nep-mac New Economics Papers
on Macroeconomics
Issue of 2019‒04‒01
eighty-six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Self-Fulfilling Debt Crises, Fiscal Policy and Investment By Carlo Galli
  2. The Limits of Forward Guidance By Campbell, Jeffrey R; Ferroni, Filippo; Fisher, Jonas; Melosi, Leonardo
  3. Inflation expectations: Review and evidence By M. Ayhan Kose; Hideaki Matsuoka; Ugo Panizza; Dana Vorisek
  4. Changes in the inflation target and the comovement between inflation and the nominal interest rate By Yunjong Eo; Denny Lie
  5. Understanding Inflation in Emerging and Developing Economies By Ha, Jongrim; Kose, Ayhan; Ohnsorge, Franziska
  6. Inflation Expectations: Review and Evidence By Kose, Ayhan; Matsuoka, Hideaki; Panizza, Ugo; Vorisek, Dana
  7. Stagnation vs singularity: The global implications of alternative productivity growth scenarios By Warwick J. McKibbin; Adam Triggs
  8. Do Greasy Wheels Curb Inequality? By Cynthia L. Doniger
  9. International Spillovers of U.S. Monetary Policy By Demir, Ishak
  10. Regime-Dependent Effects of Uncertainty Shocks: A Structural Interpretation By Stéphane Lhuissier; Fabien Tripier
  11. A Theory of Housing Demand Shocks By Liu, Zheng; Wang, Pengfei; Zha, Tao
  12. Macroprudential Policy in the New Keynesian World By Hans Gersbach; Volker Hahn; Yulin Liu
  13. A Theory of Housing Demand Shocks By Liu, Zheng; Wang, Pengfei; Zha, Tao
  14. Changing Business Cycles: The Role of Women’s Employment By Stefania Albanesi
  15. Duration Dependence, Monetary Policy Asymmetries, and the Business Cycle By Travis J. Berge; Damjan Pfajfar
  16. Business Cycles Across Space and Time By Francis, Neville; Owyang, Michael T.; Soques, Daniel
  17. State-dependent Monetary Policy Regimes By Shayan Zakipour-Saber
  18. New Financial Stability Governance Structures and Central Banks By Rochelle M. Edge; J. Nellie Liang
  19. Monetary Policy and Financial System Resilience By Bruni, Franco; Lopez, Claude
  20. The Rationality Bias By Hagenhoff, Tim; Lustenhouwer, Joep
  21. Economic and regulatory aspects of crypto-assets By Andrea Caponera; Carlo Gola
  22. Can an ageing workforce explain low inflation? By Benoit Mojon; Xavier Ragot
  23. Optimal Monetary Policy for the Masses By Bullard, James B.; DiCecio, Riccardo
  24. Government ideology and monetary policy in OECD countries By Doge Cahan; Luisa Dörr; Niklas Potrafke
  25. Macroeconomic Effects of Debt Relief: Consumer Bankruptcy Protections in the Great Recession By Auclert, Adrien; Dobbie, Will; Goldsmith-Pinkham, Paul
  26. New Evidence on the Effects of Quantitative Easing By Valentin Jouvanceau
  27. Why do fiscal multipliers depend on fiscal positions? By Raju Huidrom; M. Ayhan Kose; Jamus J. Lim; Franziska L. Ohnsorge
  28. A Quantitative Analysis of Countercyclical Capital Buffers By Faria-e-Castro, Miguel
  29. Labor shares in the EU - sectoral effects and the role of relative prices By Istvan Konya; Judit Kreko; Gabor Oblath
  30. Independent Monetary Policy Versus a Common Currency: A Macroeconomic Analysis for the Czech Republic Through the Lens of an Applied DSGE Model By Jan Bruha; Jaromir Tonner
  31. Foreign Exchange Reserves as a Tool for Capital Account Management By Davis, J. Scott; Fujiwara, Ippei; Huang, Kevin X. D.; Wang, Jiao
  32. Introducing the Distributional Financial Accounts of the United States By Michael M. Batty; Jesse Bricker; Joseph S. Briggs; Elizabeth Ball Holmquist; Susan Hume McIntosh; Kevin B. Moore; Eric Nielsen; Sarah Reber; Molly Shatto; Kamila Sommer; Tom Sweeney; Alice M. Henriques
  33. Macroeconomic Effects of Debt Relief: Consumer Bankruptcy Protections in the Great Recession By Adrien Auclert; Will S. Dobbie; Paul Goldsmith-Pinkham
  34. Firms' Price, Cost and Activity Expectations: Evidence from Micro Data By Lena Boneva; James Cloyne; Martin Weale; Tomasz Wieladek
  35. Economic Uncertainty and Structural Reforms By Alessandra Bonfiglioli; Gino Gancia
  36. Preface to the Chinese Edition of A History of Macroeconomics from Keynes to Lucas and Beyond By Michel De Vroey
  37. Risk aversion among Australian households By Robert Breunig; Owen Freestone
  38. Robots in a Small Open Economy By Stéphane Auray; Aurélien Eyquem
  39. Global Inflation Synchronization By Ha, Jongrim; Kose, Ayhan; Ohnsorge, Franziska
  40. The Persistent Employment Effects of the 2006-09 U.S. Housing Wealth Collapse By Bhattarai, Saroj; Schwartzman, Felipe; Yang, Choongryul
  41. Forecasting Financial Stress Indices in Korea: A Factor Model Approach By Hyeongwoo Kim; Wen Shi; Hyun Hak Kim
  42. The "Armey Curve" in Bulgaria (2000-18): Theoretical Considerations and Empirical Results By Vasilev, Aleksandar
  43. Identifying Credit Supply Shocks in Turkey By Tayyar Buyukbasaran; Gokce Karasoy Can; Hande Kucuk
  44. A Short Note on Aggregating Productivity By David Baqaee; Emmanuel Farhi
  45. Idiosyncratic shocks: a new procedure for identifying shocks in a VAR with application to the New Keynesian model By Wickens, Michael R.
  46. On the Heterogeneous Welfare Gains and Losses from Trade By Carroll, Daniel R.; Hur, Sewon
  47. The Macroprudential Policy Framework Needs to Be Global By Lopez, Claude; Bruni, Franco
  48. The human capital stock: a generalized approach: comment By Caselli, Francesco; Ciccone, Antonio
  49. GDP is a measure of output, not welfare. Or, HOS meets the SNA By Nicholas Outlon
  50. Prospects for Inflation in a High Pressure Economy: Is the Phillips Curve Dead or is it just Hibernating? By Daly, Mary C.
  51. Exchange Rate Pass-Through to Consumer Prices: The Increasing Role of Energy Prices By Hyeongwoo Kim; Ying Lin; Henry Thompson
  52. Exchange Rate Undershooting: Evidence and Theory By Hettig, Thomas; Müller, Gernot; Wolf, Martin
  53. An ARDL Approach on Crude Oil Price and Macroeconomic Variables By Seuk Wai, Phoong
  54. On the empirical relevance of the Lucas supply curve. (A note) By Claude Bismut; Ismael Ramajo
  55. Central Bank Intervention, Bubbles and Risk in Walrasian Financial Markets By Chang, C-L.; Ilomäki, J.; Laurila, H.; McAleer, M.J.
  56. Does the Great Recession imply the end of the Great Moderation? International evidence By Amélie Charles; Olivier Darné; Laurent Ferrara
  57. The Future of the Fed’s Balance Sheet By Harker, Patrick T.
  58. Long-term Trends in Gross Domestic Expenditure in Indonesia: Provisional Estimates By van der Eng, Pierre
  59. Bayesian MIDAS penalized regressions: estimation, selection, and prediction By Matteo Mogliani
  60. Unemployment Duration Variance Decomposition a la ABS: Evidence from Spain By Güell, Maia; Lafuente, Cristina
  61. The Term Structure of Equity Risk Premia By Ravi Bansal; Shane Miller; Dongho Song; Amir Yaron
  62. From carry trades to trade credit: financial intermediation by non-financial corporations By Bryan Hardy; Felipe Saffie
  63. The lost ones: the opportunities and outcomes of non-college-educated Americans born in the 1960s By Margherita Borella; Mariacristina De Nardi; Fang Yang
  64. Baltic Integration and the Euro By Ljungberg, Jonas
  65. The Bumpy Road to 2 Percent: Managing Inflation in the Current Economy By Daly, Mary C.
  66. Information, Secondary Market Trade, and Asset Liquidity By Athanasios Geromichalos; Kuk Mo Jung; Seungduck Lee; Dillon Carlos
  67. Labor share and growth in the long run By McAdam, Peter; Bridji, Slim; Charpe, Matthieu
  68. Decomposition of Labor Earnings Growth: Recovering Gaussianity? By Pierre Pora; Lionel Wilner
  69. Participation Following Sudden Access By Fuchs-Schündeln, Nicola; Haliassos, Michael
  70. Schätzung von Produktionspotenzial und -lücke: Eine Analyse des EU-Verfahrens und mögliche Verbesserungen By Ademmer, Martin; Boysen-Hogrefe, Jens; Carstensen, Kai; Hauber, Philipp; Jannsen, Nils; Kooths, Stefan; Rossian, Thies; Stolzenburg, Ulrich
  71. FX intervention and domestic credit: Evidence from high-frequency micro data By Boris Hofmann; Hyun Song Shin
  72. Does Price Regulation Affect Competition? Evidence from Credit Card Solicitations By Yiwei Dou; Geng Li; Joshua Ronen
  73. Asymmetric competition, risk, and return distribution By Mundt, Philipp; Oh, Ilfan
  74. An analysis of the global oil market using SVARMA models By Mala Raghavan
  75. Sources and implications of resource misallocation: new evidence from firm-level marginal products and user costs By Simone Lenzu; Francesco Manaresi
  76. The Role of Islamic Crowdfunding Mechanisms in Business and Business Development By Achsania Hendratmi
  77. The Total Risk Premium Puzzle By Jordà, Òscar; Schularick, Moritz; Taylor, Alan M.
  78. Concentration in International Markets: Evidence from US Imports By Alessandra Bonfiglioli; Rosario Crinò; Gino Gancia
  79. The Total Risk Premium Puzzle? By Jorda, Oscar; Schularick, Moritz; Taylor, Alan M.
  80. Dirty float or clean intervention? The Bank of England in the foreign exchange market By Naef, Alain
  81. When are Google data useful to nowcast GDP? An approach via pre-selection and shrinkage By Laurent Ferrara; Anna Simoni
  82. Does Higher Energy Efficiency Lower Economy-Wide Energy Use? By Sebastian Rausch; Hagen Schwerin
  83. Eligibility, Experience Rating, and Unemployment Insurance Take-up By Stéphane Auray; David L. Fuller
  84. Changing impact of shocks: a time-varying proxy SVAR approach By Haroon Mumtaz; Katerina Petrova
  85. Stress testing household balance sheets in Luxembourg By Giordana, Gaston; Ziegelmeyer, Michael
  86. Bayesian Structural VAR models: a new approach for prior beliefs on impulse responses By Martin Bruns; Michele Piffer

  1. By: Carlo Galli (Centre for Macroeconomics (CFM); University College London (UCL))
    Abstract: This paper studies the circular relationship between sovereign credit risk, government fiscal and debt policy, and output. I consider a sovereign default model with fiscal policy and private capital accumulation. I show that, when fiscal policy responds to borrowing conditions in the sovereign debt market, multiple equilibria exist where the expectations of lenders are self-fulfilling. In the bad equilibrium, pessimistic beliefs make sovereign debt costly. The government substitutes borrowing with taxation, which depresses private investment and future output, increases default probabilities and verifies lenders’ beliefs. This result is reminiscent of the European debt crisis of 2010-12: while recessionary, fiscal austerity may be the government best response to excessive borrowing costs during a confidence crisis.
