nep-mac New Economics Papers
on Macroeconomics
Issue of 2018‒09‒24
76 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Fiscal Policy and Liquidity Traps with Heterogeneous Agents By Piergallini, Alessandro
  2. Asset Prices in a Production Economy with Long-run and Idiosyncratic Risk By Ivan Sutoris
  3. An Empyrical Analysis of Price Stickiness in Five Latin American Inflation Targeters:2000-2016 By Olivo, Victor
  4. A New Keynesian Model with Wealth in the Utility Function By Pascal Michaillat; Emmanuel Saez
  5. Quasi-fiscal Deficit Financing and (Hyper) Inflation By Alejandro M. Rodríguez
  6. Cyclical Part-Time Employment in an Estimated New Keynesian Model with Search Frictions By Toshihiko Mukoyama; Mototsugu Shintani; Kazuhiro Teramoto
  7. Fiscal Policy, Potential Output and the Shifting Goalposts By Fatás, Antonio
  8. When Creativity Strikes: News Shocks and Business Cycle Fluctuations By Silvia Miranda-Agrippino; Sinem Hacioglu Hoke; Kristina Bluwstein
  9. The Role of Expectations in Changed Inflation Dynamics By Damjan Pfajfar; John M. Roberts
  10. Estimating the Elasticity of Intertemporal Substitution Using Mortgage Notches By Michael Carlos Best; James Cloyne; Ethan Ilzetzki; Henrik Kleven
  11. Taylor Rule Estimation by OLS By Carvalho, Carlos; Nechio, Fernanda; Tristao, Tiago
  12. Fiscal Policy Shocks and Stock Prices in the United States By Haroon Mumtaz; Konstantinos Theodoridis
  13. State Dependence in Labor Market Fluctuations: Evidence,Theory, and Policy Implications By Carlo Pizzinelli; Konstantinos Theodoridis; Francesco Zanetti
  14. Monetary Policy and Inflation Dynamics in ASEAN Economies By Geraldine Dany-Knedlik; Juan Angel Garcia
  15. Optimal Prudential Policy in Economies with Downward Wage Rigidity By Martin Wolf
  16. The Democrat-Republican growth gap paradox By Manuel Hidalgo-Pérez; José Luis Ferreira; Carmen Rubio-Castaño
  17. Relationship Between Financial Stability and Economic Growth in Turkey (2002-2017) By B. Tugberk Tosunoglu
  18. The Great Recession and a Missing Generation of Exporters By William F. Lincoln; Andrew H. McCallum; Michael Siemer
  19. Notes on the Underground: Monetary Policy in Resource-Rich Economies By Ferrero, Andrea; Seneca, Martin
  20. Multicandidate Elections: Recursive Equilibrium in Krusell and Smith (1998) By Dan Cao
  21. Rising Government Debt and What to Do About It By Pierre Yared
  22. Do Households Actually Generate Rational Expectations? “Invisible Hand” for Steady State By Harashima, Taiji
  23. The Costs of Macroprudential Policy By Richter, Björn; Schularick, Moritz; Shim, Ilhyock
  24. The macroeconomic effects of bank capital requirement tightenings: Evidence from a narrative approach By Sandra Eickmeier; Benedikt Kolb; Esteban Prieto
  25. Retirement in the Shadow (Banking) By Ordoñez, Guillermo; Piguillem, Facundo
  26. Loan-to-value ratio limits: an exploration for Greece By Hiona Balfoussia; Harris Dellas; Dimitris Papageorgiou
  27. A Dichotomous Analysis Of Unemployment Welfare By Hu, Xingwei
  28. The Transmission of International Shocks to CIS Economies: A Global VAR Approach By Oleksandr Faryna; Heli Simola
  29. Price Selection By Carlos Carvalho; Oleksiy Kryvtsov
  30. Fiscal Space and Government-Spending & Tax-Rate Cyclicality Patterns: A Cross-Country Comparison, 1960-2016 By Joshua Aizenman; Yothin Jinjarak; Hien Thi Kim Nguyen; Donghyun Park
  31. Global trends in interest rates By Del Negro, Marco; Giannone, Domenico; Giannoni, Marc; Tambalotti, Andrea
  32. Unconditional Basic Income: Who gets it? Who pays for it? A social Accounting Approach to Distribution. By Reich, Utz Peter; Santos, Susana
  33. Reforming Fiscal Institutions in Resource-Rich Arab Economies: Policy Proposals By Mohaddes, M.; Nugent, J.; Selim, H.
  34. International Propagation of Shocks: A Dynamic Factor Model Using Survey Forecasts By Kajal Lahiri; Yongchen Zhao
  35. Estimating the Elasticity of Intertemporal Substitution Using Mortgage Notches By Best, Michael; Cloyne, James; Ilzetzki, Ethan; Kleven, Henrik
  36. What Drives the FOMC's Dot Plots? By Gerlach, Stefan; Stuart, Rebecca
  37. Financial Stability, Growth, and Macroprudential Policy By Chang Ma
  38. ECB monetary policy and small open economies? stock markets: Estimating actions and communication spillovers By Uros Duric
  39. Estimating threshold level of inflation in Swaziland: inflation and growth By Mosikari, Teboho Jeremiah; Eita, Joel Hinaunye
  40. Measuring Aggregate Housing Wealth : New Insights from an Automated Valuation Model By Joshua H. Gallin; Raven S. Molloy; Eric Nielsen; Paul A. Smith; Kamila Sommer
  42. Time-Consistent Management of a Liquidity Trap with Government Debt By Dmitry Matveev
  43. Uncertainty and Fiscal Cliffs By Davig, Troy A.; Foerster, Andrew T.
  44. Monetary Policy Credibility and Exchange Rate Pass-Through in South Africa By Alain N. Kabundi; Montfort Mlachila
  45. How swelling debts give rise to a new type of politics in Vietnam By Viet-Ha T. Nguyen; Hong Kong Nguyen-To; Thu Trang Vuong; Manh Tung Ho; Quan-Hoang Vuong
  46. Determinants of Economic Growth in Hong Kong: The Role of Stock Market Development By Ho, Sin-Yu
  47. Oil price Fluctuation and Aggregate Output Performance in Nigeria By Ibrahim, Taofik
  48. Policy Uncertainty and Foreign Direct Investment: Evidence from the China-Japan Island Dispute By Cheng Chen; Tatsuro Senga; Chang Sun; Hongyong Zhang
  49. Modeling and Forecasting Naira / USD Exchange Rate In Nigeria: a Box - Jenkins ARIMA approach By Nyoni, Thabani
  50. Effects of bank capital requirement tightenings on inequality By Sandra Eickmeier; Benedikt Kolb; Esteban Prieto
  51. The Big Bang: Stock Market Capitalization in the Long Run By Kuvshinov, Dmitry; Zimmermann, Kaspar
  52. Quantitative Sovereign Default Models and the European Debt Crisis By Luigi Bocola; Gideon Bornstein; Alessandro Dovis
  53. Industrial Interdependence: China 1995-2010 By Jose-Miguel Albala-Bertrand
  54. Bayesian Estimation of DSGE Models: identification using a diagnostic indicator By Jagjit S. Chadha; Katsuyuki Shibayama
  55. Why Have Negative Nominal Interest Rates Had Such a Small Effect on Bank Performance? Cross Country Evidence By Jose A. Lopez; Andrew K. Rose; Mark M. Spiegel
  56. On Average Establishment Size across Sectors and Countries By Pedro Bento; Diego Restuccia
  57. Asset Pricing with Endogenously Uninsurable Tail Risk By Hengjie Ai; Anmol Bhandari
  58. The Other Way: A Narrative History of the Bank of France By Bignon, Vincent; Flandreau, Marc
  59. A Quantitative Model of Bubble-Driven Business Cycles By Benjamin Larin
  60. Expectation formation, financial frictions, and forecasting performance of dynamic stochastic general equilibrium models By Holtemöller, Oliver; Schult, Christoph
  61. Firm Dynamics, Misallocation and Targeted Policies By In Hwan Jo; Tatsuro Senga
  62. Education and 'Human Capitalists' in a Classical-Marxian Model of Growth and Distribution By Amitava Krishna Dutt; Roberto Veneziani
  63. Volatility Co-movement and the Great Moderation. An Empirical Analysis By Haroon Mumtaz; Konstantinos Theodoridis
  64. Growth, Exploitation and Class Inequalities By Giorgos Galanis; Roberto Veneziani; Naoki Yoshihara
  65. How Long Does It Take You to Pay? A Duration Study of Canadian Retail Transaction Payment Times By Geneviève Vallée
  66. Comisión del Gasto y la Inversión Pública. Informe Final By Comisión del Gasto y la Inversión Pública
  67. Agnostic Structural Disturbances (ASDs): Detecting and Reducing Misspecification in Empirical Macroeconomic Models By Wouter J. Den Haan; Thomas Drechsel
  68. (Un)expected Monetary Policy Shocks and Term Premia By Martin Kliem; Alexander Meyer-Gohde
  69. Threshold convergence between the federal fund rate and South African equity returns around the colocation period By Andrew Phiri
  70. Intratemporal Substitution between Housing and Nondurable Consumption: Evidence from Reinvestment in Housing Stock By Khorunzhina, Natalia
  71. Endogenous retirement behavior of heterogeneous households under pension reforms By Börsch-Supan, Axel; Härtl, Klaus; Leite, Duarte; Ludwig, Alexander
  72. Monetay Policy, Bounded Rationality, and Incomplete Markets By Emmanuel Farhi; Ivan Werning
  73. No Pain, No Gain. Multinational Banks in the Business Cycle By Qingqing Cao
  74. What accounts for the rise of low self-rated health during the recent economic crisis in Europe? By Michal Brzezinski
  75. Spurious Cross-Sectional Dependence in Credit Spread Changes By Jaskowski, M.; McAleer, M.J.
  76. Währungskrise in der Türkei: Ursachen und Gefahren By Matthes, Jürgen

  1. By: Piergallini, Alessandro
    Abstract: This paper explores global dynamics in a monetary model with limited asset market participation and the zero lower bound on nominal interest rates. It is shown that a rise in government transfers to ‘non-Ricardian’ consumers financed by debt-based taxes to ‘Ricardian’ consumers is capable of escaping disinflationary paths typically convergent to a liquidity trap. Fiscal policy does not need to be unsustainable at the low inflation steady state to avoid liquidity traps, as argued in the context of the standard single representative agent setup.
    Keywords: Fiscal Policy; Multiple Equilibria; Global Dynamics; Liquidity Traps; Non-Ricardian Consumers.
