nep-mac New Economics Papers
on Macroeconomics
Issue of 2018‒10‒01
89 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Firm Dynamism and Housing Price Volatility By Epstein, Brendan; Finkelstein Shapiro, Alan; Gonzalez Gomez, Andres
  2. Inflation Expectations and Nonlinearities in the Phillips Curve By Alexander Doser; Ricardo Nunes; Nikhil Rao; Viacheslav Sheremirov
  3. Missing Wage Inflation? Downward Wage Rigidity and the Natural Rate of Unemployment By Yuto Iwasaki; Ichiro Muto; Mototsugu Shintani
  4. The Intertemporal Keynesian Cross By Adrien Auclert; Matthew Rognlie; Ludwig Straub
  5. Macroeconomic Policies and Transmission Dynamics in India By Kapur, Muneesh
  6. The role of central bank knowledge and trust for the public's inflation expectations By Mellina, Sathya; Schmidt, Tobias
  7. No man is an island : the impact of heterogeneity and local interactions on macroeconomics dynamics By Mattia Guerini; Mauro Napoletano; Andrea Roventini
  8. The boundaries of central bank independence: Lessons from unconventional times By Orphanides, Athanasios
  9. Interest rate rules under financial dominance By Lewis, Vivien; Roth, Markus
  10. Macroeconomic Consequences of Bank’s Assets Reallocation After Mortgage Defaults By Hamed Ghiaie
  11. Global Financial Risk, Domestic Financial Access, and Unemployment Dynamics By Epstein, Brendan; Finkelstein Shapiro, Alan; Gonzalez Gomez, Andres
  12. To sign or not to sign? On the response of prices to financial and uncertainty shocks By Meinen, Philipp; Röhe, Oke
  13. International Spillovers and ‘Ex-ante’ Efficient Bailouts By Marina Azzimonti; Vincenzo Quadrini
  14. Financial Development, Unemployment Volatility, and Sectoral Dynamics By Epstein, Brendan; Finkelstein Shapiro, Alan
  15. Investment, Current Account, and the Long Swings of Unemployment By Hian Teck Hoon; Margarita Katsimi; Gylfi Zoega
  16. Employer Credit Checks: Poverty Traps versus Matching Efficiency By Dean Corbae; Andy Glover
  17. Employer Credit Checks: Poverty Traps versus Matching Efficiency By Dean Corbae; Andrew Glover
  18. Estimating the Effective Lower Bound for the Czech National Bank’s Policy Rate By Dominika Kolcunova; Tomas Havranek
  19. Imperfect mobility of labor across sectors and fiscal transmission By Olivier Cardi; Romain Restout; Peter Claeys
  20. Missing Events in Event Studies: Identifying the Effects of Partially-Measured News Surprises By Refet S. Gürkaynak; Burçin Kısacıkoğlu; Jonathan H. Wright
  21. Labor Force Participation Dynamics By Epstein, Brendan
  22. Pursuing the Phillips curve in an African monarchy: The Swazi case By Phiri, Andrew
  23. Financial Markets, the Real Economy, and Self-fulfilling Uncertainties By Jess Benhabib; Xuewen Liu; Pengfei Wang
  24. Monetary Policy and Long-Run Systemic Risk-Taking By Gilbert Colletaz; Grégory Levieuge; Alexandra Popescu
  25. Against All Odds: Job Search during the Great Recession By Leyva Gustavo
  26. The Costs of Macroprudential Policy By Björn Richter; Moritz Schularick; Ilhyock Shim
  27. CBO’s Projection of Labor Force Participation Rates: Working Paper 2018-04 By Joshua Montes
  28. Measuring the Signaling Effect of the ECB’s Asset Purchase Programme at the Effective Lower Bound By Zhou, Siwen
  29. Probability Forecast Using Fan Chart Analysis: A case of the Sierra Leone Economy By Jackson, Emerson Abraham; Tamuke, Edmund
  30. Inequality, imperfect competition and fiscal policy By Pavlos Balamatsias
  31. Nowcasting Canadian Economic Activity in an Uncertain Environment By Tony Chernis; Rodrigo Sekkel
  32. Individual and Aggregate Labor Supply in Heterogeneous Agent Economies with Intensive and Extensive Margins By Yongsung Chang; Sun-Bin Kim; Kyooho Kwon; Richard Rogerson
  33. Política Fiscal, Ingresos y Desigualdad en Colombia (1990-2015) By Estrada, Fernando; Trujillo, Marlyn Tatiana; Pardo, Diego
  34. Boosting investment in Greece By Panagiotis Barkas; Mauro Pisu
  35. Bubble on Real Estate: The Role of Altruism and Fiscal Policy By Lise Clain-Chamosset-Yvrard; Thomas Seegmuller
  36. Efficiency in Sequential Labor and Goods Markets By Petrosky-Nadeau, Nicolas; Wasmer, Etienne; Weil, Philippe
  37. Deviations in real exchange rate levels in the OECD countries and their structural determinants By Martin Berka; Daan Steenkamp
  38. Taking Stock of TFP News Shocks: The Inventory Comovement Puzzle By Christoph Görtz; Christopher Gunn; Thomas Lubik
  39. Improving Underlying Scenarios for Aggregate Forecasts: A Multi-level Combination Approach By Cobb, Marcus P A
  40. Firm Dynamics with Frictional Product and Labor Markets By Kaas, Leo; Kimasa, Bihemo
  41. Bank of Japan Suffers Stimulus Fatigue as Policy Costs Mount By Xing, Victor
  42. TIIE-28 Swaps as Risk-Adjusted Forecasts of Monetary Policy in Mexico By García-Verdú Santiago; Ramos Francia Manuel; Sánchez-Martínez Manuel
  43. Estimating and Projecting Potential Output Using CBO’s Forecasting Growth Model: Working Paper 2018-03 By Robert Shackleton
  44. How Nominal Foreign Currency Depreciation Against the U.S. Dollar Affects U.S. Wealth: Working Paper 2018-05 By Dorian Carloni
  45. Generating employment, raising incomes and addressing poverty in Greece By Tim Bulman; Mauro Pisu
  46. Varieties of Capitalism, Increasing Income Inequality, and the Sustainability of Long-Run Growth By Mark Setterfield; Yun K. Kim
  47. Fiscal Substitution of Investment for Highway Infrastructure: Working Paper 2018-08 By Congressional Budget Office
  48. Exchange Rate Pass-Through to Consumer Prices and the Role of Energy Prices By Hyeongwoo Kim; Ying Lin
  49. Adapting lending policies when negative interest rates hit banks’ profits By Óscar Arce; Miguel García-Posada; Sergio Mayordomo; Steven Ongena
  50. Long-term Changes in Married Couples' Labor Supply and Taxes: Evidence from the US and Europe Since the 1980s By Alexander Bick; Bettina Brüggemann; Nicola Fuchs-Schündeln; Hannah Paule-Paludkiewicz
  51. Discouraging Deviant Behavior in Monetary Economics By Lawrence Christiano; Yuta Takahashi
  52. An Analytic Estimation of the Multiplier Effect of Public Consumption in the Dominican Republic: 2007-2012 By Penson, Enrique
  53. Saddle Cycles: Solving Rational Expectations Models Featuring Limit Cycles (or Chaos) Using Perturbation Methods By Dana Galizia
  54. Relative productivity and search unemployment in an open economy By Luisito Bertinelli; Olivier Cardi; Romain Restout
  55. Relative Productivity and Search Unemployment in an Open Economy By Luisito Bertinelli; Olivier Cardi; Romain Restout
  56. On the Role of Financial Aid in a Default Episode By Cuadra Gabriel; Ramos Francia Manuel; García-Verdú Santiago
  57. Did the Basel process of capital regulation enhance the resiliency of European Banks? By Gehrig, Thomas; Iannino, Maria Chiara
  58. Intra-Household Risk Sharing and Job Search over the Business Cycle By Haomin Wang
  59. Does FDI crowd out domestic investment in transition countries? By Cristina Jude
  60. Fertility Shocks and Equilibrium Marriage-Rate Dynamics By John Knowles; Guillaume Vandenbroucke
  61. Political Stabilization by an independent Central Bank By Francesco Salsano
  62. The political economy of reforms in central bank design: evidence from a new dataset By Davide Romelli
  63. Measuring Productivity by Quadratic-mean-of-order-ð ‘Ÿ Indexes By Valentin Zelenyuk; Hideyuki Mizobuchi
  64. Financial Development Beyond the Formal Financial Market By Lin Shao
  65. Labor tax reductions in Europe: The role of property taxation By Bielecki, Marcin; Stähler, Nikolai
  66. If France continues this strategy, taxes will destroy domestic investment and economic growth By Bakari, Sayef
  67. Commodity Prices, Monetary Policy and the Taylor Rule By Siami-Namini, Sima; Hudson, Darren; Trindade, A. Alexandre; Lyford, Conrad
  68. The German productivity paradox: Facts and explanations By Elstner, Steffen; Feld, Lars P.; Schmidt, Christoph M.
  69. Do You Know That I Know That You Know...? Higher-Order Beliefs in Survey Data By Olivier Coibion; Yuriy Gorodnichenko; Saten Kumar; Jane Ryngaert
  70. Estimation of effects of recent macroprudential policies in a sample of advanced open economies By Nymoen, Ragnar; Pedersen, Kari; Sjåberg, Jon Ivar
  71. The Use of Business Expectations in the Short-Term Forecasting of Economic Activity in Ukrainian By Roman Lysenko; Nataliia Kolesnichenko
  72. Household Leverage and the Recession By Callum Jones
  73. Credit limits and heterogeneity in general equilibrium models with a finite number of agents By Pham, Ngoc-Sang
  74. The Cyclical Composition of Startups By Eran Hoffmann
  75. LTV vs. DTI Constraints: When Did They Bind, and How Do They Interact? By Marcus Ingholt
  76. The determinants of private investment in a mining export economy. Peru: 1997-2017. By Waldo Mendoza Bellido; Erika Collantes Goicochea
  77. The Behavioral Economics of John Maynard Keynes By Ronald Schettkat
  78. Fiscal rules for sub-central governments: Design and impact By Douglas Sutherland; Robert Price; Isabelle Joumard
  79. The Indeterminacy of Determinacy with Fiscal, Macro-prudential or Taylor Rules By Jean-Bernard Chatelain; Kirsten Ralf
  80. Measurement of Economic Activity in the Main Beach Tourist Areas in Mexico through the Nightlights Photographed from Space By Llamosas-Rosas Irving; Rangel González Erick; Sandoval Bustos Maritza
  81. Germany in fundamental macroeconomic disequilibrium - the external surplus By Jan Priewe
  82. DELFI 2.0, DNB's Macroeconomic Policy Model of the Netherlands By Robert-Paul Berben; Ide Kearney; Robert Vermeulen
  83. On the trade-offs in money market benchmarks' stabilisation By Marcin Dec
  84. Misallocation in the Market for Inputs: Enforcement and the Organization of Production By Johannes Boehm; Ezra Oberfield
  85. Executive Constraints as Robust Control By Timothy Besley; Hannes Mueller
  86. How CBO Produces Its 10-Year Economic Forecast: Working Paper 2018-02 By Robert W. Arnold
  87. Some unpleasant stabilization arithmetic: remarks at the Federal Reserve Bank of Boston's 62nd Economic Conference, "What are the Consequences of Long Spells of Low Interest Rates?", Boston, Massachusetts, September 8, 2018 By Rosengren, Eric S.
