nep-mac New Economics Papers
on Macroeconomics
Issue of 2018‒11‒26
eighty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Political Distribution Risk and Aggregate Fluctuations By Thorsten Drautzburg; Jesus Fernandez-Villaverde; Pablo Guerrón-Quintana
  2. Life below zero: Bank lending under negative policy rates By Heider, Florian; Saidi, Farzad; Schepens, Glenn
  3. What went wrong with Italy, and what the country should now fight for in Europe By Sergio Cesaratto; Gennaro Zezza
  4. Unconventional policies in a monetary union: a policy game approach By Manuela Mischitelli; Giovanni Di Bartolomeo
  5. Understanding the Aspects of Federal Reserve Forward Guidance By Lunsford, Kurt Graden
  6. The Foreign Exchange Interventions of the CNB as an Unconventional Instrument of Monetary Policy By Andrea Cecrdlova
  7. Missing Events in Event Studies: Identifying the Effects of Partially-Measured News Surprises By Gürkaynak, Refet S.; Kisacikoglu, Burçin; Wright, Jonathan H.
  8. Deficit finance and developing economies:Implications and results By Hasan, Zubair
  9. Human Capital Accumulation, Income Distribution and Economic Growth: A Neo-Kaleckian Analytical Framework By Gilberto Tadeu Lima; Laura Carvalho, Gustavo Pereira Serra
  10. Home Ownership and Monetary Policy Transmission By Koeniger, Winfried; Ramelet, Marc-Antoine
  11. A Dynamic Hierarchical Cluster Analysis of Economic Performance and Perceptions of the Euro across EU Countries By Emília Zimková; Vlastimil Farka?ovský; ?ubomir Pinter; Jaros?aw Szostak; Krzysztof Koj
  12. Monetary and Fiscal Policy in a Cash-in-advance Economy with Quasi-geometric Discounting By Daiki Maeda
  13. The Evolution of money debate: functionalism versus chartalism, Schumpeterian dynamics, Gresham's fallacy, and how history constrains public finance By Thomas Palley
  14. Estimate of the Elasticity of Substitution in Slovak Economy ? A Frequency Filter SUR Model By Karol Szomolányi; Martin Luká?ik; Adriana Luká?iková
  15. The permanent-transitory confusion: Implications for tests of market efficiency and for expected inflation during turbulent and tranquil times By Cukierman, Alex; Lustenberger, Thomas; Meltzer, Allan H
  16. The Framework for Risk Identification and Assessment By Cameron MacDonald; Virginie Traclet
  17. Optimal sovereign debt: Case of Slovakia By Zuzana Múèka; ¼udovít Ódor
  18. Flight-to-safety and the Credit Crunch: A new history of the banking crisis in France during the Great Depression By Patrice Baubeau; Eric Monnet; Angelo Riva; Stefano Ungaro
  19. Forecasting using mixed-frequency VARs with time-varying parameters By Markus Heinrich; Magnus Reif
  20. Spatial Approach to Heterogeneity of Inflation Expectations in the Euro Area By Karolina Tura-Gawron; Magdalena Szyszko
  21. Estimated policy rules for different monetary regimes: Flexible inflation targeting versus a dual mandate By Jacob Punnoose; Amber Wadsworth
  22. A Factor Augmented Vector Autoregressive (FAVAR) approach for Monetary Policy: Replication of the empirical results in “Measuring the effects of Monetary Policy” By Luvsannyam, Davaajargal; Batmunkh, Khuslen
  23. An Intermediation-Based Model of Exchange Rates By Malamud, Semyon; Schrimpf, Andreas
  24. Forecasting the implications of foreign exchange reserve accumulation with an agent-based model By Ramis Khabibullin; Alexey Ponomarenko; Sergei Seleznev
  25. Money Creation in Different Architectures By Faure, Salomon; Gersbach, Hans
  26. Bank Capital in the Short and in the Long Run By Mendicino, Caterina; Nikolov, Kalin; Suarez, Javier; Supera, Dominik
  27. An Heterogeneous-Agent New-Monetarist Model with an Application to Unemployment By Guillaume Rocheteau; Pierre-Olivier Weill; Tsz-Nga Wong
  28. Continuous vs Discrete Time Modelling in Growth and Business Cycle Theory By Omar Licandro; Luis A. Puch; Jesús Ruiz
  29. Bhutan; 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Bhutan By International Monetary Fund
  30. Wage Floor Rigidity in Industry-Level Agreements: Evidence from France By Fougère, Denis; Gautier, Erwan; ROUX, Sebastien
  31. Inflation-linked Bonds: An Introduction By Maria Farrugia; Glenn Formosa; Joseph Julian Pace
  32. Degree of indépendance and accountability within the monetary policy committee of the BCEAO By Régis Bokino; Moustapha Gano
  33. Finland’s Growth Performance – The Lost Decade and the Prospects in the Near Term By Kaitila, Ville; Kauhanen, Antti; Kuusi, Tero; Lehmus, Markku; Maliranta, Mika; Vihriälä, Vesa
  34. Jamaica; Fourth Review Under the Stand-By Arrangement, Request for Modification of Performance Criteria, and Monetary Policy Consultation Clause-Press Release; Staff Report; and Statement by the Executive Director for Jamaica By International Monetary Fund
  35. Argentina; First Review under the Stand-By Arrangement; Inflation Consultation; Financing Assurances Review; and Request for Rephasing, Augmentation, Waivers of Nonobservance and Applicability of Performance Criteria, and Modification of Performance Criteria-Press Release; Staff Report; and Staff Supplement By International Monetary Fund
  36. A Steeper slope: the Laffer Tax Curve in Developing and Emerging Economies By Zouhair Aït Benhamou
  37. Long-term Changes in Married Couples' Labor Supply and Taxes: Evidence from the US and Europe Since the 1980s By Bick, Alexander; Brüggemann, Bettina; Fuchs-Schündeln, Nicola; Paule-Paludkiewicz, Hannah
  38. Making sense of Piketty's 'Fundamental Laws' in a Post-Keynesian Framework: The transitional dynamics of wealth inequality By Stefan Ederer; Miriam Rehm
  39. Capital Flows in an Aging World By Barany, Zsofia; Coeurdacier, Nicolas; Guibaud, Stéphane
  40. Macro-Fiscal Implications of Climate Change: The Case of Djibouti By Alexei P Kireyev
  41. Solomon Islands; 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Solomon Islands By International Monetary Fund
  42. Macroeconomic Effects of China's Financial Policies By Kaiji Chen; Tao Zha
  43. The Impact of the ECB’s Quantitative Easing Policy on Capital Flows in the CESEE Region By Anita Angelovska–Bezhoska; Ana Mitreska; Sultanija Bojcheva-Terzijan
  44. Credit Crunches, Asset Prices and Technological Change By Araujo, Luis; Cao, Qingqing; Minetti, Raoul; Murro, Pierluigi
  45. Cabo Verde Transition Finance Country Pilot By Rachel Morris; Olivier Cattaneo; Konstantin Poensgen
  46. Financial intermediation cost, rents, and productivity: An international comparison By Guillaume Bazot
  47. Systemic illiquidity in the interbank network By Langfield, Sam; Liu, Zijun; Ota, Tomohiro; Ferrara, Gerardo
  48. The Covered Interest Parity Puzzle and the Evolution of the Japan Premium By Alexis Stenfors
  49. Matlab, Python, Julia: What to Choose in Economics? By Coleman, Chase; Lyon, Spencer; Maliar, Lilia; Maliar, Serguei
  50. The (Q,S,s) Pricing Rule: A Quantitative Analysis By Kenneth Burdett; Guido Menzio
  51. Labor supply and the business cycle: The “Bandwagon Worker Effect” By Martín-Román, Ángel L.; Cuéllar Martín, Jaime; Moral, Alfonso
  52. Dealer behaviour in the Euro money market during times of crisis By Fecht, Falko; Reitz, Stefan
  53. A New Approach for Detecting Shifts in Forecast Accuracy By Chiu,Ching-Wai; Hayes, Simon; Kapetanios, George; Theodoridis, Konstantinos
  54. Which Ladder to Climb? Wages of workers by job, plant, and education By Bayer, Christian; Kuhn, Moritz
  55. Mongolia; Fifth Review Under the Extended Fund Facility Arrangement and Request for Modification and Waiver of Applicability of Performance Criteria-Press Release; Staff Report; Staff Supplement; and Statement by the Executive Director for Mongolia By International Monetary Fund
  56. Safe Assets By Robert Barro; Jesus Fernandez-Villaverde; Oren Levintal; Andrew Mollerus
  57. Unequal Gains, Prolonged Pain: A Model of Protectionist Overshooting and Escalation By Blanchard, Emily; Willmann, Gerald
  58. Chile; 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Chile By International Monetary Fund
  59. The Price of Capital, Factor Substitutability, and Corporate Profits By Hergovich, Philipp; Merz, Monika
  60. The third pillar of the Investment Plan for Europe: An impact assessment using the RHOMOLO model By Martin Christensen; Andrea Conte; Filippo Di Pietro; Patrizio Lecca; Giovanni Mandras; Simone Salotti
  61. Central Bank Financial Strength and Inflation: A Meta-Analysis By Mojmir Hampl; Tomas Havranek
  62. Mexico; 2018 Article IV Consultation-Press Release; Staff Report; and Staff Statement By International Monetary Fund
  63. Growth without Expectations:The Original Sin of Neoclassical Growth Models By Michaël Assous; Muriel Dal Pont Legrand
  64. Series largas de algunos agregados economicos y demograficos regionales By Angel De la Fuente
  65. Modeling of Economic and Financial Conditions for Nowcasting and Forecasting Recessions: A Unified Approach By Altug, Sumru G.; Cakmakli, Cem; Demircan, Hamza
  66. Republic of Equatorial Guinea; First Review under the Staff-Monitored Program-Press Release; and Staff Report By International Monetary Fund
  67. Not all cities are alike : House price heterogeneity and the design of macro-prudential policies in China By Funke, Michael; Tsang, Andrew; Zhu, Linxu
  68. Family Firm Performance over the Business Cycle: A Meta-Analysis By Christopher Hansen; Joern H. Block; Matthias Neuenkirch
  69. Long-Term Changes in Married Couples' Labor Supply and Taxes: Evidence from the US and Europe Since the 1980s By Alexander Bick; Bettina Brüggemann; Nicola Fuchs-Schündeln; Hannah Paule-Paludkiewicz
  70. Global Investors, the Dollar, and U.S. Credit Conditions By Friederike Niepmann; Tim Schmidt-Eisenlohr
  71. Forex intervention and reserve management in Switzerland and Israel since the financial crisis: Comparison and policy lessons By Cukierman, Alex
  72. Early Warning Indicator of financial crises for V4 Countries By Michal Mares; Martin Slany
  73. Network effects at retail payments market: evidence from Russian individuals By Egor Krivosheya; Ekaterina Semerikova
  74. Monetary policy regimes and the lower bound on interest rates By Corbisiero, Giuseppe
  75. Monetary and Macroprudential Policy Coordination Among Multiple Equilibria By Itai Agur
  76. Network effects at retail payments market: evidence from Russian merchants By Egor Krivosheya
  77. 銀行の資本構成と自己資本比率規制 By Okahara, Naoto
  78. Risk-Adjusted Capital Allocation and Misallocation By David, Joel; Schmid, Lukas; Zeke, David
  79. The Dynamics of Exploitation and Inequality in Economies with Heterogeneous Agents By Galanis, Giorgos; Veneziani, Roberto; Yoshihara, Naoki
  80. Do Potential Future Health Shocks Keep Older Americans from Using Their Housing Equity? By Tim Murray
  81. Sources of Inequality in Italy By Roberto Iacono; Marco Ranaldi

  1. By: Thorsten Drautzburg (Federal Reserve Bank of Philadelphia); Jesus Fernandez-Villaverde (Department of Economics, University of Pennsylvania); Pablo Guerrón-Quintana (Department of Economics, Boston College)
    Abstract: We argue that political distribution risk is an important driver of aggregate fluctuations. To that end, we document signifucant changes in the capital share after large political events, such as political realignments, modifications in collective bargaining rules, or the end of dictatorships, in a sample of developed and emerging economies. These policy changes are associated with significant fluctuations in output and asset prices. Using a Bayesian proxy-VAR estimated with U.S. data, we show how distribution shocks cause movements in output, unemployment, and sectoral asset prices. To quantify the importance of these political shocks for the U.S. as a whole, we extend an otherwise standard neoclassical growth model. We model political shocks as exogenous changes in the bargaining power of workers in a labor market with search and matching. We calibrate the model to the U.S. corporate non-financial business sector and we back up the evolution of the bargaining power of workers over time using a new methodological approach, the partial filter. We show how the estimated shocks agree with the historical narrative evidence. We document that bargaining shocks account for 34% of aggregate fluctuations.