    Keywords: Self-fulfilling debt crises, Soverign default, Multiple equilibria, Fiscal austerity
    JEL: E44 E62 F34
    Date: 2019–02
  2. By: Campbell, Jeffrey R; Ferroni, Filippo; Fisher, Jonas; Melosi, Leonardo
    Abstract: The viability of forward guidance as a monetary policy tool depends on the horizon over which it can be communicated and its influence on expectations over that horizon. We develop and estimate a model of imperfect central bank communications and use it to measure how effectively the Fed has managed expectations about future interest rates and the influence of its communications on macroeconomic outcomes. Standard models assume central banks have perfect control over expectations about the policy rate up to an arbitrarily long horizon and this is the source of the so-called "forward guidance puzzle.'' Our estimated model suggests that the Fed's ability to affect expectations at horizons that are sufficiently long to give rise to the forward guidance puzzle is substantially limited. We also find that imperfect communication has a significant impact on the propagation of forward guidance. Finally, we develop a novel decomposition of the response of the economy to forward guidance and use it to show that empirically plausible imperfect forward guidance has a quantitatively important role bringing forward the effects of future rate changes and that poor communications have been a source of macroeconomic volatility.
    Keywords: business cycles; central bank communication; forward guidance puzzle; monetary policy; Risk management
    JEL: E0
    Date: 2019–03
  3. By: M. Ayhan Kose; Hideaki Matsuoka; Ugo Panizza; Dana Vorisek
    Abstract: This paper presents a comprehensive examination of the determination and evolution of inflation expectations, with a focus on emerging market and developing economies (EMDEs). The results suggest that long-term inflation expectations in EMDEs are not as well anchored as those in advanced economies, despite notable improvements over the past two decades. Indeed, in EMDEs, long-term inflation expectations are more sensitive to both domestic and global inflation shocks. However, EMDEs tend to be more successful in anchoring inflation expectations in the presence of an inflation targeting regime, high central bank transparency, strong trade integration, and a low level of public debt.
    Keywords: inflation, inflation expectations, monetary policy, emerging markets, developing economies
    JEL: E31 E37 E40 E50
    Date: 2019–03
  4. By: Yunjong Eo; Denny Lie
    Abstract: Does raising an inflation target require increasing the nominal interest rate in the short run? We answer this question using a standard New Keynesian model with rich backward-looking elements. We first analytically show that the short-run comovement between inflation and the nominal interest rate is less likely to be positive, all else equal, as the monetary authority reacts more aggressively to the deviation of inflation from its target or as more backward-looking elements are incorporated into the model. Meanwhile, features of the model that enhance forward-looking behavior, such as partial price indexation to the inflation target or a lower degree of price rigidity, are shown to help increase the likelihood of positive comovement. However, we find that this so called Neo-Fisherism is most likely to hold even with a significant degree of backward-lookingness in the model, unless the monetary authority reacts to inflation in an extremely aggressive manner, close to strict inflation targeting. In addition, we estimate New Keynesian models of the U.S. economy and confirm our results that the U.S. economy exhibits Neo-Fisherism: raising the inflation target necessitates a short-run increase in the nominal interest rate. This finding is robust to empirically-plausible parameterizations of the model and to the specification of price indexation to the inflation target in firms’ price-setting process.
    Keywords: Neo-Fisherism, inflation expectations, a Taylor-type rule, strict inflation targeting, hybrid NKPC
    JEL: E12 E32 E58 E61
    Date: 2019–03
  5. By: Ha, Jongrim; Kose, Ayhan; Ohnsorge, Franziska
    Abstract: Emerging market and developing economies (EMDEs) have experienced an extraordinary decline in inflation since the early 1970s. After peaking in 1974 at 17.3 percent, inflation in these economies declined to 3.5 percent in 2017. Despite a checkered history of managing inflation among many EMDEs, disinflation occurred across all regions. This paper presents a summary of our recent book, "Inflation in Emerging and Developing Economies: Evolution, Drivers, and Policies," that analyzes this remarkable achievement. Our findings suggest that many EMDEs enjoy the benefits of stability-oriented and resilient monetary policy frameworks, including central bank transparency and independence. Such policy frameworks need to be complemented by strong macroeconomic and institutional arrangements. Inflation expectations are more weakly anchored in EMDEs than in advanced economies. In EMDEs that do not operate inflation targeting frameworks, exchange rate movements tend to have larger and more persistent effects on inflation.
    Keywords: Globalization; inflation; monetary policy; Monetary Systems; prices
    JEL: E31 E42 E52 E58
    Date: 2019–03
  6. By: Kose, Ayhan; Matsuoka, Hideaki; Panizza, Ugo; Vorisek, Dana
    Abstract: This paper presents a comprehensive examination of the determination and evolution of inflation expectations, with a focus on emerging market and developing economies (EMDEs). The results suggest that long-term inflation expectations in EMDEs are not as well anchored as those in advanced economies, despite notable improvements over the past two decades. Indeed, in EMDEs, long-term inflation expectations are more sensitive to both domestic and global inflation shocks. However, EMDEs tend to be more successful in anchoring inflation expectations in the presence of an inflation targeting regime, high central bank transparency, strong trade integration, and a low level of public debt.
    Keywords: developing economies; emerging markets; inflation; Inflation expectations; monetary policy
    JEL: E31 E37 E40 E50
    Date: 2019–03
  7. By: Warwick J. McKibbin; Adam Triggs
    Abstract: Productivity growth has flat-lined in most economies despite rapid advances in technology. Economists suggest competing explanations for this paradox. Some argue the current stagnation will persist given deep structural challenges, arguing that recent technological advances are no match for those of the past. Others argue that the historical time-lag between technological advances and increased productivity means a productivity surge is just around the corner. The paper explores the implications of alternative productivity growth scenarios for the global economy, particularly for growth, labor markets and the flows of trade and capital. The paper explores the appropriate policy response under these alternative scenarios. It highlights the importance of productivity-enhancing reforms and the first-mover benefits that can flow to economies which move closer to the productivity frontier. It explores the factors that constrain an economy’s ability to reap the full benefits of any future productivity boom. It highlights the consequences of asymmetric increases in productivity across countries for both booming and non-booming economies and the role of monetary and fiscal policies, with particular warnings for the stability of the euro zone. Finally, it highlights the implications of asymmetric productivity changes across sectors and the importance of flexibility in labor, capital and product markets.
    Keywords: Econometric modelling, Computable general equilibrium models, productivity, monetary policy, fiscal policy, international trade and finance, globalization
    JEL: C5 C68 D24 E2 E5 E6 E62 F1 F2 F3 F4
    Date: 2019–03
  8. By: Cynthia L. Doniger
    Abstract: I document a disparity in the cyclicality of the allocative wage-the labor costs considered when deciding to form or dissolve an employment relationship-across levels of educational attainment. Specifically, workers with a bachelors degree or more exhibit an allocative wage that is highly pro-cyclical while high school dropouts exhibit no statistically discernible cyclical pattern. I also assess the response to monetary policy shocks of both employment and allocative wages across education groups. The less educated respond to monetary policy shocks on the employment margin while the more educated respond on the wage margin. An important takeaway is that conventional monetary policy easing reduces employment inequality but increases wage inequality. I embed these findings in a New Keynesian framework that includes price and heterogeneous wage rigidity and show that heterogeneity results in welfare losses due to fluctuations that exceed those of the output-gap and p rice-level equivalent representative agent economy. The excess welfare loss is borne by the least educated.
    Keywords: Inequality ; Monetary policy ; Wage rigidity
    JEL: E24 E52 J41
    Date: 2019–03–27
  9. By: Demir, Ishak
    Abstract: We estimate a structural dynamic factor model on large panel quarterly data to analyse the spillovers of U.S. monetary policy to the advanced economies and emerging and frontier market economies. The estimated model suggests that monetary contraction in U.S. leads to a significant decrease in real GDP with typical inverted hump-shape almost for all countries. It reduces permanently aggregate price level, increases interest rate and leads appreciation of U.S. dollar. However, contagion of U.S. monetary policy to the individual countries shows heterogeneity. For instance, its impact is larger in developing countries. We also find that global financial crisis has amplified the impact of U.S monetary policy on the rest of world in particular on developing countries. Lastly, the empirical results suggest that the cross-country heterogeneity in responses may be consequence of difference in country-specific characteristics such as exchange rate regimes, currency of price settings of firms, central bank independence and geographical distance from Unites States.
    Keywords: cross-country heterogeneity,country-specific characteristic,international monetary spillovers,structural factor model,monetary policy
    JEL: C38 E43 E52 E58 F42 G12
    Date: 2019
  10. By: Stéphane Lhuissier; Fabien Tripier
    Abstract: Using a Markov-switching VAR, we show that the effects of uncertainty shocks on output are four times higher in a regime of economic distress than in a tranquil regime. We then provide a structural interpretation of these facts. To do so, we develop a business cycle model, in which agents are aware of the possibility of regime changes when forming expectations. The model is estimated using a Bayesian minimum distance estimator that minimizes, over the set of structural parameters, the distance between the regime-switching VAR-based impulse response functions and those implied by the model. Our results point to changes in the degree of financial frictions. We discuss the implications of this structural interpretation and show that the expectation effect of regime switching in financial conditions is an important component of the financial accelerator mechanism. If agents hold pessimistic expectations about future financial conditions, then shocks are amplified and transmitted more rapidly to the economy.
    Keywords: Uncertainty shocks, Regime switching, Financial frictions, Expectation effects.
    JEL: C32 E32 E44
    Date: 2019
  11. By: Liu, Zheng (Federal Reserve Bank of San Francisco); Wang, Pengfei (Hong Kong University of Science and Technology); Zha, Tao (Federal Reserve Bank of Atlanta)
    Abstract: Aggregate housing demand shocks are an important source of house price fluctuations in the standard macroeconomic models, and through the collateral channel, they drive macroeconomic fluctuations. These reduced-form shocks, however, fail to generate a highly volatile price-to-rent ratio that comoves with the house price observed in the data (the “price-rent puzzle”). We build a tractable heterogeneous-agent model that provides a microeconomic foundation for housing demand shocks. The model predicts that a credit supply shock can generate large comovements between the house price and the price-to-rent ratio. We provide empirical evidence from cross-country and cross-MSA data to support this theoretical prediction.
    JEL: E21 E27 E32
    Date: 2019–03–07
  12. By: Hans Gersbach (ETH Zurich, Switzerland); Volker Hahn (University of Konstanz, Germany); Yulin Liu (ETH Zurich, Switzerland)
    Abstract: We integrate banks and the coexistence of bank and bond financing into an otherwise standard New Keynesian framework. There are two policy-makers: a central banker, who can decide on short-term nominal interest rates, and a macroprudential policy-maker, who can vary aggregate capital requirements. The two policy instruments can be used to stabilize shocks, to moderate bank credit cycles, and to induce a more efficient allocation of resources across sectors. Moreover, we investigate the optimal combination of simple policy rules for interest rates and capital requirements. The optimal policy rules imply that the central bank should focus exclusively on price stability and the macroprudential policy-maker should react exclusively to changes in loan rate premia.