  88. Development of a two-sector model with an extended energy sector and application to Portugal (1960-2014) By Santos, João; Domingos, Tiago; Sousa, Tânia; Serrenho, André
  89. Forced Retirement Risk and Portfolio Choice By Guodong Chen; Minjoon Lee; Tong-yob Nam

  1. By: Epstein, Brendan; Finkelstein Shapiro, Alan; Gonzalez Gomez, Andres
    Abstract: Using data for a large sample of countries, we find a robust economic and quantitatively significant positive relationship between new firm density and house price volatility. A business cycle model with endogenous firm entry, housing, and housing finance constraints successfully replicates this new fact, both qualitatively and quantitatively. Greater average firm entry is associated with higher average house prices. This makes the cost of housing loans more sensitive to housing-finance shocks, leading to sharper credit and lending-spread fluctuations, and ultimately factually-sharper house price fluctuations. We find broad empirical validation for this mechanism.
    Keywords: Endogenous firm entry, firm dynamism, housing price dynamics, fi- nancial frictions and shocks, business cycles
    JEL: E30 E32 E44
    Date: 2018
  2. By: Alexander Doser (Northwestern University); Ricardo Nunes (University of Surrey and CIMS); Nikhil Rao (University of Michigan); Viacheslav Sheremirov (Boston Fed)
    Abstract: This paper examines the role of inflation expectations and nonlinearities in the Phillips curve. We find that nonlinearities per se can address the missing disinflation. The estimated model favors two regions, with a flatter slope of the Phillips curve when unemployment is already high. This can explain why during the Great Recession inflation did not decrease as much as predicted by linear models. We also find that consumer expectations can explain the missing disinflation and prove to be a more robust feature of the Phillips curve. Namely, consumer expectations are also key in addressing the Great Inflation in the 1970s and the Volcker disinflation in the 1980s, periods in which nonlinearities have difficulty fitting the data. Our results suggest that both nonlinearities and consumer expectations should be examined jointly and that the latter is a more prevalent feature of the Phillips curve.
    JEL: D84 E24 E31 E32
    Date: 2018–08
  3. By: Yuto Iwasaki (Bank of Japan); Ichiro Muto (Bank of Japan); Mototsugu Shintani (University of Tokyo)
    Abstract: In recent years, advanced economies, including Japan, have experienced a weak response of wage inflation to the decline in the unemployment rate (i.e. missing wage inflation). In this study, we investigate whether downward wage rigidity (DWR) in recession periods can be a source of this weak wage response. Specifically, we jointly estimate the degree of DWR as well as the natural rate of unemployment using a nonlinear DSGE model with asymmetric adjustment costs. We show that wage adjustment costs are highly asymmetric in Japan, the euro area, and the UK; especially, a clear L-shaped wage Phillips curve between wage inflation and the unemployment gap (i.e. the actual unemployment rate minus the natural rate) is obtained in Japan. We argue that missing wage inflation is attributable to DWR and wage inflation is likely to reappear under the tight labor market conditions.
    Keywords: wage; natural rate of unemployment; downward wage rigidity; Phillips curve; nonliner DSGE model
    JEL: E24 E31 E32
    Date: 2018–09–25
  4. By: Adrien Auclert; Matthew Rognlie; Ludwig Straub
    Abstract: We demonstrate the importance of intertemporal marginal propensities to consume (iMPCs) in disciplining general equilibrium models with heterogeneous agents and nominal rigidities. In a benchmark case, the dynamic response of output to a change in the path of government spending or taxes is given by an equation involving iMPCs, which we call the intertemporal Keynesian cross. Fiscal multipliers depend only on the interaction between iMPCs and public deficits. We provide empirical estimates of iMPCs and argue that they are inconsistent with representative-agent, two-agent and one-asset heterogeneous-agent models, but can be matched by models with two assets. Quantitatively, models that match empirical iMPCs predict deficit-financed fiscal multipliers that are larger than one, even if monetary policy is active, taxation is distortionary, and investment is crowded out. These models also imply larger amplification of shocks that involve private borrowing, as we illustrate in an application to deleveraging.
    JEL: D1 E21 E22 E23 E32 E62
    Date: 2018–09
  5. By: Kapur, Muneesh
    Abstract: Against the backdrop of the move to an inflation targeting monetary policy framework beginning 2014 with consumer price index (CPI) inflation as the nominal anchor, this paper revisits monetary transmission dynamics. Rather than confining to the typical three equation New Keynesian model, this paper assesses transmission in a broader, disaggregated model incorporating external sector, fiscal policy, banking sector and financial market variables to capture the interactions among key macroeconomic policies and macroeconomic aggregates. The empirical analysis confirms the role of monetary policy in containing demand and inflationary pressures. In view of the ongoing structural reforms, deregulation and opening up of the Indian economy, as well as ongoing initiatives in the monetary policy operating framework to improve the efficacy of monetary transmission, the transmission dynamics can be expected to evolve over time.
    Keywords: Bank Credit, Bond Yields, Capital Flows, Current Account, Exchange Rate, Fiscal Policy, India, IS curve, Monetary Policy, Monetary Transmission, Phillips Curve, Structural Econometric Model
    JEL: C30 C53 E31 E32 E43 E52 E58 E63 F31 F32 F41 G21
    Date: 2018–08–21
  6. By: Mellina, Sathya; Schmidt, Tobias
    Abstract: Since the financial crisis, central banks have stressed the role of trust and communication in connection with their objectives and strategies for aligning the public's inflation expectations with their own and, consequently, improving the effectiveness of monetary policy. Assessing how much the general public knows about and trust in central banks and how these factors influence inflation expectations is thus important. We shed light on these issues by relying on a representative survey conducted among individuals living in Germany. Although most respondents assume that they have a good or very good knowledge of the ECB and the Bundesbank, only about 20 percent cite "price stability" when asked directly about the two central banks' objectives. Knowledge of the ECB's and the Bundesbank's goals act as significant drivers of trust in these institutions, however. And greater trust in the ECB and Bundesbank, in turn, lowers individuals' inflation expectations. More specifically, having greater trust increases the probability of expecting unchanged prices and decreases the likelihood of expecting either slightly or sharply rising prices over the medium term. Interestingly, awareness of price stability as the primary objective of the ECB's monetary policy does not seem to affect inflation expectations directly once we control for trust, individuals' socio-demographic characteristics and their interest in economic topics. Our study indicates that central banks can influence households' inflation expectations through building trust and educating the public about their targets.
    Keywords: Inflation Expectations,Trust,Economic Knowledge,Central Bank Communications,European Central Bank,Deutsche Bundesbank
    JEL: D12 D84 E52 E58
    Date: 2018
  7. By: Mattia Guerini (Scuola Superiore Sant'Anna); Mauro Napoletano (Observatoire français des conjonctures économiques); Andrea Roventini (Laboratory of Economics and Management (LEM))
    Abstract: We develop an agent-based model in which heterogeneous firms and households interact in labor and good markets according to centralized or decentralized search and matching protocols. As the model has a deterministic backbone and a full-employment equilibrium, it can be directly compared to Dynamic Stochastic General Equilibrium (DSGE) models. We study the effects of negative productivity shocks by way of impulse-response functions (IRF). Simulation results show that when search and matching are centralized, the economy is always able to return to the full employment equilibrium and IRFs are similar to those generated by DSGE models. However, when search and matching are local, coordination failures emerge and the economy persistently deviates from full employment. Moreover, agents display persistent heterogeneity. Our results suggest that macroeconomic models should explicitly account for agents’ heterogeneity and direct interactions.
    Keywords: Agent based model; Local interactions; Heterogeneous agents; DGSE Model
    JEL: E32 E37
    Date: 2018–01
  8. By: Orphanides, Athanasios
    Abstract: What institutional arrangements for an independent central bank with a price stability mandate promote good policy outcomes when unconventional policies become necessary? Unconventional monetary policy poses challenges. The large scale asset purchases needed to counteract the zero lower bound on nominal interest rates have uncomfortable fiscal and distributional consequences and require central banks to assume greater risks on their balance sheets. Lack of clarity on the precise definition of price stability, coupled with concerns about the legitimacy of large balance sheet expansions, hinders policy: It encourages the central bank to eschew the decisive quantitative easing needed to reflate the economy and instead to accommodate too-low inflation. The experience of the Bank of Japan's encounter with the zero lower bound suggests important benefits from a clear definition of price stability as a symmetric 2% goal for inflation, which the Bank adopted in 2013.
    Keywords: Bank of Japan,Federal Reserve,ECB,zero lower bound,quantitative easing,central bank independence,price stability,inflation target,balance sheet risk
    JEL: E52 E58 E61 N15
    Date: 2018
  9. By: Lewis, Vivien; Roth, Markus
    Abstract: We study the equilibrium properties of a business cycle model with financial frictions and price adjustment costs. Capital-constrained entrepreneurs finance risky projects by borrowing from banks. Banks, in turn, make loans using equity and deposits. Because financial contracts are not contingent on aggregate risk, bank balance sheets are hit when entrepreneurial defaults are higher than expected. Macroprudential policy imposes a positive response of the bank capital ratio to lending. Our main result is that the Taylor Principle is violated when this response is too weak. Then macroprudential policy is ineffective in stabilizing debt and monetary policy is subject to 'financial dominance'. A too aggressive response of the interest rate to inflation can lead to debt disinflation dynamics that destabilize the financial sector.
    Keywords: bank capital,financial dominance,interest rate rule,macroprudential policy,Taylor Principle
    JEL: E32 E44 E52 E58 E61
    Date: 2018
  10. By: Hamed Ghiaie (Université de Cergy-Pontoise, THEMA)
    Abstract: This paper proposes a DSGE model which uses Bayesian estimations to assess an economy under the strain of borrower’s default on its obligation to intermediary agents, similar to the climate of the Great Recession. The paper finds that the treasury bond market plays an important role in such economy: the default increases the spread between the return of mortgages and deposits, as a result banks prefer to compensate their losses by making profit in the mortgage market and in turn, decreasing their treasury bond holdings. These changes transfer the shock to the real side of the economy through housing, credit, deposit and government loan channels and thereby instigate a business cycle. The model proposed in this paper accurately portrays the behaviour of key economic variables before the Great Recession; in particular housing prices, mortgages, deposits and treasury bond holdings by banks. Significantly, this model illustrates the home price downward spiral which succeeded the recession. The paper demonstrates that the specification of the credit constraint relying on house price expectations as well as frictions in housing and capital investments, which can give rise to the Paradox of Thrift, are the major delay factors in recovery. In addition, the findings argue that macroprudential policies help mitigate financial risks and reduce common exposures across markets. Such policies, however, may be inadequate for the post-crisis restoration of the economy.
    Keywords: Private default, Financial business cycle, Macroprudential policy, home-price downward spiral.
    JEL: E32 E44 E62
    Date: 2018
  11. By: Epstein, Brendan; Finkelstein Shapiro, Alan; Gonzalez Gomez, Andres
    Abstract: We empirically show that after an increase in global financial risk, the response of unemployment is markedly more subdued in emerging economies (EMEs) relative to small open advanced economies (SOAEs), while the differential response of GDP and investment across the two country groups is noticeably smaller, if at all, in EMEs. A model with banking frictions, frictional unemployment, and household and firm heterogeneity in financial inclusion can help rationalize these facts. Limited financial inclusion among households is central to explaining the differ- ential response of unemployment in EMEs amid global financial risk shocks.
    Keywords: Emerging economies, business cycles, unemployment, labor search frictions, financial frictions, financial inclusion.