    Keywords: Political redistribution risk, bargaining shocks, aggregate fluctuations, partial filter, historical narrative
    JEL: E32 E37 E44 J20
    Date: 2017–07–25
  2. By: Heider, Florian; Saidi, Farzad; Schepens, Glenn
    Abstract: We show that negative policy rates affect the supply of bank credit in a novel way. Banks are reluctant to pass on negative rates to depositors, which increases the funding cost of high-deposit banks, and reduces their net worth, relative to low-deposit banks. As a consequence, the introduction of negative policy rates by the European Central Bank in mid-2014 leads to more risk taking and less lending by euro-area banks with greater reliance on deposit funding. Our results suggest that negative rates are less accommodative, and could pose a risk to financial stability, if lending is done by high-deposit banks.
    Keywords: bank balance-sheet channel; bank risk-taking channel; deposits; Negative Interest Rates; zero lower bound
    JEL: E44 E52 E58 G20 G21
    Date: 2018–09
  3. By: Sergio Cesaratto; Gennaro Zezza
    Abstract: In this paper we briefly review the evolution of the Italian economy in the post-war period, discussing the shift from a first period when fiscal policy was targeted - among other things - at full employment, to a later period when controlling inflation through a "foreign discipline" became the main policy target. We review critically the literature on the Italian productivity slowdown, suggesting that it neglects the role of aggregate demand, and of labor market reforms, on productivity. Finally, we discuss Eurozone imbalances, suggesting that Eurozone institutions adopt new rules to keep the interest rate low enough to make public debt sustainable, while using fiscal policy to stimulate growth.
    Keywords: Italy; stagnation; Eurozone; imbalances
    JEL: E44 E52 E62
    Date: 2018
  4. By: Manuela Mischitelli (La Sapienza); Giovanni Di Bartolomeo (La Sapienza)
    Abstract: How does the availability of fiscal and unconventional monetary measures modify the composition of the optimal policy mix, in a monetary union, when ZLB is binding? In order to answer to this question, we have built a simply three-period generalized New Keynesian model, in which we have assumed that non-money assets are not perfect substitutes. Following Friedman (2013), private agents' choice is responsive to a sort of long run interest rate.We have proved that in a monetary union, greater is the number of member countries adopting autonomous fiscal policy, greater will be public spending and more moderate will be the use of unconventional policies measures by central bank. Anyway, deviations in output and inflation decrease with the enlargement of the monetary union.
    Keywords: Unconventional Monetary policies, ZLB, Fiscal policy, Quantitative Easing, Forward Guidance, Policy game
    JEL: C70 E52 E60
    Date: 2018–10
  5. By: Lunsford, Kurt Graden (Federal Reserve Bank of Cleveland)
    Abstract: This paper studies the effects of Federal Open Market Committee (FOMC) forward guidance language. I estimate two policy surprises at FOMC meetings: a change in the current federal funds rate and an orthogonal change in the expected path of the federal funds rate. From February 2000 to June 2003, the FOMC only gave forward guidance about risks to the economic outlook, and a surprise increase in the expected federal funds rate path had expansionary effects. This is consistent with models of central bank information effects, where a positive economic outlook causes private agents to revise up their expectations for the economy. From August 2003 to May 2006, the FOMC also gave forward guidance about policy inclinations, and a surprise increase in the federal funds rate path had contractionary effects. These results are consistent with standard macroeconomic models of forward guidance. Overall, the effects of forward guidance depend on the FOMC’s choice to use one or both of the economic-outlook and policy-inclination aspects of forward guidance.
    Keywords: Central Bank Communication; Event Study; Federal Funds Futures; Information Effects; Monetary Policy;
    JEL: E43 E44 E52 E58 G14
    Date: 2018–11–07
  6. By: Andrea Cecrdlova (University of Economics in Prague)
    Abstract: During the last crisis monetary authorities hit zero interest rates and as a result they began to use less standard instruments. However, they failed to meet the declared inflation target for a long time. The Czech National Bank (CNB) decided to use the unconventional instrument in November 2013 when the exchange rate commitment was introduced. The aim of the paper is to evaluate the decision to use the exchange rate commitment with regard to its potential side effects. The most significant side effect is the enormous amount of foreign exchange reserves, which, due to the appreciation of the domestic currency, can get the CNB into more cumulative negative values than it already is.
    Keywords: CNB, monetary policy, unconventional monetary instruments, foreign exchange interventions, foreign exchange reserves.
    JEL: E31 E52 E58
    Date: 2018–10
  7. By: Gürkaynak, Refet S.; Kisacikoglu, Burçin; Wright, Jonathan H.
    Abstract: Macroeconomic news announcements are elaborate and multi-dimensional. We consider a framework in which jumps in asset prices around macroeconomic news and monetary policy announcements reflect both the response to observed surprises in headline numbers and latent factors, reflecting other details of the release. The details of the non-headline news, for which there are no expectations surveys, are unobservable to the econometrician, but nonetheless elicit a market response. We estimate the model by the Kalman filter, which essentially combines OLS- and heteroskedasticity-based event study estimators in one step, showing that those methods are better thought of as complements rather than substitutes. The inclusion of a single latent factor greatly improves our ability to explain asset price movements around announcements.
    Keywords: Bond Markets; event study; high-frequency data; identification
    JEL: E43 E52 E58 G12 G14
    Date: 2018–09
  8. By: Hasan, Zubair
    Abstract: This article discusses briefly various aspects and forms of deficit financing in modern economies. It deals with deficit financing (i) within countries and (ii) between the member countries of the International Monetary Fund (IMF} and that institution as aid provider to a member in difficulty. In (i) it elaborates on the use of deficit financing as an instrument to part fund development, role in crisis management and inflationary consequences. In (ii) it briefly sees deficit financing on a global scale, explain IMF conditionality and the sort of programs it envisaged the aid seeking members to follow; it presents illustration and critique of the instrument each case.. In conclusion it contains some observations including a few policy suggestions.
    Keywords: Deficit financing, Economic development; Inflation; IMF conditionality; financial turmoil
    JEL: E1 E3 E31 E6
    Date: 2018–11–01
  9. By: Gilberto Tadeu Lima; Laura Carvalho, Gustavo Pereira Serra
    Abstract: This paper incorporates human capital accumulation through provision of universal public education by a balanced-budget government to a Neo-Kaleckian analytical framework of distribution and growth. Human capital accumulation positively impacts on workers’ productivity in output production and their bargaining power in wage negotiations. Differences in tax rates on wage and profit income have distributive implications for consumption and investment and so shape how effective demand varies with income distribution. In the long-run equilibrium, a rise in workers’ (capitalists’) bargaining power raises (lowers) the pre- and after-tax wage share, which raises (reduces) the rates of physical capital utilization, employment (which also measures the rate of human capital utilization) and output growth. Meanwhile, a rise in a uniform tax rate (which also denotes the share of tax spending in public education in output) lowers the long-run equilibrium values of the pre- and after-tax wage share and the rates of physical capital utilization, employment and output growth. Paradoxically, in the long-run equilibrium, a higher share of investment in human capital in output lowers the rate of human capital accumulation, with which output growth varies positively. A strengthening in the bargaining power of workers is output growth-enhancing in the long-run equilibrium, and it does so by raising the rates of accumulation of both physical and human capital.
    Keywords: Human capital; income distribution; economic growth; employment
    JEL: E12 E24 E25 O41
    Date: 2018–11–12
  10. By: Koeniger, Winfried; Ramelet, Marc-Antoine
    Abstract: We present empirical evidence on the heterogeneity in monetary policy transmission across countries with different home ownership rates. We use household-level data together with shocks to the policy rate identified from high-frequency data. We find that housing tenure reacts more strongly to unexpected changes in the policy rate in Germany and Switzerland –the OECD countries with the lowest home ownership rates– compared with existing evidence for the U.S. An unexpected decrease in the policy rate by 25 basis points increases the home ownership rate by 0.8 percentage points in Germany and by 0.6 percentage points in Switzerland. The response of non-housing consumption in Switzerland is less heterogeneous across renters and mortgagors, and has a different pattern across age groups than in the U.S. We discuss economic explanations for these findings and implications for monetary policy.
    Keywords: Monetary policy transmission, Home ownership, Housing tenure, Consumption
    JEL: E21 E52 R21
    Date: 2018–11
  11. By: Emília Zimková (Matej Bel University in Banská Bystrica, Faculty of Economics); Vlastimil Farka?ovský (Matej Bel University in Banská Bystrica, Faculty of Economics); ?ubomir Pinter (Matej Bel University in Banská Bystrica, Faculty of Economics); Jaros?aw Szostak (WSB University in Chorzow); Krzysztof Koj (WSB University in Chorzow)
    Abstract: One of the crucial benefits of EU membership, inscribed in Art. 3(3) of the Treaty on the European Union, should be economic and social cohesion. Ample empirical studies have examined EU countries? performance in terms of nominal convergence, real convergence, and convergence of business and financial cycles. Twenty years after the inception of the Economic and Monetary Union, economic cohesion clearly is not a reality, while widening real income gaps threaten social cohesion, too. The paper aims to highlight the heterogeneity and dynamics of changes in economic performance and perceptions of the euro across Europe ? two factors arguably having a tremendous impact on the success of the European project. To this end, series of data spanning 2008 through 2017 were explored using hierarchical cluster analysis.
