date: 2018–04–02
  21. By: Colin Caines; Fabian Winkler
    Abstract: We characterize optimal monetary policy when agents are learning about endogenous asset prices. Boundedly rational expectations induce inefficient equilibrium asset price fluctuations which translate into inefficient aggregate demand fluctuations. We find that the optimal policy raises interest rates when expected capital gains, and the level of current asset prices, is high. The optimal policy does not eliminate deviations of asset prices from their fundamental value. When monetary policymakers are information-constrained, optimal policy can be reasonably approximated by simple interest rate rules that respond to capital gains. Our results are robust to a wide range of belief specifications as well as to the inclusion of an investment channel.
    Keywords: Optimal monetary policy ; Natural real Interest rate ; Learning ; Asset price volatility ; Leaning against the wind
    JEL: E44 E52
    Date: 2018–08–21
  22. By: Monica Jain
    Abstract: Given the influence that agents’ expectations have on key macroeconomic variables, it is surprising that very few papers have tried to extrapolate agents’ “true” expectations directly from the data. This paper presents one such approach, starting with the hypothesis that there is sluggishness in inflation and real GDP growth forecasts. Using individual-level data on 29 U.S. professional forecasters from the Survey of Professional Forecasters, I find that some degree of sluggishness is present in about 40% of inflation forecasts and in 60% of real GDP growth forecasts. The estimates of sluggishness are then used to recover a series of sluggishness-adjusted expectations that are more volatile and, at times, more accurate than the raw survey forecasts.
    Keywords: Econometric and statistical methods; Inflation and prices
    JEL: E31 E37
    Date: 2018
  23. By: Bruni, Franco; Siaba Serrate, José; Villafranca, Antonio
    Abstract: This paper puts forward a proposal to help monetary policies confront the challenge of the "normalisation" of money creation and interest rates. The difficult unwinding of years of unorthodox policies put financial stability at risk in major monetary centres and in EMEs. The authors argue that global coordination is crucial to facing this challenge. They propose to convene appropriate official meetings to coordinate in an explicit, formal, and well-communicated way the process of normalisation and the discussions on the needed long-term changes in the strategy and institutional setting of monetary policies.
    Keywords: monetary policy,central banks,global cooperation,financial stability,international institutions
    JEL: E51 E58 E61 E63 F33 F42
    Date: 2018
  24. By: Deepa Dhume Datta; Benjamin K. Johannsen; Hannah Kwon; Robert J. Vigfusson
    Abstract: From late 2008 to 2017, oil and equity returns were more positively correlated than in other periods. In addition, we show that both oil and equity returns became more responsive to macroeconomic news. We provide empirical evidence and theoretical justification that these changes resulted from nominal interest rates being constrained by the zero lower bound (ZLB). Although the ZLB alters the economic environment in theory, supportive empirical evidence has been lacking. Our paper provides clear evidence of the ZLB altering the economic environment, with implications for the effectiveness of fiscal and monetary policy.
    Keywords: Equities ; Macroeconomic surprises ; New-keynesian model ; Oil ; Zero lower bound
    JEL: F31 F41 E30 E01 C81
    Date: 2018–08–17
  25. By: Canofari, Paolo; Piergallini, Alessandro; Piersanti, Giovanni
    Abstract: Fiscal discipline is commonly evaluated on the basis of the debt-GDP ratio, which exhibits a stock variable measured relative to a flow variable. This way of monitoring debt solvency is arguably not consistent with transversality conditions obtained from optimizing macroeconomic frameworks. In this paper we consider a wealth-based sustainability index of government debt policy derived from a baseline endogenous growth model. We calculate the index from 1999 onwards for countries in which the after-growth real interest rate is positive, consistently with the theoretical setup. Results are radically different from common wisdom. We show that the fiscal position is sustainable for both Germany and Italy, and strongly unsustainable for both Japan and France. Policy implications of our findings are discussed.
    Keywords: Fiscal Discipline, Financial Wealth, Sustainability Indicators.
    JEL: E60 E62 H60
    Date: 2018–03–12
  26. By: Lissovolik, Yaroslav (Eurasian Development Bank); Kuznetsov, Aleksei (Eurasian Development Bank); Berdigulova, Aigul (Eurasian Development Bank)
    Abstract: World economic growth in 2017 was driven by an increase in business activity in both developed and key developing economies. In the context of falling deflation risk, as well as an improvement in unemployment – an important macroeconomic parameter – there has been a trend towards normalization of the US Federal Reserve System's monetary policy. The European Central Bank is also moving in the direction of reducing its quantitative easing program. Thus, monetary policy's supporting effect is gradually ending, but the system retains a lot of fiscal incentives to help accelerate economic growth. The rise in investment and the recovery of world trade in developed economies was the third component driving higher than expected growth in 2017. The world's positive economic growth trend drove a return to favorable conditions on world commodity markets. The average price for Brent crude in 2017 grew by 23.5% YoY. Prices for precious metals rose by 0.4% on average for the year, and non-precious metals grew by an average of 24.4%. Monetary policy in the main global economies will cease to be the main factor in supporting growth, but in Russia and other EDB countries, given current conditions, there is a chance to stimulate economic growth due to unprecedented low inflation and the possibility of a further lowering of the key rate. A softening of monetary policy in most of the region's countries will support investment activity. If a favorable external environment is maintained, positive trends can be expected to develop, including the restoration of foreign investment and growth of mutual trade between EDB countries. The increase in labor migrants' remittances will stimulate domestic demand in the region's economies, whose balance of payments largely depends on these transfers.
    Keywords: Macroeconomy; Forecasting; Eurasia; EAEU Countries; Economic Growth; Monetary Policy
    JEL: E17 E52 E66 O11
    Date: 2018–02–15
  27. By: Cavallo, Michele (Federal Reserve Board); Del Negro, Marco (Federal Reserve Bank of New York); Frame, W. Scott (Federal Reserve Bank of Atlanta); Grasing, Jamie (University of Maryland); Malin, Benjamin A. (Federal Reserve Bank of Minneapolis); Rosa, Carlo (Federal Reserve Bank of New York)
    Abstract: The paper surveys the recent literature on the fiscal implications of central bank balance sheets, with a special focus on political economy issues. It then presents the results of simulations that describe the effects of different scenarios for the Federal Reserve's longer-run balance sheet on its earnings remittances to the U.S. Treasury and, more broadly, on the government's overall fiscal position. We find that reducing longer-run reserve balances from $2.3 trillion (roughly the current amount) to $1 trillion reduces the likelihood of posting a quarterly net loss in the future from 30 percent to under 5 percent. Further reducing longer-run reserve balances from $1 trillion to precrisis levels has little effect on the likelihood of net losses.
    Keywords: central bank balance sheets; monetary policy; remittances
    JEL: E58 E59 E69
    Date: 2018–08–21
  28. By: Frame, W. Scott (Federal Reserve Bank of Atlanta); Steiner, Eva (Cornell University)
    Abstract: We study how the Federal Reserve's quantitative easing (QE) influenced the behavior of Agency mortgage real estate investment trusts (REITs)—a set of institutions identified by the Financial Stability Oversight Council as posing systemic risk. We document that Agency mortgage REITs: [i] equity prices reacted to QE announcements and in a manner consistent with their business prospects; [ii] grew markedly during QE2 and receded during QE3 in relation to the Federal Reserve's Agency MBS purchase activity; and [iii] increased their leverage during QE3. Our findings are consistent with unconventional monetary policy actions crowding out private investment and "reaching for yield" behavior by financial institutions.
    Keywords: quantitative easing; risk-taking; REITs; GSEs; mortgages; securitization
    JEL: E58 G21 G23 G28
    Date: 2018–08–01
  29. By: International Monetary Fund
    Abstract: Serbia succeeded in addressing macroeconomic imbalances and restoring confidence and growth under the precautionary SBA which expired in February 2018. Fiscal sustainability has been restored by placing public debt on a firm downward path and the external position has been realigned with fundamentals. Monetary policy has kept inflation under firm control, while supporting economic recovery. The resilience of the financial sector has improved. Progress has also been made on structural and institutional reforms, including in rationalizing the size of public sector employment, addressing fiscal risks from SOEs, and improving the business environment. However, challenges remain for achieving robust, inclusive, and sustainable growth, which Serbia needs for faster income convergence with its EU peers. The authorities requested a 30-month Policy Coordination Instrument (PCI) to provide a framework for continued macroeconomic stability and reforms, and maintain close policy dialogue with staff.
    Date: 2018–07–24
  30. By: Faryna, Oleksandr; Simola, Heli
    Abstract: This paper employs a Global Vector Auto Regressive (GVAR) model to study the evolution of the response of the Commonwealth of Independent States (CIS) to foreign output and oil price shocks. During a two-decade observation period, cross-country trade and financial linkages experience no-table changes. We find CIS countries highly sensitive to global and regional shocks, with that sensitivity increasing after the global financial crisis. CIS countries show strongest responses to output shocks originating in the US, Russia and within the region itself, but their sensitivity to euro area shocks also increases substantially. Despite growing trade relations with China, the responses of CIS countries to output shocks originating in China are still relatively moderate.
    JEL: C32 F42 F43 E32
    Date: 2018–08–30
  31. By: Shutao Cao; Césaire A. Meh; José-Víctor Ríos-Rull; Yaz Terajima
    Abstract: We document that, across households, the money consumption ratio increases with age and decreases with consumption, and that there has been a large increase in the money consumption ratio during the recent era of very low interest rates. We construct an overlapping generations (OLG) model of money holdings for transaction purposes subject to age (older households use more money), cohort (younger generations are exposed to better transaction technology), and time effects (nominal interest rates affect money holdings). We use the model to measure the role of these different mechanisms in shaping money holdings in recent times. We use our measurements to assess the interest rate elasticity of money demand and to revisit the question of what the welfare cost of inflation is (which depends on how the government uses the windfall gains from the inflation tax). We find that cohort effects are quite important, accounting for half of the increase in money holdings with age. This in turn implies that our measure of the interest rate elasticity of money is -0.6, on the high end of those in the literature. The cost of inflation is lower by one-third in the model and, as a result, lower than previously estimated in the literature that does not account for the secular financial innovation.
    Keywords: Inflation: costs and benefits
    JEL: E21 E41
    Date: 2018
  32. By: Lee, Dong (Korea U); Shin, Hyun-Han (Yonsei U); Stulz, Rene M. (OH State U and ECGI)
    Abstract: We examine whether capital flows more to high Tobin's q industries and find that it flows more to high q industries from 1971 until 1996 but not from 1997 to 2014. This change is due to a decrease in the q-sensitivity of equity funding resulting mostly from the increased q-sensitivity of repurchases after 1996. The increase in intangible assets, the aging of American firms, and the impact of the China shock explain much of the change in the q-sensitivity of equity funding and repurchases. The results are robust to how q is estimated and to a non-q measure of growth opportunities.
    JEL: E22 E44 G31 G35 L16
    Date: 2018–03
  33. By: Karnaukh, Nina (OH State U)
    Abstract: I find that the U.S. dollar appreciates over the two-day period before contractionary monetary policy decisions at scheduled Federal Open Market Committee (FOMC) meetings and depreciates over the two-day period before expansionary monetary policy decisions. The federal funds futures rate forecasts these dollar movements with a 22% R^{2}. A high federal funds futures spread three days in advance of an FOMC meeting not only predicts the target rate rise, but also predicts a rise in the dollar over the subsequent two-day period. A simple trading strategy, which exploits this predictability, exhibits a 0.93 Sharpe ratio. My findings imply that information about monetary policy changes is reflected first in the fixed income markets, and only later becomes reflected in currency markets.
    JEL: E52 F31 G12 G17
    Date: 2018–03
  34. By: International Monetary Fund
    Abstract: Cameroon’s macroeconomic performance has been mixed against the backdrop of slower economic activity and rising security concerns, with a weaker-than-envisaged fiscal consolidation in 2017. While external buffers are being rebuilt, the CEMAC’s recovery remains fragile. Renewed efforts to implement the fiscal consolidation and reform program will be essential to buttress external and fiscal sustainability and reinvigorate growth.
    Date: 2018–07–23
  35. By: Eric Engstrom; Steven A. Sharpe
    Abstract: The spread between the yield on a 10-year Treasury bond and the yield on a shorter maturity bond, such as a 2-year Treasury, is commonly used as an indicator for predicting U.S. recessions. We show that such “long-term spreads” are statistically dominated in recession prediction models by an economically more intuitive alternative, a ""near-term forward spread."" This latter spread can be interpreted as a measure of the market's expectations for the near-term trajectory of conventional monetary policy rates. The predictive power of our near-term forward spread indicates that, when market participants expected—and priced in—a monetary policy easing over the next 12-18 months, this indicated that a recession was quite likely in the offing. Yields on bonds beyond 18 months in maturity are shown to have no added value for forecasting either recessions or the growth rate of GDP.
