nep-mac New Economics Papers
on Macroeconomics
Issue of 2019‒02‒04
85 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Credit Subsidies By Fiorella de Fiore; Oreste Tristani; Isabel Horta Correia; Pedro Teles
  2. IQ, Expectations, and Choice By Francesco D’Acunto; Daniel Hoang; Maritta Paloviita; Michael Weber
  3. The Post-Crisis Phillips Curve: A New Empirical Relationship between Wage and Inflation By Voinea, Liviu
  4. An Update to the Economic Outlook: 2018 to 2028 By Congressional Budget Office
  5. Monetary policy, product market competition and growth By Aghion, Philippe; Farhi, Emmanuel; Kharroubi, Enisse
  6. The transmission of unconventional monetary policy to bank credit supply: evidence from the TLTRO By António Afonso; Joana Sousa-Leite
  7. The Long-Term Budget Outlook Under Alternative Scenarios for Fiscal Policy By Congressional Budget Office
  8. Has the U.S. Wage Phillips Curve Flattened? A Semi-Structural Exploration By Jordi Galí; Luca Gambetti
  9. Optimal Trend Inflation By Klaus Adam; Henning Weber
  10. The 2018 Long-Term Budget Outlook By Congressional Budget Office
  11. Firm Wages in a Frictional Labor Market By Rudanko, Leena
  12. Money Neutrality: An Empirical Assessment for Mexico By Carbajal-De-Nova, Carolina
  13. The Relationship between Monetary Policy and Uncertainty in Advanced Economies: Evidence from Time- and Frequency-Domains By Semih Emre Cekin; Besma Hkiri; Aviral Kumar Tiwari; Rangan Gupta
  14. Revisiting the Phillips curve trade-off: evidence from Tanzania using nonlinear ARDL approach By Nkoba, Malik Abdulrahman; Masih, Mansur
  15. Are Labor Unions Important for Business Cycle Fluctuations: Lessons from Bulgaria (1999-2016) By Aleksandar Vasilev
  16. Off the Radar: Exploring the Rise of Shadow Banking in the EU By Martin Hodula
  17. The behavior of social transfers over the business cycle: empirical evidence of Uruguay By Ronald Miranda; Leonel Muinelo-Gallo
  18. The euro at twenty: Follies of youth? By Ricardo Cabral; Francisco Louçã
  19. Interest Rate Uncertainty and Sovereign Default Risk By Alok Johri; Shahed K. Khan; Cesar Sosa-Padilla
  20. The effects of labour market reforms upon unemployment and income inequlities : an agent based model By Giovanni Dosi; Marcelo C. Pereira; Andrea Roventini; Maria Enrica Virgillito
  21. Financial Frictions, Durable Goods and Monetary Policy By Leo Michelis; Ugochi T. Emenogu
  22. Demand and distribution regimes, output hysteresis, and cyclical dynamics in a Kaleckian model By Hiroshi Nishi; Engelbert Stockhammer
  23. The Dynamics of Balanced Expansion in Monetary Economies with Sovereign Debt By Böhm, Volker
  24. Marginal Jobs and Job Surplus: A Test of the Efficiency of Separations By Simon Jäger; Benjamin Schoefer; Josef Zweimüller
  26. Digital Cash: Principles & Practical Steps By Michael D. Bordo; Andrew T. Levin
  27. Home Ownership and Monetary Policy Transmission By Winfried Koeniger; Marc-Antoine Ramelet
  28. Money, credit, monetary policy and the business cycle in the euro area: what has changed since the crisis? By Giannone, Domenico; Lenza, Michele; Reichlin, Lucrezia
  29. Is inflation targeting compatible with economic growth ? Korean experience based on ARDL and NARDL By Affendi, Diyana Najwa; Masih, Mansur
  30. Keynesian Models, Detrending, and the Method of Moments By MAO TAKONGMO, Charles Olivier
  31. The “New Fiscal Plan for Puerto Rico” (April 19, 2018): An Unrealistic and Misleading Path to Nowhere By J.Tomas Hexner; Arthur MacEwan
  32. The Short-Run Effect of Monetary Policy Shocks on Credit Risk: An Analysis of the Euro Area By Chi Hyun Kim; Lars Other
  33. Bad Sovereign or Bad Balance Sheets? Euro Interbank Market Fragmentation and Monetary Policy, 2011-2015 By Gabrieli, Silvia; Labonne, Claire
  34. Identifying global and national output and fiscal policy shocks using a GVAR By Alexander Chudik; M. Hashem Pesaran; Kamiar Mohaddes
  35. Identifying Global and National Output and Fiscal Policy Shocks Using a GVAR By Alexander Chudik; M. Hashem Pesaran; Kamiar Mohaddes
  36. Econophysics of Asset Price, Return and Multiple Expectations By Olkhov, Victor
  37. Is residential property the ultimate hedge against inflation ? new evidence from Malaysia based on ARDL and nonlinear ARDL By Aqsha, Nur Suhairah; Masih, Mansur
  38. 1930: First Modern Crisis By Gary Gorton; Toomas Laarits; Tyler Muir
  39. Leaning against the wind: macroprudential policy and the financial cycle By Kockerols, Thore; Kok, Christoffer
  40. How Big is the Wealth Effect? Decomposing the Response of Consumption to House Prices By Aruoba, S. Boragan; Elul, Ronel; Kalemli-Ozcan, Sebnem
  41. Determinants of food price inflation: evidence from Malaysia based on linear and nonlinear ARDL By Hasan, Amiratul Nadiah; Masih, Mansur
  42. How Prevalent Is Downward Rigidity in Nominal Wages? Evidence from Payroll Records in Washington State By Ekaterina S. Jardim; Gary Solon; Jacob L. Vigdor
  43. Macro and Micro Prudential Policies: Sweet and Lowdown in a Credit Network Agent Based Model By Ermanno Catullo; Federico Giri; Mauro Gallegati
  44. How Changes in Economic Conditions Might Affect the Federal Budget By Congressional Budget Office
  45. Learning Efficiency Shocks, Knowledge Capital and the Business Cycle: A Bayesian Evaluation By Alok Johri; Muhebullah Karimzada
  46. Fluctuaciones Cíclicas y Cambios de Régimen en la Economía Boliviana: Un Análisis Estructural a partir de un Modelo DSGE By David Zeballos Coria; Juan Carlos Heredia Gómez; Paola Yujra Tonconi
  47. Assessing the External Demand of the Czech Economy: Nowcasting Foreign GDP Using Bridge Equations By Tomas Adam; Filip Novotny
  48. Do Fixers Perform Worse than Non-Fixers during Global Recessions and Recoveries? By Marco E. Terrones
  49. Do Fixers Perform Worse than Non-Fixers during Global Recessions and Recoveries? By Terrones, Marco E.
  50. Monetary Policy Divergence and Net Capital Flows: Accounting for Endogenous Policy Responses By Davis, Scott; Zlate, Andrei
  51. What Influences Private Investment? The Case of the Czech Republic By Martin Gurtler
  52. Monetary Policy Communications and their Effects on Household Inflation Expectations By Olivier Coibion; Yuriy Gorodnichenko; Michael Weber
  53. The labour-augmented K+S model : a laboratory for the analysis of institutional and policy regimes By Giovanni Dosi; Marcelo C. Pereira; Andrea Roventini; Maria Enrica Virgillito
  54. Macroeconomic Effects of China's Financial Policies By Chen, Kaiji; Zha, Tao
  55. History dependence in the housing market By Bracke, Philippe; Tenreyro, Silvana
  56. IW Financial Expert Survey: First Quarter 2019 By Demary, Markus
  57. The Financial Decisions of Immigrant and Native Households: Evidence from Italy By Graziella Bertocchi; Marianna Brunetti; Anzelika Zaiceva
  58. Misallocation in the market for inputs: enforcement and the organization of production By Boehm, Johannes; Oberfield, Ezra
  59. Local Fiscal Multipliers and Fiscal Spillovers in the United States By Alan J. Auerbach; Yuriy Gorodnichenko; Daniel Murphy
  60. Bank shocks and firm performance: New evidence from the sovereign debt crisis By Marina-Eliza Spaliara; Serafeim Tsoukas; Luísa Farinha
  61. Inflation and wage rigidity/flexibility in the short run By Park, Seonyoung; Shin, Donggyun
  62. An arbitrage-free yield net model with application to the euro debt crisis By Zhiwu Hong; Linlin Niu
  63. Monetary and Exchange Rate Policies for Sustained Growth in Asia By Joseph E Gagnon; Philip Turner
  64. The productivity-wage premium: does size still matter in a service economy? By Berlingieri, Giuseppe; Calligaris, Sara; Criscuolo, Chiara
  65. The Deficit Reductions Necessary to Meet Various Targets for Federal Debt By Congressional Budget Office
  66. Heterogeneous Households under Uncertainty By Pietro Veronesi
  67. Monetary Policy Communications and their Effects on Household Inflation Expectations By Olivier Coibion; Yuriy Gorodnichenko; Michael Weber
  68. A Review of CBO’s Estimate of the Effects of the Recovery Act on SNAP By Congressional Budget Office
  69. Dying Light: War and Trade of the Separatist-Controlled Areas of Ukraine By Artem Kochnev
  70. Is the relation between lending interest rate and non-performing loans symmetric or asymmetric ? evidence from ARDL and NARDL By Bahruddin, Wan Athirah; Masih, Mansur
  71. Measuring Redenomination Risks in the Euro Area - New Evidence from Survey Data By Jens Klose
  72. What do we know about changing economic activity of firms? By Pandey, Radhika; Sapre. Amey; Sinha, Pramod
  73. Optimal Reduction of Public Debt under Partial Observation of the Economic Growth By Giorgia Callegaro; Claudia Ceci; Giorgio Ferrari
  74. Examining the trade-off between price and financial stability in India. By Patnaik, Ila; Mittal, Shalini; Pandey, Radhika
  75. Monetary policy with transitory vs. permanently low growth By Christophe Blot; Paul Hubert
  76. Human Capital and Economic Growth. By Claude DIEBOLT; Charlotte LE CHAPELAIN
  78. Greece after the Bailouts: Assessment of a Qualified Failure By George Pagoulatos
  79. Countries in the hamster’s wheel?: Nurkse-Duesenberry demonstration effects and the determinants of savings By Andrés Rius; Carolina Román
  80. Education Spillovers within the Workplace By Bentsen, Kristian Hedeager; Munch, Jakob R.; Schaur, Georg
  81. Funding for International Affairs Activities, Within and Outside Agencies’ Base Budgets By Congressional Budget Office
  82. Bad Jobs By Yu Chen; Matthew Doyle; Francisco Gonzalez
  83. The rationale for GDP-linked bonds for the euro area By Emter, Lorenz; Herzberg, Valerie
  84. Income Inequality, Poverty, and the Rule of Law: Latin America vs the Rest of the World1 By Sonora, Robert
  85. Financial constraints and corporate environmental responsibility By Götz, Martin

  1. By: Fiorella de Fiore; Oreste Tristani; Isabel Horta Correia; Pedro Teles
    Abstract: Credit subsidies are an alternative to interest rate and credit policies when dealing with high and volatile credit spreads. In a model where credit spreads move in response to shocks to the net worth of financial intermediaries, credit subsidies are able to stabilize those spreads avoiding the transmission to the real economy. Interest rate policy can be a substitute for credit subsidies but is limited by the zero bound constraint. Credit subsidies overcome this constraint. They are superior to a policy of credit easing as long as the government is less efficient than financial intermediaries in providing credit.
