nep-mac New Economics Papers
on Macroeconomics
Issue of 2018‒10‒22
87 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. With a little help from my friends: Survey-based derivation of euro area short rate expectations at the effective lower bound By Schupp, Fabian; Geiger, Felix
  2. Unemployment Risk By Michael T. Kiley
  3. Financial Frictions, the Phillips Curve and Monetary Policy By Lieberknecht, Philipp
  4. Understanding Lowflation By Andolfatto, David; Spewak, Andrew
  5. Domestic and global output gaps as inflation drivers: what does the Phillips curve tell? By Martina Jašová; Richhild Moessner; Előd Takáts
  6. Bringing the helicopter to ground: a historical review of fiscal-monetary coordination to support economic growth in the 20th century By Josh Ryan-Collins; Frank van Lerven
  7. Labor Share Decline and Intellectual Property Products Capital By Dongya Koh; Raul Santaeulalia-Llopis; Yu Zheng
  8. Robust Macroprudential Policy Rules under Model Uncertainty By Binder, Michael; Lieberknecht, Philipp; Quintana, Jorge; Wieland, Volker
  9. What inflation measure should a currency union target? By William Barnett; Chan Wang; Xue Wang; Liyuan Wu
  10. Forward guidance and heterogeneous beliefs By Philippe Andrade; Gaetano Gaballo; Eric Mengus; Benoit Mojon
  11. Unemployment insurance union By Clemens, Marius; Claveres, Guillaume
  12. Forward Guidance at the Zero Lower Bound: Curse and Blessing of Time-Inconsistency By Böhl, Gregor; Strobel, Felix
  13. Fiscal Multipliers and Financial Crises By Faria-e-Castro, Miguel
  14. The Political Economy of Exchange Rate Stability During the Gold Standard. Spain 1874—1914 By MARTÍNEZ-RUIZ, Elena; NOGUES-MARCO, Pilar
  15. On the external validity of experimental inflation forecasts: A comparison with five categories of field expectations By Camille Cornand; Paul Hubert
  16. Measuring Real-Financial Connectedness in the U.S. Economy By Erhan Uluceviz; Kamil Yilmaz
  17. Bank Regulation and Monetary Policy Transmission: Evidence from the U.S. States Liberalization By Lakdawala, Aeimit; Minetti, Raoul; Schaffer, Matthew
  18. What drives household inflation expectations in South Africa? Demographics and anchoring under inflation targeting By Stan Du Plessis; Monique Reid; Pierre Siklos
  19. A Thick ANN Model for Forecasting Inflation By Muhammad Nadim Hanif; Khurrum S. Mughal; Javed Iqbal
  20. The impact of uncertainty shocks in Spain: SVAR approach with sign restrictions By Albert, Juan-Francisco; Gómez Fernández, Nerea
  21. A Large Central Bank Balance Sheet? The Role of Interbank Market Frictions By Thaler, Dominik
  22. (Un)conventional policy and the effective lower bound By De Fiore, Fiorella; Tristani, Oreste
  23. Fiscal discipline in EMU? Testing the effectiveness of the Excessive Deficit Procedure By Jasper de Jong; Niels Gilbert
  24. Exchange rates and prices: evidence from the 2015 Swiss franc appreciation By Raphael Auer; Ariel Burstein; Sarah M Lein
  25. Permanent versus Transitory Income Shocks over the Business Cycle By Agnes Kovacs; Concetta Rondinelli; Serena Trucchi
  26. Heterogeneity, Rigidity and Convergence of Labor Markets in the Euro Area By Jocelyn Maillard
  27. A structural analysis of US entry and exit dynamicsn By Miguel Casares Polo; Sandra Miñes
  28. Macroeconomic Uncertainty and Forecasting Macroeconomic Aggregates By Magnus Reif
  29. Structural credit ratios By Bianchi, Benedetta
  30. Global Trends in Interest Rates By Marco Del Negro; Domenico Giannone; Marc P. Giannoni; Andrea Tambalotti
  31. Simultaneous Innovation and the Cyclicality of R&D By Miroslav Gabrovski
  32. All Fluctuations Are Not Created Equal: The Differential Roles of Transitory versus Persistent Changes in Driving Historical Monetary Policy By Ashley, Richard; Tsang, Kwok Ping; Verbrugge, Randal
  33. 57 Channels (And Nothin On): Does TV-News on the Eurozone affect Government Bond Yield Spreads? By Wolfinger, Julia; Köhler, Ekkehard A.; Feld, Lars P.; Thomas, Tobias
  34. Tunisia; Fourth Review Under the Extended Fund Facility Arrangement and Request for Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Tunisia By International Monetary Fund
  35. A quarter of a century of fiscal responsibility: The origins and evolution of fiscal policy governance and institutional arrangements in New Zealand, 1994 to 2018. By Buckle, Robert A.
  36. Overcoming the Original Sin: gains from local currency external debt By Ricardo Sabbadini
  37. Republic of Kazakhstan; 2018 Article IV Consultation-Press Release; and Staff Report By International Monetary Fund
  38. Gabon; Second Review of the Extended Arrangement under the Extended Fund Facility, Request for Waivers of Nonobservance of Performance Criteria and Waivers of Applicability, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Gabon By International Monetary Fund
  39. The Aggregate Consequences of Tax Evasion By Di Nola, Alessandro; Kocharkov, Georgi; Scholl, Almuth; Tkhir, Anna-Mariia
  40. Feste Zinsbindung versus kurzfristig variable Zinskonditionen in Deutschland By Clostermann, Jörg; Seitz, Franz
  41. Barbados; Request for an Extended Arrangement Under the Extended Fund Facility-Press Release; Staff Report; Staff Supplement; and Statement by the Executive Director for Barbados By International Monetary Fund
  42. Austria; 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Austria By International Monetary Fund
  43. Norway; 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Norway By International Monetary Fund
  44. Resource curse in oil exporting countries By Evgeny Kakanov; Hansjörg Blöchliger; Lilas Demmou
  45. Why did Rich Families Increase their Fertility? Inequality and Marketization of Child Care By Bar, Michael; Hazan, Moshe; Leukhina, Oksana; Weiss, David; Zoabi, Hosny
  46. Long-run Patterns of Labour Market Polarisation: Evidence from German Micro Data By Bachmann, Ronald; Cim, Merve; Green, Colin
  47. Sources of Uncertainty and the Indian Economy By Dey Shubhasis
  48. Population aging and cross-country redistribution in integrated capital markets By Davoine, Thomas
  49. Republic of Latvia; 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Latvia By International Monetary Fund
  50. Whatever it takes. What's the impact of a major nonconventional monetary policy intervention? By Carlo Alcaraz; Stijn Claessens; Gabriel Cuadra; David Marques-Ibanez; Horacio Sapriza
  51. The economics of the Syrian refugee crisis in neighboring countries. The case of Lebanon By Anda David; Mohamed Ali Marouani; Charbel Nahas; Björn Nilsson
  52. Republic of the Marshall Islands; 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of the Marshall Islands By International Monetary Fund
  53. Monetary Services Aggregation under Uncertainty: A Behavioral Economics Extension Using Choquet Expectation By William Barnett; Qing Han; Jianbo Zhang
  54. Housing Tax Policy: Comment By Hamed Ghiaie; Jean-François Rouillard
  55. Moving toward 'normal' U.S. monetary policy: remarks at the Joint Bank Indonesia-Federal Reserve Bank of New York Central Banking Forum, Nusa Dua, Indonesia By Williams, John C.
  56. The pricing of FX forward contracts: micro evidence from banks’ dollar hedging By Abbassi, Puriya; Bräuning, Falk
  57. Reducing dimensions in a large TVP-VAR By Joshua C.C. Chan; Eric Eisenstat; Rodney W. Strachan
  58. Monetary Policy Volatility Shocks in Brazil By Angelo Marsiglia Fasolo
  59. Bank Lending Behavior and Business Cycle in Dual Banking System: Evidence from Indonesia By Zulkhibri, Muhamed; Prima Sakti, Muhammad Rizky
  60. Fiscal Redistribution, Sustainability, and Demography in Latin America By Ramiro Albrieu; Jose Maria Fanelli
  61. Wages, income distribution and economic growth in Scandinavia By Bengtsson, Erik; Stockhammer, Engelbert
  62. Portugal; 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Portugal By International Monetary Fund
  63. Saudi Arabia; 2018 Article IV Consultation-Press Release and Staff Report By International Monetary Fund
  64. Household Leverage and the Recession By Callum Jones; Virgiliu Midrigan; Thomas Philippon
  65. Russian Federation; 2018 Article IV Consultation-Press Release; Staff Report By International Monetary Fund
  66. Employment Adjustment Over the Business Cycle: The Impact of Competition in the Labor Market By Douglas A. Webber
  67. Wealth of the Nation: Scotland’s Productivity Challenge - Technical Appendix By Mark Mitchell; Robert Zymek
  68. Dominica; 2018 Article IV Consultation-Press Release and Staff Report By International Monetary Fund
  69. Counting the Oil Money and the Elderly: Norway's Public Sector Balance Sheet By Ezequiel Cabezon; Christian Henn
  70. Assessing the Impact of Central Bank Digital Currency on Private Banks By Andolfatto, David
  71. Botswana; 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Botswana By International Monetary Fund
  72. Neo-Fisherianism in a Small Open-Economy New Keynesian Model By Eurilton Araújo
  73. Cross-Border Credit Intermediation and Domestic Liquidity Provision in a Small Open Economy By Thorvardur T. Olafsson
  74. Demand and Supply Shock Symmetry across Polish Voievodships By Gajewski Pawe³
  75. Systemic Banking Crises Revisited By Luc Laeven; Fabian Valencia
  76. A New Theory of Demand-Restricted Growth By Gries, Thomas
  77. Predictors of Bank Distress: The 1907 Crisis in Sweden By Grodecka, Anna; Kenny, Seán; Ögren, Anders
  78. A structural analysis of US entry and exit dynamics. Tecnnical Appendix By Miguel Casares Polo; Hashmat Khan; Jean-Christophe Poutineau
  79. Real Estate Risk Factors and Portfolio Allocation By Jean-Christophe Delfim; Martin Hoesli
  80. Production Networks: A Primer By Carvalho, V. M; Tahbaz-Salehi, A.
  81. Dynamics of Deterrence: A Macroeconomic Perspective on Punitive Justice Policy By Bulent Guler; Amanda Michaud
  82. Macroprudential Stress Tests and Policies: Searching for Robust and Implementable Frameworks By Ron Anderson; Jon Danielsson; Chikako Baba; Udaibir S Das; Heedon Kang; Miguel A. Segoviano Basurto
  83. Fiscal Decentralization and Government Size: The Role of Democracy By Mo Qiao; Siying Ding; Yongzheng Liu
  84. Reconciling Orthodox and Heterodox Views on Money and Banking By Andolfatto, David
  85. Understanding Euro Area Inflation Dynamics: Why So Low for So Long? By Yasser Abdih; Li Lin; Anne-Charlotte Paret
  86. Transmission of Monetary Policy and Bank Heterogeneity in Colombia By Carolina Ortega Londoño
  87. Macroeconomic Determinants of Non Performing Property Loans in Malaysia By Rosli Said; Nasir Daud; Tham Kuen Wei

  1. By: Schupp, Fabian; Geiger, Felix
    Abstract: The estimation of dynamic term structure models (DTSMs) turns out to be challenging in the presence of a small sample. It is exacerbated if the sample is characterized by a prolonged period of low interest rates near a time-varying effective lower bound. These challenges all weigh heavily when estimating a DTSM for the euro area OIS yield curve sample. Against this background, we propose a shadow-rate term structure model (SRTSM) that includes a time-varying effective lower bound accounting for the spread between the policy and short-term OIS rate and it also allows for future changes in the effective lower bound. In addition, it incorporates survey information in order to pin down the level of longer-term rate expectations. The model allows to adequately assess short-term monetary policy rate expectations and it generates far-distant rate expectations that are correlated with an estimated equilibrium nominal short rate derived from a macroeconomic model set-up. Our results also highlight the signaling channel of non-standard monetary policy shocks in the run-up to asset purchases based on high frequency identification approach. Our model outperforms DTSM specifications without above modeling features from a statistical and economic perspective. We confirm our findings employing a Monte Carlo simulation.