    Keywords: Economic and Monetary Union, economic performance, convergence criteria, euro adoption, euro perception, dynamic hierarchical cluster analysis
    JEL: E52 E62 E50
    Date: 2018–10
  12. By: Daiki Maeda (Graduate School of Economics, Osaka University)
    Abstract: In this paper, we analyze monetary and fiscal policies in a dynamic general equilibrium model in which households have a preference of quasi-geometric discounting and face a cash- in-advance constraint. From this policy analysis, we obtain the following two outcomes. First, when the government can control only the money supply, the Friedman rule is optimal. Second, when the government can also control income tax rates, the Friedman rule may not be optimal.
    Keywords: Quasi-geometric discounting; Friedman rule
    JEL: E21 E40
    Date: 2018–11
  13. By: Thomas Palley
    Abstract: This paper discusses the evolution of money and the monetary system. The origins of money debate is framed in terms of functionalism versus chartalism. Endogenous Schumpeterian dynamics apply to the evolution of money and monetary systems, and those dynamics are supportive of the functionalist perspective. A functionalist Schumpeterian lens shows "Gresham's law" should be relabeled "Gresham's fallacy" because good money drives out bad. The Gresham dynamic is also supportive of the functionalist perspective. Lastly, the paper shows monetary history over the past millennium does not support chartalist public finance claims as represented by modern money theory (MMT).
    Keywords: Money, functionalism, chartalism, Gresham’s law, Schumpeterian dynamics, modern monetary theory
    JEL: E4 E44
    Date: 2018
  14. By: Karol Szomolányi (University of Economics in Bratislava); Martin Luká?ik (University of Economics in Bratislava); Adriana Luká?iková (University of Economics in Bratislava)
    Abstract: The elasticity of substitution between capital and labor in Slovak economy is estimated in the paper. To avoid normalization of the constant elasticity substitution production function problem, we focus in the capital and labor demand specification. Data series of capital, labor, output and their prices gathered from the National Bank of Slovakia macroeconomic database are used. To abstract from the business cycle shocks, data are modified by frequency filters. Finally, to avoid a false regression, the specifications are differenced. Since we do not reject the correlation between error terms of the specification, we use the seemingly unrelated regression method to estimate the coefficients. In result the estimated elasticity of substitution in the Slovak economy is relatively small; its value ranges from 0.03 to 0.11.
    Keywords: elasticity of the input substitution, seemingly unrelated regression model, frequency filter
    JEL: C32 E23 E25
    Date: 2018–10
  15. By: Cukierman, Alex; Lustenberger, Thomas; Meltzer, Allan H
    Abstract: Even when all past and present information is known individuals usually remain uncertain about the permanence of observed variables. After reviewing the history and role of adaptive expectations and its statistical foundations in modeling this permanent-transitory confusion the paper investigates the consequences of this confusion for tests of market efficiency in the treasury bill and foreign exchange markets. A central result is that the detection of serial correlation in efficiency tests based on finite samples does not necessarily imply that markets are inefficient. The second part of the paper utilizes data on Israeli inflation expectations from the capital market to estimate the implicit speed of learning about changes in inflation and to examine the performance of adaptive expectations in tracking the evolution of those expectations during the 1985 Israeli shock stabilization as well as during the stable inflation targeting period.
    Keywords: behavior of inflationary expectations during stabilizations and tranquil times; Permanent-transitory confusion and rational expectations; tests of market efficiency in treasury bills and forex markets
    JEL: B16 B22 E31 G14
    Date: 2018–09
  16. By: Cameron MacDonald; Virginie Traclet
    Abstract: Risk assessment models are an important component of the Bank’s analytical tool kit for assessing the resilience of the financial system. We describe the Framework for Risk Identification and Assessment (FRIDA), a suite of models developed at the Bank of Canada to quantify the impact of financial stability risks to the broader economy and a range of financial system participants (households, businesses and banks). These risks are tail-risk events that are rare and severe but plausible. FRIDA combines models that quantify the impact of risks on both aggregate macrofinancial variables and different types of financial system participants, thus allowing us to understand the channels through which severe shocks could be transmitted and amplified within the financial system. By including sectoral models, FRIDA can consider the rich institutional features and heterogeneity that characterize different parts of the financial system and capture the various channels through which they can be affected by shocks. Like any model, FRIDA faces model uncertainty. Consequently, results from FRIDA are used in combination with expert judgment to form an overall assessment of financial stability risks.
    Keywords: Economic models, Financial Institutions, Financial stability, Housing
    JEL: C C3 C5 C6 C7 E00 E27 E37 E47 D1 G0 G21
    Date: 2018
  17. By: Zuzana Múèka (Council for Budget Responsibility); ¼udovít Ódor (National Bank of Slovakia)
    Abstract: This study exploits the trade-off between government debt as an asset that can be used for self- insurance against idiosyncratic income shocks and the distortions on labor and capital supply created by taxes needed to finance debt. In deriving optimal debt level, the paper explicitly considers a trade-off between the pain of fiscal adjustment (assuming that the current debt ratio is above the steady state optimal one) and the gain from reaching the ideal steady state level. To determine the optimal quantity of public debt the study uses a heterogeneous agent closed-economy model with incomplete insurance markets and endogenous labour supply. Furthermore, the model is enriched by welfare-increasing government activity via by productive government investment and provision of public goods. The modelling framework with uninsurable idiosyncratic productivity shocks, the degree of inequality implied by the model and restricted borrowing give rise to non-trivial effects of public debt on the economy. On the one hand, higher public debt can relax borrowing constraints of households by increasing liquidity and thus facilitating consumption-smoothing. On the other hand, rising public debt crowds out private investments and therefore lowers wages and consumption in equilibrium. Therefore, a priori it is not clear which effect is stronger. The optimal public debt is determined based on welfare comparison between stationary equilibria when transitional dynamics are either ignored or accounted for. The paper shows that public investments play an important role as they generate positive spillover effects in the private sector by boosting the productivity of labor and capital. This reduces the precautionary savings motives for households, as they can rely more on labor income. Transitionary welfare effects work differently. Reduction in public debt leads to a reduction of the tax rate in the long run. However, debt reduction requires an increase in the tax rate in the short run, which has a negative effect on welfare. Therefore, ignoring these adjustment costs, optimal debt levels would be very large and negative (government accumulates assets of 130 percent of GDP) accompanied with large welfare gains (more than 20 percent) which is fully consistent with the literature on optimal public debt (Chatterjee et al. (2017), Rohrs and Winter (2017), Aiyagari and McGrattan (1998)). However, with transitional dynamics considered, the optimal debt ratio remains positive but lower than the current level of debt (27-30 percent of GDP). The corresponding consumption-equivalent welfare gains are low, between 1.91 and 2.27 percent depending on the presence of public investment. Relatively low optimal debt level is due to low level of idiosyncratic labor income volatility as a result of low empirical wealth inequality. Hence self-insurance via private capital is more than enough and higher provision of government insurance via sovereign bonds is not necessary. Furthermore, from the perspective of rapid population ageing expected in Slovakia, calls for even more prudent levels of public debt gain relevancy. The only reason why Slovakia should have public debt at all in this model is that it is painful to get rid of the existing debt. The validity of results is supported by numerous robustness check exercises: change to model calibration, different policy rule, modified tax system, impact of public goods provision on household social welfare.
    Keywords: Infrastructure, public investment, heterogeneous agents, public debt, welfare, transitional dynamics.
    JEL: E2 E6 H3 H4 H6
    Date: 2018–11
  18. By: Patrice Baubeau; Eric Monnet; Angelo Riva; Stefano Ungaro
    Abstract: Despite France's importance in the interwar world economy, the scale and consequences of the French banking crises of 1930–1931 were never assessed quantitatively due to lack of data in the absence of banking regulation. Using a new dataset of individual balance sheets from more than 400 banks, we show that the crisis was more severe and occurred earlier than previously thought, and it was very asymmetric, without affecting main commercial banks. The primary transmission channel was a flight-to-safety of deposits from banks to savings institutions and the central bank, leading to a major, persistent disruption in business lending. In line with the gold standard mentality, cash deposited with savings institutions and the central bank was used to decrease marketable public debt and increase gold reserves, rather than pursue countercyclical policies. Despite massive capital inflows, France suffered from a severe, persistent credit crunch.
    Keywords: Great Depression, flight-to-safety, France, banking panics, Savings Banks, gold standard.
    JEL: N14 N24 G01 G21 G23 G33 E44 E51 E58
    Date: 2018
  19. By: Markus Heinrich; Magnus Reif
    Abstract: We extend the literature on economic forecasting by constructing a mixed-frequency time-varying parameter vector autoregression with stochastic volatility (MF-TVP-SVVAR). The latter is able to cope with structural changes and can handle indicators sampled at different frequencies. We conduct a real-time forecast exercise to predict US key macroeconomic variables and compare the predictions of the MF-TVP-SV-VAR with several linear, nonlinear, mixed-frequency, and quarterly-frequency VARs. Our key finding is that the MF-TVPSV-VAR delivers very accurate forecasts and, on average, outperforms its competitors. In particular, inflation forecasts benefit from this new forecasting approach. Finally, we assess the models’ performance during the Great Recession and find that the combination of stochastic volatility, time-varying parameters, and mixed-frequencies generates very precise inflation forecasts.
    Keywords: Time-varying parameters, forecasting, mixed-frequency models, Bayesian methods
    JEL: C11 C53 E32
    Date: 2018
  20. By: Karolina Tura-Gawron (Gdansk University of Technology); Magdalena Szyszko (WSB University in Poznan)
    Abstract: In this article, we examine the spatial heterogeneities in inflation expectations of the euro area consumers. We expect to find them heterogeneous in our research period of 2001-2016. Contrary to standard examination of heterogeneity, a spatial correlation analysis is applied by referring to global and local correlation measures. It is performed with the economic distance-based weights (the difference in HICP rates). Application of spatial analysis is the main contribution of our examination. Standard examinations ignore spatial relations and might be misleading. Our findings suggest that expectations are heterogeneous once the differences of inflation rates represent economic distance between the countries that we cover by our examination.
    Keywords: inflation expectations, expectations heterogeneity, euro area, spatial analysis
    JEL: E52 E61 C31
    Date: 2018–10
  21. By: Jacob Punnoose; Amber Wadsworth (Reserve Bank of New Zealand)
    Abstract: The Reserve Bank of New Zealand (RBNZ) has had a single price-stability mandate for monetary policy since February 1990. This mandate is set to be extended due to the RBNZ (Monetary Policy) Amendment Bill that is currently before parliament and that seeks to add employment to the RBNZ’s mandate. The Federal Reserve System in the United States (Federal Reserve) also has a dual mandate for monetary policy. In this paper we compare the responses of monetary policy to inflation and economic activity in New Zealand and the United States. We estimate how monetary policy in New Zealand responded to inflation and economic activity using the data available to policy makers at each point in time from 2000 through 2017. We then compare these estimates to similar estimates for the United States and assess how monetary policy settings have evolved over time. We find that, on average, monetary policy in New Zealand and the United States has responded to changes in economic activity and inflation in similar ways. Our findings show that the RBNZ has stabilised measures of economic activity, i.e. the output gap and output growth, to a similar extent to that of the Federal Reserve. This is despite the RBNZ not operating under a dual mandate. A potential explanation for this result is that the flexibility of the RBNZ’s inflation targeting strategy over history has allowed it to stabilise economic activity while maintaining the broader emphasis on price stability.