    Keywords: central banks, banking regulation, capital requirements, optimal monetary policy
    JEL: E52 E58 G28
    Date: 2018–08
  13. By: Liu, Zheng (Federal Reserve Bank of San Francisco); Wang, Pengfei (Hong Kong University of Science and Technology); Zha, Tao (Federal Reserve Bank of Atlanta)
    Abstract: Aggregate housing demand shocks are an important source of house price fluctuations in the standard macroeconomic models, and through the collateral channel, they drive macroeconomic fluctuations. These reduced-form shocks, however, fail to generate a highly volatile price-to-rent ratio that comoves with the house price observed in the data (the “price-rent puzzle”). We build a tractable heterogeneous-agent model that provides a microeconomic foundation for housing demand shocks. The model predicts that a credit supply shock can generate large comovements between the house price and the price-to-rent ratio. We provide empirical evidence from cross-country and cross-MSA data to support this theoretical prediction.
    Keywords: price-rent puzzle; heterogeneity; marginal agent; cutoff point; liquidity premium; price-to-rent ratio; collateral constraint
    JEL: E21 E44 G21
    Date: 2019–03–01
  14. By: Stefania Albanesi (University of Pittsburgh)
    Abstract: This paper studies the impact of changing trends in female labor supply on productivity, TFP growth and aggregate business cycles. We find that the growth in women’s labor supply and relative productivity added substantially to TFP growth from the early 1980s, even if it depressed average labor productivity growth, contributing to the 1970s productivity slowdown. We also show that the lower cyclicality of female hours and their growing share can account for a large fraction of the reduced cyclicality of aggregate hours during the great moderation, as well as the decline in the correlation between average labor productivity and hours. Finally, we show that the discontinued growth in female labor supply starting in the 1990s played a substantial role in the jobless recoveries following the 1990-1991, 2001 and 2007-2009 recessions. Moreover, it depressed aggregate hours, output growth and male wages during the late 1990s and mid 2000s expansions. These results suggest that continued growth in female employment since the early 1990s would have significantly improved economic performance in the United States.
    Keywords: female employment, business cycles, productivity slowdown, great moderation, jobless recoveries
    JEL: E17 E32 E37 J11 J21
    Date: 2019–03
  15. By: Travis J. Berge; Damjan Pfajfar
    Abstract: We produce business cycle chronologies for U.S. states and evaluate the factors that change the probability of moving from one phase to another. We find strong evidence for positive duration dependence in all business cycle phases but find that the effect is modest relative to other state- and national-level factors. Monetary policy shocks also have a strong influence on the transition probabilities in a highly asymmetric way. The effect of policy shocks depends on the current state of the cycle as well as the sign and size of the shock.
    Keywords: Duration analysis ; Business cycles ; Hazard rates ; Monetary policy asymmetries
    JEL: E32 C23 C25 E52
    Date: 2019–03–25
  16. By: Francis, Neville (University of North Carolina, Chapel Hill); Owyang, Michael T. (Federal Reserve Bank of St. Louis); Soques, Daniel (University of North Carolina, Chapel Hill)
    Abstract: We study the comovement of international business cycles in a time series clustering model with regime-switching. We extend the framework of Hamilton and Owyang (2012) to include time-varying transition probabilities to determine what drives similarities in business cycle turning points. We find four groups, or “clusters”, of countries which experience idiosyncratic recessions relative to the global cycle. Additionally, we find the primary indicators of international recessions to be fluctuations in equity markets and geopolitical uncertainty. In out-of-sample forecasting exercises, we find that our model is an improvement over standard benchmark models for forecasting both aggregate output growth and country-level recessions.
    Keywords: Markov-switching; time-varying transition probabilities; cluster analysis
    JEL: C11 C32 E32 F44
    Date: 2019–01–22
  17. By: Shayan Zakipour-Saber (Queen Mary University of London)
    Abstract: Are monetary policy regimes state-dependent? To answer the question this paper estimates New Keynesian general equilibrium models that allow the state of the economy to influence the monetary authority's stance on inflation. I take advantage of recent developments in solving rational expectations models with state-dependent parameter drift to estimate three models on U.S. data between 1965-2009. In these models, the probability of remaining in a monetary policy regime that is relatively accommodative towards inflation, varies over time and depends on endogenous model variables; in particular, either deviations of inflation or output from their respective targets or a monetary policy shock. The main contribution of this paper is that it finds evidence of state-dependent monetary policy regimes. The model that allows inflation to influence the monetary policy regime in place, fits the data better than an alternative model with regime changes that are not state-dependent. This finding points towards reconsidering how changes in monetary policy are modelled.
    Keywords: Markov-Switching DSGE, State-dependence, Bayesian Estimation
    JEL: C13 C32 E42 E43
    Date: 2019–02–14
  18. By: Rochelle M. Edge; J. Nellie Liang
    Abstract: We evaluate the institutional frameworks developed to implement time-varying macroprudential policies in 58 countries. We focus on new financial stability committees (FSCs) that have grown dramatically in number since the global financial crisis, and their interaction with central banks, and infer countries’ revealed preferences for effectiveness versus political economy considerations. Using cluster analysis, we find that only one-quarter of FSCs have both good processes and good tools to implement macroprudential actions, and that instead most FSCs have been designed to improve communication and coordination among existing regulators. We also find that central banks are not especially able to take macroprudential actions when FSCs are not set up to do so. We conclude that about one-half of the countries do not have structures to take or direct actions and avoid risks of policy inertia. Rather countries’ decisions appear to be consistent with strengthening the political legitimacy of macroprudential policies with prominent roles for the ministry of finance and avoiding placing additional powers in central banks that already are strong in microprudential supervision and have high political independence for monetary policy. The evidence suggests that countries are placing a relatively low weight on the ability of policy institutions to take action and a high weight on political economy considerations in developing their financial stability governance structures.
    Keywords: Central bank independence ; Countercyclical capital buffer ; Financial stability committees ; Macroprudential policy
    JEL: G18 E58 H19 G28
    Date: 2019–03–25
  19. By: Bruni, Franco; Lopez, Claude
    Abstract: In a time of global crisis, international policy coordination is quite natural. Yet, in normal times such coordination becomes a challenge. This is an issue especially when it comes to monetary and macroprudential policy of globally influential countries. This is especially relevant now with the trend of monetary normalisation in many of these countries. In this brief, we propose four necessary steps to help addressing these challenges: (i) Monetary policy should take into account its spillovers on financial stability, (ii) Systemic central banks need to account for the global impact of their policy, (iii) Multilateral consultations may provide a useful platform to assess these impacts, (iv) The analysis that helps designing monetary and macroprudential policy should include global aggregates to capture the global economic and financial context.
    Keywords: Financial system resilience,
    JEL: E5 E6 F4 F5
    Date: 2019
  20. By: Hagenhoff, Tim; Lustenhouwer, Joep
    Abstract: We analyze differences in consumption and wealth that arise because of different degrees of rationality of households. In particular, we use a standard New Keynesian model and let a certain fraction of households be fully rational while the other fraction possesses less cognitive ability. We identify the rationality bias of boundedly rational agents, defined as a deviation from the fully rational benchmark, as the driver of consumption and wealth heterogeneity. It turns out that the rationality bias can be decomposed into three individual components: the consumption expectation bias, the real interest rate bias and the preference shock expectation bias. We show that for certain specifications of monetary policy the rationality bias can be eliminated because its individual components exactly offset each other although they are individually non-zero. However, it might not be desirable from a welfare perspective to eliminate the rationality bias as this comes along with high inflation volatility.
    Keywords: heterogeneous expectations,bounded rationality,consumption and wealth heterogeneity,monetary policy
    JEL: E32 E52 D84
    Date: 2019
  21. By: Andrea Caponera (Bank of Italy); Carlo Gola (Bank of Italy)
    Abstract: TIn this study, we investigate the economic characteristics of bitcoin and similar crypto-assets. Following an introduction to the blockchain protocol, the role of exchanges and of digital wallet providers, we consider the regulatory measures adopted in various jurisdictions. Lastly, we examine the accounting and prudential aspects related to crypto-assets, of which significant uncertainties still remain. The paper provides a taxonomy of crypto-assets, and describes the basic features of the initial coin offerings (ICOs) and related aspects. The literature shows that bitcoin, and similar crypto-assets, do not fully fall within the category of money and financial instruments. This class of digital tokens, based on a permissionless distributed ledger technology (DLT), is highly volatile and absent of intrinsic value. The instability of their price, which is often undetermined, must be considered when evaluating these instruments from an accounting and prudential standpoint.
    Keywords: bitcoin, crypto-assets, blockchain, digital tokens, initial coin offerings, exchanges
    JEL: E40 E42 E51 G21 G28 K20 M40
    Date: 2019–03
  22. By: Benoit Mojon; Xavier Ragot
    Abstract: Why is wage inflation so weak in spite of the recent sharp reduction in unemployment? We show that this may be due to an ongoing change in the composition of the labor supply. Indeed, the participation rate of workers aged between 55 and 64 has increased steadily over the last decade, from a third to above a half on average across OECD countries. This is most likely the consequence of ageing and the reform of pensions. We show that the participation rate of workers aged 55 to 64 contributes to explain why wage inflation has remained weak over the last five years. Our second result is that Phillips curves are alive and well. When exploiting the cross-country variance of the data, wage inflation remains highly responsive to domestic unemployment rates, including after the Great Recession.
    Keywords: low inflation, ageing economy, Phillips curve
    JEL: E5 J3
    Date: 2019–03
  23. By: Bullard, James B. (Federal Reserve Bank of St. Louis); DiCecio, Riccardo (Federal Reserve Bank of St. Louis)
    Abstract: We study nominal GDP targeting as optimal monetary policy in a simple and stylized model with a credit market friction. The macroeconomy we study has considerable income inequality, which gives rise to a large private sector credit market. There is an important credit market friction because households participating in the credit market use non-state contingent nominal contracts (NSCNC). We extend previous results in this model by allowing for substantial intra-cohort heterogeneity. The heterogeneity is substantial enough that we can approach measured Gini coefficients for income, financial wealth, and consumption in the U.S. data. We show that nominal GDP targeting continues to characterize optimal monetary policy in this setting. Optimal monetary policy repairs the distortion caused by the credit market friction and so leaves heterogeneous households supplying their desired amount of labor, a type of "divine coincidence" result. We also further characterize monetary policy in terms of nominal interest rate adjustment.
    Keywords: Optimal monetary policy; life cycle economies; heterogeneous households; credit market participation; nominal GDP targeting; non-state contingent nominal contracting; inequality; Gini coefficients
    JEL: E4 E5
    Date: 2019–03–22
  24. By: Doge Cahan; Luisa Dörr; Niklas Potrafke
    Abstract: We examine the extent to which government ideology has influenced monetary policy in OECD countries since the 1970s. In line with important changes in the global economy and differences across countries, regression results yield heterogeneous inferences depending on the time period and the exchange rate regime/central bank dependence of the countries in the sample. Over the 1972-2010 period, Taylor rule specifications do not suggest a relationship between government ideology and monetary policy as measured by the short-term nominal interest rate or the rate of monetary expansion minus GDP trend growth. Monetary policy was, however, associated with government ideology in the 1990s: short-term nominal interest rates were lower under leftwing than rightwing governments when central banks depended on the directives of the government and exchange rates were flexible. Very independent central banks, however, raised interest rates when leftwing governments were in office. We describe the historical evidence for several individual countries.