    JEL: E31 E40 E44 E52 E58 E62 E63
    Date: 2018
  2. By: Francesco D’Acunto; Daniel Hoang; Maritta Paloviita; Michael Weber
    Abstract: We use administrative and survey-based micro data to study the relationship between cognitive abilities (IQ), the formation of economic expectations, and the choices of a representative male population. Men above the median IQ (high-IQ men) display 50% lower forecast errors for inflation than other men. The inflation expectations and perceptions of high-IQ men, but not others, are positively correlated over time. High-IQ men are also less likely to round and to forecast implausible values. In terms of choice, only high-IQ men increase their propensity to consume when expecting higher inflation as the consumer Euler equation prescribes. High-IQ men are also forward-looking -- they are more likely to save for retirement conditional on saving. Education levels, income, socio-economic status, and employment status, although important, do not explain the variation in expectations and choice by IQ. Our results have implications for heterogeneous-beliefs models of household consumption, saving, and investment.
    JEL: D12 D84 D91 E21 E31 E52 E65
    Date: 2019–01
  3. By: Voinea, Liviu
    Abstract: In this paper we test a new empirical relationship between wage and inflation. We introduce the concept of a cumulative wage gap, meaning the cumulative gap between the current wage and a maximum peak wage value in the past. In a crisis, people relate to their peak gains in the immediate past. We assume that people judge their consumption decisions based on the relation between their current wages and their past wages, adjusted for inflation. We call this the post-crisis Phillips Curve. The shape of the post-crisis Phillips Curve expresses the theoretical assumption that the inflation rate stays below its target until the cumulative real wage gap closes, and that it increases above its target when the cumulative real wage gap becomes positive. We test our hypothesis using data for 35 OECD countries for the period 1990-2017. We are able to confirm our hypothesis, as the coefficients have the expected sign and are statistically significant for the OECD panel as well as for most of the individual countries. We also find a break in the slope of the curve, as the coefficients are higher after the cumulative wage gap closes.
    Keywords: wage,cumulative wage gap,inflation,Phillips Curve,monetary policy
    JEL: E21 E24 E31
    Date: 2019
  4. By: Congressional Budget Office
    Abstract: In CBO’s updated projections, real gross domestic product (GDP) grows by 3.1 percent in 2018 and 2.4 percent in 2019. In both years, growth in actual GDP outpaces growth in potential (that is, maximum sustainable) GDP, creating excess demand in the economy and further lowering the unemployment rate.
    JEL: E20 E60 E61 E62 E66 H50
    Date: 2018–08–13
  5. By: Aghion, Philippe; Farhi, Emmanuel; Kharroubi, Enisse
    Abstract: In this paper we argue that monetary easing fosters growth more in more credit-constrained environments, and the more so the higher the degree of product market competition. Indeed when competition is low, large rents allow firms to stay on the market and reinvest optimally, no matter how funding conditions change with aggregate conditions. To test this prediction, we use industrylevel and firm-level data from the Euro Area to look at the effects on sectoral growth and firm-level growth of the unexpected drop in long-term government bond yields following the announcement of the Outright Monetary Transactions program (OMT) by the ECB. We find that the monetary policy easing induced by OMT, contributed to raising sectoral (firm-level) growth more in more highly leveraged sectors (firms), and the more so the higher the degree of product market competition in the country (sector).
    Keywords: growth; financial conditions; firm leverage; competition
    JEL: E32 E43 E52
    Date: 2018–12
  6. By: António Afonso; Joana Sousa-Leite
    Abstract: We assess the transmission of the Targeted Longer-Term Refinancing Operations (TLTRO) to the bank credit supply for the Euro area (2014:05-2018:01) and for Portugal (2011:01-2018:01), using a panel data setup. For the Euro area, we find a positive relationship between the TLTRO and the amount of credit granted to the real economy. For the vulnerable countries, the effects of the TLTRO on the stock of credit increased from 2016 to 2017. Among the group of small banks, the effects are stronger in less vulnerable countries. We also find that competition has no statistically significant impact on the transmission of the TLTRO to the bank credit supply for the Euro area. For Portugal, using a difference-in-differences model, we find no statistically significant impact of the TLTRO on credit granted by banks. Finally, bidding banks set lower interest rates than non-bidding banks and the difference seems to be larger in 2017. In Portugal, the effects of the TLTRO on loan interest rates also increased from 2016 to 2017 and are stronger for small banks.
    JEL: C33 C87 E50 E51 E52 E58
    Date: 2019
  7. By: Congressional Budget Office
    Abstract: In CBO’s most recent extended baseline projections, federal debt held by the public rises from an amount equal to 78 percent of gross domestic product (GDP) in 2018 to 118 percent of GDP in 2038. This report expands on those projections by showing how the federal budget and the nation’s economy would evolve under three alternative scenarios. In those scenarios, laws would be changed to continue certain policies now in place, leading to even higher debt.
    JEL: H68 H63 H62 H61 H60 H50 E66 E62 E61 E60 E20
    Date: 2018–08–08
  8. By: Jordi Galí; Luca Gambetti
    Abstract: Unconditional reduced form estimates of a conventional wage Phillips curve for the U.S. economy point to a decline in its slope coefficient in recent years, as well as a shrinking role of lagged price inflation in the determination of wage inflation. We provide estimates of a conditional wage Phillips curve, based on a structural decomposition of wage, price and unemployment data generated by a VAR with time varying coefficients, identified by a combination of long-run and sign restrictions. Our estimates show that the key qualitative findings from the unconditional reduced form regressions also emerge in the conditional evidence, suggesting that they are not entirely driven by endogeneity problems or possible changes over time in the importance of of wage markup shocks. The conditional evidence, however, suggests that actual changes in the slope of the wage Phillips curve may not have been as large as implied by the unconditional estimates.
    JEL: E24 E31
    Date: 2019–01
  9. By: Klaus Adam; Henning Weber
    Abstract: Sticky price models featuring heterogeneous firms and systematic firm-level productivity trends deliver radically different predictions for the optimal inflation rate than their popular homogenous-firm counterparts: (1) the optimal steady-state inflation rate generically differs from zero and (2) inflation optimally responds to productivity disturbances. We show this by aggregating a heterogenous-firm model with sticky prices in closed form. Using firm-level data from the U.S. Census Bureau, we estimate the historically optimal inflation path for the U.S. economy. In the year 1977, the optimal inflation rate stood at 1.5%, but subsequently declined to around 1.0% in the year 2015. Inflation rates up to twice these numbers can be rationalized if one considers product demand elasticities more in line with the trade literature or if one considers firms that (partially) index prices to lagged inflation rates
    Keywords: optimal inflation rate, sticky prices, firm heterogeneity
    JEL: E52 E31 E32
    Date: 2018–04
  10. By: Congressional Budget Office
    Abstract: In CBO’s projections, federal budget deficits grow substantially over the next several years in relation to the size of the economy, stabilize for a few years, and then grow again over the rest of the 30-year period. If current laws generally remained unchanged, the growing deficits would raise federal debt held by the public from 78 percent of gross domestic product this year to nearly 100 percent by the end of the next decade and 152 percent by 2048.
    JEL: E20 E60 E61 E62 E66 H50 H51 H53 H55 H60 H61 H62 H63 H68
    Date: 2018–06–26
  11. By: Rudanko, Leena (Federal Reserve Bank of Philadelphia)
    Abstract: This paper studies a labor market with directed search, where multi-worker firms follow a firm wage policy: They pay equally productive workers the same. The policy reduces wages, due to the influence of firms’ existing workers on their wage setting problem, increasing the profitability of hiring. It also introduces a time-inconsistency into the dynamic firm problem, because firms face a less elastic labor supply in the short run. To consider outcomes when firms reoptimize each period, I study Markov perfect equilibria, proposing a tractable solution approach based on standard Euler equations. In two applications, I first show that firm wages dampen wage variation over the business cycle, amplifying that in unemployment, with quantitatively significant effects. Second, I show that firm wage firms may find it profitable to fix wages for a period of time, and that an equilibrium with fixed wages can be good for worker welfare, despite added volatility in the labor market.
    Keywords: Labor Market Search; Business Cycles; Wage Rigidity; Competitive Search; Limited Commitment
    JEL: E24 E32 J41 J64
    Date: 2019–01–22
  12. By: Carbajal-De-Nova, Carolina
    Abstract: The quantity theory of money assumes that money itself is neutral with respect to real output, both in the long and short term. Therefore, this last period should not be affected by changes in money supply. A review of the literature is carried out in order to provide a framework for the empirical analysis. To test the above proposition for Mexico, M1 is used, while GDP, duly adjusted for inflation stands for output. The period under consideration covers from the first quarter of 1993 to the first quarter of 2018. The results expose a cubic function. For the long term and with respect to M1, the price elasticity is positive with a substantial coefficient (10.03). In its squared portion, the coefficient is inelastic and negative (-0.49). Finally, the cubic coefficient is close to zero (0.01). These three coefficients bear a one period lag. Besides, a dummy variable comprising the four quarters of 1995, when the Mexican economy experienced a recession, was introduced. In the short term, the coefficient for the straight section is considerably large (38.19), being negative and elastic in its square tranche (-1.81), and almost negligible in its cubic portion (0.03). As a result of the above estimates, while there has been a considerable effect in real output as a result of increases in the money supply, particularly in the early years considered, its value has been receding at a considerable pace. These results apply in the long as well as in the short term. The only difference in this similar pattern is that such effect has been stronger during the short term. With respect to the theoretical tenets underling the subject, it should be observed that the effects of money supply in real output are mixed, depending on the periods under consideration.
    Keywords: Money neutrality in Mexico; quantity theory of money.
    JEL: E13 E17 E41 E52
    Date: 2018–09–28
  13. By: Semih Emre Cekin (Department of Economics, Turkish-German University); Besma Hkiri (College of Business, University of Jeddah, Saudi Arabia); Aviral Kumar Tiwari (Montpellier Business School, 2300, avenue des Moulins, 34185 Montpellier cedex 4 0002, France); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa)
    Abstract: In this work we offer new insight into the relationship between interest rates and uncertainty for several advanced economies (Canada, EU, Japan, UK, US) for the period 2003-2018. For this purpose, we utilize the wavelets methodology, which allows us to analyze how the relationship changes over time and across different frequencies and to make inference about causality. To analyze a wide range of frequencies, and because our analysis contains the post-2008 period as well, we use the daily shadow interest rate measure of Krippner (2012, 2013) to capture the stance of monetary policy making at the zero lower bound. We also use the daily uncertainty measure by Scotti (2016), which measures uncertainty related to the real economy. Our findings suggest that there is significant comovement across time and across different frequencies in all the countries we analyze. Corresponding to the similar, yet different conduct of monetary policy, we also find that the relationship exhibits different characteristics and causality in all the economies we analyze, implying that one must be careful not to draw generalized conclusions.