    JEL: E24 E32 E44 F41
    Date: 2018
  12. By: Meinen, Philipp; Röhe, Oke
    Abstract: Based on SVAR models identified by sign restrictions, we estimate the macroeconomic effects of financial and uncertainty shocks in the euro area and the US, paying particular attention to their effects on prices. While our results confirm that such disturbances are important drivers of output fluctuations in both economies, we find the shock responses of consumer prices to be ambiguous. Moreover, restricting prices to co-moving with output can considerably attenuate the measured impact of financial and uncertainty shocks on real activity.
    Keywords: Financial Shocks,Uncertainty Shocks,Sign Restrictions,Euro Area,United States
    JEL: C11 C32 E32 E44
    Date: 2018
  13. By: Marina Azzimonti; Vincenzo Quadrini
    Abstract: We study how cross-country macroeconomic spillovers caused by sovereign default affect equilibrium bailouts. Because of portfolio diversification, the default of one country causes a macroeconomic contraction also in other countries. This generates a self-interest for these other countries to bailout the defaulting country. A novel insight of the paper is that bailouts could be efficient not only ex-post (after the debt has been issued) but also ex-ante (before the issuance of the debt). Although anticipated bailouts create the typical moral hazard problem leading countries to issue more debt, this may correct for the under issuance of public debt that would result from the lack of cross-country policy coordination.
    JEL: E44 E6 E61 E62 F3 F36 F42 F44 H63
    Date: 2018–09
  14. By: Epstein, Brendan; Finkelstein Shapiro, Alan
    Abstract: We document a negative and significant relationship between domestic financial de- velopment and unemployment volatility in developing and emerging economies (DEMEs). However, there is no significant relationship between these variables in advanced economies (AEs). A labor-search model with production heterogeneity, sectoral financial frictions, and interfirm input credit can rationalize these differential cross-country results. Un- employment volatility is decreasing in financial development, but the quantitative relevance of this relationship is increasing in the extent to which input credit is prevalent in an economy. This insight is consistent with the fact that, empirically, input credit is much more prominent in DEMEs compared to AEs.
    Keywords: Business cycles, financial development, financial frictions, labor markets, large firms, search frictions, small firms
    JEL: E24 E32 E44 F41
    Date: 2018
  15. By: Hian Teck Hoon (Singapore Management University); Margarita Katsimi (Athens University of Economics and Business); Gylfi Zoega (University of Iceland; Birkbeck, University of London)
    Abstract: We estimate the relationship between investment and unemployment over the time period 1960-2015 in 20 OECD countries. While neoclassical growth theory typically assumes full employment – with no effect of investment on unemployment – we find that over our sample period covering more than five decades, a statistically significant negative relationship does exist: when investment fell, unemployment increased. When the time period is broken down into two sub-periods to take account of the Great Recession, we find that the estimated coefficient of investment is slightly smaller when the period 2001-2015 is added to the 1960-2000 period. We also find a positive effect of the current account surplus on unemployment that very likely works through investment. A non-monetary model shows how an increase in policy uncertainty that sharply contracts investment and raises unemployment can lead to an increase in current account surplus.
    Keywords: Long swings of unemployment, investment, current account, Great Recession.
    JEL: E10 E22 E24
    Date: 2018–09
  16. By: Dean Corbae (University of Wisconsin–Madison); Andy Glover (University of Texas at Austin)
    Abstract: We develop a framework to understand pre-employment credit screening through adverse selection in labor and credit markets. Workers differ in an unobservable characteristic that induces a positive correlation between labor productivity and repayment rates in credit markets. Firms therefore prefer to hire workers with good credit because it correlates with high productivity. A poverty trap may arise, in which an unemployed worker with poor credit has a low job finding rate, but cannot improve her credit without a job. In our calibrated economy, this manifests as a large and persistent wage loss from default, equivalent to 2.3% per month over ten years. Banning employer credit checks eliminates the poverty trap, but pools job seekers and reduces matching efficiency: average unemployment duration rises by 13% for the most productive workers after employers are banned from using credit histories to screen potential hires.
    Keywords: employment, unemployment, wages
    JEL: E24 E44
    Date: 2018–09
  17. By: Dean Corbae; Andrew Glover
    Abstract: We develop a framework to understand pre-employment credit screening through adverse selection in labor and credit markets. Workers differ in an unobservable characteristic that induces a positive correlation between labor productivity and repayment rates in credit markets. Firms therefore prefer to hire workers with good credit because it correlates with high productivity. A poverty trap may arise, in which an unemployed worker with poor credit has a low job finding rate, but cannot improve her credit without a job. In our calibrated economy, this manifests as a large and persistent wage loss from default, equivalent to 2.3% per month over ten years. Banning employer credit checks eliminates the poverty trap, but pools job seekers and reduces matching efficiency: average unemployment duration rises by 13% for the most productive workers after employers are banned from using credit histories to screen potential hires.
    JEL: E24 E44
    Date: 2018–09
  18. By: Dominika Kolcunova (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank, Na prikope 28, 115 03 Prague 1, Czech Republic); Tomas Havranek (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank, Na prikope 28, 115 03 Prague 1, Czech Republic)
    Abstract: The paper focuses on the estimation of the effective lower bound for the Czech National Bank’s policy rate. The effective lower bound is determined by the value below which holding and using cash would be preferable to deposits with negative yields. This bound is approximated based on storage, insurance and transportation costs of cash and the loss of convenience associated with cashless payments and complemented with the estimate based on interest charges which present direct costs to the bank profitability. Overall we get a mean value slightly below -1%, approxi- mately in the interval (-2.0%, -0.4%). In addition, by means of a vector autoregression we show that the potential of negative rates would not be sufficient to deliver monetary policy easing similar in its effects to the impact of the Czech National Bank’s exchange rate commitment during the years 2013–2017.
    Keywords: effective lower bound, zero lower bound, negative interest rates, costs of cash, transmission of monetary policy
    JEL: E58 E43 E44
    Date: 2018–09
  19. By: Olivier Cardi; Romain Restout; Peter Claeys
    Abstract: Our paper investigates the impact of government spending shocks on relative sector size and contrasts the effects across countries. Using a panel of sixteen OECD countries over the period 1970-2007, our VAR evidence shows that a rise in government consumption i) increases the share of non tradables in labor and real GDP while lowering the share of tradables, and ii) causes a significant increase in non traded wages relative to traded wages. While the first finding reveals that the non traded sector is more intensive in the government spending shock and experiences a labor inflow that increases its relative size, the second finding suggests the presence of labor mobility costs preventing wage equalization across sectors. These labor mobility costs appear to play a key role in determining changes in relative sector size across time and space. Whilst the responses of intersectoral labor reallocation and sectoral shares are found empirically to decline over time, the share of non tradables increases more in countries where the degree of labor mobility across sectors is higher. To account for our evidence, we develop an open economy version of the neoclassical model with tradables and non tradables. Our quantitative analysis shows that the open economy model is successful in replicating the responses of sectoral output shares to a fiscal shock, as long as we allow for a difficulty in reallocating labor across sectors along with adjustment costs to capital accumulation. Finally, calibrating the model to country-specific data, we are able to generate a cross-country relationship between the degree of labor mobility and the responses of sectoral output shares which is similar to that in the data.
    Keywords: Fiscal policy, Labor mobility, Investment, Current account, Non tradables, Sectoral wages
    JEL: E22 E62 F11 F41 J31
    Date: 2018
  20. By: Refet S. Gürkaynak; Burçin Kısacıkoğlu; Jonathan H. Wright
    Abstract: Macroeconomic news announcements are elaborate and multi-dimensional. We consider a framework in which jumps in asset prices around macroeconomic news and monetary policy announcements reflect both the response to observed surprises in headline numbers and latent factors, reflecting other details of the release. The details of the non headline news, for which there are no expectations surveys, are unobservable to the econometrician, but nonetheless elicit a market response. We estimate the model by the Kalman filter, which essentially combines OLS- and heteroskedasticity-based event study estimators in one step, showing that those methods are better thought of as complements rather than substitutes. The inclusion of a single latent factor greatly improves our ability to explain asset price movements around announcements.
    JEL: E43 E52 E58 G12 G14
    Date: 2018–09
  21. By: Epstein, Brendan
    Abstract: It is well known that the U.S. labor force participation rate (LFP) is procyclical. I highlight that, in contrast, LFP is negatively correlated with labor productivity even though GDP and productivity are positively correlated. I show that these opposite correlations are explained by the differential dynamic adjustment of LFP given exoge- nous shocks to, alternatively, GDP and productivity. My analysis is guided by the theoretical underpinnings of the benchmark model of equilibrium unemployment. This guidance is important, as it helps reveal that the cyclical behavior of job vacancies explains a considerable fraction of the cyclical behavior of LFP.
    Keywords: Equilibrium unemployment; GDP; labor markets; procyclical; productivity; propagation; search and matching; vacancies; unemployment.
    JEL: E24 E32 J21 J63
    Date: 2018–08–10
  22. By: Phiri, Andrew
    Abstract: The purpose of this study is to examine whether we can identify a Philips curve fit for the Kingdom of Swaziland as a low middle income Sub-Saharan Africa monarchy using data collected between 1991 and 2016. In our approach we rely on the recently introduced nonlinear autoregressive distributive lag (N-ARDL) model to a variety of Phillips curve specifications. For robustness sake, we further employ three filters (one-sided HP, two-sided HP and Corbae-Oularis filters) to extract the gap variables necessary for empirical analysis. Our findings point to a linear, short-run traditional Philips curve whereas we find strong support for concave shaped unemployment-gap and output –gap based Phillips curve specifications. Given the specific form of concavity discovered in the Phillips curves, the low inflation rate experienced over the last couple of decades can be attributed to a worsening labour and goods markets. Moreover, our evidence also cautions Swazi policymakers of ‘overheating’ of the economy during economic booms in which stabilization tools are required to implemented in such instances. Given the overall absence of empirical studies establishing the Philips curve for the Swazi economy our study makes a valid contribution to the literature.
    Keywords: Inflation; Unemployment; Phillips curve; Central Bank of Swaziland (CBS); Hodrick-Prescott (HP) filter; Corbae-Oularis (C-O) filter; Emerging Economies.
    JEL: C22 C32 C52 E24 E31
    Date: 2018–09–28
  23. By: Jess Benhabib; Xuewen Liu; Pengfei Wang
    Abstract: Uncertainty in both financial markets and the real economy rises sharply during recessions. We develop a model of informational interdependence between financial markets and the real economy, linking uncertainty to information production and aggregate economic activities. We argue that there exists mutual learning between financial markets and the real economy. Their joint information productions determine both the allocative efficiency in the real sector and the market efficiency in the financial sector. The mutual learning creates a strategic complementarity between information production in the financial sector and that in the real sector. A self-fulfilling surge in financial uncertainty and real uncertainty can naturally arise when both sectors produce little information in anticipation of the other producing little information. At the same time, aggregate output falls as the real allocative efficiency deteriorates. In the extension to an OLG dynamic setting, our model characterizes self-fulfilling uncertainty traps with two steady-state equilibria and a two-stage economic crisis in transitional dynamics.
    JEL: E2 E44 G01 G20
    Date: 2018–09
  24. By: Gilbert Colletaz; Grégory Levieuge; Alexandra Popescu
    Abstract: As an extension to the literature on the risk-taking channel of monetary policy, this paper studies the existence of a systemic risk-taking channel (SRTC) in the Eurozone, through an original macroeconomic perspective based on causality measures. Because the SRTC is effective after an “incubation period”, we make a distinction between short and long-term causality, following the methodology proposed by Dufour and Taamouti (2010). We find that causality from monetary policy to systemic risk, while not significant in the very short term, robustly represents 75 to 100% of the total dependence between the two variables in the long run. Reverse causality is rejected: systemic risk did not influence the policy of the European Central Bank before the global financial crisis. However, central banks must be aware that a too loose monetary policy stance may be conducive to a build-up of systemic risk.