    Date: 2018–11
  22. By: Luvsannyam, Davaajargal; Batmunkh, Khuslen
    Abstract: In recent paper, Bernanke, Boivin and Eliasz’s (2005) study presented a model of how the monetary policy rate affects the large subset of the variables that the researcher and policy-maker care about. Several criticisms of the Vector autoregression (VAR) approach which is developed by the considerable literature of Bernanke and Blinder (1992) and Sims (1992) to monetary policy identification center around the relatively small amount of information used by low-dimensional VARs. In that case, FAVAR methodology leads to broadly plausible estimates for the responses of a wide variety of macroeconomic variables to monetary policy shocks. Bernanke, Boivin and Eliasz also provided empirical support for this model based on an analysis of the federal fund rate and other macroeconomic indicators of US economy between the early 1959s and late 2001. This paper replicates the main empirical findings of Bernanke, Boivin and Eliasz (2005).
    Keywords: FAVAR, 2 step principal component approach, likelihood based approach, monetary policy shock, gibbs sampling
    JEL: C32 E52
    Date: 2018–04–20
  23. By: Malamud, Semyon; Schrimpf, Andreas
    Abstract: We develop a general equilibrium model with intermediaries at the heart of international financial markets. In our model, intermediaries bargain with their customers and extract rents for providing access to foreign claims. The behavior of intermediaries, by tilting state prices, generates an explicit, non-linear risk structure in exchange rates. We show how this endogenous risk structure helps explain a number of anomalies in foreign exchange and international capital markets, including the safe haven properties of exchange rates and the breakdown of covered interest parity.
    Keywords: covered interest parity deviations; Exchange Rates; Financial Intermediation; safe haven
    JEL: E44 E52 F31 F33 G13 G15 G23
    Date: 2018–09
  24. By: Ramis Khabibullin (Bank of Russia, Russian Federation); Alexey Ponomarenko (Bank of Russia, Russian Federation); Sergei Seleznev (Bank of Russia, Russian Federation)
    Abstract: We develop a stock-flow-consistent agent-based model that comprises a realistic mechanism of money creation and parametrize it to fit actual data. The model is used to make out-of-sample projections of broad money and credit developments under the commencement/termination of foreign reserve accumulation by the Bank of Russia. We use direct forecasts from the agent-based model as well as the two-step approach, which implies the use of artificial data to pre-train the Bayesian vector autoregression model. We conclude that the suggested approach is competitive in forecasting and yields promising results.
    Keywords: Money supply, foreign exchange reserves, forecasting, agent-based model, Russia.
    JEL: C53 C63 E51 E58 F31 G21
    Date: 2018–11
  25. By: Faure, Salomon; Gersbach, Hans
    Abstract: We examine monetary architectures in which money is solely created by the public and lent by the central bank to the private sector. We compare them to today's fractional-reserve system in which money is created mainly by commercial banks. We use a simple general equilibrium setting and determine under which conditions these architectures yield the same welfare and stability outcomes and under which conditions they do not. We show, in particular, that the decentralized sovereign money system yields the same level of money creation and allocation of commodities as the fractional-reserve monetary system if the central bank solely pursues interest-rate policy.
    Keywords: 100% reserve banking; Capital regulation; Chicago Plan; full-reserve banking; monetary architecture; monetary policy; monetary system; money creation; price rigidities; reserve requirement
    JEL: D50 E4 E5 G21
    Date: 2018–09
  26. By: Mendicino, Caterina; Nikolov, Kalin; Suarez, Javier; Supera, Dominik
    Abstract: How far should capital requirements be raised in order to ensure a strong and resilient banking system without imposing undue costs on the real economy? Capital requirement increases make banks safer and are beneficial in the long run but carry transition costs because their imposition reduces aggregate demand on impact. Under accommodative monetary policy, increasing capital requirements addresses financial stability risks without imposing large transition costs on the economy. In contrast, when the policy rate hits the lower bound, monetary policy loses the ability to dampen the effects of the capital requirement increase on the real economy. The long-run benefits of higher capital requirements are larger and the transition costs are smaller when the risk that causes bank failure is high.
    Keywords: Bank Fragility; Default Risk; effective lower bound; Financial Frictions; macroprudential policy; Transition Dynamics
    JEL: E3 E44 G01 G21
    Date: 2018–09
  27. By: Guillaume Rocheteau; Pierre-Olivier Weill; Tsz-Nga Wong
    Abstract: We develop a New Monetarist model with expenditure and unemployment risks that generates equilibria with non-degenerate distribution of money holdings. Distributional effects can overturn key insights of the model with degenerate distributions such that, e.g., the value of money depends on the income distribution, a one-time money injection raises aggregate real balances in the short run – price adjustments look sluggish; anticipated inflation can raise output and welfare; there can be a long-run trade-off between inflation and unemployment. Our model features an aggregate demand channel through which transfers to workers can raise employment and a new amplification mechanism of productivity shocks.
    JEL: E40 E50
    Date: 2018–11
  28. By: Omar Licandro (University of Nottingham and Barcelona GSE .); Luis A. Puch (Universidad Complutense de Madrid and ICAE.); Jesús Ruiz (Universidad Complutense de Madrid and ICAE.)
    Abstract: Economists model time as continuous or discrete. For long, either alternative has brought about relevant economic issues, from the implementation of the basic Solow and Ramsey models of growth and the business cycle, towards the issue of equilibrium indeterminacy and endogenous cycles. In this paper, we introduce to some of those relevant issues in economic dynamics. First, we describe a baseline continuous vs discrete time modelling setting relevant for questions in growth and business cycle theory. Then we turn to the issue of local indeterminacy in a canonical model of economic growth with a pollution externality whose size is related to the model period. Finally, we propose a growth model with delays to show that a discrete time representation implicitly imposes a particular form of time–to–build to the continuous time representation. Our approach suggests that the recent literature on continuous time models with delays should help to bridge the gap between continuous and discrete time representations in economic dynamics.
    Keywords: Discrete Time, Continuous Time, Solow model, Ramsey model, Indeterminacy, Time–to–Build, Delay Differential Equations.
    JEL: O40 Q50 E10 E22
    Date: 2018–10
  29. By: International Monetary Fund
    Abstract: Bhutan has made significant strides in improving per capita incomes and reducing poverty, with growth strong and inflation in single digits. While still large, external imbalances are declining. Welcome progress has also been made on structural reforms. Key medium-term policy challenges include the mobilization of domestic revenues and prudent management of hydropower revenues to support adequate levels of public spending, while maintaining macroeconomic stability, and enhancing competitiveness and diversifying the sources of growth.
    Date: 2018–10–30
  30. By: Fougère, Denis; Gautier, Erwan; ROUX, Sebastien
    Abstract: This paper examines empirically the dynamics of wage floors defined in industry-level wage agreements in France. It also investigates how industry-level wage floor adjustment interacts with changes in the national minimum wage (NMW hereafter). For this, we have collected a unique dataset of approximately 3,200 industry-level wage agreements containing about 70,000 occupation-specific wage floors in 367 industries over the period 2006Q1-2017Q4. Our main results are the following. Wage floors are quite rigid, adjusting only once a year on average. They mostly adjust in the first quarter of the year and the NMW shapes the timing of industry-level wage bargaining. Inflation but also changes in past aggregate wage increases and in the real NMW are the main drivers of wage floor adjustments. Elasticities of wage floors with respect to these macro variables are 0.6, 0.4 and 0.3 respectively. Inflation and the NMW have both decreasing but positive effects all along the wage floor distribution.
    Keywords: collective bargaining; inflation; minimum wage; wages
    JEL: E24 J31 J51
    Date: 2018–09
  31. By: Maria Farrugia (Central Bank of Malta); Glenn Formosa (Central Bank of Malta); Joseph Julian Pace (Central Bank of Malta)
    Abstract: This paper gives an overview of inflation-linked bonds (ILBs). In the first part, it describes the characteristics of inflation-linked bonds and their pricing mechanics. This is followed by an illustrative example which compares the cashflow structure of the two types of fixed income securities. An analysis of the historical performance of inflation-linked bonds relative to their nominal counterparts1 follows on the basis of the Bloomberg Barclays total return indices for the US and Germany. Correlations between ILBs and fixed coupon bonds were computed.
    JEL: D53 E44 G1
    Date: 2018
  32. By: Régis Bokino; Moustapha Gano
    Abstract: The organization of the monetary decision-making in central banks has changed internationally and for the Central Bank of West African States (BCEAO). The decisions are now taken by the Monetary Policy Committee (MPC). The arguments on the expected benefits of this procedure are provided by the economic literature and are linked to the recent wave of central bank independence. If the MPC is independent, it has an obligation to be accountable. However, independence and accountability are not identical in term of the MPC. This article examines the MPC of BCEAO established in 2010, which is independent in accordance with the recommendations of the credibility strategy of the new classical economics and collective accountability.
    Keywords: CPM, central bank independence, accountability, BCEAO monetary policy
    JEL: D71 E58 O55
    Date: 2018
  33. By: Kaitila, Ville; Kauhanen, Antti; Kuusi, Tero; Lehmus, Markku; Maliranta, Mika; Vihriälä, Vesa
    Abstract: Abstract In the report we analyse the reasons for the weakness of Finland’s economic performance over the past decade and assess the growth prospects in the coming 5 years. The weakness of Finland’s performance relative to comparative EU-countries since 2009 can largely be explained by the collapse of Nokia’s production and the deterioration of cost competitiveness. The recovery in turn stems from a stronger export market growth, the fading away of the negative Nokia shock, and the improvement of cost competitiveness. Of the rise of employment by some 100 000 jobs since 2015 about half can be explained by a number of policy measures to increase labour supply and the so-called competitiveness pact. Based on a realistic assumption on productivity growth, we estimate that Finland could achieve an annual growth rate of about 2 per cent in the coming 5 years. This requires, nevertheless, that the employment rate increases by 2023 to the level reached by comparative countries. Although such a change would not be greater than what is taking place during the current government period, ambitious reforms are needed to achieve this.
    Keywords: Growth, Employment, Productivity, Labour supply, Competitiveness, Finland’s economy
    JEL: E37 E61 E62 F10 J11 J20 O11
    Date: 2018–11–12
  34. By: International Monetary Fund
    Abstract: Stable macroeconomy but growth continues to underperform. After nearly six years of economic reforms, unemployment is at an almost 11-year low, poverty is at a 9-year low, inflation is low, public debt is firmly on a downward trajectory, and international reserves are at historically high levels. Still, growth remains lackluster. Private investment has not fully taken advantage of the unprecedented opportunities presented by macroeconomic stability and strong fundamentals. Structural impediments need to be quickly addressed to foster capital formation. Sustained weak growth risks impeding reform momentum and could make achieving the government’s policy objectives more difficult.
