nep-mac New Economics Papers
on Macroeconomics
Issue of 2019‒09‒09
68 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Search Complementarities, Aggregate Fluctuations, and Fiscal Policy By Jesús Fernández-Villaverde; Federico Mandelman; Yang Yu; Francesco Zanetti
  2. Central bank digital currencies: The case of universal central bank reserves By Paolo Fegatelli
  3. Housing sector and optimal macroprudential policy in an estimated DSGE model for Luxembourg By Ibrahima Sangaré
  4. Monetary Policy Rules and Macroeconomic Stability By Jayawickrema, Vishuddhi
  5. Managing Households' Expectations with Salient Economic Policies By Francesco D'Acunto; Daniel Hoang; Michael Weber
  6. Is Inflation Fiscally Determined? By Bazzaoui, Lamia; Nagayasu, Jun
  7. Long-term inflation expectations and inflation dynamics By Thórarinn G. Pétursson
  8. Uncertainty, Financial Markets, and Monetary Policy over the Last Century By Sangyup Choi; Chansik Yoon
  9. On Secular Stagnation in the Industrialized World By Łukasz Rachel; Lawrence H. Summers
  10. Who Gained from India’s Demonetization? Insights from Satellites and Surveys By Chanda, Areendam; Cook, Justin
  11. China's Monetary Policy and the Loan Market: How Strong is the Credit Channel in China? By Max Breitenlechner; Riikka Nuutilainen
  12. The Effects of Asset Purchases and Normalization of US Monetary Policy By Naoko Hara; Ryuzo Miyao; Tatsuyoshi Okimoto
  13. The Role of Global and Domestic Shocks for Inflation Dynamics: Evidence from Asia By David Finck; Peter Tillmann
  14. Risk-Free Interest Rates By Diamond, William; Grotteria, Marco; van Binsbergen, Jules H.
  15. Dos Aplicaciones de la Teoría Cuantitativa By Jorge C. Ávila
  16. The Brexit Vote, Productivity Growth and Macroeconomic Adjustments in the United Kingdom By Ben Broadbent; Federico Di Pace; Thomas Drechsel; Richard Harrison; Silvana Tenreyro
  17. Interest Rate Hysteresis in Macroeconomic Investment under Uncertainty By Belke, Ansgar H.; Göcke, Matthias
  18. Rational Expectations with Endogenous Information By Jonathan J Adams
  19. Interest Rate Bands of Inaction and Play-Hysteresis in Domestic Investment: Evidence for the Euro Area By Belke, Ansgar H.; Frenzel Baudisch, Coletta; Göcke, Matthias
  20. Exposure to Daily Price Changes and Inflation Expectations By Francesco D'Acunto; Ulrike M. Malmendier; Juan Ospina; Michael Weber
  21. Anchored Inflation Expectations By Eusepi, Stefano; Moench, Emanuel; Preston, Bruce; Viana de Carvalho, Carlos
  22. Negative interest rates, excess liquidity and retail deposits: Banks’ reaction to unconventional monetary policy in the euro area By Selva Demiralp; Jens Eisenschmidt; Thomas Vlassopoulos
  23. Monetary Growth and Financial Sector Wages By Michael Patrick Curran; Matthew J. Fagerstrom
  24. International Capital Allocations and the Lucas Paradox Redux By Robert S. Chirinko; Debdulal Mallick
  25. The Relation between Minimum Wage and Unemployment across the Economic Cycle in Countries of the Visegrad Group By Bo?ena Kade?ábková; Emílie Ja?ová
  26. Revisiting the fiscal theory of sovereign risk from a DSGE viewpoint By Okano Eiji; Kazuyuki Inagaki
  27. The macroeconomic impact of the euro By Akhmadieva, Veronika; Smith, Ron P
  28. Transmission of a resource boom: The case of Australia By Mardi Dungey; Renee Fry-McKibbin; Vladimir Volkov
  29. Alternatives to Inflation Targeting in Low Interest Rate Environments By Carl E. Walsh
  30. On the Effects of the ECB’s Funding Policies on Bank Lending and the Demand for the Euro as an International Reserve By Heather D. Gibson; Stephen G. Hall; Pavlos Petroulas; George S. Tavlas
  31. Does Inflation Targeting Reduce the Dispersion of Price Setters’ Inflation Expectations? By Paulie, Charlotte
  32. What Does Peer-To-Peer Lending Evidence Say about the Risk-Taking Channel of Monetary Policy? By Yiping Huang; Xiang Li; Chu Wang
  33. Optimal Monetary and Fiscal Policy Rules, Welfare Gains and Exogenous Shocks in an Economy with Default Risk By Okano Eiji; Masataka Eguchi
  34. What does peer-to-peer lending evidence say about the risk-taking channel of monetary policy? By Huang, Yiping; Li, Xiang; Wang, Chu
  35. Fiscal policy for full-employment and debt dynamics: An attempt of mathematical analysis of MMT By Tanaka, Yasuhito
  36. Shocking aspects of monetary policy on income inequality in the euro area By Jérôme Creel
  37. Expectations Anchoring Indexes for Brazil using Kalman Filter: exploring signals of inflation anchoring in the long term By Fernando Nascimento de Oliveira; Wagner Piazza Gaglianone
  38. Fooled by the Cycle: Permanent versus Cyclical Improvements in Social Indicators By José Andrée Camarena; Luciana Galeano; Luis Morano; Jorge Puig; Daniel Riera-Crichton; Carlos Vegh; Lucila Venturi; Guillermo Vuletin
  39. Forecasting Public Investment Using Daily Stock Returns By Morita, Hiroshi
  40. Dominant-currency pricing and the global output spillovers from US dollar appreciation By Georgios Georgiadis; Ben Schumann
  41. Cryptocurrencies, Currency Competition, and the Impossible Trinity By Pierpaolo Benigno; Linda M. Schilling; Harald Uhlig
  42. International Bank Lending Channel of Monetary Policy By Silvia Albrizio; Sangyup Choi; Davide Furceri; Chansik Yoon
  43. Residential Property Price Indexes: Spatial Coordinates versus Neighbourhood Dummy Variables By Diewert, Erwin; Shimizu, Chihiro
  44. Macroeconomic Impacts of Fiscal Policy in Ghana: Analysis of an Estimated DSGE Model with Financial Exclusion By Paul Owusu Takyi; Roberto Leon-Gonzalez
  45. Entry, Trade, and Exporting over the Cycle By George A. Alessandria; Horag Choi
  46. Fiscal and Monetary Policy Interaction in Malawi By Joseph Upile Matola; Roberto Leon-Gonzalez
  47. Do reserve requirements reduce the risk of bank failure? By Glocker, Christian
  48. Imperfect Information, Shock Heterogeneity, and Inflation Dynamics By Tatsushi Okuda; Tomohiro Tsuruga; Francesco Zanetti
  49. How Do Foreclosures Exacerbate Housing Downturns? By Adam M. Guren; Timothy J. McQuade
  50. Rigid Wages and Contracts: Time- versus State-Dependent Wages in the Netherlands By Grajales Olarte, A.; Uras, Burak; Vellekoop, N.