    Keywords: Term structure modeling,short rate expectations,lower bound,survey information,yield curve decomposition,monetary policy,euro area
    JEL: E32 E43 E44 E52
    Date: 2018
  2. By: Michael T. Kiley
    Abstract: Fluctuations in upside risks to unemployment over the medium term are examined using quantile regressions. U.S. experience reveals an elevated risk of large increases in unemployment when inflation or credit growth is high and when the unemployment rate is low. Inflation was a significant contributor to unemployment risk in the 1970s and early 1980s, and fluctuations in credit have contributed importantly to unemployment risk since the 1980s. Fluctuations in upside risk to unemployment are larger than fluctuations in the median outlook or downside risk to unemployment. Accounting for inflation and the state of the business cycle is important for understanding the role of financial conditions in shaping unemployment risk. The analysis suggests that fluctuations in near-term risks to unemployment decreased after 1984 because inflation stabilized, but fluctuations in medium-term risks increased owing to the large swings in credit in recent decades.
    Keywords: Credit ; GDP at risk ; Risk management
    JEL: E32 E24 E66
    Date: 2018–09–28
  3. By: Lieberknecht, Philipp
    Abstract: How does the presence of financial frictions alter the Phillips curve and the conduct of optimal monetary policy? I investigate this question in a tractable small-scale New Keynesian DSGE model with a financial accelerator. The accelerator amplifies shocks, decreases the slope of the Phillips curve and renders forward-looking behavior more relevant for current macroeconomic dynamics. I show analytically that these three factors imply an inflationary bias of discretionary monetary policy relative to the standard model and a stabilization bias relative to commitment policy. A conservative central banker who places a larger weight on inflation stabilization than society is able to reduce both biases and closely mimics the optimal policy under commitment. The required degree of inflation conservatism increases in the degree to which financial frictions are present.
    Keywords: Financial frictions, financial accelerator, Phillips curve, missing disinflation, optimal monetary policy, discretion, commitment, inflation conservatism, inflation targeting
    JEL: E4 E42 E44 E5 E52 E58
    Date: 2018–10–09
  4. By: Andolfatto, David (Federal Reserve Bank of St. Louis); Spewak, Andrew (Federal Reserve Bank of St. Louis)
    Abstract: Central banks are viewed as having a demonstrated ability to lower long-run inflation. Since the financial crisis, however, the central banks in some jurisdictions seem almost powerless to accomplish the opposite. In this article, we offer an explanation for why this may be the case. Because central banks have limited instruments, long-run inflation is ultimately determined by fiscal policy. Central bank control of long-run inflation therefore ultimately hinges on its ability to gain fiscal compliance with its objectives. This ability is shown to be inherently easier for a central bank determined to lower inflation than for a central bank determined to accomplish the opposite. Among other things, the analysis here suggests that for the central banks of advanced economies, any stated inflation target is more credibly viewed as a ceiling.
    Keywords: Inflation; Inflation targeting; Fiscal policy
    JEL: E31 E52 E58 E62 E63
    Date: 2018–09–01
  5. By: Martina Jašová; Richhild Moessner; Előd Takáts
    Abstract: We study how domestic and global output gaps affect CPI inflation. We use a New Keynesian Phillips curve framework, which controls for non-linear exchange rate movements for a panel of 26 advanced and 22 emerging economies covering the 1994Q1-2017Q4 period. We find broadly that both global and domestic output gaps are significant drivers of inflation both in the pre-crisis (1994-2008) and post-crisis (2008-2017) periods. Furthermore, after the crisis, in advanced economies the effect of the domestic output gap declines, while in emerging economies the effect of the global output gap declines. The paper demonstrates the usefulness of the New Keynesian Phillips curve in identifying the impact of global and domestic output gaps on inflation.
    Keywords: output gaps, global factors, inflation
    JEL: E31 E58
    Date: 2018–09
  6. By: Josh Ryan-Collins; Frank van Lerven (None)
    Abstract: In the face of the perceived high public and private debt levels and sluggish recovery that has followed the financial crisis of 2007-08, there have been calls for greater fiscal-monetary coordination to stimulate nominal demand. Policy debates have been focused upon the inflationary expectations that may be generated by monetary financing or related policies, consistent with New Consensus Macroeconomics theoretical frameworks. Historical examples of fiscal-monetary policy coordination have been largely neglected, along with alternative theoretical views, such as post-Keynesian perspectives that emphasise uncertainty and demand rather than rational expectations. This paper begins to address this omission. First, we provide an overview of the holdings of government debt by both central banks and commercial banks as an imperfect but still informative proxy for fiscal-monetary coordination in advanced economies in the 20th century. Second, we develop a new typology of forms of fiscal-monetary coordination that includes both direct and less direct forms of monetary financing, illustrating this with case-study examples. In particular, we focus on the 1930s-1970s period when central banks and ministries of finance cooperated closely, with less independence accorded to monetary policy and greater weight attached to fiscal policy. We find a number of cases where fiscal-monetary coordination proved useful in stimulating economic growth, supporting industrial policy objectives and managing public debt without excessive inflation.
    Keywords: monetary policy, monetary financing, inflation, central bank independence, fiscal policy, debt, credit creation
    JEL: B22 B25 E02 E12 E31 E42 E51 E52 E58 E63 N12 N22 O43
    Date: 2018–10
  7. By: Dongya Koh (University of Arkansas); Raul Santaeulalia-Llopis (MOVE-UAB and Barcelona GSE); Yu Zheng (Queen Mary University of London)
    Abstract: We study the behaviour of the US labor share over the past 70 years. We find that the capitalization of intellectual property products in the national income and product accounts entirely explains - in a purely accounting sense - the observed decline of the US labor share. We assess the implications of this result for the US macroeconomic model and discuss the way forward.
    Keywords: Labor Share, Intellectual Property Products, Capital, 1999- and 2013-BEA Revisions
    JEL: E01 E22 E25
    Date: 2018–10–12
  8. By: Binder, Michael; Lieberknecht, Philipp; Quintana, Jorge; Wieland, Volker
    Abstract: Against the backdrop of elevated model uncertainty in DSGE models with a detailed modeling of financial intermediaries, we investigate the performance of optimized macroprudential policy rules within and across models. Using three canonical banking DSGE models as a representative sample, we show that model-specific optimized macroprudential policy rules are highly heterogeneous across models and not robust to model uncertainty, implying large losses in other models. This is particularly the case for a perfect-coordination regime between monetary and macroprudential policy. A Stackelberg regime with the central bank as leader operating according to the rule by Orphanides and Wieland (2013) implies smaller potential costs due to model uncertainty. An even more effective approach for policymakers to insure against model uncertainty is to design Bayesian model-averaged optimized macroprudential rules. These prove to be more robust to model uncertainty by performing better across models than model-specific optimized rules, regardless of the regime of interaction between the two authorities.
    Keywords: Macroprudential Policy,Optimized Policy Rules,Model Uncertainty,Bayesian Model-Averaging,Robust Policy Rules
    JEL: E44 E52 E58 E61 G28
    Date: 2018
  9. By: William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Chan Wang (School of Finance, Central University of Finance and Economics, Beijing, China); Xue Wang (Department of Finance, Jinan University, Guangzhou, China); Liyuan Wu (Guanghua School of Management, Peking University, Beijing, China)
    Abstract: What is the appropriate inflation target for a currency union, when conducting monetary policy: core inflation or headline inflation? We answer the question in a two-country New Keynesian model with an energy sector. We derive the welfare loss function and find that optimal monetary policy should target output gaps, the terms of trade gap, the Prouder Price Index inflation rates, and the real marginal cost gaps. We use the welfare loss function to evaluate two alternative Taylor-type monetary policy rules. We find that the choice of preferred policy rule depends on the shocks. Specifically, when productivity shocks hit the economy, the policymaker should follow the headline inflation Taylor rule, while the core inflation Taylor rule should be followed when a negative energy endowment shock hits the economy.
    Keywords: Core inflation; Headline inflation; Optimal monetary policy; Currency union; Welfare.
    JEL: E5 F3 F4
    Date: 2018–05
  10. By: Philippe Andrade; Gaetano Gaballo; Eric Mengus; Benoit Mojon
    Abstract: Central banks' announcements that rates are expected to remain low could signal either a weak macroeconomic outlook, which would slow expenditure, or a more accommodative stance, which may stimulate economic activity. We use the Survey of Professional Forecasters to show that, when the Fed gave guidance between Q3 2011 and Q4 2012, these two interpretations co-existed despite a consensus on low expected rates. We rationalise these facts in a New-Keynesian model where heterogeneous beliefs introduce a trade-off in forward guidance policy: leveraging on the optimism of those who believe in monetary easing comes at the cost of inducing excessive pessimism in non-believers.
    Keywords: signaling channel, disagreement, optimal policy, zero lower bound, survey forecasts
    JEL: E31 E52 E65
    Date: 2018–10
  11. By: Clemens, Marius; Claveres, Guillaume
    Abstract: A European unemployment insurance scheme has gained increased attention as a new and ambitious common fiscal instrument which could be used for temporary cross-country transfers. Part of the national stabilizers composing unemployment insurance schemes would be transferred to the central level. Unemployed are then insured by both layers. When a country is hit by an asymmetric shock, it would receive positive net transfers from the central fund in the form of reduced taxes and increased benefits, providing risk-sharing for the whole union. We build a two-country DSGE model with supply, demand and labor market shocks in order to capture the recent national insurance system and the unemployment insurance union (UIU) design. The model is calibrated to the euro area core and periphery data and matches the empirically observed cyclicality of the net replacement rate, the wage and unemployment dynamics. This baseline scenario is then compared to an optimal unemployment insurance union with passive and active benefit policies. For all underlying shocks, we find that the UIU reduces the fluctuation of consumption and unemployment while it increases the fluctuations of the trade balance. In case of a positive domestic government spending shock the UIU reduces the negative crowding out effect on private consumption and investment. The model will be used to analyze the effects of national and supranational benefit policies on labour market patterns and welfare.