    Date: 2018–11–07
  35. By: International Monetary Fund
    Abstract: The first review under the SBA is taking place in the context of turbulent market conditions, a stronger-than expected decline in activity, and an inability of the central bank to anchor inflation expectations. Data released since program approval has shown activity slowing markedly and inflation and inflation expectations rising (largely driven by a weakening currency). At the same time, a new bout of volatility in key emerging markets, together with a domestic corruption investigation, has limited Argentina’s access to market financing.
    Keywords: Stand-by arrangement reviews;Fiscal policy;Monetary policy;Exchange rate policy;Debt management;Inflation targeting;Performance criteria waivers;Performance criteria modifications;Economic indicators;Debt sustainability analysis;Letters of Intent;Press releases;Staff Reports;
    Date: 2018–10–26
  36. By: Zouhair Aït Benhamou
    Abstract: In comparing the tax burden between developed and developing economies, we argue that the Laffer curve is sensitive to two factors, namely the size of underground economic activities and tax collection costs. The baseline model exhibits counter-intuitive results for developing and emerging economies. Insofar as we find that they are able to extract higher tax rates and revenues in comparison with developed countries. The differences are due to the values computed for structural parameters and steady-state variables. However, when the share of underground activities is taken into account, the Laffer curve is pushed downward, while tax collection costs shift the peak rate to the left.
    Keywords: Laffer curve, Taxes, Tax burden, Underground economy, tax collection cost, calibration, estimation, GMM, SMM
    JEL: H21 H26 H30 E32 E37
    Date: 2018
  37. By: Bick, Alexander; Brüggemann, Bettina; Fuchs-Schündeln, Nicola; Paule-Paludkiewicz, Hannah
    Abstract: We document the time-series of employment rates and hours worked per employed by married couples in the US and seven European countries (Belgium, France, Germany, Italy, the Netherlands, Portugal, and the UK) from the early 1980s through 2016. Relying on a model of joint household labor supply decisions, we quantitatively analyze the role of non-linear labor income taxes for explaining the evolution of hours worked of married couples over time, using as inputs the full country- and year-specific statutory labor income tax codes. We further evaluate the role of consumption taxes, gender and educational wage premia, and the educational composition. The model is quite successful in replicating the time series behavior of hours worked per employed married woman, with labor income taxes being the key driving force. It does however capture only part of the secular increase in married women's employment rates in the 1980s and early 1990s, suggesting an important role for factors not considered in this paper. We will make the non-linear tax codes used as an input into the analysis available as a user-friendly and easily integrable set of Matlab codes.
    Keywords: hours worked; taxation; Two-Earner Households
    JEL: E24 H24 J22
    Date: 2018–09
  38. By: Stefan Ederer; Miriam Rehm
    Abstract: If Piketty's main theoretical prediction (r>g leads to rising wealth inequality) is taken to its radical conclusion, then a small elite will own all wealth if capitalism is left to its own devices. We formulate and calibrate a Post-Keynesian model with an endogenous distribution of wealth between workers and capitalists which permits such a corner solution of all wealth held by capitalists. However, it also shows interior solutions with a stable, non-zero wealth share of workers, a stable wealth-to-income ratio, and a stable and positive gap between the profit and the growth rate determined by the Cambridge equation. More importantly, simulations show that the model conforms to Piketty's empirical findings during a transitional phase of increasing wealth inequality, which characterizes the current state of high-income countries: The wealth share of capitalists rises to over 60%, the wealth-to-income ratio increases, and income inequality rises. Finally, we show that the introduction of a wealth tax as suggested by Piketty could neutralize this rise in wealth concentration predicted by our model.
    Keywords: Post-Keynesian, model, wealth, saving, inequality, Piketty, simulation
    JEL: C63 D31 E12 E21
    Date: 2018
  39. By: Barany, Zsofia; Coeurdacier, Nicolas; Guibaud, Stéphane
    Abstract: We investigate the importance of worldwide demographic evolutions in shaping capital flows across countries and over time. Our lifecycle model incorporates cross-country differences in fertility and longevity as well as differences in countries' ability to borrow inter-temporally and across generations through social security. In this environment, global aging triggers uphill capital flows from emerging to advanced economies, while country-specific demographic evolutions reallocate capital towards countries aging more slowly. Our quantitative multi-country overlapping generations model explains a large fraction of capital flows across advanced and emerging countries and a substantial portion of the prolonged decline in the world interest rate.
    Keywords: aging; Household Saving; International Capital Flows
    JEL: E21 F21 J11
    Date: 2018–09
  40. By: Alexei P Kireyev
    Abstract: This paper reviews the significant macro-fiscal challenges posed by climate change in Djibouti and the costs of mitigation and adaptation policies. The paper concludes that Djibouti is susceptible to climate change and related costs are potentially large. Investing now in adaptation and mitigation has large benefits in terms of reducing the related costs in the future. Reforms to generate the fiscal space are therefore needed and investment for mitigation and adaptation to climate change should be built into the long-term fiscal projections. Finally, concerted international efforts and stepping up regional cooperation could help moderate climate-related macro-fiscal risks.
    Date: 2018–11–01
  41. By: International Monetary Fund
    Abstract: Solomon Islands has made substantial progress since the Tensions in the early 2000s but faces considerable economic and governance challenges and is highly vulnerable to natural disasters. The logging industry confronts depletion and new sources of growth are needed. Governance challenges are significant, stemming from weak oversight of the resource sectors, a lack of transparency and a need to strengthen public financial management.
    Date: 2018–11–08
  42. By: Kaiji Chen; Tao Zha
    Abstract: The Chinese economy has undergone three major phases: the 1978-1997 period marked as the SOE-led economy, the 1998-2015 phase as the investment-driven economy, and the new normal economy since 2016. All three economies have been shaped by the government's financial policies, defined as a set of credit policy, monetary policy, and regulatory policy. We analyze the macroeconomic effects of these financial policies throughout the three phases and provide the stylized facts to substantiate our analysis. The stylized facts differ qualitatively across different phases or economies. We argue that the impacts of China’s financial policies work through transmission channels different from those in developed economies and that a regime switch from one economy to another was driven mainly by regime changes in financial policies.
    JEL: E5 G1 G28 O2
    Date: 2018–11
  43. By: Anita Angelovska–Bezhoska (National Bank of Republic of Macedonia); Ana Mitreska (National Bank of Republic of Macedonia); Sultanija Bojcheva-Terzijan (National Bank of Republic of Macedonia)
    Abstract: This paper attempts to empirically assess the impact of the ECB’s quantitative easing policy on capital flows in the countries of the Central and South Eastern region. Given the tight trade and financial linkages of the region with the euro area, one should expect that the buoyant liquidity provided by the ECB might affect the size of the capital inflows. We test this hypothesis by employing panel estimation on a sample of 14 countries CESEE countries for the 2003-2015 period. Contrary to the expected outcome, the results reveal either negative or insignificant impact of the change in the ECB balance sheet on the different types of capital inflows. The results suggest that the magnitude of the crisis, to which the ECB responded to was immense, hence precluding any significant impact of the monetary easing on capital flows in the region. The inclusion of a dummy in the model, to control for the 2008 crisis confirms the findings from the first specification and also does not change the finding on the ECB quantitative easing impact on the capital flows. The impact of the crisis dummy on capital flows is negative and it holds for almost all types of capital inflows, except for the government debt flows, which is consistent with the countercyclical fiscal policies and rising public debt after the crisis.
    Keywords: quantitative easing polices, ECB, capital flows, CESEE countries, panel estimates, mean group estimator
    JEL: E43 F21 C33
    Date: 2018
  44. By: Araujo, Luis (Michigan State University, Department of Economics); Cao, Qingqing (Michigan State University, Department of Economics); Minetti, Raoul (Michigan State University, Department of Economics); Murro, Pierluigi (Luiss University)
    Abstract: We investigate the effects of a credit crunch in an economy where firms can retain a mature technology or adopt a new technology. We show that firms' collateral eases firms' access to credit and investment but can also inhibit firms' innovation. When this occurs, a contraction in the price of collateral assets squeezes collateral-poor firms out of the credit market but fosters the innovation of collateral-rich firms. The analysis reveals that the credit and asset market policies adopted during recent credit market crises can boost investment but slow down innovation. We find that the predictions of the model are consistent with the innovation patterns of a large sample of European firms during the 2008-2010 credit crisis.
    Keywords: Credit Crunch; Technological Change; Collateral
    JEL: E44 G01 G21
    Date: 2018–11–16
  45. By: Rachel Morris; Olivier Cattaneo; Konstantin Poensgen
    Abstract: A transition finance country pilot was initiated by the OECD Development Assistance Committee (DAC) in partnership with the government of Cabo Verde. The study aims to capture the challenges facing Cabo Verde following graduation from Least Developed Country (LDC) to Lower Middle Income Category (LMIC), including the shifting financing for sustainable development landscape, the mounting risk of debt distress and the economic and environmental vulnerabilities as a Small Island Developing States (SIDS). In line with the Addis Ababa Action Agenda (AAAA), the pilot study proposes a new “ABC” approach targeted to assess all available sources of financing (ODA, OOF, private investment, domestic resources, and remittances), identify emerging SDG financing gaps and promote better alignment of resources with national financing for sustainable development strategies.
    Keywords: 2030 Agenda, Addis Ababa Action Agenda, Cabo Verde, Debt sustainability, Financing for Sustainable Development, Integrated National Financing Frameworks, LDC graduation, LDCs, OECD DAC, SDGs, SIDS, Transition finance
    JEL: E6 E61 F13 F24 F3 F34 F35 F4 G2 H1 H2 H5 H6 I1 O1 O11 O2 O23 P45 Q2
    Date: 2018–11–23
  46. By: Guillaume Bazot (Université Paris 8)
    Abstract: Calculation of the unit cost of financial intermediation for 20 countries from 1970 to 2015 has produced the following results. (i) Most countries’ unit costs decline and converge in the long run. (ii) Unit costs were much higher in the 1970s and 1980s, coinciding with high nominal rates, as confirmed by panel cointegration tests. (iii) Countries’ unit cost aggregation suggests a slight decrease in international unit cost whatever the set of hypotheses used in the calculation. (iv) The break down of unit costs into labor costs, capital costs, and profits shows that most of the decrease stems from reduced input costs. Gross operating surplus and total compensation per output tend to decline while distributed profit per output rises, suggesting increasing intermediation rents per output. (v) The productivity of labor in finance compared to other sectors tends to increase in most countries. (vi) The evidence suggests that most productivity gains have been captured by the financial sector in Canada, the UK, and the US. Elsewhere, productivity gains have benefited the nonfinancial sector through unit cost reduction. (vii) Deregulation is either negatively or not correlated with unit cost. In other words, deregulation is not related to unit cost increases. Finally, the paper discusses the consequences of those results for current debates about finance relative wage changes and inequalities.
