nep-mac New Economics Papers
on Macroeconomics
Issue of 2018‒12‒10
106 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Active Asset Managers Face Asymmetric Risks from Paradigm Shift By Xing, Victor
  2. Strategic Deviations in Optimal Monetary Policy By Fabio Canetg
  3. Reserves For All? Central Bank Digital Currency, Deposits and their (Non)-Equivalence By Dirk Niepelt
  4. Forward Guidance with Bayesian Learning and Estimation By Christopher J. Gust; Edward Herbst; J. David Lopez-Salido
  5. Conversion Theory: the key to understanding economic developments before and after the 2008 financial crisis By De Koning, Kees
  6. Alternative Specifications of Fisher Hypothesis: An Empirical Investigation By S, Surayya
  7. Growth and real business cycles in Vietnam and the ASEAN-5. Does the trend shock matter? By Pham, Binh T.; Sala, Hector; Silva, José I.
  8. Earnings-Based Borrowing Constraints and Macroeconomic Fluctuations By Thomas Drechsel
  9. Bilan sur le consensus de Jackson Hole By Anne-Marie Rieu-Foucault
  10. Money Markets, Collateral and Monetary Policy By De Fiore, Fiorella; Hoerova, Marie; Uhlig, Harald
  11. Second Thoughts on Estimating Expansionary Fiscal Policy E ffects in the United States By JIA, BIJIE
  12. Are "fair" wages quantitatively important for business cycle fluctuations in Bulgaria? By Vasilev, Aleksandar
  13. Macroeconomics with Endogenous Markups and Optimal Taxation By Federico Etro
  14. Macroeconomic Effects of Quantitative and Qualitative Monetary Easing Measures By Junko Koeda
  15. Inflation expectations, consumption and the lower bound: micro evidence from a large euro area survey By Duca, Ioana A.; Kenny, Geoff; Reuter, Andreas
  16. The Risk-Taking Channel of Monetary Policy in Macedonia: Evidence from Credit Registry Data By Mite Miteski; Ana Mitreska; Mihajlo Vaskov
  17. On Identification Issues in Business Cycle Accounting Models By Brinca, Pedro; Iskrev, Nikolay; Loria, Francesca
  18. Capital Gains Taxation and Investment Dynamics By Hong, Sungki; Moon, Terry S.
  19. A Note on Balanced-Budget Income Taxes and Aggregate (In)Stability in Multi-Sector Economies By Nicolas Abad; Alain Venditti
  20. Autonomous Demand and the Investment Share By Daniele Girardi; Riccardo Pariboni
  21. Asymmetries in the Responses of Regional Job Flows to Oil Price Shocks By Karaki, Mohamad
  22. The Microeconomic Foundations of Aggregate Production Functions By David Baqaee; Emmanuel Farhi
  23. Employment Effects of Unconventional Monetary Policy : Evidence from QE By Stephan Luck; Thomas Zimmermann
  24. Neo-Fisherian Policies and Liquidity Traps By Bilbiie, Florin Ovidiu
  25. Indeterminacy and multiplicity of equilibria in a two-sector economy with a public-sector production By Vasilev, Aleksandar
  26. Perceptions and Expectations of Inflation by U.S. Households By Sandor Axelrod; David E. Lebow; Ekaterina V. Peneva
  27. Employment to output elasticities & reforms towards flexicurity: Evidence from OECD countries By Görg, Holger; Hornok, Cecília; Montagna, Catia; Onwordi, George E.
  28. Collateral Damage: The Impact of Foreclosures on New Home Mortgage Lending in the 1930s By Price Fishback; Sebastián Fleitas; Jonathan Rose; Kenneth Snowden
  29. Monetray policy and asset price bubbles By Christophe Blot; Paul Hubert; Fabien Labondance
  30. Assessing Kuwaiti Energy Pricing Reforms By Manal R. SHEHABI
  31. Financial shocks and endogenous labor market participation By Carnicelli, Lauro
  32. Collateral Booms and Information Depletion By Vladimir Asriyan; Luc Laeven; Alberto Martín
  33. Public insurance of married versus single households in the US: trends and welfare consequences By Swapnil Singh
  34. The Nonlinear Effects of Uncertainty Shocks By Jackson, Laura E.; Kliesen, Kevin L.; Owyang, Michael T.
  35. Volatility-Induced Stationarity and Error-Correction in Macro-Finance Term Structure Modeling By Anne Lundgaard Hansen
  36. A DSGE Model to Evaluate the Macroeconomic Impacts of Taxation By José Alves
  37. The Real Meaning of the Real Bills Doctrine (revised Nov., 2018) By Sproul, Michael
  38. Managing Self-organization of Expectations through Monetary Policy: a Macro Experiment By Assenza, Tiziana; Heemeijer, P.; Hommes, C.H.; Massaro, D.
  39. Fostering green investments and tackling climate-related financial risks: Which role for macroprudential policies? By D'Orazio, Paola; Popoyan, Lilit
  40. Semi-structural credit gap estimation By Lang, Jan Hannes; Welz, Peter
  41. New VAR evidence on monetary transmission channels: temporary interest rate versus inflation target shocks By Lukmanova, Elizaveta; Rabitsch, Katrin
  42. Risk-Adjusted Linearizations of Dynamic Equilibrium Models By Pierlauro Lopez; David Lopez-Salido; Francisco Vazquez-Grande o
  43. Competitive Equilibrium Cycles for Small Discounting in Discrete-Time Two-Sector Optimal Growth Models By Alain Venditti
  44. Can Capitalists Afford Recovery? A 2018 Update and a Closer Look By Bichler, Shimshon; Nitzan, Jonathan
  45. Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis By Kalemli-Ozcan, Sebnem
  46. Optimal Carbon Pricing and Income Taxation Without Commitment By Alex Schmitt
  47. China’s ‘New Normal’: Is the growth slowdown demand- or supply-driven? By Anping Chen; Nicolaas Groenewold
  48. Non-Balanced Endogenous Growth and Structural Change: When Romer Meets Kaldor and Kuznets By Christian Ghiglino; Kazuo Nishimura; Alain Venditti
  49. The Role of Loan Supply Shocks in Pacific Alliance Countries: A TVP-VAR-SV Approach By Gabriel Rodríguez; Carlos Guevara
  50. The impact of oil prices on CO2 emissions in China: A Wavelet coherence approach By Bilgili, Faik; Mugaloglu, Erhan; Koçak, Emrah
  51. An Early Warning System for Systemic Banking Crises: A Robust Model Specification By O'Brien, Martin; Wosser, Michael
  52. Monetary policy and bank equity values in a time of low interest rates By Ampudia, Miguel; Heuvel, Skander Van den
  53. Lending standards and macroeconomic dynamics By Gete, Pedro
  54. Black Market Prices during World War II in Japan: An Estimate Using the Hedonic Approach By Masato Shizume
  56. Heterogeneity, distribution and financial fragility of non-financial firms: an agent-based stock-flow consistent (AB-SFC) model By Italo Pedrosa; Dany Lang
  57. Employment in the Great Recession : How Important Were Household Credit Supply Shocks? By Daniel Garcia
  58. The Micro-Level Anatomy of the Labor Share Decline By Kehrig, Matthias; Vincent, Nicolas
  59. Leverage over the Life Cycle and Implications for Firm Growth and Shock Responsiveness By Kalemli-Ozcan, Sebnem
  60. International productivity gaps: Are labour input measures comparable? By Ashley Ward; María Belén Zinni; Pascal Marianna
  61. Generational Conflict and Education Politics: Implications for Growth and Welfare By Yuki Uchida; Tetsuo Ono
  62. On the U.S. Firm and Establishment Size Distributions By Illenin O. Kondo; Logan T. Lewis; Andrea Stella
  63. Comment Israël a évité l’hyperinflation ? Le succès du plan de stabilisation (1985) à la lumière de la théorie post-keynésienne By Jonathan Marie; Sébastien Charles
  64. Time-varying Consumption Tax, Productive Government Spending, and Aggregate Instability By Mauro Bambi; Alain Venditti
  65. Complementarity and Advantage in the Competing Auctions of Skills By Alex Xi He; John Kennes; Daniel le Maire
  66. The determinants of interest rates in microfinance: age, scale and organisational charter By Jacinta C. Nwachukwu; Aqsa Aziz; Uchenna Tony-Okeke; Simplice A. Asongu
  67. Revisiting the Finance-Inequality Nexus in a Panel of African Countries By Christelle Meniago; Simplice A. Asongu
  68. The Relationship between Fiscal and Current Account Imbalances in OECD Economies By António Afonso; Philemon Kwame Opoku
  69. Dollarization and the “Unbundling†of Globalization in sub-Saharan Africa By Kazeem B. Ajide; Ibrahim D. Raheem; Simplice A. Asongu
  70. The Risk-Taking Channel of Liquidity Regulations and Monetary Policy By Stephan Imhof, Cyril Monnet, Shengxing Zhang
  71. Capital Accumulation and Dynamic Gains from Trade By B. Ravikumar; Ana Maria Santacreu; Michael Sposi
  72. What hides behind the German labor market miracle? Unemployment insurance reforms and labor market dynamics By Hartung, Benjamin; Jung, Philip; Kuhn, Moritz
  73. Factor Incomes in Global Value Chains: The Role of Intangibles By Wen Chen; Bart Los; Marcel P. Timmer
  74. Behavioral & experimental macroeconomics and policy analysis: a complex systems approach By Hommes, Cars
  75. Exploring the Linkage between Corruption and Economic Development in Case of Selected Developing and Developed Nations By Audi, Marc; Ali, Amjad
  76. Sources of borrowing and fiscal multipliers By Priftis, Romanos; Zimic, Srečko
  77. Financial liberalisation, financial development and financial crises in SADC countries By Clement Moyo; Pierre Le Roux
  78. The New Area-Wide Model II: an extended version of the ECB's micro-founded model for forecasting and policy analysis with a financial sector By Coenen, Günter; Karadi, Peter; Schmidt, Sebastian; Warne, Anders
  79. Forecasting of Recessions via Dynamic Probit for Time Series: Replication and Extension of Kauppi and Saikkonen (2008) By Byeong U. Park; Lèopold Simar; Valentin Zelenyuk
  80. Term Structure Models During the Global Financial Crisis: A Parsimonious Text Mining Approach By Kiyohiko G. Nishimura; Seisho Sato; Akihiko Takahashi
  81. Long Time Out: Unemployment and Joblessness in Canada and the United States By Kory Kroft; Fabian Lange; Matthew J. Notowidigdo; Matthew Tudball
  82. Pockets of risk in European Housing Markets: then and now By Kelly, Jane; Le Blanc, Julia; Lydon, Reamonn
  83. Housing Decision with Divorce Risk By Fischer, Marcel; Khorunzhina, Natalia
  84. The consumption-investment decision of a prospect theory household: A two-period model with an endogenous second period reference level By Hlouskova, Jaroslava; Fortin, Ines; Tsigaris, Panagiotis
  85. Inequality and relative saving rates at the top By Lieberknecht, Philipp; Vermeulen, Philip
  86. Business cycle duration dependence and foreign recessions By de Bondt, Gabe; Vermeulen, Philip
  87. Job Seekers' Perceptions and Employment Prospects: Heterogeneity, Duration Dependence and Bias By Andreas I. Mueller; Johannes Spinnewijn; Giorgio Topa
  88. The Dynamic Properties of Natural Resource Prices By Ghoshray, A.
  89. Does the size of the informal economy impede the impact of remittances on economic growth? Evidence from Sub-Saharan African countries By Njangang, Henri
  90. Prospek Ekonomi dan Budidaya Perkebunan Kelapa Sawit di Indonesia By Joko Ismoyo, Agung; Saiful M, Adi Auf; Supriadi, Cepi; Winianingsih, Dewi; Ayu Lestari, Firda; Marhama, Hasna; Pazriatu R, Intan
  92. The Effectiveness of Monetary and Fiscal Policy Shocks on U.S. Inequality: The Role of Uncertainty By Aye, G.C.; Clance, M.; Gupta, R.
  93. The Non-Bank Credit Cycle By Esti Kemp; Rene van Stralen; Alexandros Vardoulakis; Peter J. Wierts
  94. The Long Run Stability of Money Demand in the Proposed West African Monetary Union By Simplice A. Asongu; Oludele E. Folarin; Nicholas Biekpe
  95. Monetary theory and policy: the debate revisited By Jean-Luc Gaffard
  96. Economic convergence and exchange rate misalignments in the European Union By Judit Kreko; Gabor Oblath
  97. China Syndrome Or Not? Labour Market Effects Of A Greater Trade Openness In Us Manufacturing By Fabrizio Antenucci
  98. On the empirical relevance of the Lucas supply curve. (A note) By Claude Bismut; Isamaël Ramajo
  99. Emergency Collateral Upgrades By Mark A. Carlson; Marco Macchiavelli
  100. Insurance-markets Equilibrium with a Non-convex Labor Supply decision, Unobservable Effort, and Efficiency Wages of the "No-shirking" Type By Vasilev, Aleksandar
  101. Testing regional intergovernmental transfers asymmetries in Uruguay By Muinelo-Gallo, Leonel; Azar, Paola
  102. Assortative Matching or Exclusionary Hiring? The Impact of Firm Policies on Racial Wage Differences in Brazil By Gerard, Francois; Lagos, Lorenzo; Severnini, Edson R.; Card, David
  104. Macro and Micro Estimates of Household Wealth By Cussen, Mary; Lydon, Reamonn; O'Sullivan, Cormac
  105. Optimal Monetary Policy in a DSGE Model with Attenuated Forward Guidance Effects By Hess Chung; Taisuke Nakata; Matthias Paustian
  106. Some Evidence on Secular Drivers of U.S. Safe Real Rates By Kurt G. Lunsford; Kenneth D. West

  1. By: Xing, Victor
    Abstract: Active asset managers face asymmetric risks from a paradigm shift in monetary policy regimes and inflation trends, as some active funds increased risk-taking to compete with passive funds - the primary beneficiaries of prolonged low volatility. A decade of volatility and term premium suppression also led some active funds to adapt a bearish volatility stance and increased their vulnerabilities to a regime change in inflation dynamics, as they transfer risks from debt issuers onto their balance sheets. A growing body of research now point to cumulative policy costs from prolonged unconventional monetary easing, and aversion to mounting policy costs and retreat from globalization would heighten volatility and financial instability. Likelihood of regulatory scrutiny would rise if non-bank financial institutions' complacency on volatility contribute to financial stability, and "Volcker-like" rules imposed on non-bank asset managers would lead to crippling impacts on fund operations. Thus, active portfolio managers adept at managing volatility can minimize regulatory scrutiny by counterbalancing systemic risks from passive strategies.
    Keywords: Active fund management, passive fund management, volatility, monetary policy, quantitative easing, policy costs, financial stability risks, regulatory measures
    JEL: E0 E3 E4 E5 G1 G2
    Date: 2018–11–04
  2. By: Fabio Canetg
    Abstract: This paper investigates the circumstances under which a central bank is more or less likely to deviate from the optimal monetary policy rule. The research questions is addressed in a simple New Keynesian dynamic stochastic general equilibrium (DSGE) model in which monetary policy deviations occur endogenously. The model solution suggests that higher future central bank credibility attenuates the current period policy trade-o between a stable in ation rate and a stable output gap. Together with the loss of credibility after a policy deviation, this provides the central bank with an incentive to implement past policy commitments. My main result shows that the central bank is willing to implement past policy commitments if a sucient fraction of agents is not aware of the exact end date of the policy commitment. This nding challenges the time-inconsistency argument against monetary policy commitments and provides a potential explanation for the repeated implementation of monetary policy commitments in reality.