    Keywords: Unemployment insurance,search and matching,fiscal union
    JEL: E32 E61 J65
    Date: 2018
  12. By: Böhl, Gregor; Strobel, Felix
    Abstract: Forward guidance as a tool of unconventional monetary policy can be highly efficient to support aggregate demand and to steer the economy out of the zero lower bound (ZLB). However, the effect that stimulates the economy can give rise to a time-inconsistency problem: if the central bank promises to keep interest rates at the ZLB for long, the sub-sequent increase in inflation and economic activity may create a motive for the central bank to forego its promise and to exit the ZLB earlier than announced. We illustrate the time-inconsistency problem in a New Keynesian model with hand-to-mouth consumers. Using a novel and analytically tractable method for handling occasionally binding constraints, we contrast the case of commitment to forward guidance with the case in which monetary policy allows for an early exit of the ZLB. Our method is able to provide results on uniqueness and existence of (ZLB) equilibria. We study the equilibrium selection given different scenarios and conclude that central bankers should be careful when choosing the number of periods with low interest rates in order to avoid the inconsistency problem. Furthermore, we calculate government spending multipliers and argue that the multiplier is even larger if combined with forward guidance.
    Keywords: Forward Guidance,zero lower bound,occasionally binding constraints,government spending multiplier
    JEL: E63 C63 E58 E32 C62
    Date: 2018
  13. By: Faria-e-Castro, Miguel (Federal Reserve Bank of St. Louis)
    Abstract: I study the macroeconomic effects of the US fiscal policy response to the Great Recession, accounting not only for standard tools such as government purchases and transfers but also for financial sector interventions such as bank recapitalizations and credit guarantees. A global solution to a quantitative model calibrated to the US allows me to study the state-dependent effects of different types of fiscal policies. I combine the model with data on the US fiscal policy response to find that the fall in aggregate consumption would have been twice as worse in the absence of that response with a cumulative loss of 14.5%. Transfers and bank recapitalizations yielded the largest fiscal multipliers at the height of the crisis through new transmission channels that arise from linkages between household and bank balance sheets.
    JEL: E4 E6 G01 G28
    Date: 2018–10–01
    Abstract: This article contributes to the literature on central bank independence and monetary stability during the classical gold standard era. On the eve of the First World War, European periphery had not achieved stable adherence to gold despite the protection of central banks against political pressures to monetize debt. In the 19th century, most issuing institutions were private banks whose main objective was profit maximization. As a result, monetary stability depended on negotiations between monetary and fiscal authorities and not directly on central bank independence as is the case nowadays. Strong governments were needed to impose the objective of monetary stability on central banks in negotiation practices. To test our argument, we have constructed indicators of government strength and central bank independence to measure bargaining power for the case of Spain. Results confirm that a highly independent private central bank avoided the responsibility of defending gold adherence when negotiating with weak government, even in a stable macroeconomic environment. Our research suggests that the success of central bank independence in generating monetary stability during the gold standard period depended on sound political institutions.
    Keywords: gold standard, monetary stability, political economy, central bank independence, institutional design, Spain
    JEL: E02 E42 E58 F33 N13
    Date: 2018–09
  15. By: Camille Cornand (Univ Lyon, CNRS, GATE UMR 5824, F69130 Ecully, France); Paul Hubert (Sciences Po-OFCE, 10 place de Catalogne, 75014 Paris, France)
    Abstract: Establishing the external validity of laboratory experiments in terms of inflation forecasts is crucial for policy initiatives to be valid outside the laboratory. Our contribution is to document whether different measures of inflation expectations based on various categories of agents (participants to experiments, households, industry forecasters, professional forecasters, financial market participants and central bankers) share common patterns by analyzing: the forecasting performances of these different categories of data; the information rigidities to which they are subject; the determination of expectations. Overall, the different categories of forecasts exhibit common features: forecast errors are comparably large and autocorrelated, forecast errors and forecast revisions are predictable from past information, which suggests the presence of information frictions. Finally, the standard lagged inflation determinant of inflation expectations is robust to the data sets. There is nevertheless some heterogeneity among the six different sets. If experimental forecasts are relatively comparable to survey and financial market data, central bank forecasts seem to be superior.
    Keywords: inflation expectations, experimental forecasts, survey forecasts, market-based forecasts, central bank forecasts
    JEL: E3 E5
    Date: 2018
  16. By: Erhan Uluceviz (Department of Economics, Gebze Technical University); Kamil Yilmaz (Koç University)
    Abstract: We analyze connectedness between the real and financial sectors of the U.S. economy. Using the weekly ADS index of the Philadelphia FED (the widely used business conditions indicator) to represent the real side, we find that during times of financial distress and/or business cycle turning points the direction of connectedness runs from the real sector to financial markets. The ADS index is derived from a model containing a measure of term structure along with real variables, therefore, it might not be the best representative of the real activity to be used in the connectedness analysis. As an alternative, we derive a real activity index (RAI) from a dynamic factor model of the real sector variables only. The behavior of RAI over time is quite similar to that of the ADS index. When we include RAI to represent the real side of the economy in the connectedness analysis, the direction of net connectedness reverses: financial markets generate positive net connectedness to the real side of the economy.
    Keywords: macro-financial linkages, connectedness, ADS index, dynamic factor model, volatility, vector autoregression, variance decomposition
    JEL: C38 E44 E37 G10
    Date: 2018–10–10
  17. By: Lakdawala, Aeimit (Michigan State University, Department of Economics); Minetti, Raoul (Michigan State University, Department of Economics); Schaffer, Matthew (Department of Economics, University of North Carolina)
    Abstract: This paper studies the impact of geographic banking restrictions on monetary policy transmission. Exploiting the staggered deregulation of U.S. banking from the late 1970s to the early 1990s, we find that interstate deregulation significantly increased the responsiveness of bank lending to monetary shocks. This effect occurred primarily for small and illiquid banks, pointing to a strengthening of the bank lending channel. Changes in bank market structure and loan portfolio composition are unlikely to explain the effect of deregulation. This instead reflects a reduced propensity of small banks affiliated with complex bank holding companies to insulate borrowers from monetary contractions.
    Keywords: Bank regulation; Bank lending channel; Monetary policy
    JEL: E44 E52 G21
    Date: 2018–10–15
  18. By: Stan Du Plessis; Monique Reid; Pierre Siklos
    Abstract: This paper examines the demographic determinants of inflation expectations in South Africa. Five surveys covering the period 2006-2016, and consisting of over 12000 observations were empirically examined using time series, cross-sectional, censored and quantile regressions. We assess whether factors such as gender, income, education, race and age, impact one year ahead inflation expectations. In doing so we uncover clear behavioural biases in how respondents view the inflation outlook. For example, education and income tend to be inversely related to inflation expectations. This is consistent with the literature although we observe significant changes over time that many other surveys are unable to uncover. In addition, it seems that inflation expectations respond to recently observed inflation. Unlike other studies, younger individuals have lower inflation expectations and we conjecture that the adoption of inflation targeting in South Africa played a role. Finally, we find that demographic characteristics interact with communication by the South African Reserve Bank, as well whether inflation is rising or falling. These are two additional novel features of the analysis.
    JEL: E65 E31
    Date: 2018–10
  19. By: Muhammad Nadim Hanif (State Bank of Pakistan); Khurrum S. Mughal (State Bank of Pakistan); Javed Iqbal (State Bank of Pakistan)
    Abstract: Inflation forecasting is an essential activity at central banks to formulate forward looking monetary policy stance. Like in other fields, machine learning is finding its way to forecasting; inflation forecasting is not any exception. In machine learning, most popular tool for forecasting is artificial neural network (ANN). Researchers have used different performance measures (including RMSE) to optimize set of characteristics - architecture, training algorithm and activation function - of an ANN model. However, any chosen ‘optimal’ set may not remain reliable on realization of new data. We suggest use of ‘mode’ or most appearing set from a simulation based distribution of optimum ‘set of characteristics of ANN model’; selected from a large number of different sets. Here again, we may have a different trained network in case we re-run this ‘modal’ optimal set since initial weights in training process are assigned randomly. To overcome this issue, we suggest use of ‘thickness’ to produce stable and reliable forecasts using modal optimal set. Using January 1958 to December 2017 year on year (YoY) inflation data of Pakistan, we found that our YoY inflation forecasts (based on aforementioned multistage forecasting scheme) outperform those from a number of inflation forecasting models of Pakistan economy.
    Keywords: Artificial Neural Networks, Inflation Forecasting
    JEL: C45 E31 E37
    Date: 2018–10
  20. By: Albert, Juan-Francisco; Gómez Fernández, Nerea
    Abstract: The purpose of this research is to quantify the impact of economic uncertainty shocks in Spain by using an SVAR approach with sign restrictions with data from January 2001 to June 2018. Specifically, we analyze temporary and persistent economic uncertainty shocks. Furthermore, we isolate the uncertainty shocks whose origin is only politic to identify potential differences in the effects of the uncertainty according to its origin. Our results suggest that positive shocks to economic and political uncertainty lead to an increase in unemployment and a fall in consumer confidence, business confidence, IBEX 35 Index and industrial production. Moreover, these negative effects of uncertainty remain for a long-time horizon, especially for the case of industrial production and unemployment. According to these results, we can conclude that economic uncertainty shocks have a significant negative impact on the Spanish economy.
    Keywords: economic uncertainty; SVAR; sign restrictions; policy uncertainty
    JEL: D81 E21 E22
    Date: 2018–10
  21. By: Thaler, Dominik
    Abstract: Recent quantitative easing (QE) policies implemented over the course of the Great Recession by the major central banks have had a profound impact on the working of money markets, giving rise to large excess reserves and pushing down key interbank rates against their floor .the interest rate on reserves. With macroeconomic fundamentals improving, central banks now face the dilemma as to whether to maintain this large balance sheet/floor system, or else to reduce balance sheet size towards pre-crisis trends and operate traditional corridor systems. We address this issue using a relatively simple New Keynesian model with two distinct features: heterogeneous banks that trade funds in an interbank market, and matching frictions in the latter market. We show that a large balance sheet allows for ampler .policy widening the average distance between the interest on reserves and its effective lower bound. Nonetheless, a lean-balance-sheet regime that resorts to temporary QE in response to recessions severe enough for the lower bound to bind achieves similar stabilization and welfare outcomes as a large-balance-sheet regime in which interest-rate policy is the primary adjustment margin thanks to the larger policy space. At the same time, the effectiveness of QE through the channel we model is limited. In line with the empirical evidence, the marginal effect vanishes as the balance sheet becomes very big.
    Keywords: central bank balance sheet,interbank market,search and matching frictions,reserves,zero lower bound
    JEL: E20 E30 G10 G20
    Date: 2018
  22. By: De Fiore, Fiorella; Tristani, Oreste
    Abstract: We study the optimal combination of conventional (interest rates) and unconventional (credit easing) monetary policy in a model where agency costs generate a spread between deposit and lending rates. We show that unconventional measures can be a powerful substitute for interest rate policy in the face of certain financial shocks. Such measures help shield the real economy from the deterioration in financial conditions and warrant smaller reductions in interest rates. They therefore lower the likelihood of hitting the lower bound constraint. The alternative option to cut interest rates more deeply and avoid deploying unconventional measures is sub-optimal, as it would induce unnecessarily large changes in savers intertemporal consumption patterns. JEL Classification: E44, E52, E61
    Keywords: asymmetric information, optimal monetary policy, unconventional policies, zero-lower bound
    Date: 2018–10
  23. By: Jasper de Jong; Niels Gilbert
    Abstract: The Excessive Deficit Procedure (EDP), central to the Stability and Growth Pact, is criticized for both its procyclical effects and - in contrast - a perceived lack of enforcement. To test its actual effects, we construct a real-time database of EDP recommendations and estimate augmented real-time and ex-post fiscal reaction functions for a panel of EMU member states. We find that a 1% of GDP larger EDP recommendation leads to close to 1% of GDP of additional fiscal consolidation plans, and around 0.8% of actual consolidation. For countries in financial support programs we find that, while they did implement substantial consolidation measures, required and delivered consolidation efforts are less connected. Overall, our results suggest that EDP recommendations have substantially shaped euro area fiscal policy, especially in the years 2010-2014, when EDP recommendations were both largest and most frequent.