    JEL: E31 E62 E63
    Date: 2017–05–20
  2. By: Ivan Sutoris
    Abstract: This paper studies risk premia in an incomplete-markets economy with households facing idiosyncratic consumption risk. If the dispersion of idiosyncratic risk varies over the business cycle and households have a preference for early resolution of uncertainty, asset prices will be affected not only by news about current and expected future aggregate consumption (as in models with a representative agent), but also by news about current and future changes in the cross-sectional distribution of individual consumption. I investigate whether this additional effect can help explain high risk premia in a production economy where the aggregate consumption process is endogenous and thus can potentially be affected by the presence of idiosyncratic risk. Analyzing a neoclassical growth model combined with Epstein-Zin preferences and a tractable form of household heterogeneity, I find that countercyclical idiosyncratic risk increases the risk premium, but also effectively lowers the willingness of households to engage in intertemporal substitution and thus changes the dynamics of aggregate consumption. Nevertheless, with the added flexibility of Epstein-Zin preferences, it is possible both to increase risk premia and to maintain the same dynamics of quantities if we allow for higher intertemporal elasticity of substitution at the individual level.
    Keywords: Idiosyncratic risk, incomplete markets, production economy, risk premium
    JEL: E13 E21 E44 G12
    Date: 2018–05
  3. By: Olivo, Victor
    Abstract: The main objective of this study is to examine empirically the assumption of price stickiness in five Latin American countries that have implemented inflation targeting schemes during the period under study 2000-2016. These countries are Brazil, Chile, Colombia, Mexico, and Peru. The study adopts a macroeconomic approach suggested by McCallum (1989, 1996) that in turn follows a methodology proposed by Barro (1977, 1978, 1981), and Barro and Rush (1980). An important contribution of this paper is that it separates monetary shocks in two categories: M1 shocks and policy rate shocks. Both types of shocks exhibit durable effects on real output, though in general, M1 surprises tend to be more persistent than policy rate surprises.
    Keywords: Keywords: price stickiness, rational expectations, monetary policy, policy rate shocks, M1 shocks.
    JEL: E31 E32 E52 E58
    Date: 2018–08–18
  4. By: Pascal Michaillat; Emmanuel Saez
    Abstract: This paper extends the New Keynesian model by introducing wealth, in the form of government bonds, into the utility function. The extension modifies the Euler equation: in steady state the real interest rate is negatively related to consumption instead of being constant, equal to the time discount rate. Thus, when the marginal utility of wealth is large enough, the dynamical system representing the equilibrium is a source not only in normal times but also at the zero lower bound. This property eliminates the zero-lower-bound anomalies of the New Keynesian model, such as explosive output and inflation, and forward-guidance puzzle.
    JEL: E31 E32 E43 E52
    Date: 2018–08
  5. By: Alejandro M. Rodríguez
    Abstract: In the Argentine hyperinflations of 1989 and 1990, quasi-fiscal deficits were a major part of the problem. The Central Bank´s quasi-fiscal activities are financed directly by money printing but in some cases the monetary authority tries to sterilize the effect on the money supply by issuing debt or by increasing reserve requirements (it is not uncommon to pay interest on reserves when this happens). Thus, a new source of quasi-fiscal deficit arises, i.e. the interest payments on the Bank´s liabilities. When nominal interest rates are high and debt reaches unsustainable levels, the interest payments can take a life of their own leading to hyperinflation. The traditional explanation is that the Central Bank has to finance the quasi-fiscal deficit through the use of the inflation tax but as inflation increases money demand drops and there is a limit to how much revenue can be collected which is determined by a Laffer curve. Trying to finance a quasi-fiscal deficit beyond that limit (or any fiscal deficit for that matter) leads to hyperinflation. In this paper we demonstrate that very high inflation can arise even if money demand is perfectly inelastic with respect to inflation and the real value of interest payments is relatively low. The key insight is that if expected inflation is a function of the current state of the economy the Central Bank has an additional incentive to alter the future state which results in higher inflation today.
    JEL: E31 E52 E62
    Date: 2018–08
  6. By: Toshihiko Mukoyama (Department of Economics, Georgetown University); Mototsugu Shintani (Faculty of Economics, The University of Tokyo); Kazuhiro Teramoto (Department of Economics, New York University)
    Abstract: This paper analyzes the dynamics of full-time employment and part-time employment over the business cycle. We first document basic macroeconomic facts on these employment stocks using the U.S. data and decompose their cyclical dynamics into the contributions of different flows into and out of these stocks. Second, we develop and estimate a New Keynesian search-and-matching model with two labor markets to uncover the fundamental driving forces of the cyclical dynamics of employment stocks. We find that the procyclicality of the net flow from part-time to full-time employment is essential in accounting for countercyclical patterns of part-time employment.
    Keywords: Part-time employment; Bayesian estimation; DSGE model; Search, matching and bargaining.
    JEL: E24 E32
    Date: 2018–08–20
  7. By: Fatás, Antonio
    Abstract: This paper studies the negative loop created by the interaction between pessimistic estimates of potential output and the effects of fiscal policy during the 2008-2014 period in Europe. The crisis of 2008 created an overly pessimistic view on potential output among policy makers that led to a large adjustment in fiscal policy. Contractionary fiscal policy, via hysteresis effects, caused a reduction in potential output that not only validated the original pessimistic forecasts, but also led to a second round of fiscal consolidation. This succession of contractionary fiscal policies was likely self-defeating for many European countries. The negative effects on GDP caused more damage to the sustainability of debt than the benefits of the budgetary adjustments. The paper concludes by discussing alternative frameworks for fiscal policy that could potentially avoid this negative loop in future crises.
    Keywords: Fiscal policy; hysteresis; Potential Output
    JEL: E32 E62
    Date: 2018–08
  8. By: Silvia Miranda-Agrippino (Centre for Macroeconomics (CFM); Bank of England); Sinem Hacioglu Hoke (Bank of England; Data Analytics for Finance and Macro (KCL)); Kristina Bluwstein (Bank of England)
    Abstract: We use monthly US utility patent applications to construct an external instrument for identification of technology news shocks in a rich-information VAR. Technology diffuses slowly, and affects total factor productivity in an S-shaped pattern. Responsible for about a tenth of economic fluctuations at business cycle frequencies, the shock elicits a slow, but large and positive response of quantities, and a sluggish contraction in prices, followed by an endogenous easing in the monetary stance. The ensuing economic expansion substantially anticipates any material increase in TFP. Technology news are strongly priced-in in the stock market on impact, but measures of consumers’ expectations take sensibly longer to adjust, consistent with a New-Keynesian framework with nominal rigidities, and featuring informationally constrained agents.
    Keywords: Technology news schocks, Business cycle, Identification with external instruments, Patent applications
    JEL: E22 E23 E32 O33 O34
    Date: 2018–08
  9. By: Damjan Pfajfar; John M. Roberts
    Abstract: The Phillips curve has been much flatter in the past twenty years than in the preceding decades. We consider two hypotheses. One is that prices at the microeconomic level are stickier than they used to be---in the context of the canonical Calvo model, firms are adjusting prices less often. The other is that the expectations of firms and households about future inflation are now less well informed by macroeconomic conditions; because expectations are important in the setting of current-period prices, inflation is therefore less sensitive to macroeconomic conditions. To distinguish between our two hypotheses, we bring to bear information on inflation expectations from surveys, which allow us to distinguish changes in the sensitivity of inflation to economic conditions conditioning on expectations from changes in the sensitivity of expectations themselves to economic conditions. We find that, with some measures, expectations are less tied to economic conditions than in the past, and thus that this reduced attentiveness can account for a significant portion of the reduction in the sensitivity of inflation to economic conditions in recent decades.
    Keywords: Phillips curve ; Survey inflation expectations ; Inflation dynamics
    JEL: E31 E37
    Date: 2018–08–31
  10. By: Michael Carlos Best; James Cloyne; Ethan Ilzetzki; Henrik Kleven
    Abstract: Using a novel source of quasi-experimental variation in interest rates, we develop a new approach to estimating the Elasticity of Intertemporal Substitution (EIS). In the UK, the mortgage interest rate features discrete jumps – notches – at thresholds for the loan-to-value (LTV) ratio. These notches generate large bunching below the critical LTV thresholds and missing mass above them. We develop a dynamic model that links these empirical moments to the underlying structural EIS. The average EIS is small, around 0.1, and quite homogeneous in the population. This finding is robust to structural assumptions and can allow for uncertainty, a wide range of risk preferences, portfolio reallocation, liquidity constraints, present bias, and optimization frictions. Our findings have implications for the numerous calibration studies that rely on larger values of the EIS.
    JEL: D1 D14 E2 E21 E4 E43 H3 H31
    Date: 2018–08
  11. By: Carvalho, Carlos (Central Bank of Brazil); Nechio, Fernanda (Federal Reserve Bank of San Francisco); Tristao, Tiago (Opus [Organization])
    Abstract: Ordinary Least Squares (OLS) estimation of monetary policy rules produces potentially inconsistent estimates of policy parameters. The reason is that central banks react to variables, such as inflation and the output gap, which are endogenous to monetary policy shocks. Endogeneity implies a correlation between regressors and the error term, and hence, an asymptotic bias. In principle, Instrumental Variables (IV) estimation can solve this endogeneity problem. In practice, IV estimation poses challenges as the validity of potential instruments also depends on other economic relationships. We argue in favor of OLS estimation of monetary policy rules. To that end, we show analytically in the three-equation New Keynesian model that the asymptotic OLS bias is proportional to the fraction of the variance of regressors accounted for by monetary policy shocks. Using Monte Carlo simulation, we then show that this relationship also holds in a quantitative model of the U.S. economy. As monetary policy shocks explain only a small fraction of the variance of regressors typically included in monetary policy rules, the endogeneity bias is small. Using simulations, we show that, for realistic sample sizes, the OLS estimator of monetary policy parameters outperforms IV estimators.