    Keywords: Policy path ; Recession forecast ; Yield spread ; Monetary policy
    JEL: E52 G12
    Date: 2018–08–07
  36. By: Lissovolik, Yaroslav (Eurasian Development Bank); Kuznetsov, Aleksei (Eurasian Development Bank); Berdigulova, Aigul (Eurasian Development Bank)
    Abstract: The extent of global protectionism risks became obvious in the first half of 2018. The US’s escalating trade dispute with the EU and China creates considerable risks to global economic growth, which brings additional risks of an energy price correction for the EDB countries. Apart from external economic risks, weakening existing growth drivers and the need for new sources to boost economic development become new and growing challenges facing the EDB countries. One of the possible steps under the present conditions can be some softening in fiscal policy. Prospects of a fiscal stimulus emerged this year with the Russian President’s executive orders issued in May to provide additional financing to high-priority sectors. Additional expenditures can amount to up to RUB 8 trillion by 2020. Amid growing energy prices, there was an increase in spending in Kazakhstan in 1Q 2018, by 13.5% YoY, compared to almost zero growth in the same period of the previous year. At the same time, social expenditures (+20% YoY), particularly on healthcare (+23.6% YoY), outpace overall expenditure growth. However, using the budget mechanism to stimulate economic activity has some limitations, including budget rules established in oil exporting countries, such as the RF. On the other hand, some countries, like Belarus and Armenia, need to reduce government debt. An increase in spending amid a rise in commodity prices may also increase EDB countries’ dependence on global economic conditions. Thus, in order to find additional growth drivers, the EDB countries have to take measures to increase efficiency and labor productivity in their economies and to improve the investment climate. Diminishing the share of the shadow economy can be a potential economic growth driver for the EDB countries. According to the IMF, the shadow economy in the EDB countries constitutes 32.8% of Kazakhstan’s GDP, 30.1% of Kyrgyzstan’s GDP, 32.4% of Belarus’s GDP, 37.8% of Tajikistan’s GDP, 36% of Armenia’s GDP, and 33.7% of Russia’s GDP. These estimates do not correspond to the countries’ official data due to differences in assessment methods applied. According to the Kazakhstan Statistics Committee, the shadow economy amounted to 25.8% of Kazakhstan’s GDP in 2016 and 23.8% of Kyrgyzstan’s GDP. However, all conditions currently exist to decrease it. By decreasing the shadow economy, it will be possible to increase budget revenues, distribute revenues more equally, and improve the business climate and economy in general.
    Keywords: Macroeconomy; Forecasting; Eurasia; EAEU Countries; Economic Growth; Monetary Policy
    JEL: E17 E52 E66 O11
    Date: 2018–06–21
  37. By: Anmol Bhandari; David Evans; Mikhail Golosov; Thomas J. Sargent
    Abstract: We study optimal monetary and fiscal policy in a model with heterogeneous agents, incomplete markets, and nominal rigidities. We develop numerical techniques to approximate Ramsey plans and apply them to a calibrated economy to compute optimal responses of nominal interest rates and labor tax rates to aggregate shocks. Responses differ qualitatively from those in a representative agent economy and are an order of magnitude larger. Taylor rules poorly approximate the Ramsey optimal nominal interest rate. Conventional price stabilization motives are swamped by an across person insurance motive that arises from heterogeneity and incomplete markets.
    JEL: C63 E52 E63
    Date: 2018–06
  38. By: Oulton, Nicholas; Sebastiá-Barriel, María
    Abstract: We examine the hypothesis that capacity can be permanently damaged by financial, particularly banking, crises. A model which allows a financial crisis to have both a short-run effect on the growth rate of labor productivity and a long-run effect on its level is estimated on 61 countries over 1954–2010. A banking crisis as defined by Reinhart and Rogoff reduces the long-run level of GDP per worker, and also that of capital per worker, by on average 1.1 percent, for each year that the crisis lasts; it also reduces the TFP level by 0.8%. The long run, negative effect on the level of GDP per capita, 1.8 percent, is substantially larger. So there is also a hit to employment. The effects on labor productivity, capital and TFP are larger in developing than in developed countries; the opposite is the case for employment.
    Keywords: banking crisis; financial; potential output; productivity; recession
    JEL: E23 E32 J24
    Date: 2017–02–01
  39. By: Lissovolik, Yaroslav (Eurasian Development Bank); Kuznetsov, Aleksei (Eurasian Development Bank); Berdigulova, Aigul (Eurasian Development Bank)
    Abstract: The stabilisation of commodity prices and the resultant stabilisation of national currencies in most EDB countries in 1Q 2017 create a favourable basis for a recovery in trade in the EDB region. Suffice it to note that all EDB countries showed growth in mutual trade turnover in 1Q of the year; notably, the highest turnover growth rates were observed in Kazakhstan (nearly 41% y-o-y) and the Russian Federation (33.7% y-o-y). The situation with the countries’ mutual ties also improved as regards migrants’ remittances: growth in remittances to Kyrgyzstan exceeded 54% in 1Q 2017, while in Armenia this indicator was 14% y-o-y in 1Q 2017. In this review, our special report focuses on macroeconomic ties among the EDB countries and the economic growth transmission channels, mainly as regards foreign trade and remittance flows. Our study testifies to a considerable role of these factors in the regional countries’ economic recovery, but we also note that the region’s economies remain highly vulnerable to external shocks, and to energy price fluctuations above all. Russia’s economic growth outlook for 2017 has improved from 0.8% to 1.3%. The projection change was influenced by the first quarter’s economic data and a revised oil price projection that took into account the first quarter’s trends in world energy prices. The improvement in the Belarusian GDP projection from minus 0.5% to positive 1.3% over 2017 is caused by higher than expected economic activity recovery rates in the 1st quarter and by the agreement reached on gas prices and oil supply from the Russian Federation. Kazakhstan’s improved GDP outlook is caused by stronger external demand and by the expansion of the State budget deficit with a view to revitalising the banking system. More optimistic assumptions concerning the foreign economic situation and a revised fiscal boost were the main factors behind the improved GDP outlook for Kyrgyzstan. Tajikistan’s economic growth projection was revised downwards as its banking sector situation deteriorated. A key risk for the remainder of 2017 is renewed volatility in the commodity markets after a period of strengthening exchange rates of some EDB countries’ currencies. Early May developments in both the Russian and Kazakh financial markets showed that, after a considerable strengthening in the preceding months, the national currencies have become more sensitive to increased volatility in oil prices. We expect that, given the increased external risks, the CB of the Russian Federation may harden its rhetoric and slow the reduction in the key rate.
    Keywords: Macroeconomy; Forecasting; Eurasia; EAEU Countries; Economic Growth; Monetary Policy
    JEL: E17 E52 E66 O11
    Date: 2017–05–13
  40. By: Bill Martin; Centre for Business Research
    Abstract: In Version One of his new paper, Oulton merges supply-side and demand-side theoretical models as a means better to understand why, since the financial crisis that broke in 2007, the UK’s productivity growth has not only been negligible but also a very poor outlier judged by international experience. Drawing on Arthur Lewis’s famous model of development, Oulton concludes, "rapid rates of immigration in conjunction with low rates of growth of export demand in the aftermath of the Great Recession can explain the UK productivity puzzle". According to Oulton, the UK's relatively poor productivity performance is attributable to a combination of the export demand constraint and of the continued growth of labour supply, which led to capital shallowing - a reduction in the rate of growth of capital services per hour worked. Bill Martin concludes, alas, that Arthur Lewis does not hold the key. The dominant, proximate "explanation" of the UK's relatively poor performance is relatively weak Total Factor Productivity (TFP), not relatively weak capital intensity. Moreover, the UK was not relatively more exposed to export demand shocks but delivered relatively worse output growth outcomes. Oulton nevertheless articulates the profound idea that full-employment capacity has adjusted to weak effective demand arising from adverse global developments. If this deep insight is correct, TFP would be a "measure of our ignorance" of the mechanisms that drove productive capacity to align with low aggregate demand.
    Keywords: productivity, slowdown, immigration, capital, Lewis, TFP
    JEL: E24 O41 O47 J24 F43 F44
    Date: 2018–03
  41. By: Fernando Mundaca (BCRP); Elmer Sánchez León (BCRP)
    Abstract: El objetivo del documento es estimar un índice de precios de departamentos para Lima Metropolitana utilizando la metodología de precios hedónicos. Para este propósito se utilizan tres variantes de la metodología (método de variables binarias de tiempo, método de características y método de imputación). Los índices calculados por estos tres métodos presentan resultados similares. Se muestra, además, que no ha habido una gran variación de las características de los departamentos ni de las valoraciones de estas características. Las características con mayor valoración de los compradores son el número de cocheras y el número de baños. Finalmente, se encuentra similitud de los índices calculados en base a regresiones hedónicas y el índice de medianas calculado y publicado actualmente por el BCRP.
    Keywords: Regresiones hedónicas, índice de precios de inmuebles
    JEL: E37 E44 E52
    Date: 2018–07
  42. By: Stephanie E. Curcuru; Steven B. Kamin; Canlin Li; Marius del Giudice Rodriguez
    Abstract: This paper evaluates the popular view that quantitative easing exerts greater international spillovers than conventional monetary policies. We employ a novel approach to compare the international spillovers of conventional and balance sheet policies undertaken by the Federal Reserve. In principle, conventional monetary policy affects bond yields and financial conditions by affecting the expected path of short rates, while balance-sheet policy is believed act through the term premium. To distinguish the effects of these two types of policies we use a term structure model to decompose longer-term bond yields into expected short-term interest rates and term premiums. We then examine the relative effects of changes in these two components of yields on changes in exchange rates and foreign bond yields. We find that the dollar is more sensitive to expected short-term interest rates than to term premia; moreover, the rise in the sensitivity of the dollar to monetary policy announcements since the GFC owes more to an increased sensitivity of the dollar to expected interest rates than to term premiums. We also find that changes in short rates and term premiums have similar effects on foreign yields. All told, our findings contradict the popular view that quantitative easing exerts greater international spillovers than conventional monetary policies.
    Keywords: Monetary policy ; International spillovers ; Term premium
    JEL: E5 F3
    Date: 2018–08–21
  43. By: Maryam Farboodi (Department of Economics, Princeton University); Gregor Jarosch (Department of Economics, Princeton University); Guido Menzio (Department of Economics, University of Pennsylvania)
    Abstract: This paper develops a theory of asset intermediation as a pure rent extraction activity. Agents meet bilaterally in a random fashion. Agents differ with respect to their valuation of the asset's dividends and with respect to their ability to commit to take-it-or-leave-it offers. In equilibrium, agents with commitment behave as intermediaries, while agents without commitment behave as end users. Agents with commitment intermediate the asset market only because they can extract more of the gains from trade when reselling or repurchasing the asset. We study the extent of intermediation as a rent extraction activity by examining the agent's decision to invest in a technology that gives them commitment. We find that multiple equilibria may emerge, with different levels of intermediation and with lower welfare in equilibria with more intermediation. We find that a decline in trading frictions leads to more intermediation and typically lower welfare, and so does a decline in the opportunity cost of acquiring commitment. A transaction tax can restore efficiency.
    Keywords: Intermediation, Rent extraction
    JEL: D11 D21 D43 E32
    Date: 2016–12–01
  44. By: Moore, Rachel; Pecoraro, Brandon
    Abstract: Fiscal policy analysis in heterogeneous-agent models typically involves the use of smooth tax functions to approximate present tax law and proposed reforms. We argue that the tax detail omitted under this conventional approach has macroeconomic implications relevant for policy analysis. In this paper, we develop an alternative approach by embedding an internal tax calculator into a large-scale overlapping generations model that explicitly models key provisions in the Internal Revenue Code applied to labor income. While both approaches generate similar policy-induced patterns of economic activity, we find that the similarities mask differences in key economic aggregates and welfare due to variation in the underlying distribution of household labor supply responses. Absent sufficient tax detail, analysis of specific policy changes - particularly those involving large, discrete effects on a relatively small group of households - using heterogeneous-agent models can be unreliable.
    Keywords: dynamic scoring, tax policy, tax functions and calculators, heterogeneous agents
    JEL: C63 E62 H30
    Date: 2018–06–08
  45. By: Jing Cynthia Wu; Ji Zhang
    Abstract: In a standard open-economy New Keynesian model, the effective lower bound causes anomalies: output and terms of trade respond to a supply shock in the opposite direction compared to normal times. We introduce a tractable two-country model to accommodate for unconventional monetary policy. In our model, these anomalies disappear. We allow unconventional policy to be partially active and asymmetric between the countries. Empirically, we find the US, Euro area, and UK have implemented a considerable amount of unconventional monetary policy: the US follows the historical Taylor rule, whereas the others have done less compared to normal times.
    JEL: E52 F00
    Date: 2018–06
  46. By: Juan Angel Garcia; Sebastian Werner
    Abstract: Do euro area inflation expectations remain well-anchored? This paper finds that the protracted period of low (and below-target) inflation in the euro area since 2013 has weakened their anchoring. Testing their sensitivity to inflation and macroeconomic news, this paper expands existing results in two key dimensions. First, by analyzing all available (advanced) inflation releases. Second, the reactions of expectations are investigated at daily, time-varying and intraday frequency regressions to add robustness to our conclusions. Results point to a significant impact of inflation news over recent years that had not been observed before in the euro area.
    Keywords: Inflation;Inflation expectations;Monetary policy;Econometric models;Euro Area;inflation, market-based inflation expectations, macroeconomic news, monetary policy
    Date: 2018–07–19
  47. By: Betsy Donald; Mia Gray; Centre for Business Research
    Abstract: We are now facing Sayer’s 'diabolical double crisis' - which encompasses both a deep financial crisis and an environmental one. The scale, scope and nature of this double-crisis is downplayed in the regional studies literature, much of which still focuses on innovative growth models often divorced from broader social and ecological contexts. To help solve both crises we call for regional studies to explore new models that allow us to focus on the most important issues of our time. We illustrate this by focusing on the contradictions in the waste produced by contemporary regional economies - waste of abundance, labour, and resources.