    Keywords: government ideology, monetary policy, partisan politics, panel data
    JEL: D72 E52 E58 C23
    Date: 2019
  25. By: Auclert, Adrien; Dobbie, Will; Goldsmith-Pinkham, Paul
    Abstract: This paper argues that the debt forgiveness provided by the U.S. consumer bankruptcy system helped stabilize employment levels during the Great Recession. We document that over this period, states with more generous bankruptcy exemptions had significantly smaller declines in non-tradable employment and larger increases in unsecured debt write-downs compared to states with less generous exemptions. We interpret these reduced form estimates as the relative effect of debt relief across states, and develop a general equilibrium model to recover the aggregate employment effect. The model yields three key results. First, substantial nominal rigidities are required to rationalize our reduced form estimates. Second, with monetary policy at the zero lower bound, traded good demand spillovers across states boosted employment everywhere. Finally, the ex-post debt forgiveness provided by the consumer bankruptcy system during the Great Recession increased aggregate employment by almost two percent.
    Keywords: Consumer bankruptcy; micro to macro; regional multipliers
    JEL: D14 E32 K35
    Date: 2019–03
  26. By: Valentin Jouvanceau (Univ Lyon, Université Lyon 2, GATE UMR 5824, F-69130 Ecully, France)
    Abstract: Have the macroeconomic effects of QE programs been overestimated empirically? Using a large set of model specifications that differ in the degree of time-variation in parameters, the answer is yes. Our forecasting exercise suggests that it is crucial to allow for time-variation in parameters, but not for stochastic volatility to improve the fit with data. Having a more reliable specification, we find that the portfolio balance and signaling channels had sizable contributions to the transmission of QE programs. Finally, our identified structural shocks show that QE1 had larger macroeconomic effects than QE2 and QE3, but much smaller than usually found in the literature.
    Keywords: Quantitative Easing, Model specification, TVP-FAVAR, Transmission channels
    JEL: C11 C32 C52 E52 E58
    Date: 2019
  27. By: Raju Huidrom; M. Ayhan Kose; Jamus J. Lim; Franziska L. Ohnsorge
    Abstract: The fiscal position can affect fiscal multipliers through two channels. Through the Ricardian channel, households reduce consumption in anticipation of future fiscal adjustments when fiscal stimulus is implemented from a weak fiscal position. Through the interest rate channel, fiscal stimulus from a weak fiscal position heightens investors’ concerns about sovereign credit risk, raises economy-wide borrowing cost, and reduces private domestic demand. We document empirically the relevance of these two channels using an Interactive Panel Vector Auto Regression model. We find that fiscal multipliers tend to be smaller when fiscal positions are weak than strong.
    Keywords: Fiscal multipliers, fiscal position, state-dependency, Ricardian channel, interest rate channel, business cycle
    JEL: E62 H50 H60
    Date: 2019–03
  28. By: Faria-e-Castro, Miguel (Federal Reserve Bank of St. Louis)
    Abstract: This paper analyzes the effects of countercyclical capital buffers (CCyB) in a nonlinear DSGE model with a financial sector that is subject to occasional panics. The model is combined with data to estimate sequences of structural shocks and study policy counterfactuals. First, I show that lowering capital buffers during a crisis can moderate the intensity of the crisis. Second, I show that raising capital buffers during leverage expansions can reduce the frequency of crises by more than half. A quantitative application to the 2008 financial crisis shows that CCyB in the ±2% range (as in the Federal Reserve’s current framework) could have greatly mitigated the financial panic in 2007Q4-2008Q4. These findings suggest that CCyB are a useful policy tool both ex-ante and ex-post.
    Keywords: countercyclical capital buffers; financial crises; macroprudential policy
    JEL: E4 E6 G2
    Date: 2019–03–19
  29. By: Istvan Konya (Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences, University of Pécs and Central European University); Judit Kreko (Central European University and Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences); Gabor Oblath (Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences)
    Abstract: The paper studies the labor share among countries of the European Union, with a particular attention to newer member states of Central and Eastern Europe (CEEU). After discussing methodological issues in the computation of the labor share, we present various stylized facts at the country level, and also for broad sectors within the aggregate economy. We find that CEEU countries typically have lower labor shares, both in the aggregate and at the sectoral level. Structural change, while quite pronounced among the CEEU economies, plays only a minor role in the evolution of the labor share. The exception is agriculture, which for some countries have a sizable impact on the level and dynamics of the labor share - partly because of important measurement problems. We also document links between productivity, the relative prices of consumption and investment, and the labor share. In particular, we find that a significant part of the difference in conventionally measured labor shares between the more developed EU countries and less developed CEEU countries can be attributed to differences in relative prices. We discuss possible explanations, and show that given reasonable assumptions, a simple two-sector model is able to account for the main findings.
    Keywords: labor share, development, labor productivity, relative prices, European Union
    JEL: E24 J30 O11
    Date: 2019–01
  30. By: Jan Bruha; Jaromir Tonner
    Abstract: The goal of this paper is to contribute to the understanding of the macroeconomic costs and benefits of euro adoption by the Czech economy through the lens of the CNB's official structural macroeconomic model - called g3. To do so, we perform simulations using the g3 model and a modification thereof with a fixed nominal exchange rate and with the policy rate given by the ECB. First, we compare the unconditional volatilities of selected macro variables implied by the two models. Second, we use the g3 model to filter the historical data to identify the structural shocks that affected the Czech economy in the past ten years, and we then use the modified model to simulate the counterfactual outcome of what would have happened to the Czech economy if the euro had been adopted in the past. Our results indicate that euro adoption would have had positive effects on the levels of macroeconomic variables at the cost of an increase in nominal volatility.
    Keywords: DSGE model, euro, monetary policy
    JEL: E47 E52 F47
    Date: 2018–12
  31. By: Davis, J. Scott (Federal Reserve Bank of Dallas); Fujiwara, Ippei (Keio University); Huang, Kevin X. D. (Vanderbilt University); Wang, Jiao (University of Melbourne)
    Abstract: Many recent theoretical papers have argued that countries can insulate themselves from volatile world capital flows by using a variable tax on foreign capital as an instrument of monetary policy. But at the same time many empirical papers have argued that only rarely do we observe these cyclical capital taxes used in practice. In this paper we construct a small open economy model where the central bank can engage in sterilized foreign exchange intervention. When private agents can freely buy and sell foreign bonds, sterilized foreign exchange intervention has no effect. But we analytically prove that when private agents cannot freely buy and sell foreign bonds, that is, under acyclical capital controls, optimal sterilized foreign exchange intervention is equivalent to an optimally chosen tax on foreign capital. Numerical simulations of the model show that a variable capital tax is a reasonable approximation for sterilized foreign exchange intervention under the levels of capital controls observed in many emerging markets.
    Keywords: Central bank; small open economy; foreign exchange reserves; capital controls
    JEL: E30 E50 F40
    Date: 2019–02–05
  32. By: Michael M. Batty; Jesse Bricker; Joseph S. Briggs; Elizabeth Ball Holmquist; Susan Hume McIntosh; Kevin B. Moore; Eric Nielsen; Sarah Reber; Molly Shatto; Kamila Sommer; Tom Sweeney; Alice M. Henriques
    Abstract: This paper describes the construction of the Distributional Financial Accounts (DFAs), a new dataset containing quarterly estimates of the distribution of U.S. household wealth since 1989, and provides the first look at the resulting data. The DFAs build on two existing Federal Reserve Board statistical products --- quarterly aggregate measures of household wealth from the Financial Accounts of the United States and triennial wealth distribution measures from the Survey of Consumer Finances --- to incorporate distributional information into a national accounting framework. The DFAs complement other existing sources of data on the wealth distribution by using a more comprehensive measure of household wealth and by providing quarterly data on a timely basis. We encourage policymakers, researchers, and other interested parties to use the DFAs to help understand issues related to the distribution of U.S. household wealth.
    Keywords: Economic data ; Economic measurement ; Household economics ; Inequality ; National accounts ; Wealth distribution ; Wealth dynamics
    JEL: N3 E01 H5 H31
    Date: 2019–03–22
  33. By: Adrien Auclert; Will S. Dobbie; Paul Goldsmith-Pinkham
    Abstract: This paper argues that the debt forgiveness provided by the U.S. consumer bankruptcy system helped stabilize employment levels during the Great Recession. We document that over this period, states with more generous bankruptcy exemptions had significantly smaller declines in non-tradable employment and larger increases in unsecured debt write-downs compared to states with less generous exemptions. We interpret these reduced form estimates as the relative effect of debt relief across states, and develop a general equilibrium model to recover the aggregate employment effect. The model yields three key results. First, substantial nominal rigidities are required to rationalize our reduced form estimates. Second, with monetary policy at the zero lower bound, traded good demand spillovers across states boosted employment everywhere. Finally, the ex-post debt forgiveness provided by the consumer bankruptcy system during the Great Recession increased aggregate employment by almost two percent.
    JEL: D14 E32 K35
    Date: 2019–03
  34. By: Lena Boneva (Bank of England; CEPR); James Cloyne (CEPR; UC Davis; NBER); Martin Weale (Centre for Macroeconomics (CFM); Kings College London); Tomasz Wieladek (CEPR; Barclays)
    Abstract: Firms’ expectations play a central role in modern macroeconomic models, but little is known empirically about how these are formed or whether they matter for economic outcomes. Using a novel panel data set of manufacturing firms’ expectations about prices and wage rates, new orders, employment and unit costs for the United Kingdom, we document a range of stylized facts about the properties of firms’ expectations and their relationship with recent experience. There is wide dispersion of expectations across firms. Expected future price and wage growth are influenced by firm-specific factors but macroeconomic factors also matter. Expectations of employment and new orders are influenced by firm-specific measures of past orders while expected unit costs seem to be influenced more by firm-specific cost pressures and aggregate import prices. After controlling for a wide range of variables we find a significant connection between past expected price and wage increases and their out-turns. But there is also strong evidence that firms’ expectations are clearly not rational.
    Keywords: Firm exceptions, Price setting, Rationality, Survey data, Inflation expectations
    JEL: C23 C26 E31
    Date: 2019–02
  35. By: Alessandra Bonfiglioli (Queen Mary University of London); Gino Gancia (Queen Mary University of London)
    Abstract: Does economic uncertainty promote the implementation of structural reforms? We answer this question using one of the most exhaustive cross-country panel data set on reforms in six major areas and measuring economic uncertainty with stock market volatility. To address endogeneity concerns, we propose various identification strategies, instrumenting uncertainty with world shocks to volatility and with natural disasters, political coups and revolutions. Across all specifications, we find that uncertainty has a positive and significant effect on the adoption of reforms. This result is robust to the inclusion of a large number of controls, such as political variables, economic variables, crisis indicators, and a host of country, reform and time fixed effects.
    Keywords: Reforms, Uncertainty
    JEL: E02 E60 L51
    Date: 2018–11–08
  36. By: Michel De Vroey (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: In this preface, I reflect on the evolution of macroeconomics in the wake of the 2018 recession. I give a sketch of the developments that have taken place and assess the validity of some of the main criticisms that have been addressed to DSGE macroeconomics
    Keywords: History of macroeconomics, 2008 recession, DSGE macroeconomics, RBC model, New Keynesian model
    JEL: B22 E12 E E30
    Date: 2019–01
  37. By: Robert Breunig; Owen Freestone
    Abstract: This paper explores risk aversion among Australian households using panel data from the Household Income and Labour Dynamics in Australia (HILDA) survey. Using households’ share of risky assets, we test whether relative risk aversion is constant in wealth. After accounting for measurement error, we cannot reject the constant relative risk aversion (CRRA) assumption. Using an Euler equation that adjusts for measurement error in consumption data, we estimate the coefficient of relative risk aversion in the CRRA utility function. Point estimates from our preferred non-linear models suggest a moderate degree of risk aversion for the typical Australian household, with values ranging from 1.2 to 1.4. These findings can provide guidance for calibrating household preferences in macroeconomic models of the Australian economy.