    JEL: E47 E50 E52 E58
    Date: 2018–09–06
  12. By: Haroon Mumtaz (Queen Mary University of London); Konstantinos Theodoridis (Bank of England and Lancaster University)
    Abstract: This paper uses a range of structural VARs to show that the response of US stock prices to fiscal shocks changed in 1980. Over the period 1955-1980 an expansionary spending or revenue shock was associated with modestly higher stock prices. After 1980, along with a decline in the fiscal multiplier, the response of stock prices to the same shock became negative and larger in magnitude. We use an estimated DSGE model to show that this change is consistent with a switch from an economy characterised by active fiscal policy and passive monetary policy to one where fiscal policy was passive and the central bank acted aggressively in response to inflationary shocks
    Keywords: Fiscal policy shocks, Stock prices, VAR, DSGE
    JEL: C5 E1 E5 E6
    Date: 2017–02–28
  13. By: Carlo Pizzinelli (University of Oxford); Konstantinos Theodoridis (Cardiff Business School); Francesco Zanetti (University of Oxford)
    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 finding 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-specifc 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
  14. By: Geraldine Dany-Knedlik; Juan Angel Garcia
    Abstract: This paper investigates the evolution of inflation dynamics in the five largest ASEAN countries between 1997 and 2017. To account for changes in the monetary policy frameworks since the Asian Financial Crisis (AFC), the analysis is based on country-specific Phillips Curves allowing for time-varying parameters. The paper finds evidence of a higher degree of forward-looking dynamics and a better anchoring of inflation expectations, consistent with the improvements in monetary policy frameworks in the region. In contrast, the quantitative impact of cyclical fluctuations and import prices has gradually diminished over time.
    Keywords: Phillips curve, monetary policy, inflation expectations, ASEAN countries
    JEL: C22 E31 E5
    Date: 2018
  15. By: Martin Wolf
    Abstract: This paper studies optimal policy in economies with downward nominal wage rigidity when only prudential instruments are available. The optimal policy reduces labor demand in expansions as this curtails unemployment in recessions. The cost of the intervention is that in expansions, the economy produces below potential. We characterize this trade-o theoretically and quantitatively by applying our model to Greece, 1999-2016. We and that the optimal prudential policy would have significantly reduced Greek unemployment after the downturn in 2008. Furthermore, we and large welfare gains of the optimal prudential policy, removing about one fourth of the total welfare cost of downward wage rigidity.
    JEL: E24 E32 F41
    Date: 2018–08
  16. By: Manuel Hidalgo-Pérez (Universidad Pablo de Olavide); José Luis Ferreira (Universidad Carlos III); Carmen Rubio-Castaño (Universidad Pablo de Olavide)
    Abstract: Economic performance has been historically better under Democrat presidents compared to Republican ones. This gap has not yet been fully explained appealing to better management or luck. In fact, the economic cycles under one group of administrations or the other are quite similar. Blinder and Watson (2016) provide the best attempt so far at solving the paradox, but can explain only half of the gap. Drawing from them, and using a different method to account for the initial conditions of each presidential term, we are able to show that the phase of the economic cycle at the different elections are correlated to the party of the president. We also find ample evidence suggesting that there is a subtle causality: when the unemployment is high, the probability of a person voting for a Democrat president increases, thus causing Democrats being elected more often at the end of a recession and the beginning of a recovery. This, and not the difference in competence dealing with the economic cycles, is enough to close the gap.
    Keywords: Business cycle, econometric time series, elections, economic growth
    JEL: D72 E23 E32 E65 N12 N42 C43 C32
    Date: 2018–09
  17. By: B. Tugberk Tosunoglu (Anadolu University)
    Abstract: This study aims to analyze the relationship between financial stability and economic growth in Turkey as an emerging market. Financial stability, in general terms, is expressed as the resilience of the economy against the unexpected situations that may disrupt the multi-dimensional equilibrium in the financial system. Although a large number of studies have examined the effect of financial deepening on economic growth, there is a little evidence on the effect of financial stability or soundness on economic growth. A present study considering the 2002 ? 2017 period which covers the implementation of inflation targeting monetary policy regime analyses the short and long-run dynamics of financial stability ? economic growth relationship by using co-integration and ARDL techniques. Obtained results show that a steadily functioning financial system is a requirement for economic growth. In particular, financial leverage, capital adequacy, asset quality, and liquidity are important components of financial stability affecting the economic growth. Thus, formulating the efficient policies to support economic growth requires understanding the factors that affect financial stability.
    Keywords: Economic Growth, Financial Stability
    JEL: F43 E44 E00
    Date: 2018–06
  18. By: William F. Lincoln; Andrew H. McCallum; Michael Siemer
    Abstract: The collapse of international trade surrounding the Great Recession has garnered significant attention. This paper studies firm entry and exit in foreign markets and their role in the post-recession recovery of U.S. exports using confidential microdata from the U.S. Census Bureau. We find that incumbent exporters account for the vast majority of the decline in export volumes during the crisis. The recession also induced a missing generation of exporters, with large increases in exits and a substantial decline in entries into foreign markets. New exporters during these years tended to have larger export volumes, however, compensating for the decline in the number of exporting firms. Thus, while entry and exit were important for determining the variety of U.S. goods that were exported, they were less important for the trajectory of aggregate foreign sales.
    Keywords: entry, exit, business cycles, exports, firm dynamics, recession, financial crisis
    JEL: F10 F40 E32 E44 J2
    Date: 2018–08
  19. By: Ferrero, Andrea; Seneca, Martin
    Abstract: The central bank of a commodity-exporting small open economy faces the traditional stabilization tradeoff between domestic inflation and output gap. The commodity sector introduces a terms-of-trade inefficiency that gives rise to an endogenous cost-push shock, changes the target level for output, reduces the slope of the Phillips curve, and increases the importance of stabilizing the output gap. Optimal monetary policy calls for a reduction of the interest rate following a drop in the oil price. In contrast, a central bank with a mandate to stabilize consumer price inflation needs to raise interest rates to limit the inflationary impact of an exchange rate depreciation.
    Keywords: monetary policy; oil export; small open economy
    JEL: E52 E58 Q30
    Date: 2018–08
  20. By: Dan Cao (Department of Economics, Georgetown University)
    Abstract: This paper combines the tools developed in two important and independent literatures - one on large economies started with Aumann (1964) and the other on dynamically incomplete markets, notably Duffie et al (1994)- to study Krusell and Smith’s incomplete markets economy with both idiosyncratic and aggregate shocks. It establishes the existence of sequential competitive equilibrium, generalized recursive equilibrium, recursive equilibrium with an extended-state space, and characterizes several important properties of the equilibrium variables. The equilibrium process admits an ergodic measure, which enables the application of the ergodic theorem for the simulation and calibration of the model. Without aggregate shocks, the existence and some characterization results carry over to economies with only idiosyncratic shocks such as Huggett (1997)’s economy. However, the existence of recursive equilibrium with the natural minimal state space in Krusell and Smith's economy remains elusive, as in finite-agent incomplete markets economies.
    Keywords: Incomplete Markets; Large Economies; Aggregate and Idiosyncratic Shocks; Recursive Equilibrium Existence; Kakutani-Glicksberg-Fan Fixed Point Theorem; Ergodicity
    JEL: C62 C63 C68 D52 D91 E13 E21 E32
    Date: 2018–09–14
  21. By: Pierre Yared
    Abstract: Over the past four decades, government debt as a fraction of GDP has been on an upward trajectory in advanced economies, approaching levels not reached since World War II. While normative macroeconomic theories can explain the increase in the level of debt in certain periods as a response to macroeconomic shocks, they cannot explain the broad-based long-run trend in debt accumulation. In contrast, political economy theories can explain the long-run trend as resulting from an aging population, rising political polarization, and rising electoral uncertainty across advanced economies. These theories emphasize the time-inconsistency in government policymaking, and thus the need for fiscal rules that restrict policymakers. Fiscal rules trade off commitment to not overspend and flexibility to react to shocks. This tradeoff guides design features of optimal rules, such as information dependence, enforcement, cross-country coordination, escape clauses, and instrument vs. target criteria.
    JEL: D02 E62 H21 H6
    Date: 2018–08
  22. By: Harashima, Taiji
    Abstract: The rational expectations hypothesis has been criticized for imposing substantial demands on economic agents, and this problem has not been sufficiently solved by introducing a learning mechanism. I present a new approach to this problem by assuming that households behave on the basis of not the rate of time preference but the capital-output (income) ratio. I show that households can equivalently reach and stay at a steady state without doing anything equivalent to computing a complex macro-econometric model. Although households are not required to implement anything difficult, they look to be behaving fully rationally, led by an “invisible hand.”
    Keywords: Capital-output ratio; Rational expectation; Steady state; Sustainable heterogeneity; Time preference
    JEL: D84 E10 E60
    Date: 2018–09–06
  23. By: Richter, Björn; Schularick, Moritz; Shim, Ilhyock
    Abstract: Central banks increasingly rely on macroprudential measures to manage the financial cycle. However, the effects of such policies on the core objectives of monetary policy to stabilise output and inflation are largely unknown. In this paper we quantify the effects of changes in maximum loan-to-value (LTV) ratios on output and inflation. We rely on a narrative identification approach based on detailed reading of policy-makers' objectives when implementing the measures. We find that over a four year horizon, a 10 percentage point decrease in the maximum LTV ratio leads to a 1.1% reduction in output. As a rule of thumb, the impact of a 10 percentage point LTV tightening can be viewed as roughly comparable to that of a 25 basis point increase in the policy rate. However, the effects are imprecisely estimated and the effect is only present in emerging market economies. We also find that tightening LTV limits has larger economic effects than loosening them. At the same time, we show that changes in maximum LTV ratios have substantial effects on credit and house price growth. Using inverse propensity weights to rerandomise LTV actions, we show that these effects are likely causal.
    Keywords: loan-to-value ratios; local projections; macroprudential policy; narrative approach
    JEL: E58 G28
    Date: 2018–08
  24. By: Sandra Eickmeier; Benedikt Kolb; Esteban Prieto
    Abstract: Bank capital regulations are intended to enhance financial stability in the long run, but may, in the meanwhile, involve costs for the real economy. To examine these costs we propose a narrative index of aggregate tightenings in regulatory US bank capital requirements from 1979 to 2008. Anticipation effects are explicitly taken into account and found to matter. In response to a tightening in capital requirements, banks temporarily reduce business and real estate lending, which temporarily lowers investment, consumption, housing activity and production. A decline in financial and macroeconomic risk helps sustain spending in the medium run. Monetary policy also cushions negative effects of capital requirement tightenings on the economy.