    Keywords: inequality, climate change, precarious labour, waste, wealth, redistribution
    JEL: D63 E21 E24 O44
    Date: 2018–09
  48. By: Hao Jin (Xiamen University); Chen Xiong (Xiamen University)
    Abstract: We study the effectiveness of macroprudential policies in mitigating credit growth in open economies. Empirically we find that macroprudential policies contain domestic credit growth but are less effective in financially more integrated economies due to greater cross-border bank borrowing. We develop a small open economy DSGE model with cross-border bank financing to interpret the empirical findings and quantitatively evaluate the macroeconomic and welfare implications of macroprudential policies. Consistent with the empirical evidence, our model shows that banks contract credits and increase the fraction of foreign financing in response to macroprudential policy tightening. This liability composition shift significantly under-mines the stabilizing effect and welfare gains of macroprudential policies, so they become less effective in financially more open economies. Our results also suggest it is desirable to implement more restrictive macroprudential regulations when capital moves more freely.
    Keywords: Intermediary; Financial Frictions; Financial Openness; Macroprudential Policy
    Date: 2018–08
  49. By: Chevillon, Guillaume (ESSEC Research Center, ESSEC Business School); Mavroeidis, Sophocles (Department of Economics and Institute for New Economic Thinking at the Oxford Martin School, Oxford University); Zhan, Zhaoguo (Department of Economics, Finance and Quantitative Analysis, Kennesaw State University)
    Abstract: Long-run restrictions are a very popular method for identifying structural vector autoregressions, but they suffer from weak identification when the data is very persistent, i.e., when the highest autoregressive roots are near unity. Near unit roots introduce additional nuisance parameters and make standard weak-instrument-robust methods of inference inapplicable. We develop a method of inference that is robust to both weak identi fication and strong persistence. The method is based on a combination of the Anderson-Rubin test with instruments derived by fi ltering potentially non-stationary variables to make them near stationary. We apply our method to obtain robust con fidence bands on impulse responses in two leading applications in the literature.
    Keywords: weak instruments; identification; SVARs; near unit roots; IVX
    JEL: C12 C32 E32
    Date: 2016–11–22
  50. By: Paul Beaudry; Tim Willems
    Abstract: Is over-optimism about a country's future growth perspective good for an economy, or does over-optimism also come with costs? In this paper we document that recessions, fiscal problems, as well as Balance of Payment-difficulties are more likely to arise in countries where past growth expectations have been overly optimistic. We arrive at this conclusion by looking at the medium-run effects of instances of over-optimism or caution in IMF forecasts. To isolate the causal effect of over-optimism we take an instrumental variables approach, where we exploit variation provided by the pseudo-random allocation of IMF Mission Chiefs across countries. As a necessary first step, we document that IMF Mission Chiefs tend to systematically differ in their individual degrees of forecast-optimism or caution. The mechanism that transforms over-optimism into a later recession seems to run through higher debt accumulation, both public and private. Our findings illustrate the potency of unjustified optimism and underline the importance of basing economic forecasts upon realistic medium-term prospects.
    JEL: E17 E32
    Date: 2018–06
  51. By: Tsukhlo Sergey (Gaidar Institute for Economic Policy)
    Abstract: This Chapter has been prepared on the results of business surveys of industrial enterprises which have been conducted by the Gaidar Institute using a European harmonized method in monthly cycles since September 1992, covering the entire territory of the Russian Federation. The panel size is around 1,000 enterprises employing over 13 percent of industrial employees. The panel is shifted towards large enterprises for each of the segregated sub-industries. The ratio of returned questionnaires is in the range of 70-75 percent
    Keywords: Russian economy, industrial sector
    JEL: C53 E37 L21 L52
    Date: 2018
  52. By: International Monetary Fund
    Abstract: Romania posted one of the highest growth rates in the EU in 2017, with record-low unemployment and an improving financial sector. Domestic consumption supported by fiscal stimulus led the strong growth, while investment lagged and structural reforms slowed. Economic growth is expected to again exceed potential in 2018 with elevated inflation, but slow down over the medium term assuming the fiscal stimulus wanes. With signs of overheating, however, there is a risk that the current policy trajectory increases macroeconomic volatility, wears down buffers, and ultimately slows down convergence toward the advanced EU countries. Investor confidence in Romania could be disrupted by further deterioration in fiscal and external balances, weakening of institutions, or global financial volatility.
    Keywords: Romania;Europe;
    Date: 2018–06–06
  53. By: Abhiman Das (Indian Institute of Management Ahmedabad); Kajal Lahiri (Department of Economics, University at Albany, State University of New York); Yongchen Zhao (Department of Economics, Towson University)
    Abstract: Using a large household survey conducted by the Reserve Bank of India since 2005, we estimate the dynamics of aggregate inflation expectations over a volatile inflation regime. A simple average of the quantitative responses produces biased estimates of the official inflation data. We therefore estimate expectations by quantifying the reported directional responses. For quantification, we use the Hierarchical Ordered Probit model, in addition to the balance statistic. We find that the quantified expectations from qualitative forecasts track the actual inflation rate better than the averages of the quantitative forecasts, highlighting the filtering role of qualitative tendency surveys. We also report estimates of disagreement among households. The proposed approach is particularly suitable in emerging economies where inflation tends to be high and volatile.
    Keywords: Hierarchical ordered probit model, Quantification, Tendency survey, Disagreement, Indian inflation.
    JEL: C25 D84 E3
    Date: 2018–08
  54. By: Feng Dong (Shanghai Jiao Tong University); Zhiwei XU (Shanghai Jiao Tong University)
    Abstract: Burgeoning empirical evidence suggests that credit booms may not only increase misallocation, but also sow seeds for financial crises. However, there is relative under-supply of theory accounting for these facts. To bridge the gap, we develop a unified general equilibrium banking model with heterogeneous firms to analyze the misallocation consequences of credit expansion policy both within and across sectors. The main insight is the trade-off between credit quantity and quality. On the one hand, a moderate credit expansion has a non-monotonic impact on the aggregate output. It raises credit potentially available for production at the cost of more severe productivity distortion. On the other hand, a sufficiently large credit expansion may trigger an inter-bank market crisis, generating discontinuous effect. The resulting economic recession is exacerbated by the firm-level productivity misallocation. By extending the static model to a dynamic environment, we show that an expansionary credit policy can generate endogenous boom-bust business cycles despite the absence of adverse shocks.
    Date: 2018
  55. By: Sproul, Michael
    Abstract: The real bills doctrine asserts that money should be issued in exchange for short-term real bills of adequate value. Critics of this doctrine have thought of it as a means to make the money supply move in step with the production of goods, a task at which it supposedly fails. In this essay I explain that the real bills doctrine is actually a means to make the money supply move in step with the money-issuer’s assets. When viewed this way, I find that the real bills doctrine is an effective means to prevent inflation. More importantly, the real bills doctrine is a means to make the quantity of money grow and shrink with the needs of business, thus preventing money shortages and the resulting recessions.
    Keywords: real bills, money, inflation
    JEL: E50
    Date: 2018–06–26
  56. By: Bholat, David (Bank of England); Broughton, Nida (Behavioural Insight Team); Parker, Alice (Bank of England); Ter Meer, Janna (Behavioural Insights Team); Walczak, Eryk (Bank of England)
    Abstract: In this joint Bank of England and Behavioural Insights Team study, we test the effectiveness of different approaches to central bank communications. Using an online experiment with a representative sample of the UK population, we measure how changes to the Bank of England’s summaries of the Inflation Report impact comprehension and trust in its policy messages. We find that the recently introduced Visual Summary of the Inflation Report improves comprehension of its main messages in a statistically significant way compared to the traditional executive summary. We also find that public comprehension and trust can be further improved by making the Visual Summary more relatable to people’s lives. Our findings thus shed light on how central banks can improve communication with the public at a time when trust in public institutions has fallen, while the responsibilities delegated to central banks have increased.
    Keywords: Central bank communications; central bank legitimacy; experimental economics; behavioural economics; Bank of England Vision 2020
    JEL: A12 A13 A29 C21 C83 C90 C91 C93 D83 D91 E52 E58 M38
    Date: 2018–08–15
  57. By: Miles S. Kimball; Matthew D. Shapiro; Tyler Shumway; Jing Zhang
    Abstract: This paper develops an overlapping generations model of optimal rebalancing where agents differ in age and risk tolerance. Equilibrium rebalancing is driven by a leverage effect that influences levered and unlevered agents in opposite directions, an aggregate risk tolerance effect that depends on the distribution of wealth, and an intertemporal hedging effect. After a negative macroeconomic shock, relatively risk tolerant investors sell risky assets while more risk averse investors buy them. Owing to interactions of leverage and changing wealth, however, all agents have higher exposure to aggregate risk after a negative macroeconomic shock and lower exposure after a positive shock.
    JEL: D53 E44 G11
    Date: 2018–06
  58. By: Yasuo Hirose (Keio University); Takushi Kurozumi (Bank of Japan); Willem Van Zandweghe (Federal Reserve Bank of Kansas City)
    Abstract: A large literature has established that the Fed's change from a passive to an active policy response to inflation led to U.S. macroeconomic stability after the Great Inflation of the 1970s. This paper revisits the literature's view by estimating a generalized New Keynesian model using a full-information Bayesian method that allows for equilibrium indeterminacy and adopts a sequential Monte Carlo algorithm. The estimated model shows an active policy response to inflation even during the Great Inflation. Moreover, a more active policy response to inflation alone does not suffice for explaining the macroeconomic stability, unless it is accompanied by a change in either trend inflation or policy responses to the output gap and output growth. Our model empirically outperforms its canonical counterpart that is similar to models used in the literature, thus giving strong support to our view.
    Date: 2018
  59. By: Ruediger Bachmann (University of Notre Dame); Sebastian Rueth (Ghent University)
    Abstract: What are the macroeconomic consequences of changing aggregate lending standards in residential mortgage markets, as measured by loan-to-value (LTV) ratios? Using a structural VAR, we find that GDP and business investment increase following an expansionary LTV shock. Residential investment, by contrast, falls, a result that depends on the systematic reaction of monetary policy. We show that, in our sample, the Fed tended to respond directly to expansionary LTV shocks by raising the monetary policy instrument, and, as a result, mortgage rates increase and residential investment declines. The monetary policy reaction function in the US appears to include lending standards in residential markets, a finding we confirm in Taylor rule estimations. Without the endogenous monetary policy reaction residential investment increases. House prices and household (mortgage) debt behave in a similar way. This suggests that an exogenous loosening of LTV ratios is unlikely to explain booms in residential investment and house prices, or run ups in household leverage, at least in times of conventional monetary policy.
    Date: 2018
  60. By: Domenico Ferraro (Arizona State University); Giuseppe Fiori (North Carolina State University)
    Abstract: The employment-to-population ratio in the United States features a marked cyclical asymmetry: deviations below trend (troughs) are larger than deviations above trend (peaks). This asymmetry generates a “scarring effect,” which reduces the average level of the employment-to-population ratio around which the economy fluctuates. To quantify this scar, we build an equilibrium business cycle model featuring search frictions and a labor force participation choice. The model, parametrized to match key observations of U.S. data, including gross worker flows between employment, unemployment, and nonparticipation, generates the observed cyclical asymmetry in the face of symmetric aggregate shocks. We quantify that the employment-to-population ratio would be 0.3 percentage points higher (or, equivalently, a gain of about a million jobs) in the absence of business cycles. Further, by dampening cyclical fluctuations, countercyclical stabilization policy can reduce the job loss by 70%.
    Date: 2018
  61. By: Martin M. Andreasen; Andrew C. Meldrum
    Abstract: We study whether it is better to enforce the zero lower bound (ZLB) in models of U.S. Treasury yields using a shadow rate model or a quadratic term structure model. We show that the models achieve a similar in-sample fit and perform comparably in matching conditional expectations of future yields. However, when the recent ZLB period is included in the sample, the models ' ability to match conditional expectations away from the ZLB deteriorates because the time-series{{p}}dynamics of the pricing factors change. In addition, neither model provides a reasonable description of conditional volatilities when yields are away from the ZLB.
    Keywords: Quadratic term structure models ; Sequential regression approach ; Shadow rate models ; Zero lower bound
    JEL: E43 E47 G12
    Date: 2018–08–13
  62. By: International Monetary Fund
    Abstract: The gradual economic recovery in this fragile state has persisted, with solid growth for the second consecutive year. Fiscal performance has been strong, inflation contained, and the external position robust. Implementation of the authorities’ economic program, supported by an Extended Credit Facility (ECF) arrangement approved in July 2016, has been generally strong, buttressing the recovery.
    Date: 2018–07–25
  63. By: Andrade, Philippe; Gaballo, Gaetano; Mengus, Eric; Mojon, Benoît
    Abstract: Central banks' announcements that future interest rates will remain low could signal either a weak future macroeconomic outlook - which is bad news - or a future expansionary monetary policy - which is good news. In this paper, we use the Survey of Professional Forecasters to show that these two interpretations coexisted when the Fed engaged into date-based forward guidance policy between 2011Q3 and 2012Q4. We then extend an otherwise standard New-Keynesian model to study the consequences of such heterogeneous interpretations. We show that it can strongly mitigate the effectiveness of forward guidance and that the presence of few pessimists may require keeping rates low for longer. However, when pessimists are sufficiently numerous forward guidance can even be detrimental.