    Keywords: Unit cost, deregulation, convergence
    JEL: E3 E4 F3 G2 N2
    Date: 2018–11
  47. By: Langfield, Sam; Liu, Zijun; Ota, Tomohiro; Ferrara, Gerardo
    Abstract: We study systemic illiquidity using a unique dataset on banks’ daily cash flows, short-term interbank funding and liquid asset buffers. Failure to roll-over short-term funding or repay obligations when they fall due generates an externality in the form of systemic illiquidity. We simulate a model in which systemic illiquidity propagates in the interbank funding network over multiple days. In this setting, systemic illiquidity is minimised by a macroprudential policy that skews the distribution of liquid assets towards banks that are important in the network. JEL Classification: D85, E44, E58, G28
    Keywords: liquidity regulation, macroprudential policy, systemic risk
    Date: 2018–11
  48. By: Alexis Stenfors (University of Portsmouth)
    Abstract: A disturbance or breakdown of the first stage of the monetary transmission mechanism tends to be synonymous with high and volatile money market risk premia. Such market indicators include violations of the covered interest parity (CIP). This was not only evident during the financial crisis of 2007-08, but already during the Japanese banking crisis in the late 1990s, when it became referred to as the 'Japan Premium'. Despite extraordinary policy measures by central banks in recent years, however, deviations from the CIP indicate continuing or even elevated stress in the international monetary system. This paper examines a string of distinct, but closely interconnected, assumptions and perceptions regarding CIP arbitrage. By doing so, it not only sheds some fresh light on the recent 'CIP puzzle' but also on the era of the Japan Premium during the 1990s and its aftermath.
    Keywords: arbitrage, covered interest parity, financial crisis, FX swap market, Japan Premium, money market
    JEL: E4 E52 F3 G15
    Date: 2018–11–21
  49. By: Coleman, Chase; Lyon, Spencer; Maliar, Lilia; Maliar, Serguei
    Abstract: We perform a comparison of Matlab, Python and Julia as programming languages to be used for implementing global nonlinear solution techniques. We consider two popular applications: a neoclassical growth model and a new Keynesian model. The goal of our analysis is twofold: First, it is aimed at helping researchers in economics to choose the programming language that is best suited to their applications and, if needed, help them transit from one programming language to another. Second, our collections of routines can be viewed as a toolbox with a special emphasis on techniques for dealing with high dimensional economic problems. We provide the routines in the three languages for constructing random and quasi-random grids, low-cost monomial integration, various global solution methods, routines for checking the accuracy of the solutions, etc. Our global solution methods are not only accurate but also fast. Solving a new Keynesian model with eight state variables only takes a few seconds, even in the presence of active zero lower bound on nominal interest rates. This speed is important because it then allows the model to be solved repeatedly as one would require in order to do estimation.
    Keywords: Dynamic programming; Global solution; High dimensionality; Julia; Large scale; Matlab; Nonlinear; Python; Toolkit; Value function iteration
    JEL: C6 C61 C63 C68 E31 E52
    Date: 2018–09
  50. By: Kenneth Burdett (Department of Economics, University of Pennsylvania); Guido Menzio (Department of Economics, University of Pennsylvania)
    Abstract: Are nominal prices sticky because menu costs prevent sellers from continuously adjusting their prices to keep up with inflation or because search frictions make sellers indifferent to any real price over some non-degenerate interval? The paper answers the question by developing and calibrating a model in which both search frictions and menu costs may generate price stickiness and sellers are subject to idiosyncratic shocks. The equilibrium of the calibrated model is such that sellers follow a (Q,S,s) pricing rule: each seller lets inflation erode the effective real value of the nominal prices until it reaches some point s and then pays the menu cost and sets a new nominal price with an effective real value drawn from a distribution with support [S,Q], with s
    Keywords: Search frictions, Menu costs, Sticky prices
    JEL: D11 D21 D43 E32
    Date: 2017–09–25
  51. By: Martín-Román, Ángel L.; Cuéllar Martín, Jaime; Moral, Alfonso
    Abstract: The relationship between the labor force participation and the business cycle has become a topic in the economic literature. However, few studies have considered whether the cyclical sensitivity of the labor force participation is influenced by “social effects”. In this paper, we construct a theoretical model to develop the “Added Worker Effect” and the “Discouraged Worker Effect”, and we integrate the “social effects”, coining a new concept, the Bandwagon Worker Effect (BWE). To estimate the cyclical sensitivity of the labor force participation, we employ a panel dataset of fifty Spanish provinces for the period 1977–2015. Finally, we use spatial econometrics techniques to test the existence of the BWE in the local labor markets in Spain. Our results reveal that there exists a positive spatial dependence in the cyclical sensitivity of the labor force participation that decreases as we fix a laxer neighborhood criterion, which verifies the existence of the BWE. From the perspective of economic policy, our work confirms that “social effects” play a key role at the time of determining the economic dynamics of the territories.
    Keywords: labor force participation, business cycle, regional labor markets, bandwagon effect, spatial dependence
    JEL: C23 D03 E32 J21 R23
    Date: 2018–11–06
  52. By: Fecht, Falko; Reitz, Stefan
    Abstract: This article shows how the recent money market disruptions with elevated counterparty risks and uncertainty about the fundamental value of liquidity influenced the trading behaviour of a key dealer in the Euro money market. The complete trading record in the unsecured segment of the money market for 2007 and 2008 is used to estimate a stylized pricing model, which explicitly accounts for the over-the-counter structure. The empirical results suggest that the market maker learns from order flow, but this information aggregation was increasingly hampered as the crisis unfolded.
    Keywords: Euro money market,financial crisis,market microstructure,pricing behaviour
    JEL: E43 G15 C32
    Date: 2018
  53. By: Chiu,Ching-Wai; Hayes, Simon; Kapetanios, George (King's College London); Theodoridis, Konstantinos (Cardiff Business School)
    Abstract: Forecasts play a critical role at inflation targeting central banks, such as the Bank of England. Breaks in the forecast performance of a model can potentially incur important policy costs. Commonly used statistical procedures, however, implicitly put a lot of weight on type I errors (or false positives), which result in a relatively low power of tests to identify forecast breakdowns in small samples. We develop a procedure which aims at capturing the policy cost of missing a break. We use data-based rules to find the test size that optimally trades of the costs associated with false positives with those that can result from a break going undetected for too long. In so doing, we also explicitly study forecast errors as a multivariate system. The covariance between forecast errors for different series, though often overlooked in the forecasting literature, not only enables us to consider testing in a multivariate setting but also increases the test power. As a result, we can tailor the choice of the critical values for each series not only to the in-sample properties of each series but also to how the series for forecast errors covary.
    Keywords: Forecast Breaks, Statistical Decision Making, Central Banking
    JEL: C53 E47 E58
    Date: 2018–11
  54. By: Bayer, Christian; Kuhn, Moritz
    Abstract: Wages grow but also become more unequal as workers age. Using German administrative data, we largely attribute both life-cycle facts to one driving force: some workers progress in hierarchy to jobs with more responsibility, complexity, and independence. In short, they climb the career ladder. Climbing the career ladder explains 50% of wage growth and virtually all of rising wage dispersion. The increasing gender wage gap by age parallels a rising hierarchy gap. Our findings suggest that wage dynamics are shaped by the organization of production, which itself likely depends on technology, the skill set of the workforce, and labor market institutions.
    Keywords: careers; Human Capital; life-cycle wage growth; Wage inequality
    JEL: D33 E24 J31
    Date: 2018–09
  55. By: International Monetary Fund
    Abstract: A three-year arrangement for Mongolia under the Extended Fund Facility (EFF) was approved on May 24, 2017, in an amount equivalent to SDR 314.5054 million (435 percent of quota, or about $425 million). The arrangement is part of a $5.5 billion multi-donor financing package that supports the authorities’ Economic Recovery Plan. The extended arrangement is subject to quarterly reviews.
    Date: 2018–11–02
  56. By: Robert Barro (Department of Economics, Harvard University); Jesus Fernandez-Villaverde (Department of Economics, University of Pennsylvania); Oren Levintal (Department of Economics, University of Pennsylvania); Andrew Mollerus (Department of Economics, Harvard University)
    Abstract: A safe asset’s real value is insulated from shocks, including declines in GDP from rare macroeconomic disasters. However, in a Lucas-tree world, the aggregate risk is given by the process for GDP and cannot be altered by the creation of safe assets. Therefore, in the equilibrium of a representative-agent version of this economy, the quantity of safe assets will be nil. With heterogeneity in coefficients of relative risk aversion, safe assets can take the form of private bond issues from low-risk-aversion to high-risk-aversion agents. The model assumes Epstein-Zin/Weil preferences with common values of the intertemporal elasticity of substitution and the rate of time preference. The model achieves stationarity by allowing for random shifts in coefficients of relative risk aversion. We derive the equilibrium values of the ratio of safe to total assets, the shares of each agent in equity ownership and wealth, and the rates of return on safe and risky assets. In a baseline case, the steady-state risk-free rate is 1.0% per year, the unlevered equity premium is 4.2%, and the quantity of safe assets ranges up to 15% of economy-wide assets (comprising the capitalized value of GDP). A disaster shock leads to an extended period in which the share of wealth held by the low-risk-averse agent and the risk-free rate are low but rising, and the ratio of safe to total assets is high but falling. In the baseline model, Ricardian Equivalence holds in that added government bonds have no effect on rates of return and the net quantity of safe assets. Surprisingly, the crowding-out coefficient for private bonds with respect to public bonds is not 0 or -1 but around -0.5, a value found in some existing empirical studies.
    Keywords: Safe assets, risk premium, risk-free rate, heterogeneous agents
    JEL: E21 G12
    Date: 2017–05–10
  57. By: Blanchard, Emily; Willmann, Gerald
    Abstract: We develop a model of democratic political responses to macroeconomic shocks in the short and long run. We show that when economic adjustment is slower than potential political change, exogenous changes in the global marketplace can trigger populist surges in favor of distortionary economic policies. Applied to trade policy, our model demonstrates that an exogenous terms-of-trade improvement or skill-biased technological change will lead to a spike in protectionism that blunts the younger generation's incentive to acquire education. In the long run, the initial surge in protectionism will gradually diminish if and only if education enables less-skilled workers to catch up with the overall economy. The more unequal the initial distribution of human capital, the greater and longer-lasting the protectionist backlash will be: unequal gains, prolonged pain. Evidence on key data markers suggested by the model exhibits patterns consistent with recent populist support for Brexit and Trump.
    Keywords: Dynamic Political Economy; education; Endogenous Tari; Human Capital; Overlapping Generations; Overshooting; populism; protectionism
    JEL: D7 E6 F5
    Date: 2018–09
  58. By: International Monetary Fund
    Abstract: The Chilean economy is recovering from a prolonged slowdown that started with the decline in copper prices in 2011 and intensified over the past two years. The new administration, which took office in March, aims at reinvigorating investment and economic growth through structural reforms, but a divided Congress may constrain the reform space.