    Keywords: optimal monetary policy, strategic deviations, forward guidance
    JEL: E42 E52 E58
    Date: 2018–07
  3. By: Dirk Niepelt
    Abstract: I o er a macroeconomic perspective on the \Reserves for All" (RFA) proposal to let the general public use electronic central bank money. After distinguishing RFA from cryptocurrencies and relating the proposal to discussions about narrow banking and the abolition of cash I propose an equivalence result according to which a marginal substitution of outside for inside money does not a ect macroeconomic outcomes. I identify key conditions on bank and government (central bank) incentives for equivalence and argue that these conditions likely are violated, implying that RFA would change macroeconomic outcomes. I also relate my analysis to common arguments in the discussion about RFA and point to inconsistencies and open questions.
    Keywords: Central bank digital currency, Fedcoin, CADcoin, e-krona, e-Peso, JCoin, reserves for all, deposits, narrow banking, cash, equivalence, central bank, lender of last resort, politico-economic equivalence
    JEL: E42 E51 E58 E61 E63 H63
    Date: 2018–07
  4. By: Christopher J. Gust; Edward Herbst; J. David Lopez-Salido
    Abstract: Considerable attention has been devoted to evaluating the macroeconomic effectiveness of the Federal Reserve's communications about future policy rates (forward guidance) in light of the U.S. economy's long spell at the zero lower bound (ZLB). In this paper, we study whether forward guidance represented a shift in the systematic description of monetary policy by estimating a New Keynesian model using Bayesian techniques. In doing so, we take into account the uncertainty that agents have about policy regimes using an incomplete information setup in which they update their beliefs using Bayes rule (Bayesian learning). We document a systematic change in U.S. policymakers' reaction function during the ZLB episode (2009-2016) that called for a persistently lower policy rate than in other regimes (we call this the forward guidance regime). Our estimates suggest that private sector agents were slow to learn about this change in real time, which limited the effectiveness of t he forward guidance regime in stimulating economic activity and curbing disinflationary pressure. We also show that the incomplete information specification of the model fits economic outcomes over the economy's long spell at the ZLB better than the full information specification.
    Keywords: Bayesian estimation ; Bayesian learning ; forward guidance
    JEL: E32 C32 E52 C11
    Date: 2018–10–25
  5. By: De Koning, Kees
    Abstract: Conversion is a term often used for exchanging one currency into another. This can be done on basis of daily exchange rates: the spot rates, but also on basis of future needs: the forward rates. There is a second type of conversion, which in economic terms may be much more relevant than the currency spot and forward rates: it is the capacity of governments, central banks and the financial sector to turn long term obligations into daily tradable ones and vice versa. In the U.S., prior to the financial crisis in 2007-2008, banks started to accelerate the underwriting of subprime mortgages. By 2007, subprime mortgages comprised 14%; equivalent to $1.46 trillion. Of these mortgages, the securitized element was about 75% or about $ 1.1 trillion. This element accounted for about 15% of all outstanding U.S. mortgage-backed securities ($7.3 trillion). As a trick of financial alchemy, securitization turned long term obligations by the borrowers into daily tradable investments by the holders of such debt: conversion. In mixing prime borrower debt with subprime debt to form single securities, the risk assessment for investors was made extremely difficult. Many relied on U.S. credit rating agencies for such assessment; the latter often indicated AA or AA+ ratings. The investors were proven wrong and bad risks repelled good risk taking. Short-term doubts drove away the prospect of securing long-term commitments. Liquidity evaporated. In the U.S. the legal system took charge of the outstanding loan recoveries. Over the years 2007-2014, 21.228 million households were confronted with foreclosure filings out of the 51.234 million households who had a mortgage: 41.4% of all mortgage holders! This legal system approach is at odds with what may have been a recommendable economic solution. The legal approach created a snowball effect; a negative feedback loop of more doubtful debtors leading to more forced home sales; dropping house prices and subsequently more doubtful debtors. History shows that the U.S. government debt increased by $4.5 trillion between 2007-2009, while real GDP still shrank. The actions of the Fed by creating money through Quantitative Easing, to the extent of $3.5 trillion, made borrowing cheaper for future borrowers but did little to improve the life of existing ones. This paper will set out the dangers of conversion and will propose an alternative economic approach to address the conversion-driven changes in the financial position of individual home mortgage borrowers.
    Keywords: Conversion Theory; financial crisis; U.S. home mortgages; transfer of mortgage risks; long-term into short term risk conversion; Northern Rock bank; U.S. unemployment; U.S. government debt; U.S. new housing starts;U.S. median home sale prices; U.S.real median income levels; foreclosure filings.
    JEL: E3 E32 E4 E42 E44 E5 E58
    Date: 2018–09–18
  6. By: S, Surayya
    Abstract: Fisher hypothesis provides theoretical framework for the study of relationship between nominal interest rate and inflation. It assumes one to one direct relationship between nominal interest rate and inflation. Modifications to this model are explained by Mundell effect, Phillips curve and Friedman effect , Levi and Makin effect, Darby effect and Carmichael and Stebbing effect (Inverted Fisher Hypothesis). The objective of this paper is to explore the Fisher hypothesis and its alternative specifications using IFS Panel data set and applying General to Specific Methodology .Findings of this paper show that Inverted Fisher hypothesis holds in above average money supply ̷ GDP countries. Full Fisher effect is present only when Phillips curve effect and Friedman effect are also present in below average money supply ̷ GDP countries.
    Keywords: Fisher Hypothesis, Interest Rate, Inflation, Panel Data, General to Specific Model.
    JEL: E4 E40 E43 E5 E52
    Date: 2018
  7. By: Pham, Binh T.; Sala, Hector; Silva, José I.
    Abstract: We examine Vietnam’s economy together with its closest trade partners. We show that capital accumulation has been the primary growth engine since the start of its transition to the pro-market economy in 1986–the Doi Moi. We also show that the cyclical behavior of its macro-aggregates is similar to the one of its ASEAN-5 peers and other developing countries. We extend the standard small-open-economy RBC model by considering habit persistence and government consumption which allows a close match of the moments of the growth variables. At the business cycle frequency, transitory productivity shocks account for approximately one-half of Vietnam’s output variance, while country-risk and non-transitory productivity shocks account to close to one-fifth each. Regarding Solow residual's volatility, we find that the trend component merely accounts for 12% of this variance in Vietnam, while in Thailand it is only 6%. These findings refute “the cycle is the trend” hypothesis in Aguiar and Gopinath (2007), and align to those in García-Cicco, Pancrazi, and Uribe (2010) and Rhee (2017), in which the stationary component is overwhelmingly dominant. We claim that technological progress and productivity-enhancing measures are fundamental for Vietnam's economy to sustain a high growth.
    Keywords: Vietnam, ASEAN, DSGE, RBC, trend shock, growth
    JEL: E0 E13 E3 E32 E60
    Date: 2018–11–22
  8. By: Thomas Drechsel
    Abstract: Micro evidence on US corporate borrowing suggests a strong connection between firms' current earnings and their access to debt. This paper formalizes this link through an earnings-based constraint on firm borrowing and studies its macroeconomic implications. Introducing the proposed constraint in a business cycle model alters the transmission of shocks relative to an asset-based collateral constraint, which has become a standard building block in macroeconomics. In response to positive investment shocks, corporate debt expands when earnings-based constraints are present, while it contracts with collateral constraints, as the shock reduces the relative value of capital. The paper empirically verifies these theoretical predictions using both aggregate and firm-level data. The responses of debt to investment shocks in the data support the aggregate relevance of the earnings-based constraint, and heterogeneous borrowing dynamics at the firm-level are in line with the mechanism. In an estimated quantitative model with nominal rigidities, earnings-based constraints dampen the output response to fiscal shocks, whereas monetary shocks have stronger but less persistent effects relative to counterfactual estimations without the constraint.
    JEL: E22 E32 E44 G32
    Date: 2018–11–24
  9. By: Anne-Marie Rieu-Foucault
    Abstract: Before the 2007 crisis, the monetary authorities agreed in Jackson Hole for independence between monetary policy and financial stability. They thus validated the mandate of central banks with the objective of price stability. This point, however, is debated. This paper takes the arguments that led to the Jackson Hole consensus before the crisis and then revisits them in the light of the 2007 crisis. Financial imbalances and the existence of a risk-taking channel need to be addressed by economic policy. After the crisis, the monetary authorities chose to implement macroprudential policies to address this concern but did not question the independence between monetary policy and financial stability, resulting in the separation of monetary policy and macro-prudential policies. The limitations of macroprudential tools may, however, lead to changes in the central bank's strategy or mandate for the integration of a financial stability objective into monetary policy.
    Keywords: Monetary policy, Financial Stability, Central banks
    JEL: E52 E58 G01
    Date: 2018
  10. By: De Fiore, Fiorella; Hoerova, Marie; Uhlig, Harald
    Abstract: Interbank money markets have been subject to substantial impairments in the recent decade, such as a decline in unsecured lending and substantial increases in haircuts on posted collateral. This paper seeks to understand the implications of these developments for the broader economy and monetary policy. To that end, we develop a novel general equilibrium model featuring heterogeneous banks, interbank markets for both secured and unsecured credit, and a central bank. The model features a number of occasionally binding constraints. The interactions between these constraints - in particular leverage and liquidity constraints - are key in determining macroeconomic outcomes. We find that both secured and unsecured money market frictions force banks to either divert resources into unproductive but liquid assets or to de-lever, which leads to less lending and output. If the liquidity constraint is very tight, the leverage constraint may turn slack. In this case, there are large declines in lending and output. We show how central bank policies which increase the size of the central bank balance sheet can attenuate this decline.
    Keywords: Eurozone; haircuts; money markets; unsecured interbank market
    JEL: E44 E58
    Date: 2018–11
  11. By: JIA, BIJIE
    Abstract: This paper revisits mixed findings of the expansionary fiscal spending effect in the United States. An array of standard Vector-Autoregressive (VAR) models has been implemented to capture inconsistent effects of the fiscal expansion. Findings in this paper consistently reveal that without considering the influence of transfer payments, state and local government spending, and the timing of sample, measuring the effect of expanded government purchases along would result in an upward bias of the comprehensive fiscal stimulus effect. This paper questions the validity of using government purchases alone to precisely evaluate the effect of fiscal expansion.
    Keywords: E21; E32; E62; H30; H50.
    JEL: E21 E32 E62 H30 H50
    Date: 2018–10
  12. By: Vasilev, Aleksandar
    Abstract: We introduce "fair" wages in a general-equilibrium model where worker's effort is unobservable and investigate whether such a mechanism can quantitatively account for the degree of real wage rigidity in the Bulgarian labor markets, as documented in Lozev, Vladova, and Paskaleva (2011) and Paskaleva (2016). In contrast to Danthine and Kurmann (2004), here we internalize the effect that past wages have on current effort level. We calibrate the model to Bulgarian data (1999-2016), and quantify the effect of technological shocks on hours and wages in the theoretical setup. Overall, the calibrated model with "fair" wages performs poorly when it comes to the relative volatilities of labor market variables. This is because aggregate labor market conditions, as proxied by the employment rate and past aggregate wages, turn out not to be quantitatively important for business cycles in Bulgaria.
    Keywords: Business cycles,unobservable effort,fair wages,unemployment
    JEL: E24 E32 J41
    Date: 2018
  13. By: Federico Etro
    Abstract: We augment a flexible price dynamic general equilibrium model with any symmetric intratemporal preferences over a variety of goods supplied under monopolistic, Bertrand or Cournot competition to derive implications for business cycle and market inefficiencies. Endogenous markups can magnify the impact of shocks on consumption and labor supply through intertemporal substitution mechanisms, and the optimal fiscal policy requires a variable labor income subsidy and a capital income tax that converges to zero in the long run. With an endogenous number of goods and strategic interactions, also entry affects markups and the optimal fiscal policy requires also a tax on profits. We characterize equilibrium and efficient market structures and derive optimal tax rules for a variety of preferences, including a new type of general additive preferences that nest direct, indirect, implicit and homothetic additivity
    Keywords: Business cycles, Monopolistic competition, Optimal taxation, variable markups.
    JEL: E1 E2 E3
    Date: 2018
  14. By: Junko Koeda (School of Political Science and Economics, Waseda University (E-mail:
    Abstract: We estimate a structural vector autoregressive model with an effective lower bound of nominal interest rates (ELB) using Japanese macroeconomic and financial data from the mid-1990s to the end of 2016. The estimated results show that the Bank of Japan fs quantitative and qualitative easing (QQE) policy increased output via gpure h quantitative easing when the first-year fs QQE level effect was controlled, complemented by qualitative easing. Our nonlinear counter- factual analyses show that raising the ELB or lowering an inflation threshold in forward guidance is not necessarily contractionary.
    Keywords: effective lower bound of nominal interest rates, quantitative and qualitative monetary easing policy, forward guidance, structural vector autoregression, maximum likelihood
    JEL: E58 E52 C32
    Date: 2018–11
  15. By: Duca, Ioana A.; Kenny, Geoff; Reuter, Andreas
    Abstract: This paper exploits a very large multi-country survey of consumers to investigate empirically the relationship between inflation expectations and consumer spending. We document that for the Euro Area and almost all of its constituent countries this relationship is generally positive: a higher expected change in inflation is associated with an increase in the probability that a given consumer will make major purchases. Moreover, in line with the predictions of macroeconomic theory, the impact is stronger when the lower bound on nominal interest rates is binding. Also, using the estimated spending probabilities from our micro-level analysis, we indirectly estimate the impact of a gradual increase in inflation expectations on aggregate private consumption. We find the effects to be economically relevant, especially when the lower bound is binding. JEL Classification: D12, D84, E21, E31, E52
    Keywords: consumer inflation expectations, consumption, lower bound, micro data
    Date: 2018–11
  16. By: Mite Miteski (National Bank of Republic of Macedonia); Ana Mitreska (National Bank of Republic of Macedonia); Mihajlo Vaskov (National Bank of Republic of Macedonia)
    Abstract: The last global crisis brought the monetary policy risk-taking channel to the fore, arguing that lingering low interest rates might affect not only the quantity, but the quality of credit extended as well. In line with this debate, this paper is the first effort to empirically investigate the potential existence of the monetary policy risk-taking channel in Macedonia. For this purpose we use a rather unique database of corporate loans, taken from the Credit Registry of the National Bank of the Republic of Macedonia (NBRM), which is complemented with data from banks’ balance sheets. By using pooled OLS on semi-annual data for the 2010-2017 period, our study points to an inverse relationship between the policy rate and the ex-ante risk rating assigned by the banks, a finding that is supportive to the existence of the risk-taking channel, although the effect is relatively small. The results prove to be robust after controlling for several bank, loan and time specific variables. We also test for possible difference in the risk-taking by banks conditioned on the capitalization level, but the results do not confirm difference in the reaction. The findings of the study are policy-relevant, as they confirm the need for policy makers to be mindful on financial stability impact when making monetary decisions.