    Keywords: monetary policy; forward guidance; communication; heterogeneous beliefs; disagreement
    JEL: A10
    Date: 2016–11–01
  64. By: Cahuc, Pierre (Ecole Polytechnique, Paris); Kramarz, Francis (CREST (ENSAE)); Nevoux, Sandra (CREST (ENSAE))
    Abstract: Short-time work programs were revived by the Great Recession. To understand their operating mechanisms, we first provide a model showing that short-time work may save jobs in firms hit by strong negative revenue shocks, but not in less severely-hit firms, where hours worked are reduced, without saving jobs. The cost of saving jobs is low because short-time work targets those at risk of being destroyed. Using extremely detailed data on the administration of the program covering the universe of French establishments, we devise a causal identification strategy based on the geography of the program that demonstrates that short-time work saved jobs in firms faced with large drops in their revenues during the Great Recession, in particular when highly levered, but only in these firms. The measured cost per saved job is shown to be very low relative to that of other employment policies.
    Keywords: short-time work, unemployment, employment
    JEL: E24 J22 J65
    Date: 2018–07
  65. By: Julien Champagne (Bank of Canada); Rodrigo Sekkel (Bank of Canada)
    Abstract: We use narrative evidence along with a novel database of real-time data and forecasts from the Bank of Canada’s staff economic projections from 1974 to 2015 to construct a new measure of monetary policy shocks and estimate the effects of monetary policy in Canada. We show that it is crucial to take into account the break in the conduct of monetary policy caused by the announcement of inflation targeting in 1991 when estimating the effects of monetary policy. For instance, we find that a 100-basis-point increase in our new shock series leads to a 1.0 per cent peak decrease in real GDP and a 0.5 per cent fall in the price level, while not accounting for the break leads to a very persistent decrease in real GDP and a price puzzle. Albeit the change in monetary policy regime, we find that the effects of monetary policy have not changed much before and after IT. Finally, we compare our results with narrative evidence for the U.S. and the U.K. and find slightly stronger effect of monetary policy on output and significantly smaller effects on the price level in Canada.
    Date: 2018
  66. By: Phiri, Andrew
    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: 2018–08–10
  67. By: Dmitry Kuvshinov (Department of Economics, University of Bonn); Kaspar Zimmermann (Department of Economics, University of Bonn)
    Abstract: This paper presents annual stock market capitalization data for 17 advanced economies from 1870 to today. Extending our knowledge beyond individual benchmark years in the seminal work of Rajan and Zingales (2003) reveals a striking new time series pattern: over the long run, the evolution of stock market size resembles a hockey stick. The stock market cap to GDP ratio was stable for more than a century, then tripled in the 1980s and 1990s and remains high to this day. This trend is common across countries and mirrors increases in other financial and price indicators, but happens at a much faster pace. We term this sudden structural shift “the big bang” and use novel data on equity returns, prices and cashflows to explore its underlying drivers. Our first key finding is that the big bang is driven almost entirely by rising equity prices, rather than quantities. Net equity issuance is sizeable but relatively constant over time, and plays very little role in the short, medium and long run swings in stock market cap. Second, much of this price increase cannot be explained by more favourable fundamentals such as profits and taxes. Rather, it is driven by lower equity risk premia – a factor that is linked to subjective beliefs and can be quite fickle, and easily reversible. Third, consistent with this risk premium view of stock market size, the market cap to GDP ratio is a reliable indicator of booms and busts in the equity market. High stock market capitalization – the “Buffet indicator” – forecasts low subsequent equity returns, and low – rather than high – cashflow growth, outperforming standard predictors such as the dividend-price ratio.
    Keywords: Stock market capitalization, financial development, financial wealth, equity issuance, equity valuations, risk premiums, equity bubbles.
    JEL: E44 G10 G20 N10 N20 O16
    Date: 2018–08
  68. By: Jennifer Bruner; Dylan G. Rassier; Kim J. Ruhl
    Abstract: Profit shifting to low-tax countries imposes challenges for the treatment of multinational enterprises in economic accounts. Using adjustments for profit shifting calculated in Guvenen et al. (2017) under an alternative measurement methodology, this paper empirically demonstrates how the effects of profit shifting cascade throughout a fully articulated set of economic accounts for the United States in 2014. We find a 1.5 percent and 3.5 percent increase in measured U.S. gross domestic product and operating surplus, respectively, and a 33.5 percent decrease in measured income receivable from the rest of world. As a result of offsetting effects, measured U.S. gross national saving decreases by 0.8 percent, and national borrowing increases by 6.9 percent. There are also potentially significant implications for analytic uses of the measures, including decreases for the labor share of income and the return on U.S. direct investment abroad and increases for the trade in services balance and the return on domestic non-financial business.
    JEL: E01 F23 H26
    Date: 2018–08
  69. By: Miura, Shinji
    Abstract: Saving brings an economic loss. This is one of the basic propositions of the under-consumption theory. This paper aims to give a welfare economic foundation of this proposition through an optimization method considering money circulation in the case where a type of saving is limited to hoarding. If price is fixed, a non-hoarding state is a necessary condition for Pareto efficiency. However, individual agents who prefer future expenditure hoard money, thus individual rational behavior brings about a Pareto inefficient state. This irrationality of rationality occurs because of a qualitative difference of the budget constraint between the whole society and an individual agent. The former’s constraint incorporates a truth that hoarding decreases other’s revenue, whereas the latter’s does not. Selfish individual agents make a decision with an ignorance of this relational truth because their interest is limited to their private range. As a result, agents fall into an irrational situation despite their rational judgment.
    Keywords: Money Circulation; Welfare Economics; Under-Consumption; Paradox of Thrift; Intertemporal Choice.
    JEL: C61 D60 E21
    Date: 2018–08–13
  70. By: Enrica Carbone; John Hey; Tibor Neugebauer
    Abstract: The Lucas (1978) asset pricing model lies at the heart of modern macro-finance. At its core, it provides an analysis of the equilibrium price of a long-lived financial asset in an economy where consumption is the objective, and the sole purpose of the asset is to smooth consumption through time. Experimental tests of the model are mainly confined to Crockett et al (forthcoming 2019) and Asparouhova et al (2016), both of them using a particular instantiation of the Lucas Model. Here we adopt a different instantiation, extending their analyses from a two-period oscillating world to a three-period cyclical world. We also go one step further, and compare this asset market solution (to a consumption-smoothing problem) with the perhaps intuitively more reasonable solution provided by a credit market, in which agents can directly trade consumption between periods. We find that the latter is more efficient in smoothing consumption, and that prices in the credit market are closer to their equilibrium values than those in the asset market, and also less volatile. We find evidence of uncompetitive trading in both markets.
    Keywords: Asset Market Experiment; Bewley Incomplete Markets; Consumption Smoothing; Credit Market; Exchange Economy; General Equilibrium; Herfindahl Index; Intertemporal Choice; Lucas Tree Model; Re-trade Ratio.
    JEL: C90 D50 E51 G12
    Date: 2018–08
  71. By: Mikhail Golosov (University of Chicago); Thomas Winberry (University of Chicago)
    Abstract: Modern DSGE models do a good job at accounting for the dynamics of aggregate quantities. However, this success is built on a fundamental tension: asset prices play an allocative role in determining aggregate quantities, but are completely at odds with the data. We study the implications of asset pricing facts for the understanding of quantity dynamics. To do so, we estimate a stochastic discount factor from asset pricing data and compute the behavior of a neoclassical production sector given this SDF. We have two main preliminary results. First, over 99% of the variation in aggregate quantities can be accounted for using the risk-free rate alone. Hence, risk premia - which are crucial for matching asset pricing data - are unimportant in determining quantities. Second, large adjustment frictions are necessary to match quantity dynamics. The reason is that the risk-free rate is negatively correlated with productivity in the data, so it does not dampen the response of firms to productivity shocks. We explore the implications of these findings for a range of economic issues.
    Date: 2018
  72. By: Laura Liu (Federal Reserve Bank); Hyungsik Moon (Department of Economics, USC); Frank Schorfheide (Department of Economics, University of Pennsylvania)
    Abstract: This paper considers the problem of forecasting a collection of short time series using cross sectional information in panel data. We construct point predictors using Tweedie's formula for the posterior mean of heterogeneous coefficients under a correlated random effects distribution. This formula utilizes cross-sectional information to transform the unit-specific (quasi) maximum likelihood estimator into an approximation of the posterior mean under a prior distribution that equals the population distribution of the random coefficients. We show that the risk of a predictor based on a non-parametric estimate of the Tweedie correction is asymptotically equivalent to the risk of a predictor that treats the correlated-random-effects distribution as known (ratio-optimality). Our empirical Bayes predictor performs well compared to various competitors in a Monte Carlo study. In an empirical application we use the predictor to forecast revenues for a large panel of bank holding companies and compare forecasts that condition on actual and severely adverse macroeconomic conditions.
    Keywords: Bank Stress Tests, Empirical Bayes, Forecasting, Panel Data, Ratio Optimality, Tweedies Formula
    JEL: C11 C14 C23 C53 G21
    Date: 2016–12–21
  73. By: Toan Phan (Federal Reserve Bank of Richmond); Andrew Hanson (University of North Carolina Chapel Hill); Siddhartha Biswas (University of North Carolina, Chapel Hill)
    Abstract: We analyze the welfare tradeoff of rational bubbles in a tractable growth model with financial frictions and downward nominal wage rigidity. The monetary authority follows an inflation targeting Taylor-type interest rate rule that is constrained by the zero lower bound. We show that competitive speculation in a risky bubbly asset can result in an excessive investment boom that precedes an inefficient bust, and a larger boom precedes a deeper bust. In particular, the collapse of a large bubble can push the economy into a “secular stagnation” equilibrium, where the zero lower bound and the nominal wage rigidity constraint bind, leading to a persistent recession with inefficiently low employment, investment and output. The inefficiency is due to the pecuniary externality of speculative investment that arises from combination of financial frictions and nominal rigidities. The model provides a framework to evaluate macroprudential leaning-against-the-bubble policies to balance the welfare tradeoff between the boom and bust phases of bubbly episodes.
    Date: 2018
  74. By: Vaclav Broz; Michal Hlavacek
    Abstract: We study the bank-level distributional dynamics and factors of client interest rates on consumer loans in the Czech Republic. We take into account that client interest rates can have different fixation periods, focus on the consumer loans category, which exhibits multimodal client interest rate distributions, and employ an alternative measure to the mean interest rate - the mode measure. We show that in recent years, most banks in the Czech Republic have started to provide new consumer loans at unprecedentedly low client interest rates. The bank-level analysis then reveals that reduced market concentration (increased market competition) and to some extent also accommodative monetary policy and changes in the market for housing loans and mortgages have been driving this development. Our results are in line with the international literature but are novel in the Czech context.
    Keywords: Banks, client interest rates, competition, consumer loans
    JEL: C23 C46 E43 G21
    Date: 2018–06
  75. By: Andrea Pescatori
    Abstract: This paper assesses the quality of the CBC’s communication policy by looking at the predictability and effectiveness of monetary policy communications by the Central Bank of Chile (CBC). To do so, we construct indeces of monetary policy surprises for the three major communication channels of the CBC: the release of policy meetings’ statements, minutes, and monetary policy reports (IPoM). We assess monetary policy predictability and efficacy by looking at the size and time-evolution of monetary policy surprises associated with meeting statements and the impact of the above communication channels on asset markets. We find that, in general, the CBC’s has been effective in its forward guidance through its statements and IPoM. Policy actions are quite predictable, especially post the global financia crisis. The response of equity prices and the exchange rate to monetary policy surprises have the right sign but are not robust. We also find an asymmetric response of equity prices to minutes suggesting that market participants extract information on the status of the economy especially when minutes have a loosening effect. Finally, to look at the macroeconomic impact we find that a 100 bps monetary policy tightening shock implies a decline in economic activity (IMACEC) of about 2 pp. after one year, while the response of inflation is more muted.
    Keywords: Financial crises;Foreign banks;Monetary policy; monetary policy shocks; proxy VAR; central bank communication; central bank predictability; inflation forecast dispersion, Chile, Monetary policy, monetary policy shocks, proxy VAR, central bank communication, central bank predictability, inflation forecast dispersion, Credit Rationing, Relationship Lending
    Date: 2018–07–06
  76. By: Gauti Eggertsson (Brown University); Jacob Robbins (Brown University)
    Abstract: The macroeconomic data of the last thirty years has overturned at least two of Kaldor's famous stylized growth facts: constant interest rates, and a constant labor share. At the same time, the research of Piketty and others has introduced several new and surprising facts: an increase in the financial wealth-to-output ratio in the US, an increase in measured Tobin's Q, and a divergence between the marginal and the average return on capital. In this paper, we argue that these trends can be explained by an increase in market power and pure profits in the US economy, i.e., the emergence of a non-zero-rent economy, along with forces that have led to a persistent long term decline in real interest rates. We make three parsimonious modifications to the standard neoclassical model to explain these trends. Using recent estimates of the increase in markups and the decrease in real interest rates, we show that our model can quantitatively match these new macroeconomic facts.
    Date: 2018
  77. By: Ye Li (The Ohio State University)
    Abstract: This paper studies financial instability in an economy where growth is driven by intangible investment. Firms' intangible investment creates new productive capital. Once created, capital can be sold to financial intermediaries. Since intangible investment is not pledgeable, firms carry cash, which is inside money issued by intermediaries (short-term safe debt). In good times, well capitalized intermediaries push up the price of capital. This motivates firms to create more capital, but to do so, they must build up cash holdings. As firms' money demand expands, the yield on inside money (i.e., intermediaries' debt cost) declines, so intermediaries increase leverage and push up capital price even further. This inside money channel generates several features shared with the U.S. economy before the Great Recession: rising corporate cash holdings, financial intermediaries growing through leverage, increasing asset prices, and declining interest rate. The model also generates endogenous risk accumulation: a longer period of boom and expansion of the financial sector predict a more severe crisis. In crises, the spiral flips, leading to sudden deleveraging of intermediaries, asset price collapse, and investment contraction.