    Keywords: Narrative Approach, Bank Capital Requirements, Local Projections
    JEL: G28 G18 C32 E44
    Date: 2018–09
  25. By: Ordoñez, Guillermo; Piguillem, Facundo
    Abstract: The U.S. economy has recently experienced a large increase in life expectancy and in shadow banking activities. We argue that these two phenomena are intimately related. Agents rely on financial intermediaries to insure consumption during their uncertain life spans after retirement. When they expect to live longer, they rely more heavily on financial intermediaries that are riskier but offer better insurance terms - including shadow banks. We calibrate the model to replicate the level of financial intermediation in 1980, introduce the observed change in life expectancy and show that the demographic transition is critical in accounting for the boom in both shadow banking and credit that preceded the recent U.S. financial crisis. We compare the U.S. experience with a counterfactual without shadow banks and show that they may have contributed around 0.6GDP to output, four times larger than the estimated costs of the crisis.
    Keywords: Ageing Population; financial crisis; shadow banking
    JEL: E21 E44
    Date: 2018–08
  26. By: Hiona Balfoussia (Bank of Greece); Harris Dellas (University of Bern, CEPR); Dimitris Papageorgiou (Bank of Greece)
    Abstract: We study the role of the loan-to-value (LTV) ratio instrument in a DSGE model with a rich set of financial frictions (Clerc et al., 2015). We find that a binding LTV ratio limit in the mortgage market leads to lower credit and default rates in that market as well as lower levels of investment and output, while leaving other sectors and agents largely unaffected. Interestingly, when the level of capital requirements is in the neighborhood of its optimal value, implementing an LTV ratio cap has a negative impact on welfare, even if it leads to greater macroeconomic stability. Furthermore, the availability of the LTV ratio instrument does not impact on the optimal level of capital requirements. It seems that once capital requirements have been optimally deployed to tame banks’ appetite for excessive risk, the use of the LTV ratio could prove counterproductive from a welfare point of view.
    Keywords: Macroprudential Policy; General Equilibrium; Greece
    JEL: E3 E44 G01 G21 O52
    Date: 2018–07
  27. By: Hu, Xingwei
    Abstract: In an economy which could not accommodate full employment of its labor force, it employs some but does not employ others. The bipartition of the labor force is random, and we characterize it by a probability distribution with equal employment opportunity. We value each employed individual by his marginal contribution to the production; we also value each unemployed individual by the potential marginal contribution he would make if the market hired him. We fully honor both the individual value and its national aggregate in our distribution of the net production to the unemployment welfare and the employment benefits. Using a balanced budget rule of taxation, we derive a fair, debt-free, and risk-free tax rate for any given unemployment rate. The tax rate minimizes both the asymptotic mean and variance of the underlying posterior unemployment rate; it also stimulates employment, boosts productivity, and mitigates income inequality. One could also apply the rate and valuation approach to areas other than the labor market. This framework is open to alternative identification strategies and other forms of equal opportunity.
    Keywords: Tax Rate, Unemployment Welfare, Fair Division, Equality of Opportunity, Shapley Value
    JEL: C71 D63 E24 E62 H21
    Date: 2018–08–26
  28. By: Oleksandr Faryna (National Bank of Ukraine); Heli Simola (Institute for Economies in Transition BOFIT, Bank of Finland)
    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 notable 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.
    Keywords: international shocks, cross-country spillovers, CIS, Global VAR
    JEL: C32 F42 F43 E32
    Date: 2018–09
  29. By: Carlos Carvalho; Oleksiy Kryvtsov
    Abstract: We propose a simple, model-free way to measure price selection and its impact on inflation. Price selection exists when prices that change in response to aggregate shocks are not representative of the overall population of prices. Due to selection, increases (decreases) in inflation can be amplified because adjusting prices tend to originate from levels far below (above) the average. Using detailed micro-level consumer price data for the United Kingdom, the United States and Canada, we find robust evidence of strong price selection across goods and services. At a disaggregate level, price selection accounts for around 36% of inflation variance in the United Kingdom and the United States, and 28% in Canada. Price selection is stronger for goods with less frequent price changes or with larger average price changes. Aggregation largely washes out price selection for regular price changes, but not for changes associated with price discounts. This evidence favors multi-sector sticky-price models with strong price selection at a sector level.
    Keywords: Business fluctuations and cycles, Inflation and prices, Transmission of monetary policy
    JEL: E31 E51
    Date: 2018
  30. By: Joshua Aizenman; Yothin Jinjarak; Hien Thi Kim Nguyen; Donghyun Park
    Abstract: The upward trajectory of OECD policy interest rates may impose growing fiscal challenges, thus testing the fiscal space of countries and their resilience. Against this background, we compare fiscal cyclicality across Asia, Latin America, OECD, and other regions from 1960-2016, then identify factors that explain countries’ government spending and tax-policy cyclicality. Our study reveals a mixed fiscal scenery, where more than half of the countries are recently characterized by limited fiscal space, and fiscal policy is either acyclical or procyclical (though not as high the level of 1980s), notably post-GFC becoming even more procyclical in government spending when accounting for net acquisition of nonfinancial assets and capital expenditure (spending components do matter). The cyclicality is also asymmetric: on average, a more indebted (relative to tax base) government spent more in good times (positive growth) and cut back the spending even more in bad times (weak economy). Added to the public debt/GDP data, we construct the ‘limited-fiscal-capacity’ statistic, measured by the size of public debt/[average tax revenue] and its volatility, which is found positively associated with the fiscal pro-cyclicality. Further, we also find that country’s sovereign wealth fund has a countercyclical effect in our estimation. The analysis depicts a significant economic impact of an enduring interest-rate rise on fiscal space: a 10% increase of public debt/tax base is associated with an upper bound of 6.1% increase in government-spending procyclicality. For both government-spending cyclicality and tax-rate cyclicality, we find no one-size-fits-all explanation for all (OECD/developing) countries at all (good/bad) times. Fiscal space, trade, and financial openness, the share of natural resource/manufacturing exports, inflation, and institutional risks are associated with the cross-country patterns of fiscal cyclicality, suggesting the measured cyclicality is context specific and the fiscal-monetary-political economy interactions are at work. We rank the explanatory factors across countries and regions and discuss policies to increase the fiscal capacity for countercyclical policy.
    JEL: F4 F41 H2 H3
    Date: 2018–09
  31. By: Del Negro, Marco (Federal Reserve Bank of New York); Giannone, Domenico (Federal Reserve Bank of New York); Giannoni, Marc (Federal Reserve Bank of Dallas); Tambalotti, Andrea (Federal Reserve Bank of New York)
    Abstract: The trend in the world real interest rate for safe and liquid assets fluctuated close to 2 percent for more than a century, but has dropped significantly over the past three decades. This decline has been common among advanced economies, as trends in real interest rates across countries have converged over this period. It was driven by an increase in the convenience yield for safety and liquidity and by lower global economic growth.
    Keywords: world interest rate; convenience yield; interest rate parity; VAR with common trends
    JEL: E43 E44 F31 G12
    Date: 2018–09–01
  32. By: Reich, Utz Peter; Santos, Susana
    Abstract: Unconditional basic income is not a new topic in political economy, and it gains new momentum as more and more research is being devoted to it. The discussion focusses on the adequacy and effects such a policy measure may entail for a person and his socio-economic situation, usually. Object of investigation is the individual, and the corresponding theory is of micro-economic descent. In this paper, in contrast, we develop a method of how to assess feasibility and consequences of an unconditional basic income for a modern, open economy, on the macroeconomic level, using concepts and statistics of a Social Accounting Matrix (SAM) as our main tool. A SAM-based approach can measure, and perhaps model, the impact on the economic activity of a country, and on its economic institutions of new policy measures such as introducing an unconditional basic income. The economic activity of a country is expressed in monetary flows as registered in the National Accounts. So their underlying principles and definitions are adopted. However, the habitual way of putting an economy into a sequence of institutional accounts connecting each institution’s income to the cost, - similar to business accounting - reveals only one, namely the inner-institutional half of the economic circuit. The other, outer half, namely, how the costs of one institution generate income for another one is better captured by the format of a Social Accounting Matrix. In the paper, the impact of an unconditional basic income is quantified, for macroeconomic aggregates of institutional sectors and socio-economic groups of households, taking the German and the Portuguese economies as examples. Purpose of the paper is not to argue for, or against, an unconditional basic income, but to offer a scientific tool with which to calculate and assess possibilities and consequences of the proposal, for a national economy as a whole.
    Keywords: Social Accounting Matrix; Unconditional Basic Income; Income Distribution.
    JEL: E01 E02 E64
    Date: 2018–08–22
  33. By: Mohaddes, M.; Nugent, J.; Selim, H.
    Abstract: This paper traces the evolution of fiscal institutions of Resource Rich Arab Economies (RRAEs) over time since their pre-oil days, through the discovery of oil to their build-up of oil exports. It then identifies challenges faced by RRAEs and variations in their severity among the different countries over time. Finally, it articulates specific policy reforms, which, if implemented successfully, could help to overcome these challenges. In some cases, however, these policy proposals may give rise to important trade-offs that will have to be evaluated carefully in individual cases.
    Keywords: Fiscal policy, fiscal institutions, fiscal sustainability, public spending efficiency, budget transparency, fiscal rules, volatility, oil curse, Arab World, oil exporters, and Middle East and North Africa.
    JEL: E02 E62 H50 H60 H61 O53
    Date: 2018–09–05
  34. By: Kajal Lahiri (Department of Economics, University at Albany, State University of New York); Yongchen Zhao (Department of Economics, Towson University)
    Abstract: This paper studies the pathways for the propagation of shocks across G7 and major Asia-Pacific countries using multi-horizon forecasts of real GDP growth from 1995 to 2017. We show that if the forecasts are efficient in the long run, results obtained using the forecasts are comparable to those obtained from the actual outturns. We measure global business cycle connectedness and study the impact of country- specific shocks as well as common international shocks using a panel factor structural VAR model. Our results suggest strong convergence of business cycles within the group of industrialized countries and the group of developing economies during non-recessionary periods. In particular, we find increased decoupling between the industrialized and developing economies after the 2008 recession. However, the direction of shock spillovers during recessions and other crisis periods are varied, depending on the nature and origin of the episode.
    Keywords: GDP growth, business cycle connectedness, transmission of shocks, common international shocks, panel VAR model, Blue Chip Surveys.
    JEL: F41 F42 E32 C33
    Date: 2018–09
  35. By: Best, Michael; Cloyne, James; Ilzetzki, Ethan; Kleven, Henrik
    Abstract: Using a novel source of quasi-experimental variation in interest rates, we develop a new approach to estimating the Elasticity of Intertemporal Substitution (EIS). In the UK, the mortgage interest rate features discrete jumps -- notches -- at thresholds for the loan-to-value (LTV) ratio. These notches generate large bunching below the critical LTV thresholds and missing mass above them. We develop a dynamic model that links these empirical moments to the underlying structural EIS. The average EIS is small, around 0.1, and quite homogeneous in the population. This finding is robust to structural assumptions and can allow for uncertainty, a wide range of risk preferences, portfolio reallocation, liquidity constraints, present bias, and optimization frictions. Our findings have implications for the numerous calibration studies that rely on larger values of the EIS.