    Keywords: Interest Rate, Uncertainty, Advanced Economies, Wavelet
    JEL: C22 E52 E58
    Date: 2019–01
  14. By: Nkoba, Malik Abdulrahman; Masih, Mansur
    Abstract: The spotlight of this study is to re-examine the presence and nature of the long run relationship between inflation and unemployment. The topic has been of much interest to researchers and policy makers as it has significant implications on macroeconomic stabilization policies. Using expected inflation rates and expected unemployment rates generated by Autoregressive integrated moving average (ARIMA), the study tests whether the relationship between the variables is symmetrical or asymmetrical in both short run and long run. Applying the autoregressive distributed lags model (ARDL) and Nonlinear ARDL approaches proposed by Pesaran et al. (2001) and Shin et al. (2014), we confirm the presence of long run equilibrium relationship between expected inflation and expected unemployment. Findings tend to indicate that the long run relationship is symmetrical whereas evidence is in support of asymmetrical short-run trade-off between the variables. CUSUM and CUSUMSQ tests confirm the stability of the coefficients. The study contributes to the literature in three ways. First it uses expected as opposed to actual variables, second it employs recent methodology of Nonlinear ARDL and third it presents new evidence from a Highly indebted poor country-HIPC (Tanzania) using data from 1991 to 2017.
    Keywords: Phillips curve, unemployment, inflation, nonlinear ARDL
    JEL: C22 C58 E44
    Date: 2018–12–29
  15. By: Aleksandar Vasilev (Lincoln International Business School, UK)
    Abstract: In this paper we investigate the quantitative importance of collective agreements in explaining uctuations in Bulgarian labor markets. Following Maffezzoli (2001), we introduce a monopoly union in a real-business-cycle model with government sector. We calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2016), and compare and contrast it to a model with indivisible labor and no unions as in Rogerson and Wright (1988). We find that the sequential bargaining between unions and firms produces an important internal propagation mechanism, which fits data much better that the alternative framework with indivisible labor.
    Keywords: business cycles, general equilibrium, labor unions, indivisible labor, involuntary unemployment.
    JEL: E32 E24 J23 J51
    Date: 2019–01
  16. By: Martin Hodula
    Abstract: This paper uses novel ECB/Eurosystem data on non-bank financial intermediation to investigate the potential factors of shadow banking growth for a panel of 24 EU countries. Consistent with several strands of literature, the EU shadow banking system is found to be highly procyclical and positively related to increasing demand of long-term institutional investors, more stringent capital regulation, and faster financial development. In addition, the paper offers two findings that have not been reported in the literature. First, it shows that the relationship between monetary policy and shadow banking growth is level-dependent and may be determined by the relative magnitude of interest rates in the economy. In this respect, two main motives driving the relationship are identified - the "funding cost" motive and the "search for yield" motive. Second, the driving forces of shadow banking differ between the old and new EU countries, largely due to the missing legal framework for securitization in the new members.
    Keywords: European Union, monetary policy, panel data analysis, shadow banking
    JEL: E44 E52 G21 G23
    Date: 2018–12
  17. By: Ronald Miranda (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Leonel Muinelo-Gallo (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía)
    Abstract: This paper analyzes the cycle fluctuations of the social transfers in Uruguay over the period 1988.Q1 to 2016.Q3. The unobservable cyclical components are extracted from the observable time series following different empirical strategies. The results show that social transfers behave procyclical and lag the macroeconomics fluctuations. In this way, social transfers instead of contributing to stabilize the Uruguayan economy have aggravated the business cycle, and through various items of expenditure, expose the vulnerable groups of society to more adverse economic conditions.
    Keywords: social transfers; business cycle; detrending; Uruguay
    JEL: C10 E32 H50 H55
    Date: 2018–12
  18. By: Ricardo Cabral; Francisco Louçã
    Abstract: This paper overviews the early history of the euro and argues that the euro was suboptimally designed, without monetary sovereignty of Eurozone (EZ) Member States, in order to comply with political goals set by wealthier Member States. Given this constraint, the euro architects designed a single currency in which its irreversibility is achieved through the EZ banking system, with recourse to the TARGET2 payment system. This allowed the banking systems of deficit Member States to fund large cumulative current account deficits in the first decade of the euro. The euro crisis led EZ policy makers to define new far more demanding fiscal rules and a new Banking Union to constrain the ability of EZ banking systems to fund sovereigns and current account deficits. Thus, the euro at twenty has become more fragile.
    Keywords: Euro crisis, fiscal rules, banking union, Eurozone, austerity strategy
    JEL: F32 F34 E62 E52 F36 F42
    Date: 2019–01
  19. By: Alok Johri; Shahed K. Khan; Cesar Sosa-Padilla
    Abstract: Fluctuations in sovereign bond yields display a large global component which is associated with a rise in uncertainty. We build a model of sovereign default in which shocks to the level and to the volatility of the world interest rate help to account for this phenomenon. We calibrate the model parameters to Argentine data and estimate a process for the world interest rate using US treasuries data. Time variation in the world interest rate interacts with default incentives and its effect on borrowing and sovereign spreads is state contingent. We find that shocks to the level and volatility of the world interest rate (i.e. uncertainty shocks) cause the model to predict an average sovereign spread that is 280 basis points larger and 200 basis points more volatile than a model with a constant world interest rate. The model also predicts that countries will prefer a longer maturity for their debt when facing a time-varying world interest rate. The welfare gains from eliminating uncertainty about the world interest rate amount up to a permanent increase in consumption of 1 percent.
    Keywords: Sovereign default, Interest rate spread, Political turnover, Left-wing, Right-wing, Cyclicality of fiscal policy.
    JEL: E32 E43 F34 F41
    Date: 2018–12
  20. By: Giovanni Dosi (Laboratory of Economics and Management); Marcelo C. Pereira (Universidade Estadual de Campinas); Andrea Roventini (Observatoire français des conjonctures économiques); Maria Enrica Virgillito (Scuola Superiore Sant'Anna)
    Abstract: This work analyses the effects of labour market structural reforms by means of the labour-augmented ‘Schumpeter meeting Keynes’ (KþS) Agent-Based model. We introduce a policy regime change characterized by a set of structural reforms on the labour market. Confirming a recent IMF report, the model shows how structural reforms reducing workers’ bargaining power and compressing wages tend to increase (a) unemployment, (b) functional income inequality and (c) personal income inequality. We further undertake a global sensitivity analysis on key variables and parameters which corroborates the robustness of our findings.
    Keywords: Labor market; Structural reforms; Income distribution; Inequality; Unemployment; Growth
    JEL: C63 E02 E12 E24 O11
    Date: 2017–12
  21. By: Leo Michelis (Department of Economics, Ryerson University, Toronto, Canada); Ugochi T. Emenogu (Bank of Canada, Ottawa, Canada)
    Abstract: This paper examines the effect of financial frictions on the consumption of durables and non-durables in a two-sector DSGE model with sticky prices and heterogeneous agents. The financial frictions are a combination of loan-to-value (LTV) and payment-to-income (PTI) constraints faced by borrowers. In this setting a monetary contraction reduces drastically the maximum amount that consumers can borrow in order to purchase durable goods. As a result, the model predicts that the consumption of durables falls, along with non-durables even when durable prices are fully flexible. Also output falls and the nominal interest rate increases following a monetary tightening. Thus, the model matches better the predictions of the model with the data, relative to the existing literature.
    Keywords: Durable goods, Sticky prices, Financial frictions, Monetary policy
    JEL: E44 E52
    Date: 2019–01
  22. By: Hiroshi Nishi; Engelbert Stockhammer
    Abstract: This study analyses the interaction of demand, income distribution, and natural output level in a dynamic Kaleckian model with output hysteresis. Hysteresis means that the natural output level depends on the path of the demand-driven actual output level. We consider wage-led and profit-led demand regimes and goods market-led and labour market-led income distribution regimes. We find that the stability of the steady state is closely related to hysteresis in certain regimes. Limit cycles can arise when the strong flexibility of either prices or wages to the output gap is combined with a moderate degree of natural output hysteresis. We make the persuasive case that a Kaleckian model with a wage-led demand regime and anticyclical profit share is less unstable and that pseudo-Goodwin cycles can arise in the profit-led demand regime with a procyclical profit share.
    Keywords: Hysteresis, Natural output level, Demand regime, Income distribution
    JEL: D33 E12 E32
    Date: 2019–01
  23. By: Böhm, Volker (Center for Mathematical Economics, Bielefeld University)
    Abstract: The paper examines the role of fiscal and monetary policy on the dynamics of monetary expansion in a macroeconomy. Its microeconomic structure defined by producers with neoclassical production functions, heterogeneous OLG consumers, and a stationary fiscal and monetary policy induces a consistent dynamic closed macroeconomic model of the AS-AD type. Existence and uniqueness of a temporary competitive monetary equilibrium are shown in a two-market economy (determining prices, wages, output, and employment) under a standard set of neoclassical conditions on production, consumer preferences, fiscal and monetary parameters. Comparative statics on prices, wages, and allocations for all levels of the state variables: money balances, debt, and expectations are shown. The dynamic development of temporary equilibria is defined by orbits of a dynamical system generated by three mappings of the one-step (recursive) time change, one for each state variable. The paper defines and describes explicitly the forecasting rules for prices as functions (so-called perfect predictors) which induce perfect foresight along orbits of the economy. It establishes sufficient conditions for their existence and uniqueness and provides a constructive characterization of perfect predictors for the AS-AD economy. Given existence of a globally perfect predictor, perfect foresight holds along all orbits of the economy. The results show that constant intertemporal allocations are uniquely gener- ated by orbits of balanced expansion of both money balances and public debt. Generically, depending on parameters, there exist two or no balanced paths while stationary equilibria with zero inflation exist only on a small (non-open) set of parameters. For a benchmark case (defined by isoelastic utility and production functions) perfect foresight dynamics exist globally and are monotonic (no cycles). There exist at most two balanced paths one of which is always unstable. Their existence and stability are influenced in a decisive way by fiscal and monetary parameters determining steady state inflation rates, allocations, as well as bounds for sustainable debt-to-GDP ratios.
    Keywords: monetary/fiscal policy, deficit, monetary growth, stability, perfect foresight
    Date: 2018–09–28
  24. By: Simon Jäger; Benjamin Schoefer; Josef Zweimüller
    Abstract: We present a sharp test for the efficiency of job separations. First, we document a dramatic increase in the separation rate – 11.2ppt (28%) over five years – in response to a quasi-experimental extension of UI benefit duration for older workers. Second, after the abolition of the policy, the “job survivors” in the formerly treated group exhibit exactly the same separation behavior as the control group. Juxtaposed, these facts reject the “Coasean” prediction of efficient separations, whereby the UI extensions should have extracted marginal (low-surplus) jobs and thereby rendered the remaining (high-surplus) jobs more resilient after its abolition. Third, we show that a formal model of predicted efficient separations implies a piece-wise linear function of the actual control group separations beyond the missing mass of marginal matches. A structural estimation reveals point estimates of the share of efficient separations below 4%, with confidence intervals rejecting shares above 13%. Fourth, to characterize the marginal jobs in the data, we extend complier analysis to difference-in- difference settings such as ours. The UI-induced separators stemmed from declining firms, blue-collar jobs, with a high share of sick older workers, and firms more likely to have works councils – while their wages were similar to program survivors. The evidence is consistent with a “non-Coasean” framework building on wage frictions preventing efficient bargaining, and with formal or informal institutional constraints on selective separations.