    Keywords: Monetary policy, risk taking, ex-ante credit risk, leverage, POLS
    JEL: E43 E44 E52 G21
    Date: 2018
  17. By: Brinca, Pedro; Iskrev, Nikolay; Loria, Francesca
    Abstract: Since its introduction by Chari et al. (2018), Business Cycle Accounting (BCA) exercises have become widespread. Much attention has been devoted to the results of such exercises and to methodological departures from the baseline methodology. Little attention has been paid to identification issues within these classes of models, despite the methodology typically involving estimating relatively large scale dynamic stochastic general equilibrium models. In this paper we investigate whether such issues are of concern in the original methodology and in an extension proposed by Sustek (2011) called Monetary BCA. We resort to two types of identification tests in population. One concerns strict identification as theorized by Komuner and Ng (2011), while the other deals both with strict and weak identification as in Iskrev (2015). As to the former, when restricting the estimation to the parameters governing the latent variable's laws of motion, we find that both in the BCA and MBCA framework, all parameters fulfill the requirements for strict identification. If instead we estimate all structural parameters of the model jointly, both frameworks show strict identification failures in several parameters. These results hold for both tests. We show that restricting estimation of some deep parameters can obviate such failures. When we explore weak identification issues, we find that they affect both models. They arise from the fact that many of the estimated parameters do not have a distinct effect on the likelihood. Most importantly, we explore the extent to which these weak identification problems affect the main economic takeaways and find that the identification deficiencies are not relevant for the standard BCA model. Finally, we compute some statistics of interest to practitioners of the BCA methodology.
    Keywords: Business Cycle Accounting, Identification, Maximum Likelihood Estimation
    JEL: C32 C51 C52 E27 E32 E37
    Date: 2018–11–26
  18. By: Hong, Sungki (Federal Reserve Bank of St. Louis); Moon, Terry S. (Princeton University, Department of Economics and Industrial Relations Section)
    Abstract: This paper quantifies the long-run effects of reducing capital gains taxes on aggregate investment. We develop a dynamic general equilibrium model with heterogeneous firms, which face discrete capital gains tax rates based on their firm size. We calibrate our model by targeting important micro moments as well as the difference-in-differences estimate of the capital elasticity based on our institutional setting in Korea. We find that the firm-size reform that reduced the capital gains tax rates from 24 percent to 10 percent for the affected firms increased aggregate investment by 1.22 percent in the steady state, with the short-run effects overstating the effects by 1.18 percentage points. Additionally, a counterfactual analysis where we set the uniformly low tax rate of 10 percent reveals that aggregate investment rose by 7 percent in the long-run. We also find that general equilibrium effects through prices are substantial in our simulation. Taken together, our findings suggest that reducing capital gains tax rates would substantially increase investment in the short-term, and accounting for dynamic and general equilibrium responses is important for understanding the aggregate effects of capital gains taxes.
    Keywords: Capital; Fiscal Policy; Investment Decisions; Business Taxes and Subsidies; Saving and Capital Investment
    JEL: E22 E62 G11 H25 O16
    Date: 2018–10–31
  19. By: Nicolas Abad (University of Rouen & CREAM); Alain Venditti (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE & EDHEC Business School)
    Abstract: We examine the impact of balanced-budget labor income taxes on the existence of expectation- driven business cycles in a two-sector version of the Schmitt-Grohé and Uribe (SGU) [18] model with constant government expenditures and counter-cyclical taxes. Our results show that the destabilizing impact of labor income taxes strongly depends on the capital intensity difference across sectors. Local indeterminacy is indeed more likely when the consumption good sector is capital intensive, as the minimal tax rate decreases, and less likely when the investment good sector is capital intensive, as the minimal tax rate increases. The implication of this result can be quantitatively significant. Indeed, when compared to SGU, local indeterminacy can be either completely ruled out for all OECD countries when the investment good is sufficiently capital intensive, or drastically improved, delivering indeterminacy for a larger set of OECD countries, if the consumption good is sufficiently capital intensive. Focusing however on recent estimates of the sectoral capital shares corresponding to the empirically plausible case of a capital intensive consumption good, we find that there is a significant increase of the range of economically relevant labor tax rates (from a minimum tax rate of 30% to 24.7%) for which local indeterminacy arises with respect to the aggregate formulation of SGU.
    Keywords: aggregate (in)stability, local indeterminacy, expectations-driven fluctuations, labor income taxes, balanced-budget rule, infinite-horizon two-sector model, capital intensity difference
    JEL: C62 E32 O41
    Date: 2018–06
  20. By: Daniele Girardi (Department of Economics, University of Massachusetts, Amherst); Riccardo Pariboni (Department of Economics, Roma Tre University)
    Abstract: This paper looks at the effect of demand shocks on the investment share of the economy. Using panel data on 20 OECD countries, we show that the rate of growth of autonomous demand (exports, public spending and housing investment) is positively correlated with subsequent values of the share of business investment in GDP. By means of an instrumental-variables strategy, we confirm a positive effect of demand dynamics on the business investment share. We instrument autonomous demand with US demand for imports interacted with exposure to trade with the US, openness to trade of a country’s main export destinations, and military spending. A permanent 1% increase in autonomous demand growth raises the investment share by 1.5 to 1.9 percentage points of GDP in our preferred panel IV specification. Our results provide empirical support for the view that the influence of aggregate demand on capital accumulation can be a major source of hysteresis. Our results are inconsistent with the canonical New Keynesian 3-equations model, the Neo-Kaleckian model with flexible equilibrium utilization and Classical-Marxian growth models. A positive influence of autonomous demand on the investment share is instead compatible with demand-led models in which capacity adjusts to demand in the long-run.
    Keywords: Hysteresis, Investment, Demand-led Growth, Capacity Adjustment, Supermultiplier
    JEL: C26 E11 E12 E22 O41
    Date: 2018
  21. By: Karaki, Mohamad
    Abstract: This paper studies the effect of oil price innovations on manufacturing job flows across U.S states. First, I estimate a nonlinear structural equation model and compute impulse response functions by Monte Carlo integration. I find asymmetries in the responses of job flows to positive and negative oil price innovations. Yet, these asymmetries do not pass a test of symmetry on the impulse responses, especially after accounting for data mining. Third, I use a test for the absence of job reallocation to evaluate whether an unexpected increase in the real price of oil price triggers an important change in job reallocation. I find that oil price shocks have limited regional allocative effects.
    Keywords: regional business cycles, job flows, oil prices.
    JEL: E24 E32 Q43
    Date: 2017–02–24
  22. By: David Baqaee; Emmanuel Farhi
    Abstract: Aggregate production functions are reduced-form relationships that emerge endogenously from input-output interactions between heterogeneous producers and factors in general equilibrium. We provide a general methodology for analyzing such aggregate production functions by deriving their first- and second-order properties. Our aggregation formulas provide non-parameteric characterizations of the macro elasticities of substitution between factors and of the macro bias of technical change in terms of micro sufficient statistics. They allow us to generalize existing aggregation theorems and to derive new ones. We relate our results to the famous Cambridge-Cambridge controversy.
    JEL: E0 E1 E25
    Date: 2018–11
  23. By: Stephan Luck; Thomas Zimmermann
    Abstract: This paper investigates the effect of the Federal Reserve's unconventional monetary policy on employment via a bank lending channel. We find that banks with higher mortgage-backed securities holdings issued relatively more loans after the first and third rounds of quantitative easing (QE1 and QE3). While additional volume is concentrated in refinanced mortgages after QE1, increases are driven by newly originated home purchase mortgages and additional commercial and industrial lending after QE3. Using spatial variation, we show that regions with a high share of affected banks experienced stronger employment growth after both, QE1 and QE3. While the ability of households to refinance mortgages after QE1 spurred local demand, the resulting additional employment growth was relatively weak and confined to the non-tradable goods sector. In contrast, the increase in overall employment after QE3 is sizable and can be attributed to the supply of additional credit to firms. To s upport this finding, we use new confidential loan-level data to show that firms with stronger ties to affected banks increased employment and capital investment more after QE3. Altogether, our findings suggest that unconventional monetary policy can, similar to conventional monetary policy, affect real economic outcomes.
    Keywords: Bank Lending ; Central Banking ; Employment ; Financial Crisis ; Quantitative Easing ; Real Effects ; Unconventional Monetary Policy
    JEL: E4 E00 E5 G00 G21
    Date: 2018–10–24
  24. By: Bilbiie, Florin Ovidiu
    Abstract: Liquidity traps can be either fundamental, or confidence-driven. In a simple unified New-Keynesian framework, I provide the analytical condition for the latter's prevalence: enough shock persistence and endogenous intertemporal amplification of future ("news") shocks, making income effects dominate substitution effects. The same condition governs Neo-Fisherian effects (expansionary-inflationary interest-rate increases) which are thus inherent in confidence traps. Several monetary-fiscal policies (forward guidance, interest rate increases, public spending, labor-tax cuts) have diametrically opposed effects according to the trap variety. This duality provides testable implications to disentangle between trap types; that is essential, for optimal policies are likewise diametrically opposite.
    Keywords: confidence and fundamental liquidity traps; Fiscal multipliers; forward guidance; monetary policy; neo-Fisherian; optimal policy
    JEL: E3 E4 E5 E6
    Date: 2018–11
  25. By: Vasilev, Aleksandar
    Abstract: We introduce government production of both output-augmenting and utility-enhancing public services into an exogenous growth model with a detailed government sector, and calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2016). We show that in contrast to the case without government output, e.g., Vasilev (2009), when the economy features saddle-path stability, the presence of a second sector leads to equilibrium indeterminacy in the model. When public sector production adds to private sector output, the setup exhibits "sink" dynamics, and equilibrium paths are determined by "animal spirits." These results are in line with the findings in the literature, e.g., Benhabib and Farmer (1994, 1996) and Farmer (1999), and have major implications for policy-making and welfare.
    Keywords: Equilibrium indeterminacy,animal spirits,two-sector model,government production
    JEL: E32 E37
    Date: 2018
  26. By: Sandor Axelrod; David E. Lebow; Ekaterina V. Peneva
    Abstract: To better understand inflation expectations, we examine newly available data on U.S. households' inflation perceptions-what people think inflation has been in the past. The overarching summary is that inflation perceptions look similar to inflation expectations. The central tendencies of the responses for perceived inflation over the past five to ten years are similar to those of expected inflation for the next five to ten years, and all are a little above official estimates of inflation. Thus, survey respondents overall do not expect long-term inflation to change in the future relative to the recent past. Moreover, individuals who perceive higher inflation in the past tend to expect higher inflation in the future; people whose perceptions change tend to revise their expectations in the same direction; and perceptions and expectations vary similarly by gender and income. These results suggest that if inflation perceptions were to change, they could lead inflation e xpectations to change as well.
    Keywords: Consumer surveys ; Inflation dynamics ; Inflation expectations ; Inflation perceptions
    JEL: D84 E31
    Date: 2018–10–25
  27. By: Görg, Holger; Hornok, Cecília; Montagna, Catia; Onwordi, George E.
    Abstract: How do labour market policies influence employment's responsiveness to output fluctuations (employment-output elasticity)? We revisit this question on a panel of OECD countries, which also incorporates the period of the Great Recession. We distinguish between passive and active labour market policies and allow for their interactions, i.e. the policy mix, to play a role. We find that the effects of any single policy change are shaped by the broader existing policy-mix within which it takes place. Finally, we evaluate the effect of a move to 'flexicurity' on the employment-output elasticity in each country.
    Keywords: employment-output elasticity,labour market policy,welfare state,flexicurity
    JEL: E24 E32 J21 J65
    Date: 2018
  28. By: Price Fishback; Sebastián Fleitas; Jonathan Rose; Kenneth Snowden
    Abstract: Foreclosures led to severe disruptions in home mortgage lending during the recent Great Recession and the Great Depression of the 1930s. It is difficult to measure these impacts in the modern market where origination, funding and servicing are separated within complex lending structures, but during the 1930s local building & loans (B&Ls) combined all three functions. We measure the impact of foreclosures on new mortgage lending using a panel of all B&Ls in 4 states. The foreclosure overhang explains about 30 percent of the drop in new mortgage lending by B&Ls as the housing crisis intensified between 1930 and 1935.
    JEL: E32 E44 G23 N12 N22 R31
    Date: 2018–11
  29. By: Christophe Blot (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques); Fabien Labondance (Observatoire français des conjonctures économiques)
    Abstract: This paper assesses the linear and non-linear dynamic effects of monetary policy on asset price bubbles. We use a Principal Component Analysis to estimate new bubble indicators for the stock and housing markets in the United States based on structural, econometric and statistical approaches. We find that the effects of monetary policy are asymmetric so the responses to restrictive and expansionary shocks must be differentiated. Restrictive monetary policy is not able to deflate asset price bubbles contrary to the “leaning against the wind” policy recommendations. Expansionary interest rate policies would inflate stock price bubbles whereas expansionary balance-sheet measures would not.
    Keywords: Booms and busts; Mispricing; Price deviations; Interest rate policy; Unconventional monetary policy
    JEL: E44 G12 E52
    Date: 2018–11
  30. By: Manal R. SHEHABI (Business School, The University of Western Australia and Oxford Institute for Energy Studies)
    Abstract: From mid-2014 Kuwait has experienced a substantial drop in its petroleum export price and,consequently, government revenue, causing a severe fiscal deficit and impaired economic performance. Cutting energy subsidies has become a policy priority. In the face of widespread opposition, the government raised gasoline prices in August 2016, proclaiming such reform the key to solving economic problems; yet recent policy discussions have not addressed the mechanism of pricing reforms. The paper offers a quantification and assessment of energy pricing reform in the current low petroleum price environment via a general equilibrium model of the Kuwaiti economy that embodies the structure of its economy and its labor market, its oligopolistic industries, and external flows associated with its sovereign wealth fund. Simulations clarify the required adjustments, including the seldom discussed expatriate labor exit and the decline in oligopoly rents. While necessary, subsidy reform implies trade-offs, notably between fiscal stabilization and cost of living sustainability. The results confirm that successful implementation must be accompanied by carefully designed mitigation measures and associated microeconomic reforms.
    Keywords: petroleum; price volatility; general equilibrium; subsidy, oligopoly; sovereign wealth fund; expatriate labor; Kuwait, CGE
    JEL: C68 D43 D58 E24 E62 F41 H50 L13 L43 O53 Q43
    Date: 2017
  31. By: Carnicelli, Lauro
    Abstract: This article studies the effects of financial shocks on the labor market when participation in the labor force is endogenous. Previous research concerning endogenous participation produced models that generated a counterfactually procyclical unemployment rate and a positively sloped Beveridge curve. This paper shows that collateral constraints alone are not able to produce correlations in line with the data. However, financial shocks, that change the collateral requirements, are responsible for most of the movements on the labor market and generate a countercyclical unemployment and a negatively slopped Beveridge curve.