  51. Is Declining Union Membership Contributing to Low Wages Growth? Discussion By van Rens, Thijs
  52. Dollarization in Montenegro: evidence after two decades of experience By Maja Bacovic
  53. Modeling the Dynamics of Inflation in India By Pulapre Balakrishnan; M. Parameswaran
  54. The distribution of well-being among Europeans By Andrea Brandolini; Alfonso Rosolia
  55. Institutional Responses to Aging Populations and Economic Growth: A Panel Data Approach By Emerson, Patrick M.; Knabb, Shawn D.; Sirbu, Anca-Ioana
  56. Fiscal challenges and inclusive growth in ageing societies By Dorothée Rouzet; Aida Caldera Sánchez; Theodore Renault; Oliver Roehn
  57. The probability of automation of occupations in Italy By Emilia Filippi; Sandro Trento
  58. Macroeconomic Uncertainty and Investment Relationship for Turkey By Pelin Öge Güney
  59. Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization By Xiao,Tim
  60. Skills Scarcity and Export Intensity By Carlo Perroni; Davide Suverato
  61. Misallocation Under Trade Liberalization By Yan Bai; Keyu Jin; Dan Lu
  62. Does Unemployment Worsen Babies' Health? A Tale of Siblings, Maternal Behaviour and Selection By De Cao, Elisabetta; McCormick, Barry; Nicodemo, Catia
  63. The Euro Area Economic, Fiscal and Financial Governance: Difficulties and Successes in the Past - Present Challenges - Future Steps By Jean-Claude Trichet
  64. All?s well that ends well; The end was never well: Collective memory in Khushwant Singh?s Train to Pakistan By Nagendra Kumar
  65. The American Dream Lives in Sweden: Trends in intergenerational absolute income mobility By Liss, Erik; Korpi, Martin; Wennberg , Karl
  66. Predicting Consumer Default: A Deep Learning Approach By Stefania Albanesi; Domonkos F. Vamossy
  67. Long-Run Effects of Dynamically Assigned Treatments: a New Methodology and an Evaluation of Training Effects on Earnings By van den Berg, Gerard J.; Vikström, Johan
  68. Consumer Learning and Firm Dynamics By Zachary Mahone; Filippo Rebessi

  1. By: Jesús Fernández-Villaverde; Federico Mandelman; Yang Yu; Francesco Zanetti
    Abstract: We develop a quantitative business cycle model with search complementarities in the inter-firm matching process that entails a multiplicity of equilibria. An active static equilibrium with strong joint venture formation, large output, and low unemployment can coexist with a passive static equilibrium with low joint venture formation, low output, and high unemployment. Changes in fundamentals move the system between the two static equilibria, generating large and persistent business cycle fluctuations. The volatility of shocks is important for the selection and duration of each static equilibrium. Sufficiently adverse shocks in periods of low macroeconomic volatility trigger severe and protracted downturns. The magnitude of government intervention is critical to foster economic recovery in the passive static equilibrium, while it plays a limited role in the active static equilibrium.
    JEL: C63 C68 E32 E37 E44 G12
    Date: 2019–08
  2. By: Paolo Fegatelli
    Abstract: We analyse several motivations for the introduction of a widely accessible central bank digital currency (CBDC). If a central bank decided to offer a CBDC, its design would have to consider different areas of central bank activity, taking into account multiple policy principles, objectives and constraints. In addition, the introduction of a CBDC on a large scale may have a non-trivial impact on the architecture of the financial system. From this perspective, some common arguments in favour of CBDC may seem simplistic and the field of feasible options may be narrower than often believed. We reconsider Tobin’s idea to establish a system of universal access to central bank reserves, and clarify its feasibility and advantages as an account-based CBDC.
    Keywords: Central bank digital currency, universal central bank reserves, deposited currency accounts, cash, central bank, central bank policies, monetary policy, financial stability, payment systems, deposit insurance, bank deposits, inside money, collateral, virtual currencies
    JEL: E41 E42 E43 E51 E52 E58
    Date: 2019–07
  3. By: Ibrahima Sangaré
    Abstract: This study investigates the optimal macroprudential policies for Luxembourg using an estimated closed-economy DSGE model. The model features a monopolistically competitive banking sector, a collateral constraint and an explicit differentiation between the flow and the stock of household mortgage debt. Based on a welfare-oriented approach and in a context of easy monetary policy environment, we first find that the non-joint optimal loan-to-value (LTV) and risk weighted capital requirement (RW) ratios for Luxembourg seem to be 90% and 30%, respectively, while the joint optimal ratios are found to be 100% and 10% respectively. Our results from the combination of instruments suggest that the policy scenario that provides better stabilization effects on mortgage credits isn’t necessarily the one that is welfare improving. In other words, we find a complementarity between LTV and RW in terms of welfare, while their optimal combination diminishes the stabilization effects on mortgage debt and house prices. However, the time-varying and endogenous rules for LTV and RW improve the social welfare and better stabilizes mortgage loans and house prices compared to their static exogenous ratios. We further find that the optimal interactions between LTV and RW ratios in our modelling framework exhibit a convex shape. It should be recalled that the results are conditional on the model’s specific assumptions.
    Keywords: LTV, Risk weights, optimal macroprudential policy, combination of macroprudential instruments
    JEL: E32 E44 R38
    Date: 2019–07
  4. By: Jayawickrema, Vishuddhi
    Abstract: This paper attempts to characterize the monetary policy regimes in the United States and analyze their effects on macroeconomic stability. It does so by estimating Taylor-type forward-looking monetary policy reaction functions for the pre- and post-1979 periods, and simulating the resultant coefficients in a basic New Keynesian business cycle model. The feedback coefficient on inflation in the estimated policy reaction function is found to be less than unity for the 1960-1979 period, suggesting an accommodative monetary policy stance of the Federal Reserve. However, for the 1979-2017 period, the feedback coefficient on inflation is estimated to be substantially greater than unity, implying that the Federal Reserve adopted a proactive policy stance towards controlling inflation. It is also found that in recent times, the Federal reserve has shifted its focus from short one period ahead inflation targets to longer target horizons such as one year ahead inflation targets. Meanwhile, the model simulations show that the economy exhibits greater stability under a model with post-1979 calibration than a model with a combination of pre-1979 parameters and `sunspot' shocks.
    Keywords: Monetary Policy, Monetary Policy Rules, Taylor Rule, Macroeconomic Stability
    JEL: E32 E43 E52
    Date: 2019–01
  5. By: Francesco D'Acunto; Daniel Hoang; Michael Weber
    Abstract: The empirical effectiveness of economic policies that operate theoretically through similar channels differs substantially. We document this fact by comparing an easy-to-grasp expectations-based policy, unconventional fiscal policy, with a policy whose implications are harder to understand by non-expert consumers, forward guidance. Both policies aim to stimulate consumption via managing inflation expectations based on the Euler equation. Unconventional fiscal policy uses trivial announcements of future consumer-price increases to boost inflation expectations and consumption expenditure on impact. Instead, forward guidance requires that agents understand the inflationary effects of future low interest rates to increase their inflation expectations and spending today. We find households’ inflation expectations and readiness to spend react substantially to unconventional fiscal policy announcements. The reaction is homogeneous across households with different levels of sophistication. Instead, households do not react after forward guidance announcements. These results support recent work stressing the importance of limited cognition for the effectiveness of policies.