    JEL: E2 E24 H0 H3 J0 J01 J18 J23 J31 J63 J64 J65
    Date: 2019–01
  25. By: Roman N. Bozhya-Volya (National Research University Higher School of Economics); Alina S. Rybak (National Research University Higher School of Economics)
    Abstract: We investigate new instrument of monetary policy which is able to stimulate economy in the age of electronic money. Demurrage (negative interest on money holdings) is a non inflationary monetary instrument that is able to boost the rate of economic transactions. We show with the search-theoretic model that the search effort of buyers is increasing in demurrage fees and higher search effort is associated with the lower price level and higher aggregate output. We find that aggregate welfare is higher when demurrage is imposed compared to quantitative easing policy. While demurrage is complicated to impose on banknotes it is easily set on electronic money which makes this unconventional policy measure more technologically feasible
    Keywords: demurrage, negative interest on money, monetary policy, government policy in recession
    JEL: E50
    Date: 2019
  26. By: Michael D. Bordo; Andrew T. Levin
    Abstract: If the global economy encounters another severe adverse shock in coming years, will major central banks be able to provide sufficient monetary stimulus to preserve price stability and foster economic recovery? Our empirical analysis indicates that the Federal Reserve’s QE3 program was not an effective form of monetary stimulus and that unconventional monetary policies undertaken in the Eurozone and in Japan have been similarly limited in impact. We then consider how digital cash could bolster the effectiveness of monetary policy, and we characterize some potential steps for implementing digital cash via public-private partnerships between the central bank and supervised financial institutions. Our analysis indicates that digital cash could significantly enhance the stability of the financial system.
    JEL: E42 E52 E58
    Date: 2019–01
  27. By: Winfried Koeniger; Marc-Antoine Ramelet
    Abstract: We present empirical evidence on the heterogeneity in monetary policy transmission across countries with different home ownership rates. We use household-level data together with shocks to the policy rate identified from high-frequency data. We find that housing tenure reacts more strongly to unexpected changes in the policy rate in Germany and Switzerland –the OECD countries with the lowest home ownership rates–compared with existing evidence for the U.S. An unexpected decrease in the policy rate by 25 basis points increases the home ownership rate by 0.8 percentage points in Germany and by 0.6 percentage points in Switzerland. The response of non-housing consumption in Switzerland is less heterogeneous across renters and mortgagors, and has a different pattern across age groups than in the U.S. We discuss economic explanations for these findings and implications for monetary policy.
    Keywords: Monetary policy transmission, Home ownership, Housing tenure, Consumption
    JEL: E21 E52 R21
    Date: 2018
  28. By: Giannone, Domenico; Lenza, Michele; Reichlin, Lucrezia
    Abstract: This paper studies the relationship between the business cycle and financial intermediation in the euro area. We establish stylized facts and study their stability during the global financial crisis and the European sovereign debt crisis. Long-term interest rates have been exceptionally high and long-term loans and deposits exceptionally low since the Lehman collapse. Instead, short-term interest rates and short-term loans and deposits did not show abnormal dynamics in the course of the financial and sovereign debt crisis. JEL Classification: E32, E51, E52, C32, C51
    Keywords: euro area, loans, monetary policy, money, non-financial corporations
    Date: 2019–01
  29. By: Affendi, Diyana Najwa; Masih, Mansur
    Abstract: The relationship between inflation and growth has been one of the most widely researched topics in economics. Studies have shown various outcomes, deeming positive, negative and non-existence of relationship between the two macroeconomic variables, and the result varies among the areas of study. The complex dynamics between inflation and growth has made it difficult for policy makers to comprehend whether inflation targeting policy will result in favourable or adverse effect to the economic growth. This paper aims to study the relationship between inflation and economic growth in South Korea, one of the fastest growing economies in Asia. Consumer Price Index (CPI) will be used as an indicator for inflation and GDP by market price is used to represent the economic growth. Using the recent time series techniques, ARDL and NARDL, the study seeks to find the long-term relationship and causality between the two variables. Based on the results, it is found that inflation is exogenous, while GDP is endogenous. The relationship between inflation and GDP is also found to be asymmetric in the long run. The policy implication of this study is that the central bank of Korea should not adopt inflation targeting policy while having the objective of boosting the GDP in mind since they are conflicting macroeconomic objectives. Instead, inflation targeting policy should be applied mainly to focus on keeping the price stability.
    Keywords: Inflation, Economic growth, ARDL, NARDL
    JEL: C22 C58 E44
    Date: 2018–12–28
  30. By: MAO TAKONGMO, Charles Olivier
    Abstract: One important question in the Keynesian literature is whether we should detrend data when estimating the parameters of a Keynesian model using the moment method. It has been common in the literature to detrend data in the same way the model is detrended. Doing so works relatively well with linear models, in part because in such a case the information that disappears from the data after the detrending process is usually related to the parameters that also disappear from the detrended model. Unfortunately, in heavy non-linear Keynesian models, parameters rarely disappear from detrended models, but information does disappear from the detrended data. Using a simple real business cycle model, we show that both the moment method estimators of parameters and the estimated responses of endogenous variables to a technological shock can be seriously inaccurate when the data used in the estimation process are detrended. Using a dynamic stochastic general equilibrium model and U.S. data, we show that detrending the data before estimating the parameters may result in a seriously misleading response of endogeneous variables to monetary shocks. We suggest building the moment conditions using raw data, irrespective of the trend observed in the data.
    Keywords: RBC models, DSGE models, Trend.
    JEL: C12 C13 C15 E17 E51
    Date: 2019
  31. By: J.Tomas Hexner (President of Hex, Inc. Founder and director, Science Initiative Group at the Institute for Advanced Study at Princeton, New Jersey); Arthur MacEwan (Professor Emeritus of Economics at the University of Massachusetts Boston)
    Abstract: The New Fiscal Plan for Puerto Rico, issued by the Fiscal Oversight and Management Board on April 19, 2018, is deeply flawed. It is based on two incompatible goals: establishing a foundation for growth of the Puerto Rican economy and assuring that the Puerto Rican government will move quickly toward meeting its debt obligations. As result of this incompatibility, the Plan is deeply flawed and should be abandoned. The Plan imposes an austerity program, which will undermine possibilities for growth, harm the well-being of the populace, and likely undermine the government’s ability to meet debt obligations. Also, the plan makes unrealistically optimistic assumptions about positive impacts of the structural reforms it imposes on economic relations in Puerto Rico. This paper: (1) explains the austerity nature of the Plan and its negative impacts; and (2) discusses the Plan’s proposed structure reforms—labor reforms, tax reforms, education and human capital reforms, and government regulations and the organization of government agencies.
    Keywords: New Fiscal Plan for Puerto Rico,PROMESA, Puerto Rico debt, level playing field austerity
    JEL: E62 E63 O23 O24
    Date: 2018–09
  32. By: Chi Hyun Kim; Lars Other
    Abstract: We examine the credit channel of monetary policy from 2000 to 2015 in the Euro Area using daily monetary policy shock and credit risk measures in an autoregressive distributed lag model. We find that an expansionary monetary policy shock leads to a short-run increase in the credit risk of non-financial corporations. This dysfunctionality of the credit channel is driven by the crisis-dominated post-2009 period. During this period, market participants may have interpreted expansionary monetary policy shocks as a signal of worsening economic prospects. We further distinguish policy shocks aiming at short- and long-run expectations of market participants, i.e. target and path shocks. The adverse effect disappears for crisis countries when the European Central Bank targets long-run rather than short-run expectations.
    Keywords: Credit channel, credit spreads, Euro area financial markets, forward guidance, monetary policy, Zero lower bound
    JEL: C22 E44 E52 G12
    Date: 2019
  33. By: Gabrieli, Silvia (Banque de France); Labonne, Claire (Federal Reserve Bank of Boston)
    Abstract: We measure the relative role of sovereign-dependence risk and balance sheet (credit) risk in euro area interbank market fragmentation from 2011 to 2015. We combine bank-to-bank loan data with detailed supervisory information on banks’ cross-border and cross-sector exposures. We study the impact of the credit risk on banks’ balance sheets on their access to, and the price paid for, interbank liquidity, controlling for sovereign-dependence risk and lenders’ liquidity shocks. We find that (i) high non-performing loan ratios on the GIIPS portfolio hinder banks’ access to the interbank market throughout the sample period; (ii) large sovereign bond holdings are priced in interbank rates from mid-2011 until the announcement of the OMT; (iii) the OMT was successful in closing this channel of cross-border shock transmission; it reduced sovereign-dependence and balance sheet fragmentation alike.
    Keywords: interbank market; credit risk; fragmentation; sovereign risk; country risk; credit rationing; market discipline
    JEL: E43 E58 G01 G15 G21
    Date: 2018–07–12
  34. By: Alexander Chudik; M. Hashem Pesaran; Kamiar Mohaddes
    Abstract: The paper contributes to the growing global VAR (GVAR) literature by showing how global and national shocks can be identified within a GVAR framework. The usefulness of the proposed approach is illustrated in an application to the analysis of the interactions between public debt and real output growth in a multicountry setting, and the results are compared to those obtained from standard single country VAR analysis. We find that on average (across countries) global shocks explain about one third of the long-horizon forecast error variance of output growth, and about one fifth of the long run variance of the rate of change of debt-to-GDP. Evidence on the degree of cross-sectional dependence in these variables and their innovations are exploited to identify the global shocks, and priors are used to identify the national shocks within a Bayesian framework. It is found that posterior median debt elasticity with respect to output is much larger when the rise in output is due to a fiscal policy shock, as compared to when the rise in output is due to a positive technology shock. The cross country average of the median debt elasticity is 1.58 when the rise in output is due to a fiscal expansion as compared to 0.75 when the rise in output follows from a favorable output shock.
    Keywords: Factor-augmented VARs, Global VARs, identification of global and country-specific shocks, Bayesian analysis, public debt and output growth, debt elasticity
    JEL: C30 E62 H6
    Date: 2019–01
  35. By: Alexander Chudik; M. Hashem Pesaran; Kamiar Mohaddes
    Abstract: The paper contributes to the growing global VAR (GVAR) literature by showing how global and national shocks can be identified within a GVAR framework. The usefulness of the proposed approach is illustrated in an application to the analysis of the interactions between public debt and real output growth in a multicountry setting, and the results are compared to those obtained from standard single country VAR analysis. We find that on average (across countries) global shocks explain about one third of the long-horizon forecast error variance of output growth, and about one fifth of the long run variance of the rate of change of debt-to-GDP. Evidence on the degree of cross-sectional dependence in these variables and their innovations are exploited to identify the global shocks, and priors are used to identify the national shocks within a Bayesian framework. It is found that posterior median debt elasticity with respect to output is much larger when the rise in output is due to a fiscal policy shock, as compared to when the rise in output is due to a positive technology shock. The cross country average of the median debt elasticity is 1.58 when the rise in output is due to a fiscal expansion as compared to 0.75 when the rise in output follows from a favorable output shock.
    Keywords: factor-augmented VARs, global VARs, identification of global and country-specific shocks, Bayesian analysis, public debt and output growth, debt elasticity
    JEL: C30 E62 H60
    Date: 2019
  36. By: Olkhov, Victor
    Abstract: This paper describes asset price and return disturbances as result of relations between transactions and multiple kinds of expectations. We show that disturbances of expectations can cause fluctuations of trade volume, price and return. We model price disturbances for transactions made under all types of expectations as weighted sum of partial price and trade volume disturbances for transactions made under separate kinds of expectations. Relations on price allow present return as weighted sum of partial return and trade volume “return” for transactions made under separate expectations. Dependence of price disturbances on trade volume disturbances as well as dependence of return on trade volume “return” cause dependence of volatility and statistical distributions of price and return on statistical properties of trade volume disturbances and trade volume “return” respectively.