    Keywords: Endogenous participation; Financial shocks
    JEL: E32 E44 J63 J64
    Date: 2018–11
  32. By: Vladimir Asriyan; Luc Laeven; Alberto Martín
    Abstract: We develop a new theory of information production during credit booms. In our model, entrepreneurs need credit to undertake investment projects, some of which enable them to divert resources towards private consumption. Lenders can protect themselves from such diversion in two ways: collateralization and costly screening, which generates durable information about projects. In equilibrium, the collateralization-screening mix depends on the value of aggregate collateral. High collateral values raise investment and economic activity, but they also raise collateralization at the expense of screening. This has important dynamic implications. During credit booms driven by high collateral values (e.g. real estate booms), the economy accumulates physical capital but depletes information about investment projects. As a result, collateral-driven booms end in deep crises and slow recoveries: when booms end, investment is constrained both by the lack of collateral and by the lack of information on existing investment projects, which takes time to rebuild. We provide new empirical evidence using US rm-level data in support of the model's main mechanism.
    Keywords: credit booms, collateral, information production, crises, misallocation
    JEL: E32 E44 G01 D80
    Date: 2018–11
  33. By: Swapnil Singh (Center for Excellence in Finance and Economic Research (CEFER), Bank of Lithuania)
    Abstract: Using the March Current Population Survey, I show that over the last two decades, married households in the United States received increasingly more public insurance against labor income risk, whereas the opposite was true for single households. To evaluate the welfare consequences of this trend, I perform a quantitative analysis. As a novel contribution, I expand the standard incomplete markets model à la Aiyagari (1994) to include two groups of households: married and single. The model allows for changes in the marital status of households and accounts for transition dynamics between steady states. I show that the divergent trends in public insurance have a significant detrimental effect on the welfare of both married and single households.
    Keywords: Incomplete markets, welfare, consumption inequality, progressive taxation, insurance
    JEL: D52 D60 E21 E62 H31
    Date: 2018–11–30
  34. By: Jackson, Laura E. (Bentley University, Department of Economics); Kliesen, Kevin L. (Federal Reserve Bank of St. Louis); Owyang, Michael T. (Federal Reserve Bank of St. Louis)
    Abstract: We consider the effects of uncertainty shocks in a nonlinear VAR that allows uncertainty to have amplification effects. When uncertainty is relatively low, fluctuations in uncertainty have small, linear effects. In periods of high uncertainty, the effect of a further increase in uncertainty is magnified. We find that uncertainty shocks in this environment have a more pronounced effect on real economic variables. We also conduct counterfactual experiments to determine the channels through which uncertainty acts. Uncertainty propagates through both the household consumption channel and through businesses delaying investment, providing substantial contributions to the decline in GDP observed after uncertainty shocks. Finally, we find evidence of the ability of systematic monetary policy to mitigate the adverse effects of uncertainty shocks.
    Keywords: uncertainty; time-varying threshold VAR; monetary policy; generalized impulse response functions
    JEL: C34 E2 E32
    Date: 2018–11–16
  35. By: Anne Lundgaard Hansen (Department of Economics, University of Copenhagen, Denmark)
    Abstract: It is well-known that interest rates and inflation rates are extremely persistent, yet they are best modeled and understood as stationary processes. These properties are contradictory in the workhorse Gaussian affine term structure model in which the persistent data often result in unit roots that imply non-stationarity. We resolve this puzzle by proposing a macro-finance term structure model with volatility-induced stationarity. Our model employs a level-dependent conditional volatility that maintains stationarity despite presence of unit roots in the characteristic polynomial corresponding to the conditional mean. Compared to the Gaussian affine term structure model, we improve out-of-sample forecasting of the yield curve and estimate term premia that are economically plausible and consistent with survey data. Moreover, we show that volatility-induced stationarity affects the error-correcting mechanism in a system of interest rates, inflation, and real activity.
    Keywords: Yield curve, error-correction, unit root, volatility-induced stationarity, macro-finance term structure model, level-dependent conditional volatility
    JEL: E43 E44 G12
    Date: 2018–12–03
  36. By: José Alves
    Abstract: As recognized, taxation is not only an instrument for government to collect revenues from the economic agents but also an instrument of fiscal policy to influence the agents’ behaviour. In this work, we develop a DSGE model to assess the macroeconomic impact of three tax items (taxes on individual income, on firms’ income and on consumption) on the dynamics of both individual tax items and on the aggregate revenues as well. Moreover, we also intend to evaluate how macroeconomic aggregates behave in a presence of stochastic shocks in taxation.
    Keywords: DSGE models; Tax effects; Fiscal Policy; Optimal taxation
    JEL: D58 E62 H21 H30
    Date: 2018–11
  37. By: Sproul, Michael
    Abstract: The real bills doctrine asserts that money should be issued in exchange for short-term real bills of adequate value. Critics of this doctrine have thought of it as a means to make the money supply move in step with the production of goods, a task at which it supposedly fails. In this essay I explain that the real bills doctrine is actually a means to make the money supply move in step with the money-issuer’s assets. When viewed this way, I find that the real bills doctrine is an effective means to prevent inflation. More importantly, the real bills doctrine is a means to make the quantity of money grow and shrink with the needs of business, thus preventing money shortages and the resulting recessions.
    Keywords: real bills, backing, money, inflation, recession
    JEL: E5 E50
    Date: 2018–11–13
  38. By: Assenza, Tiziana; Heemeijer, P.; Hommes, C.H.; Massaro, D.
    Abstract: The New Keynesian theory of inflation determination is tested in this paper by means of laboratory experiments. We find that the Taylor principle is a necessary condition to ensure convergence to the inflation target, but it is not sufficient. Using a behavioral model of expectation formation, we show how heterogeneous expectations tend to self-organize on different forecasting strategies depending on monetary policy. Finally, we link the central bank ability to control inflation to the impact that monetary policy has on the type of feedback {positive or negative{ between expectations and realizations of aggregate variables and in turn on the composition of subjects with respect to the type of forecasting rules they use.
    Keywords: Laboratory Experiments; Monetary Policy; Expectations; Taylor principle
    JEL: C91 C92 D84 E52
    Date: 2018–11
  39. By: D'Orazio, Paola; Popoyan, Lilit
    Abstract: While there is a growing debate among researchers and practitioners on the possible role of central banks and financial regulators in supporting a smooth transition to a low-carbon economy, the information on which macroprudential instruments could be used for reaching the "green structural change" is still quite limited. Moreover, the achievement of climate goals is still affected by the so-called "green finance gap". The paper addresses these issues by proposing a critical review of existing and novel prudential approaches to incentivizing the decarbonization of banks' balance sheets and align finance with sustainable growth and development objectives. The analysis carried out in the paper allows understanding under which conditions macroprudential policy could tackle climate change and promote green lending, while containing climate-related financial risks.
    Keywords: climate change,climate finance gap,banking regulation,macroprudential policy,central banking,climate-finance risk
    JEL: E50 E52 G28 Q50 Q58
    Date: 2018
  40. By: Lang, Jan Hannes; Welz, Peter
    Abstract: This paper proposes a semi-structural approach to identifying excessive household credit developments. Using an overlapping generations model, a normative trend level for the real household credit stock is derived that depends on four fundamental economic factors: real potential GDP, the equilibrium real interest rate, the population share of the middle-aged cohort, and institutional quality. Semi-structural household credit gaps are obtained as deviations of the real household credit stock from this fundamental trend level. Estimates of these credit gaps for 12 EU countries over the past 35 years yield long credit cycles that last between 15 and 25 years with amplitudes of around 20%. The early warning properties for financial crises are superior compared to credit gaps that are obtained from purely statistical filters. The proposed semistructural household credit gaps could therefore provide useful information for the formulation of countercyclical macroprudential policy, especially because they allow for economic interpretation of observed credit developments. JEL Classification: E32, E51, E21, G01, D15
    Keywords: credit cycles, early-warning models, equilibrium credit, financial crises, macro-prudential analysis
    Date: 2018–11
  41. By: Lukmanova, Elizaveta; Rabitsch, Katrin
    Abstract: We augment a standard monetary VAR on output growth, inflation and the nominal interest rate with the central bank's inflation target, which we estimate from a New Keynesian DSGE model. Inflation target shocks give rise to a simultaneous increase in inflation and the nominal interest rate in the short run, at no output expense, which stands at the center of an active current debate on the Neo-Fisher effect. In addition, accounting for persistent monetary policy changes reflected in inflation target changes improves identification of a standard temporary nominal interest rate shock in that it strongly alleviates the price puzzle.
    Keywords: Monetary policy, Neo-Fisher effect, Time-varying inflation target, DSGE, VAR
    Date: 2018–11
  42. By: Pierlauro Lopez; David Lopez-Salido; Francisco Vazquez-Grande o
    Abstract: We propose a simple risk-adjusted linear approximation to solve a large class of dynamic models with time-varying and non-Gaussian risk. Our approach generalizes lognormal affine approximations commonly used in the macro-finance literature and can be seen as a first-order perturbation around the risky steady state. Therefore, we unify coexisting theories of risk-adjusted linearizations. We provide a formal foundation for approximation methods that remained so far heuristic, and offer explicit formulas for approximate equilibrium objects and conditions for their local existence and uniqueness. Affine approximations are not nested in conventional perturbations of arbitrary order. We apply this technique to models featuring Campbell-Cochrane habits, recursive preferences, and time-varying disaster risk. The proposed affine approximation performs similarly to global solution methods in many applications; risk pricing is accurate at all investment horizons, thereby capturing the main properties of investors’ marginal utility of wealth and measures of welfare costs of fluctuations.
    Keywords: Perturbation methods, Risky steady state, Macroeconomic uncertainty, Intertemporal risk prices, Risk-return tradeoff.
    JEL: C63 G12 E32 E44
    Date: 2018
  43. By: Alain Venditti (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE & EDHEC Business School)
    Abstract: We study the existence of endogenous competitive equilibrium cycles under small discounting in a two-sector discrete-time optimal growth model. We provide precise concavity conditions on the indirect utility function leading to the existence of period-two cycles with a critical value for the discount factor that can be arbitrarily close to one. Contrary to the continuous-time case where the existence of periodic-cycles is obtained if the degree of concavity is close to zero, we show that in a discrete-time setting the driving condition does not require a close to zero degree of concavity but a symmetry of the indirect utility function’s concavity properties with respect to its two arguments.
    Keywords: two-sector optimal growth model, small discounting, period-two cycles, strong and weak concavity
    JEL: C62 E32 O41
    Date: 2018–11
  44. By: Bichler, Shimshon; Nitzan, Jonathan
    Abstract: This research note starts by showing that, for much of the postwar period, U.S. unemployment to has been a highly reliable leading indicator for the capitalist share of domestic income three years later, and then assesses whether this relationship still holds.
    Keywords: crisis,income distribution,power,sabotage,unemployment
    JEL: P16 E24 D3
    Date: 2018
  45. By: Kalemli-Ozcan, Sebnem
    Abstract: We quantify the role of financial factors behind the sluggish post-crisis performance of European firms. We use a firm-bank-sovereign matched database to identify separate roles for firm and bank balance sheet weaknesses arising from changes in sovereign risk and aggregate demand conditions. We find that firms with higher debt levels and a higher share of short-term debt reduce their investment more after the crisis. This negative effect is stronger for firms linked to weak banks with exposures to sovereign risk, signifying increased rollover risk. These financial channels explain about 60% of the decline in aggregate corporate investment.
    Keywords: Bank-Sovereign Nexus; debt maturity; Firm Investment; Rollover Risk
    JEL: E0 F0
    Date: 2018–11
  46. By: Alex Schmitt
    Abstract: At what rate should a government price carbon emissions? This paper analyzes optimal carbon pricing while taking into account interactions with the taxation of labor and capital income. In an otherwise standard climate-economy model, the policy maker has to resort to a distortionary tax on labor and capital income, and is unable to commit to future policies. I show that the optimal time-consistent carbon price is in general not at its Pigouvian level, that is, at the level of marginal damages induced by climate change. This is due to the presence of costs and benefits of emitting carbon that only materialize in the presence of income taxes. Quantitatively, I find that in a standard calibration of the model, this tax-interaction effect accounts for deviation of the optimal tax from the level of marginal climate damages in the ballpark of 10%, due to the second-best effects partially offsetting each other. Compared to a setting with lump-sum income taxes, I observe a smaller optimal carbon price without commitment, with the average differences over time amounting to 14%.
    Keywords: Climate-economy modeling, carbon tax, optimal income taxation
    JEL: E61 E62 H21 H23 Q54
    Date: 2018
  47. By: Anping Chen (School of Economics, Jinan University); Nicolaas Groenewold (Business School, The University of Western Australia)
    Abstract: China’s ‘New Normal’ has been much discussed in recent years. An important aspect of the New Normal is the growth slowdown from levels of around 10% per annum to a more modest 6 or 7%. Not surprisingly, there has been widespread discussion of whether the slowdown is permanent or not and, in either case, what the sources of the slowdown are. However, much of this discussion has been based on informal analysis of the data rather than formal econometric results. We make a move in the direction of formal empirical analysis of this issue by estimating and simulating a vector autoregressive (VAR) model which distinguishes between demand, supply and foreign shocks as possible drivers of changes in economic growth. We analyse both two-variable (growth and inflation) and three-variable (foreign growth, domestic growth and inflation) VAR models and identify demand, supply and foreign shocks, using a modification of the Blanchard-Quah identification procedure. In the two-variable model we identify two shocks (demand and supply) and find that the slowdown since the GFC has been mainly supply-driven. This conclusion is not changed when a foreign growth variable is added to the model and a foreign shock is allowed for – we find that demand continues to be of relatively little importance, that the foreign shock also makes little contribution to explaining the long-run growth decline in China which continues to be driven by long-term supply factors. This conclusion is robust to a number of alternative formulations of the model. Thus, the growth slowdown may, indeed, be characterised as the ‘New Normal’.
    Keywords: China, slowdown, New Normal, growth, supply shocks, demand shocks
    JEL: O47 O53 E17 F47
    Date: 2017
  48. By: Christian Ghiglino (Department of Economics, University of Essex); Kazuo Nishimura (RIEB, Kobe University); Alain Venditti (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE & EDHEC Business School)
    Abstract: We propose a model of non-balanced endogenous growth in which the final good, which can be either consumed or used as capital, is produced using two intermediate inputs, one being “knowledge-intensive†. Agents working in the knowledge-intensive sector need to accumulate technological knowledge and thus have to decide how to split their individual unit of time between accumulation of technological knowledge (research) and work. Agents working in the second sector do not need to accumulate knowledge and thus devote all their individual unit of time to work. Individual knowledge therefore becomes a labor-augmenting factor, and knowledge accumulation leads to an unbounded increase in TFP in the knowledge-intensive sector, and thus to endogenous capital deepening. The asymmetry in the growth rates of TFP leads to non-balanced growth. Labor (number of workers) reallocations across sectors occur, leading to a greater increase in output for the knowledge-intensive sector. We show that non-balanced growth is consistent with Kaldor facts, as the asymptotic equilibrium is above all characterized by a constant interest rate and capital share in national income. However, the economy follows a growth path converging to a particular level of wealth that depends on the initial price of capital and knowledge. As a consequence, countries with the same fundamentals but lower initial wealth will be characterized by lower asymptotic wealth. We therefore extend the Lucas [19] finding and prove the existence of non-convergence across countries in a framework with structural change.