    JEL: D14 E21 E43 H31
    Date: 2018–08
  36. By: Gerlach, Stefan; Stuart, Rebecca
    Abstract: The Federal Open Market Committee (FOMC) releases quarterly its members' views about what federal funds rate will be appropriate at the end of the current and the next two or three years, and in the "longer run." We construct constant horizon interest rate projections one, two and three years ahead and use real-time data on 32 variables to study how these variables impact on the FOMC's interest-rate setting. News regarding the labour market is particularly important. At the shortest horizon, prices and financial market news is also significant; at longer horizons, household's financial situation also matters.
    Keywords: Federal Reserve; interest rate expectations; interpolation; monetary policy
    JEL: E52 E58
    Date: 2018–08
  37. By: Chang Ma (Johns Hopkins University)
    Abstract: Many emerging market economies have used macroprudential policy to mitigate the risk of financial crises and the resulting output losses. However, macroprudential policy may reduce economic growth in good times. This paper introduces endogenous growth into a small open economy model with occasionally binding collateral constraints in order to study the impact of macroprudential policy on financial stability and growth. In a calibrated version of the model, I find that optimal macroprudential policy reduces the probability of crisis by two thirds at the cost of lowering average growth by a small amount (0.01 percentage point). Moreover, macroprudential policy can generate welfare gains equivalent to a 0.06 percent permanent increase in annual consumption.
    Date: 2018
  38. By: Uros Duric (Technical University Darmstadt)
    Abstract: Despite being at the core of central bankers? and investors? interest, the question of the European Central Bank?s influence on global stock markets has not yet been fully answered. This paper aims to fill this gap by examining the influence of ECB monetary policy on 46 small open economies? stock markets around the world. Using the data from the Swiss Economic Institute?s Monetary Policy Communicator (MPC), a differentiation is made between ECB actions and future policy communication effects. Contractionary ECB monetary policy proves to exert a negative impact on stock markets worldwide, with the results being statistically significant for 41 out of 46 countries. A positive 50 b.p. shock to the ECB interest rate leads to a 2.9% fall in stock markets on average when looking at the two-months window after the shock. A corresponding shock to the MPC index results in a 4.2% fall. Results imply that the inclusion of communication variable is crucial for estimating the full effects of ECB monetary policy.
    Keywords: Monetary policy, stock markets, international spillovers, central bank communication,interest rates.
    JEL: E52 F42 G15
    Date: 2018–06
  39. By: Mosikari, Teboho Jeremiah; Eita, Joel Hinaunye
    Abstract: The objective of this study is to estimate optimal threshold effect of inflation for the economy of Swaziland. The study applied the liner OLS and Two-Stage least squares (2SLS) methods to determine the optimal effect of inflation on growth. It used annual data for the period 1980 to 2015. The results of liner OLS method show that the estimated optimal threshold level is at 12%. The results show that inflation rate beyond optimal level of 12% decrease growth by 1.02%. Similar results were also found in applying 2SLS method, where inflation exerted a negative impact beyond threshold point by 18.5%. These findings on Swaziland economy have crucial implications for monetary policy makers in terms of keeping inflation below the threshold point to sustain a positive economic growth in the long run.
    Keywords: economic growth, inflation, threshold level
    JEL: E31 O40
    Date: 2018–01–25
  40. By: Joshua H. Gallin; Raven S. Molloy; Eric Nielsen; Paul A. Smith; Kamila Sommer
    Abstract: We construct a new measure of aggregate U.S. housing wealth based on Zillow’s Automated Valuation Model (AVM). AVMs offer advantages over other methods because they are based on recent market transaction prices, utilize large datasets which include property characteristics and local geographic variables, and are updated frequently with little lag. However, using Zillow’s AVM to measure aggregate housing wealth requires overcoming several challenges related to the representativeness of the Zillow sample. We propose methods that address these challenges and generate a new estimate of aggregate U.S. housing wealth from 2001 to 2016. This new measure provides insights into some of the disadvantages of other approaches to measuring housing wealth. Specifically, with respect to the owner valuations typically used in survey data, it appears that homeowners were slow to recognize the drop in housing wealth during the financial crisis and that their estimates of this drop were unrealistically small. At the same time, repeat-sales price indexes appear to overstate the extent of the drop in value between 2006 and 2011 and overstate the recovery thereafter.
    Keywords: Consumer economics and finance ; Data collection and estimation ; Flow of funds ; Residential real estate
    JEL: R31 E21 C82
    Date: 2018–09–06
  41. By: Donato Masciandaro
    Abstract: The 2007-2008 global financial crisis highlighted the importance of establishing macroprudential architectures to address problems of financial stability. Central banks are always part of macroprudential settings, but their role is far from homogeneous across countries. How can this heterogeneity be explained? The aim of the chapter is twofold. First, it offers a systematic review of the economics of central bank involvement in macroprudential policies, which leads to the conclusion that political motivations are highly relevant drivers. Second, given this insight, it explores the institutional settings in 31 advanced and emerging market economies and sheds light on several key drivers of the central banker’s role as a macroprudential supervisor: central bankers who are already in charge of microeconomic supervision and less politically independent are more likely to be granted extended macroprudential powers. The same is true for central bankers who have low levels of monetary policy discretion.
    Date: 2018
  42. By: Dmitry Matveev (Bank of Canada)
    Abstract: This paper studies the effects of government debt under optimal discretionary monetary and fiscal policy when the lower bound on nominal interest rates is occasionally binding. This issue is addressed in a model with the labor income tax and long-term government debt. The risk of a binding lower bound reduces steady-state inflation. This causes an increase in government debt in the steady state. The debt increase and associated tax rate increase mitigate the reduction in inflation by raising the marginal cost of production. At the lower bound, given a fall in output, it is optimal for the government to temporarily reduce debt. This debt reduction stimulates output by lowering expected real interest rates following the liftoff of the nominal rate from the lower bound.
    Date: 2018
  43. By: Davig, Troy A. (Rokos Capital); Foerster, Andrew T. (Federal Reserve Bank of San Francisco)
    Abstract: Large pending fiscal policy changes, such as in the United States in 2012 or in Japan with consumption taxes, often generate considerable uncertainty. “Fiscal cliff” episodes have several features: an announced possible future change, a skewed set of possible out-comes, the possibility that implementation may not actually occur, and a known resolution date. This paper develops a model capturing these features and studies their impact. Fiscal cliff uncertainty shocks have immediate impact, with a magnitude that depends on the probability of implementation, which generates economic volatility. The possibility of fiscal cliffs lowers economic activity even in periods of relative certainty.
    JEL: E20
    Date: 2018–09–05
  44. By: Alain N. Kabundi; Montfort Mlachila
    Abstract: This paper investigates the key factors that explain the documented decline in the exchange rate pass-through in South Africa over the past two decades, which coincides with the adoption of the inflation-targeting regime. The paper conjectures, in line with the literature, that this outcome is largely due to improved monetary policy credibility. To do this, it first documents the factors that explain monetary policy credibility. Using the standard deviation of individual inflation forecasts as a measure of monetary policy credibility, its shows that the latter is negatively affected by the level of inflation itself, monetary policy uncertainty, and a measure of the unobserved stochastic volatility of inflation. The second phase proceeds by analyzing the determinants of the pass-through using the monetary policy credibility index derived from the first phase. The paper confirms the remarkable achievement that, despite the many shocks that the economy has witnessed, the declining pass-through is indeed explained by the improving monetary policy credibility.
    Keywords: South Africa;Sub-Saharan Africa;Central banks and their policies;Exchange rate pass-through;monetary policy credibility, Monetary Policy (Targets, Instruments, and Effects)
    Date: 2018–07–30
  45. By: Viet-Ha T. Nguyen; Hong Kong Nguyen-To; Thu Trang Vuong; Manh Tung Ho; Quan-Hoang Vuong
    Abstract: Vietnam has seen fast-rising debts, both domestic and external, in recent years. This paperreviews the literature on credit market in Vietnam, providing an up-to-date take on the domesticlending and borrowing landscape. The study highlights the strong demand for credit in both therural and urban areas, the ubiquity of informal lenders, the recent popularity of consumer financecompanies, as well as the government’s attempts to rein in its swelling public debt. Given thehigh level of borrowing, which is fueled by consumerism and geopolitics, it is inevitable that theamount of debt will soon be higher than the saving of the borrowers. Unlike the conventionalwisdom that creditors have more bargaining power over the borrowers, we suggest that—albeitlacking a quantitative estimation—when the debts pile up so high that the borrowers could notrepay, the power dynamics may reverse. In this new politics of debt, the lenders fear to lose themoney’s worth and continue to lend and feed the insolvent debtors. The result is a toxic lending/borrowing market and profound lessons, from which the developing world could learn.
    Keywords: debt; credit; financial system; Vietnam; consumerism; geopolitics; political economy; government finance
    JEL: E26 E44 E51 F34 H63
    Date: 2018–08–20
  46. By: Ho, Sin-Yu
    Abstract: We assessed the impact of stock market development on growth in Hong Kong for the period 1986Q2 to 2015Q4. By constructing a composite index of stock market development and controlling for the key determinants of growth, we found stock market development to promote growth both in the short and long run. We further constructed an alternative index of stock market development and found this conclusion to be robust. Our findings are broadly consistent with the growth experience of Hong Kong. Policies meant to promote stock market development may enhance growth in Hong Kong as well.
    Keywords: Determinants; Economic Growth; Stock Market Development; Hong Kong.
    JEL: C32 E44
    Date: 2018–09
  47. By: Ibrahim, Taofik
    Abstract: This paper investigates the relationship between oil price fluctuation and output performance in Nigeria during the period 1970 to 2015. It synthesizes the standard neoclassical growth model and the Keynesian national income identity by augment the typical production function to include oil price as one of the factors of production and then super-impose the augmented production function on the Keynesian national income identity. The Two Stage Least Square (2SLS) estimation technique that accounts for the plausibility of endogeneity was adopted in the study. The ADF unit root and Johansen cointegration tests were used to determine the time series properties of the data used in the study. Findings suggest that oil price impacted positively on aggregate output but negatively on agricultural, manufacturing and service sector suggesting that fluctuation in oil price create uncertainty in the production capacity of the productive sectors and it also undermines the effectiveness of the government fiscal management of crude oil revenue. The study, therefore, recommends that the Nigerian government need to diversify its export revenue base in order to minimize the over reliance on crude oil. Also, the country needs to develop the local capacity of its refinery so as to reduce the importation of refined petroleum which serves as input to most productive sectors of the economy.