    Keywords: Monetary Policy, Systemic Risk-Taking, Long Run Causality, SRisk.
    JEL: E52 E58 G21
    Date: 2018
  25. By: Leyva Gustavo
    Abstract: The unemployed in the United States appear to allocate time to job search activities regardless of the stance of the economy. Drawing on the American Time Use Survey between 2003 and 2014, I document that the unemployed increase their search intensity only slightly if at all during recessions. Roughly, 30 minutes in a week is the additional search intensity attributed to the unemployed in response to the Great Recession. While their search intensity depends on a number of factors that would predict otherwise, such as the odds of finding work, one argument shows promise: the search costs that accumulate over an expected long period of unemployment make a job more valuable during recessions. I estimate the elasticity of the value of a job to changes in labor productivity to be at least 0.67 and at most -0.04.
    Keywords: unemployed;search intensity;value of a job;business cycle
    JEL: E24 E32 J22 J64
    Date: 2018–08
  26. By: Björn Richter; Moritz Schularick; Ilhyock Shim
    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.
    JEL: E58 G28
    Date: 2018–09
  27. By: Joshua Montes
    Abstract: As part of its responsibility for producing baseline projections of the economy and the federal budget, the Congressional Budget Office regularly produces estimates and projections of labor force participation rates. Those projections serve as a key input to CBO’s estimate of potential output and the agency’s macroeconomic forecasts and budget projections. This paper describes the methodology used to produce CBO’s projections of labor force participation rates. The paper further examines the factors behind the recent trend decline in the overall and
    JEL: E17 E24 E27 J21 J22
    Date: 2018–03–16
  28. By: Zhou, Siwen
    Abstract: This paper analyses the signaling effect of the European Central Bank’s (ECB) statements related to its asset purchase programme (APP) on market expectations for the future path of short-term interest rates in the euro area. Considering a broad set of event days and daily changes in euro area stock indices as surprise reactions to the statements, an event-study analysis is employed to capture the changes in country-specific short-term interest rate expectations, as extracted from an effective lower bound (ELB) consistent shadow-rate term structure model. The empirical results generally support the presence of signaling effects in the euro area, but the estimated effectiveness of the channel has a considerable degree of uncertainty. Regarding country-specific differences, the reaction of interest rate expectations in the periphery countries tends to be stronger for dovish APP statement surprises, and thus these countries may benefit more from the signaling channel. Lastly, the responses of interest rate expectations to APP statement surprises are found to vary considerably depending on the identification strategy of the APP statements, which ultimately shows that these conclusions based on the empirical results are likely to be fragile.
    Keywords: Quantitative Easing, Asset Purchase Programme, European Central Bank, Shadow-Rate Term Structure Model, Signaling Channel
    JEL: C54 E43 E52 G15
    Date: 2018
  29. By: Jackson, Emerson Abraham; Tamuke, Edmund
    Abstract: This article made use of ARIMAX methodology in producing probability forecast from Fan Chart analysis for the Sierra Leone economy. In view of the estimation technique used to determine best model choice for outputting the Fan Chart, the outcomes have shown the importance of Exchange Rate variable as an exogenous component in influencing Inflation dynamics in Sierra Leone. The use of Brier Score probability was also used to ascertain the accuracy of the forecast methodology. Despite inflation outcome is showing an upward trend for the forecasted periods, the probability bands (upper and lower) have also revealed the peculiarity of the Sierra Leone economy when it comes to addressing policy measures for controlling spiralling inflation dynamics.
    Keywords: Inflation Forecast; ARIMAX; Fan Chart; Brier Score; Sierra Leone
    JEL: C32 C51 E27 E31 E37
    Date: 2018–08–31
  30. By: Pavlos Balamatsias
    Abstract: We build a New Keynesian model with imperfectly competitive goods markets and heterogeneous people and examine their impact on fiscal multipliers and on the net increase in output and expenditure caused by fiscal policies, using the balanced budget multiplier. Results show that in highly unequal economies the maximum net increase in output and expenditure comes when governments increase expenditure and tax high-income workers because the adverse effects on the economy are smaller. However, when inequality decreases and enough people belong to the high-income group governments should fund expenditure by taxing low-income people. Finally, inequality also affects the welfare effects of fiscal policies.
    Keywords: Income inequality,Fiscal multiplier,Public Expenditure,Taxation
    JEL: D63 E12 E62
    Date: 2017
  31. By: Tony Chernis; Rodrigo Sekkel
    Abstract: This paper studies short-term forecasting of Canadian real GDP and its expenditure components using combinations of nowcasts from different models. Starting with a medium-sized data set, we use a suite of common nowcasting tools for quarterly real GDP and its expenditure components. Using a two-step combination procedure, the nowcasts are first combined within model classes and then merged into a single point forecast using simple performance-based weighting methods. We find that no single model clearly dominates over all forecast horizons, subsamples and target variables. This highlights that when operating in an uncertain environment, where the choice of model is not clear, combining forecasts is a prudent strategy.
    Keywords: Econometric and statistical methods
    JEL: C53 E52 E37
    Date: 2018
  32. By: Yongsung Chang; Sun-Bin Kim; Kyooho Kwon; Richard Rogerson
    Abstract: We study business cycle fluctuations in heterogeneous-agent general equilibrium models that feature both intensive and extensive margins of labor supply. A nonconvexity in the mapping between time devoted to work and labor services combined with idiosyncratic shocks generates operative extensive and intensive margins. We consider calibrated versions of this model that differ in the value of a key preference parameter for labor supply and the extent of heterogeneity. The model is able to capture the salient features of the empirical distribution of hours worked, including how individuals transit within this distribution. We then study how the various specifications influence labor supply responses to aggregate technology shocks. We ask to what extent our predictions for business cycle fluctuations are affected by abstracting from the intensive margin and instead assuming that adjustment occurs only along the extensive margin. We find that abstracting from intensive margin adjustment can have large effects on the volatility of aggregate hours even if fluctuations along the intensive margin are small.
    JEL: E24 E32
    Date: 2018–09
  33. By: Estrada, Fernando; Trujillo, Marlyn Tatiana; Pardo, Diego
    Abstract: Due to the supported economic growth of the first decade of the 21st century, Colombia managed to reduce the levels of poverty and inequality. Nevertheless, the country continued to present one of the most inequitable economies in the world maintaining a high income concentration. In that sense, this paper aims at analyzing the fiscal policy incident in the income distribution. To that effect, the redistributive impact of the fiscal action in Colombia, Latin America and the group of country members of the Organization for Economic Co-operation and Development (OECD) were examined. Besides, a historical follow-up of the income and public expenditures behavior in Colombia was carried out from 1990 until 2015, highlighting two fundamental facts: 1) from the constitutional reform of 1991, the social public expenditure presented a remarkable growth as a response to the fiscal commitments acquired by the state and 2) the Income Tax and the Value-Added tax (VAT) have been the props on which the national tax structure has been supported. With these elements and the information supplied by the National Survey of Income and Home Expenses, there was approached the study of the distributive incident in Colombia, estimating Gini’s indicators, the income concentration, Kakwani and Reynolds-Smolensky. The results of the present investigation allow to conclude that though the Income Tax to natural people, the Value-Added Tax (VAT) and the public expenditure show a progressive behavior, their redistributive capacity is limited; that is why the Gini’s coefficient don’t present significant variations after the fiscal action.
    Keywords: Income Distribution, Taxes, Public Social Spending, Fiscal Policy, Inequality, Income Concentration, Progressivity, Redistribution.
    JEL: B22 B25 E60 E62 E63 E64 E65
    Date: 2018
  34. By: Panagiotis Barkas; Mauro Pisu
    Abstract: Aggregate investment has declined markedly over the crisis and has yet to recover. Reviving domestic and foreign investment is crucial to supporting the economic recovery, deepen Greece’s integration into global value chains and raising living standards. This will hinge primarily on improving the business environment, by lifting barriers to product market competition and enhancing the quality of regulation. Other key policies involve fully implementing the recent insolvency reforms, building an innovation system, overcoming problems in the banking sector and enhancing the quality of public investment through a long-term strategy. This Working Paper relates to the 2018 OECD Economic Survey of Greece. ( c-survey-greece.htm).
    Keywords: bank lending, competition, credit, financial markets, foreign direct investment, innovation, insolvency, intangible capital, Investment, public investment, tax credits
    JEL: E21 E22 G21 G23 G24 G28 G38 H20 H43 H54 O16
    Date: 2018–09–17
  35. By: Lise Clain-Chamosset-Yvrard (Univ. Lyon, Université Lumière Lyon 2, GATE UMR 5824); Thomas Seegmuller (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE)
    Abstract: In this paper, we are interested in the interplay between real estate bubble, aggregate capital accumulation and taxation in an overlapping generations economy with altruistic households. We consider a three-period overlapping generations model with three key elements: altruism, portfolio choice, and financial market imperfections. Households realise different investment decisions in terms of asset at different periods of life, face a binding borrowing constraint and leave bequests to their children. We show that altruism plays a key role on the existence of a productive real estate bubble, i.e. a bubble in real estate raising physical capital stock and aggregate output. The key mechanism relies on the fact that a real estate bubble raises income of retired households. Because of higher bequests, there children are able to invest more in productive capital. Introducing fiscal policy, we show that raising real estate taxation dampens capital accumulation.
    Keywords: bubble, altruism, real estate, credit, overlapping generations
    JEL: E22 E44 G11
    Date: 2018–09
  36. By: Petrosky-Nadeau, Nicolas (Federal Reserve Bank of San Francisco); Wasmer, Etienne (NYU Abu Dhabi); Weil, Philippe (ULB and CEPR)
    Abstract: This paper studies the optimal sharing of value added between consumers, producers, and labor. We first define a constrained optimum. We then compare it with the decentralized allocation. They coincide when the price maximizes the expected marginal revenue of the firm in the goods market, an outcome of the competitive search equilibrium, and when the wage exactly offsets the congestion externality of firm entry in the labor market, which is the traditional Hosios condition. Under price and wage bargaining, this allocation is achieved under a double Hosios condition combining the logic of competitive search and Hosios efficiency. The consumer receives a share of the goodsmarket trading surplus equal to the amount of externality occasioned by its search activity and the worker receives a share of the labor match surplus to offset the externality of firm entry in the matching process. A calibration of the model to the US economy indicates that the labor market is near efficient, and free-entry of consumers leads to excess excess consumer market power in setting prices. Restoring efficiency leads to a modest change in welfare.
    JEL: E24 E32 J63 J64
    Date: 2018–09–27
  37. By: Martin Berka; Daan Steenkamp
    Abstract: We study the validity of an augmented Balassa-Samuelson theory in a panel of real exchange rate levels across 17 OECD countries between 1970 and 2012 using a unique panel of levels of total factor productivity (TFP) across sectors. We find that real exchange rates can be explained by relative sectoral TFP levels both across countries and over time in the direction predicted by Balassa-Samuelson hypothesis. We also show that drivers of labour wedges such as structural labour market differences are important in explaining real exchange rate levels. Nevertheless, large average conditional deviations in real exchange rate levels remain across countries in our sample.