    Keywords: expectations, natural experiments, consumption, fiscal policy, monetary policy, macroeconomics with micro data
    JEL: D12 D84 D91 E21 E31 E32 E52 E65
    Date: 2019
  6. By: Bazzaoui, Lamia; Nagayasu, Jun
    Abstract: This paper examines the relationship between fiscal variables and inflation for 46 countries from 1960–2017 using a linear identity that links inflation to fiscal and monetary variables and economic growth. The results indicate that inflation is affected by both monetary and fiscal policies. However, the relation between inflation and fiscal variables disappears when monetary policy is based on commitment strategies. We conclude that fiscal determinacy of inflation is only possible when central banks practice poorly structured discretion.
    Keywords: inflation, fiscal policy, monetary policy, public debt, panel VAR GMM
    JEL: E31 E43 E63 H63
    Date: 2019–08
  7. By: Thórarinn G. Pétursson
    Abstract: After rising sharply following the Global Financial Crisis, inflation in Iceland has been low and stable in recent years despite a strong cyclical recovery. This not only reflects favourable external conditions but also coincides with a significant decline in long-term inflation expectations in financial markets. It is argued, however, that this market-based measure of inflation expectations actually underestimates the true decline in long-term inflation expectations of price setters. To extract this unobserved wedge between inflation expectations of price setters and financial agents, we estimate a time-varying parameter Phillips curve model for the inflation-targeting period since 2001, adjusting also for an unobserved risk premium in market-based inflation expectations. The empirical results suggest that the expectations wedge was significantly positive until early 2012, after which it starts to gradually decline towards zero. The true decline in long-term inflation expectations of actual price setters is therefore much steeper than is captured by the market-based measure and taking this into account results in a stable and plausible specification of the Phillips curve that can explain key features of the recent inflation developments in Iceland.
    JEL: E31 E32 E37 E52
    Date: 2019–08
  8. By: Sangyup Choi (Yonsei University); Chansik Yoon (Princeton University)
    Abstract: What has been the effect of uncertainty shocks in the U.S. economy over the last century? What are the historical roles of the financial channel and monetary policy channel in propagating uncertainty shocks? Our empirical strategies enable us to distinguish between the effects of uncertainty shocks on key macroeconomic and financial variables transmitted through each channel. A hundred years of data further allow us to answer these questions from a novel historical perspective. This paper finds robust evidence that financial conditions have played a crucial role in propagating uncertainty shocks over the last century, supporting many theoretical and empirical studies emphasizing the role of financial frictions in understanding uncertainty shocks. However, heightened uncertainty does not amplify the adverse effect of financial shocks, suggesting an asymmetric interaction between uncertainty and financial shocks. Interestingly, the stance of monetary policy seems to play only a minor role in propagating uncertainty shocks, which is in sharp contrast to the recent claim that binding zero-lower-bound amplifies the negative effect of uncertainty shocks. We argue that the contribution of constrained monetary policy to amplifying uncertainty shocks is largely masked by the joint concurrence of binding zero-lower-bound and tightened financial conditions.
    Keywords: uncertainty shocks; financial channel; counterfactual VARs; local projections; zero-lower- bound
    JEL: E31 E32 E44 G10
    Date: 2019–08–14
  9. By: Łukasz Rachel; Lawrence H. Summers
    Abstract: We argue that the economy of the industrialized world taken as a whole is currently – and for the foreseeable future will remain – highly prone to secular stagnation. But for extraordinary fiscal policies, real interest rates would have fallen much more and be far below their current slightly negative level, current and prospective inflation would be further short of the two percent target levels and past and future economic recoveries would be even more sluggish. We start by arguing that, contrary to current practice, neutral real interest rates are best estimated for the bloc of all industrial economies given capital mobility between them and relatively limited fluctuations in their aggregated current account. We show, using standard econometric procedures and looking at direct market indicators of prospective real rates, that neutral real interest rates have declined by at least 300 basis points over the last generation. We argue that these secular movements are in larger part a reflection of changes in saving and investment propensities rather than the safety and liquidity properties of Treasury instruments. We highlight the observation that levels of government debt, the extent of pay-as-you-go old age pensions and the insurance value of government healthcare programs have all ceteris paribus operated to raise neutral real rates. Using estimates drawn from the literature, as well as two general equilibrium models emphasizing respectively life-cycle heterogeneity and individual uncertainty, we suggest that the “private sector neutral real rate” may have declined by as much as 700 basis points since the 1970s.
    JEL: E43 E44 E50 E60 F41
    Date: 2019–08
  10. By: Chanda, Areendam; Cook, Justin
    Abstract: On November 8, 2016, the Indian government abruptly demonetized 86% of its currency in circulation in an attempt to reduce black money, corruption, and counterfeiting. Yet, 99% of the currency was eventually returned to banks. We exploit large regional variations in deposit growth as a result of demonetization to study the medium-term effects of this policy. Using night-light data, we show that districts which experienced higher deposit growth during the demonetization period recorded higher levels of economic activity in the year and a half that followed. We estimate a one standard deviation increase in deposits is associated with a 5% increase in district GDP per capita. Further, districts with larger rural population, agricultural and non-agricultural informal labor shares also recorded an increase in nighttime light activity. The results are also supported by household-level surveys on income and expenditures.
    Keywords: Demonetization, Regional Economic Growth, Monetary Policy, Indian Economy, Difference in Difference, Informal Economy, Agriculture, Credit
    JEL: E21 E26 E51 E65 O11 O13 O16 O17 O18 O5
    Date: 2019–08–23
  11. By: Max Breitenlechner (University of Innsbruck); Riikka Nuutilainen (Bank of Finland)
    Abstract: We study the credit channel of Chinese monetary policy in a structural vector autoregressive framework. Using combinations of zero and sign restrictions, we identify monetary policy shocks linked to supply and demand responses in the loan market. Our results show that policy shocks coinciding with loan supply effects account for roughly 10 percent of output dynamics after two years, while loan demand effects represent up to 7 percent of output dynamics depending on the policy measure. The credit channel thus constitutes an important and economically relevant transmission channel for monetary policy in China. Monetary policy in China also accounts for a relatively high share of business cycle dynamics.
    Keywords: China, Monetary Policy, Transmission Effects, Structural Vector Autoregression, Zero and Sign Restrictions
    JEL: C32 E44 E52
    Date: 2019–08–22
  12. By: Naoko Hara (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Ryuzo Miyao (Professor, Faculty of Economics, University of Tokyo (E-mail:; Tatsuyoshi Okimoto (Associate Professor, Crawford School of Public Policy, Australian National University, and Visiting Fellow, Research Institute of Economy, Trade and Industry (RIETI) (E-mail: tatsuyoshi.
    Abstract: This paper examines changes in the effects of unconventional monetary policies in the US. To this end, we estimate a Markov-switching VAR model with absorbing regimes to capture possible structural changes. Our results detect regime changes around the beginning of 2011 and the middle of 2013. Before 2011, the US large-scale asset purchases (LSAPs) had relatively large impacts on the real economy and prices, but after the middle of 2013, their effects were weaker and less-persistent. In addition, after the middle of 2013, which includes the monetary policy normalization period, the asset purchase (or balance sheet) shocks had slightly weaker effects than during the early stage of the LSAPs but stronger effects than during the late stage of the LSAPs, while interest rate shocks had insignificant effects on the real economy and prices. Finally, our results suggest that the positive responses of durables and capital goods expenditures to interest rate shocks weakened the negative impacts of interest rate hikes after the middle of 2013 including the period of monetary policy normalization.