    Keywords: financial transactions; expectations; economic space; asset price; return
    JEL: C58 E44 G02 G1 G12 G32
    Date: 2019–01–19
  37. By: Aqsha, Nur Suhairah; Masih, Mansur
    Abstract: Residential property is seen as a good investment asset which can protect the real wealth of investors against increase in prices of goods and services. Despite rising house prices, consumer home buying power is still going strong in Malaysia. Nevertheless, many believe that over longer time horizon, house prices could decline jeopardizing the real returns on investment especially during inflationary pressure. Therefore, this paper aims to analyze the inflation-hedging abilities of Malaysian housing properties both in the long run and short run. We extend current literature using relatively advanced technique of NARDL (Shin et al, 2014) in order to examine the intrinsic asymmetric relationship among the variables. Different hedging tools are included for comparison purpose namely, gold price and stock price. Overall, we find that house price responds to inflation rate asymmetrically in the long run. Gold has asymmetric linkage with inflation but the NARDL estimation result is insignificant, whereas stock price is proven to be a much better option as it reacts symmetrically over both short- and longer-time horizon. However, house ownership can still hedge against inflation in the long-run since the home prices have risen faster than inflation rate during the recent housing bubbles. The findings tend to suggest that ignoring potential nonlinearity may lead to misleading evidence as house prices can be influenced by different macroeconomic determinants. Therefore, it could be of major importance for more effective property investment and policymaking in the context of the Malaysian house market.
    Keywords: Residential Property, House Price, Inflation, Hedging, Nonlinear ARDL, Malaysia
    JEL: C58 E44
    Date: 2018–12–30
  38. By: Gary Gorton; Toomas Laarits; Tyler Muir
    Abstract: Modern financial crises are difficult to explain because they do not always involve bank runs, or the bank runs occur late. For this reason, the first year of the Great Depression, 1930, has remained a puzzle. Industrial production dropped by 20.8 percent despite no nationwide bank run. Using cross-sectional variation in external finance dependence, we demonstrate that banks' decision to not use the discount window and instead cut back lending and invest in safe assets can account for the majority of this decline. In effect, the banks ran on themselves before the crisis became evident.
    JEL: E02 E3 G01
    Date: 2019–01
  39. By: Kockerols, Thore; Kok, Christoffer
    Abstract: Should monetary policy lean against financial stability risks? This has been a subject of fierce debate over the last decades. We contribute to the debate about “leaning against the wind” (LAW) along three lines. First, we evaluate the cost and benefits of LAW using the Svensson (2017) framework for the euro area and find that the costs outweigh the benefits. Second, we extend the framework to address a critique that Svensson does not consider the lower frequency financial cycle. Third, we use this extended framework to assess the costs and benefits of monetary and macroprudential policy. We find that macroprudential policy has net marginal benefits in addressing risks to financial stability in the euro area, whereas monetary policy has net marginal costs. This would suggest that an active use of macroprudential policies targeting financial stability risks would alleviate the burden on monetary policy to “lean against the wind”. JEL Classification: E58, G01
    Keywords: financial cycle, leaning against the wind, macroprudential policy
    Date: 2019–01
  40. By: Aruoba, S. Boragan (University of Maryland); Elul, Ronel (Federal Reserve Bank of Philadelphia); Kalemli-Ozcan, Sebnem (University of Maryland)
    Abstract: We investigate the effect of declining house prices on household consumption behavior during 2006-2009. We use an individual-level dataset that has detailed information on borrower characteristics, mortgages and credit risk. Proxying consumption by individual-level auto loan originations, we decompose the effect of declining house prices on consumption into three main channels: wealth effect, household financial constraints, and bank health. We find a negligible wealth effect. Tightening householdlevel financial constraints can explain 40-45 percent of the response of consumption to declining house prices. Deteriorating bank health leads to reduced credit supply both to households and firms. Our dataset allows us to estimate the effect of this on households as 20-25 percent of the consumption response. The remaining 35 percent is a general equilibrium effect that works via a decline in employment as a result of either lower credit supply to firms or the feedback from lower consumer demand. Our estimate of a negligible wealth effect is robust to accounting for the endogeneity of house prices and unemployment. The contribution of tightening household financial constraints goes down to 35 percent, whereas declining bank credit supply to households captures about half of the overall consumption response, once we account for endogeneity.
    Keywords: Financial crisis; mortgage; individual-level data; general equilibrium; bank health; credit supply
    JEL: E32 O16
    Date: 2019–01–22
  41. By: Hasan, Amiratul Nadiah; Masih, Mansur
    Abstract: Given the adverse impact of growing inflation on food prices and the importance of policymakers to keep the food price inflation stable, this study aims to investigate the determinants of food price inflation. This study contributes to the existing literature by employing Nonlinear ARDL (NARDL) technique to identify whether the relationship between the focused variables is linear and symmetric or not. This study finds that the variables are cointegrated in the long run. The error correction model VECM and the Variance Decompositions analysis found that the exchange rate is the most exogenous variable and the government has no control over it since it is determined by the external factors such as, supply and demand for Malaysia ringgit. Further, NARDL found that the relationship between the food price and exchange rate to be symmetric in the long run but asymmetric in the short run. Since the exchange rate is the most exogenous variable in this study and the fact that Malaysia in on flexible exchange regime, it makes it hard for the policy makers to control the fluctuations of the Malaysian exchange rate to control food price. Hence the adjustment and control of food price should be made through the reduction of the food import in order to minimise the exchange rate pass through effect on the food price inflation.
    Keywords: food price inflation, exchange rate, ARDL, Nonlinear ARDL, Malaysia
    JEL: C22 C58 E44
    Date: 2018–12–31
  42. By: Ekaterina S. Jardim; Gary Solon; Jacob L. Vigdor
    Abstract: For more than 80 years, many macroeconomic analyses have been premised on the assumption that workers’ nominal wage rates cannot be cut. The U.S. evidence on this assumption has been inconclusive because of distortions from reporting error in household surveys. Following a British literature, we reconsider the issue with more accurate wage data from the payroll records of most employers in the State of Washington over the period 2005-2015. For every one of the 40 four-quarters-apart periods for which we observe year-to-year wage changes, we find that at least 20 percent of job stayers experience nominal wage reductions.
    JEL: E24 J3
    Date: 2019–01
  43. By: Ermanno Catullo (Department of Economics and Social Sciences, Universita' Politecnica delle Marche); Federico Giri (Department of Economics and Social Sciences, Universita' Politecnica delle Marche); Mauro Gallegati (Department of Economics and Social Sciences, Universita' Politecnica delle Marche)
    Abstract: The paper presents an agent based model reproducing a stylized credit network that evolves endogenously through the individual choices of rms and banks. We introduce in this framework a anancial stability authority in order to test the e ects of different prudential policy measures designed to improve the resilience of the economic system. Simulations show that a combination of micro and macro prudential policies reduces systemic risk, but at the cost of increasing banks' capital volatility. Moreover, agent based methodology allows us to implement an alternative meso regulatory framework that takes into consideration the connections between firms and banks. This policy targets only the more connected banks, increasing their capital requirement in order to reduce the di usion of local shocks. Our results support the idea that the meso prudential policy is able to reduce systemic risk without a ecting the stability of banks'capital structure.
    Keywords: Micro prudential policy; Macro prudential policy; Credit Network; Meso prudential policy; Agent based model
    JEL: E50 E58 G18 G28 C63
    Date: 2019–01
  44. By: Congressional Budget Office
    Abstract: To show the budgetary effects of scenarios in which economic conditions differ from those in the agency’s current economic forecast, CBO has developed “rules of thumb†that provide a rough sense of how changes in four key economic variables—productivity growth, labor force growth, interest rates, and inflation—would affect revenues, outlays, and deficits. The agency has released an interactive workbook along with the report that allows users to create their own alternative economic scenarios and see how those scenarios might affect the federal budget.
    JEL: E23 E31 E47 H60 J21
    Date: 2018–06–28
  45. By: Alok Johri; Muhebullah Karimzada
    Abstract: We incorporate shocks to the efficiency with which firms learn from production activity and accumulate knowledge into an otherwise standard real DSGE model with imperfect competition. Using real aggregate data and Bayesian inference techniques, we find that learning efficiency shocks are an important source of observed variation in the growth rate of aggregate output, investment, consumption and especially hours worked in post-war US data. The estimated shock processes suggest much less exogenous variation in preferences and total factor productivity are needed by our model to account for the joint dynamics of consumption and hours. This occurs because learning efficiency shocks induce shifts in labour demand uncorrelated with current TFP, a role usually played by preference shocks. At the same time, knowledge capital acts like an endogenous source of productivity variation in the model. Measures of model fit prefer the specification with learning efficiency shocks. Independent evidence on learning efficiency shocks are provided using sign-restriction based structural vector auto-regressions.
    Keywords: Business Cycles, Learning-by-Doing, Learning Efficiency Shocks, Knowledge Capital
    JEL: E32
    Date: 2018–12
  46. By: David Zeballos Coria (Universidad La Salle); Juan Carlos Heredia Gómez (Universidad Andina Simón Bolívar); Paola Yujra Tonconi (Investigadora Junior)
    Abstract: El objetivo de la investigación es evaluar el comportamiento de la economía boliviana con base en un modelo de Equilibrio General Dinámico Estocástico, con cambio de Régimen (Markov-Switching DSGE). Empleando un modelo para una pequeña economía abierta, con instrumentación de la política monetaria basada en agregados y un mecanismo de intervención cambiaria, mediante técnicas de estimación bayesiana, se encuentra evidencia que parámetros estructurales del modelo, como los coeficientes de la función de reacción del Banco Central, experimentaron un cambio de régimen en 2000-2017; un comportamiento similar se verificaría también en las volatilidades de los choques estructurales experimentados por la economía boliviana en dicho período.
    Keywords: DFluctuaciones económicas, Modelo DSGE, Markov Switching, Estimación Bayesiana.
    JEL: E3 E6
    Date: 2018–10
  47. By: Tomas Adam; Filip Novotny
    Abstract: We propose an approach to nowcasting foreign GDP growth rates for the Czech economy. For presentational purposes, we focus on three major trading partners: Germany, Slovakia and France. We opt for a simple method which is very general and which has proved successful in the literature: the method based on bridge equation models. A battery of models is evaluated based on a pseudo-real-time forecasting exercise. The results for Germany and France suggest that the models are more successful at backcasting, nowcasting and forecasting than the naive random walk benchmark model. At the same time, the various models considered are more or less successful depending on the forecast horizon. On the other hand, the results for Slovakia are less convincing, possibly due to the stability of the GDP growth rate over the evaluation period and the weak relationship between GDP growth rates and monthly indicators in the training sample.
    Keywords: Bayesian model averaging, bridge equations, nowcasting, short-term forecasting
    JEL: C53 E37
    Date: 2018–12
  48. By: Marco E. Terrones (Universidad del Pací fico)
    Abstract: There is an important debate about how economies with different exchange rate regimes performed during the Great Recession and its ensuing recovery. While economic theory suggests that economies with fixed exchange rates are more affected and recover more slowly from global shocks than economies with non-fixed exchange rates, the empirical evidence on the most recent global recession has been mixed. This paper examines the exchange rate and economic growth nexus and assesses how this relationship is affected by the four global recessions and recoveries the world economy has experienced post-Bretton Woods. While there is no robust long-term relationship between exchange rate regimes and growth, there is evidence that fixers recover from global recessions at a weaker pace than non-fixers.