    Keywords: Oil Price, Aggregate output, Agricultural output, Manufacturing output, Service output, Nigeria, Two-Stage Least Square (2SLS)
    JEL: E32 O13 O40
    Date: 2018–01–10
  48. By: Cheng Chen (University of Hong Kong); Tatsuro Senga (Queen Mary University of London); Chang Sun (Princeton University); Hongyong Zhang (RIETI)
    Abstract: Can a temporary negative shock generate long-lasting effects on economic activities? To show causal evidence, we utilize data from Japanese multinational corporations (MNCs) and explore the economic impact of the unexpected escalation of an island dispute between China and Japan in 2012. Our difference-in-differences (DID) estimation substantiates that a sharp, but temporary fall in local sales of Japanese MNCs in China led to persistent downward deviation of foreign direct investment (FDI) from its trend. Moreover, despite the quick recovery of local sales, Japanese MNCs in China have continued to underestimate their local sales, which generates pessimistic and more dispersed forecast errors after the island crisis. We view this as evidence for a belief-driven channel through which a large and unexpected negative shock leads agents to revise their beliefs and start tail risk hedging.
    Keywords: Uncertainty, Forecasts, FDI, Geopolitical conflicts, Business cycles
    JEL: D84 E22 E32 F23
    Date: 2016–11–02
  49. By: Nyoni, Thabani
    Abstract: In the financial as well as managerial decision making process, forecasting is a crucial element (Majhi et al, 2009). Most research have been made on forecasting of financial and economic variables through the help of researchers in the last decades using series of fundamental and technical approaches yielding different results (Musa et al, 2014). The theory of forecasting exchange rate has been in existence for many centuries where different models yield different forecasting results either in the sample or out of sample (Onasanya & Adeniji, 2013). A country’s exchange rate is one of the most closely monitored indicators, as fluctuations in exchange rates can have far reaching economic consequences (Ribeiro, 2016). The recent financial turmoil all over the world demonstrates the urgency of perfect information of the exchange rates (Shim, 2000). Understanding the forecasting of exchange rate behaviour is important to monetary policy (Simwaka, 2007). One of the important variables that have considerable influence on other socio – economic variables in Nigeria is the Nigerian naira / dollar exchange rate (Ismail, 2009). Owing to the critical role played by exchange rate dynamics in international trade and overall economic performance of all countries in general, the need for a good forecasting tool cannot be ruled out. In this study, we model and forecast the Naira / USD exchange rates over the period 1960 – 2017. Our diagnostic tests such as the ADF test indicate that EXC time series data is I (1). Based on the minimum AIC value, the study presents the ARIMA (1, 1, 1) model as the optimal model. The ADF test further indicates that the residuals of the ARIMA (1, 1, 1) model are stationary and thus bear the characteristics of a white noise process. It is also important to note that our forecast evaluation statistics, namely ME, RMSE, MAE, MPE, MAPE and Theil’s U absolutely show that our forecast accuracy is quite good. Our forecast actually indicates that the Naira will continue to depreciate. The main policy implication from this study is that the Central Bank of Nigeria (CBN), should devalue the Naira in order to not only restore exchange rate stability but also encourage local manufacturing and promote foreign capital inflows.
    Keywords: ARIMA, Exchange rate, Forecasting, Nigeria
    JEL: C53 E37 E47 F31 F37 O24
    Date: 2018–08–22
  50. By: Sandra Eickmeier; Benedikt Kolb; Esteban Prieto
    Abstract: We use a newly constructed narrative measure of regulatory bank capital requirement tightening events (Eickmeier et al., 2018) to examine their effects on household income and expenditure inequality in the US. Income and expenditure inequality both decline (the latter decline being slightly less pronounced than the former). Financial income strongly drops after the regulatory events. Richer households tend to be more exposed to financial markets. Hence, their income and expenditures decline by more than those of poorer households. The monetary policy easing after the regulation is shown to contribute to the decline in inequality at longer horizons, as it cushions the negative effects of the capital requirement tightenings on wages and salaries in the medium run, which represent a considerable share of income for lower- to middle-income households.
    Keywords: Narrative Approach, Bank Capital Requirements, Local Projections, Inequality
    JEL: G28 G18 C32 E44
    Date: 2018–09
  51. By: Kuvshinov, Dmitry; Zimmermann, Kaspar
    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: 2018–08–21
  52. By: Luigi Bocola; Gideon Bornstein; Alessandro Dovis
    Abstract: A large literature has developed quantitative versions of the Eaton and Gersovitz (1981) model to analyze default episodes on external debt. In this paper, we study whether the same framework can be applied to the analysis of debt crises in which domestic public debt plays a prominent role. We consider a model where a government can issue debt to both domestic and foreign investors, and we derive conditions under which their sum is the relevant state variable for default incentives. We then apply our framework to the European debt crisis. We show that matching the cyclicality of public debt ---rather than that of external debt--- allows the model to better capture the empirical distribution of interest rate spreads and gives rise to more realistic crises dynamics.
    JEL: E44 F34 G15
    Date: 2018–08
  53. By: Jose-Miguel Albala-Bertrand (Queen Mary University of London)
    Abstract: This paper is a continuation of our study of structural change in China and deals with the changes of domestic industrial/sectoral backward and forward linkages (i.e. the pull and push of the economy) as well as the changes in their domestic and imported components (i.e. via import substitution/penetration) over the 1995-2010 period. We present the results in terms of rates of change for the period as a whole as well as for their yearly evolution over such a period. The main conclusions are that the secondary sector has become the main pull engine of the economy by far, with the tertiary sector also increasing its pull, and that there are three distinctive periods for the evolution of import substitution/penetration, which seem to correspond to both international crises and domestic reform.
    Keywords: China, Industrial structural change, Input-output decomposition, Trajectories over 1995-2010
    JEL: L16 O4 B4 E2
    Date: 2016–10–24
  54. By: Jagjit S. Chadha (Centre for Macroeconomics (CFM); National Institute of Economic and Social Research (NIESR)); Katsuyuki Shibayama (University of Kent)
    Abstract: Koop, Pesaran and Smith (2013) suggest a simple diagnostic indicator for the Bayesian estimation of the parameters of a DSGE model. They show that, if a parameter is well identified, the precision of the posterior should improve as the (artificial) data size T increases, and the indicator checks the speed at which precision improves. As it does not require any additional programming, a researcher just needs to generate artiÖcial data and estimate the model with increasing sample size, T. We apply this indicator to the benchmark Smets and Wouters' (2007) DSGE model of the US economy, and suggest how to implement this indicator on DSGE models.
    Keywords: Bayesian estimation, Dynamic stochastic general equilibrium
    JEL: C51 C52 E32
    Date: 2018–09
  55. By: Jose A. Lopez; Andrew K. Rose; Mark M. Spiegel
    Abstract: We examine the effect of negative nominal interest rates on bank profitability and behavior using a cross-country panel of over 5,100 banks in 27 countries. Our data set includes annual observations for Japanese and European banks between 2010 and 2016, which covers all advanced economies that have experienced negative nominal rates, including currency union members as well as both fixed and floating exchange rates countries. When we compare negative nominal interest rates with low positive rates, banks experience losses in interest income that are almost exactly offset by savings on deposit expenses and gains in non-interest income, including capital gains on securities and fees. We find heterogeneous effects of negative rates: banks from regimes with floating exchange rates, small banks, and banks with low deposit ratios drive most of our results. Low-deposit banks have enjoyed particularly striking gains in non-interest income, likely from capital gains on securities. There have only been modest differences between high and low deposit-ratio banks’ changes in interest expenses; high deposit banks do not seem disproportionately vulnerable to negative rates. Banks also responded to negative rates by increasing lending activity, and raising the share of deposit funding. Overall, our results indicate surprisingly benign implications of negative rates for commercial banks thus far.
    JEL: E43 G21
    Date: 2018–09
  56. By: Pedro Bento; Diego Restuccia
    Abstract: We construct a new dataset for the average employment size of establishments across sectors and countries from hundreds of sources. Establishments are larger in manufacturing than in services, and in each sector they are larger in richer countries. The cross-country income elasticity of establishment size is remarkably similar across sectors, about 0.3. We discuss these facts in light of several prominent theories of development such as entry costs and misallocation. We then quantify the sectoral and aggregate impact of entry costs and misallocation in an otherwise standard two-sector model of structural transformation with endogenous firm entry and firm-level productivity. We find that observed measures of misallocation account for the entire range of establishment-size differences across sectors and countries and almost 50 percent of the difference in non-agricultural GDP per capita between rich and poor countries.
    JEL: E02 E1 O1 O4
    Date: 2018–08
  57. By: Hengjie Ai; Anmol Bhandari
    Abstract: This paper studies asset pricing in a setting in which idiosyncratic risk in human capital is not fully insurable. Firms use long-term contracts to provide insurance to workers, but neither side can commit to these contracts; furthermore, worker-firm relationships have endogenous durations owing to costly and unobservable effort. Uninsured tail risk in labor earnings arises as a part of an optimal risk-sharing scheme. In the general equilibrium, exposure to the resulting tail risk generates higher risk premia, more volatile returns, and variations in expected returns across firms. Model outcomes are consistent with the cyclicality of factor shares in the aggregate, and the heterogeneity in exposures to idiosyncratic and aggregate shocks in the cross section.
    JEL: E24 G12 J3
    Date: 2018–08
  58. By: Bignon, Vincent; Flandreau, Marc
    Abstract: This paper offers a comprehensive (short) history of central banking in France, starting in the 18th century and finishing with the creation of the Euro in 2001. We first discuss how the French experience with central banking in the 18th century shaped the drafting of the charter and the governance of the Bank of France in 1800. We then single out how the Bank implements its monetary policy in the 19th century and assess the bank achievement in terms of monetary and financial stability. Finally we discuss how the sovereign debt overhang triggered by World War I and the reconstruction subverted the model of central banking previously implemented, and how the reluctance of the Bank to be implicated in the management of the sovereign yield ultimately leads to the loss of its independence vis-a-vis the state. Against this background the use of financial repression under the guidance of the state allowed a smoother management of the debt overhang during the post WW II period, but created its own issues that were addressed effectively only with the creation of the Euro.