    Keywords: EMU; Stability and Growth Pact; fiscal policy; real-time data
    JEL: E02 E62 H30 H68
    Date: 2018–09
  24. By: Raphael Auer; Ariel Burstein; Sarah M Lein
    Abstract: The removal of the lower bound on the EUR/CHF exchange rate in January 2015 provides a unique setting to study the implications of a large and sudden appreciation in an otherwise stable macroeconomic environment. Using transaction-level data on non-durable goods purchases by Swiss consumers, we measure the response of border and consumer retail prices to the CHF appreciation and how household expenditures responded to these price changes. Consumer prices of imported goods and of competing Swiss-produced goods fell by more in product categories with larger reductions in border prices and a lower share of CHF-invoiced border prices. These price changes resulted in substantial expenditure switching between imported and Swiss-produced goods. While the frequency of import retail price reductions rose in the aftermath of the appreciation, the average size of these price reductions fell (and more so in product categories with larger border price declines and a lower share of CHF-invoiced border prices), contributing to low pass-through into import prices.
    Keywords: large exchange rate shocks, exchange rate pass-through, invoicing currency, expenditure switching, price-setting, nominal and real rigidities, monetary policy
    JEL: D4 E31 E50 F31 F41 L11
    Date: 2018–10
  25. By: Agnes Kovacs (Department of Economics, The University of Manchester; IFS); Concetta Rondinelli (Bank of Italy, Economic Outlook and Monetary Policy Directorate); Serena Trucchi (Department of Economics, University Of Venice Cà Foscari)
    Abstract: This paper investigates the role of subjective income expectations in shaping consumption dynamics of European economies in the last decade. We make two main contributions. We first exploit the joint availability of income expectations and realizations in a unique micro panel-dataset to identify the levels of transitory and permanent income shocks at the individual level. We then evaluate whether these calculated income shocks can help to explain contractions in aggregate consumption over the two most recent crisis. We find strong evidence that consumption behavior during the 2012-2013 crisis can be explained by the observed income shocks, but the same is not true of the 2008-2009 crisis.
    Keywords: Persistence of income shocks, income uncertainty, expectations, consumption, financial crisis
    JEL: D12 E21
    Date: 2018
  26. By: Jocelyn Maillard (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824. 93, Chemin des Mouilles, F-69130 Ecully, France)
    Abstract: This paper investigates the welfare consequences of labor market convergence reforms for a large range of calibrations in a two-country monetary union DSGE model with search and matching frictions. The model features trade in consumption and investment goods, price stickiness, firing costs and is calibrated to reflect the structural asymmetries of flexible and rigid countries of the Euro Area in terms of size and labor market variables. Across steady states, convergence brings welfare gains for the rigid country and welfare losses for the flexible country in most situations. The higher the flexibility induced by the convergence, the higher the gains for the rigid country and the lower the losses for the flexible country. Taking into account the transition path brings results that are qualitatively similar, but have a lower magnitude in terms of welfare gains/losses. Indeed, wage bargaining has a short-term negative impact on the rigid country and a short-term positive impact on the flexible country. As such, I conclude that convergence in labor markets can lead to substantial welfare gains in a monetary union, but only if the implementation is carefully designed.
    Keywords: Unemployment, Monetary Union, Labor Market Reform
    JEL: E32 F41 J64
    Date: 2018
  27. By: Miguel Casares Polo (Departamento de Economía-UPNA); Sandra Miñes (UPNA)
    Abstract: We report empirical evidence indicating that US business formation has recently turned more volatile, procyclical and persistent due to changes in exit dynamics. To study these stylized facts, we estimate a DSGE model with endogenous entry and exit. Business units feature heterogeneous productivity and they shut down if the present value of expected future dividends falls below the current liquidation value. The estimation results imply structural changes in US exit dynamics after 2007: the semi- elasticity of the exit rate to critical productivity has increased and the average plant-level productivity has decreased.
    Keywords: Endogenous entry and exit, DSGE models, US business cycles
    JEL: E20 E32
    Date: 2018
  28. By: Magnus Reif
    Abstract: Can information on macroeconomic uncertainty improve the forecast accuracy for key macroeconomic time series for the US? Since previous studies have demonstrated that the link between the real economy and uncertainty is subject to nonlinearities, I assess the predictive power of macroeconomic uncertainty in both linear and nonlinear Bayesian VARs. For the latter I use a threshold VAR that allows for regimedependent dynamics conditional on the level of the uncertainty measure. I find that the predictive power of macroeconomic uncertainty in the linear VAR is negligible. In contrast, using information on macroeconomic uncertainty in a threshold VAR can significantly improve the accuracy of short-term point and density forecasts, especially in the presence of high uncertainty.
    Keywords: Forecasting, BVAR, nonlinearity, threshold VAR, uncertainty
    JEL: C11 C53 E32
    Date: 2018
  29. By: Bianchi, Benedetta
    Abstract: This paper studies the relation between the credit-to-GDP ratio and macroeconomic trends. We estimate a long run equation on a sample of EU countries; our findings suggest that the macroeconomic factors with which the credit ratio associates most strongly are economic development, the investment share in GDP, and inflation. We then obtain projections for past and future trends. First, we study the evolution of the credit ratio in the past. We find that most of the increase starting in 1985 is associated with economic development and falling inflation, while the decrease of investment may have slowed down this trend. Second, we offer a forward-looking estimate of the structural credit ratio, defined as the long run, or sustainable, component. We offer band estimates based on two alternative assumptions on future economic outcomes, which can be interpreted as a structural and a cyclical view of current macroeconomic dynamics. Estimates of structural credit ratios based on this method are useful to policy makers having to decide on the activation of the countercyclical capital buffer, especially when assessing the sustainability of credit growth. JEL Classification: E51, G01, E44
    Keywords: credit gap, equilibrium credit, long run modelling, macro-prudential analysis
    Date: 2018–10
  30. By: Marco Del Negro; Domenico Giannone; Marc P. Giannoni; Andrea Tambalotti
    Abstract: The trend in the world real interest rate for safe and liquid assets fluctuated close to 2 percent for more than a century, but has dropped significantly over the past three decades. This decline has been common among advanced economies, as trends in real interest rates across countries have converged over this period. It was driven by an increase in the convenience yield for safety and liquidity and by lower global economic growth.
    JEL: E43 E44 F31 G12
    Date: 2018–09
  31. By: Miroslav Gabrovski (University of Hawaii at Manoa Ministry of Strategy and Finance, Republic of Korea)
    Abstract: There is ample evidence that R&D investment is mildly pro-cyclical. Whereas the existing literature can explain the positive correlation between investment in R&D and output, the moderate strength of the relationship remains under-explored. This paper develops a stochastic expanding-variety endogenous growth model that accounts for the observed mild pro-cyclicality of R&D. In the model, several firms may simultaneously make the same innovation. Research projects innovated by many firms simultaneously are of higher quality, on average, and contribute relatively more to the expansion of the knowledge stock in the economy. This delivers an endogenous mechanism that breaks the otherwise perfect correlation between R&D and output. A calibration of our model closely matches the cyclical properties of R&D.
    Keywords: Simultaneous Innovation, Research and Development, Medium-Term Cycles, Macroeconomic Fluctuations, Endogenous Cycles
    JEL: O30 O40 E32
    Date: 2018–10
  32. By: Ashley, Richard (Virginia Tech); Tsang, Kwok Ping (Virginia Tech); Verbrugge, Randal (Federal Reserve Bank of Cleveland)
    Abstract: The historical analysis of FOMC behavior using estimated simple policy rules requires the specification of either an estimated natural rate of unemployment or an output gap. But in the 1970s, neither output gap nor natural rate estimates appear to guide FOMC deliberations. This paper uses the data to identify the particular implicit unemployment rate gap (if any) that is consistent with FOMC behavior. While its ability appears to have improved over time, our results indicate that, both before the Volcker period and through the Bernanke period, the FOMC distinguished persistent movements in the unemployment rate from other movements; implicitly such movements were treated as an intermediate target, one that departs substantially from conventional estimates of the natural rate. We further investigate historical FOMC responses to inflation fluctuations. In this regard, FOMC behavior changed in the Volcker-Greenspan-Bernanke period: its response to the inflation rate became much stronger, and it focused more intensely on very persistent movements in this variable. Our results shed light on the “Great Inflation” experience of the 1970s, and are consistent with the view that political pressures effectively limited the FOMC response to the buildup of inflation. They also suggest new directions for DSGE modeling.
    Keywords: Taylor rule; Great Inflation; intermediate target; natural rate; persistence; dependence;
    JEL: C22 C32 E52
    Date: 2018–10–12
  33. By: Wolfinger, Julia; Köhler, Ekkehard A.; Feld, Lars P.; Thomas, Tobias
    Abstract: This article empirically investigates the relationship between TV news coverage on the eurocrisis and the GIIPS countries bond yield spreads with daily data between January 1, 2007 and December 1, 2016. We use 1,542,233 human coded news items from evening news shows of leading TV stations in 12 countries. These news items include 37,859 news on the EU, on the Eurozone and on country-specific economic issues related to the GIIPS countries and Germany. We find that an increasing share of news about the Eurozone reduces yield spreads, especially when the news has a positive tonality. This, at least in the short run, hints at the effectiveness of political communication through the media by European institutions and in particular the European Central Bank (ECB). In conjunction with the tonality of the news, we find some hints on country-specific news to have a significant impact on GIIPS yield spreads. A higher share of positive/negative news is positively associated with a decrease/increase the GIIPS yield spreads vis-`a-vis Germany. Despite these hardly surprising results, we find some evidence that some news is not immediately and completely priced in by market participants when it is released: we still find a significant effect of prior days news on the GIIPS bond yield spreads. In addition, we find that this peculiar effect of country specific news is stronger when the respective news is aired on the North American media market. We explain this higher coefficient as follows: North American TV news air only those news that are truly surprising and have thus a strong effect on yield spreads
    Keywords: Eurozone,Euro,political communication,media coverage,yield spreads,dynamic macro panel,FGLS
    JEL: E58 G12 L8 N14 E58 G12 L8 N14
    Date: 2018
  34. By: International Monetary Fund
    Abstract: The recovery continues in a difficult environment. The recovery has proceeded broadly as expected in the Third Review, notwithstanding elevated socio-political tensions and a further increase in oil prices. Growth accelerated to 2.8 percent in the second quarter driven by agriculture and tourism, inflation decelerated to 7.5 percent in August, and the current account deficit for the first half of the year improved by one percent of GDP. However, investment remains weak, unemployment is high especially among the youth and women, and the Tunisians’ purchasing power is eroding. The fiscal deficit at end-July was lower than expected, reflecting the 2018 tax package and improved collection. The authorities met all Quantitative Performance Criteria and implemented two out of the three Structural Benchmarks due for the Fourth Review, notably the competitive central bank foreign exchange auctions.