    Keywords: Cycles, international cycles, global recessions and recoveries, exchange rates, economic growth of open economies
    JEL: E32 F31 F41 F43 F44
    Date: 2019–01
  49. By: Terrones, Marco E.
    Abstract: There is an important debate about how economies with different exchange rate regimes performed during the Great Recession and its ensuing recovery. While economic theory suggests that economies with fixed exchange rates are more affected and recover more slowly from global shocks than economies with non-fixed exchange rates, the empirical evidence on the most recent global recession has been mixed. This paper examines the exchange rate and economic growth nexus and assesses how this relationship is affected by the four global recessions and recoveries the world economy has experienced post-Bretton Woods. While there is no robust long-term relationship between exchange rate regimes and growth, there is evidence that fixers recover from global recessions at a weaker pace than non-fixers.
    Keywords: Cycles; international cycles; global recessions and recoveries; exchange rates; economic growth of open economies.
    JEL: E32 F31 F41 F43 F44
    Date: 2019–01
  50. By: Davis, Scott (Federal Reserve Bank of Dallas); Zlate, Andrei (Federal Reserve Bank of Boston)
    Abstract: This paper measures the effect of monetary tightening in key advanced economies on net capital flows around the world. Measuring this effect is complicated by the fact that the domestic monetary policies of affected economies respond endogenously to the foreign tightening shock. Using a structural VAR framework with quarterly panel data we estimate the impulse responses of domestic policy variables and net capital flows to a foreign monetary tightening shock. We find that the endogenous response of domestic monetary policy depends on each economy's capital account openness and exchange rate regime. We use a method to compute counterfactual impulse responses for net capital outflows under the assumption that the domestic policy rate does not respond to foreign monetary tightening. Our results suggests that failing to account for the endogenous response of domestic monetary policy biases down the estimated elasticity of net capital flows to foreign interest rates by as much as one-third for countries with open capital accounts.
    Keywords: trilemma; structural VAR; counterfactual VAR; net capital inflows; exchange rates
    JEL: E5 F3 F4
    Date: 2018–09–27
  51. By: Martin Gurtler
    Abstract: What influences private investment in the Czech Republic? This paper arrives at a conclusion based on a survey of fixed-asset purchases in 30,000 non-financial corporations over the period 2008-2015. BVAR models are estimated on aggregates for 19 industries and the whole non-financial economy. As our results show, foreign demand is the most important factor for Czech business investment, especially in manufacturing and tourism. We also find an increased importance of expectations and uncertainty during the period under review. According to our findings, business investment is fostered by a devalued currency and is crowded out by public investment. The most profound crowding-out was seen in manufacturing and agriculture, whereas services, trade, and construction exhibit crowding-in. Finally, EU funds are found to be successful in providing occasional support to private investment.
    Keywords: Bayesian VAR, crowding-out, Czech Republic, EU funds, exchange rate, interest rate, investment, monetary and fiscal policy, survey data, uncertainty
    JEL: D22 E22 H32 M21
    Date: 2018–12
  52. By: Olivier Coibion; Yuriy Gorodnichenko; Michael Weber
    Abstract: We study how different forms of communication influence the inflation expectations of individuals in a randomized controlled trial. We first solicit individuals’ inflation expectations in the Nielsen Homescan panel and then provide eight different forms of information regarding inflation. Reading the actual Federal Open Market Committee (FOMC) statement has about the same average effect on expectations as simply being told about the Federal Reserve’s inflation target. Reading a news article about the most recent FOMC meetings results in a forecast revision which is smaller by half. Our results have implications for how central banks should communicate to the broader public.
    JEL: C83 D84 E31
    Date: 2019–01
  53. By: Giovanni Dosi (Laboratory of Economics and Management); Marcelo C. Pereira (Universidade Estadual de Campinas); Andrea Roventini (Observatoire français des conjonctures économiques); Maria Enrica Virgillito (Scuola Superiore Sant'Anna)
    Abstract: In this work we discuss the research findings from the labour-augmented Schumpeter meeting Keynes (K+S) agent-based model. It comprises comparative dynamics experiments on an artificial economy populated by heterogeneous, interacting agents, as workers, firms, banks and the government. The exercises are characterised by different degrees of labour flexibility, or by institutional shocks entailing labour market structural reforms, wherein the phenomenon of hysteresis is endogenous and pervasive. The K+S model constitutes a laboratory to evaluate the effects of new institutional arrangements as active/passive labour market policies, and fiscal austerity. In this perspective, the model allows mimicking many of the customary policy responses which the European Union and many Latin American countries have embraced in reaction to the recent economic crises. The obtained results seem to indicate, however, that most of the proposed policies are likely inadequate to tackle the short-term crises consequences, and even risk demoting the long-run economic prospects. More objectively, the conclusions offer a possible explanation to the negative path traversed by economies like Brazil, where many of the mentioned policies were applied in a short period, and hint about some risks ahead.
    Keywords: Labour market ; Policy evaluation; Agent based model
    JEL: C63 E24 H53 J88
    Date: 2018–09
  54. By: Chen, Kaiji (Emory University); Zha, Tao (Federal Reserve Bank of Atlanta)
    Abstract: The Chinese economy has undergone three major phases: the 1978–97 period marked as the SOE-led economy, the 1998–2015 phase as the investment-driven economy, and the new normal economy since 2016. All three economies have been shaped by the government financial policies, defined as a set of credit policy, monetary policy, and regulatory policy. We analyze the macroeconomic effects of these financial policies throughout the three phases and provide the stylized facts to substantiate our analysis. The stylized facts differ qualitatively across different phases or economies. We argue that the impacts of China's financial policies work through transmission channels different from those in developed economies and that a regime switch from one economy to another was driven mainly by regime changes in financial policies.
    Keywords: marketized tools; regime change; growth; investment; capital intensity; local governments; regulations; shadow banking; debts; real estate; preferential credits; industrialization; SOEs; POEs; heavy and light sectors; monetary stimulus; trends and cycles
    JEL: E5 G1 G28 O2
    Date: 2018–11–01
  55. By: Bracke, Philippe; Tenreyro, Silvana
    Abstract: Using data on the universe of housing transactions in England and Wales over a twenty-year period, we document a robust pattern of history dependence in housing markets. Sale prices and selling propensities are affected by house prices prevailing in the period in which properties were previously bought. We investigate the causes of history dependence complementing our analysis with administrative data on mortgages and online house listings, which we match to actual sales. We find that cognitive and financial frictions explain the history dependence in the data. Both contributed to the collapse and slow recovery of the volume of housing transactions in the post-crisis period.
    Keywords: housing market; fluctuations; down-payment effects; reference dependence; anchoring; loss aversion
    JEL: E30 R21 R31
    Date: 2018–08
  56. By: Demary, Markus
    Abstract: Pessimism determines the experts' predictions for the first and second quarter of 2019 which can be inferred from the downward revisions of the experts' forecasts. Although the experts still expect the yield curve to become steeper, they expect long-term interest rates to increase less compared to the last survey. The lower interest rate forecasts are consistent with the experts' lower inflation and growth expectations. The experts expect 1.7 percent inflation in the Eurozone and a growth rate of real gross domestic product of 1.6 percent for 2019, which indicates a slowdown of economic growth and a failure of the European Central Bank (ECB) in meeting its inflation target. Given that, the experts expect the long-term interest rate to be 0.51 percent at the end of the first quarter of 2019, which is 0.24 percentage points lower than their prediction in the last survey. For the short rate the experts expect no change, since they expect the ECB's main refinancing rate to stay at 0.0 percent in the first half of 2019. But the experts expect the yield of US Treasury bonds to increase from 2.86 percent to 3.31 percent by the end of the first half of 2019 and thereby a growing interest rate differential between the US and Europe. Given the less accommodative monetary policy by the ECB in 2019 the experts forecast of a mild appreciation of the Euro from 1.138 US-Dollar to 1.143 US-Dollar in the first quarter and to 1.162 US-Dollar in the second quarter of 2019. Although the experts revised their stock market forecasts downwards, they expect the DAX and the Stoxx index to recover in the first half of 2019. On average, the experts predict the Stoxx index to increase from 2.807 points at the end of the fourth quarter of 2018 to 2.951 points at the end of the first quarter of 2019 and to 3.072 points at the end of the second quarter of 2019. This would correspond to increases of 5.1 percent and 9.4 percent since December 2018. Moreover, the experts expect the DAX to increase from 10.788 to 11.396 in the first quarter of 2019 and to 11.919 in the second quarter of 2019, which corresponds to increases by 5.6 and 10.5 percent since end of December 2018. Interesting is that the experts expect the Stoxx and the DAX to grow faster than the S&P 500, which we surveyed for the first time. For the S&P 500 the experts only expect increases by 0.7 and 5.3 percent. In the long-term ranking, which covers the last 16 quarters, National-Bank could defend rank one, while Commerzbank and Nord/LB could defend rank two and rank three.
    JEL: G12 G17
    Date: 2019
  57. By: Graziella Bertocchi (University of Modena and Reggio Emilia,CEPR,CHILD,Dondena,GLO and IZA); Marianna Brunetti (DEF & CEIS,University of Rome "Tor Vergata"); Anzelika Zaiceva (University of Modena and Reggio Emilia,IZA and POP,UNU-MERIT)
    Abstract: Using rich Italian data for the period 2006-2014, we document sizeable gaps between native and immigrant households with respect to wealth holdings and financial decisions. Immigrant household heads hold less net wealth than native, but only above the median of the wealth distribution, with housing as the main driver. Immigrant status reduces the likelihood of holding risky assets, housing, mortgages, businesses, and valuables, while it increases the likelihood of financial fragility. Years since migration, countries of origin, and the pattern of intermarriage also matter. The Great Recession has worsened the condition of immigrants in terms of wealth holdings, home ownership, and financial fragility.
    Keywords: immigrants, household finance, wealth, financial portfolios, Great Recession
    JEL: F22 G11 D14 E21 J15
    Date: 2019–01–25
  58. By: Boehm, Johannes; Oberfield, Ezra
    Abstract: The strength of contract enforcement determines how firms source inputs and organize production. Using microdata on Indian manufacturing plants, we show that production and sourcing decisions appear systematically distorted in states with weaker enforcement. Specifically, we document that in industries that tend to rely more heavily on relationship-specific intermediate inputs, plants in states with more congested courts shift their expenditures away from intermediate inputs and appear to be more vertically integrated. To quantify the impact of these distortions on aggregate productivity, we construct a model in which plants have several ways of producing, each with different bundles of inputs. Weak enforcement exacerbates a holdup problem that arises when using inputs that require customization, distorting both the intensive and extensive margins of input use. The equilibrium organization of production and the network structure of input-output linkages arise endogenously from the producers' simultaneous cost minimization decisions. We identify the structural parameters that govern enforcement frictions from cross-state variation in the first moments of producers' cost shares. A set of counterfactuals show that enforcement frictions lower aggregate productivity to an extent that is relevant on the macro scale.
    Keywords: production networks; intermediate inputs; misallocation; productivity; contract enforcement; value chains
    JEL: E23 F12 O11
    Date: 2018–09
  59. By: Alan J. Auerbach; Yuriy Gorodnichenko; Daniel Murphy
    Abstract: We estimate local fiscal multipliers and spillovers for the United States using a rich dataset based on U.S. Department of Defense contracts and a variety of outcome variables relating to income and employment. We find strong positive spillovers across locations and industries. Both backward linkages and general equilibrium effects (e.g., income multipliers) contribute to the positive spillovers. Geographical spillovers appear to dissipate fairly quickly with distance. Our evidence points to the relevance of Keynesian-type models that feature excess capacity.