    Keywords: Quantitative easing, Unconventional monetary policy, LSAP, MSVAR
    JEL: C32 E21 E52
    Date: 2019–08
  13. By: David Finck (Justus-Liebig-University Gießen, Germany); Peter Tillmann (Justus-Liebig-University Gießen, Germany)
    Abstract: This paper studies the changing nature of inflation dynamics in small open economies and the shifting output-inflation trade-off. We estimate a series of VAR models for a set of six Asian emerging market economies, in which we identify a battery of domestic and global shocks using sign restrictions. We find that global shocks ex- plain large parts of inflation and output dynamics. The global shocks are procycli- cal with respect to the domestic components of economic activity. We estimate Phillips curve regressions based on alternative decompositions of output into global and domestic components. For the domestic component of GDP we find a positive and significant Phillips curve slope. While including the output component driven by oil prices ’flattens’ the Phillips curve, the component driven by global demand shocks ’steepens’ the trade-off. Hence, whether or not global shocks flatten the Phillips curve crucially depends on the nature of these global shocks. A series of counterfactuals supports these findings and suggests that the role of monetary pol- icy and exchange rate shocks is limited.
    Keywords: inflation targeting, business cycle, open economy, monetary policy, Phillips curve
    JEL: E3 E5 F4
    Date: 2019–08–16
  14. By: Diamond, William; Grotteria, Marco; van Binsbergen, Jules H.
    Abstract: We estimate risk-free interest rates unaffected by convenience yields on safe assets. We infer them from risky asset prices without relying on any specific model of risk. We obtain a term structure of convenience yields with maturities up to 2.5 years at a minutely frequency. The convenience yield on treasuries equals about 40 basis points, is larger below 3 months maturity, and quadruples during the financial crisis. In high-frequency event studies, conventional and unconventional monetary stimulus reduce convenience yields, particularly during the crisis. We further study convenience-yield-free CIP deviations, and we show significant bond return predictability related to convenience yields.
    Keywords: Convenience Yield; Demand for Safe Assets; monetary policy; Quantitative easing
    JEL: E41 E43 E44 G12 G21
    Date: 2019–07
  15. By: Jorge C. Ávila
    Abstract: Resumen: El propósito del ensayo es sistematizar, en la tradición de Friedman y Schwartz (1963), el análisis de dos recientes coyunturas monetarias: la crisis de las hipotecas sub-prime (EEUU 2008-2011) y la corrida contra las Lebac (Argentina 2018-2019). Ambos casos son un buen ejemplo de la capacidad de desestabilización de fuerzas monetarias básicas, tales como cambios de la velocidad de circulación y el multiplicador monetario. En el primero, destacamos la agresiva política de la Reserva Federal como prestamista de última instancia. En el segundo, concluimos que a) la mayor parte del aumento del nivel de precios del período febrero 2018-febrero 2019 se debió a un aumento de la velocidad, y b) si el multiplicador no hubiera caído como lo hizo, la inflación del período habría sido bastante más alta. Abstract: The purpose of the essay is to systematize, in the Friedman and Schwartz (1963) tradition, the analysis of two recent monetary crises: the sub-prime mortgage crisis (USA 2008-2011) and the run against the Lebac (Argentina 2018-2019). Both cases are good examples of the ability to destabilize of elementary monetary forces, such as changes in the velocity of circulation and the money multiplier. Regarding the first case, we highlight the aggressive role of the Federal Reserve as last resort lender. In the second, we conclude that a) most of the price level increase in the period February 2018-February 2019 was due to an increase in velocity, and b) if the multiplier had not fallen as it fell, inflation in the period would have been much higher.
    JEL: E31 E51
    Date: 2019–08
  16. By: Ben Broadbent (Bank of England; Centre for Macroeconomics (CFM)); Federico Di Pace (Bank of England); Thomas Drechsel (University of Maryland; Centre for Macroeconomics (CFM)); Richard Harrison (Bank of England; Centre for Macroeconomics (CFM)); Silvana Tenreyro (Bank of England; London School of Economics (LSE); Centre for Macroeconomics (CFM); Centre for Economic Policy Research (CEPR))
    Abstract: The UK economy has experienced significant macroeconomic adjustments following the 2016 referendum on its withdrawal from the European Union. This paper develops and estimates a small open economy model with tradable and non-tradable sectors to characterise these adjustments. We demonstrate that many of the effects of the referendum result can be conceptualised as news about a future slowdown in productivity growth in the tradable sector. Simulations show that the responses of the model economy to such news are consistent with key patterns in UK data. While overall economic growth slows, an immediate permanent fall in the relative price of non-tradable output (the real exchange rate) induces a temporary ‘sweet spot’ for tradable producers before the slowdown in tradable sector productivity associated with Brexit occurs. Resources are reallocated towards the tradable sector, tradable output growth rises and net exports increase. These developments reverse after the productivity decline in the tradable sector materialises. The negative news about tradable sector productivity also leads to a decline in domestic interest rates relative to world interest rates and to a reduction in investment growth, while employment remains relatively stable. As a by-product of our analysis, we provide a quantitative analysis of the UK business cycle.
    Keywords: Brexit, Small open economy, Productivity, Tradable sector, UK economy
    JEL: E13 E32 F17 F47 O16
    Date: 2018–08
  17. By: Belke, Ansgar H. (University of Duisburg-Essen); Göcke, Matthias
    Abstract: The interest rate is generally considered as an important driver of macroeconomic investment. As an innovation, this paper derives the exact shape of the "hysteretic" impact of changes in the interest rate on macroeconomic investment under the scenarios of both certainty and uncertainty. We capture the direct interest rate-hysteresis on the investments and the capital stock and, explicitly, of stochastic changes on the interest rate-investment hysteresis. Starting with hysteresis effects on a microeconomic level of a single firm, we apply an explicit aggregation procedure to derive the interest rate hysteresis effects on a macroeconomic level. Based on our simple model we are able to obtain some conclusions about the efficacy of a central bank's interest rate policy, e.g. in times of low or even zero interest rates and high uncertainty, in terms of stimulating macroeconomic investment.
    Keywords: forward guidance, interest rate, investment, Mayergoyz-Preisach model, monetary policy, path dependence, non-ideal relay, sunk-cost hysteresis, uncertainty, zero lower bound
    JEL: C61 E22 E44
    Date: 2019–08
  18. By: Jonathan J Adams (Department of Economics, University of Florida)
    Abstract: This paper characterizes a general class of macroeconomic models with incomplete information, particularly when the information process includes endogenous variables. I derive conditions for existence and uniqueness of equilibrium, which apply even when the model contains endogenous state variables. I introduce an algorithm to solve the general model, which is easily applied whether the information process is exogenous or endogenous. As an application I consider a business cycle model where firms must make inferences about aggregate shocks through the movements of endogenous prices. Observed prices do not fully reveal the state of the economy, so monetary shocks can have real effects. In this model there is a role for policy: the central bank's money supply rule determines the size of the real effects of nominal shocks, by controlling how informative prices are about the aggregate state. The optimal policy targets acyclical inflation, which makes money neutral. Finally, I demonstrate an advantage of models with endogenous information: the noisy signals are driven by fundamental shocks, rather than ad hoc noise. These shocks are observable ex post, so data can discipline the information structure. Accordingly, I calibrate the model using US industry-level panel data.