    Keywords: Balassa-Samuelson;Real Exchange Rates;OECD;Total Factor Productivity;Labour Wedge;Unit Labour Cost
    JEL: E12 E23 E24 F31 F33 F41 F43
    Date: 2018–09
  38. By: Christoph Görtz (University of Birmingham); Christopher Gunn (Department of Economics, Carleton University); Thomas Lubik (Federal Reserve Bank of Richmond)
    Abstract: Inventories are an important, highly volatile and forward looking component of the business cycle, yet they have been largely neglected by the literature on TFP news shocks that argues such shocks are important drivers of macroeconomic fluctuations. We use a standard VAR identification to document a new fact: in response to TFP news, inventories move procyclically along with the other major macroeconomic aggregates. Our finding is not self-evident: conventional views would suggest news about higher future productivity provides incentives to run the current inventory stock down and increase stockholding in the future when productivity is high. We provide evidence that this substitution effect is dominated by a demand effect due to which firms increase inventories in response to sales in light of rising consumption and investment. Our empirical fact corroborates the view that TFP news shocks are important drivers of macroeconomic fluctuations. However, it imposes a challenge to existing theoretical frameworks as they fail to reproduce the procyclical inventory movements in response to TFP news shocks. We suggest this comovement puzzle can be solved through extending a standard framework with intangible capital and wage stickiness.
    Keywords: News shocks, Business cycles, Inventories.
    JEL: E2 E3
    Date: 2018–06–12
  39. By: Cobb, Marcus P A
    Abstract: Abstract In some situations forecasts for a number of sub-aggregations are required for analysis in addition to the aggregate itself. In this context, practitioners typically rely on bottom-up methods to produce a set of consistent forecasts in order to avoid conflicting messages. However, using this approach exclusively can mean that forecasting accuracy is negatively affected when compared to using other methods. This paper presents a method for increasing overall accuracy by jointly combining the forecasts for an aggregate, any sub-aggregations, and the components from any number of models and measurement approaches. The framework seeks to benefit from the strengths of each of the forecasting approaches by accounting for their reliability in the combination process and exploiting the constraints that the aggregation structure imposes on the set of forecasts as a whole. The results from the empirical application suggest that the method is successful in allowing the strengths of the better-performing approaches to contribute to increasing the performance of the rest.
    Keywords: Bottom-up forecasting; Forecast combination; Hierarchical forecasting; Reconciling forecasts
    JEL: C53 E27 E37
    Date: 2018–08
  40. By: Kaas, Leo (Goethe University Frankfurt); Kimasa, Bihemo (University of Konstanz)
    Abstract: This paper analyzes the joint dynamics of prices, output and employment across firms. We develop a dynamic equilibrium model of heterogeneous firms who compete for workers and customers in frictional labor and product markets. Idiosyncratic productivity and demand shocks have distinct implications for the firms' output and price adjustments. Using panel data on prices and output for German manufacturing firms, we calibrate the model to evaluate the quantitative contributions of productivity and demand for the labor market and the dispersions of prices and labor productivity. We further analyze the impact of shocks to the first and second moments of idiosyncratic risk on macroeconomic outcomes. An increase in demand uncertainty induces sizable declines in output and employment together with rising cross-sectional dispersion of price and output growth which are typical features of recessions in our data.
    Keywords: firm dynamics, prices, demand, employment, uncertainty shocks
    JEL: D21 E24 L11
    Date: 2018–08
  41. By: Xing, Victor
    Abstract: Policy debates within the BOJ has shifted toward making the QE programs more sustainable, for policymakers acknowledged it may take longer than expected to reach policy objective as rising costs become “hard to ignore;" possible policy changes may include tweaking the yield-curve control program to allow for a more natural rise in long-term interest rates to ease pressure on banks, and to shift ETF buying toward stocks linked to the Topix index. The policy considerations highlighted growing concerns over unconventional programs’ side effects on both the real economy as well as market disruptions, for the BOJ has become the top shareholder for some big corporations. Despite policymakers’ hesitance to connect social impacts to low interest rates, research by the BIS noted higher saving by indebted Japanese households to meet end-of-life objectives, as income overcomes substitution effects. While concerned about policy sustainability, the BOJ will likely look to prevent an uncontrolled rise in bond yields, but the on-going debates highlighted that QE is not costless, and BOJ officials are forced to re-examine policy path.
    Keywords: Bank of Japan, Yield Curve Control, Quantitative Easing, Policy Costs, ETF purchases
    JEL: E1 E4 E5 G1
    Date: 2018–07–29
  42. By: García-Verdú Santiago; Ramos Francia Manuel; Sánchez-Martínez Manuel
    Abstract: Information extracted from financial derivatives on interest rates is commonly used to forecast movements in such rates. Yet, such an extraction generally assumes that agents are risk-neutral. Thus, it might be useful to account for their risk-aversion when doing forecasts. This can be done adding a risk-correction. In this context, we use TIIE-28 swaps to forecast changes in monetary policy in Mexico, using financial variables to account for the risk-correction. We assess whether models with a risk-correction outperform the TIIE-28 swaps rates. Their in-sample explained variability improves when using a risk-correction. Our main model’s out-of-sample forecasts are similar for short horizons (3-month), and statistically better for longer horizons (9 to 24-month), compared to the direct use of TIIE-28 swaps interest rates.
    Keywords: TIIE-28;Swaps;Interest Rates;Expected Monetary Policy
    JEL: E52 G12
    Date: 2018–08
  43. By: Robert Shackleton
    Abstract: As part of its responsibility for producing baseline projections of the economy and the federal budget, CBO regularly produces estimates and projections of potential output, a measure of the economy’s fundamental ability to supply goods and services. The projection of potential output serves as a key input to CBO’s macroeconomic forecasts and budget projections, helping the agency maintain consistency between its projections of labor supply and capital accumulation and its projections of taxes on income from labor and capital, of federal expenditures, and of the
    JEL: E17 E27
    Date: 2018–02–15
  44. By: Dorian Carloni
    Abstract: Foreign currency depreciation against the U.S. dollar would affect the wealth holdings of U.S. residents in several ways. Specifically, I analyze the effects of a one-time large depreciation of 20 percent. If foreign currencies depreciated by 20 percent against the U.S. dollar, the value of U.S. holdings of foreign assets would decrease by an estimated $2,451 billion and the value of U.S. liabilities to foreigners by $168 billion (values are based on 2015 holdings and values). On net, the total worth of U.S. households would decrease by $2.3 trillion—a drop of 2.2 percent.
    JEL: D31 E21 F30 F31
    Date: 2018–06–11
  45. By: Tim Bulman; Mauro Pisu
    Abstract: Employment is pivotal to strengthening Greece’s economic recovery, increasing social welfare and redressing poverty. Jobs are returning, making inroads into high unemployment, but their wages and skill levels are lower than many that were lost during the crisis. Greece’s hiring is benefiting from more flexible arrangements. Legislative amendments can maintain this flexibility, ensure wages align with productivity and better protect individuals from labour market risks. Ensuring that workers possess skills that match employers’ needs will sustain employment and productivity growth. Improving the education system is a long-term mission and involves raising its pedagogical strength and orientation towards professional needs. A social welfare system dominated by pensions has not been able to prevent a steep hike in poverty among children and the young, risking long-term harm to well-being. Pursuing recent steps towards a better targeted social protection, accompanied by support programmes for jobseekers, will provide a reliable safety net and reduce poverty. This Working Paper relates to the 2018 OECD Economic Survey of Greece. ( c-survey-greece.htm).
    Keywords: Childcare, compensation and labour costs, consumption, demand and supply of labour, education, employment, government expenditures and welfare programs, labour markets, poverty, simulation modelling, social security, unemployment, wages, welfare programmes, well-being
    JEL: C63 E21 E24 H52 H53 H55 I2 I3 J13 J2 J3 J63 J68
    Date: 2018–09–17
  46. By: Mark Setterfield; Yun K. Kim
    Abstract: We model US household debt accumulation during the neoliberal boom as a response to emulation effects and the decline of the social wage, which has “privatized" an increasing share of the costs of providing for services such as health and education. The debt dynamics of the US economy are then studied under alternative assumptions about the configuration of distributional variables, which is shown to differ across varieties of capitalism that have “neoliberalized" to different degrees. A key result is that distributional change alone will not make US neoliberal capitalism financially sustainable due, in part, to the paradoxical nature of inequality as a spur to household borrowing, and hence a source of both demand-formation and financial fragility. Achieving sustainability requires, instead, more wide-ranging reform.
    Keywords: Varieties of capitalism, neoliberalism, inequality, growth, financial fragility, financial sustainability
    JEL: E12 E44 O41
    Date: 2018–08
  47. By: Congressional Budget Office
    Abstract: The federal government provides grants to state and local governments for their transportation infrastructure. State and local governments use some of those funds to replace funds that they would have provided for such investment.
    JEL: E22 E62 H54 H72 H76 H77
    Date: 2018–08–24
  48. By: Hyeongwoo Kim; Ying Lin
    Abstract: A group of researchers has asserted that the rate of exchange rate pass-through (ERPT) to domestic prices has declined substantially over the last few decades. We revisit this claim of a downward trend in the rate of ERPT to the Consumer Price Index (CPI) by employing the vector autoregressive (VAR) model for the U.S. macroeconomic data under the current floating exchange rate regime. Our VAR approach that nests the conventional single equation method reveals very weak evidence of ERPT during the pre-1990 era. On the other hand, we observe statistically significant evidence of ERPT during the post-1990 era, which sharply contrasts with previous findings. After statistically confirming a structural break in ERPT to the total CPI via Hansen's (2001) test procedure, we seek the source of the structural break using the disaggregate level CPIs, which pinned down a key role of energy prices in explaining the emergence of the break. The dependency of the U.S. energy consumption on imports has increased since the 1990s. This change magnifies the effects of the exchange rate shock on domestic energy prices, resulting in greater responses of the total CPI via this energy price channel.
    Keywords: Exchange Rate Pass Through; Disaggregated CPI; Structural Break; Oil Price Shock
    JEL: E31 F31 F41
    Date: 2018–09
  49. By: Óscar Arce (Banco de España); Miguel García-Posada (Banco de España); Sergio Mayordomo (Banco de España); Steven Ongena (University of Zurich, SFI, KU LEUVEN and CEPR)
    Abstract: What is the impact of negative interest rates on bank lending and risk-taking? To answer this question we study the changes in lending policies using both the Euro area Bank Lending Survey and the Spanish Credit Register. Banks whose net interest income is adversely affected by negative rates are concurrently lowly capitalized, take less risk and adjust loan terms and conditions to shore up their risk weighted assets and capital ratios. These banks also increase non-interest charges more. But, importantly, we find no differences in banks’ credit supply or standard setting, neither in the Euro area nor in Spain. These findings suggest that negative rates do not necessarily contract the supply of credit and that the so-called “reversal rate” may not have been reached yet.
    Keywords: negative interest rates, risk taking, lending policies
    JEL: G21 E52 E58
    Date: 2018–09
  50. By: Alexander Bick; Bettina Brüggemann; Nicola Fuchs-Schündeln; Hannah Paule-Paludkiewicz
    Abstract: We document the time-series of employment rates and hours worked per employed by married couples in the US and seven European countries (Belgium, France, Germany, Italy, the Netherlands, Portugal, and the UK) from the early 1980s through 2016. Relying on a model of joint household labor supply decisions, we quantitatively analyze the role of non-linear labor income taxes for explaining the evolution of hours worked of married couples over time, using as inputs the full country- and year-specific statutory labor income tax codes. We further evaluate the role of consumption taxes, gender and educational wage premia, and the educational composition. The model is quite successful in replicating the time series behavior of hours worked per employed married woman, with labor income taxes being the key driving force. It does however capture only part of the secular increase in married women’s employment rates in the 1980s and early 1990s, suggesting an important role for factors not considered in this paper. We will make the non-linear tax codes used as an input into the analysis available as a user-friendly and easily integrable set of Matlab codes.