    JEL: E62 H5
    Date: 2019–01
  60. By: Marina-Eliza Spaliara; Serafeim Tsoukas; Luísa Farinha
    Abstract: Prior empirical investigations of corporate failures consider the effects of macroeconomic conditions and financial health, but the literature contains limited evidence of the real effects of the bank shocks caused by the sovereign debt crisis. Using a rich source of high-quality firm-bank matched data for 2005-2014, this study examines the real effects of bank shocks on firms’ survival prospects in Portugal. We first present evidence that a funding outflow is associated with a reduction in the credit supply. Furthermore, firms borrowing from banks exposed to the funding outflow are more likely to fail. We also uncover significant heterogeneity in firms’ financial positions and show that the negative effect of a funding shock is stronger for younger, higher-risk firms, and those that used their potential lines of bank credit.
    JEL: E44 F32 F34 G15 G21
    Date: 2018
  61. By: Park, Seonyoung; Shin, Donggyun
    Abstract: A recent literature uses accurate wage data from payroll records and provides compelling evidence against the conventional belief that nominal wages are downward sticky. This paper provides a unique contribution to this literature by conducting a formal analysis of the role of inflation in cyclical wage rigidity/flexibility. Analysis of payroll-based wage data from the Korean labor market for the period 1971 to 2014 finds that the degree of downward nominal wage flexibility is countercyclical, and the countercyclicality becomes stronger during a deflationary, relative to inflationary, recession. This serves as a counter-example to the conventional theory of cyclical wage rigidity.
    Keywords: Cyclicality, Downward nominal wage rigidity, Inflation, Recession, Establishment,
    Date: 2019
  62. By: Zhiwu Hong; Linlin Niu
    Abstract: We develop a parsimonious arbitrage-free yield net model for consistent bond pricing across maturities and issuers. Containing a core curve and multiple periphery curves, the yield net is spanned by three layers of factors: base factors spanning all curves, common spread factors spanning all periphery yield spreads, and specific factors each spanning yield spreads of a periphery issuer. Under the arbitrage-free assumption, we prove a parsimonious solution to the risk-neutral process that guarantees strong identification on the latent risk factors and parameters. We apply the model to Treasury yields of Germany and GIIPS countries from 2009 to 2016. The model fits data remarkably well and disentangles the common credit risk, market liquidity risk, and country-specific risks. The results demonstrate that relative risk pricing determines signs and magnitudes of the "flight to liquidity" effect and spillover effects among bonds of different issuers.
    Keywords: Term structure models, European debt crisis, Liquidity, Sovereign credit risk, Nelson-Siegel factors
    JEL: C33 E43 G15
    Date: 2019–01–30
  63. By: Joseph E Gagnon; Philip Turner
    Abstract: The more advanced economies in Asia are experiencing slower growth rates. Structural reforms are the most important policies for keeping growth rates up, but this paper takes the growth slowdown as given and focuses on implications for monetary policy. The key policy implication is the impor­tance of keeping core inflation at or above 2 percent to avoid prolonged periods of economic slack.
    Date: 2019–01
  64. By: Berlingieri, Giuseppe; Calligaris, Sara; Criscuolo, Chiara
    Abstract: Ever since Moore (1911) a large empirical and theoretical literature has established the existence of a firm size-wage premium. At the same time, a second regularity in empirical work, linking size and productivity, has inspired a vast literature in multiple fields. However, the majority of the existing evidence is based on manufacturing data only. With manufacturing nowadays accounting for a very small share of the economy in many countries, whether productivity, size, and wages are closely linked, and how tight this link is across sectors, is still an open question. Using a unique dataset that collects micro-aggregated firm-level information on productivity, size, and wages for the entire economy in 17 countries over the 1994-2012 period, this paper unveils a much more subtle picture. First, while in the manufacturing sector both productivity and wages increase monotonically with firm size, the same is not true in the service sector. Second, a tight and positive link between wages and productivity is instead found in both manufacturing and services. The combination of these results suggests that, when looking at data for a much larger share of the economy, the "size-wage premium" becomes more a "productivity-wage premium". Unbundling the relationship between size, wages, and productivity has first-order policy implications for both workers and firms.
    Keywords: productivity; size-premium; wages
    JEL: D2 E2 J3
    Date: 2018–07
  65. By: Congressional Budget Office
    Abstract: CBO has examined various illustrative scenarios in which the federal government makes debt held by the public smaller than it would be if current laws remained generally unchanged. In those scenarios, the primary deficit—that is, the deficit excluding net outlays for interest—is reduced to make debt equal 41 percent, 78 percent, or 100 percent of gross domestic product (GDP) over the next 15 to 30 years. Two broad strategies are used: reducing the primary deficit by a constant share of GDP over time and reducing the primary deficit by an increasing share of GDP.
    JEL: E61 E62 E66 H50 H60 H61 H62 H63 H68
    Date: 2018–08–21
  66. By: Pietro Veronesi
    Abstract: I characterize a dynamic economy under general distributions of households’ risk tolerance, endowments, and beliefs about long-term growth. As the economy expands and the stock market rises (a) the fraction of households with declining consumption-share increases; (b) the wealth-share of high risk-tolerant households increases; (c) richer households’ wealth display a higher CAPM beta; and (d) households’ portfolios change qualitatively. A log-utility investor for instance borrows in contractions but lends in expansions. Variations in uncertainty and expected growth generate trading volume due to risk sharing. Higher uncertainty increases stock prices, risk premiums, volatility, wealth inequality and the dispersion of portfolio holdings, consistently with the events in the late 1990s.
    JEL: E21 G1 G11 G12
    Date: 2019–01
  67. By: Olivier Coibion; Yuriy Gorodnichenko; Michael Weber
    Abstract: We study how different forms of communication influence the inflation expectations of individuals in a randomized controlled trial. We first solicit individuals’ inflation expectations in the Nielsen Homescan panel and then provide eight different forms of information regarding inflation. Reading the actual Federal Open Market Committee (FOMC) statement has about the same average effect on expectations as simply being told about the Federal Reserve’s inflation target. Reading a news article about the most recent FOMC meetings results in a forecast revision which is smaller by half. Our results have implications for how central banks should communicate to the broader public.
    Keywords: expectations management, inflation expectations, surveys, communication, randomized controlled trial
    JEL: E31 C83 D84
    Date: 2019
  68. By: Congressional Budget Office
    Abstract: CBO estimated in February 2009 that spending under the American Recovery and Reinvestment Act of 2009 (ARRA) for Supplemental Nutrition Assistance Program (SNAP) benefits would total $19 billion from 2009 to 2013. Actual outlays were $22 billion more than that amount. This report explains CBO’s calculations, identifies factors that contributed to the underestimate, and examines factors affecting ARRA-related spending on SNAP for 2014 to 2019.
    JEL: E62 E65 H50 H53 I30 I38
    Date: 2018–12–20
  69. By: Artem Kochnev
    Abstract: The paper investigates how war and the war-related government policies affected economic activity of the separatist-controlled areas of Ukraine. The paper applies a quasi-experimental study design to estimate the impact of two events on the separatist-controlled areas the introduction of the separatist control and the introduction of the second round of the trade ban, which was imposed by the government of Ukraine on the separatist-controlled territories in 2017. Using a difference-in-difference estimation procedure that controls for the yearly and monthly effects, individual fixed effects, and the region-specific time shocks, the study finds that the separatist rule decreased the economic activity by 38% in the Donetsk region and 51% in the Luhansk region according to the preferred specifications. At the same time, the trade ban of the year 2017 against the major industrial enterprises of the separatist-controlled areas decreased luminosity by 20%. The paper argues that the trade disruptions due to the war actions were nested within the negative effect of the separatist rule and accounted for half of it.
    Keywords: costs of war, satellite data, trade, Ukraine crisis, political economy
    JEL: D74 E01 E20 F51
    Date: 2019–01
  70. By: Bahruddin, Wan Athirah; Masih, Mansur
    Abstract: Lending interest rate has an inherent implicit cost on the credit issued by banks with implication on loan defaults. In this regard, high level of non-performing loans ( NPLs) will depress economic growth owing to many banks refusing to lend. This paper makes the initial attempt to test the non-linear asymmetric relationships between lending interest rate and NPLs by using the NARDL approach and provides a direction of Granger causality between the lending interest rate and NPLs. Malaysia is used as a case study. The finding tends to indicate that lending interest rate and NPLs has an asymmetric relationship in the short-run and symmetric relationship in the long-run. This paper suggests that banks can improve their quality credit management by streamlining their collection process and the quality of customers in order to reduce the number of NPLs in the short-run. Besides, banks can keep their total risk low by diversifying their loan portfolios.
    Keywords: Lending interest rates, non-performing loans, ARDL, NARDL, Malaysia
    JEL: C22 C58 E44
    Date: 2018–12–31
  71. By: Jens Klose (THM Business School)
    Abstract: This article introduces a new indicator to measure redenomination risks in Euro area countries. The measure is based on survey data. The influence of this indicator in determining sovereign bond yield spreads is tested using an ARDL-approach. The results for ten EMU countries in the period June 2012 to January 2018 show that the risk of a depreciation is almost abandoned for Euro area countries, i.e. the former crisis countries Ireland and Portugal. If anything an appreciation may occur for some countries once they leave the EMU. The only countries facing depreciation problems once leaving the monetary union are Italy and to some extent Spain.
    Keywords: Redenomination Risk, Euro Area, Exit
    JEL: E43 G01
    Date: 2019
  72. By: Pandey, Radhika (National Institute of Public Finance and Policy); Sapre. Amey (National Institute of Public Finance and Policy); Sinha, Pramod (National Institute of Public Finance and Policy)
    Abstract: Identifiation of primary economic activity of firms is a prerequisite for compiling several macro aggregates. In this paper we take a statistical approach to understand the extent of changes in primary economic activity of firms over time and across different industries. We use the history of economic activity of over 46000 firms spread over 25 years from CMIE Prowess to identify the number of times firms change the nature of their business. Using the count of changes, we estimate Poisson and Negative Binomial regression models to gain predictability over changing economic activity across industry groups. We show that a Poisson model accurately characterizes the distribution of count of changes across industries and that firms with a long history are more likely to have changed their primary economic activity over the years. Findings show that classification can be a crucial problem in a large dataset like the MCA21 and can even lead to distortions in value addition estimates at the industry level.
    Keywords: Economic Activity ; Manufacturing ; India ; Poisson Distribution
    JEL: E00 E01
    Date: 2019–01
  73. By: Giorgia Callegaro; Claudia Ceci; Giorgio Ferrari
    Abstract: We consider a government that aims at reducing the debt-to-gross domestic product (GDP) ratio of a country. The government observes the level of the debt-to-GDP ratio and an indicator of the state of the economy, but does not directly observe the development of the underlying macroeconomic conditions. The government's criterion is to minimize the sum of the total expected costs of holding debt and of debt's reduction policies. We model this problem as a singular stochastic control problem under partial observation. The contribution of the paper is twofold. Firstly, we provide a general formulation of the model in which the level of debt-to-GDP ratio and the value of the macroeconomic indicator evolve as a diffusion and a jump-diffusion, respectively, with coefficients depending on the regimes of the economy. These are described through a finite-state continuous-time Markov chain. We reduce via filtering techniques the original problem to an equivalent one with full information (the so-called separated problem), and we provide a general verification result in terms of a related optimal stopping problem under full information. Secondly, we specialize to a case study in which the economy faces only two regimes, and the macroeconomic indicator has a suitable diffusive dynamics. In this setting we provide the optimal debt reduction policy. This is given in terms of the continuous free boundary arising in an auxiliary fully two-dimensional optimal stopping problem.