    JEL: D84 E32 C62 C63
    Date: 2019–09
  19. By: Belke, Ansgar H. (University of Duisburg-Essen); Frenzel Baudisch, Coletta (Justus Liebig University, Giessen); Göcke, Matthias
    Abstract: The interest rate represents an important monetary policy tool to steer investment in order to reach price stability. Therefore, implications of the exact form and magnitude of the interest rate-investment nexus for the European Central Bank's effectiveness in a low interest rate environment gain center stage. We first present a theoretical framework of the hysteretic impact of changes in the interest rate on macroeconomic investment under certainty and under uncertainty to investigate whether uncertainty over future interest rates in the Euro area hampers monetary policy transmission. In this non-linear model, strong reactions in investment activity occur as soon as changes of the interest rate exceed a zone of inaction, that we call 'play' area. Second, we apply an algorithm describing path-dependent play-hysteresis to estimate investment hysteresis using data on domestic investment and interest rates on corporate loans for 5 countries of the Euro area in the period ranging from 2001Q1 to 2018Q1. We find hysteretic effects of interest rate changes on investment in most countries. However, their shape and magnitude differ widely across countries which poses a challenge for a unified monetary policy. By introducing uncertainty into the regressions, the results do not change much which may be due to the interest rate implicitly incorporating uncertainty effects in investment decisions, e.g. by risk premia.
    Keywords: European Central Bank, interest rate, investment, monetary policy, non-ideal relay, path-dependence, play-hysteresis, uncertainty
    JEL: C32 E44 E49 E52 F21
    Date: 2019–08
  20. By: Francesco D'Acunto; Ulrike M. Malmendier; Juan Ospina; Michael Weber
    Abstract: We show that, to form aggregate inflation expectations, consumers rely on the price changes they face in their daily lives while grocery shopping. Specifically, the frequency and size of price changes, rather than their expenditure share, matter for individuals’ inflation expectations. To document these facts, we collect novel micro data for a representative US sample that uniquely match individual expectations, detailed information about consumption bundles, and item-level prices. Our results suggest that the frequency and size of grocery-price changes to which consumers are personally exposed should be incorporated in models of expectations formation. Central banks' focus on core inflation - which excludes grocery prices - to design expectations-based policies might lead to systematic mistakes.
    Keywords: beliefs formation, rational inattention, realized inflation, transmission of monetary policy
    JEL: C90 D14 D84 E31 E52 G11
    Date: 2019
  21. By: Eusepi, Stefano; Moench, Emanuel; Preston, Bruce; Viana de Carvalho, Carlos
    Abstract: Because of policy uncertainty long-run inflation beliefs are a state-contingent function of short-run inflation surprises. Expectations are well anchored only when the central bank is credible and long-run beliefs display small and declining sensitivity to short-run forecast errors. Nominal rigidities mean shifts in beliefs induce an endogenous inflation trend, with time-varying persistence and volatility. This feature of our theory of the nominal anchor distinguishes it from common explanations of low-frequency movements in inflation. The model, estimated using only US inflation and short-term forecasts from professional surveys, accurately predicts observed measures of long-term inflation expectations for the US and other countries, including several episodes of poorly anchored expectations.
    Keywords: Anchored expectations; Inflation expectations; survey data
    JEL: D83 D84 E32
    Date: 2019–07
  22. By: Selva Demiralp (Koç University); Jens Eisenschmidt (European Central Bank); Thomas Vlassopoulos (European Central Bank)
    Abstract: Negative interest rate policy (NIRP) is associated with a particular friction. The remuneration of banks´ retail deposits tends to be floored at zero, which limits the typical transmission of policy rate cuts to bank funding costs. We investigate whether this friction affects banks’ reactions under NIRP compared to a standard rate cut in the euro area. We argue that reliance on retail deposit funding and the level of excess liquidity holdings may increase banks’ responsiveness to NIRP. We find evidence that banks highly exposed to NIRP tend to grant more loans. This confirms studies pointing to higher risk taking by banks under NIRP and contrasts results that associate NIRP with a contraction in bank loans. Broader coverage of our loan data and the explicit consideration of banks’ excess liquidity holdings are likely reasons for this different result compared to some earlier literature. We are the first to document the importance of banks’ excess liquidity holdings for the effectiveness of NIRP, pointing to a strong complementarity of NIRP with central bank liquidity injections, e.g. via asset purchases.
    Keywords: Negative rates, bank balance sheets, monetary transmission mechanism
    JEL: E43 E52 G11 G21
    Date: 2019–09
  23. By: Michael Patrick Curran (Department of Economics, Villanova School of Business, Villanova University); Matthew J. Fagerstrom (Department of Economics, Villanova School of Business, Villanova University)
    Abstract: We investigate the relation between monetary growth and the growth of and compensation in the financial industry since the end of the Bretton Woods system. Estimating structural vector autoregressions, we find that the growth of the monetary base is positively associated with a higher di erential between financial and average wages, but not with a larger financial industry.
    Keywords: Cantillon Effect; Inequality; Money Non-neutrality; Financial Industry
    JEL: D31 E31 E52
    Date: 2019–08
  24. By: Robert S. Chirinko; Debdulal Mallick
    Abstract: This paper studies the marginal product of private capital (MPK) with new data and a new framework to obtain a better understanding of international capital allocations and the Lucas Paradox (LP). Our point of departure is three influential studies of MPK’s and, based on the most recently available data, the LP is either sustained, inverted, or rejected. We then introduce three improvements in measuring spot MPK’s, and the LP clearly reemerges. While these results are provocative, they may be misleading because they do not recognize the dynamics of the capital accumulation process toward steady-states. We develop and estimate a model that allows us to map spot MPK’s into steady-state MPK’s. The LP remains; the steady-state MPK’s for poor countries is 48% to 77% higher than for rich countries. Four policy implications follow from these estimates. First, there is a great deal of misallocated capital globally: 14% to 21% of the global capital stock. Second, this misallocation is primary due to the difference between country-specific steady-state MPK’s and the global MPK that would maximize world output. Third, the benefits of optimally reallocating capital and eliminating the LP are modest: 1.0% to 1.5% of global output or $873 to $1,309 billions of 2019 US dollars. Fourth, the estimates for both misallocation and reallocation depend crucially on the elasticity of substitution between capital and labor. Our empirical work uncovered three new puzzles that have emerged beginning in 1990, 1) the MPK’s for both poor and rich countries have been rising sharply, 2) the gap has been widening, and 3) the steady-state MPK’s exceed the average spot-MPK’s. The later result is inconsistent with the Dynamic Inefficiency, Saving Glut, or Secular Stagnation hypotheses.
    Keywords: international capital allocations, Lucas Paradox, cross-country marginal products of capital, macroeconomic analyses of economic development
    JEL: E22 F20 O11 O57
    Date: 2019
  25. By: Bo?ena Kade?ábková (University of economics in Prague); Emílie Ja?ová (Institute for Forcast)
    Abstract: The aim of the present article is to clarify existence and nature of the relation between minimum wage and selected unemployment indicators in countries of the Visegrad group, with the use of an empirical analysis. The obtained figures of correlation coefficients related to the Czech Republic, Hungary and Poland showed that the positive influence was predominant over the negative one, meaning rise of the minimum wage was followed by unemployment growth. In accordance with similar studies in the world we have proved that a contradictory effect of the relationship between minimum wage changes and selected unemployment indicators was also relevant for V4 countries.