  59. By: Hergovich, Philipp; Merz, Monika
    Abstract: The capital-to-labor ratio has steadily risen in the U.S. and elsewhere during the post-WWII period. Since the 1970s this rise has been accompanied by a rise in the level and variability of corporate profits whereas the labor share of income has declined. In this paper we ask whether these trends are related in that they can be explained by a common determinant such as the observed decline in the relative price of new capital goods, or the change in production technology towards increased substitutability between capital and labor. We use a dynamic stochastic equilibrium model of competitive search in the labor market augmented by a CES production function that allows firms to substitute between capital and labor at varying degrees. By assumption, firms can adjust capital more easily than labor. Profits arise from rents paid to quasi-fixed factors of production. We find that the declining relative price of capital and the increase in factor substitutability each causes the capital-to-labor ratio and corporate profits to rise, but only increased factor substitutability generates the observed decrease in the labor share of income and increases the relative variability of profits.
    Keywords: competitive search; factor substitutability; profits; quasi-fixed production factor
    JEL: E24 G32 J64
    Date: 2018–09
  60. By: Martin Christensen (European Commission - JRC); Andrea Conte (European Commission - JRC); Filippo Di Pietro (European Commission - JRC); Patrizio Lecca (European Commission - JRC); Giovanni Mandras (European Commission - JRC); Simone Salotti (European Commission - JRC)
    Abstract: We evaluate the macroeconomic impact of the legislative proposals contained in the third pillar of the Investment Plan for Europe using the RHOMOLO modelling framework. In particular, we study a number of proposals related to the Capital Markets Union, the Single Market Strategy, the Digital Single Market, and the Energy Union. The likely economic effects of the removal of cross-country barriers to investment related to these four initiatives are positive and quantified to be on average equal to an increase of 1.5% of EU GDP by 2030. Such an impact would also entail the creation of about 1 million jobs.
    Keywords: rhomolo, region, growth, investment plan for europe, third pillar, capital markets union, single market strategy, energy union, digital single market, modelling
    JEL: C54 C68 E62
    Date: 2018–11
  61. By: Mojmir Hampl; Tomas Havranek
    Abstract: Several empirical studies have reported that financially weak central banks tend to tolerate systematically higher inflation. If the effect were genuine, central banks would have to pay attention to their capital levels and could not treat them as a residuum. In this note, we take stock of this literature using the statistical techniques of meta-analysis. We collect 176 estimates of the effect of central bank financial strength on inflation and observe that 86% of them are negative, suggesting that low capital levels indeed lead to higher inflation. However, we show that the literature is plagued by publication bias, the preferential reporting of intuitive and significant results. When we correct the literature for this bias, we obtain no evidence for any interplay between central bank financial strength and inflation. The result is robust to employing various meta-regression and nonparametric selection models.
    Keywords: Central bank capital, inflation, monetary policy, publication bias, seigniorage
    JEL: C83 E58
    Date: 2017–10
  62. By: International Monetary Fund
    Abstract: A new political landscape is shaping up in Mexico following the July elections. President-elect López Obrador has promised to reduce corruption and crime, and boost social spending and public investment, while maintaining fiscal prudence. The incoming administration will inherit an economy with very strong fundamentals and policy frameworks that has exhibited resilience in the face of a complex external environment. But Mexico still confronts significant challenges—namely to strengthen growth while reducing poverty and inequality—and has yet to win the fight against corruption and crime. At the same time, uncertainty associated with the global economic environment and the policies of the incoming administration persists. Prospects hinge on the steadfast implementation of structural reforms while ensuring continued macroeconomic stability.
    Date: 2018–11–08
  63. By: Michaël Assous (Université Lyon 2, CNRS, Triangle); Muriel Dal Pont Legrand (Université Côte d'Azur, CNRS, GREDEG, France)
    Abstract: Early developments of growth theory are seen widely as the result of a two-step process – the first represented by Harrod's Essay in Dynaamic Theory, and the second by Solow's 1956 model. Harrod is considered to be the first to highlight the pervasive instability in macrodynamics, which Solow showed disappeared with the inclusion of flexible-coefficient production functions. It has been recognized since that this is a misreading (Besomi 1995, 1998, Bruno and Dal-Pont Legrand 2014). Hoover and Halsmayer (2016) examined how this "culture of misunderstanding" guided both Solow's modelling work and his reading of Harrod. Our paper pays attention to the specific issue of the introduction of an (independent) investment function in those early growth models. Using new archival material, we examine this complex issue and show how macroeconomists of that period dealt with problems related to incorporating expectations, an a priori unavoidable step in order to build robust investment functions. Those elements were indeed discussed at length, in the early 1960s, by economists such as Sen, Samuelson and Solow as shown in his correspondence with Hahn. Our paper sheds light on some hidden foundations of growth models and examines the nature of the break Solow’s model introduced in the growth research program as initially defined by Harrod.
    Keywords: : growth, expectations, investment function, (in-)stability
    JEL: B2 B22 E1
    Date: 2018–11
  64. By: Angel De la Fuente
    Abstract: En esta nota se describe brevemente la ultima actualizacion de RegData, una base de datos que recoge los principales agregados economicos y demograficos de las regiones españolas durante las ultimas seis decadas. En su mayoria, las series comienzan en 1950 o 1955 y se extienden hasta 2017.
    Keywords: Documento de Trabajo , Economía Global , España
    JEL: E01 R1
    Date: 2018–11
  65. By: Altug, Sumru G.; Cakmakli, Cem; Demircan, Hamza
    Abstract: This paper puts forward a unified framework for the joint estimation of the indexes that can broadly capture economic and financiall conditions together with their cyclical regimes of recession and expansion. We do this by utilizing a dynamic factor model together with Markov regime switching dynamics of model parameters that specifically exploit the temporal link between the cyclical behavior of economic and financial factors. This is achieved by constructing the cycle in the financial factor using the cycle in the economic factor together with phase shifts. The resulting framework allows the financial cycle to potentially lead/lag the business cycle in a systematic manner and exploits the information in economic and financial variables for estimation of both economic and financial conditions as well as their cyclical behavior in an efficient way. We examine the potential of the model using a mixed frequency and mixed time span ragged-edge dataset for Turkey. Comparison of our framework with more conventional polar cases imposing a single common cyclical dynamics as well as independent cyclical dynamics for economic and financial conditions reveal that the proposedspecification provides precise estimates of economic and financial conditions and it delivers quite accurate probabilities of recessions that match with stylized facts. We further conduct a recursive real-time exercise of nowcasting and forecasting business cycle turning points. The results show convincing evidence of superior predictive power of our specification by signaling oncoming recessions (expansions) as early as 3.5 (3.4) months ahead of the actual realization.
    Keywords: Bayesian inference; Business cycle; Coincident economic index; Dynamic factor model; Financial conditions index; Markov switching
    Date: 2018–09
  66. By: International Monetary Fund
    Abstract: In May 2018, the IMF’s Management approved a 7-month Staff-Monitored Program (SMP), covering the period January 1–July 31, 2018. The main fiscal objectives of the SMP are to (i) reduce the budget deficit through non-hydrocarbon revenue mobilization and expenditure reduction while protecting social spending and (ii) address critical weaknesses in public financial management. The program also contains measures to improve the business climate, foster economic diversification, and lay the basis for improving governance and transparency. In addition, the program is providing a framework for bolstering capacity and helping build an adequate track record of performance as the basis for discussions on a potential Fund-supported program later this year.
  67. By: Funke, Michael; Tsang, Andrew; Zhu, Linxu
    Abstract: This paper investigates the implementation of regionally differentiated macro-prudential policies in China. To assess the relative intensity of the city-level macro-prudential policies over time, we construct a time-varying city-level macro-prudential policy intensity indicator for 70 Chinese cities from 2010-2017. The empirical evidence shows China’s macro-prudential toolbox has gradually evolved toward city-level policies tailored to granular local conditions to mitigate risks.
    JEL: O18 E52 C38
    Date: 2018–11–14
  68. By: Christopher Hansen; Joern H. Block; Matthias Neuenkirch
    Abstract: The financial performance of family firms has been widely studied in the literature. Combining the results of 172 primary studies from 38 countries with data about business cycles, we investigated how family firm performance changes over the business cycle. Using meta-analytic estimation methods, we found that family firms slightly outperform nonfamily firms in both economically good and economically difficult times. For non-OECD countries, we found evidence for a countercyclical effect where the relative outperformance of family firms is higher in economically difficult times. No such cyclical effect was found for family firms in OECD countries. Our study extends the literature on how family firm performance depends on macroeconomic factors.
    Keywords: family firms, financial performance, meta-analysis, business cycle
    Date: 2018
  69. By: Alexander Bick; Bettina Brüggemann; Nicola Fuchs-Schündeln; Hannah Paule-Paludkiewicz
    Abstract: We document the time-series of employment rates and hours worked per employed by married couples in the US and seven European countries (Belgium, France, Germany, Italy, the Netherlands, Portugal, and the UK) from the early 1980s through 2016. Relying on a model of joint household labor supply decisions, we quantitatively analyze the role of non-linear labor income taxes for explaining the evolution of hours worked of married couples over time, using as inputs the full country- and year-specific statutory labor income tax codes. We further evaluate the role of consumption taxes, gender and educational wage premia, and the educational composition. The model is quite successful in replicating the time series behavior of hours worked per employed married woman, with labor income taxes being the key driving force. It does however capture only part of the secular increase in married women’s employment rates in the 1980s and early 1990s, suggesting an important role for factors not considered in this paper. We will make the non-linear tax codes used as an input into the analysis available as a user-friendly and easily integrable set of Matlab codes.
    Keywords: taxation, two-earner households, hours worked
    JEL: E60 H20 H31 J22
    Date: 2018
  70. By: Friederike Niepmann; Tim Schmidt-Eisenlohr
    Abstract: This paper documents that an appreciation of the U.S. dollar is associated with a reduction in the supply of commercial and industrial loans by U.S. banks. An increase in the broad dollar index by 2.5 points (one standard deviation) reduces U.S. banks’ corporate loan originations by 10 percent. This decline is driven by a reduction in the demand for loans on the secondary market where prices fall and liquidity worsens when the dollar appreciates, with stronger effects for riskier loans. Today, the main buyers of U.S. corporate loans—and, hence, suppliers of funding for these loans—are institutional investors, in particular mutual funds, which experience outflows when the dollar appreciates. A shift of traditional financial intermediation to these relatively unregulated entities, which are more sensitive to global developments, has led to the emergence of this new channel through which the dollar affects the U.S. economy, which we term the secondary market channel.