    Date: 2018–10–08
  35. By: Buckle, Robert A.
    Abstract: The foundations for New Zealand’s current fiscal policy governance and institutional arrangements were established nearly 25 years ago by the Fiscal Responsibility Act 1994 (FRA). This Act placed an emphasis on fiscal principles and reporting provisions which were regarded as world-leading fiscal reforms when first introduced. These fundamental reforms have been embraced by successive New Zealand governments, and in 2005 were incorporated into the Public Finance Act 1989. This paper traces the evolution of the principles and reporting provisions during the past quarter of a century in response to the fiscal challenges posed by intergenerational issues and population ageing, avoiding unsustainable government expenditure growth during economic booms, the coordination of fiscal and monetary policy, recognition of the economic and social importance of the Government’s balance sheet, and the demands for greater transparency in fiscal policy decisions and performance. The paper concludes with a discussion of contemporary issues and challenges.
    Keywords: Fiscal policy, Budget policy, Public debt, Policy institutions, Transparency, Credibility, Sustainability,
    Date: 2018
  36. By: Ricardo Sabbadini
    Abstract: Is it better for emerging countries to issue external debt denominated in local (LC) or foreign currency (FC)? An economy issuing LC debt can avoid an explicit and costly default by inflating away its debt. However, in the hands of a discretionary policymaker, such tool might lead to excessive inflation and negative consequences for welfare. To investigate this question, I develop a quantitative model of sovereign default extended to incorporate real exchange rates and inflation. I find that an economy issuing LC debt defaults less often, sustains slightly lower debt levels, and presents positive average inflation. The net effect is a modest welfare loss when compared to issuing debt in FC. However, if monetary policy is credible, the welfare change is positive, but also of limited size. In this case, the real exchange rate serves as a buffer to accommodate negative output shocks and to prevent defaults
    Date: 2018–09
  37. By: International Monetary Fund
    Abstract: Recovery is gaining strength, while inflation has been declining and the tenge has continued to float. Export growth—driven by oil, metals, and mining—has reduced the current account deficit. State support to banks led to a higher fiscal deficit in 2017, although there was underlying adjustment. The 2018 budget foresees further adjustment and ambitious spending reforms. Consolidation is set to continue over the medium term to rebuild buffers. The authorities have taken major steps to secure financial sector stability, but actions have been costly financially and risks remain. More work is needed, especially to overhaul bank business models and address gaps in supervision. Progress is being made on flagship structural reforms (business climate, governance), although, in practice, the measures taken have yet to prove their effectiveness in full. Efforts should continue to support greater productivity, inclusivity, connectivity, and diversification. Risks relate to oil prices and slower growth in key trading partners (Russia, China, EU).
    Date: 2018–09–14
  38. By: International Monetary Fund
    Abstract: While external buffers are being rebuilt, the CEMAC’s recovery remains fragile. In Gabon, macroeconomic conditions are slowly improving. Activity is stabilizing, with 2017 growth revised to 0.5 percent—a slowdown broadly in line with trends envisaged at the time of the program request a year ago. Oil and mining exports helped narrow the 2017 current account deficit. The overall fiscal deficit (cash basis) declined by 3¼ percent of GDP, but the adjustment relied on large cuts in public investment. Weak program implementation contributed to the underperformance of non-oil revenues and overruns on current spending. Fiscal slippages aggravated already significant cashflow pressures, contributing to the authorities’ failure to clear all external arrears at end 2017. The authorities recently announced a strong package of fiscal consolidation measures.
    Date: 2018–09–12
  39. By: Di Nola, Alessandro; Kocharkov, Georgi; Scholl, Almuth; Tkhir, Anna-Mariia
    Abstract: There is a sizeable overall tax gap in the U.S., albeit tax noncompliance differs sharply across income types. While only small percentages of wages and salaries are underreported, the estimated misreporting rate of self-employment business income is substantial. This paper studies how tax evasion in the self-employment sector affects aggregate outcomes and inequality. To this end, we develop a dynamic general equilibrium model with incomplete markets in which heterogeneous agents choose between being a worker and being self-employed. Self-employed agents may hide a share of their business income but are confronted with the probability of being detected by the tax authority. Our model replicates important quantitative features of U.S. data, in particular, the misreporting rate, wealth inequality, and the firm size distribution. Our quantitative findings suggest that tax evasion induces self-employed businesses to stay small. In the aggregate, tax evasion increases the size but decreases the productivity of the self-employment sector. Moreover, it increases aggregate savings and reduces wealth inequality. We show that tax revenues follow a Laffer curve in the size of the tax evasion penalty.
    Keywords: Tax evasion,Self-Employment,Wealth inequality,Tax policy.
    JEL: H24 H25 H26 C63 E62 E65
    Date: 2018
  40. By: Clostermann, Jörg; Seitz, Franz
    Abstract: Wir stellen einer festen Zinsbindung von 10 Jahren bei Wohnungsbaukrediten eine monatliche an einem Kurzfristzins angepassten Zinsbelastung bei unterschiedlichen Rückzahlungsfristen gegenüber. Dafür werten wir Monatsdaten seit den 1950er Jahren für Deutschland aus. Damit greifen wir mehrere Zinszyklen, Zinserhöhungs- und Zinssenkungsphasen ab. Im Ergebnis finden wir, dass in der überwiegenden Mehrzahl der Fälle kurzfristig variable Zinsen eine geringere Zinsbelastung nach sich ziehen. Und diese weisen auch noch geringere Schwankungen auf.
    Keywords: Zinsbindung,Zinsspread,Zinsen
    JEL: E43 E47 G21
    Date: 2018
  41. By: International Monetary Fund
    Abstract: The key objectives of the program are to restore macroeconomic and debt sustainability, address falling reserves, and increase growth. The new government, which took office in late May, has committed to fiscal consolidation and structural reform as key tools for macroeconomic adjustment.
    Date: 2018–10–04
  42. By: International Monetary Fund
    Abstract: Living standards in Austria are high, and income inequality and poverty low. The economy has picked up markedly, accelerating to 3 percent in 2017, and 3.1 percent (y/y) in 2018: Q1. This provides an opportunity to implement reforms to raise the economy’s potential output, reduce unemployment further, and ensure long-term fiscal sustainability. Also, further strengthening the financial system would guard against a less benign global financial environment.
    Date: 2018–09–12
  43. By: International Monetary Fund
    Abstract: Norway is in the midst of a healthy recovery from the 2015–16 oil-driven downturn. After growing by 1.9 percent in 2017, mainland economic activity is expected to accelerate further and to grow by about 2½ percent this year and next. But population aging and labor productivity will weigh on potential growth going forward. Norway also faces important challenges to sustaining its prosperity into the future: securing competitiveness in non-oil sectors as the contribution from oil wanes, and dealing with high and rising non-oil fiscal deficits, which will only worsen as aging pressures start to bite. More immediately, high household debt is an ongoing source of concern.
    Date: 2018–09–17
  44. By: Evgeny Kakanov; Hansjörg Blöchliger; Lilas Demmou
    Abstract: This paper provides a comprehensive analysis of the “resource curse” phenomenon, i.e. the negative impact of oil abundance on long-term economic growth, for a set of oil exporting countries. It distinguishes between two potential drivers of resource courses: oil dependence and oil price volatility, and it investigates whether the resource curse depends on a country’s institutional and macroeconomic environment. The empirical analysis relies on a panel of 24 oil exporters between 1982 and 2012 and an error correction model. The paper provides robust evidence in favour of the resource curse hypothesis, and there is no evidence that higher quality institutions could mitigate the curse. Oil price shocks appear to have an asymmetric impact in the short run: the growth effect is positive when oil prices rise, while no statistically significant effect is observed when they fall. There is also indirect evidence that the impact of an oil price shock is partly offset by fiscal policies, particularly in countries with high oil dependence. In the long run, oil price volatility does not appear to have a statistically significant impact on GDP. Finally, exchange rate regimes seem to play a role: countries allowing their currencies to float seem to gain from positive oil price shocks in the short run, but in the long run a fixed exchange rate regime is associated with higher GDP, probably owing to active stabilisation by sovereign wealth funds.
    Keywords: exchange rate, institutions, oil dependence, oil price shocks, resource curse
    JEL: E02 K00 Q32
    Date: 2018–10–11
  45. By: Bar, Michael (San Francisco State University); Hazan, Moshe (Tel-Aviv University; CEPR); Leukhina, Oksana (Federal Reserve Bank of St. Louis); Weiss, David (Tel Aviv University); Zoabi, Hosny (New Economic School)
    Abstract: A negative relationship between income and fertility has persisted for so long that its existence is often taken for granted. One economic theory builds on this relationship and argues that rising inequality leads to greater differential fertility between rich and poor. We show that the relationship between income and fertility has flattened between 1980 and 2010 in the US, a time of increasing inequality, as high income families increased their fertility. These facts challenge the standard theory. We propose that marketization of parental time costs can explain the changing relationship between income and fertility. We show this result both theoretically and quantitatively, after disciplining the model on US data. We explore implications of changing differential fertility for aggregate human capital. Additionally, policies, such as the minimum wage, that affect the cost of marketization, have a negative effect on the fertility and labor supply of high income women. We end by discussing the insights of this theory to the economics of marital sorting.
    Keywords: Income Inequality; Marketization; Differential Fertility; Human Capital; Minimum Wage
    JEL: E24 J13 J24 J31 J38
    Date: 2018–09–25
  46. By: Bachmann, Ronald; Cim, Merve; Green, Colin
    Abstract: The past four decades have witnessed dramatic changes in the structure of employment. In particular, the rapid increase in computational power has led to large-scale reductions in employment in jobs that can be described as intensive in routine tasks. These jobs have been shown to be concentrated in middle skill occupations. A large literature on labour market polarisation characterises and measures these processes at an aggregate level. However to date there is little information regarding the individual worker adjustment processes related to routine-biased technological change. Using an administrative panel data set for Germany, we follow workers over an extended period of time and provide evidence of both the short-term adjustment process and medium-run effects of routine task intensive job loss at an individual level. We initially demonstrate a marked, and steady, shift in employment away from routine, middle-skill, occupations. In subsequent analysis, we demonstrate how exposure to jobs with higher routine task content is associated with a reduced likelihood of being in employment in both the short term (after one year) and medium term (five years). This employment penalty to routineness of work has increased over the past four decades. More generally, we demonstrate that routine task work is associated with reduced job stability and more likelihood of experiencing periods of unemployment. However, these negative effects of routine work appear to be concentrated in increased employment to employment, and employment to unemployment transitions rather than longer periods of unemployment.