    Keywords: Minimum wage, unemployment, unemployment rate, previous occupations of the unemployed, correlation coefficient
    JEL: E24 E32 E37
    Date: 2019–07
  26. By: Okano Eiji (Nagoya City University); Kazuyuki Inagaki (Nanzan University)
    Abstract: We revisit Uribe’s[32]‘fiscal theory of sovereign risk,’ which suggests a trade-off between stabilizing inflation and suppressing default. Unlike Uribe[32], we develop a class of dynamic stochastic general equilibrium models in which the fiscal surplus is endogenous, but where the default mechanism follows Uribe[32] with nominal rigidities. We find that an optimal monetary and fiscal policy, in which both the nominal interest rate and the tax rate are policy instruments, not only stabilizes inflation and the output gap, but also default through stabilizing the fiscal surplus. Thus, there is not necessarily a trade-off between stabilizing inflation and suppressing default.
    Keywords: Sovereign Risk; Optimal Monetary Policy; Fiscal Theory of the Price Level
    JEL: E52 E60
    Date: 2019–01
  27. By: Akhmadieva, Veronika (Birkbeck, University of London); Smith, Ron P (Birkbeck, University of London)
    Abstract: This paper examines whether the establishment of the euro caused structural breaks in the main macroeconomic relationships of member countries. It compares eight original members of the common currency with four European countries that did not join. The analysis constructs counterfactuals using both single equation models and a six equation vector autoregression with foreign exogenous variables, VARX*, explaining output, inflation, equity prices, exchange rates and short and long interest rates. It considers which equations changed the most and the most likely dates for any structural break.
    Keywords: euro, structural-breaks, GVAR
    JEL: C5 E5 F4
    Date: 2019–08
  28. By: Mardi Dungey; Renee Fry-McKibbin; Vladimir Volkov
    Abstract: This paper presents evidence on the macroeconomic adjustment of a resource-rich country to a resource boom using the effects of Chinese industrialisation on Australia from 1988 to 2016. An SVAR model is specified, incorporating a proxy for Chinese resource demand and commodity prices to identify the effects of commodity supply and demand shocks on the Australian macroeconomy. We develop a multivariate historical decomposition to show how resource sector shocks deviate the macroeconomy away from the projection. The paper identifies four phases of the transmission of the resource boom before its conclusion in 2015.
    Keywords: Chinese resource demand, SVAR, multivariate historical decomposition, commodity demand shock, commodity supply shock
    JEL: C51 E32 F43
    Date: 2019–09
  29. By: Carl E. Walsh (Distinguished Professor of Economics, University of California, Santa Cruz (E-mail:
    Abstract: The challenges of a low interest rate, low inflation environment have led to calls to re-examine the basic framework of flexible inflation targeting (IT). Interest in alternatives such as price-level targeting (PLT) and average inflation targeting (AIT) arises from the way in which these policy regimes cause inflation expectations to work as automatic stabilizers, a factor that can be of major importance if the central bank is constrained at the ELB. I show that the performance of PLT deteriorates significantly relative to IT and AIT in the presence of wage rigidities, shocks to productivity, and deviations from rational expectations. A central bank able to credibly commit to the optimal policy consistent with PLT is likely to face a much higher probability of needing balance sheet policies to implement policy than would be the case under IT or AIT. These results suggest it is too early to count IT out in the competition over policy design.
    Keywords: Optimal monetary policy, Inflation targeting, Price-level targeting, Average inflation targeting
    JEL: E52 E58
    Date: 2019–08
  30. By: Heather D. Gibson (Bank of Greece); Stephen G. Hall (University of Leicester, Bank of Greece and University of Pretoria); Pavlos Petroulas (Bank of Greece); George S. Tavlas (Bank of Greece and University of Leicester)
    Abstract: The euro-area financial crisis that erupted in 2009 was marked by negative confidence effects that had both domestic and international ramifications. Domestically, bank lending declined sharply. Internationally, the demand for the euro as a reserve currency fell precipitously. We investigate the effects of ECB policies on banks’ lending, taking account of national and regional spillovers. We also assess the effects of ECB policies on euro reserve holdings. The results suggest that those policies were important for rebuilding confidence, thus supporting both bank lending and the use of the euro as a reserve asset.
    Keywords: euro area financial crisis, monetary policy operations, European banks, spatial panel model
    JEL: E3 G01 G14 G21
    Date: 2019–08–08
  31. By: Paulie, Charlotte (Uppsala University)
    Abstract: Using detailed Swedish micro data on prices and costs, this paper documents a decrease in the dispersion of changes in prices and markups following the introduction of an official inflation target of 2 percent. Using a structural model to decompose the change in the price-change distribution by potential explanatory factors, about 63 percent of the decrease in the price-change dispersion can be attributed to a decrease in the cross-sectional variance of inflation expectations. The lower dispersion of inflation expectations results in a lower markup dispersion and a welfare gain equivalent to a 0.79 percent increase in consumption.
    Keywords: Inflation targeting; price setting; misallocation; welfare
    JEL: D84 E52 L11
    Date: 2019–04–01
  32. By: Yiping Huang; Xiang Li; Chu Wang
    Abstract: This paper uses loan application-level data from a peer-to-peer lending platform to study the risk-taking channel of monetary policy. By employing a direct ex-ante measure of risk-taking and estimating the simultaneous equations of loan approval and loan amount, we are the first to provide quantitative evidence of the impact of monetary policy on the risk-taking of nonbank financial institution. We find that the search-for-yield is the main workhorse of the risk-taking effect, while we do not observe consistent findings of risk-shifting from the liquidity change. Monetary policy easing is associated with a higher probability of granting loans to risky borrowers and a greater riskiness of credit allocation, but these changes do not necessarily relate to a larger loan amount on average.
    Keywords: monetary policy, risk-taking, nonbank financial institution, peer-to-peer lending, search-for-yield, risk-shifting
    JEL: E52 G23
    Date: 2019
  33. By: Okano Eiji (Nagoya City University); Masataka Eguchi (Komazawa University)
    Abstract: We develop a class of dynamic stochastic general equilibrium models with nominal rigidities and we introduce default risk in the model. We find that if productivity changes are observed, policy authorities should be aware of default risk, although being aware of such risk is not very important following government expenditure changes. Welfare gains from awareness of default risk are nonnegligible if productivity changes, although welfare gains from awareness of default risk are tiny following government expenditure changes.
    Keywords: Sovereign Risk; Optimal Monetary Policy; Fiscal Theory of the Price Level
    JEL: E52 E60
    Date: 2019–07
  34. By: Huang, Yiping; Li, Xiang; Wang, Chu
    Abstract: This paper uses loan application-level data from a peer-to-peer lending platform to study the risk-taking channel of monetary policy. By employing a direct ex-ante measure of risk-taking and estimating the simultaneous equations of loan approval and loan amount, we are the first to provide quantitative evidence of the impact of monetary policy on the risk-taking of nonbank financial institution. We find that the search-for-yield is the main workhorse of the risk-taking effect, while we do not observe consistent findings of risk-shifting from the liquidity change. Monetary policy easing is associated with a higher probability of granting loans to risky borrowers and a greater riskiness of credit allocation, but these changes do not necessarily relate to a larger loan amount on average.