    Date: 2018
  78. By: Juan Angel Garcia; Aubrey Poon
    Abstract: This paper incorporates market-based inflation expectations to the growing literature on trend inflation estimation, and finds that there has been a significant decline in euro area trend inflation since 2013. This finding is robust to using different measures of long-term inflation expectations in the estimation, both market-based and surveys. That evidence: (i) supports the expansion of ECB’s UMP measures since 2015; (ii) provides a metric to monitor long-term inflation expectations following their introduction, and the likelihood of a sustained return of inflation towards levels below, but close to, 2% over the medium term
    Keywords: Inflation;Inflation expectations;Stochastic analysis;Econometric models;Euro Area;trend inflation, market-based inflation expectations, state space model, stochastic volatility
    Date: 2018–07–06
  79. By: Wen Yao (Tsinghua University); Xiaodong Zhu (University of Toronto)
    Abstract: One salient feature of business cycles in developed countries is that the aggregate employment is highly procyclical. In China, however, the correlation of the cyclical components of aggregate employment and output is close to zero. In this paper, we document three new stylized facts: (1) the business cycle properties of employment at sector level (agriculture and non-agriculture) in China are very similar to those in the US; (2) employments in the agricultural and non-agricultural sectors are negatively correlated in both China and the US; and (3) for both economies, the agriculture’s share of employment is negatively correlated with the real GDP per work in both sectors. These facts suggest that difference in sector composition could be an important reason for the difference in aggregate employment fluctuations between the two economies. We then construct a simple two-sector growth model with productivity shocks and non-homothetic preferences and show that the model can simultaneously account for the secular trend in labor reallocation away from agriculture and employment fluctuations at sector level and in the aggregate for both China and the US.
    Date: 2018
  80. By: Ferlito, Carmelo
    Abstract: Economic reality shows us that business fluctuations are everywhere and the crisis that emerged in the Western world in 2007 is just the latest and most evident manifestation of such dynamics. As mentioned in Ferlito (2016a, pp. 202-203), which develops the vision brought out in Ferlito (2014a), capitalism without fluctuations does not exist. I expressed the idea that business cycles are unavoidable by developing the doctrine of the natural cycle (see in particular Ferlito 2016b, Chapter 3). I will now summarize that framework in order to describe the evolution of the property market in the last decade. Section 2 presents the theory of the natural cycle, which will be used in section 3 for the analysis of the Malaysian property market over the past decade. According to such framework, business cycles are originated from positive profit expectations and each expansionary wave is followed by a secondary wave, which can be called imitative-speculative, usually supported by credit expansion. Such an evolution can be observed in the Malaysian property market from 1997, while today the declining movement is already initiated. In section 4, I focus on certain disproportionalities in the housing industry, arguing that the investor focus on the high-end segment was not unjustified and that government action is crowding out private constructors from the affordable housing segment. In section 5, I present some free market-oriented policy suggestions, aiming to create the conditions to limit the insurgence of future crises, to face the coming property crisis, and to revive the affordable housing market. Section 6 concludes.
    Keywords: Property market,Malaysia
    JEL: E32
    Date: 2018
  81. By: Jan De Loecker; Jan Eeckhout
    Abstract: To date, little is known about the evolution of market power for the economies around the world. We extract data from the financial statements of over 70,000 firms in 134 countries, and we analyze and document the evolution of markups over the last four decades. We show that the average global markup has gone up from close to 1.1 in 1980 to around 1.6 in 2016. Markups have risen most in North America and Europe, and least in emerging economies in Latin America and Asia. We discuss the distributional implications of the rise in global market power for the labor share and for the profit share.
    JEL: E0 K0 L0
    Date: 2018–06
  82. By: Iñaki Aldasoro; Kyounghoon Park
    Abstract: Using proprietary balance sheet data for Korean banks and a simultaneous equation model, we document that increased marginal funding costs lead to larger solvency risk (as measured by the Tier 1 regulatory capital ratio), which, in turn, leads to larger marginal funding costs. A 100 bp increase in marginal funding costs (solvency risk) is associated with a 155 (77) bp increase in solvency risk (marginal funding costs). The findings of an economically and statistically significant relationship are robust to considering different proxies for solvency risk, types of banks, interest rate regimes, and interest margin management strategies. They also hold irrespective of the funding profile considered. FX-related macroprudential policies can affect the negative feedback loop by muting the effect of marginal funding costs on solvency risk. Our findings can inform the calibration of macroprudential stress tests.
    Keywords: solvency risk, funding cost, simultaneous equation model, stress testing, macroprudential policy, bank business models
    JEL: C50 G00 G10 G21
    Date: 2018–08
  83. By: Adrian Peralta-Alva (International Monetary Fund); Marina Mendes Tavares (ITAM and IMF); Xin Tang (International Monetary Fund and Wuhan University); Xuan Tam (City University of Hong Kong)
    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
  84. By: Christian Bredemeier (University of Cologne); Andreas Schabert (University of Cologne); Christoph Kaufmann (European Central Bank)
    Abstract: Announcements of future monetary policy rate changes have been found to be imperfectly passed through to various interest rates. We provide evidence for rates of return on less liquid assets to respond by less than, e.g., treasury rates to forward guidance announcements of the US Federal Reserve, suggesting that single-interest-rate models tend to overestimate their macroeconomics effects. We apply a macroeconomic model with interest rate spreads stemming from differential pledgeability of assets, implying that assets provide liquidity services to different extents. Consistent with empirical evidence, announcements of future reductions in the policy rate lead to an increase in liquidity premia. The output effects of forward guidance do not increase with length of the guidance period and are substantially less pronounced than they are predicted to be by a standard New Keynesian model. We thereby provide a solution to the so-called "forward guidance puzzle".
    Date: 2018
  85. By: Marcus Hagedorn (University of Oslo); Iourii Manovskii (University of Pennsylvania); Jinfeng Luo (University of Pennsylvania); Kurt Mitman (Stockholm University)
    Abstract: We assess the power of forward guidance—promises about future interest rates—as a monetary tool in a liquidity trap using a quantitative incomplete-markets model. Our results suggest the effects of forward guidance are negligible. A commitment to keep future nominal interest rates low for a few quarters—although macro indicators suggest otherwise—has only trivial effects on current output and employment. We explain theoretically why in complete markets models forward guidance is powerful—generating a “forward guidance puzzle”—and why this puzzle disappears in our model. We also clarify theoretically ambiguous conclusions from previous research about the effectiveness of forward guidance in incomplete and complete markets models.
    Date: 2018
  86. By: Khromov Mikhail (Gaidar Institute for Economic Policy)
    Abstract: In 2017, banking sector demonstrated moderate development trends across main indicators. Asset holdings went up by 6 percent during the year somewhat below nominal growth rate of Russia’s GDP. The ratio of banks’ asset holdings and annual GDP remained at 91–92 percent for the second year in a row. The number of lending institutions decreased by 56 from 623 to 567 during the year. The process whereby some of the credit institutions were forced out of the market on the grounds of failing to meet the regulator’s requirements notably slowed down. Around fifty banking licenses were revoked in 2017 – half of what was seen in 2015 and 2016 when ninety banking licenses were revoked annually.
    Keywords: Russian economy, banking sector, profit, capital, corporate loans, retail deposits
    JEL: E41 E51 G28 G21 G24
    Date: 2018
  87. By: Axelle Ferrière; Gaston Navarro
    Abstract: This paper investigates how government spending multipliers depend on the distribution of taxes across households. We exploit historical variations in the financing of spending in the U.S. since 1913 to show that multipliers are positive only when financed with more progressive taxes, and zero otherwise. We rationalize this finding within a heterogeneous-household model with indivisible labor supply. The model results in a lower labor responsiveness to tax changes for higher-income earners. In turn, spending financed with more progressive taxes induces a smaller crowding-out, and thus larger multipliers. Finally, we provide evidence in support of the model’s cross-sectional implications.
    Keywords: Fiscal stimulus ; Government spending ; Transfers ; Heterogeneous agents
    JEL: D30 E62 H23 H31 N42
    Date: 2018–08–22
  88. By: International Monetary Fund
    Abstract: In a favorable global conjuncture, France has benefitted from a broad-based recovery last year, with robust growth and improving labor market trends, which have led to a decline in the fiscal deficit below 3 percent of GDP last year. But structural challenges persist, with still high unemployment, weak competitiveness, and high private and public debt burdens, which are hampering economic performance.
    Date: 2018–07–26
  89. By: Alberto Felettigh (Banca d’Italia); Claire Giordano (Banca d’Italia)
    Abstract: A comprehensive analysis of price and cost competitiveness warrants an assessment of a range of alternately deflated nominal effective exchange rates. Here, we focus solely on the price-competitiveness indicator currently published by the Bank of Italy (Felettigh et al., 2015), which is based on the producer prices of domestically-sold manufactures, and we refine its measurement. First, we update the data sources for the producer price index. Revisions mainly refer to non-euro area countries, yet also affect relative prices and therefore the price-competitiveness trends of the four main euro-area economies. These countries have performed better according to the revised indicators, in particular since 2010. Second, we present a novel three-market view of price-competitiveness indicators by splitting destination markets. The overall indicator encompassing competitive pressures on both the import and the export side can indeed be broken down into three components: the domestic market, where local producers are rivalled by foreign competitors with their import penetration; euro-area markets, where all countries compete; and non-euro-area markets, where, similarly, all countries compete. Whereas France and Germany have displayed similar price-competitiveness developments in both the euro and non-euro area markets over the entire period since 1999, Italy and Spain have performed better in the non-euro area than in the euro-area markets. Competitiveness in the domestic market and that in non-euro area markets are the main, equally important, drivers of overall developments since 1999 in Italy and in Germany.
    Keywords: price-competitiveness indicators, real effective exchange rates, producer prices, destination markets, import competition
    JEL: F10 F30 F31
    Date: 2018–07
  90. By: Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Mark E. Wohar (College of Business Administration, University of Nebraska at Omaha, Omaha, USA; School of Business and Economics, Loughborough University, Leicestershire, UK.)
    Abstract: Theory suggests a strong link between monetary policy rate uncertainty and equity return volatility, since asset pricing models assume the risk-free rate to be a key factor for equity prices. Given this, our paper uses historical monthly data for the United Kingdom over 1833:01 to 2018:07, to show that monetary policy uncertainty increases stock market volatility within sample. In addition, we show that the information on monetary policy uncertainty also adds value to forecasting out-of-sample equity market volatility.
    Keywords: Equity prices, Monetary policy rate uncertainty, Realized volatility, Risk-free interest rates, Volatility forecasting
    JEL: C22 C52 E52 G12
    Date: 2018–08
  91. By: Meniago, Christelle; Asongu, Simplice
    Abstract: The study assesses the role of financial development on income inequality in a panel of 48 African countries for the period 1996 to 2014. Financial development is defined in terms of depth (money supply and liquid liabilities), efficiency (from banking and financial system perspectives), activity (at banking and financial system levels) and stability while, three indicators of inequality are used, namely, the: Gini coefficient, Atkinson index and Palma ratio. The empirical evidence is based on Generalised Method of Moments. When financial sector development indicators are used exclusively as strictly exogenous variables in the identification process, it is broadly established that with the exception of financial stability, access to credit (or financial activity) and intermediation efficiency have favourable income redistributive effects. The findings are robust to the: control for unobserved heterogeneity in terms of time effects and inclusion of time invariant variables as strictly exogenous variables in the identification process. The findings are also robust to the Kuznets hypothesis: a humped shaped nexus between increasing GDP per capita and inequality. Policy implications are discussed.
    Keywords: Africa; Finance; Inequality; Poverty
    JEL: D60 E25 G20 I10 O55
    Date: 2018–01
  92. By: Facundo Piguillem (EIEF); Alessandro Riboni (Ecole Polytechnique)
    Abstract: Most fiscal rules can be overridden by consensus. We show that the possibility of override does not make fiscal rules ineffectual. Fiscal rules can lead the party in power to offer spending concessions to the opposition to avoid their application. Since fiscal rules determine the outside option in case of disagreement, the opposition uses fiscal rules as “bargaining chips”. This reduces the incentive for inefficient debt accumulation. We analyze three standard fiscal rules: government shutdown, budget balance and mandatory spending, and show that when political polarization is high, a government shutdown provision maximizes the bargaining power of the opposition and leads to a sizeable reduction of debt. When the degree of polarization is low, a balanced budget rule is preferable. Mandatory spending eliminates the incentive to over-accumulate debt by reducing political risk. However, it gives a considerable advantage to the initial incumbent, generating large and persistent static inefficiencies.
    Date: 2018
  93. By: Jesus Fernandez-Villaverde (Department of Economics, University of Pennsylvania)
    Abstract: What do we know about the economic consequences of labor market regulations? Few economic policy questions are as contentious as labor market regulations. The effects of minimum wages, collective bargaining provisions, and hiring/firing restrictions generate heated debates in the U.S. and other advanced economies. And yet, establishing empirical lessons about the consequences of these regulations is surprisingly difficult. In this paper, I explain some of the reasons why this is the case, and I critically review the recent findings regarding the effects of minimum wages on employment. Contrary to often asserted statements, the preponderance of the evidence still points toward a negative impact of permanently high minimum wages.