    Keywords: polarization,occupational mobility,worker flows,tasks
    JEL: J23 J24 J62 E24
    Date: 2018
  47. By: Dey Shubhasis (Indian Institute of Management Kozhikode)
    Abstract: Indian economy is exposed to various forms of uncertainty. Theories of investment underuncertainty and real options predict that increased uncertainty tends to depress real investment.Literature finds that uncertainties regarding oil price and real exchange rate adversely affect domestic capital formation. The socio-economic realities of India together with the lack of penetration of formal financial institutions make gold as a one of the main modes of investment for Indian households. However, over-investment in gold may have adverse consequences for the real economy as it drives away resources from productive capital. Moreover, higher inflation uncertainty makes it harder to extract information from the price system and thus may reduce economic efficiency. In this paper, we use a bivariate GARCH-in-mean VAR model to estimate the interrelationships of various uncertainty measures and the real economy. We find that the Indian economy is not particularly vulnerable to real exchange rate or oil price uncertainties.However, gold price uncertainty has a significant positive effect on output growth. Higher WPI inflation uncertainty is detrimental to growth rates of private consumption expenditure and gross capital formation. Moreover, a rise in the growth rate of government expenditure following a positive CPI inflation shock may partially explain the lack of any detrimental effect on output growth.
    Keywords: Uncertainty; output growth; bivariate GARCH-in-mean VAR; India
    Date: 2017–06
  48. By: Davoine, Thomas
    Abstract: Population aging challenges the financing of social security systems in developed economies, as the fraction of the population in working age declines. The resulting pressure on capital-labor ratios translates into a pressure on factor prices and production. While European countries all face this challenge, the speed at which their population ages differs, and thus the pressure on capital-labor ratios. If capital markets are integrated, differences in population aging may lead to cross-country spillovers, as investors freely seek the best returns on capital. Using a multi-country overlapping-generations model covering 14 European Union countries, I quantify spillovers and find that capital market integration leads to redistribution across countries over the long run. For instance, GDP per capita would on average be 2.9 %-points lower in Germany in each of the next 50 years if capital markets were perfectly integrated and public debts kept constants with increases in labor income taxes, compared to a closed economy case; by contrast, GDP per capita would on average be 2.1 %-points higher in France, whose population ages slower than in Germany. I also show that pension reforms can change the cross-country redistribution patterns, some countries losing from capital market integration without the reform but winning with it.
    Keywords: population aging,pension reforms,capital markets,cross-country spillovers,overlapping-generations modelling
    JEL: C68 E60 F41 J11
    Date: 2018
  49. By: International Monetary Fund
    Abstract: The economy has gained momentum amidst sound fundamentals. Growth in 2017 surprised with a strong and broad-based upswing driven by a recovery in investment and a supportive external environment, and the outlook is favorable. Fiscal and current account deficits remain at prudent levels, as does the public debt burden. The financial system remains stable.
    Keywords: Europe;Latvia;
    Date: 2018–09–05
  50. By: Carlo Alcaraz; Stijn Claessens; Gabriel Cuadra; David Marques-Ibanez; Horacio Sapriza
    Abstract: We assess how a major, unconventional central bank intervention, Draghi's "whatever it takes" speech, affected lending conditions. Similar to other large interventions, it responded to adverse financial and macroeconomic developments that also influenced the supply and demand for credit. We avoid such endogeneity concerns by comparing credit granted and its conditions by individual banks to the same borrower in a third country. We show that the intervention reversed prior risk-taking - in volume, price, and risk ratings - by subsidiaries of euro area banks relative to other local and foreign banks. Our results document a new effect of interventions and are robust along many dimensions.
    Keywords: unconventional monetary policy, credit conditions, spillovers
    JEL: E51 F34 G21
    Date: 2018–09
  51. By: Anda David (Agence Française de Développement & DIAL); Mohamed Ali Marouani (UMR « Développement et Société », IEDES / Université Paris1-Panthéon-Sorbonne, PSL, Université Paris-Dauphine, LEDa, IRD UMR DIAL); Charbel Nahas (Former Minister of Labor and Telecom, Lebanon); Björn Nilsson (PSL, Université Paris-Dauphine, LEDa, UMR DIAL)
    Abstract: In this article, we investigate the effects of a massive displacement of workers from a war-torn economy on the economy of a neighboring country. Applying a general equilibrium approach to the Lebanese economy, we explore effects from various components of the crisis on the labor market, the production apparatus, and macroeconomic indicators. Along with previous literature, our findings suggest limited or no adverse effects on high-skilled native workers, but a negative impact on the most vulnerable Lebanese workers is found. When aid takes the form of investment subsidies, significantly better growth and labor market prospects arise, recalling the necessity of complementing humanitarian aid with development aid to succeed in achieving long-term objectives. This may however not be politically viable in a context where refugees are considered as temporary.
    Keywords: labor markets, macroeconomic impacts of refugees, Syrian crisis, Lebanon
    JEL: E17 F22 J15
    Date: 2018–10
  52. By: International Monetary Fund
    Abstract: The economy rebounded in FY2016 after a two-year recession, and growth is expected to remain robust driven by continued infrastructure investment. Overall risks remain tilted to the downside. The issuance of a decentralized digital currency as a second legal tender would increase macroeconomic and financial integrity risks, and elevate the risk of losing the last U.S. dollar correspondent banking relationship. Insufficient fiscal consolidation before the reduction of the U.S. Compact grant after FY2023 remains the main medium- to long-term risk.
    Keywords: Asia and Pacific;Marshall Islands;
    Date: 2018–09–10
  53. By: William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Qing Han (Department of Economics, University of Kansas); Jianbo Zhang (Department of Economics, University of Kansas)
    Abstract: A central tenet of behavioral economics is that the axioms producing expected utility maximization by consumers are too strong to be descriptive of rational behavior. The existing theory of monetary services aggregation under risk assume expected utility maximization. We extend those results to uncertainty under weaker axiomatic assumptions by using Choquet expectations. Choquet integration reduces to Riemann integration as a special case under the stronger assumption of additive probability measure, not accepted in the literature on behavioral economics. Our theoretical results on monetary services aggregation are generalizations of prior results, nested as special cases of our results under stronger behavioral assumptions.
    Keywords: Uncertainty Aversion, User Cost, Choquet Expectation, Monetary Aggregation.
    JEL: E41 G12 C43
    Date: 2018–08
  54. By: Hamed Ghiaie (Département d'économique, Université de Cergy-Pontoise); Jean-François Rouillard (Département d'économique, Université de Sherbrooke)
    Abstract: Alpanda and Zubairy (2016) examine the effects of permanent changes to four types of housing-related tax policies in the context of a multi-agent DGE model. They find long-run tax multipliers that range from -2.21 to -1.53. However, we find an error in their codes that has a significant impact on the size of these multipliers. We correct their error and re-simulate their model. The long-run multipliers we find are reduced almost in half—they now range from -1.25 to -0.84. We also com- pute short-run multipliers at a 20-quarter horizon and find much lower multipliers, ranging between -0.14 to -0.02.
    Keywords: Housing taxation, banking, dynamic general equilibrium.
    JEL: E62 G28 H24 R38
    Date: 2018–10
  55. By: Williams, John C. (Federal Reserve Bank of New York)
    Abstract: Remarks at the Joint Bank Indonesia-Federal Reserve Bank of New York Central Banking Forum, Nusa Dua, Indonesia.
    Keywords: strong economy; monetary policy normalization; FOMC; forward guidance; natural evolution of Federal Reserve language; FOMC communication; R-star; balance sheet; dual mandate
    Date: 2018–10–10
  56. By: Abbassi, Puriya (Deutsche Bundesbank); Bräuning, Falk (Federal Reserve Bank of Boston)
    Abstract: We use transaction-level data on foreign exchange (FX) forward contracts for the period 2014 through 2016 in conjunction with supervisory balance sheet information to study the drivers of banks’ dollar hedging costs. Comparing contracts of the same maturity that are initiated during the same hour of the same day, we find large heterogeneity in banks’ hedging costs. We show that these costs (i) are higher for banks with a larger FX funding gap, (ii) depend on banks’ FX funding composition in terms of the source (interbank versus retail) and rollover structure (long-term versus short-term), (iii) are lower for banks with deeper internal dollar capital markets, and (iv) increase with banks’ shadow cost of capital. Our results are important for understanding how shocks are transmitted internationally through the FX hedging market.
    Keywords: FX markets; foreign exchange; dollar hedging; price determination; global banks; international financial shocks
    JEL: D40 E43 F30 F31 G15
    Date: 2018–03–01
  57. By: Joshua C.C. Chan; Eric Eisenstat; Rodney W. Strachan
    Abstract: This paper proposes a new approach to estimating high dimensional time varying parameter structural vector autoregressive models (TVP-SVARs) by taking advantage of an empirical feature of TVP-(S)VARs. TVP-(S)VAR models are rarely used with more than 4-5 variables. However recent work has shown the advantages of modelling VARs with large numbers of variables and interest has naturally increased in modelling large dimensional TVP-VARs. A feature that has not yet been utilized is that the covariance matrix for the state equation, when estimated freely, is often near singular. We propose a specification that uses this singularity to develop a factor-like structure to estimate a TVP-SVAR for 15 variables. Using a generalization of the re-centering approach, a rank reduced state covariance matrix and judicious parameter expansions, we obtain efficient and simple computation of a high dimensional TVP-SVAR. An advantage of our approach is that we retain a formal inferential framework such that we can propose formal inference on impulse responses, variance decompositions and, important for our model, the rank of the state equation covariance matrix. We show clear empirical evidence in favour of our model and improvements in estimates of impulse responses.
    Keywords: Large VAR, time varying parameter, reduced rank covariance matrix
    JEL: C11 C22 E31
    Date: 2018–10
  58. By: Angelo Marsiglia Fasolo
    Abstract: This paper provides empirical evidence for the impact of changes in volatility of monetary policy in Brazil using a SVAR where the time-varying volatility of shocks directly affects the level of observed variables. Contrary to the literature, an increase in monetary policy volatility results in higher in inflation, combined with reduction in output. The qualitative differences of impulse responses functions, compared to the literature for developed economies, are explained using a calibrated small-scale DSGE model with habit persistence in consumption and stochastic volatility shocks in the Taylor rule. The DSGE model is capable of explaining the increase of inflation in the medium term after a monetary policy volatility shock
    Date: 2018–08
  59. By: Zulkhibri, Muhamed (The Islamic Research and Teaching Institute (IRTI)); Prima Sakti, Muhammad Rizky (Islamic Economic Forum for Indonesian Development (ISEFID), Indonesia)
    Abstract: This study examines bank-lending channel over the business cycle for Indonesian dual banking system by ascertaining to what extent Islamic banks have a role in the credit smoothing. In this context, we utilize Indonesian dual banking system unbalanced panel data for the period 2001-2015. By employing two-step dynamic GMM estimators, the study shows that the bank lending behaviour are procyclical. However, when we categorize the lending behaviour into conventional and Islamic banks, the cyclicality of bank lending affects only conventional banks. As for the Islamic banks, the business cycle does not affect their financing decision. Specifically, large Islamic banks are more counter-cyclical in their financing behavior than small and medium size Islamic banks. Robustness tests using different measures of loans and model specifications confirm the results that Islamic bank is more stable and less procyclical in the case of Indonesian banking system.