    JEL: E52 G23
    Date: 2019–08–29
  35. By: Tanaka, Yasuhito
    Abstract: We examine the effects of a fiscal policy which realizes full-employment from a state of under-employment (a sate with deflationary GDP gap). We show that the larger the growth rate of real GDP or the government expenditure by a fiscal policy over the ordinary growth rate is, the smaller the debt-to-GDP ratio at the time when full-employment is realized is, and an aggressive fiscal policy for full-employment can reduce the debt-to-GDP ratio. Therefore, full-employment can be realized by a fiscal policy with smaller debt-to-GDP ratio than before the fiscal policy. An increase in the government expenditure may induce a rise of the interest rate. Since the higher the interest rate is, the larger the debt-to-GDP ratio is, we need an appropriate monetary policy which maintains the low interest rate. Also we show that the condition about propensity to consume for realization of full-employment within one year from under-employment state without increasing the debt-to-GDP ratio before fiscal policy is not demanding. This paper is an attempt of mathematical analysis in a spirit of Modern Monetary Theory.
    Keywords: fiscal policy, full-employment, debt-to-GDP ratio.
    JEL: E62
    Date: 2019–08–29
  36. By: Jérôme Creel (Observatoire français des conjonctures économiques)
    Abstract: This paper examines the distributional effects of monetary policy, either standard, nonstandard or both, on income inequality in 10 EA countries over the period 2000-2015. We use three different indicators of income inequality in a Panel VAR setting in order to estimate IRFs of inequality to a monetary policy shock. Results suggest that: (i) the distributional effects of ECB’s monetary policy have been modest and (ii) mainly driven in times of conventional monetary policy measures, especially in peripheral countries, while, overall, (iii) standard and non-standard monetary policies do not significantly differ in terms of impact on income inequality.terms of impact on income inequality.
    Keywords: Euro area; Monetary policy; Income distribution; Panel Var
    JEL: E62 E64 D63
    Date: 2019–09
  37. By: Fernando Nascimento de Oliveira; Wagner Piazza Gaglianone
    Abstract: Our objective in this paper is to build expectations anchoring indexes for inflation in Brazil that are fundamentally driven by the monetary authority’s capacity to anchor long-term inflation expectations vis-à-vis short-run inflation expectations. The expectations anchoring indexes are generated from a Kalman filter, based on a state-space model that also takes into account fiscal policy dynamics. The model’s signals are constructed using inflation expectations from the Focus survey of professional forecasters, conducted by the Central Bank of Brazil, and from the swap and federal government bond markets, which convey daily information of long-term inflation expectations. Although varying across specifications, the expectations anchoring indexes that we propose tend to display a downward trajectory, more clearly in 2009, and show a recovery starting in 2016 until the end of the sample (mid-2017).
    Date: 2019–08
  38. By: José Andrée Camarena; Luciana Galeano; Luis Morano; Jorge Puig; Daniel Riera-Crichton; Carlos Vegh; Lucila Venturi; Guillermo Vuletin
    Abstract: This paper studies the time-series behavior of a set of widely-used social indicators and uncovers two important stylized facts. First, not all social indicators are created equal in terms of the importance of cyclical fluctuations. While some social indicators such as the unemployment rate and monetary poverty show large cyclical fluctuations, other social measures such as the Human Development Index are, by construction, dominated by long-run trends. Second, a large fraction of the cyclical fluctuations in social indicators can be explained by the cyclical changes in income (proxied by real GDP per capita). Since cyclical income volatility is much larger in the developing world, these two critical facts raise fundamental issues regarding how permanent are improvements in social indicators (like the ones observed in many developing countries during the last commodity super-cycle). Finally, and relying on a global sample of industrial and developing countries, we dig deeper into the importance of cyclical versus permanent components by extending the seminal contribution of Datt and Ravallion (1992). In particular, we show that more than 40 percent of the fall in monetary poverty observed in Latin America and the Caribbean during the so-called Golden Decade can be attributed to cyclical changes in income.
    JEL: E32 I32 O54
    Date: 2019–08
  39. By: Morita, Hiroshi
    Abstract: This paper investigates the predictability of public investment in Japan using the daily excess stock returns of the construction industry, to contribute to the recent discussion on fiscal foresight. To examine the relationship between monthly public investment and daily stock returns without any prior time aggregation, we employ the VAR model with MIDAS regression and estimate the optimal weights for connecting high-frequency and low-frequency data in addition to VAR coefficients and the variance-covariance structure. We find that the VAR model with MIDAS regression reduces the mean square prediction error in out-of-sample forecasting by approximately 15% and 2.5% compared to the no-change forecast and VAR model forecasting with prior time aggregation, respectively. Moreover, using the local projection method, we find evidence of the fiscal news shock estimated in our proposed model delaying positive effects on output, consumption, hours worked, and real wage when news shocks actually result in increasing public investment. This finding suggests the New Keynesian structure of the Japanese economy.
    Keywords: MIDAS regression, fiscal foresight, stock returns, local projection method
    JEL: C22 C53 E62
    Date: 2019–08
  40. By: Georgios Georgiadis (European Central Bank); Ben Schumann (European Central Bank)
    Abstract: Different export-pricing currency paradigms have different implications for a host of issues that are critical for policymakers such as business cycle co-movement, optimal monetary policy, optimum currency areas and international monetary policy co-ordination. Unfortunately, the literature has not reached a consensus on which pricing paradigm best describes the data. Against this background, we test for the empirical relevance of dominant-currency pricing (DCP). Specifically, we first set up a structural three-country New Keynesian dynamic stochastic gen- eral equilibrium model which nests DCP, producer-currency pricing (PCP) and local-currency pricing (LCP). In the model, under DCP the output spillovers from shocks that appreciate the US dollar multilaterally decline with an economy’s export-import US dollar pricing share differential, i.e. the difference between the share of an economy’s exports and imports that are priced in the dominant currency. Underlying this prediction is a change in an economy’s net exports in response to multilateral changes in the US dollar exchange rate that arises because of differences in the extent to which exports and imports are priced in the dominant currency. We then confront this prediction of DCP with the data in a sample of up to 46 advanced and emerging market economies for the time period from 1995 to 2018. Specifically, controlling for other cross-border trans- mission channels, we document that consistent with the prediction from DCP the output spillovers from US dollar appreciation correlate negatively with recipient economies’ export-import US dollar invoicing share differentials. We document that these findings are robust to considering US demand, US monetary policy and exogenous exchange rate shocks as a trigger of US dollar appreciation, as well as to accounting for the role of commodity trade in US dollar invoicing.
    Keywords: Dominant-currency pricing, US shocks, spillovers
    JEL: F42 E52 C50
    Date: 2019–08–16
  41. By: Pierpaolo Benigno; Linda M. Schilling; Harald Uhlig
    Abstract: We analyze a two-country economy with complete markets, featuring two national currencies as well as a global (crypto)currency. If the global currency is used in both countries, the national nominal interest rates must be equal and the exchange rate between the national currencies is a risk- adjusted martingale. We call this result Crypto-Enforced Monetary Policy Synchronization (CEMPS). Deviating from interest equality risks approaching the zero lower bound or the abandonment of the national currency. If the global currency is backed by interest-bearing assets, additional and tight restrictions on monetary policy arise. Thus, the classic Impossible Trinity becomes even less reconcilable.