    JEL: E24 H24 J22
    Date: 2018–09
  51. By: Lawrence Christiano; Yuta Takahashi
    Abstract: We consider a model in which monetary policy is governed by a Taylor rule. The model has a unique equilibrium near the steady state, but also has other equilibria. The introduction of a particular escape clause into monetary policy works like the Taylor principle to exclude the other equilibria. We reconcile our finding about the escape clause with the sharply different conclusion reached in Cochrane (2011). Atkeson et al. (2010) study a different version of the escape clause policy, but that version is fragile in that it lacks a crucial robustness property.
    JEL: E5
    Date: 2018–08
  52. By: Penson, Enrique
    Abstract: This study estimates the multiplier effect of public consumption in the Dominican Republic via an analytic methodology that works with input-output tables using data on the years 2007-2012. This study finds that the public sector has an employment multiplier of 1.5, which means that for every 10 jobs that are created within the public sector because of public consumption, 5 jobs are created within the private sector. Also, the study finds that around 20\% of imports are directly and indirectly caused by the effect of public consumption. The proportion of GDP explained by public consumption is also estimated around 20\%. However, when one takes into account (and discounts) the effect that the money directed to public spending would've had if it had been spent by the private sector on consumption and investment, the impact is reduced by at least a quarter.
    Keywords: Dominican Republic; Public Consumption; Input-Output Models; Multiplier Effect
    JEL: C67 D57 E62
    Date: 2017–12–11
  53. By: Dana Galizia (Department of Economics, Carleton University)
    Abstract: Unlike their linear counterparts, non-linear models of the business cycle can generate sustained economic fluctuations even in the absence of shocks (e.g., via limit cycles or chaos). A popular approach to solving non-linear models is the use of perturbation methods. I show that, as typically implemented, these methods are generally incapable of finding solutions that feature limit cycles or chaos, a fact that does not appear to be recognized in the existing literature. Standard algorithms only seek solutions that feature converge to the steady state, which is stronger than the standard definitional requirement that a solution simply cannot explode. Because of this, in estimation exercises any parameterization that involves limit cycles would typically (and incorrectly) be discarded. I propose a modification to standard algorithms that does not impose the overly strong requirement that solutions involve convergence.
    Keywords: Dynamic equilibrium economies; Computational methods; Non-linear solution methods; Limit cycles; Chaos;
    JEL: C63 C68 E37
    Date: 2018–09–10
  54. By: Luisito Bertinelli; Olivier Cardi; Romain Restout
    Abstract: This paper develops a tractable version of a two-sector open economy model with search frictions to disentangle the implications of workers' mobility costs and labor market institutions following higher relative productivity of tradables. Using a panel of eighteen OECD countries, our estimates show that higher productivity in tradables relative to non tradables causes a decline in non traded relative to traded wages. The fall in the relative wage reveals the presence of labor mobility costs which mitigate the appreciation in the relative price of non tradables and lower the relative unemployment rate of tradables following higher relative productivity of tradables. Whilst our evidence suggests that such responses have increased over time as the result of decreasing labor mobility costs, our estimates also reveal that the magnitude of the effects vary considerably across countries. Using a set of indicators capturing the heterogeneity of labor market frictions across economies, we find that both the relative wage and the relative unemployment rate of tradables decline significantly more and the relative price appreciates less in countries where labor market regulation is more pronounced. We show that these empirical findings can be rationalized in a two-sector open economy model with search in the labor market as long as we allow for an endogenous sectoral labor force participation decision. When we calibrate the model to country-specific data, numerical results reveal that the responses of the relative wage, the relative price, and to a lesser extent the relative unemployment rate display a wide dispersion across countries. Importantly, all variables display a significant negative relationship with labor market regulation.
    Keywords: Relative productivity of tradables, Search theory, Labor market institutions, Labor mobility, Sectoral price and wage differences, Sectoral unemployment, Current account
    JEL: E24 F16 F32 F41 J64
    Date: 2018
  55. By: Luisito Bertinelli (University of Luxembourg CREA); Olivier Cardi (Université de Paris CRED); Romain Restout (Université de Lorraine BETA)
    Abstract: This paper develops a tractable version of a two-sector open economy model with search frictions to disentangle the implications of workers' mobility costs and labor market institutions following higher relative productivity of tradables. Using a panel of eighteen OECD countries, our estimates show that higher productivity in tradables relative to non tradables causes a decline in non traded relative to traded wages. The fall in the relative wage reveals the presence of labor mobility costs which mitigate the appreciation in the relative price of non tradables and lower the relative unemployment rate of tradables following higher relative productivity of tradables. Whilst our evidence suggests that such responses have increased over time as the result of decreasing labor mobility costs, our estimates also reveal that the magnitude of the effects vary considerably across countries. Using a set of indicators capturing the heterogeneity of labor market frictions across economies, we find that both the relative wage and the relative unemployment rate of tradables decline significantly more and the relative price appreciates less in countries where labor market regulation is more pronounced. We show that these empirical findings can be rationalized in a two-sector open economy model with search in the labor market as long as we allow for an endogenous sectoral labor force participation decision. When we calibrate the model to country-specific data, numerical results reveal that the responses of the relative wage, the relative price, and to a lesser extent the relative unemployment rate display a wide dispersion across countries. Importantly, all variables display a significant negative relationship with labor market regulation.
    Keywords: Relative productivity of tradables; Search theory; Labor market institutions; Labor mobility; Sectoral price and wage differences; Sectoral unemployment; Current account
    JEL: E24 F16 F32 F41 J64
  56. By: Cuadra Gabriel; Ramos Francia Manuel; García-Verdú Santiago
    Abstract: We develop a dynamic stochastic quantitative model of sovereign default featuring fiscal policy, endogenous financial aid and risk-averse foreign lenders, in order to explore the role of financial aid in a default episode. After calibrating the model, we feed output shocks into the model to show that it captures some of the most salient features of the fiscal and debt situation in Argentina during the 1998-2002 period. This underscores the economic nature of the decision to default and the role that official aid could have taken in avoiding such an event. In effect, given the economic challenges endured by Argentina, a full-fledged default took place. In addition, we discuss a number of policy implications associated with financial aid programs aimed at preventing sovereign default episodes.
    Keywords: Sovereign default;fiscal policy;financial aid
    JEL: E62 F34
    Date: 2018–08
  57. By: Gehrig, Thomas; Iannino, Maria Chiara
    Abstract: This paper analyses the evolution of the safety and soundness of the European banking sector during the various stages of the Basel process of capital regulation. In the first part we document the evolution of various measures of systemic risk as the Basel process unfolds. Most strikingly, we find that the exposure to systemic risk as measured by SRISK has been steeply rising for the highest quintile, moderately rising for the second quintile and remaining roughly stationary for the remaining three quintiles of listed European banks. This observation suggests that the Basel process has succeeded in containing systemic risk for the majority of European banks but not for the largest and most risky institutions. In the second part we analyze the drivers of systemic risk. We find compelling evidence that the increase in exposure to systemic risk (SRISK) is intimately tied to the implementation of internal models for determining credit risk as well as market risk. Based on this evidence, the sub-prime crisis found especially the largest and more systemic banks ill-prepared and lacking resiliency. This condition has even aggravated during the European sovereign crisis. Banking Union has not restored aggregate resiliency to pre-crises levels. Finally, low interest rates considerably a ect the contribution to systemic risk for the safer banks.
    JEL: B26 E58 G21 G28 H12 N24
    Date: 2018–09–27
  58. By: Haomin Wang
    Abstract: This paper studies the extent to which working couples can insure one another against cyclical fluctuations in the labor market and examines the implications of joint household decision-making for cyclical fluctuations in the unemployment rate. For this purpose, I provide a dynamic life-cycle model of households that make joint savings and job search decisions in the presence of aggregate shocks. I show that two key mechanisms are at play. The first is the added-worker effect, which leads to counter-cyclical search intensity because workers increase search intensity when their spouse becomes unemployed. The second is the comparative advantage effect, according to which couples’ job search efforts are coordinated based on the relative returns to search of each spouse. I estimate the model using data from the US Current Population Survey, and find that joint household decision-making contributes to the counter-cyclicality of women’s unemployment rate, but not for men. Moreover, joint household decision-making lowers the welfare costs of cyclicality.
    Keywords: Joint Decision-Making, Cyclical Fluctuations, Unemployment Rate, Search Intensity, Intra-Household Risk Sharing
    JEL: J64 E32 D10
    Date: 2018
  59. By: Cristina Jude
    Abstract: The aim of this paper is to empirically investigate the relationship between FDI and domestic investment in a sample of 10 Central and Eastern European countries over the period 1995-2015. We find FDI to lead to a creative destruction phenomenon, with a short-term crowding out effect on domestic investment, followed by a long-term crowding in. Greenfield FDI develops stronger long run complementarities with domestic investment, while mergers and acquisitions do not show a significant effect on domestic investment. Financial development seems to mitigate crowding out pressures and even foster a crowding in for mergers and acquisitions.
    Keywords: investment, FDI, crowding-out, economic transition, financial development.
    JEL: E22 F21 F43 O52
    Date: 2018
  60. By: John Knowles (Simon Fraser University); Guillaume Vandenbroucke (Federal Reserve Bank of St. Louis)
    Abstract: Prolonged disruptions of the matching process can distort the apparent effect of the singles sex-ratio on marriage-market prospects. Contrary to the usual matching model predictions, female marriage probabilities were 50% higher in France in the years after World War 1, despite a large drop in the sex ratio. We develop a model of marital matching in which composition effects in the singles pool affect post-disruption matching rates. When calibrated to French data from World War 1, this mechanism explains 2/3 of the post-war rise in female marriage probabilities as the result of better composition of the pool of single men. We conclude that endogeneity issues make the sex ratio a potentially unreliable indicator of female marriage prospects.
    Keywords: Family Economics, Household Formation, Marriage, Fertility
    JEL: D10 E13 J12 J13 O11
    Date: 2018–09
  61. By: Francesco Salsano (Birkbeck, University of London; Università di Milano)
    Abstract: The paper is an extension of the Gabillon and Martimort model (2004), which studies how the independence of the institution in charge of monetary policy may stabilize inflationary fluctuations due to political uncertainty when the economy is characterized by lobbies that seek to promote their own interests to the detriment of the general interests of society.
    Keywords: Monetary Policy, Central Bank, Partisan politics
    JEL: E58 L51
    Date: 2018–07
  62. By: Davide Romelli (Trinity College Dublin)
    Abstract: What accounts for the worldwide changes in central bank design over the past four decades? Using a new dataset on central bank institutional design, this paper investigates the timing, pace and magnitude of reforms in a sample of 154 countries over the period 1972-2017. I construct a new dynamic index of central bank independence and show that initial reforms that increase the level of independence, as well as a regional convergence, represent important drivers of changes in central bank design. Similarly, an external pressure to reform, such as an IMF loan program, also increases the likelihood of reforms, while political factors or crises episodes have little impact. These results are robust to controlling for the direction and size of reforms, alternative indices of central bank independence and estimation strategies.
    Keywords: central banks, central bank independence, central bank governance, legislative reforms.
    JEL: E58 G28 N20 P16
    Date: 2018–09
  63. By: Valentin Zelenyuk (CEPA - School of Economics, The University of Queensland); Hideyuki Mizobuchi (Faculty of Economics, Ryukoku University)
    Abstract: In this paper, we propose the quadratic-mean-of-order-𠑟 indexes of output, input and productivity and show that all index number formulae belonging to this family are superlative indexes. In turn, this helps by deriving a generalization of the well-known Diewert’s theorem about equivalence of Fisher and Malmquist indexes. Our results also give new justifications for output and input comparison and productivity measurement via other interesting indexes such as the implicit Walsh index.