    Keywords: Labor market regulations, minimum wages, job creation and job destruction
    JEL: J01 J08 E30
    Date: 2016–12–28
  94. By: Moritz Lenel (University of Chicago); Martin Schneider (Stanford University); Monika Piazzesi (Stanford University)
    Abstract: The payment intermediary share is the share of fixed income claims held by financial intermediaries with money-like liabilities. It is higher in times of higher risk premia, such as during the 1970s and in recent recessions. This paper proposes a model of a modern monetary economy that accounts for the valuation of fixed income claims as well as their allocation inside vs outside the payment intermediaries. While all assets are valued for their risk and return properties, those held inside payment intermediaries are also valued as collateral that backs inside money. The payment-intermediary share depends on the transactions demand for inside money as well as portfolio responses to uncertainty shocks. It determines the quantitative impact of monetary policy and macro-prudential regulation on asset prices.
    Date: 2018
  95. By: Park, Cyn-Young (Asian Development Bank); Shin, Kwanho (Korea University)
    Abstract: Although the global financial crisis of 2008 took root in the advanced countries, its shocks spread through the emerging economies, reflecting the increasingly interconnected global financial system. This paper develops an empirical methodology to test the contagion effect at the country level using bilateral data on bank claims between countries. It measures the direct and indirect exposures of emerging economies to crisis countries and tests whether these matter for capital outflows from emerging economies. The paper measures these exposures to the crisis-affected countries by using bilateral foreign claims sourced from Bank for International Settlements (i) consolidated banking statistics foreign claims on immediate counterparty and ultimate risk bases and (ii) locational banking statistics cross-border total claims. Findings show that emerging market economies more exposed directly or indirectly to banks in the crisis-affected countries suffered more capital outflows during the global financial crisis.
    Keywords: capital outflows; contagion; direct/indirect exposures; global financial crisis; interconnectedness
    JEL: E44 F15 F21 F34 F42
    Date: 2017–07–31
  96. By: Umoh, O. J.; Onye, Kenneth U.; Atan, Johnson A.
    Abstract: This study investigates the political economy of fiscal policy making in West Africa by relying on a two-fold estimation technique, namely – the Instrumental variable regression model which accounts for potential endogeneity issue in the data and the Generalized Least Square regression model. The analysis covered 14 West African countries and spans over the period 1980 to 2016. The key results are as follows. First, we find evidence that fiscal policy has been more persistence in the region. This suggests that the governments of West African economies are either unwilling or just unable to adequately implement counter-cyclical fiscal policy. Second, fiscal policymaking has generally been drivenby political and institutional factor rather than on the basis of sound economic considerations. And third, the core politico-institutional factors determining fiscal persistence include corruption, government effectiveness and rule of law.
    Keywords: Fiscal Persistence, political stability, Corruption, West Africa
    JEL: E62 H3
    Date: 2018
  97. By: Baum, Christopher F. (Boston College); Pundit, Madhavi (Asian Development Bank); Ramayandi, Arief (Asian Development Bank)
    Abstract: There is mixed evidence for the impact of international capital flows on financial sector's stability. This paper investigates the relationship between components of gross capital flows and various financial stability indicators for 16 emerging and newly industrialized economies. Departing from panel data methods, for each financial stability proxy, we employ systems of seemingly unrelated regression estimators to allow variation in the estimated relationship across countries, while permitting crossequation restrictions to be imposed within a country. The findings suggest that, after controlling for macroeconomic factors, there are significant effects of different gross capital flow measures on the financial stability proxies. However, the effects are not homogeneous across our sample economies and across flows. Country-specific financial and macroeconomic characteristics help to explain some of these differences.
    Keywords: emerging economies; financial stability; international capital flows
    JEL: E44 F41
    Date: 2017–10–20
  98. By: Dosi, G.; Pereira, M. C.; Roventini, A.; Virgillito, M. E.
    Abstract: In this work we discuss the research findings from the labour-augmented Schumpeter meeting Keynes (K+S) agent-based model. It comprises comparative dynamics experiments on an artificial economy populated by heterogeneous, interacting agents, as workers, firms, banks and the government. The exercises are characterised by different degrees of labour flexibility, or by institutional shocks entailing labour market structural reforms, wherein the phenomenon of hysteresis is endogenous and pervasive. The K+S model constitutes a laboratory to evaluate the effects of new institutional arrangements as active/passive labour market policies, and fiscal austerity. In this perspective, the model allows mimicking many of the customary policy responses which the European Union and many Latin American countries have embraced in reaction to the recent economic crises. The obtained results seem to indicate, however, that most of the proposed policies are likely inadequate to tackle the short-term crises consequences, and even risk demoting the long-run economic prospects. More objectively, the conclusions offer a possible explanation to the negative path traversed by economies like Brazil, where many of the mentioned policies were applied in a short period, and hint about some risks ahead.
    Keywords: Labour market,Policy evaluation,Agent-based model
    JEL: C63 E24 H53 J88
    Date: 2018
  99. By: International Monetary Fund
    Abstract: In recent years, El Salvador has suffered from low growth, high and rising public debt, political polarization, and sovereign financial strains. A downward revision of nominal GDP, due to the rebasing of the national accounts, increased the 2017 debt-to-GDP ratio from 63 to 71 percent. The country has pursued a strategy to address the growth and fiscal problems through (i) pro-growth measures and (ii) gradual fiscal adjustment combined with a recent pension reform, which was facilitated by an improvement in collaboration across the political spectrum. The recent decision by the U.S. administration to end the temporary protection status (TPS) for Salvadoran immigrants and further restrictive immigration policies pose risks to remittances’ inflows and growth going forward. Presidential elections are scheduled for early-2019.
    Keywords: El Salvador;Western Hemisphere;
    Date: 2018–06–07
  100. By: Ales Marsal (National Bank of Slovakia)
    Abstract: We explore asset pricing implications of productive, wasteful and utility enhancing government expenditures in a New Keynesian macro-finance model with Epstein-Zin preferences. We decompose the pricing kernel into four underlying macroeconomic factors (consumption growth, inflation, time preference shocks, long run risks for consumption and leisure) and design novel method to quantify the contribution of each factor to bond prices. Our methodology extends the performance attribution analysis typically used in finance literature on portfolio analysis. Using this framework, we show that bonds can serve as an insurance vehicle against the fluctuations in investors wealth induced by government spending. Increase in uncertainty surrounding government spending rises the demand for bonds leading to decrease in yields over the whole maturity profile. Bonds insure investors by i) providing buffer against bad times, ii) hedging inflation risk and iii) hedging real risks by putting current consumption gains against future losses. In a special case where the central bank does not respond to changes in output bonds leverage inflation risk. Spending reversals strongly reduce the sensitivity of bond prices to changes in government spending.
    Date: 2018
  101. By: Sushant Acharya (Federal Reserve Bank of New York); Keshav Dogra (Federal Reserve Bank of New York)
    Abstract: Does market incompleteness radically transform the properties of monetary economies? Using an analytically tractable heterogeneous agent New Keynesian (NK) model, we show that whether incomplete markets resolve `policy paradoxes' in the representative agent NK model (RANK) depends primarily on the cyclicality of income risk, rather than incomplete markets per se. Incomplete markets reduce the effectiveness of forward guidance and multipliers in a liquidity trap only if risk is procyclical. Acyclical or countercyclical risk amplifies these puzzles relative to RANK. Cyclicality of risk also affects determinacy: procyclical risk permits determinacy even under a peg, while countercyclical income risk generates indeterminacy even if the Taylor principle holds. Finally, we uncover a new dimension of monetary-fiscal interaction. Since fiscal policy affects the cyclicality of income risk, it influences the effects of monetary policy even when `passive'.
    Date: 2018
  102. By: International Monetary Fund
    Abstract: Colombia is near completion of a successful adjustment to large external shocks guided by its very strong economic policy framework and timely policy actions. The flexible exchange rate, combined with an inflation-targeting regime, effective financial sector supervision and regulation, and a fiscal rule, allowed the country to smooth the impact of a large permanent terms of trade deterioration. Amid continued strong appetite for Colombian assets, foreign participation in the local public debt and equity markets has continued to increase.
    Keywords: Western Hemisphere;Western Hemisphere;Colombia;
    Date: 2018–06–07
  103. By: Gabriel Di Bella; Francesco Grigoli; Francisco Ramirez
    Abstract: Despite conventional macroeconomic theory is based on the idea that demand shocks can only have temporary effects on unemployment, several European economies display highly persistent unemployment dynamics. The theory of hysteresis challenges this view and points out that, under certain conditions, demand disturbances can have permanent effects. In this paper, we find strong empirical evidence of unemployment hysteresis in advanced economies since the 1990s. Relying on an identification scheme instigated by an insider/outsider model, we study the effects of demand shocks allowing for cross-country heterogeneous dynamics, and exploit such heterogeneity to investigate what institutional settings have the potential to soften or amplify the effects of demand shocks. Our results indicate that strengthening labor market institutions that promote a faster adjustment of real wages, removing disincentives for firms to hire and for workers to be employed, and improving the matching between labor supply and labor demand can lessen the effects of adverse demand shocks and lead to a faster reversion of unemployment rates to pre-shock levels.
    Date: 2018–07–24
  104. By: Shrestha, Rashesh; Coxhead, Ian
    Abstract: In Indonesia, an export boom and sustained, rapid GDP growth in the decade after 2000 was accompanied by real earnings that were flat on average, and even declining for many workers. Conventional models of growth and trade predict that labor productivity rises as an economy develops; that this should not be observed during a period of high GDP growth is a puzzle that merits careful investigation. In this paper we explore these seemingly paradoxical trends using several waves of a panel of individual employment data. Economic growth is rarely balanced in a sectoral sense, and the nature of the structural change experienced by Indonesia is also strongly associated with lower competitiveness in sectors where formal employment rates are high, causing some degree of involuntary labor movement from formal to informal modes of employment. We explore this econometrically and find that the earnings of workers displaced from formal to informal jobs are significantly lower relative to workers who remain in the formal market. The fact of this displacement, and its implications for individual earnings, undercuts conventional thinking about the welfare gains from a sustained growth experience. Our findings add, perhaps for the first time, a developing-country dimension to the existing job displacement literature. They also shed some light on the causes of Indonesia's unprecedented increase in inequality during the same growth epoch.
    Keywords: Displacement, Formal, Informal, Earnings, Indonesia
    JEL: E24 F16 J23 J63 O17
    Date: 2018–08
  105. By: Polezhaeva Natalia (RANEPA)
    Abstract: The first corporate governance code in its present-day meaning – the Cadbury Code – was adopted in the UK in 1992 when the Cadbury Committee on Corporate Governance Issues developed the guidelines for the best corporate governance practices. The Cadbury Code laid the foundation not only for British corporate governance codes, but also paved the way for development of such codes in Europe. Late in the 1990s and early in the 2000s, corporate governance codes were approved in Austria, Belgium, Germany, France, Switzerland and Sweden.[1] At the same period, similar documents were developed in Australia, Canada, the USA and Japan. In Russia, the first corporate governance code was adopted in 2002. At present, a majority of developing and developed countries have introduced such codes, too.
    Keywords: Russian economy, financial market regulation
    JEL: E44
    Date: 2018
  106. By: Francois Geerolf (University of California, Los Angeles)
    Abstract: This paper argues that the Phillips Curve is driven by a correlation between real exchange rates and economic activity, which implies a correlation between inflation and economic activity in fixed exchange rate regimes. According to this interpretation, the Phillips Curve is a correlation between relative prices and economic activity, and does not result from a monetary phenomenon. Three new facts are put forward to support that hypothesis. First, the original Phillips relation is valid in fixed exchange rate regimes, including across regions of the same country, and becomes flatter as the exchange rate regime moves continuously from fixed to floating. Second, when nominal or real exchange rates are used in place of inflation, the Phillips relation is restored in floating exchange rate regimes. Third, identified aggregate demand shocks (such as tax cuts) drive a positive relation between real exchange rates and economic activity in the reduced form. A textbook international finance model is developed to help rationalize these findings. This hypothesis implies that the US Phillips Curve broke down in the 1970s following the collapse of the Bretton Woods system.
    Date: 2018
  107. By: International Monetary Fund
    Abstract: The Guinean economy is growing at a faster than anticipated pace on the back of buoyant mining activity. The growth momentum is expected to continue, with real growth at about 6 percent in 2018 and over the medium term. However, risks of instability are heightened by the current electoral cycle.
    Date: 2018–07–20
  108. By: Sihao Chen (Hong Kong Univ of Science and Technology)
    Abstract: We use the production network approaches to show that the shocks on U.S. sectoral financing cost propagate through international trade linkages and drive the business cycles of Mexico. We take three steps to reach this conclusion. First, using a simple three-sector two-country model, we analytically show that U.S. financial shocks influence Mexican sectoral value-added by two channels. The price effect propagates through Mexican import network while the demand effect propagates through Mexican export network. Both effects transmit further via Mexican domestic production network. Secondly, utilizing a multiple-industry two-country model, we conduct structural factor model analysis and find that external financial shocks account for around 19% of the volatility of Mexico domestic output. Illustrated by impulse response functions, the demand effect dominates in the short run. Thirdly, employing the methodology in Acemoglu, Akcigit and Kerr (2016) to construct the "network effect" of shocks, we empirically test the role of trade linkages. The evidence on demand effect is prevalent but the evidence on price effect is mixed. More importantly, the interest-rate-driven demand effect not only propagate through Mexico export network but also transmit upward in Mexican domestic supply chain.