    Keywords: risk aversion, intertemporal consumption choice, Euler equation, measurement error, GMM, instrumental variables
    JEL: D12 E21
    Date: 2019–03
  38. By: Stéphane Auray (CREST; ENSAI; Université du Littoral Côte d’Opale); Aurélien Eyquem (Université Lumière Lyon 2 ; GATE-LSE ; Institut universitaire de France)
    Abstract: In this paper, we build a small open-economy model la Ghironi & Melitz (2005) with endogenously produced and traded varieties and automation to analyze the effects of a slow-moving, permanent automation shock. Our results are threefold: (i) in the long run a permanent automation shock effectively produces a displacement effect that increases wage inequality between routine and non-routine workers, as well as a fall (increase) in the demand of firms for routine (non-routine) labor, (ii) the relative impact on routine and non-routine labor eventually depends on the relative size of labor supply elasticities, (iii) the external effects of an automation shock remain limited at best.
    Keywords: Robots, Automation, Employment, Open-economy
    JEL: E32 E52 F41
    Date: 2018–10–01
  39. By: Ha, Jongrim; Kose, Ayhan; Ohnsorge, Franziska
    Abstract: We study the extent of global inflation synchronization using a dynamic factor model in a large set of countries over a half century. Our methodology allows us to account for differences across groups of countries (advanced economies and emerging market and developing economies) and to analyze commonalities in inflation synchronization across a wide range of inflation measures. We report three major results. First, inflation movements have become increasingly synchronized internationally over time: a common global factor has accounted for about 22 percent of variation in national inflation rates since 2001. Second, inflation synchronization has also become more broad-based: while it was previously much more pronounced among advanced economies than among emerging market and developing economies, it has become substantial in both groups over the past two decades. In addition, inflation synchronization has become significant across all inflation measures since 2001, whereas it was previously prominent only for inflation measures that included mostly tradable goods.
    Keywords: Advanced economies; developing economies; Dynamic factor model; emerging markets; Global inflation; Synchronization
    JEL: E31 E32 F42
    Date: 2019–03
  40. By: Bhattarai, Saroj (UT Austin); Schwartzman, Felipe (Federal Reserve Bank of Richmond); Yang, Choongryul (UT Austin)
    Abstract: We show that the housing wealth collapse of 2006-09 had a persistent impact on employment across counties in the U.S. In particular, localities that had a larger loss in housing net worth during that period had more depressed employment as late as 2016, without a commensurate population response. The use of IV's and controls to identify the causal impact of the wealth shock amplifies those results, leading to an estimate that a 10 percent change in housing net worth between 2006 and 2009 causes a 4.5 percent decline in local employment by 2016, as compared with a 2006 baseline. We do not find a long-term causal impact of the shock on wages. Sectoral results indicate, however, that the results are unlikely to be purely a result of persistently low demand, since, contrary to the short-run effects, the effect over the longer horizon is less concentrated in the non-tradables sectors and is instead more prominent in the high-skilled services sector.
    Keywords: U.S. housing collapse; Housing Net-Worth; Housing wealth; Persistent employment effects; Regional analysis; Local labor markets; Financial crises; Sectoral effects
    JEL: E24 G01 R23
    Date: 2019–03–08
  41. By: Hyeongwoo Kim; Wen Shi; Hyun Hak Kim
    Abstract: We propose factor-based out-of-sample forecast models for Korea's financial stress index and its 4 sub-indices that are developed by the Bank of Korea. We extract latent common factors by employing the method of the principal components for a panel of 198 monthly frequency macroeconomic data after differencing them. We augment an autoregressive-type model of the financial stress index with estimated common factors to formulate out-of-sample forecasts of the index. Our models overall outperform both the stationary and the nonstationary benchmark models in forecasting the financial stress indices for up to 12-month forecast horizons. The first common factor that represents not only financial market but also real activity variables seems to play a dominantly important role in predicting the vulnerability in the financial markets in Korea.
    Keywords: Financial Stress Index; Principal Component Analysis; PANIC; In-Sample Fit; Out-of-Sample Forecast; Diebold-Mariano-West Statistic
    JEL: E44 E47 G01 G17
    Date: 2019–03
  42. By: Vasilev, Aleksandar
    Abstract: In this paper we provide a theoretical basis for the so-called "Armey curve," the inverted U-shape relationship between the level of government purchases and GDP growth, named after Armey (1995). We use an otherwise standard Keynesian model, augmented with a quadratic relationship between investment and lagged government expenditure, which was documented empirically. This modelling approach is a useful shortcut that aims to capture the common link shared by both variables, namely their dependence on the real interest rate, as suggested also by the extended static IS-LM model. This resulting dynamic relationship is a newly-documented stylized fact, at least in Bulgarian data for the period 2000-2018, and the source in the extended Keynesian model that generates an Armey curve for Bulgaria.
    Keywords: Armey curve,GDP growth,government purchases,Bulgaria
    JEL: E12 E22
    Date: 2019
  43. By: Tayyar Buyukbasaran; Gokce Karasoy Can; Hande Kucuk
    Abstract: This paper aims to identify credit supply shocks and analyse their macroeconomic effects in Turkey. For this purpose, we use a Bayesian Structural Vector Autoregression (SVAR) with sign and zero restrictions. We focus on the impact of credit supply shocks on real GDP growth and highlight how the size of this impact changes when we explicitly account for the effects of capital inflows on credit conditions. Hence, our results confirm the importance of external finance for credit supply in Turkey. Our main findings are robust to some alternative data choices, prior selections as well as some alternative identifying restrictions.
    Keywords: Credit supply shocks, SVAR, Bayesian VAR, Sign and zero restrictions
    JEL: C11 C32 E52 F41
    Date: 2019
  44. By: David Baqaee; Emmanuel Farhi
    Abstract: This paper provides two simple and economically-interpretable decompositions for aggregate productivity analysis in the presence of distortions and in general equilibrium. In the process, we propose a new “distorted” Solow residual which, contrary to the traditional Solow residual, accurately measures changes in aggregate productivity in disaggregated economies with distortions. Our formulas apply to any collection of producers ranging from one isolated producer to an industry or to an entire economy. They can be useful for empiricists and theorists alike. Potential applications of these formulas include: (1) decomposing aggregate productivity into its microeconomic sources, separating technical and allocative efficiency; (2) aggregating microeconomic estimates (for example, from natural experiments) to assess macroeconomic effects; (3) constructing and interpreting aggregate counterfactuals. Despite their simplicity, the formulas are general, allowing for production networks, multi-product firms, and non-constant returns. They are also entirely nonparametric. They only assume market clearing and cost minimization.
    JEL: E0 L0
    Date: 2019–03
  45. By: Wickens, Michael R.
    Abstract: A key issue in VAR analysis is how best to identify economic shocks. The paper discusses the problems that the standard methods pose and proposes a new type of shock. Named an idiosyncratic shock, it is designed to identify the component in each VAR residual associated with the corresponding VAR variable. The procedure is applied to a calibrated New Keynesian model and to a VAR based on the same variables and using US data. The resulting impulse response functions are compared with those from standard procedures.
    Keywords: Macroeconomic Shocks; New Keynesian Model; VAR analysis
    JEL: C32 E32
    Date: 2019–03
  46. By: Carroll, Daniel R. (Federal Reserve Bank of Cleveland); Hur, Sewon (Federal Reserve Bank of Cleveland)
    Abstract: How are the gains and losses from trade distributed across individuals within a country? First, we document that tradable goods constitute a larger fraction of expenditures for poor households. Second, we build a trade model with nonhomothetic preferences—to generate the documented relationship between tradable expenditure shares, income, and wealth—and uninsurable earnings risk—to generate heterogeneity in income and wealth. Third, we use the calibrated model to quantify the differential welfare gains and losses from trade along the income and wealth distribution. In a numerical exercise, we permanently reduce trade costs so as to generate a rise in import share of GDP commensurate with that seen in the data from 2001 to 2014. We find that households in the lowest wealth decile experience welfare gains over the transition, measured by permanent consumption equivalents, that are 67 percent larger than those in the highest wealth decile.
    Keywords: trade gains; inequality; consumption;
    JEL: E21 F10 F13
    Date: 2019–03–22
  47. By: Lopez, Claude; Bruni, Franco
    Abstract: Basell III was a direct answer to the 2008 financial crisis. Now 10 years after the crisis, it is time to assess its timeliness and make the necessary adjustments so it becomes truly global. In this policy brief, we first clarify the goals of macroprudential policy before highlighting the main challenges that home and host countries may run into when global financial institutions lend beyond their home countries. We then suggest to focus on four priorities to address these vulnerabilities: (i) An adaptable and flexible global framework, (ii) The generalization of international standards and best practices, (iii) A stronger global data depository, (iv) Regulatory and monitoring cooperation.
    Keywords: macroprudential policy, G20
    JEL: E6 F5
    Date: 2019–03
  48. By: Caselli, Francesco; Ciccone, Antonio
    Abstract: Jones (2014) examines development accounting with imperfect substitutability between different types of skills in the production of output. He finds that human capital variation can account for the totality of the variation in income across countries. We show that this finding is entirely due to an assumption that the relative wage of skilled workers is solely determined by attributes of workers (once the supply of skilled workers is accounted for). If skill premia are predominantly determined by technology, institutions, and other features of the economic environment, human capital differences explain none of the variation in income per worker.
    JEL: E24 J24 J31
    Date: 2019–03–01
  49. By: Nicholas Outlon (Centre for Macroeconomics (CFM); London School of Economics (LSE); NIESR; ESCoE)
    Abstract: What effect, if any, do changes in the terms of trade have on the level of output (GDP) or welfare? I examine this issue through two versions of a textbook, Hecksher-Ohlin-Samuelson (HOS), two-good model of a small, open economy. In the first version both goods are for final consumption. In the second, one good is an imported intermediate input into the other. In both versions, economic theory suggests that an improvement in the terms of trade raises welfare (consumption) but leaves aggregate output (GDP) unchanged. This follows from a continuous-time analysis using Divisia index numbers. I then show that a national income accountant applying the principles of the 2008 System of National Accounts (SNA) would reach the same conclusions.
    Keywords: GDP, Welfare, SNA, Hecksher-Ohlin-Samuelson, Terms of trade, Divisia
    JEL: E01 F11 C43 D60
    Date: 2019–03
  50. By: Daly, Mary C. (Federal Reserve Bank of San Francisco)
    Abstract: Slides presented at the 2019 U.S. Monetary Policy Forum New York, New York, Mary C. Daly, President and Chief Executive Officer, Federal Reserve Bank of San Francisco, February 22, 2019.