    JEL: E58 N23 N24
    Date: 2018–08
  59. By: Benjamin Larin (Leipzig University)
    Abstract: The 2007-2008 financial crisis highlighted that a turmoil in the financial sector including bursting asset price bubbles can cause pronounced and persistent fluctuations in real economic activity. This motivates the consideration of evolving and bursting asset price bubbles as another source of fluctuations in a business cycle model. In this paper rational asset price bubbles are therefore incorporated into a life-cycle RBC model as first developed by Rı́os-Rull (1996). The calibration of the model to the post-war US economy and the numerical solution show that the model is able to generate plausible bubble-driven business cycles – economic fluctuations caused by evolving and bursting asset price bubbles.
    Date: 2018
  60. By: Holtemöller, Oliver; Schult, Christoph
    Abstract: In this paper, we document the forecasting performance of estimated basic dynamic stochastic general equilibrium (DSGE) models and compare this to extended versions which consider alternative expectation formation assumptions and financial frictions. We also show how standard model features, such as price and wage rigidities, contribute to forecasting performance. It turns out that neither alternative expectation formation behaviour nor financial frictions can systematically increase the forecasting performance of basic DSGE models. Financial frictions improve forecasts only during periods of financial crises. However, traditional price and wage rigidities systematically help to increase the forecasting performance.
    Keywords: business cycles,economic forecasting,expectation formation,financial frictions,macroeconomic modelling
    JEL: C32 C53 E37
    Date: 2018
  61. By: In Hwan Jo (National University of Singapore); Tatsuro Senga (Queen Mary University of London)
    Abstract: Access to external finance is a major obstacle for small and young firms; thus, providing subsidized credit to small and young firms is a widely-used policy option across countries. We study the impact of such targeted policies on aggregate output and productivity and highlight indirect general equilibrium effects. To do so, we build a model of heterogeneous firms with endogenous entry and exit, wherein each firm may be subject to forward-looking collateral constraints for their external borrowing. Subsidized credit alleviates credit constraints small and young firms face, which helps them to achieve the efficient and larger scale of production. This direct effect is, however, either reinforced or offset by indirect general equilibrium effects. Factor prices increase as subsidized firm demand more capital and labor. As a result, higher production costs induce more unproductive incumbents to exit, while replacing them selectively with productive entrants. This cleansing effect reinforces the direct effect by enhancing the aggregate productivity. However, the number of firms in operation decreases in equilibrium, and this, in turn, depresses the aggregate productivity.
    Keywords: Firm dynamics, Misallocation, Financial frictions, Firm size and age
    JEL: E22 G32 O16
    Date: 2016–12–22
  62. By: Amitava Krishna Dutt (University of Notre Dame, and FLACSO); Roberto Veneziani (Queen Mary University of London)
    Abstract: A simple classical-Marxian model of growth and distribution is developed in which education transforms low-skilled workers into high-skilled ones and in which high-skilled workers save and hold capital, therefore receiving both high-skilled wages and profit income. We analyze the implications for class divisions, growth and distribution, of the transformation of the modern capitalist economy from one in which the main class division is between capitalists who own capital and workers who only receive wage income into one in which education and human capital play a major role. We show than an expansion in education can have a positive effect on growth but by altering the distribution of income rather than by fostering technological change, and that it yields some changes in income distribution and the class structure of the capitalist economy, but need not alter its fundamental features.
    Keywords: Education, Human capital, Workers' savings, Growth, Distribution
    JEL: E2 E11 O41 I24
    Date: 2017–01–01
  63. By: Haroon Mumtaz (Queen Mary University of London); Konstantinos Theodoridis (Bank of England)
    Abstract: We propose an extended time-varying parameter Vector Autoregression that allows for an evolving relationship between the variances of the shocks. Using this model, we show that the relationship between the conditional variance of GDP growth and the long-term interest rate has become weaker over time in the US. Similarly, the co-movement between the variance of the long=term interest rate across the US and the UK declined over the 'Great Moderation' period. In contrast, the volatility of US and UK GDP growth appears to have become increasingly correlated in the recent past.
    Keywords: Vector-Autoregressions, Time-varying parameters, Stochastic volatility
    JEL: C15 C32 E32
    Date: 2016–11–02
  64. By: Giorgos Galanis (University of Warwick, and Goldsmiths, University of London); Roberto Veneziani (Queen Mary University of London); Naoki Yoshihara (University of Massachusetts Amherst, Hitotsubashi University, and Kochi University of Technology)
    Abstract: This paper provides a formal dynamic analysis of exploitation, class inequalities and profits. A stylised model of a capitalist economy with two classes - workers and capitalists - is considered which extends Roemer [21, 22]. First, a dynamic generalisation of a key Marxian insight is provided by proving that the profitability of capitalist production is synonimous with the existence of exploitation. Second, it is shown that, in a competitive environment, asset inequalities are fundamental for the emergence of exploitation, but they are not sufficient for its persistence, both in equilibria with accumulation and growth, and, perhaps more surprisingly, in stationary intertemporal equilibrium paths. Finally, it is shown that labour-saving technical progress may yield persistent exploitation by ensuring the persistent abundance of labour.
    Keywords: Dynamics, Accumulation, Exploitation, Classes
    JEL: E11 D51 D63 C61 B24
    Date: 2017–01–01
  65. By: Geneviève Vallée
    Abstract: Using an exclusive data set of payment times for retail transactions made in Canada, I show that cash is the most time-efficient method of payment (MOP) when compared with payments by debit and credit cards. I model payment efficiency using Cox proportional hazard models, accounting for consumer choice of MOP. I propose two instruments to identify and estimate the causal relationship between MOP and payment time: (1) the value of the transaction, and (2) the duration of the payment preceding the one under observation. Discounting consumer selection underestimates the efficiency of cash relative to cards. Overall, the efficiency of MOPs is an important component of the private and social costs of making and accepting payments. The efficiency of cash helps explain its continued use in Canada, which is motivated by its low cost in terms of payment time for consumers and merchants.
    Keywords: Bank notes, Econometric and statistical methods, Payment clearing and settlement systems
    JEL: C25 C36 C41 D23 E41 E42
    Date: 2018
  66. By: Comisión del Gasto y la Inversión Pública
    Abstract: De acuerdo con lo dispuesto en la Ley de Reforma Tributaria de 2016, en febrero de 2017 se creó la Comisión del Gasto y la Inversión Pública, con el propósito de revisar, entre otros, los programas de subsidios y de asistencia pública, los criterios de priorización de la inversión, las inflexibilidades presupuestales, las rentas de destinación específica, y los efectos sobre la equidad y la eficiencia de las decisiones de gasto, con el objeto de proponer reformas orientadas a fortalecer la equidad, la inclusión productiva, la formalización y la convergencia del desarrollo entre zonas urbanas y rurales, la redistribución del ingreso, la eficiencia de la gestión pública y el fortalecimiento del Estado. La Comisión tuvo un plazo de diez meses a partir de su conformación para allegar al Gobierno Nacional un documento con sus principales análisis y recomendaciones. Este informe consta de diez capítulos que a su vez sirvieron de soporte para sus recomendaciones. En los primeros cinco capítulos se abordan temas transversales como son: las tendencias y perspectivas del gasto público en las últimas décadas, dado el escenario económico y de ingresos previstos; las principales limitaciones del proceso presupuestal, del empleo público, del sistema de compras y contratación públicas y, por último, la carga que, para el presupuesto, se presentan los litigios contra el Estado, acompañado todo de las respectivas recomendaciones en cada tema. En los siguientes cinco capítulos se abordan los temas sectoriales que, a juicio de la Comisión, son de mayor impacto en materia de eficiencia y eficacia del gasto público. En esta parte del documento se analizan y formulan recomendaciones sobre el gasto público en pensiones, salud, educación, defensa y el gasto en subsidios a personas y hogares y al sector productivo. Los nueve comisionados firmantes de este informe participaron a título ad-honorem. Para las labores de la secretaría técnica se contó con la financiación de la Cooperación de la Secretaría de Asuntos Económicos del Gobierno Suizo (SECO) en el marco del proyecto “Fortalecimiento de la Gestión de las Finanzas Públicas”, cuya implementación adelanta AECOM International Development Europe.
    Keywords: Gastos Públicos, Inversiones Públicas, Procesos Presupuestales, Ingresos Públicos, Política Pública, Desarrollo Económico y Social, Comisión del Gasto y la Inversión Pública, Colombia
    JEL: H50 H76 H61 H20 E24
    Date: 2018–04–30
  67. By: Wouter J. Den Haan (Centre for Macroeconomics (CFM); London School of Economics and Political Science (LSE)); Thomas Drechsel (Centre for Macroeconomics (CFM); London School of Economics and Political Science (LSE))
    Abstract: Exogenous random structural disturbances are the main driving force behind fluctuations in most business cycle models and typically a wide variety is used. This paper documents that a minor misspecification regarding structural disturbances can lead to large distortions for parameter estimates and implied model properties, such as impulse response functions with a wrong shape and even an incorrect sign. We propose a novel concept, namely an agnostic structural disturbance (ASD), that can be used to both detect and correct for misspecification of the structural disturbances. In contrast to regular disturbances and wedges, ASDs do not impose additional restrictions on policy functions. When applied to the Smets-Wouters (SW) model, we find that its risk-premium disturbance and its investment-specific productivity disturbance are rejected in favor of our ASDs. While agnostic in nature, studying the estimated associated coefficients and the impulse response functions of these ASDs allows us to interpret them economically as a risk-premium/preference and an investment-specific productivity type disturbance as in SW, but our results indicate that they enter the model quite differently than the original SW disturbances. Our procedure also selects an additional wage mark-up disturbance that is associated with increased capital efficiency.
    Keywords: DSGE, Full-information model estimation. sturctural disturbances
    JEL: C13 C52 E30
    Date: 2018–08
  68. By: Martin Kliem (Deutsche Bundesbank); Alexander Meyer-Gohde (University of Hamburg)
    Abstract: Central banks are relying increasingly on multiple instruments when implementing monetary policy. This presents empirical analyses of the effects of monetary policy shocks with an ongoing identification challenge. We provide a structural, quantitatively reasonable model of the interaction between monetary policy and the term structure of interest rates to address this. Our model shows that the effects of monetary policy shocks on term premia depend crucially on whether they contain news about future monetary policy. This structural interpretation provides a plausible explanation for the discrepancy in the existing empirical literature.