    Keywords: index numbers, superlative index, quadratic-mean-of-order-ð ‘Ÿ index, Fisher index, Malmquist index, implicit Walsh index, time reversal test
    JEL: C14 D24 E31 O47
    Date: 2018–09
  64. By: Lin Shao
    Abstract: This paper studies the effects of financial development, taking into account both formal and informal financing. Using cross-country firm-level data, we document that informal financing is utilized more by rich countries than poor countries. To account for this empirical pattern, we build a model in which the supply of informal financing increases with financial development, while the demand for informal financing declines with it. The model generates a hump-shaped relationship between the incidence of informal financing and GDP per capita. Our analysis shows that, at the early stage of economic development, the output loss from financial frictions is reinforced by the low supply of informal financing. Informal financing contributes more to the aggregate output of the richest countries than to that of the poorer countries in our sample.
    Keywords: Financial markets, Firm dynamics, Productivity
    JEL: E44 O17 O47
    Date: 2018
  65. By: Bielecki, Marcin; Stähler, Nikolai
    Abstract: We use a New Keynesian DSGE model with search frictions on the housing market to evaluate how financing a labor tax reduction by higher property taxation affects the real economy and welfare. Search on the housing market enables us to explicitly model stocks and flows, which is necessary to differentiate between recurrent property taxes (levied on stocks) and property transaction taxes (levied to flows). We find that using recurrent property taxation as financing instrument outperforms other instruments although all policy measures increase aggregate economy-wide welfare. Our simulations suggest that using property transaction taxation as financing instrument is the least favorable measure.
    Keywords: Search Frictions in Housing Markets,Property Taxation,Tax Reform,General Equilibrium
    JEL: E51 E6 R31 K34
    Date: 2018
  66. By: Bakari, Sayef
    Abstract: The aim of this article is to study empirically the nexus between tax revenue, domestic investment and economic growth in France, since it's never been done before. In addition, there were many problems and repercussions that criticized France's tax policy and its danger to the economic structure, which encourages us to do this research. To attempt this objective, annual data for the period 1972 - 2016 was tested by using correlation analysis and estimation based on vector error correction model. Our results suggest that in the long run there is a negative relationship between tax revenue, domestic investment and economic growth. It is seen that the strategy tax policy of France is not safe for domestic investment and economic growth. For this reason, immediate intervention should be encouraged to carry out the necessary measures before the situation becomes more disastrous.
    Keywords: Tax revenue, Domestic investment, Economic Growth, France
    JEL: E62 H21 O47 O52
    Date: 2018–07
  67. By: Siami-Namini, Sima; Hudson, Darren; Trindade, A. Alexandre; Lyford, Conrad
    Abstract: One way to analyze the impact of commodity price shocks on monetary policy is to think about short-term interest rates set by Fed according to the Taylor rule. Taylor (1993) suggested a policy reaction function for moderating short-term interest rates to achieve the two-fold goals of stabilizing economic growth in the short-term and inflation in the long-term. One important question is why monetary policy makers focus on core inflation instead of headline inflation. Therefore, the main goal of this research article is to study the pattern of monetary policy responses to commodity price shocks derived from an impulse response function (IRF). To do this, we first estimate two individual Taylor rules based on core and headline consumer price index (CPI) inflation by using real-time data of the US economy for the Greenspan years from 1987 to 2006 and predict the residuals. Then, we estimate two regressions for core and headline CPI inflation as our two individual dependent variables against some independent variables including commodity price shocks, and the Taylor rule residuals. At the end, we predict the monetary policy responses to commodity price shocks by using IRF analysis in multivariate systems of a vector autoregression (VAR) model.
    Keywords: Agricultural Finance, Consumer/Household Economics, Financial Economics, Research Methods/ Statistical Methods
    Date: 2018–01–17
  68. By: Elstner, Steffen; Feld, Lars P.; Schmidt, Christoph M.
    Abstract: Despite massive digitization efforts, the German economy has experienced a marked slowdown in its productivity growth. This paper analyzes the reasons behind this disconcerting development. A major factor is the turnaround of the labor market that commenced around 2005. The successful integration of five million predominantly low-productivity workers into the labor market induced an attenuating effect on productivity growth. This does not explain the slowdown entirely, however. As a potentially important countervailing force, technological advances associated with digitization would have had the potential to lift productivity growth more strongly, but they frequently translated into employment growth instead.
    Keywords: labor productivity,labor markets,technology shocks,digitalization,structural VARs
    JEL: O40 E24 C32
    Date: 2018
  69. By: Olivier Coibion; Yuriy Gorodnichenko; Saten Kumar; Jane Ryngaert
    Abstract: We implement a new survey of firms, focusing on their higher-order macroeconomic expectations. The survey provides a novel set of stylized facts regarding the relationship between first-order and higher-order expectations of economic agents, including how they adjust their beliefs in response to a variety of information treatments and how these adjustments affect their economic decisions. We show how these facts can be used to calibrate key parameters of noisy-information models with infinite regress as well as to test predictions made by this class of models. The survey also quantifies cognitive limits of agents in the form of level-k thinking. We find little evidence that this departure from infinite regress helps reconcile the data and theory.
    JEL: C83 D84 E31
    Date: 2018–09
  70. By: Nymoen, Ragnar (Dept. of Economics, University of Oslo); Pedersen, Kari (The Financial Supervisory Authority of Norway); Sjåberg, Jon Ivar (The Financial Supervisory Authority of Norway)
    Abstract: We analyse a quarterly panel data set consisting of ten advanced open economies that have introduced macroprudential policy measures: caps on loan to value and income (LTV and LTI), and debt service to income (DSTI) requirements in particular, but also risk weights (RW), amortization (Amort) and, less used, countercyclical buffer (CCyB). Estimation of dynamic panel data models, that also include the central bank rate, and controls for common nominal and real trends, gives support to the view that several of the measures may have reduced credit growth when they were introduced.The estimated impact effects are most significant for LTV, LTI and RW. For Amort, the long-run effect on credit growth is significant, and the same is found for RW. The estimation results when house price growth is the dependent variable are in the main consistent with the results for credit growth. The results do not support that CCyB has reduced lending (as a consequence of higher financing costs), and we suggest that the variable is mainly a control in our data set. In that interpretation, it is interesting that the estimated coefficients of the other five instruments are robust with respect to exclusion of CCyB from the empirical models. The results are also robust to controls in the form of impulse indicator saturation (IIS).
    Keywords: Macroprudential policy measures; house prices; credit growth; open economics; macro panel; impulse indicator saturation; robust estimation
    JEL: C23 C44 C58 G28 G38
    Date: 2018–09–14
  71. By: Roman Lysenko (National Bank of Ukraine); Nataliia Kolesnichenko (National Bank of Ukraine)
    Abstract: This paper focuses on the predictive capability of business outlook survey findings in forecasting changes in Ukraine’s real GDP, and in its consumption and investment components. Survey findings have been generalized through the use of principal component analysis. The business outlook index compiled by the National Bank of Ukraine is used as an alternative measure. To forecast GDP and its components, we employ ARDL and VAR models, which factor in the estimated principal components, the business outlook index, and the business outlook survey findings for construction investment over the next 12 months. In estimating the predictive capability of the models, we use pseudo-out-of-sample forecasting. A comparison with actual data shows that annual GDP and consumption growth are best forecast in the current period by applying business outlook survey findings that have been generalized using a principal component analysis, and the first difference of the business outlook index.
    Keywords: business expectations, GDP, short-term forecasting
    JEL: E27 E58
    Date: 2018–06
  72. By: Callum Jones (International Monetary Fund)
    Abstract: During the Great Recession, employment declined more in regions where household debt declined more. We study a model where liquidity constraints amplify the response of consumption and employment to changes in debt. We estimate the model using Bayesian likelihood methods on state-level and aggregate data. Credit shocks account well for the differential rise and fall of employment across individual states. Credit shocks explain a smaller fraction of the initial drop in aggregate employment but the tightening of household credit greatly contributes to the slow recovery in the aftermath of recession.
    Date: 2018
  73. By: Pham, Ngoc-Sang
    Abstract: We introduce two-period general equilibrium models with heterogeneous producers and financial frictions. Any agent can borrow to realize their productive project but the debt repayment does not exceed a fraction (so-called credit limit) of the project's value. Our framework allows us to investigate the aggregate and distributional effects of credit limits and heterogeneity of agents. The connection between credit limits, welfare, and efficiency is also explored.
    Keywords: General equilibrium, credit limits, heterogeneity, distributional effects, welfare, efficiency, wealth distribution.
    JEL: D3 D5 D6 E44 G1
    Date: 2018–08–29
  74. By: Eran Hoffmann (Stanford University)
    Abstract: This paper proposes a new theory of business cycles based on the idea that financial uncertainty shocks change the nature of innovation. When investors become more risk tolerant, they fund riskier startups with greater growth potential. As these ambitious startups grow, the initial shock propagates and generates a boom in output and employment. I develop a heterogeneous firm industry model of the US business sector with countercyclical risk premia and innovation by startups and existing firms. The quantitative implementation of the model jointly matches time series properties of stock returns and macroeconomic aggregates, as well as micro evidence on firm cohort growth over the cycle.
    Date: 2018
  75. By: Marcus Ingholt (University of Copenhagen)
    Abstract: I document that the elasticity of mortgage loan origination with respect to house prices is highly dependent on the change in personal incomes and vice versa, using U.S. county-level panel data. I rationalize this in a model with two occasionally binding borrowing constraints: a loan-to-value (LTV) constraint and a debt-service-to-income (DTI) constraint. A Bayesian estimation of the model infers when the LTV and DTI constraints have been binding during 1975-2017, and which shocks that caused them to bind. A macroprudential experiment shows that countercyclical LTV limits cannot dampen mortgage debt growth in expansions, but DTI limits can.
    Date: 2018
  76. By: Waldo Mendoza Bellido (Departamento de Economía de la Pontificia Universidad Católica del Perú); Erika Collantes Goicochea (Departamento de Economía de la Pontificia Universidad Católica del Perú)
    Abstract: Peru is an economy where about 60 percent of exports are mineral, of which copper, in turn, represents half. What is the weight of international factors and domestic factors in determining private investment in this mining export economy? In this paper, we identify the dominant influence of international conditions on the evolution of private investment in Peru, as well as the enormous individual weight of the price of exports in this evolution. In the period 1997-2017, external factors explained 54, 64 and 44 percent of the variance in the growth rate of total private investment, mining investment, and non-mining investment, respectively; while more than half of the weight of external factors was explained by the price of exports. On the other hand, internal factors explained 46, 36 and 56 percent of the variance in the growth rate of total private investment, mining investment. and non-mining investment; while about 40 percent of the weight of domestic factors was explained by public investment. These findings are important because they show the price of exports to be the main channel connecting private investment in Peru with the world economy, and public investment as the most effective policy variable affecting it. JEL Classification-JEL: C32 , E22 , E32 , H54 , L72 , L74
    Keywords: Decomposition of Variance, Historical Decomposition, Fluctuaciones, Impulse-response, Private Mining Investment, non-mining private investment, Total private investment, Public investment , Export price
    Date: 2018
  77. By: Ronald Schettkat
    Abstract: After the publication of Keynes’ “General Theory,” economics was frequently described as schizophrenia: (neo-) classical at the micro-level, but Keynesian at the macro-level. In actuality, Keynes’ revolution was, to a substantial part, based on the behavioral micro-foundations of the world we live in, which has been dismissed as ad hocery, or simply ignored or reclassified in the neoclassical synthesis. Keynes’ General Theory is truly general. It includes the full-employment equilibrium as a special case. In addition, its microeconomic foundations are broader than the extremely narrow behavioral assumption of the neoclassical model. Consequently, we argue that Keynes’ microeconomics – although not fully worked out - is actually revolutionary. This may be difficult for (neo-) classical economists to accept, but it is strongly confirmed by the recent results in behavioral economics. Keynes’ macroeconomics is the result of his microeconomics. Keynes’ theory is a criticism of (neo-) classical economics, where he offers alternatives from micro to macro. It is truly a general theory, micro and macro.