    Date: 2019–02–22
  51. By: Hyeongwoo Kim; Ying Lin; Henry Thompson
    Abstract: A group of researchers has asserted that the rate of exchange rate pass-through (ERPT) to domestic prices has declined substantially over the last few decades. We revisit this claim of a downward trend in ERPT to the Consumer Price Index (CPI) in a vector autoregressive (VAR) model for US macroeconomic data under the current floating exchange rate regime. Our VAR approach nests the conventional single equation method, revealing very weak evidence of ERPT during the pre-1990 era, but statistically significant evidence of ERPT during the post-1990 era, sharply contrasting with previous findings. After statistically confirming a structural break in ERPT to total CPI via Hansen's (2001) test procedure, we seek the source of the structural break with disaggregated level CPIs, pinning down a key role of energy prices in the break. The dependency of US energy consumption on imports increased since the 1990s until the recent recession. This change magnifies effects of the exchange rate shocks on domestic energy prices, resulting in greater responses of the total CPI via this energy price channel.
    Keywords: Exchange Rate Pass Through; Disaggregated CPI; Structural Break; Oil Price Shock
    JEL: E31 F31 F41
    Date: 2019–03
  52. By: Hettig, Thomas; Müller, Gernot; Wolf, Martin
    Abstract: We run local projections to estimate the effect of US monetary policy shocks on the dollar. We find that monetary contractions appreciate the dollar and establish two results. First, the spot exchange rate undershoots: the appreciation is smaller on impact than in the longer run. Second, forward exchange rates also appreciate on impact, but their response is flat across tenors. Next, we develop and estimate a New Keynesian model with information frictions. In the model, investors do not observe the natural rate of interest directly. As a result, they learn only over time whether an interest rate surprise represents a monetary contraction. The model accurately predicts the joint dynamics of spot and forward exchange rates following a monetary contraction.
    Keywords: Forward Exchange Rate; Forward premium puzzle; information effect; Information Frictions; monetary policy; Spot Exchange Rate; UIP puzzle
    JEL: E43 F31
    Date: 2019–03
  53. By: Seuk Wai, Phoong (Faculty of Business and Accountancy, University of Malaya, Malaysia Author-2-Name: Seuk Yen, Phoong Author-2-Workplace-Name: Department of Mathematics, Faculty Science and Mathematics, Sultan Idris Education University, 35900 Tanjung Malim, Perak, Malaysia Author-3-Name: Author-3-Workplace-Name: Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)
    Abstract: Objective – The removal of fuel subsidies by the Malaysian government in 2014 has been implement with the managed float system for fuel prices. Methodology/Technique – This study investigates the impact of the managed floating system of crude oil prices on the Malaysian economy using ARDL approach by looking at macroeconomic variables such as inflation, economic growth and unemployment rates. Findings – The results show that all of the variables have short lived relationship with oil prices whereby inflation and economic growth are positively related to oil prices. However, unemployment rate has a negative relationship with the changes of WTI crude oil prices. Novelty – The major input in the economy of Malaysia contributes to a positive relationship between inflation and oil prices, whilst the contribution of Malaysia being an oil-producing country results in the positive relationship of economic growth and oil price. Likewise, as oil prices are high, the increase in demand results in increase in job opportunities. Lastly, the correlation test shows that inflation and economic growth have a high positive correlation while unemployment rate has a low negative correlation with oil price. Type of Paper: Empirical.
    Keywords: ARDL; Crude Oil Price; GDP; Inflation; Unemployment.
    JEL: E10 E30 E39
    Date: 2019–03–15
  54. By: Claude Bismut (CEE-M - Centre d'Economie de l'Environnement - Montpellier - FRE2010 - INRA - Institut National de la Recherche Agronomique - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier); Ismael Ramajo (CEE-M - Centre d'Economie de l'Environnement - Montpellier - FRE2010 - INRA - Institut National de la Recherche Agronomique - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier)
    Abstract: In this paper we extend the usual Lucas supply curve to allow the likely external influence on inflation, together with domestic conditions. We test the relationship between the inflation surprise, the output gap and the real exchange rate using simple time series regressions on annual data for a list of 16 developed countries. These tests confirm the empirical relevance of the Lucas supply curve but also support the assumption that part of the inflation surprise may come from unexpected variations of the real exchange rate.
    Keywords: Lucas supply curve,inflation surprise imported inflation,output gap,natural rate of unemployment
    Date: 2018
  55. By: Chang, C-L.; Ilomäki, J.; Laurila, H.; McAleer, M.J.
    Abstract: The paper investigates the effects of central bank interventions in financial markets, composed of asymmetrically-informed rational investors and noise traders. If the central bank suspects a bubble, it should lift the real risk-free rate to deflate the bubble in “leaning against the wind”. A rise in the real risk-free rate reduces the risk of rational informed investors, and increases the risk of rational uninformed investors. If the central bank intervenes through the nominal risk-free rate and the Fisher arbitrage condition holds, an increase in the nominal rate is transferred to inflation, thereby dampening the policy effect. Conversely, this implies that the central bank can also deflate the bubble by inducing a reduction in inflationary expectations. The effect on the informed investor risk remains ambiguous, while the risk of he uninformed investor grows, but only if they suffer from money illusion.
    Keywords: Central bank intervention, asymmetric information, rational investors, noise traders, bubbles, risk-free rate, Fisherian arbitrage, inflation, expectations, money illusion
    JEL: D82 E58 G11 G14 G32
    Date: 2019–02–01
  56. By: Amélie Charles (Audencia Recherche - Audencia Business School); Olivier Darné (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - IEMN-IAE Nantes - Institut d'Économie et de Management de Nantes - Institut d'Administration des Entreprises - Nantes - UN - Université de Nantes - IUML - FR 3473 Institut universitaire Mer et Littoral - UM - Le Mans Université - UA - Université d'Angers - UN - Université de Nantes - ECN - École Centrale de Nantes - UBS - Université de Bretagne Sud - IFREMER - Institut Français de Recherche pour l'Exploitation de la Mer - CNRS - Centre National de la Recherche Scientifique); Laurent Ferrara (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique, Centre de recherche de la Banque de France - Banque de France)
    Abstract: In this paper we examine whether or not the Great Recession had a temporary or permanent effect on output growth volatility after years of low macroeconomic volatility since the early eighties. Based on break detection methods applied to a set of advanced countries, our empirical results do not give evidence to the end of the Great Moderation period but rather that the Great Recession is characterized by a dramatic short‐lived effect on the output growth but not on its volatility. We show that neglecting the breaks both in mean and in variance can have large effects on output volatility modeling based on GARCH specifications
    Date: 2018
  57. By: Harker, Patrick T. (Federal Reserve Bank of Philadelphia)
    Abstract: In opening remarks on a panel at the US Monetary Policy Forum in New York City, Philadelphia Fed President Patrick Harker discussed unwinding the Fed’s balance sheet. He said that, in his view, "a slow and steady approach is not only the safer option, it’s one that will reduce uncertainty about the evolution of the balance sheet."
    Date: 2019–02–22
  58. By: van der Eng, Pierre
    Abstract: This paper seeks to overcome the fact that historical estimates of Gross Domestic Product (GDP) for Indonesia are currently only available in constant prices. Using the expenditure approach it offers new estimates of Gross Domestic Expenditure (GDE), the equivalent of GDP, in current prices. The paper anchors the estimates on Indonesia’s Input-Output (I-O) Tables available for benchmark years between 1969 and 2010, which reveal that until 1995 Indonesia’s official national accounts underestimated GDP and GDE. The paper combines corrections based on the I-O Tables with additional sources to present provisional new estimates of GDE in current prices for 1870-1941 and 1948-1995. It then analyses the composition of GDE, noting the generally modest proportions of discretionary public expenditure and capital formation, particularly during 1870-1913 and 1948-1966.
    Keywords: GDP, Indonesia, expenditure, economic growth
    JEL: E01 N15 O47
    Date: 2019–03
  59. By: Matteo Mogliani
    Abstract: We propose a new approach to mixed-frequency regressions in a high-dimensional environment that resorts to Group Lasso penalization and Bayesian techniques for estimation and inference. To improve the sparse recovery ability of the model, we also consider a Group Lasso with a spike-and-slab prior. Penalty hyper-parameters governing the model shrinkage are automatically tuned via an adaptive MCMC algorithm. Simulations show that the proposed models have good selection and forecasting performance, even when the design matrix presents high cross-correlation. When applied to U.S. GDP data, the results suggest that financial variables may have some, although limited, short-term predictive content.
    Keywords: MIDAS regressions, penalized regressions, variable selection, forecasting, Bayesian estimation.
    JEL: C11 C22 C53 E37
    Date: 2019
  60. By: Güell, Maia; Lafuente, Cristina
    Abstract: In a recent paper, Alvarez, Borovickova, and Shimer (2014) revisit the analysis of the determinants of unemployment duration by proposing a new method (the ABS method hereafter) that directly estimates the importance of each component and implementing it using precise information on unemployment spells from social security administrative data for Austria. In this paper, we apply the ABS method to social security administrative data for Spain with the objective of comparing these two very different labor markets as well as Spain along the business cycle. Administrative data have many advantages compared to Labor Force Survey data, but the incomplete nature of the data needs to be addressed in order to use the data for unemployment analysis (e.g., unemployed workers that runout of unemployment insurance have no labor market status in the data). The degree and nature of such incompleteness are country-specific and are particularly important in Spain. Following Lafuente (2018), we approach the matter of data incompleteness in a systematic way by using information from the Spanish LFS data as well as institutional information. We hope that our approach will provide a useful way to apply the ABS method in other countries. Our findings are as follows: (i) The aggregate component is clearly the most important one, followed by heterogeneity and duration dependence, which are roughly comparable. (ii) The relative importance of each component and, in particular, duration dependence is quite similar in Austria and Spain, especially when minimizing the effect of fixed-term contracts in Spain. Similarly, we do not find big differences in the relative contribution of the different components along the business cycle in Spain. (iii) These comparisons suggest that statistical discrimination due to dynamic sample selection does not seem to be the main driver of duration dependence.
    Keywords: administrative social security data; Duration Dependence; Unemployment Duration
    JEL: E24 J64
    Date: 2019–03
  61. By: Ravi Bansal; Shane Miller; Dongho Song; Amir Yaron
    Abstract: We use traded equity dividend strips from U.S., Europe, and Japan from 2004-2017 to study the slope of the term structure of equity dividend risk premia. In the data, a robust finding is that the term structure of dividend risk premia (growth rates) is positively (negatively) sloped in expansions and negatively (positively) sloped in recessions. We develop a consumption-based regime switching model which matches these robust data-features and the historical probabilities of recession and expansion regimes. The unconditional population term structure of dividend-risk premia in the regime-switching model, as in standard asset pricing models (habits and long-run risks), is increasing with maturity. The regime-switching model also features a declining average term structure of dividend risk-premia if recessions are over-represented in a short sample, as is the case in the data sample from Europe and Japan. In sum, our analysis shows that the empirical evidence in dividend strips is entirely consistent with a positively sloped term structure of dividend risk-premia as implied by standard asset pricing models.
    JEL: E0
    Date: 2019–03
  62. By: Bryan Hardy; Felipe Saffie
    Abstract: We use unique firm level data from Mexico to document that non-financial corporations engage in carry trades by borrowing in foreign currency and lending in domestic currency, largely to related partners (trade credit), accumulating currency risk in the process. The interest rate differential between local and foreign currency borrowing largely drives this behavior at a quarterly frequency, inducing an expansion in gross trade credit and sales. Firms that were active in carry-trade have decreased investment following a large depreciation, independent of currency exposure levels and export status, but maintain their supply of trade credit.