    Date: 2018
  109. By: International Monetary Fund
    Abstract: The Slovak economy is enjoying consecutive years of favorable performance marked by robust real per capita GDP growth, record-low unemployment and sustained improvement in fiscal balances. However, shortages of skilled labor, and gaps in education and institutional quality pose risks to an already declining productivity growth. A decade-long double-digit mortgage lending growth has more than doubled household indebtedness relative to GDP, posing financial stability risks.
    Date: 2018–07–26
  110. By: Cong, Lin William (U of Chicago); Li, Ye (Oh State U); Wang, Neng (Columbia U and China Academy of Financial Research)
    Abstract: We provide a dynamic asset-pricing model of (crypto-)tokens on (blockchain-based) platforms, and highlight their roles on endogenous user adoption. Tokens intermediate transactions on decentralized networks, and their trading creates an inter-temporal complementarity among users, generating a feedback loop between token valuation and platform adoption. Consequently, tokens capitalize future platform growth, accelerate adoption, and reduce user-base volatility. Equilibrium token price increases non-linearly in platform productivity, user heterogeneity, and endogenous network size. The model also produces explosive growth of user base after an initial period of dormant adoption, accompanied by a run-up of token price volatility. We further discuss how our framework can be used to discuss cryptocurrency supply, token competition, and pricing assets under network externality.
    JEL: C73 E42 F43 L86
    Date: 2018–03
  111. By: Al-Abri, Almukhtar (Sultan Qaboos University); Genc, Ismail H. (American University of Sharjah); Naufal, George S (Texas A&M University)
    Abstract: The literature on remittances is large and growing. However, its focus has mainly been on the effects of remittance inflows on the receiving economies. Little has been done on the sending economies. In this paper, we use data from Saudi Arabia, one of the top remitting countries in the world, to identify the impact of government spending on Saudi Arabia's real output considering the role of remittance outflows. The results suggest that remittance outflows have a weak effect, if at all, on government spending, which, in turn, has an insignificant impact on GDP. The paper discusses some policy implications.
    Keywords: remittances, multipliers, fiscal policy, GCC
    JEL: C23 E61 F24 N15
    Date: 2018–07
  112. By: Ali Alichi; Rania A. Al-Mashat; Hayk Avetisyan; Jaromir Benes; Olivier Bizimana; Aram Butavyan; Robert Ford; Narek Ghazaryan; Vahagn Grigoryan; Mane Harutyunyan; Anahit Hovhannisyan; Edgar Hovhannisyan; Hayk Karapetyan; Mariam Kharaishvili; Douglas Laxton; Akaki Liqokeli; Karolina Matikyan; Gevorg Minasyan; Shalva Mkhatrishvili; Armen Nurbekyan; Andrei Orlov; Babken Pashinyan; Garik Petrosyan; Yekaterina Rezepina; Aleksandr Shirkhanyan; Tamta Sopromadze; Lusine Torosyan; Erik Vardanyan; Hou Wang; Jiaxiong Yao
    Abstract: Estimates of potential output and the neutral short-term interest rate play important roles in policy making. However, such estimates are associated with significant uncertainty and subject to significant revisions. This paper extends the structural multivariate filter methodology by adding a monetary policy block, which allows estimating the neutral rate of interest for the U.S. economy. The addition of the monetary policy block further improves the reliability of the structural multivariate filter.
    Keywords: United States;Western Hemisphere;Potential output;Macroeconomic Modeling, Neutral Rate, Model Construction and Estimation, Monetary Policy (Targets, Instruments, and Effects)
    Date: 2018–07–06
  113. By: International Monetary Fund
    Abstract: Grenada made important strides under the 2014-17 ECF-supported program, achieving an impressive debt reduction by 37 percent of GDP since 2013, upgrading the framework for fiscal policy, strengthening the financial system, improving governance, and creating a better business environment. Nonetheless, public debt is still relatively high, job creation has been insufficient, and the institutional capacity for policy implementation needs strengthening.
    Date: 2018–07–25
  114. By: Jieying Li (Stockholm School of Economics); Xin Zhang (Sveriges Riksbank)
    Abstract: Using a monthly panel dataset of individuals' debt composition including mortgage and non-mortgage consumer credit, we show that house price changes can explain a significant fraction of personal debt composition dynamics. We exploit the variation in local house price growth as shocks to homeowners' housing wealth to study the consequential adjustment of personal debt composition. To account for local demand shocks and disentangle the housing collateral channel from the wealth effect, we use renters and non-equity-withdrawal homeowners in the same region as control groups. We present direct evidence that homeowners reoptimize their debt structure by using withdrawn home equity to pay down comparatively expensive short-term non-mortgage debt during a housing boom, unsecured consumer loans in particular. We also find that homeowners withdraw home equity to finance their entrepreneurial activities. Our study sheds new light on the dynamics of personal debt composition in response to changes in house prices.
    Date: 2018
  115. By: Sylvain Leduc (Bank of Canada); Daniel Wilson (Federal Reserve Bank of San Francisco)
    Abstract: This paper estimates the cross-geographical wage Phillips Curve (PC) and relates this object to the aggregate wage PC through the lens of a New Keynesian model of regions within a monetary union. We argue that a well-identfied cross-geographical PC, combined with a theoretical mapping from this object to the aggregate PC, provides an appealing alternative to estimating the latter from time-series variation. We employ this approach to study the recent debates over whether the wage PC slope has flattened in recent years and whether the wage PC is nonlinear. We find substantial evidence of a flattening of the wage PC during the recovery from the Great Recession, using both state and city panel data. We find no evidence of any economically meaningful nonlinearity. As our theoretical model shows, a flattening cross-geographical wage PC need not imply a flattening aggregate PC if intra-national labor mobility has risen and/or if monetary policy has become less passive. However, evidence points to the opposite, suggesting that the aggregate PC slope flattened at least as much.
    Date: 2018
  116. By: Johnny Cotoc; Alok Johri; Cesar Sosa-Padilla
    Abstract: Using data from 40 nations, we obtain new stylized facts regarding the impact of polit- ical leanings of the ruling government on sovereign debt yields and fiscal policy. Left- wing governments' yields are 166 basis points higher and 23% more volatile than yields of right-wing governments. Moreover, left-wing governments face more counter-cyclical yields. Left-wing governments have higher levels of government spending and right-wing governments collect lower tax revenue as a percent of GDP. A calibrated sovereign de- fault model with elections and two politically heterogeneous policy makers who differ in the marginal impact of their fiscal choices on their re-election probabilities delivers the above-mentioned facts.
    Keywords: Sovereign default, Interest rate spread, Political turnover, Left-wing, Right-wing, Cyclicality of fiscal policy.
    JEL: F34 F41 E62
    Date: 2018–08
  117. By: Tursoy, Turgut
    Abstract: This paper investigates the dynamic relationship between financial development, energy demands, economic growth and total trade with the ARDL Bounds and Combined cointegration approaches in North Cyprus for the period of 1977Q1 – 2016Q4. The empirical results provide evidences for the long-run and short-run relationship between the concern variables. All the techniques such as cointegration and innovation accounting method supporting the relationship between variables. Positive innovation in GDP is connected with increase in financial development and energy demands. Energy demands response positively for the shocks from GDP and Financial development, and financial development responses just only GDP and itself.
    Keywords: Financial development, GDP, Energy, Trade
    JEL: E44 O43 Q43
    Date: 2018–08–02
  118. By: Gregor Semieniuk; Mariana Mazzucato (Department of Economics, SOAS University of London, UK)
    Abstract: This paper surveys the current state of financing green growth in the energy sector, based on the insight that there are different qualities of finance. In past transformational changes in other sectors, public monies played a key role across the innovation landscape. Public financing was central also in a number of past national energy transitions, as reviewed here for Iceland (from fossil to geothermal energy), Norway (from mainly non-electricity energy to hydroelectricity), France (from oil to nuclear) and the United States (from conventional to shale gas). In the current transition to low-carbon energy supplies, there is much public activity, most directed and concerted in China, but also reasons to doubt it is enough and applied in the right places to be able to finance the transition to a low carbon sector on time scales consistent with current climate change mitigation targets. A discussion of opportunities and challenges to a more central role for public financing concludes, drawing also on insights from the recent mission-oriented innovation literature.
    Keywords: energy intensity, labor productivity, decoupling, green growth, stylized fact
    JEL: O44 O47 Q43 E17
    Date: 2018–04
  119. By: Luca Brugnolini (Central Bank of Malta's Research Department)
    Abstract: I compare the performance of the vector autoregressive (VAR) model impulse response function estimator with the Jordà (2005) local projection (LP) methodology. In a Monte Carlo experiment, I demonstrate that when the data generating process is a well-specified VAR, the standard impulse response function estimator is the best option. However, when the sample size is small, and the model lag-length is misspecified, I prove that the local projection estimator is a competitive alternative. Finally, I show how to improve the local projection performance by fixing the lag-length at each horizon.
    Keywords: VAR,information criteria,lag-length,Monte Carlo
    JEL: C32 C52 C53 E52
    Date: 2018–06–09
  120. By: International Monetary Fund
    Abstract: A fragile state, Guinea-Bissau has maintained robust growth at around 6 percent for the past three years despite a political crisis that led to multiple changes of government and absence of a functioning parliament for most of the period. A recent consensus-based appointment of a new Prime Minister and agreement to undertake parliamentary elections in November 2018 are relieving political tensions.
    Keywords: Guinea-Bissau;Sub-Saharan Africa;
    Date: 2018–06–06
  121. By: Isaac Baley (Universitat Pompeu Fabra & Barcelona GSE); Ana Figueiredo (Universitat Pompeu Fabra and Barcelona GSE); Robert Ulbricht (Toulouse School of Economics)
    Abstract: Using a recently developed worker-occupation mismatch measure for the US labor market, we document that mismatch is procyclical. However, there is substantial heterogeneity by previous employment status: mismatch is procyclical for workers in ongoing job relationships, consistent with the cleansing effect of recessions; but it is countercyclical for the flow of new hires from unemployment, consistent with the sullying effect of recessions. Our empirical findings show that the cleansing effect dominates. We also provide evidence that, conditional on mismatch, business cycle conditions at the start of the match are important in explaining variation in job duration. We explain these empirical patterns through a learning model à la Jovanovic (1979) augmented with adjustment costs and a learning technology that varies over the business cycle.
    Date: 2018
  122. By: Bakari, Sayef; Mabrouki, Mohamed; Othmani, Abdelhafidh
    Abstract: The contribution of this study is to search the six linkages between Foreign Direct Investment, Domestic Investment, Exports, Imports, Labor Force and Economic Growth in Nigeria by using vector error correction model for the period 1981 – 2015. The empirical results indicate that there is no relationship between the six variables in the long run. In the short run imports cause economic growth and domestic investment; exports and FDI cause labor; and labor causes FDI. These findings present the critical situation of Nigeria, which requires an entry of urgent economic reforms.
    Keywords: Economic Growth, Domestic investment, FDI, Labor, Exports, Imports, VECM, Nigeria.
    JEL: E22 F14 J21 N77 O16 O47 O55
    Date: 2018
  123. By: International Monetary Fund
    Abstract: The flexibility shown by the ECB/Eurosystem in adapting its framework, as required by circumstances, has helped improve funding and liquidity conditions. Compared to the situation pre-crisis, the ECB/Eurosystem has provided liquidity against a broader range of collateral and for as long as four years in terms of maturity; extended liquidity in foreign currency; conducted outright purchases of public and private sector assets (now tapering off); and reduced interest rates into negative territory. In these arrangements, policy is directed from the center, but is implemented mostly by the National Central Banks (NCBs); risks are largely shared. Market participants are complimentary about the role the ECB/Eurosystem has played in backstopping the financial system and its forward guidance on monetary policy.
    Date: 2018–07–19
  124. By: Riza Demirer (Department of Economics & Finance, Southern Illinois University Edwardsville, Edwardsville); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Zhihui Lv (School of Mathematics and Statistics, Northeast Normal University, China); Wing-Keung Wong (Department of Finance, Fintech Center, and Big Data Research Center, Asia University; Department of Medical Research, China Medical University Hospital; Department of Economics and Finance, Hang Seng Management College; Department of Economics, Lingnan University)
    Abstract: This paper contributes to the literature on stock market predictability by exploring the causal relationships between equity return dispersion, stock market volatility and excess returns via multivariate nonlinear causality tests. Both bivariate and multivariate nonlinear causality tests yield significant evidence of causality from return dispersion to both stock market volatility and equity premium, even after controlling for the state of the economy. While we find significant causality from business conditions to return dispersion, we see that expansionary (contractionary) market states are associated with low (high) level of equity return dispersion, indicating asymmetries in the relationship between equity return dispersion and economic conditions. Overall, our findings suggest that both return dispersion and business conditions are valid joint forecasters of both the stock market volatility and excess market returns and that return dispersion possesses incremental information regarding future stock return dynamics beyond which can be explained by the state of the economy.
    Keywords: Equity return dispersion, Stock market volatility, Business cycle, Multivariate causality
    JEL: C32 E32 G10
    Date: 2018–07
  125. By: Rischen, Tobias; Theissen, Erik
    Abstract: We conduct the most extensive study of underpricing in the euro area bond market so far and find strong evidence of underpricing. In cross-sectional regressions we find patterns that are consistent with bookbuilding-based theories of underpricing and inconsistent with liquidity-based explanations. The underpricing has increased considerably during the financial crisis and has remained at an elevated level since. We also show that secondary market liquidity in the euro area bond market is significantly lower in the post-crisis period than pre-crisis. These results are consistent with recent US evidence and may represent unintended side effects of new regulation enacted in the wake of the financial crisis, such as Basel III and the Volcker Rule. Furthermore, our evidence suggests that the ECB's asset purchase programs have led to a decrease in underpricing.