    Keywords: leveraged loan market, commercial and industrial loans, U.S. dollar exchange rate, credit standards, institutional investors
    JEL: E44 F31 G15 G21 G23
    Date: 2018
  71. By: Cukierman, Alex
    Abstract: This paper compares the appreciation pressures on the currencies of the two countries, documents the similarities and differences between their methods of interventions and discusses their consequences for the size of forex reserve accumulation and their management. It is argued that the differences in methods of intervention and in the magnitude of reserve accumulation should be understood within the larger context of differences in the monetary policies of the Swiss National Bank (SNB) and of the Bank of Israel (BOI) including, in particular, the fact that the SNB hit the zero lower bound earlier than the BOI and has maintained a negative rate for some time. The paper discusses the structural differences in inflation, growth, openness, and safe haven considerations that are responsible for those difference in monetary policies. Following a comparison of the effectiveness of "strong" and discretionary interventions in the two countries the paper discusses the pros and cons of forex interventions by small open economies faced with large trading partners whose policy rates are at or below the ZLB and who engage in large scale asset purchases. Sustained periods of intervention lead to large reserve accumulations that ultimately raise questions about potential costs of large reserves. The paper critically examines conventional views about such costs, the related accounting methods used to quantify them and proposes institutional changes designed to ameliorate the tradeoff between leaning against appreciations and "excessive" reserve accumulation. In this context the experience of Switzerland and of the Norwegian sovereign wealth fund is particularly relevant for Israel.
    Keywords: financial crisis; Forex intervention; policy lessons; reserve management
    JEL: E4 E5 F3
    Date: 2018–09
  72. By: Michal Mares (University of Economics, Prague); Martin Slany (University of Economics, Prague)
    Abstract: This paper represents an early warning indicator of financial crises applied to the data of the Czech Republic, Poland, Hungary and Slovakia (V4 counties) between 2005 and 2018. Based on the previous research, 16 indicators were selected to build up the composite indicator of cyclical components ? so. Composite Index of Financial Instability (CIFI), and discussed its development. The relevance of the presented indicator, especially in the context of the Euro-American financial crisis of 2008-2009, is demonstrated in both graphical and econometric analysis using panel logistic regression. The conclusion implies that all V4 countries had experienced a high instability in connection with the global financial crisis 2008/2009 and implies different developments in financial conditions in recent years. The output of econometric model confirms positive relation between the value of CIFI and probability of financial crises occurrence. An increase in the CIFI per unit indicates an increase in probability of occurrence crisis approximately by 7 %. In spite of all its limitations, the usefulness of the composite index in the context of economic policymaking is proven by the analysis.
    Keywords: financial crises, early warning indicator, composite index, Visegrad countries,panel regression
    JEL: C53 E47 G01
    Date: 2018–10
  73. By: Egor Krivosheya (Moscow school of management SKOLKOVO, National Research University Higher School of Economics, Russian Federation); Ekaterina Semerikova (Moscow school of management SKOLKOVO)
    Abstract: This research empirically evaluates the effect of network externalities for individuals behavior at Russian retail payments market. Specifically, the effects of direct and indirect network externalities for cardholding and usage probabilities are examined. Using the representative sample of 1500 individuals from all Russian regions this study finds significant robust evidence of positive association between the degree of both types of network externalities and individuals? activity at the Russian retail payments market. Results are economically significant: a standard deviation increase in network effects leads to 2.5-4 percentage points increase in probability of cardholding and usage. Findings imply that one needs to account for network effects which play an important role for the payment behavior before implementing payment stimulating programs in Russia aimed at cardholders or users.
    Keywords: Retail payments; payment cards; network effects; cardholders' behavior; financial services
    JEL: G21 D53 E42
    Date: 2018–10
  74. By: Corbisiero, Giuseppe (Central Bank of Ireland)
    Abstract: This Letter analyses different monetary policy regimes from the New Keynesian perspective. In the presence of a lower bound on policy rates, adjusting the inflation target with past realisations of inflation strengthens monetary stimuli during recessions. However, amplified short-term fluctuations in inflation and output make such history-dependent regimes unappealing. Therefore, this Letter discusses a hybrid regime that incorporates their advantages without suffering from their drawbacks.
    Date: 2018–05
  75. By: Itai Agur
    Abstract: The notion of a tradeoff between output and financial stabilization is based on monetary-macroprudential models with unique equilibria. Using a game theory setup, this paper shows that multiple equilibria lead to qualitatively different results. Monetary and macroprudential authorities have tools that impose externalities on each other's objectives. One of the tools (macroprudential) is coarse, while the other (monetary policy) is unconstrained. We find that this asymmetry always leads to multiple equilibria, and show that under economically relevant conditions the authorities prefer different equilibria. Giving the unconstrained authority a weight on "helping" the constrained authority ("leaning against the wind") now has unexpected effects. The relation between this weight and the difficulty of coordinating is hump-shaped, and therefore a small degree of leaning worsens outcomes on both authorities' objectives.
    Date: 2018–11–02
  76. By: Egor Krivosheya (Moscow school of management SKOLKOVO, National Research University Higher School of Economics, Russian Federation)
    Abstract: This research examines the role of network externalities in card acceptance by merchants on the retail payments market in Russia. The work empirically tests the effects of both direct and indirect network externalities for the merchants? card acceptance probability based on the representative survey of 800 traditional (offline) merchants from all Russian regions. The main finding of this study is that the probability of cashless payments acceptance by merchants increases with the presence of direct and indirect or both types of network externalities, controlling for a large set of control variables, including merchants? characteristics and location-specific differences between the retailers. The results are robust to the changes in measures of network externalities and inclusion of shadow economy controls. The findings are significant both statistically and economically.
    Keywords: Retail payments; payment cards; network effects; merchants' acceptance; financial services
    JEL: G21 E42
    Date: 2018–10
  77. By: Okahara, Naoto
    Abstract: This study proposes a model that describes banks' decisions about their capital structures and analyzes the regulation of the capital adequacy ratio (CAR), that is, the ratio of equity finance to risky assets. The aim of this study is to investigate two questions. First, which level of CAR is optimal for a bank when both deposit finance and equity finance have advantages and disadvantages. Second, whether or not a bank reduces the amount of lending when it is required to rise its CAR. In this study, we analyze tow types of the model: one without a constraint on the maximum amount of funding a bank can obtain from households, and one with the constraint. In either case, the optimal CAR could be determined as an interior solution. In addition, a regulation of the CAR decreases a bank's profit if its CAR is not large enough to satisfy the regulation in either case. Even though an unsound bank always chooses to use more equity finance to satisfy regulation in the former case, it would choose to reduce the amount of lending in the latter case because its capital structure is affected by households portfolio optimizations. The model shows that the more risk-averse households are, the more likely a bank is to reduce lending. These results show that there is a positive probability that regulating banks' capital structures have a negative effect in economy, and to investigate such effect we consider the interaction between banks and households more carefully.
    Keywords: Bank capital, Capital regulation
    JEL: E10 G18 G21
    Date: 2018–08–27
  78. By: David, Joel; Schmid, Lukas; Zeke, David
    Abstract: We develop a theory linking "misallocation," i.e., dispersion in static marginal products of capital (MPK), to systematic investment risks. In our setup, firms differ in their exposure to these risks, which we show leads naturally to heterogeneity in firm-level risk premia and, more importantly, MPK. The theory predicts that cross-sectional dispersion in MPK (i) depends on cross-sectional dispersion in risk exposures and (ii) fluctuates with the price of risk, and thus is countercyclical. We document strong empirical support for these predictions. We devise a strategy to quantify variation in firm-level risk exposures using data on the dispersion of expected stock market returns. Our estimates imply that risk considerations explain almost 40% of observed MPK dispersion among US firms and in particular, can rationalize a large persistent component in firm-level MPK deviations. Our framework provides a sharp link between aggregate volatility, cross-sectional asset pricing and long-run economic performance - MPK dispersion induced by risk premium effects, although not prima facie inefficient, lowers the average level of aggregate TFP by as much as 7%, suggesting large "productivity costs" of business cycles.
    Keywords: costs of business cycles; cross-section of returns; Misallocation; time-varying risk premia
    Date: 2018–09
  79. By: Galanis, Giorgos; Veneziani, Roberto; Yoshihara, Naoki
    Abstract: This paper analyses the relation between growth, inequalities, and exploitation as the unequal exchange of labour (UE exploitation). An economy with heterogeneous, intertemporally optimising agents is considered which generalises John Roemer's [52, 53] seminal models. First, a correspondence between prots and the existence (and intensity) of UE exploitation is proved in the dynamic context. This result is important, positively, because the prot rate is one of the key determinants of investment decisions, and, normatively, because it provides a link between UE exploitation and the functional distribution of income. Second, it is shown that asset inequalities are fundamental for the emergence of UE exploitation, but they are not sucient for its persistence, both in equilibria with accumulation and growth, and, perhaps more surprisingly, in stationary intertemporal equilibrium paths. Labour-saving technical progress, however, may yield sustained growth with persistent UE exploitation by keeping labour abundant relative to capital. Persistent inequalities in income and labour exchanged arise from the interaction between labour market conditions and dierential ownership of productive assets.
    Keywords: Dynamics, accumulation, exploitation, inequalities
    JEL: D51 D63 C61 E11
    Date: 2018–10
  80. By: Tim Murray
    Abstract: Many retirees retain their housing equity until they die and do not utilize it to help finance spending on consumption. In this paper, I examine how older Americans (age 55+) may use their house as a form of precautionary savings in the event they face an increase in out-of-pocket medical expenses due to a health shock. I find that households are 12-percentage points more likely to own a home in their late retirement years if they might face an unexpected increase in medical bills, indicating that many of such households prefer not to own but choose to knowing they may get sick and face an increase in out-of-pocket medical expenses. Accordingly, I propose an insurance policy that would cover any out-of-pocket medical expenses not covered by Medicaid. When the price of the insurance policy is between 0.15%-0.50% of each householdâs house value, 12.8% of households purchase the insurance policy. In the presence of an insurance policy and health shocks, the homeownership and moving rates look like an economy without health shocks, thus correcting a possible market failure that causes households to use their house as a form of precautionary savings.
    JEL: D14 E13 R21
    Date: 2018–11–13
  81. By: Roberto Iacono (Norwegian University of Science and Technology, Norway); Marco Ranaldi (PSE and University Paris 1 Panthéon-Sorbonne, France)
    Abstract: In this article, we study the link between the functional and personal distribution of income, focusing on the case of Italy between 1989 and 2016. To this end, we rely on the novel concept of income composition inequality. Income composition inequality focuses on how unequally the composition of income is distributed across the population. The higher the overall degree of income composition inequality is, the stronger the link between the functional and personal distribution of income. We show that the strength of this link decreased steadily in Italy over the period considered. This result is robust to the use of different definitions of capital and labor and different estimation techniques of the degree of income composition inequality. The implications of this result are twofold. First, fluctuations in the total factor shares of income are having an increasingly weaker impact on income inequality in Italy. Second, Italy is moving towards becoming a multiple sources of income society. Finally, we conceptualize a simple rule of thumb for policy makers seeking to reduce income inequality in the long run: This rule relates fluctuations in the total factor shares and the level of income composition inequality to the specific income source to be redistributed.
    Keywords: Income composition inequality, functional and personal income distribution, Italy.
    JEL: C43 E25 H24
    Date: 2018–10

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