    Keywords: emerging market corporate debt, currency mismatch, liability dollarization, carry trades, trade credit
    JEL: E44 G15
    Date: 2019–03
  63. By: Margherita Borella (University of Torino); Mariacristina De Nardi (University College London / Federal Reserve Bank of Chicago / IFS / NBER); Fang Yang (Louisiana State University)
    Abstract: White, non-college-educated Americans born in the 1960s face shorter life expectancies, higher medical expenses, and lower wages per unit of human capital compared with those born in the 1940s, and men’s wages declined more than women’s. After documenting these changes, we use a life-cycle model of couples and singles to evaluate their effects. The drop in wages depressed the labor supply of men and increased that of women, especially in married couples. Their shorter life expectancy reduced their retirement savings but the increase in out-of-pocket medical expenses increased them by more. Welfare losses, measured as a one-time asset compensation, are 12.5%, 8%, and 7.2% of the present discounted value of earnings for single men, couples, and single women, respectively. Lower wages explain 47-58% of these losses, shorter life expectancies 25-34%, and higher medical expenses account for the rest.
    Keywords: education, Health, wage gap, welfare losses, life expectancy
    JEL: E21 H31
    Date: 2019
  64. By: Ljungberg, Jonas (Department of Economic History, Lund University)
    Abstract: Which have been the consequences of the euro for integration and economic performance in the Baltic Sea region? After the collapse of the Soviet Union, the three Baltic states and Poland have been rapidly catching-up with Western Europe. The Great Recession became a great setback for the former, while less so for Poland. A difference is the monetary policy: the Polish zloty depreciated in the critical moment of the crisis, while currency boards with the aim of joining the euro bestowed appreciation for the Baltics and Finland. Contrary to the purpose, monetary integration has not fostered integration in trade, and the share of the Eurozone in Baltic trade has stagnated. A comparison with other countries in the Baltic Sea region suggests that the euro provides “the golden fetters” of our time. Emigration, also a kind of integration, has become a safety valve with severe social and economic consequences for the Baltic states.
    Keywords: economic growth; integration; exports; EMU; Baltic Sea region; exchange rates
    JEL: E39 E42 F14 F15 F43 N14
    Date: 2019–03–20
  65. By: Daly, Mary C. (Federal Reserve Bank of San Francisco)
    Abstract: Remarks to The Commonwealth Club, San Francisco, California, Mary C. Daly, President and Chief Executive Officer, Federal Reserve Bank of San Francisco, March 26, 2019.
    Date: 2019–03–27
  66. By: Athanasios Geromichalos; Kuk Mo Jung; Seungduck Lee; Dillon Carlos (Department of Economics, University of California Davis)
    Abstract: Economists often say that certain types of assets, e.g., Treasury bonds, are very `liquid'. Do they mean that these assets are likely to serve as media of exchange or collateral (a definition of liquidity often employed in monetary theory), or that they can be easily sold in a secondary market, if needed (a definition of liquidity closer to the one adopted in finance)? We develop a model where these two notions of asset liquidity coexist, and their relative importance is determined endogenously in general equilibrium: how likely agents are to visit a secondary market in order to sell assets for money depends on whether sellers of goods/services accept these assets as means of payment. But, also, the incentive of sellers to invest in a technology that allows them to recognize and accept assets as means of payment depends on the existence (and efficiency) of a secondary market where buyers could liquidate assets for cash. The interaction between these two channels offers new insights regarding the determination of asset prices and the ability of assets to facilitate transactions and improve welfare.
    Keywords: Information, Over-the-Counter Markets, Search and Matching, Liquidity, Asset prices, Monetary policy
    JEL: E40 E50 G11 G12 G14
    Date: 2019–03–21
  67. By: McAdam, Peter; Bridji, Slim; Charpe, Matthieu
    Abstract: This paper establishes some stylized facts of the long run relationship between growth and labor shares using historical data for the United States (1898-2010), the United Kingdom (1856-2010), and France (1896-2010). Performing individual country time-frequency analysis, we demonstrate the existence of long-term cycles in labor share of thirty to fifty years explaining a major part of the variance in the data. Further, the impact of labor share on growth changes sign with the frequency considered from negative at high frequencies to positive at low frequencies. Finally, the positive coefficient associated with the labor share at low frequencies increases over time. JEL Classification: E24, E25, N1
    Keywords: growth, income distribution, labor share, wavelet analysis
    Date: 2019–03
  68. By: Pierre Pora (CREST; INSEE.); Lionel Wilner (CREST; INSEE.)
    Abstract: Recent works have concluded to non-Gaussian features of labor earnings growth. We argue in this paper that it is mainly due to working hours'volatility. Using the non-parametric approach developed by Guvenen et al. (2016), we find on French data that labor earnings changes exhibit strong asymmetry as well as high peakedness. However, after decomposing labor earnings growth into wage and working time growth, the log-normality of hourly wages remains a quite plausible assumption since deviations from Gaussianity stem mainly from working time changes. The joint dynamics of hourly wages and working time help explain those deviations which relate most likely to labor supply decisions at the extensive margin.
    Keywords: Labor earnings growth; non-Gaussian distributions; skewness; kurtosis.
    JEL: E24 J22 J31
    Date: 2019–02–15
  69. By: Fuchs-Schündeln, Nicola; Haliassos, Michael
    Abstract: This paper employs the German reunification "experiment" to study how sudden access to previously unavailable financial products, supported by knowledgeable practitioners, influences participation. Findings provide new perspectives on participation and inertia. Controlling for characteristics, East Germans experienced a jump in securities participation to a level comparable to West Germans' participation immediately following reunification, and to an even higher level for consumer debt, while exhibiting inertia in previously accessible products. They showed no signs of subsequent retreat. Lower financial resources are the most important characteristic explaining lower East German participations in all asset classes, while expectations and peer effects are important drivers of the high East German debt participation. Average income among the new peers has had larger effects on East than on West German participation in both securities and consumer debt.
    Keywords: asset market access; Consumer credit; German reunification; Household Debt; household finance; Social interactions; Stockholding
    JEL: E21 G11
    Date: 2019–03
  70. By: Ademmer, Martin; Boysen-Hogrefe, Jens; Carstensen, Kai; Hauber, Philipp; Jannsen, Nils; Kooths, Stefan; Rossian, Thies; Stolzenburg, Ulrich
    Abstract: Schätzungen des Produktionspotenzials und der Produktionslücke einer Volkswirtschaft sind von großer Bedeutung für die Wirtschaftspolitik. Sie spielen eine wesentliche Rolle für den Europäischen Stabilitäts- und Wachstumspakt und für die im Grundgesetz verankerte Schuldenbremse. In der vorliegenden Studie werden die zugrundeliegenden Modelle und Schätzmethoden basierend auf dem Verfahren der Europäischen Kommission kritisch analysiert und es werden Möglichkeiten zur Verbesserung des Verfahrens aufgezeigt.
    Keywords: Produktionspotenzial,Produktionslücke,Konjunktur,Zyklus,Finanzpolitik,Europäische Kommission,potential output,output gap,business cycle,fiscal policy,European Commission
    Date: 2019
  71. By: Boris Hofmann; Hyun Song Shin
    Abstract: We employ a rarely available high-frequency micro data set to study the impact of foreign exchange intervention on domestic credit growth. We find that sterilised purchases of dollars by the central bank dampens the flow of new domestic corporate loans in Colombia. Slowing the pace of currency appreciation plays a key role in dampening credit expansion. Our analysis sheds light on the role of FX intervention as part of the financial stability-oriented policy response to credit booms associated with capital inflow surges.
    Keywords: FX intervention, credit registry, emerging markets, financial channel of exchange rates
    JEL: E58 F31 F33 F41 G20
    Date: 2019–03
  72. By: Yiwei Dou; Geng Li; Joshua Ronen
    Abstract: We study the unintended consequences of consumer financial regulations, focusing on the CARD Act, which restricts consumer credit card issuers’ ability to raise interest rates. We estimate the competitive responsiveness-the degree to which a credit card issuer changes offered interest rates in response to changes in interest rates offered by its competitors-as a measure of competition in the credit card market. Using small business card offers, which are not subject to the Act, as a control group, we find a significant decline in the competitive responsiveness after the Act. The decline in responsiveness is more pronounced for competitors’ reductions, as opposed to increases, in interest rates, and is more pronounced in areas with more subprime borrowers. The reduced competition underscores the potential unintended consequence of regulating the consumer credit market and contributes toward a more comprehensive and balanced evaluation of the costs and benefits of consumer financial regulations.
    Keywords: CARD Act ; Competitive responsiveness ; Credit card market ; Regulations
    JEL: L51 G21 E51
    Date: 2019–03–25
  73. By: Mundt, Philipp; Oh, Ilfan
    Abstract: We propose a parsimonious statistical model of firm competition where structural differences in the strength of competitive pressure and the magnitude of return fluctuations above and below the system-wide benchmark translate into a skewed Subbotin or asymmetric exponential power (AEP) distribution of returns to capital. Empirical evidence from US data illustrates that the AEP distribution compares favorably to popular alternative models such as the symmetric or asymmetric Laplace density in terms of goodness of fit when entry and exit dynamics of markets are taken into account.
    Keywords: return on capital,maximum entropy,asymmetric Subbotin distribution
    JEL: C16 D21 L10 E10 C12
    Date: 2019
  74. By: Mala Raghavan
    Abstract: The paper analyses the importance of supply versus demand shocks on the global oil market from 1974 to 2017, using a parsimonious structural vector autoregressive moving average (SVARMA) model. The superior out-of-sample forecasting performance of the reduced form VARMA compared to VAR alternatives advocates the suitability of this framework. We specifically account for the changes in the oil market over three distinctive sub-periods - pre moderation, great moderation and post moderation periods, to provide a means of identifying the changing nature of shock transmission mechanism across times. The findings shed some light on the effects of supply versus demand related oil shocks under different economic environment. Oil supply shocks explain large fraction of the movements in the global oil market in the pre and post moderation periods, i.e. during the slower economic growth periods. The importance of global activity shock on oil price movements is obvious during the 2003-2008 boom period. The oil specific shock has an interesting transmission path on the global economic activity, where the global activity responded positively and negatively during the global economic expansion and contraction respectively, emphasising the precautionary nature of the shock.
    Keywords: VARMA models, Oil price shocks, Global oil market, Impulse responses, Forecasting
    JEL: C32 E32 Q43
    Date: 2019–03
  75. By: Simone Lenzu (NYU Stern); Francesco Manaresi (Bank of Italy)
    Abstract: Using micro-data on firm-specific borrowing costs and wages, we demonstrate that distortions in firms’ policies can be empirically measured using firm-level gaps between marginal revenue products and user costs (MRP-cost gaps). We estimate MRP-cost gaps for 4.7 million firm-year observations in Italy between 1997 and 2013: their variation is closely related to the extent of credit and labor market frictions. Using the MRP-cost gaps, we assess the scope of input misallocation in Italy, and its impact on aggregate output and total factor productivity (TFP). The Italian corporate sector could produce 6% to 8% more output by reallocating resources toward higher-value users. Output losses from misallocation are larger (i) during episodes of financial instability, (ii) in non-manufacturing industries, (iii) in areas with less developed institutions and (iv) among high-risk firms. We highlight an important gain/risk tradeoff: gains from reallocation might come at the expense of increasing aggregate financial fragility, because maximizing reallocation gains requires a transfer of resource from large, old, and low-risk firms toward small, young, and high-risk firms.