    Keywords: Procyclicality; Bank Lending; Dual Banking System; GMM; Indonesia
    JEL: E59 E69 G29
    Date: 2018–05–08
  60. By: Ramiro Albrieu (Universidad de San Andres, Buenos Aires); Jose Maria Fanelli (Universidad de San Andres, Buenos Aires)
    Abstract: The paper investigates empirically the links between the fiscal space, fiscal redistributions, and distributional outcomes for the case of Latin America. It focus on two factors; first, the role of intertemporal restrictions and debt sustainability and, second, the demographic transition’s influence on the fiscal redistribution structure. The paper identifies some stylized facts that matter in designing distribution-friendly fiscal consolidation policies. Two findings deserve highlighting. First, the way in which a given fiscal adjustment is implemented matters to income distribution. As a general rule, the downward adjustment of expenditures is regressive, although the importance of the impact varies substantially according to the expenditure item and from one economy to another. Second, the Demographic Window of Opportunity (DWO) is the key stage of the demographic transition regarding the fiscal space in Latin America. Younger countries are entering the DWO and the older ones have to prepare to abandon it and enter the aging stage. The exercises suggest that the DWO will create the fiscal space required to implement progressive policies in younger countries while the opposite will occur in the countries that will age. The simulations indicate that the demographic transition-driven effects on the items of fiscal redistributions are potentially very large and have substantial consequences for income distribution and debt sustainability.
    Keywords: Fiscal Policy, Demographics
    JEL: E62 J11
    Date: 2018–09
  61. By: Bengtsson, Erik (Department of Economic History, Lund University); Stockhammer, Engelbert (Department of European & International Studies, King's College, London)
    Abstract: Wage restraint plays an important role in the conventional economic history explanation of the post-war golden growth experience of industrialized economies. Conversely, wage increases harming investment and increasing unemployment have been proffered as explanations for some of the high unemployment during the interwar period. This article argues that the conventional account implicitly only considers effects of wage growth on investment and not the advantageous effects on consumption. Thus, the evaluation of the effects on GDP growth is lop-sided. We employ a Post-Keynesian model to estimate effects of growth in the wage share of national income on consumption, investment, exports and imports separately, and weigh the effects together to estimate total effects on GDP growth, in Scandinavia (Denmark, Norway and Sweden) 1900–2010. Furthermore, we estimate the positive effects of wage pressure on productivity, showing it to be significant and positive in all three countries. We show that the postwar wage push had small positive effects on GDP growth in Denmark and Sweden, and a small negative effect in Norway. Thus, wage restraint is not a valid explanation for the postwar growth miracle. We propose a more comprehensive macroeconomic framework for understanding the implications of labour-capital distribution.
    Keywords: functional income distribution; inequality; consumption; investment; Scandinavia; Bhaduri-Marglin model; economic history
    JEL: E12 N14
    Date: 2018–10–11
  62. By: International Monetary Fund
    Abstract: The Portuguese economy performed strongly in 2017. Investment and exports were the key drivers of growth. Labor market conditions continued to improve, with falling unemployment and broad-based employment creation. The underlying fiscal balance posted a strong improvement, which can be attributed to buoyant economic growth, controlled budget execution, and falling interest costs, and has contributed to more favorable financing terms throughout the economy. Stability and confidence in the banking system strengthened following successful efforts by banks to raise capital and reduce NPLs, and the sale of Novo Banco in 2017.
    Date: 2018–09–12
  63. By: International Monetary Fund
    Abstract: Reform momentum remains strong under Vision 2030. New reform initiatives are being rolled-out under the Vision Realization Programs (VRPs). Oil prices have risen over the past year and are positively affecting fiscal and external balances. Higher oil prices provide both an opportunity and a risk to the fiscal reforms.
    Keywords: Middle East;Saudi Arabia;
    Date: 2018–08–24
  64. By: Callum Jones; Virgiliu Midrigan; Thomas Philippon
    Abstract: We evaluate and partially challenge the ‘household leverage’ view of the Great Recession. In the data, employment and consumption declined more in states 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 with Bayesian methods combining state and aggregate data. Changes in household credit limits explain 40 percent of the differential rise and fall of employment across states, but a small fraction of the aggregate employment decline in 2008-2010. Nevertheless, since household deleveraging was gradual, credit shocks greatly slowed the recovery.
    Keywords: United States;Western Hemisphere;Financial crises;Great Recession, Household Debt, Regional Evidence, Zero Lower Bound, General
    Date: 2018–08–30
  65. By: International Monetary Fund
    Abstract: The Russian economy is recovering from the 2015–16 recession. Over the past few years, the authorities have put in place a strong macroeconomic policy framework that has reduced uncertainty and helped weather external shocks. However, Russia’s convergence to advanced economy income levels has stalled and its weight in the global economy is shrinking.
    Date: 2018–09–12
  66. By: Douglas A. Webber (Department of Economics, Temple University)
    Abstract: Using linked employer-employee data which covers the majority of U.S. employment, I examine how frictions in the labor market have evolved over time. I estimate that the labor supply elasticity to the firm declined by approximately 0.19 log points (1.20 to 1.01) since the late 1990's, with the steepest declines occurring during the financial crisis. I find that this decline in labor market competition cost workers about 4 percent in lost earnings. I also find evidence that relatively monopsonistic firms smooth their employment behavior, growing at a rate lower than relatively competitive firms in good economic climates and slightly higher during poor economic climates. This conforms with the predictions of recent macroeconomic search models which suggest that frictions in the economy may actually reduce employment fluctuations.
    Keywords: Monopsony, Great Recession, Business Cycle
    JEL: J21 J42 J64
    Date: 2018–08
  67. By: Mark Mitchell; Robert Zymek
    Abstract: This note provides technical background information on some contents of the report Wealth of the Nation: Scotland’s Productivity Challenge (Kelly et al.,2018). The report shows that Scotland’s productivity performance is only middling in the OECD: Scotland would need to close a productivity gap of 20% to reach the top quartile of most productive OECD countries. It also illustrates that this gap can be attributed to a relatively low capital stock and low Total Factor Productivity (TFP) in equal measure. In this note, we make transparent the data and assumptions underlying these calculations.
    Keywords: input-output, development accounting, productivity
    JEL: E01 F40 O52 R11
    Date: 2018–10
  68. By: International Monetary Fund
    Abstract: Category 5 Hurricane Maria hit Dominica on September 18, 2017 while it was still recovering from tropical storm Erika, which had damaged the island on August 27, 2015. While Erika had caused severe damage, estimated at 96 percent of GDP, Maria was Dominica’s worst natural disaster with damage estimated at US$1.3 billion (226 percent of GDP). Prior to the disaster, the government had been making progress on fiscal consolidation commitments associated with the October 28, 2015 disbursement under the Rapid Credit Facility (SDR 6.15 million), which had sought to generate primary surpluses adequate to reduce the debt to GDP ratio to 60 percent by 2030.
    Keywords: Western Hemisphere;Dominica;
    Date: 2018–09–05
  69. By: Ezequiel Cabezon; Christian Henn
    Abstract: Based on a permanent income analysis, Gagnon (2018) has prominently suggested that Norway has saved too much, thereby free-riding on the rest of the world for demand. Our public sector balance sheet analysis comes to the opposite conclusion, chiefly because it also accounts for future aging costs. Unsurprisingly, we find that Norway’s current assets exceed its liabilities by some 340 percent of mainland GDP. But its nonoil fiscal deficits have grown very large (to almost 8 percent of mainland GDP) and aging pressures are only commencing. Therefore, Norway’s intertemporal financial net worth (IFNW) is negative, at about -240 percent of mainland GDP. As IFNW represents an intertemporal budget constraint, this implies that Norway’s savings are likely insufficient to address aging costs without additional fiscal action.
    Keywords: Public sector;Balance sheets;Oil revenues;Fiscal policy;Aging;Pensions;Fiscal balance;Debt sustainability;Norway;Public Sector Balance Sheet, Intertemporal Fiscal Balances, Debt Sustainability, General, Social Security and Public Pensions, General, Governmental Loans and Credits, Norway
    Date: 2018–08–27
  70. By: Andolfatto, David (Federal Reserve Bank of St. Louis)
    Abstract: In this paper, I investigate the impact of central bank digital currency (CBDC) on banks in a model where the banking sector that is not perfectly competitive. The theoretical framework combines the Diamond (1965) model of government debt with the Klein (1971) and Monti (1972) model of a monopoly bank. There are two main results. First, the introduction of interest-bearing CBDC increases financial inclusion and diminishes the demand for cash. Second, the introduction of interest-bearing CBDC need not disintermediate banks in any way and may, in fact, expand their depositor base if the added competition compels banks to raise their deposit rates.
    Keywords: Digital Currency; Central Banks; Monopoly; Markups
    JEL: E4 E5
    Date: 2018–10–05
  71. By: International Monetary Fund
    Abstract: In recent years, sizable buffers and prudent policies have kept the economy stable despite diamond market weakness and volatility. Nevertheless, the diamond cum public sector-led development model has shown its limits with slower growth and sluggish job creation, while the implementation of structural reforms has been challenging because of limited capacity, insufficient coordination among government entities, and political constraints. The 2017 National Development Plan aims at addressing these issues, with emphasis on private sector development and economic diversification, but more focused time-bound plans with concrete reforms and revised investment priorities need to be formulated and implemented.
    Keywords: Sub-Saharan Africa;Botswana;
    Date: 2018–09–05
  72. By: Eurilton Araújo
    Abstract: In this study, the Neo-Fisherian hypothesis denotes the positive short-run co-movement between the nominal interest rate and inflation conditional on a monetary policy shock. To investigate the situations in which this hypothesis may arise in a simple small open-economy New Keynesian model, I extend the analysis of Garín et al. (2018) to the framework in Galí and Monacelli (2005). This paper shows that, under relatively high substitutability between domestic and foreign goods, this hypothesis most likely emerges in economies that are more open. Furthermore, targeting CPI inflation accentuates the forces leading to a Neo-Fisherian behavior
    Date: 2018–08
  73. By: Thorvardur T. Olafsson
    Abstract: This paper develops a small open economy model where global and domestic liquidity is intermediated to the corporate sector through two financial processes. Investment banks intermediate cross-border credit through interlinked debt contracts to entrepreneurs and commercial banks intermediate domestic savings to liquidity constrained final good producers. Both processes are needed to facilitate development of key production inputs. The model captures procyclical investment bank leverage dynamics, global liquidity spillovers, domestic money market pressures, and macrofinancial linkages through which shocks propagate across the two processes, affecting spreads and balance sheets, as well as the real economy through investment and working capital channels.
    Keywords: Financial intermediation;financial frictions, cross-border banking flows, macrofinancial linkages, working capital, credit contracts, General, Financial Markets and the Macroeconomy, International Lending and Debt Problems, Open Economy Macroeconomics
    Date: 2018–09–11
  74. By: Gajewski Pawe³ (Faculty of Economics and Sociology, University of Lodz)
    Abstract: The aim of this paper is to evaluate the symmetry of demand and supply shocks affecting Polish voievodships and to assess the risk of asymmetric shocks in the future. The study employs the SVAR-based Blanchard and Quah (1989) decomposition as modified by Bayoumi and Eichengreen (1992) and utilizes a new method of estimating quarterly GDP by voievodships. The results point to a relatively high symmetry of shocks and a rather low risk of their occurrence. Shock asymmetry does not appear to be strongly related to differences in production structures, which is claimed in most theoretical approaches, including the Optimum Currency Areas Theory.