    Keywords: two-sector model, technological knowledge, non-balanced endogenous growth, structural change, Kaldor and Kuznets facts
    JEL: C62 E32 O41
    Date: 2018–10
  49. By: Gabriel Rodríguez (Departamento de Economía de la Pontificia Universidad Católica del Perú); Carlos Guevara (Departamento de Economía de la Pontificia Universidad Católica del Perú)
    Abstract: This paper analyzes the effect of loan supply shocks on the real economic activity of Pacific Alliance countries. The econometric approach is a Time-Varying Parameter VAR with Stochastic Volatility (TVP-VAR-SV), which is identified by sign restrictions. Results of a trace test, t-tests and the Kolmogorov-Smirnov test reveal the existence of significant changes in the distribution of parameters over time, which supports the use of time-varying parameters. The results indicate that loan supply shocks have an important impact on real economic activity in all Pacific Alliance countries: about 1% in Colombia, Mexico, and Peru, and about 0.5% in Chile. Moreover, loan supply shocks have a considerable role in driving business cycle fluctuations, not only in crisis periods, but also in stability periods. Their contribution to GDP growth is higher than that of aggregate supply shocks and as high as that of aggregate demand and monetary policy shocks. The evolution of the impact of loan supply shocks on real economic activity shows evidence of cross-country heterogeneity, reflecting different financial structures among Pacific Alliance countries. Furthermore, by assessing the effects on different measures of economic activity, it is estimated that loan supply shocks have a higher impact on domestic demand, while the impact is similar when the model is estimated for non-primary activities. Finally, the sensitivity analysis indicates that the results of the model are robust to different priors specifications, to different measures of external variables, and to multiple sets of sign restrictions. Moreover, by applying an agnostic identification, the results indicate that even letting the response of GDP unrestricted, its response to loan supply shocks remains positive and significant. With this multiple specification, the impact of loan supply shocks on GDP growth ranges between 0.8% and 1.2% in Peru and Colombia, and between 0.5% and 0.8% in Chile. These results are close to the baseline estimation and show robustness. Regarding Mexico, it is estimated that the impact of loan supply shocks varies between 0.8%-3.5%. JEL Classification-JEL: C32, E32, E51
    Keywords: Loan Supply Shocks, Variance Decomposition, Historical Decomposition, Time-Varying Parameter VAR with Stochastic Volatility, Sign Restrictions
    Date: 2018
  50. By: Bilgili, Faik; Mugaloglu, Erhan; Koçak, Emrah
    Abstract: This paper observes the possible co-movements of oil price and CO2 emissions in China by following wavelet coherence and wavelet partial coherence analyses to be able to depict short-run and long-run co-movements at both low and high frequencies. To this end, this research might provide the current literature with the output of potential short run and long run, structural, changes in CO2 emissions upon a shock (a change) in oil prices in China together with the control variables of World oil prices, fossil energy consumption, and renewables consumption, and, urban population in China. Therefore, this research aims at determining wavelet coherencies between the variables and phase differences to exhibit the leading variable in potential co-movements. By following the time domain and frequency domain analyses of this research, one may claim that the oil prices in China has considerable negative impact on CO2 emissions at high frequencies for the periods 1960-2014 and 1971-2014 in China. Besides, one may underline as well other important output of the research exploring that the urban population and CO2 emissions have positive associations, move together for the period 1960-2014 in China. Eventually, this paper might suggest that authorities follow demand side management policies considering energy demand behavior at both shorter cycles and longer cycles to diminish the CO2 emissions in China.
    Keywords: Wavelet coherence, wavelet partial coherence, oil price, CO2 emissions, urbanization, China
    JEL: C1 C32 C49 C61 C63 E32 E37 I0 J11 J18 Q2 Q21 Q31 Q32 Q40 Q52 Q53 Q56 Q57 R0
    Date: 2018–04
  51. By: O'Brien, Martin (Central Bank of Ireland); Wosser, Michael (Central Bank of Ireland)
    Abstract: Using a panel dataset of 27 developed economies, estimated quarterly from 1980-2016, we develop a flexible systemic banking crisis early warning system (EWS). Evidence is provided that fitted multivariate logit probabilities, estimated recursively against documented crises, yield more informative crisis signals than any single macroeconomic, credit aggregate or asset price variable does independently. When the model robustness techniques of Young and Holsteen (2017) are applied, even stronger crisis signals are generated. Deciding which variables to include in the model is determined by adopting a signals-based approach to each prospective indicator, with the most informative yet robust variables identified in terms of their performance according to noise-to-signal ratios, weighted noise-to-signal ratios and an Alessi and Detken (2011) “usefulness” measure. The latter takes policy-makers’ preferences for false versus missed signals into account. The approach ensures a parsimonious yet effective EWS yielding forwardlooking indicators that outperform all raw input indicators in crisis-signaling terms.
    Keywords: early warning system, systemic banking crises, macroprudential policy, model robustness, financial stability
    JEL: G01 G21 G28 E58
    Date: 2018–09
  52. By: Ampudia, Miguel; Heuvel, Skander Van den
    Abstract: This paper examines the effects of monetary policy on the equity values of European banks. We identify monetary policy shocks by looking at changes in the EONIA one-month and two-year swap contract rates during narrow windows around the press statements and press conferences announcing monetary policy actions taken by the ECB. We find that an unexpected decrease of 25 basis points on the short-term policy rate increases banks’ stock prices by about 1% on average. These effects vary substantially over time; in particular, they were stronger during the crisis period and reversed during the recent period with low and even negative interest rates. That is, with rates close to or below zero, further interest rate cuts became detrimental for banks’ equity values. The composition of banks’ balance sheets is important in order to understand these effects. In particular, the change in sensitivity to interest rate surprises as rates drop to low and negative levels is much more pronounced for banks with a high reliance on deposit funding, compared to other banks. We argue that this pattern can be explained by a reluctance of banks to pay negative interest rates on retail deposits. JEL Classification: E52, E58, G21
    Keywords: bank profitability, ECB, monetary policy, negative rates
    Date: 2018–11
  53. By: Gete, Pedro
    Abstract: This paper proposes a tractable way to incorporate lending standards ("credit qualification thresholds") into macro models of financial frictions. Banks can reject borrowers whose risk is above an endogenous threshold at which no lending rate sufficiently compensates banks for the borrowers’ default risk. Firms denied credit cut employment and labor reallocates mostly towards safer producers. Lending standards propagate bank capital shortfalls through labor misallocation causing deeper and more persistent real effects. The paper also shows that lending spreads are insufficient indicators of credit supply disruptions. That is, for the same increase in credit spreads, output falls faster when denial rates are increasing. Finally, with endogenous lending standards, first-moment bank capital shocks look like second-moment shocks. JEL Classification: E32, E44, E47, G2
    Keywords: bank capital, bank losses, extensive margin, labor reallocation, lending standards, misallocation
    Date: 2018–11
  54. By: Masato Shizume (Professor, Waseda University; Institute for Monetary and Economic Studies, the Bank of Japan (e-mail:
    Abstract: This paper constructs a time series of data related to black- market prices of five goods (rice, sweet potatoes, potatoes, chicken eggs and sugar) during World War II (WWII) in Japan. It is the first attempt to capture the actual price fluctuation trends for individual products throughout the period during and after WWII. To this end, I have employed the hedonic approach, which is a methodology used to adjust for the quality of goods including the characteristics of counterparties and places of transaction in constructing the price data, to obtain estimates that are as unbiased as possible. The data reveals that 1) black-market prices of these goods soared during WWII to post 40-80 percent inflation on a quarterly basis toward the end of the war, 2) by the end of the war, black-market prices had already increased by over 50 times (in the case of sweet potatoes) or 700 times (in the case of sugar) compared with 1934 levels, prior to wartime inflation, indicating more severe inflation during the war than after the war, 3) the most severe period of inflation varied by product, peaking during the war for rice and sugar and after the war for sweet potatoes, potatoes and chicken eggs, and 4) black- market prices were generally higher in urban areas than in rural areas.
    Keywords: Price Formation, Black Markets, World War II, Hedonic Approach, Economic Controls
    JEL: E31 N15 N45
    Date: 2018–11
  55. By: Willem Devriendt; Freddy Heylen (-)
    Abstract: Demographic change forces governments in all OECD countries to reform the public pension system. Increased sensitivity to rising inequality in society has made the challenge for policy makers only greater. In this paper we evaluate alternative reform scenarios. We employ an overlapping generations model for an open economy with endogenous hours worked, human and physical capital, output, and welfare. Within each generation we distinguish individuals with high, medium or low ability to build human capital. Frequently adopted reforms in many countries such as an increase of the normal retirement age or a reduction in the pension benefit replacement rate can guarantee the financial sustainability of the system, but they fail when the objective is also to improve macroeconomic performance and aggregate welfare without raising intergenerational or intragenerational welfare inequality. Our results prefer a reform which combines an increase of the retirement age with an intelligent design of the linkage between the pension benefit and earlier labour earnings. First, this design conditions pension benefits on past individual labour income, with a high weight on labour income earned when older and a low weight on labour income earned when young. Second, to avoid rising welfare inequality this linkage is complemented by a strong rise in the benefit replacement rate for low ability individuals (and a reduction for high ability individuals).
    Keywords: demographic change, population ageing, pension reform, retirement age, heterogeneous abilities, inequality, overlapping generations
    JEL: E6 H55 J22 J26
    Date: 2018–11
  56. By: Italo Pedrosa (Federal University of Rio de Janeiro); Dany Lang (Centre d'Economie de l'Université de Paris Nord (CEPN))
    Abstract: In Minsky's Financial Instability Hypothesis (FIH), financial fragility of non-financial firms tends to increase endogenously over the cycle along with the macroeconomic leverage ratio. This analysis has been criticized for two main complementary reasons: firstly, it does not duly consider the aggregate pro-cyclicallity of profits; secondly, due to an overly aggregate analysis, some inferences about the relation between aggregate leverage and systemic fragility are potentially misleading. In this paper, we take these criticisms into account by building an agent-based stock-flow consistent model which integrates the real and financial sides of the economy in a fundamentally dynamic environment. We calibrate and simulate our model and show that the dynamics generated are in line with empirical evidence both at the micro and the macro levels. We create a financial fragility index and examine how systemic financial fragility relates to the aggregate leverage along the cycle. We show that our model yields both Minskian regimes, in which the aggregate leverage increases along with investment, and Steindlian regimes, where investment brings leverage down. Our key findings are that the sensitivity of financial fragility to aggregate leverage is not as big as assumed in the literature; and that the distribution of profits amongst firms does matter for the stability of the system, both statically (immediately for financial fragility) and dynamically (because of the dynamics of leverage).
    Keywords: financial fragility; firms; leverage; cash flow; distribution
    JEL: C63 D39 E32 G01 G32 O31
    Date: 2018–11
  57. By: Daniel Garcia
    Abstract: I pool data from all large multimarket lenders in the U.S. to estimate how many of the over seven million jobs lost in the Great Recession can be explained by reductions in the supply of mortgage credit. I construct a mortgage credit supply instrument at the county level, the weighted average (by prerecession mortgage market shares) of liquidity-driven lender shocks during the recession. The reduction in mortgage supply explains about 15 percent of the employment decline. The job losses are concentrated in construction and finance.
    Keywords: Great Recession ; Credit supply ; Employment
    JEL: E44 G21 R31
    Date: 2018–11–13
  58. By: Kehrig, Matthias; Vincent, Nicolas
    Abstract: The aggregate labor share in U.S. manufacturing declined from 62 percentage points (ppt) in 1967 to 41 ppt in 2012. The labor share of the typical U.S. manufacturing establishment, in contrast, rose by over 3 ppt during the same period. Using micro-level data, we document a number of striking facts: (1) there has been a dramatic reallocation of value added to "hyper- productive" (HP) low-labor share establishments, with much more limited reallocation of inputs; (2) HP establishments have only temporarily lower labor shares that rebound after five to eight years to the level of their peers; (3) selection into HP status has become increasingly correlated with past size; (4) low labor shares are driven by high revenue total factor productivity (TFPR), not low wages; (5) employment has become less responsive to positive TFPR shocks over time; and (6) HP establishments enjoy a product price premium relative to their peers that causes their high (revenue) productivity, pointing to a significant role for demand-side forces. Counterfactual exercises indicate that selection along size is the primary driver of the fall in the aggregate labor share, with a smaller role for the decline in responsiveness.
    Keywords: firm size distribution; Labor Share; productivity; Relative Prices
    JEL: E2 L1 L2 L6 O4
    Date: 2018–11
  59. By: Kalemli-Ozcan, Sebnem
    Abstract: We study the leverage of U.S. firms over their life-cycle and implications for firm growth and responses to shocks. We use a new dataset that matches private firms' balance sheets to U.S. Census Bureau's Longitudinal Business Database (LBD) for the period 2005-2012. A number of stylized facts emerge. First, firm size and leverage are strongly positively correlated for private firms, both in the cross section of firms and over time for a given firm. For public firms, there is a weak negative relation between leverage and size. Second, young private firms borrow more, but firm age has no relation to public firms' leverage. Third, while private firms switch from debt to equity financing as they age, public firms slightly reduce equity financing as they age. Building on this "normal times" benchmark and using the "Great Recession" as a shock to financial conditions, we show that, for private firms, firm size can serve as a good predictor of financial constraints. During the Great Recession, leverage declines for private firms, but not for public firms. We also provide evidence that private firms' growth is positively related to leverage, as they finance their growth during normal times with short-term borrowing, whereas the relationship between leverage and firm growth is negative for public firms. These results suggest that public firms are not financially constrained during normal times or during crisis, but private firms are.
    Keywords: age; census data; Financial constraints; firm life-cycle; leverage; Short-term debt
    JEL: E0
    Date: 2018–11
  60. By: Ashley Ward (OECD); María Belén Zinni (OECD); Pascal Marianna (OECD)
    Abstract: Cross-country differences in the measurement of labour input contribute to observed productivity gaps across countries. In most countries, labour force surveys (LFS) form a primary source of information for employment related statistics, such as persons employed, employees and hours worked. However, because the coverage of LFS does not fully align with the coverage of activities used to estimate GDP, additional adjustments relying on complementary sources, such as administrative or business statistics, are often applied to bridge conceptual differences, and in many countries, the use of these sources is often preferred to LFS data. Evidence from the 2018 OECD/Eurostat national accounts labour input survey shows that the adjustments made to align measures of labour input with the corresponding measures of production according to the domestic concept, vary considerably across countries, with many countries making no adjustments, in particular, for the measurement of hours worked. This paper demonstrates that countries making no adjustments to average hours worked measures extracted from the original source, such as self-reported hours actually worked in the LFS, appear to systematically over-estimate labour input and, so, under-estimate labour productivity levels. To illustrate the size of this bias, for this group of countries, the paper adopts a simplified component method that introduces a series of explicit adjustments on working time using information available in LFS and complementary sources. The results point to a reduction in relative productivity gaps of around 10 percentage points in many countries compared to current estimates. Although future releases of OECD productivity (levels) statistics will incorporate these changes, it is important to stress that these estimates will only be used as a stop-gap while countries making no, or minimal adjustments, work to leverage all available data sources to produce average hours worked estimates that align with the national accounts domestic concept and that address self-reporting bias; which is the paper’s principal recommendation for those countries that currently make no or only partial adjustments. Indeed, many EU member states, coordinated by Eurostat, are already moving in this direction, with ESA 2010 derogations set to expire by 2020.