    Date: 2018–09
  78. By: Douglas Sutherland (OECD); Robert Price (OECD); Isabelle Joumard (OECD)
    Abstract: Against a background of mounting demands for spending on services provided by sub-central governments, this paper examines how fiscal rules can help to ensure that pressure on resources is minimised and available resources are used efficiently. Drawing on questionnaire responses and other sources, this paper gives a detailed picture of fiscal rules for sub-central governments in place among a number of OECD countries. The paper examines the rationales for using fiscal rules, the various impacts fiscal rules can have, the factors making for effective implementation and the interactions between the various types of rule. It then constructs a number of synthetic sub-indicators designed to assess the extent to which sub-central government fiscal frameworks exhibit favourable characteristics for the achievement of fiscal objectives. It concludes with the construction of a composite indicator based on the combined impacts in the different areas of fiscal policy.
    Keywords: fiscal discipline, fiscal rules, indicators, Sub-central government
    JEL: C43 D78 H71 H72 H74 H81
    Date: 2018–09–26
  79. By: Jean-Bernard Chatelain (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Kirsten Ralf (ESCE – International Business School)
    Abstract: The determinacy of dynamic stochastic general equilibrium models including fiscal, macro-prudential or Taylor rules relies on the assumption that policy instruments are forward-looking when policy targets are also forward-looking. Blanchard and Kahn (1980) determinacy condition does not forbid to assume that policy instruments are backward-looking when policy targets are forward-looking, as it is the case for Ramsey optimal policy under quasi-commitment. There is indeterminacy of determinacy unless six criteria are considered which are in favor of assuming that policy instruments are backward-looking when policy targets are forward-looking.
    Keywords: Determinacy,Proportional Feedback rules,Dynamic Stochastic General Equilibrium,Taylor rule,Fiscal rule,Macro-prudential rule,optimal control,Ramsey optimal policy under quasi-commitment
    Date: 2018–09
  80. By: Llamosas-Rosas Irving; Rangel González Erick; Sandoval Bustos Maritza
    Abstract: Based on satellite photos of night light from NASA and the U.S. Department of Defense, and using the methodology proposed by Henderson, Storeygard and Weil (2012), this paper measures the economic growth of the main 15 beach tourist areas in Mexico for the period from 1993 to 2017. This methodology opens a new series of opportunities to measure economic activity, by providing new tools for measurement at the regional level, regardless of administrative boundaries.
    Keywords: GDP;lights;satellites;touristic areas
    JEL: E01 E23 O11 O47
    Date: 2018–07
  81. By: Jan Priewe
    Abstract: Despite performing very positively on some key macroeconomic indicators in recent years, the German economy is in grave disequilibrium if the high current account surplus is included in the analysis. The paper scrutinises the evolution of Germany's external surplus since the inception of the Euro in 1999. This is done by identifying the main determinants of exports and imports and by analysing the accounting identity in which the current account is national saving less total fixed investment. While price competitiveness measured by real exchange rates is strongly improved by German imports for exports within international value chains, also by real undervaluation against other member countries, the focus is on the combination of price- and non-price competitiveness. The latter is mainly determined by the global income elasticity for imports from Germany, relative to the income elasticity for imports to Germany. Despite heavy fluctuations, the past trend shows a clear wedge between the growth of exports and imports of almost one percentage point. If this trend continues the German trade balance would reach 15% of GDP in 2026 which would be a time bomb for the cohesion of the European Monetary Union. Market-based rebalancing is not in sight. It is the built-in dynamics of the external surplus that is hazardous. The problem is aggravated as Germany sits in the same boat with three other hard-core surplus seeking countries (Netherlands, Ireland, Luxembourg). In recent years the imbalances within EMU have changed, pulling former deficit countries in mild surplus but leaving the diversity of current account balances among EMU members at a spread of 8-10 percentage points, with an external trade surplus of EMU as a whole of 4.5% and 3.5% current account surplus. Germany carries nearly 77% and 55% of the current account and the trade surplus, respectively, and has - far ahead others - become the largest surplus country on the globe, in absolute terms. This constellation is unsustainable and requires policy action in Germany, in the European Union, the Euro Area and also by global authorities.
    Keywords: balance of payments, global imbalances, real exchange rates, competitiveness, European Monetary Union
    JEL: E5 E6 F14 F15 F41 F42
    Date: 2018
  82. By: Robert-Paul Berben; Ide Kearney; Robert Vermeulen
    Abstract: This paper presents DELFI 2.0 - DNB's new macroeconomic policy model of the Netherlands. DELFI 2.0 is a medium-sized 'semi structural' macro-econometric model, which tries to strike a balance between theoretical rigour and statistical fit to the data. The model differs from its predecessor by incorporating a banking sector, an improved modelling of the pension sector and an explicit role for consumer confidence. A general overview of the structure of the model is given, including its steady state properties. The model's properties are explored in detail using various simulations, which also illustrate the interactions between the real and the financial side of the economy in model.
    Date: 2018–09
  83. By: Marcin Dec
    Abstract: We propose a theoretical stochastic set-up for a panel of contributors to a volume weighted raw money market index, which is the main contribution of this research. 'The hypothetical problems with: changes in the panel's composition as well as the irregu- larity of daily contributions may strongly influence the utility of a final benchmark to be used in medium and long term loan contracts, especially with retail clients. Our focus is on several classes of benchmarks' formulae that are derived from this raw index and allow for some confinement of the mentioned drawbacks while decreasing quality measured by other criteria (goodness of fit). The set of classes include: the geometric time weights with different smoothing parameters and observation window's length used on the original raw index, stabilisation of the raw index in bands, rolling window volume weights rebalancing and finally the geometric time weights performed on log-transformed index (log-raw index is calculated from volume logarithms). The potential trade-offs in such a benchmark's stabilisation efforts are shown.
    Keywords: financial market indices, interest rate benchmarks, compound Poisson process, index volatility reduction, transaction based benchmarks
    JEL: G12 G13 E43
    Date: 2018–08
  84. By: Johannes Boehm; Ezra Oberfield
    Abstract: The strength of contract enforcement determines how firms source inputs and organize production. Using microdata on Indian manufacturing plants, we show that production and sourcing decisions appear systematically distorted in states with weaker enforcement. Specifically, we document that in industries that tend to rely more heavily on relationship-specific intermediate inputs, plants in states with more congested courts shift their expenditures away from intermediate inputs and appear to be more vertically integrated. To quantify the impact of these distortions on aggregate productivity, we construct a model in which plants have several ways of producing, each with different bundles of inputs. Weak enforcement exacerbates a holdup problem that arises when using inputs that require customization, distorting both the intensive and extensive margins of input use. The equilibrium organization of production and the network structure of input-output linkages arise endogenously from the producers' simultaneous cost minimization decisions. We identify the structural parameters that govern enforcement frictions from cross-state variation in the first moments of producers' cost shares. A set of counterfactuals show that enforcement frictions lower aggregate productivity to an extent that is relevant on the macro scale.
    Keywords: production networks, intermediate inputs, misallocation, productivity, contract enforcement, value chains
    JEL: E23 O11 F12
    Date: 2018–09
  85. By: Timothy Besley; Hannes Mueller
    Abstract: This paper looks at the case for executive constraints in a world of imperfect electoral accountability and policy risk. It develops a model in which policy can be subject to judicial oversight by an imperfectly informed judiciary. Limiting discretion can be good for reducing risk but can worsen incentives creating a non-trivial trade-off for voters. We argue that this is always resolved in favor of executive constraints when looking at the worst case scenario meaning that executive constraints are best justified as a form of robust control.
    Keywords: political institutions, robust control, checks and balances, elections, executive constraints, uncertainty
    JEL: E02 O43 D02 D60 D72
    Date: 2018–09
  86. By: Robert W. Arnold
    Abstract: As part of its mandate to provide nonpartisan analyses to assist economic and budgetary decisions by the Congress, CBO prepares an economic forecast twice per year. Those forecasts are used in the agency’s projections for the federal budget and cost estimates for proposed federal legislation. Forecasts of gross domestic product, inflation, interest rates, and income play a particularly significant role in the agency’s budgetary analysis; for example, projections of wages and salaries are used to forecast individual income tax receipts. This paper describes the process used
    JEL: E17
    Date: 2018–02–02
  87. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: These slides represent the combined thoughts of President Rosengren and his co-presenters, Joe Peek and Geoffrey M. B. Tootell.
    Keywords: monetary policy; interest rates; financial stability; Research conference; fiscal policy
    Date: 2018–09–08
  88. By: Santos, João; Domingos, Tiago; Sousa, Tânia; Serrenho, André
    Abstract: In basic economic growth models, energy is neglected as a production factor, and output is generated from capital and labor in a single-sector process, with most of growth attributed to an exogenous residual. However, alternative approaches argue for a multi-sector system in which the major contribution to growth comes from increased efficiency in the conversion of energy to more productive forms. In this work we develop a two-sector model for the economy, featuring an extended energy sector, including all primary-to-final (energy industries) and final-to-useful (end-use devices) exergy conversion processes. Exergy is a thermodynamics concept, accounting for the potential of energy to perform work. Empirical application of the model for a single country (Portugal) requires decomposition and reclassification of national accounts and energy balances, to match empirical data with the model’s variables. Obtained estimates for the price of useful exergy (an intermediate product) facilitate the construction of gross output measures for more accurate growth accounting. Evidence suggests that declining useful exergy prices act as an engine of growth, as previously suggested in the literature. Additionally, useful exergy and capital inputs to non-energy related production act as complements while capital productivity in useful exergy generation declines slightly in the past decade.
    Keywords: Two-sector model; extended energy sector; useful exergy; national accounts; energy balances;
    JEL: C82 E01 O41 O47 Q41 Q43
    Date: 2018–09–07
  89. By: Guodong Chen (Department of Finance, New York University at Shanghai); Minjoon Lee (Department of Economics, Carleton University); Tong-yob Nam (Office of the Comptroller of the Currency, U.S. Department of Treasury)
    Abstract: The literature on the effect of labor income on portfolio choice overlooks that workers face a risk of being forced to retire before their planned retirement age. Using the Health and Retirement Study data, this paper finds the forced retirement risk to be significant and also highly correlated with stock market fluctuations. A life-cycle portfolio choice model with the estimated forced retirement risk shows that the labor income of those subject to the risk of forced retirement becomes stock-like as individuals approach retirement. Therefore, contrary to conventional wisdom, those who are still working but close to retirement should have a lower share of risky assets in their financial portfolios than retirees do. Given that most financial assets are held by middle-aged households, this finding gives an alternative explanation to the risk premium puzzle.
    Keywords: Forced Retirement, Portfolio Choice, the Risk Premium Puzzle
    JEL: D14 E11 G11 G12
    Date: 2018–06–20

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