    Keywords: Underpricing,Bond Markets,Primary Market,Post-Crisis Regulation,ECB,Unconventional Monetary Policy,Quantitative Easing,Asset Purchase Programs
    JEL: G12 G32 E58
    Date: 2018
  126. By: Barinova Vera (Gaidar Institute for Economic Policy); Zemtsov Tsepan (Gaidar Institute for Economic Policy); Tsareva Yulia (Gaidar Institute for Economic Policy)
    Abstract: Over the period 2016–2017, a number of specialized normative legal acts were introduced with the aim of developing the small and medium-sized business sector (SMB), including the SMB Development Strategy until 2030;[1] the SMB Corporation was set up;[2] and the creation of a basic support infrastructure was completed in many regions. The Single Register of SMB Subjects was introduced in order to follow the monthly movement of their basic indices. In 2017, 77.9 percent of all organizations and individual entrepreneurs (IEs) belonged to the category of SMB subjects, while at year-end 2016, the share of SMB subjects in the national average employment rate (calculated on the basis of their average staffing number index) amounted to 37.9 percent, and in the total turnover of enterprises and organizations – to 37.1 percent. The input of SMBs, IEs including, in GDP over the period from 2011 through 2016 jumped by 0.5 percentage points, and now amounts to approximately 20 percent.
    Keywords: Russian economy, small businesses, medium-sized enterprises
    JEL: C53 E37 L21 L52
    Date: 2018
  127. By: Aur\'elien Hazan (LISSI)
    Abstract: In this article the problem of reconstructing the pattern of connection between agents from partial empirical data in a macro-economic model is addressed, given a set of behavioral equations. This systemic point puts the focus on distributional and network effects, rather than time-dependence. Using the theory of complex networks we compare several models to reconstruct both the topology and the flows of money of the different types of monetary transactions, while imposing a series of constraints related to national accounts, and to empirical network sparsity. Some properties of reconstructed networks are compared with their empirical counterpart.
    Date: 2018–07
  128. By: Sang-yoon Song (Economic Research Institute, The Bank of Korea)
    Abstract: This study provides new evidence on the large contribution of performance pay to wage inequality among employers via heterogeneous rent-sharing behaviors, focusing on industry affiliation and employer size. Using comprehensive Korean worker-level data, I first show that wage betweeninequality at the industry-size level has substantially contributed to a growing wage inequality trend since 1994 even after controlling for observed andunobserved worker characteristics and factoring in sorting effects; this phenomenon is dominated by the employer size-wage effect. The size-wage effect is mainly due to the differences in performance pay between employer sizes, while the effects of performance pay on within-inequality are limited. I then show the sources of the rising wage between-inequality in terms of firm-side factors using firm-level balance sheet data merged with worker-level data at the industry-size-year level. I find that changes in the estimated rentsharing parameters and the prices of capital-to-labor ratio are the main factors in the increasing dispersal of between-inequality and that they became more positively correlated with wages between 2009 and 2015 than they were before 2009. This positive correlation is observed even more clearly when performance pay is included in wages. These findings show that employers exhibit rent-sharing behavior and compensate for capital dependency using performance pay, and differentials of performance pay among employers are translated into increased between-inequality of wages.
    Keywords: Foreign investors, Institutional investors, Price impact, Investor heterogeneity, Treasury bond liquidity
    JEL: E23 J21 J31
    Date: 2018–02–08
  129. By: Claire Giordano (Banca d’Italia)
    Abstract: This study first assesses recent misalignments of the real effective exchange rate (REER) of the euro area and of the Harmonized Competitiveness Indicators (HCIs) of its main economies, based on a quarterly Behavioural Equilibrium Exchange Rate (BEER) model. Next, it draws a comparison with comparable estimates published by the IMF and by CEPII. The BEER model here employed was first put forward by Fidora, Giordano and Schmitz (2017; 2018) and enables the assessment of the departure of actual REERs and HCIs from values consistent with underlying economic fundamentals (i.e. “equilibrium” values). The quarterly model has now been extended to cover a longer time span (1999-2017) and refined by employing new data sources, in particular relative to producer price indices, one of five alternative price/cost indicators used to derive the REERs and HCIs. There is evidence of a modest overvaluation of the euro-area REER in 2017, partly linked to the nominal appreciation of its currency in the second half of the year.
    Keywords: price competitiveness, cost competitiveness, real effective exchange rate, equilibrium exchange rate, misalignments
    JEL: E31 F00 F31
    Date: 2018–07
  130. By: Russell Cooper (The Pennsylvania State University); Immo Schott (Université de Montréal)
    Abstract: This paper studies the effects of cyclical capital reallocation on aggregate productivity. Frictions in the reallocation process are a source of factor misallocation and lead to variations in measured aggregate productivity over the business cycle. The effects are quantitatively important in the presence of fluctuations in the cross-sectional dispersion of plant-level productivity shocks. The cyclicality of the productivity losses depends on the joint distribution of capital and plant-level productivity. Even without aggregate productivity shocks, the model has quantitative properties that resemble those of a standard stochastic growth model: (i) persistent variation in the Solow residual, (ii) positive co-movement of output, investment and consumption and (iii) consumption smoothing. The estimated model with dispersion shocks alone accounts for nearly 85\% of the time series variation in the observed Solow residual. Contrary to a model with productivity shocks, the model driven by dispersion shocks can mimic the dynamics of reallocation and the cross sectional dispersion in average capital productivity. Instead of relying on approximative solution techniques we show analytically that a higher-order moment is needed to solve the model accurately.
    Date: 2018
  131. By: Lukas Pfeifer; Martin Hodula
    Abstract: Over the last few years, national macroprudential authorities have developed different strategies for setting the countercyclical capital buffer (CCyB) rate in the banking sector. The existing approaches are based on various indicators used to identify the current phase of the financial cycle. However, to our knowledge, there is no approach that directly takes into consideration banks' prudential behavior over the financial cycle as well as cyclical risks in the banking sector. In this paper, we propose a new profit-to-provisioning approach that can be used in the macroprudential decision-making process. We construct a new set of indicators that largely capture the risk of cyclicality of profit and loan loss provisions. We argue that banks should conserve a portion of the cyclically overestimated profit (non-materialized expected loss) in their capital during a financial boom. We evaluate the performance of our newly proposed indicators using two econometric exercises. Overall, they exhibit good statistical properties, are relevant to the CCyB decision-making process, and may contribute to a more precise assessment of both systemic risk accumulation and risk materialization. We believe that the relevance of the profit-to-provisioning approach and the related set of newly proposed indicators increases under IFRS 9.
    Keywords: Banking prudence indicators, countercyclical capital buffer, financial stability, macroprudential policy, profit-to-provisioning approach
    JEL: E58 G21 G28
    Date: 2018–05
  132. By: Christian Moser (Columbia University); Benjamin Wirth (IAB Nuremberg); Farzad Saidi (Stockholm School of Economics)
    Abstract: We study pass-through of negative interest rates to workers’ wages in the European currency union from 2014-16. To this end, we construct a novel dataset combining ad- ministrative linked employer-employee (IAB-LIAB) data with proprietary syndicated loans (Dealscan) and executive compensation (BoardEx) data from Germany. To identify monetary policy effects on wage inequality between and within firms, we exploit the interaction of nominal interest rate movements around the zero lower bound with variation in pre-determined balance sheet exposure of banks and their lending relations with firms. We find significant increases in credit supply of affected banks, leading to increased within-firm inequality. The results are driven by executives and highest- paid employees reaping relatively greater benefits from positive firm-level credit supply shocks. At the same time, low-paying firms increase their average pay in response to easier credit access.
    Date: 2018
  133. By: Kyriakos Chousakos (Yale University); Gary Gorton (Yale University); Guillermo Ordonez (University of Pennsylvania)
    Abstract: The amount of information produced in an economy varies over time depending on the state of the macro economy. We define movements in aggregate economic activity very agnostically and introduce new ways to characterize aggregate economic activity based on information in stock prices. We empirically investigate changes in economy-wide measures of information and changes in aggregate economic fragility as aggregate economic activity changes based on the level of real GDP. We find that our stock price-based measures of information are significant in predicting recessions with and without a financial crisis. We then show evidence of a feedback effect to investment from the information produced especially during recessions associated with crises. Finally, we document the presence of a global information factor; information produced in advanced countries can predict financial crises in emerging markets and results in reallocation at a global level via capital flows among countries.
    Date: 2018
  134. By: Max Ole Liemen (Universität Hamburg); Michel van der Wel (Erasmus University Rotterdam); Olaf Posch (Universität Hamburg)
    Abstract: In this paper we show how high-frequency financial data can be used in a combined macro-finance framework to estimate the underlying structural parameters. Our formulation of the model allows for substituting macro variables by asset prices in a way that enables casting the relevant estimation equations partly (or completely) in terms of financial data. We show that using only financial data allows for identification of the majority of the relevant parameters. Adding macro data allows for identification of all parameters. In our simulation study, we find that it also improves the accuracy of the parameter estimates. In the empirical application we use interest rate, macro, and S&P500 stock index data, and compare the results using different combinations of macro and financial variables.
    Date: 2018
  135. By: Jorge Miranda-Pinto (University of Queensland); Daniel Murphy (University of Virginia); Eric Young (University of Virginia); Kieran Walsh (University of Virginia)
    Abstract: We document that the interest rate response to fiscal stimulus is lower in countries with high inequality. To interpret this evidence we develop a model in which households have minimum consumption constraints. In equilibrium, many households with low wealth hit this constraint and take on debt in the face of adverse shocks. Now debt-burdened, these households use additional income to deleverage. In economies with more debt-burdened households, increases in government spending tighten credit conditions less (relax credit conditions more), leading to smaller increases (larger declines) in the interest rate. Using data from the Panel Study of Income Dynamics, we show that low-wealth households behave as predicted by the model.
    Date: 2018
  136. By: Donaldson, Jason; Gromb, Denis; Piacentino, Giorgia
    Abstract: We develop a model in which collateral serves to protect creditors from the claims of competing creditors. We find that borrowers rely most on collateral when cash flow pledgeability is high, because this is when it is easy to take on new debt, diluting existing creditors. Creditors thus require collateral for protection against being diluted. This causes a collateral rat race that results in all borrowing being collateralized. But collateralized borrowing has a cost: it encumbers assets, constraining future borrowing and investment, i.e. there is a collateral overhang. Our results suggest that the absolute priority rule, by which secured creditors are senior to unsecured creditors, may have an adverse effect — it may trigger the collateral rat race.
    Keywords: Pledgeability; creditor protection; creditor competition
    JEL: E51
    Date: 2017–01–01
  137. By: Petre Caraiani (Institute for Economic Forecasting, Romanian Academy); Adrian Cantemir Călin (Institute for Economic Forecasting, Romanian Academy); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa)
    Abstract: In this paper, we analyze the effects of monetary policy on the bubbles in the Real Estate Investment Trusts (REITs) sector of the United States. We use a time-varying vector autoregressive (VAR) model over the quarterly period of 1972:1 to 2018:1. We find protracted periods, starting from the onset of the recent financial crisis to the end of the sample period, where contractionary monetary policy is associated with increases in the bubble component in the REITs of the US economy. This result, which is robust to alternative REITs indexes, is contrary to the “conventional" view, as well as to the predictions of standard models of bubbles.
    Keywords: REITs, Bubbles, VAR, Monetary Policy
    Date: 2018–07
  138. By: Stefan Avdjiev; Catherine Koch; Patrick McGuire; Goetz von Peter
    Abstract: This paper explores the basic question of whose monetary policy matters for banks' international lending. In the international context, monetary policies from several countries could come into play: the lender's, the borrower's, and that of a third country, the issuer of the currency in which cross-border lending is denominated. Using the rich dimensionality of the BIS international banking statistics, we find significant effects for all three policies. US monetary easing fuels cross-border lending in US dollars, as befits a global funding currency. At the same time, a tightening in the lender or the borrower country reinforces international dollar lending as global banks turn to the greenback for cheaper funding and toward borrowers abroad. Our results also show that stronger capitalization and better access to funding sources mitigate the frictions underpinning the transmission channels. Analogous results for euro-denominated lending confirm that global funding currencies play a key role in international monetary policy transmission.
    Keywords: international banking, dollar lending, global funding currency, monetary policy transmission, international spillovers
    JEL: E59 F42 G21
    Date: 2018–08
  139. By: Mario Gara (Banca d’Italia); Michele Giammatteo (Banca d’Italia); Enrico Tosti (Banca d’Italia)
    Abstract: Criminals worldwide typically use misreporting tricks of different sorts to exploit the transfer of goods between different countries for money laundering purposes. The main international anti-money laundering organisations started paying attention to this phenomenon, known as trade-based money laundering, or TBML, a long time ago, but the absence of suitable analytical tools has reportedly impeded preventive action. Nonetheless, the literature has consistently shown that the analysis of discrepancies in mirrored bilateral trade data could provide some help. Based on previous studies, this work builds a model factoring in the main structural determinants of discrepancies between mirrored data concerning Italy’s external trade in the period 2010-13, considered at a highly detailed (6-digit) level of goods classification for each partner country. Point estimates of freight costs are used to net the cif-fob discrepancy. The regression estimates are then used to compute TBML risk indicators at country and at (4-digit) product level. Based on these indicators, rankings of countries and product lines can be compiled and used to detect potential illegal commercial transactions.
    Keywords: Money laundering, illicit trade flows, mirror statistics
    JEL: E26 F14 K42
    Date: 2018–07

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