    Keywords: employment, hours worked, labour input, labour productivity, mismeasurement
    JEL: E1 E24 E26
    Date: 2018–12–10
  61. By: Yuki Uchida (Faculty of Economics, Seikei University); Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: This study considers the politics of public education and its impact on economic growth and welfare across generations. We employ probabilistic voting to demon- strate the generational con ict regarding taxes and spending, and show that aging results in a tax burden shift from the retired to the working generation, a reduction in public education spending, and ultimately in slowing down economic growth. We subsequently consider a legal constraint that aims to boost education spending: a spending oor for education. This constraint stimulates economic growth, but cre- ates a trade-off between current and future generations in terms of welfare. Finally, the quantitative implications of our results are explored by calibrating the model to the Japanese economy.
    Keywords: Public education, Economic growth, Capital income tax, Proba- bilistic voting
    JEL: D70 E24 H52
    Date: 2018–02
  62. By: Illenin O. Kondo; Logan T. Lewis; Andrea Stella
    Abstract: This paper revisits the empirical evidence on the nature of firm and establishment size distributions in the United States using the Longitudinal Business Database (LBD), a confidential Census Bureau panel of all non-farm private firms and establishments with at least one employee. We establish five stylized facts that are relevant for the extent of granularity and the nature of growth in the U.S. economy: (1) with an estimated shape parameter significantly below 1, the best-fitting Pareto distribution substantially differs from Zipf's law for both firms and establishments; (2) a lognormal distribution fits both establishment and firm size distributions better than the commonly-used Pareto distribution, even far in the upper tail; (3) a convolution of lognormal and Pareto distributions fits both size distributions better than lognormal alone while also providing a better fit for the employment share distribution; (4) the estimated parameters are different across manufa cturing and services sectors, but the distribution fit ranking remains unchanged in the sectoral subsamples. Finally, using the Census of Manufactures (CM), we find that (5) the distribution of establishment-level total factor productivity---a common theoretical primitive for size---is also better described by lognormal than Pareto. We show that correctly characterizing the firm size distribution has first order implications for the effect of firm-level idiosyncratic shocks on aggregate activity.
    Keywords: Firm size distribution ; Granularity ; Lognormal ; Pareto ; TFP distribution ; Zipf's law
    JEL: L11 E24
    Date: 2018–11–14
  63. By: Jonathan Marie (Centre d'Economie de l'Université de Paris Nord (CEPN)); Sébastien Charles (LEDA)
    Abstract: Adoptant un cadre post-keynésien, l’article analyse le processus inflationniste à l’œuvre de 1948 jusqu’aux années 1980 pour, d’une part, comprendre les origines de la quasi hyperinflation du 1er semestre 1985 et, d’autre part, saisir la réussite du plan de stabilisation intervenu lors de l’été de cette même année. En 1985 le shekel semble devoir être complètement rejeté par ses utilisateurs au profit du dollar, ce qui, dans le contexte fortement inflationniste d’alors, aurait dû engendrer une hyperinflation. Ce résultat est provoqué par la conjonction de plusieurs facteurs : la virulence historique du conflit de répartition, la présence de mécanismes d’indexation et la fragilité des comptes extérieurs marqués par un déficit courant structurel. Le plan de stabilisation, soutenu par l’aide financière importante des États-Unis, permet d’atténuer immédiatement la contrainte de financement externe et parvient à affaiblir durablement la virulence du conflit de répartition, écartant ainsi les risques hyperinflationnistes. L’analyse de cette trajectoire historique confirme la cohérence théorique de l’analyse post-keynésienne de l’hyperinflation.
    Keywords: Israël, Hyperinflation, analyse post-keynésienne
    JEL: E12 E31 N15
    Date: 2018–11
  64. By: Mauro Bambi (University of York, Department of Economics and Related Studies); Alain Venditti (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE & EDHEC Business School)
    Abstract: In this paper we investigate if government balanced-budget rules together with endogenous taxation may lead to aggregate instability in an endogenous growth framework. After highlighting the differences with the exogenous growth framework, we prove that under counter-cyclical consumption taxes, while there exists a unique balanced growth path, sunspot equilibria based on self-fulfilling expectations occur through a form of global indeterminacy. In addition, we argue that this result is empirically plausible for a large set of OECD countries and that it may also emerge with endogenous income taxes.
    Keywords: endogenous growth, time-varying consumption tax, global indeterminacy, self-fulfilling expectations, sunspot equilibria
    JEL: C62 E32 H20 O41
    Date: 2018–10
  65. By: Alex Xi He (Department of Economics, MIT); John Kennes (Department of Economics and Business Economics, Aarhus University, Denmark); Daniel le Maire (University of Copenhagen)
    Abstract: We use a directed search model to develop estimation procedures for the identification of worker and rm rankings from labor market data. These methods allow for a general specication of production complementarities and the possibility that higher ranked workers are not more productive in all firms. We also offer conditions for a positive/negative assortative matching that incorporate the possibility of a stochastic job ladder with on-the-job search. Numerical simulations relate the implications of the model to the implications of fixed effect regressions and give further insights into the performance of our estimation procedures. Finally, we evaluate evidence for Denmark using our methods and we show that workers are highly sorted and that higher type workers are less productive than lower type workers while employed in lower type jobs.
    Keywords: Directed search, sorting, wage dynamics, auctions
    JEL: J64 J63 E32
    Date: 2018–12–03
  66. By: Jacinta C. Nwachukwu (Coventry University, UK); Aqsa Aziz (Coventry University, UK); Uchenna Tony-Okeke (Coventry University, UK); Simplice A. Asongu (Yaoundé, Cameroon)
    Abstract: This study compares the responsiveness of microcredit interest rates to age, scale of lending and organisational charter. It uses an unbalanced panel of 300 MFIs from 107 developing countries from 2005 to 2015. Three key trends emerge from the results of a 2SLS regression. First, the adoption of formal microbanking practices raises interest rates compared with other forms of microlending. Second, large scale lending lowers interest rates only for those MFIs that already hold legal banking status. Third, age of operation in excess of eight years exerts a negative impact on interest rates, regardless of scale and charter type of MFI. Collectively, our results indicate that policies which incentivise mature MFIs to share their knowledge will be more effective in helping the nascent institutions to overcome their cost disadvantages compared with reforms to transform them into licensed banks. For MFIs which already hold permits to operate as banks, initiatives to increase loan sizes are key strategic pricing decisions, irrespective of the institution’s age. This study is original in its differentiation of the impact on interest rates of regulations which promote formal banking principles, credit market extension vis-Ã -vis knowledge sharing between mature and nascent MFIs.
    Keywords: Microfinance, microbanks, non-bank financial institutions
    JEL: G21 G23 G28 E43 N20
    Date: 2018–01
  67. By: Christelle Meniago (Sol Plaatje University, South Africa); Simplice A. Asongu (Yaoundé, Cameroon)
    Abstract: The study assesses the role of financial development on income inequality in a panel of 48 African countries for the period 1996 to 2014. Financial development is defined in terms of depth (money supply and liquid liabilities), efficiency (from banking and financial system perspectives), activity (at banking and financial system levels) and stability while, three indicators of inequality are used, namely, the: Gini coefficient, Atkinson index and Palma ratio. The empirical evidence is based on Generalised Method of Moments. When financial sector development indicators are used exclusively as strictly exogenous variables in the identification process, it is broadly established that with the exception of financial stability, access to credit (or financial activity) and intermediation efficiency have favourable income redistributive effects. The findings are robust to the: control for unobserved heterogeneity in terms of time effects and inclusion of time invariant variables as strictly exogenous variables in the identification process. The findings are also robust to the Kuznets hypothesis: a humped shaped nexus between increasing GDP per capita and inequality. Policy implications are discussed.
    Keywords: Africa; Finance; Inequality; Poverty
    JEL: D60 E25 G20 I30 O55
    Date: 2018–01
  68. By: António Afonso; Philemon Kwame Opoku
    Abstract: This study re-examines the nexus between the fiscal balance and the current account balance for 18 OECD countries for the period 1995Q1 to 2018 Q1 using panel cointegration, and panel vector autoregressive (VAR) methods. Our results indicate that a strengthening in the fiscal balance by one percentage point of GDP leads to an improvement in the current account balance of about 0.1-0.3 percentage point of GDP. On the other hand, an increase in real government consumption generally leads to a deterioration in the current account balance. The impact of the real effective exchange rate is not statistically significant. The findings also confirm that there is a long-run relationship between the fiscal balance and the current account balance.
    Keywords: Fiscal imbalances, Current account, Twin-deficit, Panel analysis
    JEL: C32 C40 E62 H62
    Date: 2018–11
  69. By: Kazeem B. Ajide (University of Lagos, Lagos, Nigeria); Ibrahim D. Raheem (University of Kent, Canterbury, UK); Simplice A. Asongu (Yaoundé, Cameroon)
    Abstract: This study contributes to the dollarization literature by expanding its determinants to account for different dimensions of globalization, using the widely employed KOF index of globalization. Specifically, globalization is “unbundled†into three different layers namely: economic, social and political dimensions. The study focuses on 25 sub-Saharan African (SSA) countries for the period 2001-2012.Using the Tobit regression approach, the following findings are established. First, from both economic and statistical relevance, the social and political dimensions of globalization constitute the key dollarization amplifiers, while the explanatory power of the economic component is weaker on dollarization. Second, consistent with the theoretical underpinnings, macroeconomic instabilities (such as inflation and exchange rate volatilities) have the positive expected signs. Third, the positive association between the accumulation of international reserves and dollarization is also apparent. Policy implications are discussed.
    Keywords: Dollarization; Globalization; sub-Saharan Africa; Tobit regression
    JEL: E41 F41 C21
    Date: 2018–01
  70. By: Stephan Imhof, Cyril Monnet, Shengxing Zhang
    Abstract: We study the implications of liquidity regulations and monetary policy on depositmaking and risk-taking. Banks give risky loans by creating deposits that firms use to pay suppliers. Firms and banks can take more or less risk. In equilibrium, higher liquidity requirements always lower risk at the cost of lower investment. Nevertheless, a positive liquidity requirement is always optimal. Monetary conditions affect the optimal size of liquidity requirements, and the optimal size is countercyclical. It is only optimal to impose a 100% liquidity requirement when the nominal interest rate is sufficiently low.
    Date: 2018–07
  71. By: B. Ravikumar (Federal Reserve Bank of St. Louis); Ana Maria Santacreu (Federal Reserve Bank of St. Louis); Michael Sposi (Southern Methodist University & Federal Reserve Bank of Dallas)
    Abstract: We compute welfare gains from trade in a dynamic, multicountry model with capital accumulation and trade imbalances. We develop a gradient-free method to compute the exact transition path following a trade liberalization. We find that (i) larger countries accumulate a current account surplus, and financial resources flow from larger countries to smaller countries, boosting consumption in the latter, (ii) countries with larger short-run trade deficits accumulate capital faster, (iii) the gains are nonlinear in the reduction in trade costs, and (iv) capital accumulation accounts for substantial gains. The net foreign asset position before the liberalization is positively correlated with the gains. The tradables intensity in consumption goods production determines the static gains, and the tradables intensity in investment goods production determines the dynamic gains that include capital accumulation.
    Keywords: Welfare gains, Dynamics, Capital accumulation, Trade imbalances
    JEL: E22 F11
    Date: 2018–11
  72. By: Hartung, Benjamin; Jung, Philip; Kuhn, Moritz
    Abstract: A key question in labor market research is how the unemployment insurance system affects unemployment rates and labor market dynamics. We revisit this old question studying the German Hartz reforms. On average, lower separation rates explain 76% of declining unemployment after the reform, a fact unexplained by existing research focusing on job finding rates. The reduction in separation rates is heterogeneous, with long-term employed, high-wage workers being most affected. We causally link our empirical findings to the reduction in long-term unemployment benefits using a heterogeneous-agent labor market search model. Absent the reform, unemployment rates would be 50% higher today.
    Keywords: endogenous separations; labor market flows; Unemployment insurance
    JEL: E24 J63 J64
    Date: 2018–11
  73. By: Wen Chen; Bart Los; Marcel P. Timmer
    Abstract: Recent studies document a decline in the share of labour and a simultaneous increase in the share of residual (‘factorless’) income in national GDP. We argue the need for study of factor incomes in cross-border production to complement country studies. We define a GVC production function that tracks the value added in each stage of production in any country-industry. We define a new residual as the difference between the value of the final good and the payments to all tangibles (capital and labour) in any stage. We focus on GVCs of manufactured goods and find the residual to be large. We interpret it as income for intangibles that are (mostly) not covered in current national accounts statistics. We document decreasing labour and increasing capital income shares over the period 2000-14. This is mainly due to increasing income for intangible assets, in particular in GVCs of durable goods. We provide evidence that suggests that the 2000s should be seen as an exceptional period in the global economy during which multinational firms benefitted from reduced labour costs through offshoring, while capitalising on existing firm-specific intangibles, such as brand names, at little marginal cost.
    JEL: E01 E22
    Date: 2018–11
  74. By: Hommes, Cars
    Abstract: This survey discusses behavioral and experimental macroeconomics emphasizing a complex systems perspective. The economy consists of boundedly rational heterogeneous agents who do not fully understand their complex environment and use simple decision heuristics. Central to our survey is the question under which conditions a complex macro-system of interacting agents may or may not coordinate on the rational equilibrium outcome. A general finding is that under positive expectations feedback (strategic complementarity) – where optimistic (pessimistic) expectations can cause a boom (bust) – coordination failures are quite common. The economy is then rather unstable and persistent aggregate fluctuations arise strongly amplified by coordination on trend-following behavior leading to (almost-)self-fulfilling equilibria. Heterogeneous expectations and heuristics switching models match this observed micro and macro behaviour surprisingly well. We also discuss policy implications of this coordination failure on the perfectly rational aggregate outcome and how policy can help to manage the self-organization process of a complex economic system. JEL Classification: D84, D83, E32, C92
    Keywords: almost self-fulfilling equilibria, coordination failure, expectations feedback, experimental & behavioral macro-economics, learning, simple heuristics
    Date: 2018–11
  75. By: Audi, Marc; Ali, Amjad
    Abstract: Corruption is like an epidemic that has the power to destroy a country’s socioeconomic, financial, human and political environment. It has severe consequences in developing countries. This study has examined the impact of existing human, political, financial and economic factors on corruption for a set of panel countries. The data from 1995 to 2004 is used to serve this purpose. For examining the stationarity of the variables, Levin- Lin-Chu (2002), Fisher-ADF and Fisher-PP tests are applied. Pedroni Residual based Co-integration and FMOLS by Phillips and Hansen (1990) test has been used for examining the co-integration among the variables of the model. The speed of adjustment and short-run relationship has been tested through VECM. The estimated results show that exports, GDP per capita and political stability have a negative impact on corruption, whereas imports, financial development, human development index, bureaucracy, democracy and the rule of law have a positive relationship with corruption. The simplified procedures of import and export will help in reducing the practice of bribes and corruption. The governments should take the necessary steps not only to increase the income, but also to improve the people’s standard of living. There should be improvements in the political system. Democracy is also helpful to get rid of corruption.