    Keywords: demand shocks, supply shocks, voievodships, monetary policy
    JEL: E5
    Date: 2018–10–08
  75. By: Luc Laeven; Fabian Valencia
    Abstract: This paper updates the database on systemic banking crises presented in Laeven and Valencia (2008, 2013). Drawing on 151 systemic banking crises episodes around the globe during 1970-2017, the database includes information on crisis dates, policy responses to resolve banking crises, and the fiscal and output costs of crises. We provide new evidence that crises in high-income countries tend to last longer and be associated with higher output losses, lower fiscal costs, and more extensive use of bank guarantees and expansionary macro policies than crises in low- and middle-income countries. We complement the banking crises dates with sovereign debt and currency crises dates to find that sovereign debt and currency crises tend to coincide or follow banking crises.
    Date: 2018–09–14
  76. By: Gries, Thomas
    Abstract: Mainstream growth theory is dominated by variations of the neoclassical approach. Growth is explained fully by elements of the supply side. In this paper we examine the general mechanism of technology growth and capital accumulation. However, instead of following a fully supply-side driven neoclassical approach we suggest a hybrid approach that allows for growth restrictions induced by demand-side elements. We obtain a demand-restricted growth by suggesting an unconventional equilibrium concept in a stochastic environment. We define macroeconomic equilibrium as stationary no-expectation-error equilibrium. This equilibrium concept relates to the Nash idea of individual stationary behavior as long as expectations prove to be realized. No rigidities are introduced. Even if potential growth is generated by technical change and capital accumulation, the level of the path and the growth rate are restricted by effective earnings. Both can be stable below the neoclassical potential growth. The growth rate in the demand restricted regime is semi-endogenous and determined by entrepreneurial conditions and activities. However, the growth process mutates to the neoclassical process if effective earnings are sufficient and the earnings ratio turns to one. As a result, the demand side cannot generate growth, but the demand side can permanently restrict growth which could have been generated by the supply side. Our hybrid model could help to bridge a gap between Keynesian and neoclassical ideas of economic growth.
    Keywords: Demand restricted growth,no-expectation-error equilibrium,neoclassical growth theory
    JEL: E12 E13 O40 E60
    Date: 2018
  77. By: Grodecka, Anna (Sveriges Riksbank); Kenny, Seán (Department of Economic History, Lund University); Ögren, Anders (Department of Economic History, Lund University)
    Abstract: This paper contributes to literature on bank distress using the Swedish experience of the in- ternational crisis of 1907, often paralleled with 2008. By employing previously unanalyzed bank-level data, we use logit regressions and principal component analysis to measure the im- pact of pre-crisis bank characteristics on the probability of their subsequent distress. The crisis was characterized by “creative destruction,” as those banks with weaker corporate governance structures, wider branching networks, operating with lower cost efficiency were more likely to experience distress. We find that poor credit allocation rather than foreign borrowing, as often stressed, were associated with ultimate demise.
    Keywords: bank distress; financial crises; Swedish banks; lender of last resort
    JEL: E58 G21 G28 H12 N23
    Date: 2018–10–12
  78. By: Miguel Casares Polo (Departamento de Economía-UPNA); Hashmat Khan; Jean-Christophe Poutineau
    Abstract: A. The optimizing programs of the model and other technical details (pages 1-7) B. Short-run and long-run equilibria in the DSGE model with endogenous entry and exit (pages 8-12) C. Average productivity (pages 13-15) D. Data and measurement equations (pages 16 and 17) E. The loglinearized equation for short-run fluctuations of critical productivity, zcr (pages 18 and 19) F. Aggregation (pages 20-24) G. The overall resources constraint (pages 25 and 26) H. Estimated shock decomposition for US data (pages 27-31) I. The sources of fluctuations in the Great Recession (pages 32-37).
    Date: 2018
  79. By: Jean-Christophe Delfim; Martin Hoesli
    Abstract: This research focuses on macroeconomic risk factors pertaining to the various types of real estate exposure (direct, listed, and non-listed) and how the resulting return predictability can be used in a mixed-asset portfolio framework. Comparing sensitivities to risk factors is important to assess whether indirect (listed and non-listed) exposures react in the same way as direct investments to the macroeconomy and how well such investments replicate direct real estate behavior. The various types of real estate exposure generally respond similarly to risk factors: GDP, money supply, construction costs, expected inflation, and expected economic activity positively impact returns, while the term and credit spreads, unemployment, and unexpected inflation negatively affect returns. We then rely on the identified risk factors to predict the expected returns and volatility of real estate, stocks, and bonds. These forecasts are used to build mixed-asset portfolios for various investment horizons. The benefits of including real estate in a portfolio and the possible substitutability between the three types of exposure are analyzed. The empirical analyses are conducted using U.S. data spanning over 30 years.
    Keywords: Investment horizon; Macroeconomy; Mixed-asset allocation; Real estate risk factors; Return predictability
    JEL: R3
    Date: 2018–01–01
  80. By: Carvalho, V. M; Tahbaz-Salehi, A.
    Abstract: This article reviews the literature on production networks in macroeconomics. It presents the theoretical foundations for the roles of input-output linkages as a shock propagation channel and a mechanism for transforming microeconomic shocks into macroeconomic fluctuations. The article provides a brief guide to the growing literature that explores these themes empirically and quantitatively.
    Keywords: networks, shock propagation, input-output linkages.
    Date: 2018–10–05
  81. By: Bulent Guler (Indiana University Bloomington); Amanda Michaud (University of Western Ontario)
    Abstract: We argue that transitional dynamics play a critical role in the evaluation of punitive incarceration reform on crime, inequality and the macroeconomy. Individuals’ past choices related to crime and employment under old policies have persistent consequences that limit their future responses to policy changes. Novel cohort evidence is provided in support of this mechanism. A quantitative model of this theory calibrated using restricted administrative data predicts nuanced, non-monotone dynamics of crime and incarceration similar to the U.S. experience following a single permanent increase in punitive incarceration in the 1980s. Increased inequality and declining employment accompany these changes and are borne unequally across generations.
    Date: 2018
  82. By: Ron Anderson; Jon Danielsson; Chikako Baba; Udaibir S Das; Heedon Kang; Miguel A. Segoviano Basurto
    Abstract: Macroprudential stress testing (MaPST) is becoming firmly embedded in the post-crisis policy-frameworks of financial-sectors around the world. MaPSTs can offer quantitative, forward-looking assessments of the resilience of financial systems as a whole, to particularly adverse shocks. Therefore, they are well suited to support the surveillance of macrofinancial vulnerabilities and to inform the use of macroprudential policy-instruments. This report summarizes the findings of a joint-research effort by MCM and the Systemic-Risk-Centre, which aimed at (i) presenting state-of-the-art approaches on MaPST, including modeling and implementation-challenges; (ii) providing a roadmap for future-research, and; (iii) discussing the potential uses of MaPST to support policy.
    Keywords: Financial crises;Systemic risk;Macroprudential Policy;Financial stability;Macroprudential Stress testing, Asset Pricing, Financial Markets and the Macroeconomy, Bayesian Analysis, Semiparametric and Nonparametric Methods, Cross-Sectional Models, Model Evaluation and Testing, Financial Econometrics
    Date: 2018–09–11
  83. By: Mo Qiao (Peking University); Siying Ding (Renmin University of China & Indiana University Bloomington); Yongzheng Liu (Renmin University of China)
    Abstract: This paper examines how the level of democracy in a country affects the relationship between fiscal decentralization and government size. We argue that political regimes, proxied by their democracy levels, are important for different decentralization theories to predict the impact of fiscal decentralization on government size. We test this argument using cross-country data from 76 developed and developing countries during 1972–2013. We find strong and robust evidence that fiscal decentralization is negatively associated with government size and that a higher level of democracy tends to mitigate the negative impact of fiscal decentralization. Therefore, our study contributes to the literature by offering a novel insight on mixed results regarding the relationship between fiscal decentralization and government size in the literature.
    Date: 2018–09
  84. By: Andolfatto, David (Federal Reserve Bank of St. Louis)
    Abstract: A wide range of heterodox theories claim that banks are special because they create money in the act of lending. Put another way, banks can create the funding they need ex nihilo, whereas all other agencies must first acquire the funding they need from other parties. Mainstream economic theory largely agrees with this assessment, but questions its theoretical and empirical relevance, preferring to view banks as one of many potentially important actors in the financial market. In this paper, I develop a formal economic model in an attempt to make these ideas precise. The model lends some support to both views on banking.
    Keywords: Heterodox view; Money; Banking
    JEL: E4 E5
    Date: 2018–10–09
  85. By: Yasser Abdih; Li Lin; Anne-Charlotte Paret
    Abstract: Despite closing output gaps and tightening labor markets, inflation has remained low in the euro area. Based on an augmented Phillips Curve framework, we find that this phenomenon—sometimes attributed to low global inflation—has been primarily caused by a remarkable persistence of inflation, keeping it low despite the reduction in slack. This feature is shown to be specific to the euro area (in comparison with the United States). Monetary policy needs to stay accommodative to help guide inflation back to target.
    Keywords: Inflation;Inflation expectations;Inflation persistence;Monetary policy;Econometric models;Euro Area;Phillips curve, inflation persistence and expectations, General, Forecasting and Simulation, Monetary Policy (Targets, Instruments, and Effects)
    Date: 2018–08–22
  86. By: Carolina Ortega Londoño
    Abstract: This study provides evidence of bank heterogeneity in Colombiafor the period 2002-2014 and analyzes how bank-specific character-istics determine the bank-lending channel for monetary policy. Toanalyze bank heterogeneity, this study estimates technical (cost) effi-ciency using Stochastic Frontier Analysis, which also allows for themeasurement of Returns to Scale and a Lerner Index to proxy mar-ket power in the loans market. This study also provides measuresof capitalization, liquidity, and the commonly used ratios of financialand operational efficiency with bank’s balance-sheet data. Further-more, using a long and unbalanced panel, this study finds evidence ofthe existence of a bank-lending channel and finds that this transmis-sion mechanism is determined by bank-specific characteristics. Theresults suggest higher technical and operational efficiency, capitaliza-tion, liquidity and market power, increase the sensitivity of loans dis-bursements to monetary policy shocks, while higher returns to scalelowers this sensitivity.
    Keywords: monetary policy transmission; bank lending channel; bank heterogeneity; bank efficiency
    JEL: G21 E52 E59
    Date: 2018–06–01
  87. By: Rosli Said; Nasir Daud; Tham Kuen Wei
    Abstract: Non-performing property loans pose a huge threat to any country’s economic stability. This paper examines the effects and relationships of macroeconomic factors in determining the possible outcomes of non-performing real estate loans in Malaysia. It also examines some banking sentiments in their receptivity towards the conditions in terms of number of loans approved, rejected and applied. Using Stepwise Regression Approach, it was shown that Gross National Income responded significantly negative to the number of Non-performing Property Loans in Malaysia relatively close to the study conducted in Greece where GDP growth seems to be the dominant and main determinant in terms of non-performing loans compared to other macroeconomic determinants. At the same time, Unemployment responded significantly positive, where levels of unemployment would cause the inability of private individuals to repay their loans or debts. At the same time, sentiments of consumers shown that Applications for Non-residential Loans decreases as Non-performing Property Loans increases. Surprisingly, this study also shows that as Non-Performing Property Loans increases, the number of Loans Approved for Non-Housing Property Loans increases as well. This shows that Banking Sentiments in loan approvals are not affected by the conditions of economy when it comes to Non-Residential Properties.
    Keywords: Macroeconomic Determinants; Non-performing Property Loans; Stepwise Regression
    JEL: R3
    Date: 2018–01–01

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