    Date: 2019–01
  74. By: Patnaik, Ila (National Institute of Public Finance and Policy); Mittal, Shalini (National Institute of Public Finance and Policy); Pandey, Radhika (National Institute of Public Finance and Policy)
    Abstract: In recent years, many emerging economies including India have adopted inflation targeting framework. Post the global financial crisis, there is a growing debate on whether monetary policy should target financial stability. Using India as a case study, we present an empirical approach to assess whether monetary policy can target financial stability. This is done by examining the trade-off between price and financial stability for India. Using correlation between price and financial cycles, we find that a trade-off exists between price and financial stability. Our finding is robust to a series of robustness checks. Our study has implications for the conduct of monetary policy in emerging economies. Presence of a trade-off may constrain the ability of a central bank in emerging economies to target financial stability with monetary policy instrument.
    Date: 2019–01
  75. By: Christophe Blot (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: The recent economic slowdown in the euro area depends on supply-side and demand-side factors with different consequences on potential output. On the one hand, it may grow at a low pace for a long time; on the other hand, it may soon grow a bit faster. The ECB strategy has to adapt to these different possible outcomes. Anyway, we argue that the ECB has rooms for manoeuvre whatever the trend in output
    Keywords: ECB; Monetary Policy; Growth; Slowdown
    Date: 2018–11
  76. By: Claude DIEBOLT; Charlotte LE CHAPELAIN
    Abstract: The aim of this entry is (I) to undertake a critical reading of the seminal contribution of Lucas’ work to construct a model which represents the complexity of the links between human capital and economic growth (II) to review the empirical assessments of its endogenous nature.
    Keywords: Economic Growth, Human Capital.
    JEL: E13 I20 I25 N30
    Date: 2019
  77. By: Carlos Gustavo Machicado Salas (Instituto de Estudios Avanzados en Desarrollo (INESAD))
    Abstract: Este trabajo analiza el crecimiento económico de largo plazo de Bolivia entre 1950 y 2015, identificando sus causas próximas a través de un ejercicio de contabilidad del crecimiento, que considera los efectos directos e indirectos de la Productividad Total de Factores (PTF) sobre el PIB por trabajador. La novedad es que la medida de PTF que se obtiene toma en cuenta el ajuste por calidad y uso de los factores de producción (capital y trabajo). Adicionalmente se hacen ejercicios de contabilidad del desarrollo (en tasas de crecimiento y niveles) comparando el desempeño de la economía boliviana con la economía chilena, encontrando que a pesar de que se han cerrado ciertas brechas con Chile, en los últimos años, sigue siendo la baja productividad el talón de Aquiles de la economía boliviana. Finalmente, se analizan las causas profundas del crecimiento económico boliviano, poniendo énfasis en los factores institucionales, externos, de eficiencia de la inversión y financieros. Se encuentra que los términos de intercambio y la estabilidad macroeconómica son los determinantes fundamentales de la PTF en Bolivia.
    Keywords: Crecimiento y Desarrollo, Productividad Total de Factores, Datos
    JEL: E23 O11 O47
    Date: 2018–12
  78. By: George Pagoulatos
    Abstract: Lax fiscal oversight, loose credit following euro-accession, and credibility conferred by Eurozone membership led Greece to a debt-driven growth funded by external capital inflows. These private flows came to a “sudden stop” in 2010, forcing a bailout. The first adjustment program viewed the problem as one of liquidity rather than solvency, imposing heavily front-loaded austerity, that accentuated recession and led to complete target slippage. The second program included debt restructuring, exhibited greater flexibility, and focused on decreasing labour costs to improve competitiveness. The third program, whose size increased by the 2015 deterioration of the economy, contained much of what had been left undone, and was the only one completed. Despite deleveraging, both public and private debt as share of GDP continued to grow because of the steep recession, procyclical policy mix, and bank-sovereign doom loop. Eventually, hard external conditionality overcame much of the resistance of status quo coalitions to reforms. Despite the successive reform programmes, the Greek economy continues to suffer a weak public administration, slow functioning justice system, low savings, high consumption, small average business size, and a still weak export sector. Prolonged austerity has left a heavy legacy in terms of poverty, social vulnerability, and weakened productive capacity, as steep disinvestment and the decline of employment are dragging down the economy’s growth potential. On the other hand, the twin deficits (fiscal and current account) have been eradicated, a wide array of significant structural reforms have been implemented, exports have increased, and the administrative capacity of the state has relatively improved. Greece represented a Mediterranean market economy, driven by domestic demand and deficit-financing; the crisis has brought about an evolving rebalancing of the economy towards a fiscally disciplined, reform-driven, and more export-oriented growth model.
    Keywords: Lax fiscal oversight, credibility, Eurozone, growth, bailout, liquidity, austerity, competitiveness, reforms, Greece
    Date: 2018–11
  79. By: Andrés Rius (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Carolina Román (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía)
    Abstract: Throughout the world, stable regional patterns of private savings are hard to come by. For example, Latin America’s saving rates have been, for a long time, below those of countries with similar levels of development. Those same savings rates have been growing lately, in almost as intriguing manner. These stylized facts remain intellectual puzzles and development policy challenges. In addition, while it may be true that savings often seem to follow rather than lead the growth process, it has been shown that in the long run, it is not possible to grow sustainably with domestic savings persistently below investments. For these and other scientific considerations, understanding the determinants of savings is an important research objective that has previously escaped analysts that tried to make sense of results from varied, distinct models. This article explores one set of variables much aligned with the rise of behavioral economics, which could add to the literature on the macroeconomics of savings. Specifically, the article revisits the hypothesis that, as there is evidence of emulation patterns between consumers, there might be international (macroeconomic) “emulation”. The interdependence would arise from consumers basing their consumption decisions on relative rather absolute income, their choices incorporating increasing amounts of information about consumption standards in rich countries, and this pushing up propensities to consume and down savings ratios. We test demonstration effect theories exploiting recent international data on savings, incomes, and means of exposure of global consumers to the evolution of savings patterns. With the resulting country panels, we find some evidence in favour of demonstration effect for the period when television was spreading around the world and much consistent with the same effect for the more recent times when the Internet was rapidly becoming a preferred means of discovering foreign consumption standards. We speculate about the conjectural mechanisms that could make sense of the results.
    Keywords: private saving rates, demonstration effect, behavioral economics
    JEL: E21 O16
    Date: 2018–09
  80. By: Bentsen, Kristian Hedeager (University of Copenhagen); Munch, Jakob R. (University of Copenhagen); Schaur, Georg (University of Tennessee)
    Abstract: Education policies depend in part on the presence of externalities, but very little evidence exists to confirm the existence of such externalities. In this paper we investigate if there are spillover effects from education within peer groups at the workplace. We estimate the effect of increasing the share of higher educated workers in close peer groups on wages, using a rich data source linking workers to workplaces and specific occupations. Our empirical approach accounts for the endogenous sorting of workers into peer groups and workplaces, and, at the same time avoids the reflection problem. In our main specification we find statistically significant but economically small peer effects across all occupations. The magnitude of the effect differs across length and type of education, as well as across occupations and peer group- and workplace size.
    Keywords: education externality, peer effects, match worker-firm data
    JEL: E20 J24
    Date: 2018–12
  81. By: Congressional Budget Office
    Abstract: The Congress provides the State Department, the Agency for International Development (USAID), and other agencies a “base budget†each year to fund ongoing activities related to international affairs. The agencies have received other “nonbase†funding in recent years, in the form of supplemental appropriations, emergency appropriations, and funding for overseas contingency operations. In this report, CBO analyzes the recent use of such nonbase appropriations for international affairs activities.
    JEL: E61 E62 F33 F34 F35 F51 F52 F53 F55 H12 H56 H57 H61 H84 H87 N40 H42 O19
    Date: 2018–12–10
  82. By: Yu Chen (University of Calgary); Matthew Doyle (Department of Economics, University of Waterloo); Francisco Gonzalez (Department of Economics, University of Waterloo)
    Abstract: We propose a definition of bad jobs and a competitive search model that addresses why workers seek such jobs, why employers create them and why market forces allow bad jobs to persist. The model features competitive search equilibria in which unemployed workers search for jobs that are unambiguously bad in a well defined sense. Concretely, these are jobs with suboptimal career prospects and jobs characterized by employers' underinvestment in labor. Our theory builds on the insight that when current employers can counter outside offers, potential employers who do not observe workers' productivity in their current jobs use wages as a signal of workers' willingness to switch jobs. In turn, this implies that the wage contracts that employers post in the market for unemployed workers not only direct job search but also signal career prospects. Bad jobs are a symptom of coordination failure stemming from a conflict between the signaling and allocative roles of wage contracts. Our analysis brings out potential difficulties inherent to the economics of bad jobs.
    JEL: D82 E24 J31
    Date: 2019–01
  83. By: Emter, Lorenz (Central Bank of Ireland); Herzberg, Valerie (Central Bank of Ireland)
    Abstract: Performance related government bonds such as GDP-linked bonds can play a role in enhancing the architecture of the Economic Monetary Union. This Letter highlights the potential contribution of such instruments to reduce and share risks outside of financial crisis through more integrated capital markets. For governments to avail of this insurance, however, and to issue these bonds requires the additional cost or premium to be contained. Using the Capital Asset Pricing Model as a yardstick, we find that in the euro area this is likely to be the case for large issuers. Consequently, large member states should lead the development of this market.
    Date: 2018–11
  84. By: Sonora, Robert
    Abstract: This paper investigates the relationship between the rule of law and income inequality and poverty in twenty Latin American countries using an unbalanced panel over the period 1995 - 2014. These results are then compared to estimates for non-Latin American counties. Using feasible GLS panel methods, we finnd that in many cases, improvements to legal systems reduce inequality and poverty in Latin America while having the opposite effect in the rest of the world. Results are robust to different definitions of inequality and rule of law. Protection of property rights is the most significant rule of law indicator for Latin America economies.
    Keywords: Income Inequality, Poverty Growth, Rule of law, Panel data, Institutions
    JEL: D63 E02 I32 K42 O43 O54
    Date: 2019–01–05
  85. By: Götz, Martin
    Abstract: This paper analyzes the effect of financial constraints on firms' corporate social responsibility. Exploiting heterogeneity in firms' exposure to a monetary policy shock in the U.S., which reduced financial constraints for some firms, I find that firms increase their environmental responsibility. I use facility-level data to account for unobservable time-varying influences on pollution and find that toxic emissions decrease when parent companies are more exposed to the monetary policy shock. I further find that these facilities are also more likely to implement pollution abatement activities. Examining within-parent company heterogeneity I find that pollution abatement investments center on facilities at greater risk of facing additional costs due to environmental regulation. The findings are consistent with the idea that a reduction in financial constraints reduces pollution as it allows firms to implement pollution abatement measures.
    Keywords: Corporate Social Responsibility,Emissions,Financial Constraints,Pollution,Bond Markets
    JEL: G32 E52 Q52 Q53
    Date: 2018

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