    Keywords: Corruption, Economic Development Financial Development, Human Development,
    JEL: D73 E44 O15
    Date: 2018
  76. By: Priftis, Romanos; Zimic, Srečko
    Abstract: This paper finds that debt-financed fiscal multipliers vary depending on the location of the debt buyer. In a sample of 33 countries fiscal multipliers are larger when government purchases are financed by issuing debt to foreign investors (non-residents), compared to when they are financed by issuing debt to home investors (residents). In a theoretical model, the location of the government creditor produces these differential responses through the extent that private investment is crowded out. International capital mobility of the resident private sector decreases the difference between the two types of financing both in the model and in the data. JEL Classification: E62, F41, H3
    Keywords: debt financing, fiscal multipliers, investment crowding in, proxy-SVAR, sign restrictions, small open-economy model, structural vector autoregressions
    Date: 2018–11
  77. By: Clement Moyo (Department of Economics, Nelson Mandela University); Pierre Le Roux (Department of Economics, Nelson Mandela University)
    Abstract: The issue of financial reforms and financial development has received considerable attention over the recent past. A number of recent studies conclude that financial development may hinder economic growth. Therefore, to shed light on this negative relationship, this study investigates whether financial liberalisation and financial development increase the likelihood financial crises in SADC countries. The logit model is employed for the analysis using data for the period 1990 to 2015. The results showed that financial liberalisation captured by real interest rates and capital account openness reduces the likelihood of financial crises. On the other hand, financial development represented by bank credit, increases the incidence of financial crises. Therefore, financial liberalisation may increase the likelihood of financial crises indirectly through financial development. The study recommends that a sound regulatory and supervisory framework be established as well as institutional quality raised to curb the effect of financial development on the incidence of financial crises.
    Keywords: Financial liberalisation, financial crises, financial development, logit model.
    JEL: C23 E60 G01 G21 G28
    Date: 2018–11
  78. By: Coenen, Günter; Karadi, Peter; Schmidt, Sebastian; Warne, Anders
    Abstract: This paper provides a detailed description of an extended version of the ECB’s New Area-Wide Model (NAWM) of the euro area (cf. Christoffel, Coenen, and Warne 2008). The extended model—called NAWM II—incorporates a rich financial sector with the threefold aim of (i) accounting for a genuine role of financial frictions in the propagation of economic shocks and policies and for the presence of shocks originating in the financial sector itself, (ii) capturing the prominent role of bank lending rates and the gradual interest-rate pass-through in the transmission of monetary policy in the euro area, and (iii) providing a structural framework useable for assessing the macroeconomic impact of the ECB’s large-scale asset purchases conducted in recent years. In addition, NAWM II includes a number of other extensions of the original model reflecting its practical uses in the policy process over the past ten years. JEL Classification: C11, C52, E30, E37, E58
    Keywords: Bayesian inference, DSGE modelling, euro area, financial frictions, forecasting, policy analysis
    Date: 2018–11
  79. By: Byeong U. Park (Department of Statistics, Seoul National University, Korea); Lèopold Simar (Institut de Statistique, Biostatistique et Sciences Actuarielles, Universitè Catholique de Louvain, Belgium.); Valentin Zelenyuk (School of Economics and Centre for Efficiency and Productivity Analysis (CEPA) at The University of Queensland, Australia)
    Abstract: In this work we first replicate the results of the fully parametric dynamic probit model for forecasting US recessions from Kauppi and Saikkonen (2008) (which is in the spirit of Estrella and Mishkin (1995, 1998) and Dueker (1997)) and then contrast them to results from a nonparametric local-likelihood dynamic choice model for the same data. We then use expanded data to gain insights on whether these models could have warned the public about approach of the latest recession, associated with the Global Financial Crisis. Finally, we also apply both approaches to gain insights for 2018.
    Keywords: Forecasting of recessions, Nonparametric quasi-likelihood, Local likelihood, Dynamic discrete choice.
    JEL: C14 C22 C25
    Date: 2018–11
  80. By: Kiyohiko G. Nishimura (National Graduate Institute for Policy Studies (GRIPS) and CARF, University of Tokyo); Seisho Sato (Graduate School of Economics and CARF, University of Tokyo); Akihiko Takahashi (Graduate School of Economics and CARF, University of Tokyo)
    Abstract: This work develops and estimates a three-factor term structure model with explicit sentiment factors in a period including the global financial crisis, where market confidence was said to erode considerably. It utilizes a large text data of real time, relatively high-frequency market news and takes account of the difficulties in incorporating market sentiment into the models. To the best of our knowledge, this is the first attempt to use this category of data in term-structure models. Although market sentiment or market confidence is often regarded as an important driver of asset markets, it is not explicitly incorporated in traditional empirical factor models for daily yield curve data because they are unobservable. To overcome this problem, we use a text mining approach to generate observable variables which are driven by otherwise unobservable sentiment factors. Then, applying the Monte Carlo filter as a filtering method in a state space Bayesian filtering approach, we estimate the dynamic stochastic structure of these latent factors from observable variables driven by these latent variables. As a result, the three-factor model with text mining is able to distinguish (1) a spread-steepening factor which is driven by pessimists’ view and explaining the spreads related to ultra-long term yields from (2) a spread-flattening factor which is driven by optimists’ view and influencing the long and medium term spreads. Also, the three-factor model with text mining has better fitting to the observed yields than the model without text mining. Moreover, we collect market participants’ views about specific spreads in the term structure and find that the movement of the identified sentiment factors are consistent with the market participants’ views, and thus market sentiment.
    Date: 2018–11
  81. By: Kory Kroft; Fabian Lange; Matthew J. Notowidigdo; Matthew Tudball
    Abstract: We compare patterns of unemployment and joblessness between Canada and the U.S. during the Great Recession. Similar to previous findings for the U.S. in Kroft et al. [2016], we document a rise in long-term unemployment in Canada. This increase is not accounted for by changes in the observable composition of the unemployed. We then extend the matching model in Kroft et al. [2016] to exploit the restricted-access panel data from the Canadian Labor Force Survey which contains information on the time since the last job (“joblessness duration”) for both unemployed individuals and non-participants. This allows us to model duration dependence in all labor force flows involving either unemployment or non-participation. To calibrate the extended matching model, we create a new historical vacancy series for Canada based on relative employment in “recruiting industries”, allowing us to construct a monthly Beveridge curve for Canada. We find that the calibrated model matches the time series of unemployment fairly well, but does less well matching non-participation. Our results also indicate that allowing for duration dependence in flows between unemployment and non-participation is crucial for explaining overall levels in long-term joblessness, and that changes in the duration distribution among the unemployed and non-participants contributed less to the deterioration of labor market conditions in Canada, relative to the U.S. In part, this difference comes from the fact that the U.S. recession was much more severe.
    JEL: E24 J64
    Date: 2018–11
  82. By: Kelly, Jane (Central Bank of Ireland); Le Blanc, Julia (Deutsche Bundesbank, Research Centre); Lydon, Reamonn (Central Bank of Ireland)
    Abstract: Using household survey data, we document evidence of a loosening of credit standards in Euro area countries that experienced a property price boom-and-bust cycle. Borrowers in these countries exhibited significantly higher loan-to-value (LTV) and loan-to-income (LTI) ratios in the run up to the financial crisis, and an increasing tendency towards longer-term loans compared to borrowers in other countries. In recent years, despite the long period of historically low interest rates and substantial house price increases in some countries, we do not find similar credit easing as before the crisis. Instead, we find evidence of a considerable change in borrower characteristics since 2010: new borrowers are older and have higher incomes than before the crisis.
    Keywords: real estate markets, macroprudential policy, systemic risk, financial crises, bubbles, financial regulation, financial stability indicators.
    JEL: E5 G01 G17 G28 R39
    Date: 2018–10
  83. By: Fischer, Marcel; Khorunzhina, Natalia
    Abstract: We build a realistically calibrated life-cycle model of housing decisions under divorce risk. As observed in the data, our model predicts the recent increase in divorce rates leads to reduced homeownership rates. The event of a divorce negatively affects homeownership, and this effect is long-lasting. The risk of a divorce triggers a precautionary savings motive. However, this motive is weaker when individuals can invest in owner-occupied homes because homeowners’ higher savings partially substitute for precautionary savings. When young, the larger asset accumulation due to divorce-risk induced precautionary savings enables households to buy homes earlier, whereas the presence of transaction costs leads to reduced homeownership for middle-aged and older households when divorce risk goes up.
    Keywords: household finance, real estate, life cycle, divorce risk, family economics
    JEL: D91 E21 G11 J12 R21
    Date: 2018–11–14
  84. By: Hlouskova, Jaroslava (Institute for Advanced Studies, Vienna, Austria and Department of Economics, Thompson Rivers University, Kamloops, BC, Canada); Fortin, Ines (Institute for Advanced Studies, Vienna, Austria); Tsigaris, Panagiotis (Department of Economics, Thompson Rivers University, Kamloops, BC, Canada)
    Abstract: In this paper we analyze the two-period consumption-investment decision of a household with prospect theory preferences and an endogenous second period reference level which captures habit persistence in consumption and in the current consumption reference level. In particular, we examine three types of household depending on how the household’s current consumption reference level relates to a given threshold which is equal to the average discounted endowment income. The first type of household has a relatively low reference level (less ambitious household) and can avoid relative consumption losses in both periods. The second type of household (balanced household) always consumes exactly its reference levels. The third type of household has a relatively high reference level (more ambitious household) and cannot avoid to incur relative consumption losses, either now or in the future. Note that these households may act very differently from one another and thus there will often be a diversity of behavior. For all three types we examine how the household reacts to changes in: income (e.g., income fall caused by recession or taxation of endowment income), persistence to consumption, the first period reference level and the degree of loss aversion. Among others we find that the household increases its exposure to risky assets in good economic times if it is less ambitious and in bad economic times if it is more ambitious. We also find that in some cases more income can lead to less happiness. In addition, the less ambitious household and the more ambitious household with a higher time preference will be less happy with a rising persistence in consumption while the more ambitious household with a lower time preference will be happier if it sticks more to its consumption habits. Finally, the household will be happiest for the lowest possible current consumption reference level, i.e., not comparing at all will lead to the highest level of happiness.
    Keywords: prospect theory, loss aversion, consumption-savings decision, portfolio allocation, happiness, income effects
    JEL: G02 G11 E20
    Date: 2018–11
  85. By: Lieberknecht, Philipp; Vermeulen, Philip
    Abstract: We estimate the long- and short-run relationship between top income and wealth shares for France and the US since 1913. We find strong evidence for a long-run cointegration relationship governed by relative saving rates at the top. For both countries, we estimate a decline in the relative saving rates at the top – after 1968 in France and 1983 in the US, equivalent to a reduction of the long-run gap between wealth and income inequality compared to the period before. In the short-run, income inequality drives wealth inequality, while the converse link is weaker and slower. Using counterfactual simulations, we find that the recent rise in wealth inequality in the US is largely attributable to the contemporary increase in income inequality. Modest income concentration dynamics and a stronger decline in relative saving rates at the top than in the US contributed to a more subdued rise in wealth inequality in France. JEL Classification: D31, E21, E25, N32, N34
    Keywords: cointegration, income inequality, top shares, VECM, wealth inequality
    Date: 2018–11
  86. By: de Bondt, Gabe; Vermeulen, Philip
    Abstract: We estimate business cycle regime switching logit models for G7 countries to determine the effect of duration of the current business cycle phase and of foreign recessions on the likelihood that expansions and recessions come to an end. With respect to expansions in a G7 country, we find that the probability they end roughly doubles each time another G7 country falls into a recession. We also find that expansions in the US and Germany are duration dependent, i.e. are more likely to end as they grow older. This contrasts with other G7 countries where expansions are not duration dependent. With respect to recessions in a G7 country, we find that the likelihood of them coming to an end is not affected by other G7 countries’ recessions. We find duration dependence of recessions for all G7 countries, i.e. recessions that have gone on for a while are more likely to end. JEL Classification: E32, C41
    Keywords: business cycles, duration dependence, recessions, regime switching logit model
    Date: 2018–11
  87. By: Andreas I. Mueller; Johannes Spinnewijn; Giorgio Topa
    Abstract: This paper analyses job seekers' perceptions and their relationship to unemployment outcomes to study heterogeneity and duration-dependence in both perceived and actual job finding. Using longitudinal data from two comprehensive surveys, we document (1) that reported beliefs have strong predictive power of actual job finding, (2) that job seekers are over-optimistic in their beliefs, particularly the long-term unemployed, and (3) that job seekers do not revise their beliefs downward when remaining unemployed. We then develop a reduced-form statistical framework, where we exploit the joint observation of beliefs and ex-post realizations, to disentangle heterogeneity and duration-dependence in true job finding rates while allowing for elicitation errors and systematic biases in beliefs. We find a substantial amount of heterogeneity in true job finding rates, accounting for more than half of the observed decline in job finding rates over the spell of unemployment. Moreover, job seekers' beliefs are systemically biased and under-respond to differences in job finding rates both across job seekers and over the unemployment spell. Finally, we show theoretically and quantify in a calibrated model of job search how these biases in beliefs contribute to the slow exit out of unemployment. The biases jointly explain about 15 percent of the high incidence of long-term unemployment.
    JEL: E24 J6 J64
    Date: 2018–11
  88. By: Ghoshray, A.
    Abstract: Whether the trends in natural resource prices are stochastic or deterministic remains a contentious issue. A number of studies have employed unit root tests that determine the order of integration of the price series which in turn allows us to infer whether or not prices contain a stochastic trend. While earlier studies have delivered mixed results, the more recent studies have rejected that natural resource prices contain a stochastic trend and are therefore not persistent to shocks. However, a drawback with these studies is the assumption that the underlying model is linear, as integration is a linear concept. Since theoretical papers have argued that prices are likely to be nonlinear, the existing definitions of integrability do not apply. This paper employs a new concept, summability, which is a generalisation of integrability. A further contribution is made by updating the data. This is timely and topical given the upheavals that have occurred in natural resource prices in recent years. The conclusions show that the results are sensitive to the sample size and the underlying nonlinearity in prices. We conclude that the dynamic properties of individual natural resource prices differ and each price should be evaluated on an individual basis. Acknowledgement :
    Keywords: Demand and Price Analysis
    Date: 2018–07
  89. By: Njangang, Henri
    Abstract: The purpose of this paper is to investigate the relationship between remittances and economic growth. Additionally, it examines whether the size of the informal economy alter negatively the effect of remittances on economic growth, which surprisingly has received less attention in the literature. The paper applied the Ordinary Least Squared (OLS) and system Generalized Method of Moment (GMM) by Arellano and Bond (1991) and Arellano and Bover (1995). The sample include 30 Sub-Saharan African (SSA) countries over 1991-2015. The results show that: first, remittances have a positive and significant effect on economic growth. Second, the impact of remittances on economic growth decreases with the size of the informal economy.
    Keywords: Remittances, the informal economy, economic growth, SSA
    JEL: E26 F22 F43 O55
    Date: 2018–11–22
  90. By: Joko Ismoyo, Agung; Saiful M, Adi Auf; Supriadi, Cepi; Winianingsih, Dewi; Ayu Lestari, Firda; Marhama, Hasna; Pazriatu R, Intan
    Abstract: Planting oil palms must meet the growing conditions and appropriate cultivation methods so that the products obtained are in good condition, qualitatively and quantitatively. Palm oil contains high saturated fatty acids (> 50%) and relatively few polyunsaturated fatty acids (
    Keywords: Key words: Palm, acids, land, economically.