    Keywords: total factor productivity, economic development, policy distortions
    JEL: O16 O40 E24
    Date: 2019–03
  76. By: Achsania Hendratmi (Faculty of Economics and Business, Universitas Airlangga, Indonesia. Author-2-Name: Puji Sucia Sukmaningrum Author-2-Workplace-Name: Faculty of Economics and Business, Universitas Airlangga, Jl. Airlangga No.4, 60286, Surabaya, Indonesia Author-3-Name: Muhamad Nafik Hadi Ryandono Author-3-Workplace-Name: Faculty of Economics and Business, Universitas Airlangga, Jl. Airlangga No.4, 60286, Surabaya, Indonesia Author-4-Name: Ririn Tri Ratnasari Author-4-Workplace-Name: Faculty of Economics and Business, Universitas Airlangga, Jl. Airlangga No.4, 60286, Surabaya, Indonesia Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)
    Abstract: Objective – This study aims to determine the role of Islamic crowdfunding towards business development of start-up businesses financed in Singapore, Malaysia and Indonesia. Methodology/Technique – This study uses a qualitative approach with an exploratory case study strategy. The data collection was carried out by conducting in-depth interviews with CEOs and COOs of Kapital Boost and CEO Investee (funded SMEs) informants. Findings – The results show that there is an increase in assets, sales turnover, and the capacity of Micro, Small and Medium Enterprises (MSMEs) and Startup businesses that received funding through campaigns on the Kapital Boost platform. In addition, pioneering business people can get easier access to financing compared to financing through bank-provided credit. Novelty – The findings of this paper can be used to develop crowdfunding platform will be implemented in Muslim countries or countries with a majority Muslim population. Type of Paper: Empirical.
    Keywords: Crowdfunding Platforms; Islamic Crowdfunding; Business Development; MSMEs; Start-up Companies.
    JEL: E44 M21 M29
    Date: 2019–03–19
  77. By: Jordà, Òscar; Schularick, Moritz; Taylor, Alan M.
    Abstract: The risk premium puzzle is worse than you think. Using a new database for the U.S. and 15 other advanced economies from 1870 to the present that includes housing as well as equity returns (to capture the full risky capital portfolio of the representative agent), standard calculations using returns to total wealth and consumption show that: housing returns in the long run are comparable to those of equities, and yet housing returns have lower volatility and lower covariance with consumption growth than equities. The same applies to a weighted total-wealth portfolio, and over a range of horizons. As a result, the implied risk aversion parameters for housing wealth and total wealth are even larger than those for equities, often by a factor of 2 or more. We find that more exotic models cannot resolve these even bigger puzzles, and we see little role for limited participation, idiosyncratic housing risk, transaction costs, or liquidity premiums.
    Keywords: Consumption-based asset pricing; Equity premium; housing premium; risk aversion
    JEL: E44 G12 G15 N20
    Date: 2019–03
  78. By: Alessandra Bonfiglioli (Queen Mary University of London and CEPR); Rosario Crinò (Università Cattolica del Sacro Cuore, Dept. of Economics and Finance, CEPR and CESifo); Gino Gancia (Queen Mary University of London, CREi and CEPR)
    Abstract: We use transaction-level data to study changes in the concentration of US imports. Concentration has fallen in the typical industry, while it is stable by industry and country of origin. The fall in concentration is driven by the extensive margin: the number of exporting firm has grown, and the number of exported products has fallen more for top firms. Instead, average revenue per product of top firms has increased. At the industry level, top firms are converging, but top firms within country are diverging. These facts suggest that intensified competition in international markets coexists with growing concentration among national producers.
    Keywords: Superstar Firms, Concentration, US Imports, Firm Heterogeneity, International Trade
    JEL: E23 F12 F14 L11 R12
    Date: 2019–02–28
  79. By: Jorda, Oscar (Federal Reserve Bank of San Francisco); Schularick, Moritz (University of Bonn); Taylor, Alan M. (University of California, Davis;)
    Abstract: The risk premium puzzle is worse than you think. Using a new database for the U.S. and 15 other advanced economies from 1870 to the present that includes housing as well as equity returns (to capture the full risky capital portfolio of the representative agent), standard calculations using returns to total wealth and consumption show that: housing returns in the long run are comparable to those of equities, and yet housing returns have lower volatility and lower covariance with consumption growth than equities. The same applies to a weighted total-wealth portfolio, and over a range of horizons. As a result, the implied risk aversion parameters for housing wealth and total wealth are even larger than those for equities, often by a factor of 2 or more. We find that more exotic models cannot resolve these even bigger puzzles, and we see little role for limited participation, idiosyncratic housing risk, transaction costs, or liquidity premiums.
    JEL: E44 G12 G15 N20
    Date: 2019–03–20
  80. By: Naef, Alain (University of Cambridge)
    Abstract: The effectiveness of central bank intervention is debated and despite literature showing mixed results, central banks regularly intervene in the foreign exchange market, both in developing and developed economies. Does foreign exchange intervention work? Using over 60,000 new daily observations on intervention and exchange rates, this paper is the first study of the Bank of England’s foreign exchange intervention between 1952 and 1972. The main finding is that the Bank of England was unsuccessful in managing a credible exchange rate over that period. Running an event study, I demonstrate that betting systematically against the Bank of England would have been a profitable trading strategy. The Bank of England failed to maintain credibility in offshore markets and eventually manipulated the publication of its reserve figures to avoid a run on sterling.
    Keywords: intervention; foreign exchange; central bank; Bank of England; Bretton Woods
    JEL: E50 F31 N14 N24
    Date: 2019–03–20
  81. By: Laurent Ferrara (Banque de France); Anna Simoni (CREST; CNRS.)
    Abstract: Nowcasting GDP growth is extremely useful for policy-makers to assess macroe-conomic conditions in real-time. In this paper, we aim at nowcasting euro area GDP with a large database of Google search data. Our objective is to check whether this speci?c type of information can be useful to increase GDP nowcasting accuracy, and when, once we control for o?cial variables. In this respect, we estimate shrunk bridge regressions that integrate Google data optimally screened through a targeting method, and we empirically show that this approach provides some gain in pseudo-real-time nowcasting of euro area GDP quarterly growth. Especially, we get that Google data bring useful information for GDP nowcasting for the four ?rst weeks of the quarter when macroeconomic information is lacking. However, as soon as o?cial data become available, their relative nowcasting power vanishes. In addition, a true real-time anal-ysis con?rms that Google data constitute a reliable alternative when o?cial data are lacking.
    Keywords: Nowcasting, Big data, Google search data, Sure Independence Screening, Ridge Regularization.
    Date: 2019–02–21
  82. By: Sebastian Rausch (ETH Zurich, Switzerland); Hagen Schwerin (ETH Zurich, Switzerland)
    Abstract: We develop a general equilibrium growth model with capital and energy use to examine the hypothesis that economy-wide energy use increases with energy efficiency. To obtain energy use that would have occurred in the absence of energy efficiency changes, chosen energy efficiency is induced by technological change. Viewing technological change in form of changes in the cost of capital and energy producing energy services enables us to control for the sources of energy efficiency improvements in a counterfactual setting. Calibrating the model to the post-WWII U.S. economy, we find that higher energy efficiency increased rather than reduced energy use, because lower capital cost enhanced energy use by more than the increase in energy cost reduced it. This casts strong doubts on the view that energy-saving technological change has lowered fossil energy use.
    Keywords: energy use, energy efficiency, energy rebound, efficiency paradox, Jevons paradox, energy-saving technological change, investment-specific technological change, general equilibrium, putty clay
    JEL: D13 E23 O30 O41 Q43
    Date: 2018–10
  83. By: Stéphane Auray (CREST; ENSAI; Université du Littoral Côte d’Opale); David L. Fuller (Université du Wisconsin-Oshkosh)
    Abstract: In this paper we investigate the causes and consequences of "unclaimed" unemployment insurance (UI) benefits. A search model is developed where the costs to collecting UI benefits include both a traditional "fixed" administrative cost and an endogenous cost arising from worker and firm interactions. Experience rated taxes give firms an incentive to challenge a worker's UI claim, and these challenges are costly for the worker. Exploiting data on improper denials of UI benefits across states in the U.S. system, a two-way fixed e ects analysis shows a statistically significant negative relationship between the improper denials and the UI take-up rate, providing empirical support for our model. We calibrate the model to elasticities implied by the two-way fixed e ects regression to quantify the relative size of these UI collection costs. The results imply that on average the costs associated with firm challenges of UI claims account for 42% of the total costs of collecting, with improper denials accounting for 6% of the total cost. The endogenous collection costs imply the unemployment rate responds much slower to changes in UI benefits relative to a model with fixed collection costs. Finally, removing all eligibility requirements and allowing workers to collect UI benefits without cost increases welfare by almost 5% with minimal impact on the unemployment rate.
    Keywords: Unemployment Insurance, Take-up Rate, Experience Rating, Matching Frictions, Search
    JEL: E61 J32 J64 J65
    Date: 2018–10–03
  84. By: Haroon Mumtaz (Queen Mary University of London); Katerina Petrova (University of St. Andrews)
    Abstract: In this paper we extend the Bayesian Proxy VAR to incorporate time variation in the parameters. A Gibbs sampling algorithm is provided to approximate the posterior distributions of the model's parameters. Using the proposed algorithm, we estimate the time-varying effects of taxation shocks in the US and show that there is limited evidence for a structural change in the tax multiplier.
    Keywords: Time-Varying parameters, Stochastic volatility, Proxy VAR, tax shocks
    JEL: C2 C11 E3
    Date: 2018–11–07
  85. By: Giordana, Gaston; Ziegelmeyer, Michael
    Abstract: This paper uses representative individual household data from Luxembourg to evaluate how severe economic conditions could affect bank exposure to the household sector. Information on household income, expenses and liquid assets are used to calculate household-specific probabilities of default (PD), aggregate bank exposure at default (EAD) and aggregate bank loss given default (LGD). The exercise is repeated with scenarios combining severe but plausible shocks to real estate prices, bonds and stocks, household income and interest rates. Compared to the no-shock baseline, the LGD rises by a multiple of eight, reaching 4.2% of total bank exposure to the household sector. The high-stress scenario also generates a relatively high percentage of defaults among socio-economically disadvantaged households. Our main conclusion is that bank losses appear to be quite sensitive to financial stress, despite three mitigating factors in Luxembourg: indebted households tend to hold liquid assets that can help smooth shocks, household leverage tends to decline rapidly once mortgages have been serviced several years, and loan-to-value ratios at origination appear not to be excessive. JEL Classification: D10, D14, E44, G01, G21
    Keywords: financial stability, HFCS, household finance
    Date: 2019–03
  86. By: Martin Bruns (Freie Universitat Berlin and German Institute for Economic Research (DIW Berlin)); Michele Piffer (Queen Mary University of London)
    Abstract: Structural VAR models are frequently identified using sign restrictions on impulse responses. Moving beyond the popular but restrictive Normal-inverse-Wishart-Uniform prior, we develop a methodology that can handle almost any prior distribution on contemporaneous responses. We then propose a new sampler that explores the posterior just as efficiently as done by the existing algorithm for the Normal-inverse-Wishart-Uniform case. We use this exible and tractable framework to combine sign restrictions with information on the volatility of the data, giving less prior mass to impulse effects that are inconsistent with the data from a training sample. This approach sharpens posterior bands and makes sign restrictions more informative. We apply the methodology to the oil market and show that oil supply shocks have a non-negligible effect on oil price dynamics.
    Keywords: Sign restrictions, Bayesian inference, Oil market
    JEL: C32 C11 E50 H62
    Date: 2018–11–23

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