    Date: 2018
  69. By: Andrew Phiri (Nelson Mandela Metropolitan University [Port Elizabeth, South Africa])
    Abstract: Using weekly data collected from 20.09.2008 to 09.12.2016, this paper uses dynamic threshold adjustment models to demonstrate how the introduction of high-frequency and algorithmic trading on the Johannesburg Stock Exchange (JSE) has altered convergence relations between the federal fund rate and equity returns for aggregate and disaggregate South African market indices. We particularly find that for the post-crisis period, the JSE appears to operate more efficiently, in the weak-form sense, under high frequency trading platforms. JEL Classifications: C32, C51, C52, E44, E52
    Keywords: global financial crisis,high frequency trading,Colocation,threshold cointegration,Federal fund rates,Johannesburg Stock Exchange (JSE),equity returns
    Date: 2017
  70. By: Khorunzhina, Natalia
    Abstract: I investigate empirically the intratemporal dependence between nondurable consumption and housing. Using the data on maintenance expenditures and self-assessed house value, I separate the measure of housing stock and house prices, and use these data for estimation of the model, which allows for testing whether consumption and housing are characterized by intratemporal nonseparability in the contemporaneous utility. I find evidence in favor of a substitution mechanism between housing and total nondurable consumption. A similar conclusion is reached for some separate consumption categories, such as food, transport, clothing, vacations, and entertainment.
    Keywords: Housing, Nondurable Consumption, Intratemporal Nonseparability
    JEL: C51 D12 D13 E21 R21
    Date: 2018–08–26
  71. By: Börsch-Supan, Axel; Härtl, Klaus; Leite, Duarte; Ludwig, Alexander
    Abstract: We propose a unified framework to measure the effects of different reforms of the pension system on retirement ages and macroeconomic indicators in the face of demographic change. A rich overlapping generations (OLG) model is built and endogenous retirement decisions are explicitly modeled within a public pension system. Heterogeneity with respect to consumption preferences, wage profiles, and survival rates is embedded in the model. Besides the expected direct effects of these reforms on the behavior of households, we observe that feedback effects do occur. Results suggest that individual retirement decisions are strongly influenced by numerous incentives produced by the pension system and macroeconomic variables, such as the statutory eligibility age, adjustment rates, the presence of a replacement rate, and interest rates. Those decisions, in turn, have several impacts on the macro-economy which can create feedback cycles working through equilibrium effects on interest rates and wages. Taken together, these reform scenarios have strong implications for the sustainability of pension systems. Because of the rich nature of our unified model framework, we are able to rank the reform proposals according to several individual and macroeconomic measures, thereby providing important support for policy recommendations on pension systems.
    Keywords: population aging,pension reform,social security,life-cycle behavior,labor supply,retirement age,welfare
    JEL: C68 D91 E17 H55 J11 J26
    Date: 2018
  72. By: Emmanuel Farhi (Harvard University); Ivan Werning (Massachusetts Institute of Technology)
    Abstract: This paper extends the benchmark New-Keynesian model by introducing two key frictions: (1) agent heterogeneity with incomplete markets, uninsurable idiosyncratic risk, and occasionally- binding borrowing constraints; and (2) bounded rationality in the form of level-k thinking. Compared to the benchmark model, we show that the interaction of these two frictions leads to a powerful mitigation of the effects of monetary policy, which is much more pronounced at long horizons, and offers a potential rationalization of the “forward guidance puzzle”. Each of these frictions, in isolation, would lead to no or much smaller departures from the benchmark model.
    Date: 2018
  73. By: Qingqing Cao (Michigan State University)
    Abstract: We study the role of multinational banks in the propagation of business cycles in host countries. In our economy, multinational banks can transfer liquidity across borders through internal capital markets. However, their scarce knowledge of local firms' collateral hinders their allocation of liquidity to firms. We find that, through the interaction between the "liquidity origination" advantage and the "liquidity allocation" disadvantage, multinational banks can act as a short-run stabilizer in the immediate aftermath of domestic liquidity shocks but be a drag on the subsequent recovery. Structural and cyclical policies can ameliorate the trade-off induced by the presence of multinational banks.
    Date: 2018
  74. By: Michal Brzezinski (Faculty of Economic Sciences, University of Warsaw)
    Abstract: This study examines how different economic mechanisms affected low self-rated health (SRH) in Europe over the recent crisis period (2008−2011). We use balanced panel data for covering 26 European countries and 43 456 participants coming from the longitudinal 2011 European Union Statistics on Income and Living Conditions (EU-SILC) database. Over-time increases in low SRH incidence are decomposed into the contributions of changes in the distribution of covariates and changes in returns to the covariates. Results show that low SRH incidence increased in Europe during the crisis by almost 2 percentage points (3.7 percentage points in case of the Baltic countries). Decomposition analysis shows that: 1) decreasing household incomes and changing income distribution had no impact on low SRH incidence, 2) rise of material deprivation accounts for 12% of the overall growth in low SRH rates (27% for the Baltic countries), 3) decreasing levels of full-time and part-time employment as well as transitions to unemployment, economic inactivity, disability, or retirement account jointly for about 21% of the rise in low SRH in Europe (73% for Baltic countries).
    Keywords: self-rated health, economic crisis, decomposition, Oaxaca-Blinder, unemployment, material deprivation
    JEL: D63 E32 I1 I14
    Date: 2018
  75. By: Jaskowski, M.; McAleer, M.J.
    Abstract: In order to understand the lingering credit risk puzzle and the apparent segmentation of the stock market from credit markets, we need to be able to assess the strength of the cross-sectional dependence in credit spreads. This turns out to be a non-trivial task due to the extreme data sparsity that is typical for any panel of credit spreads that is extracted from corporate bond transactions. The problem of data sparsity has led to some erroneous conclusions in the literature, including inferences that have been drawn from spurious cross-sectional dependence in credit spread changes. Understanding the pitfalls leads to a new and improved estimator of the latent factor in credit spread changes and its characteristics.
    Keywords: Credit spread puzzle, Market segmentation, Latent factors, Spurious cross-sectional dependence
    JEL: G12 G13 G17 E43
    Date: 2018–08–01
  76. By: Matthes, Jürgen
    Abstract: Die Krise in der Türkei ist überwiegend selbst verschuldet und hat nur oberflächlich mit den verschärften US-Handelssanktionen zu tun. Zahlreiche expansive wirtschaftspolitische Maßnahmen trugen zwar dazu bei, einen anhaltenden Wirtschaftseinbruch nach dem Putschversuch im Juli 2016 abzuwenden. Jedoch hielt die türkische Regierung die starke Konjunkturstimulierung vor wichtigen Wahlen zu lange aufrecht und verteilte vor allem vor der Präsidentschaftswahl im Juni 2018 umfangreiche Wahlgeschenke. Dies führte zu einer Überhitzung der Wirtschaft mit steigender Inflation und höheren Leistungsbilanzdefiziten. Problematisch ist zudem, dass es zu einem starken Anstieg der Verschuldung von Banken und nicht-finanziellen Unternehmen kam. Diese von politischem Wahlkalkül getriebene Konjunkturpolitik auf Pump und auf Kosten der Zukunft rächt sich nun. Denn mit der privaten Verschuldung wuchs auch die Auslandsverschuldung von Banken und nicht-finanziellen Unternehmen deutlich, sodass Solvenzrisiken drohen. Besorgnis erregt in dieser Hinsicht vor allem der sehr hohe Fremdwährungsanteil an der Auslandsverschuldung. Damit ist die Türkei äußerst anfällig für Währungsabwertungen, weil mit jeder Abwertung die Auslandsverschuldung in inländischer Währung steigt. Im Vergleich zum Jahresdurchschnitt 2017 hat die Abwertung der türkischen Lira gegenüber dem Euro bis zum 22. August 2018 die Fremdwährungsschulden ceteris paribus um über 70 Prozent erhöht. Im Gegensatz zu den Banken sind nicht-finanzielle Unternehmen gegen dieses Risiko bislang kaum abgesichert, hatten aber Ende Mai 2018 Fremdwährungsschulden von knapp 340 Milliarden US-Dollar (teils auch bei inländischen Gläubigern). Allein aufgrund der Wechselkursveränderung seit Ende Mai hat sich deren Gegenwert um rund 500 Milliarden türkische Lira auf gut 2.000 Milliarden türkische Lira erhöht. Es drohen zudem Liquiditätsrisiken. Denn die private Verschuldung von Banken und nicht-finanziellen Unternehmen ist zu knapp einem Drittel mit kurzfristigen und daher schnell reversiblen Kapitalzuflüssen aus dem Ausland finanziert. Bei einer Vertrauenskrise kann es daher schnell zu einem Versiegen dieser Finanzquellen und einer Liquiditätskrise ("sudden stop") kommen, die bis hin zur Zahlungsunfähigkeit gehen kann. Dieses Risiko ist umso relevanter, weil die offiziellen Devisenreserven im internationalen Vergleich relativ gering sind und nur rund die Hälfte der kurzfristigen Auslandsverschuldung decken. Die türkische Regierung scheint bislang das Primat der Politik über die Erfordernisse der wirtschaftlichen Stabilität zu stellen. Die jüngsten Rating-Herabstufungen zeigen, dass vor allem deshalb das Vertrauen der Investoren im Ausland zu schwinden beginnt. Um dem entgegenzuwirken, muss die türkische Regierung die Unabhängigkeit der Zentralbank wieder garantieren und die Inflation konsequent bekämpfen lassen. In der Fiskalpolitik ist mehr Transparenz und Disziplin mit Blick auf die versteckten fiskalischen Risiken ebenso nötig wie eine baldige Beschneidung der ausgeuferten Subventionen und sonstigen Fiskalstimuli. Zentral ist auch die Sicherung der makrofinanziellen Stabilität angesichts der erheblichen Risiken, die sich aus dem Kreditboom und der gestiegenen Verschuldung ergeben. Eine restriktivere Geld-, Fiskal- und makroprudenzielle Politik wird die türkische Wirtschaft abbremsen und wohl auch zu einem Anstieg der ohnehin schon hohen Arbeitslosigkeit führen. Diese Anpassung muss die Politik hinnehmen, da sie unumgänglich ist, um die Überhitzung und die resultierenden Anfälligkeit aufgrund der hohen Auslands- und Fremdwährungsschuldenlast zu bekämpfen. Sollte es zu einer deutlichen Krisenverschärfung kommen, wird kein Weg daran vorbeiführen, den IWF zu Hilfe zu rufen.
    JEL: E63 F34 F31
    Date: 2018

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