    JEL: Q4
    Date: 2018
  91. By: Jill Trinh (Business School, The University of Western Australia)
    Abstract: This paper examines the relationship between the Pareto distribution and Piketty’s third fundamental law of capitalism. It has been widely known that top income and wealth takes the form of Pareto distribution, yet there is very limited literature investigating the role of Piketty’s third fundamental law of capitalism, in which r (the rate of return on capital) > g (the growth rate of national income), in determining the shape parameter α of the Pareto distribution. The central takeaway of this paper includes: (i) a critical assessment of Piketty’s criticism of Pareto’s work on distributional inequality, presented in Capital in the Twenty First century (2014) in which he indicated that Pareto had an illusion of “stable” inequality; and (ii) a simple agent model to formally demonstrate the relationship between Pareto’s alpha and Piketty’s third fundamental law of capitalism. The first one concerns intellectual history and the second one has contemporary relevance.
    Date: 2017
  92. By: Aye, G.C.; Clance, M.; Gupta, R.
    Abstract: The study examines the effect of monetary and fiscal policy on inequality conditioned on low and high uncertainty. We use U.S. quarterly time series data on different measures of income, labour earnings, consumption and total expenditure inequality as well as economic uncertainty. Our analysis is based on the impulse responses from the local projection methods that enable us to recover a smoothed average of the underlying impulse response functions. The results show that both contractionary monetary and fiscal policies increase inequality, and in the presence of relatively higher levels of uncertainty, the effectiveness of both policies is weakened. Thus, pointing to the need for policy-makers to be aware of the level of uncertainty while conducting economic policies in the U.S. Acknowledgement : I thank the anonymous Reviewers and conference organizers in advance.
    Keywords: Agricultural and Food Policy
    Date: 2018–07
  93. By: Esti Kemp; Rene van Stralen; Alexandros Vardoulakis; Peter J. Wierts
    Abstract: We investigate the cyclical properties of non-bank credit and its relevance for financial stability. We construct a measure of non-bank credit for a large sample of countries and find that its cyclical properties differ from those of bank credit. Non-bank credit cycles are highly correlated with bank credit cycles in some countries but not in others. Moreover, non-bank credit cycles are less synchronised than bank credit cycles across countries. Finally, non-bank credit cycles could act as a leading indicator for currency, but not for systemic banking, crises. The opposite is true for bank credit cycles. These findings highlight the value added of monitoring non-bank credit.
    Keywords: Credit cycle ; Financial crisis ; Leading indicator ; Non-bank credit
    JEL: G01 G23 F34
    Date: 2018–11–14
  94. By: Simplice A. Asongu (Yaoundé/Cameroon); Oludele E. Folarin (University of Ibadan, Ibadan, Nigeria); Nicholas Biekpe (University of Cape Town, Cape Town, South Africa)
    Abstract: This study examines the stability of money demand in the proposed West African Monetary Union (WAMU). The study uses annual data for the period 1981 to 2015 from thirteen of the fifteen countries making-up the Economic Community of West African States (ECOWAS). A standard money demand function is designed and estimated using a bounds testing approach to co-integration and error-correction modeling. The findings show divergence across ECOWAS member states in the stability of money demand. This divergence is informed by differences in cointegration, stability, short run and long term determinants, and error correction in event of a shock.
    Keywords: Stable; demand for money; bounds test
    JEL: E41 C22
    Date: 2018–01
  95. By: Jean-Luc Gaffard
    Abstract: This paper is aimed at revisiting monetary analysis in order to better understand erroneous choices in the conduct of monetary policy. According to the prevailing consensus, the market economy is intrinsically stable and is upset only by poor behaviour by government or the banking system. We maintain on the contrary that the economy is unstable and that achieving stability requires a discretionary economic policy. This position relies upon an analytical approach in which monetary and financial organisations are devices that help markets to function. In this perspective, which focuses on the heterogeneity of markets and agents, and, consequently, on the role of institutions in determining overall performance, it turns out that nominal rigidities and financial commitment offer the means to achieve economic stability. This is because they prevent successive, unavoidable disequilibria from becoming explosive.
    Keywords: inflation, market, money, stability
    Date: 2018–11–28
  96. By: Judit Kreko (Institute of Economics - Centre for Economic and Regional Studies, Hungarian Academy of Science); Gabor Oblath (Institute of Economics - Centre for Economic and Regional Studies, Hungarian Academy of Science)
    Abstract: We investigate (i) the characteristics of real economic and price convergence, (ii) the relationship between economic growth (convergence) and real exchange rate (RER) misalignments within the European Union (EU) during the period 1995–2016. In addition to the relative external price level of GDP, we quantified an alternative indicator for the RER: the internal relative price of services to goods, as measured from the expenditure side of GDP. We interpreted RER-misalignments as deviations from levels consistent with levels of economic development among EU countries. Regarding real convergence, the “catching up” of the less developed member states to the more affluent ones within the EU was expressly rapid in terms of relative per capita growth measured at current PPPs; it was less impressive if measured at constant PPPs, and rather modest in terms of relative real GDP-growth. As for price levels and the relative price of services to goods, a rapid convergence could be observed until the international financial crisis, but this process halted in 2008. Using pooled OLS and dynamic panel techniques, we found that within the EU there is a negative relationship between the contemporaneous sign of RER-misalignment (based on both the external price level and internal relative prices) and economic growth: over- (under-) valuations are associated with lower (higher) growth. This is mainly due to developments in countries operating under fixed exchange rate regimes. Our results indicate that the level of development does not influence the strength of the growth-misalignment relationship within the EU. These results are robust to the applied panel estimation method. Regarding the external price level, we find that the positive relationship between undervaluation and growth diminishes with increasing size of undervaluation. The aggregate effect of misalignments is significantly negative on both export market shares and the ratio of gross fixed capital formation to GDP: both the competitiveness and the investment channel play an important role in the relationship between growth and RER misalignments. As an extension, we analyse the relationship between growth and the misalignment of wages from productivity levels; “wage-misalignments” are also negatively associated with economic growth. Although our study carries policy messages – in particular, mild real exchange rate undervaluations are positively, while overvaluations are negatively associated with growth and real economic convergence – the RER is an endogenous variable, which is not under direct policy control. Our results point to the importance of a growth strategy avoiding overvaluation on the one hand, and to the futility of aiming at excessive undervaluation, on the other.
    Keywords: real economic and price level convergence; external and internal relative prices; exchange rate misalignment
    JEL: E01 O40 O47 O52 P22 P27
    Date: 2018–10
  97. By: Fabrizio Antenucci
    Abstract: According to the recent economic literature, international trade has had a significant influence on the US labour market, due to the import penetration of Chinese products. In particular, according to David Author and his co-authors, Chinese import would have caused a “China syndrome”, i.e. strong employment contraction as well as negative impact on the cumulated earnings of workers in the areas most exposed to this competition. Although it can be maintained that, in recent decades, international trade has had a negative impact on the US labour market, in this paper it is claimed that, from a theoretical point of view, import penetration does not represent an appropriate index to detect the influence of international trade on the labour market. The aim of this paper is to offer an alternative analysis tool, the Trade Openness Index, which could exceed the limits of the Factor Content of Trade and the Stolper-Samuelson theorem.
    Keywords: Trade, Globalization, Deindustrialization, Labour Market Adjustment, Technical progress
    JEL: E24 F10
    Date: 2018–12
  98. By: Claude Bismut; Isamaël Ramajo
    Abstract: In this paper we extend the usual Lucas supply curve to allow the likely external influence on inflation, together with domestic conditions. We test the relationship between the inflation surprise, the output gap and the real exchange rate using simple time series regressions on annual data for a list of 16 developed countries. These tests confirm the empirical relevance of the Lucas supply curve but also support the assumption that part of the inflation surprise may come from unexpected variations of the real exchange rate.
    Keywords: Lucas supply curve, natural rate of unemployment, output gap, inflation surprise imported inflation
    Date: 2018–11
  99. By: Mark A. Carlson; Marco Macchiavelli
    Abstract: During the 2008-09 financial crisis, the Federal Reserve established two emergency facilities for broker-dealers. One provided collateralized loans. The other lent securities against a pledge of other securities, effectively providing collateral upgrades, an operation similar to activities traditionally undertaken by broker-dealers. We find that these facilities alleviated dealers' funding pressures when access to repos backed by illiquid collateral deteriorated. We also find that dealers used the facilities, especially the ability to upgrade collateral, to continue funding their own illiquid inventories (avoiding potential fire-sales), and to extend funding to their clients. Exogenous variation in collateral policies at one facility allows a causal interpretation of these stabilizing effects.
    Keywords: Financial crisis ; Lender of last resort ; Collateral ; Dealers ; Repo
    JEL: G24 G01 E58
    Date: 2018–11–15
  100. By: Vasilev, Aleksandar
    Abstract: The purpose of this paper is to describe the lottery- and insurance-market equilibrium in an economy with non-convex labor supply decision, unobservable effort, and efficiency wages of the no-shirking type a la Shapiro and Stiglitz (1984). The presence of indivisible labor creates a market incompleteness, which requires that an insurance market for (un)employment be put in operation to "complete" the market.
    Keywords: indivisible labor,lotteries,unobservable effort,insurance,no-shirking efficiency wages
    JEL: E1 J22 J41
    Date: 2018
  101. By: Muinelo-Gallo, Leonel; Azar, Paola
    Abstract: In this paper we seek to complement the scarce empirical evidence for middle-income countries about the effects of unconditional central government transfers on subnational fiscal behaviour. To this end, we have used an unbalanced panel of 18 Uruguayan regional governments from 1991 to 2016. Our database includes data from the regional budget and other sources of information, which allows us to investigate the role of political economy factors. The application of panel data techniques with the use of instrumental variables highlights the presence of a sizeable flypaper effect and a significant role of variables related with the political economy design of sub-national finances.
    Keywords: Fiscal federalism, Intergovernmental transfers, Flypaper effect, Endogeneity, Uruguay
    JEL: E62 H7
    Date: 2018–11–26
  102. By: Gerard, Francois (Columbia University); Lagos, Lorenzo (Columbia University); Severnini, Edson R. (Carnegie Mellon University); Card, David (University of California, Berkeley)
    Abstract: A growing body of research shows that firms' employment and wage-setting policies contribute to wage inequality and pay disparities between groups. We measure the effects of these policies on racial pay differences in Brazil. We find that nonwhites are less likely to work at establishments that pay more to all race groups, a pattern that explains about 20% of the white-nonwhite wage gap for both genders. The pay premiums offered by different employers are also compressed for nonwhites relative to whites, contributing another 5% of the overall gap. We then ask how much of the under-representation of nonwhites at higher-paying workplaces is due to the selective skill mix at these establishments. Using a counterfactual based on the observed skill distribution at each establishment and the nonwhite shares in different skill groups in the local labor market, we conclude that assortative matching accounts for about two-thirds of the under-representation gap for both men and women. The remainder reflects an unexplained preference for white workers at higher-paying establishments. The wage losses associated with unexplained sorting and differential wage setting are largest for nonwhites with the highest levels of general skills, suggesting that the allocative costs of race-based preferences may be relatively large in Brazil.
    Keywords: assortative matching, discrimination, firm policies, racial wage differences, Brazil
    JEL: E24 J15 J31
    Date: 2018–10
  103. By: Elena Grigorieva (RUDN University); Darya Karpova (RUDN University)
    Abstract: The article presents an analysis of the foreign experience of the mechanism of tax increment financing (TIF) in the financing of infrastructure projects and assesses the possibility of implementing this mechanism in the Russian investment practice.Investment in infrastructure development is an important factor in the socio-economic development of the country and has a multiplier effect. In the world practice, the involvement of private capital in the creation and subsequent operation of infrastructure facilities contributes to the sustainable growth of the national economy, the introduction of promising technological, organizational and institutional innovations, resource saving and energy independence, improving the quality of services provided to the population.The problem of efficiency of joint investment activity of private and public capital owners in infrastructure projects is due to the complexity of taking into account the interests of all participants. The format of joint activities should be based on the principles of risk sharing, connection of projects with the target socio-economic characteristics of the development of territories, obtaining benefits from the results of projects.The authors studied the most successful practices of infrastructure development financing, taking into account possible future benefits from the creation of these facilities in the form of additional revenues from taxes, fees, access rights to the operation of infrastructure and other privileges. One of these tools is the mechanism of tax increments of financing.The paper analyzes the conditions for the implementation and fulfillment of this mechanism in different countries of the world, studied the experience of the TIF mechanism, taking into account industry specifics and other features of the projects, describes the specific models of the TIF mechanism.The comparative approach and macroeconomic analysis were used to compare the conditions of implementation of the TIF mechanism and project financing, and to identify fundamental similarities and differences. The conclusion is made about the possibility of embedding (diffusion) of individual elements of the TIF mechanism in project financing in Russia.The use of institutional and statistical analysis, as well as the methodology for assessing the effectiveness of investment projects, allowed the authors to form a comprehensive assessment of the possibility of using the TIF mechanism in the Russian environment.
    Keywords: tax increment financing, TIF, investments, project finance, infrastructure development, public-private partnership
    JEL: E62 O22 O18
    Date: 2018–10
  104. By: Cussen, Mary (Central Bank of Ireland); Lydon, Reamonn (Central Bank of Ireland); O'Sullivan, Cormac (Central Bank of Ireland)
    Abstract: This paper compares estimates of the financial wealth of Irish households from the Irish Household Finance and Consumption Survey (HFCS) with estimates from statistical and administrative data sources. This cross-checking exercise yields three key results. First, like most wealth surveys in other countries, the Irish HFCS significantly under-records the total value of deposits held by Irish households: we estimate the HFCS captures around one-third of the aggregate figure. Second, this level of under-recording is broadly similar across the distribution of deposits. Thus, the HFCS appears to provide an accurate picture of the distribution of household deposits. Third, the degree of under-recording does not appear to be heavily concentrated in any one population group, i.e. by region or age group. With regard to the reason for the under-recording, we find no one single factor behind the underrecording. Issues identified in the survey design literature around sample design (sampling the wealthy), item and unit non-response all appear to play some role.
    Keywords: Assets, deposits, balance sheet, households, wealth.
    JEL: D12 E21
    Date: 2018–10
  105. By: Hess Chung; Taisuke Nakata; Matthias Paustian
    Abstract: In this article, we explore the implications of attenuating the power of forward guidance for the optimal conduct of forward guidance policy in a quantitative DSGE model of the U.S. economy.
    Date: 2018–10–19
  106. By: Kurt G. Lunsford; Kenneth D. West
    Abstract: We study long run correlations between safe real interest rates in the U.S. and over 30 variables that have been hypothesized to influence real rates. The list of variables is motivated by an intertermporal IS equation, by models of aggregate savings and investment, and by reduced form studies. We use annual data, mostly from 1890 to 2016. We find that safe real interest rates are correlated as expected with demographic measures. For example, the long run correlation with labor force hours growth is positive, which is consistent with overlapping generations models. For another example, the long run correlation with the proportion of 40 to 64 year-olds in the population is negative. This is consistent with standard theory where middle-aged workers are high-savers who drive down real interest rates. In contrast to standard theory, we do not find productivity to be positively correlated with real rates. Most other variables have a mixed relationship with the real rate, with long run correlations that are statistically or economically large in some samples and by some measures but not in others.
    JEL: E43
    Date: 2018–11

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