    JEL: D53 E4 F31 G12
    Date: 2019–08
  42. By: Silvia Albrizio (Bank of Spain); Sangyup Choi (Yonsei University); Davide Furceri (IMF); Chansik Yoon (Princeton University)
    Abstract: How does domestic monetary policy in systemic countries spillover to the rest of the world? This paper examines the transmission channel of domestic monetary policy in the cross-border context. We use exogenous shocks to monetary policy in systemically important economies, including the U.S., and local projections to estimate the dynamic effect of monetary policy shocks on bilateral cross-border bank lending. We find robust evidence that an increase in funding costs following an exogenous monetary tightening leads to a statistically and economically significant decline in cross-border bank lending. The effect is weakened during periods of high uncertainty. In contrast, the effect is found to not vary according to the degree of borrower country riskiness, further weakening support for the international portfolio rebalancing channel.
    Keywords: Monetary policy spillovers; International bank lending channel; Cross-border banking flows; Global financial cycles; Local projections
    JEL: E52 F21 F32 F42
    Date: 2019–08–10
  43. By: Diewert, Erwin; Shimizu, Chihiro
    Abstract: The paper addresses the following question: can satisfactory residential property price indexes be constructed using hedonic regression techniques where location effects are modeled using local neighbourhood dummy variables or is it necessary to use spatial coordinates to model location effects. Hill and Scholz (2018) addressed this question and found, using their hedonic regression model, that it was not necessary to use spatial coordinates to obtain satisfactory property price indexes for Sydney. However, their hedonic regression model did not estimate separate land and structure price indexes for residential properties. In order to construct national balance sheet estimates, it is necessary to have separate land and structure price indexes. The present paper addresses the Hill and Scholz question in the context of providing satisfactory residential land price indexes. The spatial coordinate model used in the present paper is a modification of Colwell’s (1998) spatial interpolation method. The modification can be viewed as a general nonparametric method for estimating a function of two variables.
    Keywords: Residential property price indexes, System of National Accounts, Balance Sheets, methods of depreciation
    JEL: C2 C14 C21 C23 C25 C43 E31 R21
    Date: 2019–09–05
  44. By: Paul Owusu Takyi (National Graduate Institute for Policy Studies, Tokyo, Japan); Roberto Leon-Gonzalez (National Graduate Institute for Policy Studies, Tokyo, Japan)
    Abstract: This study develops and estimates a standard New-Keynesian DSGE model for the Ghanaian economy, for the analysis of the impacts of government spending, consumption tax, and labor income tax shocks on household consumption and workinghours. It also applies the model to examination of the effects of fiscal policy shocks on key macroeconomic variables in the Ghanaian economy. The model features heterogeneous households of two types, financially excluded and financially included, and considers two labor markets: perfectly and monopolistically competitive labormarkets. We use quarterly time series data from 1985Q1-2017Q4 to estimate the model’s parameters using a Bayesian approach. The results show that a positive government spending shock has an expansionary effect on the consumption of financially excluded households but has a decreased effect on that of fully financially included ones. We find that positive consumption and labor income tax shocks decrease the consumption of financially excluded househo lds more than that of financially included ones. From a policy perspective, government spending is effective for increasing output, employment, and the consumption of financially excluded households, although it reduces that of financially included ones.
    Date: 2019–09
  45. By: George A. Alessandria; Horag Choi
    Abstract: We study how international trade and the exporting decisions of establishments affect establishment creation over the business cycle in a general equilibrium model. The model captures two key features of establishment and exporter dynamics: i) new establishments start small and grow over time and ii) exporters tend to be bigger and more productive than non-exporters and remain so for some time. When the cost of creating establishments fluctuates with aggregate productivity, we find the model can generate procyclical fluctuations in the stock of domestic establishments and importers similar to the data. Without international trade, entry is weakly countercyclical and too smooth. The model also generates fluctuations in the stock of importers, exporters, and domestic establishments of similar magnitude to those in the data. With an entry margin, we also find that output is hump-shaped following a productivity shock since investments in creating establishments and exporters generate an incentive to delay accumulating physical capital. This hump is stronger in an open economy model and strongly increases the value of creating new establishments in a boom.
    JEL: E32 F41
    Date: 2019–08
  46. By: Joseph Upile Matola (National Graduate Institute for Policy Studies, Tokyo, Japan / bMinistry of Finance, Economic Planning, and Development, Lilongwe, Malawi); Roberto Leon-Gonzalez (National Graduate Institute for Policy Studies, Tokyo, Japan)
    Abstract: In this paper, the interaction between fiscal and monetary policies in Malawi is analyzed in a structural VAR framework employing sign restrictions. The key question addressed is whether macroeconomic policy environment in Malawi is characterized by fiscal dominance or monetary dominance. The model that we derive is used to identify government spending shocks, government revenue shocks, and monetary policy shocks so as to observe their respective effects on the conduct of fiscal and monetary policy. The results show that policy making in Malawi leans towards a monetary dominant regime rather than a fiscal dominant one. This is manifested by a counteractive reaction of monetary policy to loose fiscal policy on one hand and a cooperative reaction of fiscal policy to tight monetary policy stance on the other hand. The results also show that spending shocks are not financed by tax revenues which, coupled with the non-cooperative nature of monetary policy, is consistent the high public debt accumulation observed in the data.
    Date: 2019–09
  47. By: Glocker, Christian
    Abstract: There is an increasing literature proposing reserve requirements for financial stability. This study assesses their effects on the probability of bank failure and compares them to those of capital requirements. To this purpose a banking model is considered that is subject to legal reserve requirements. In general, higher reserve requirements promote risk-taking as either borrowers or banks have an incentive to choose riskier assets, so banks' probability of failure rises. Borrowers' moral hazard problem augments the adverse effects. They are mitigated when allowing for imperfectly correlated loan-default as higher interest revenues from non-defaulting loans curb losses from defaulting loans.
    Keywords: Reserve requirements, liquidity regulation, capital requirements, bank failure, default correlation
    JEL: E43 E58 G21 G28
    Date: 2019–08
  48. By: Tatsushi Okuda (Deputy Director and Economist, Institute for Monetary and Economic Studies (currently, Research and Statistics Department), Bank of Japan (E-mail:; Tomohiro Tsuruga (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, International Monetary Fund, E-mail:; Francesco Zanetti (University of Oxford (E-mail: francesco.zanetti@
    Abstract: We establish important empirical regularities on firms' expectations about aggregate and idiosyncratic components of sectoral demand using industry-level survey data for the universe of Japanese firms. Expectations about the idiosyncratic component of demand differ across sectors, and they positively co-move with those about aggregate component. To study the implications for firms' price setting, we develop a theoretical framework that captures systematic features in firms' expectation formation based on inference of different shocks from a common signal |a chief modelling approach to imperfect information. We show that the sensitivity of inflation to changes in demand decreases with the volatility of idiosyncratic component of demand that proxies the degree of shock heterogeneity. We use principal component analysis on Japanese sectoral-level data to estimate the degree of shock heterogeneity, and we establish that the observed increase in shock heterogeneity plays a significant role for the reduced sensitivity of inflation to movements in real activity since the late 1990s.
    Keywords: Imperfect information, Shock heterogeneity, Inflation dynamics
    JEL: E31 D82 C72
    Date: 2019–08
  49. By: Adam M. Guren; Timothy J. McQuade
    Abstract: This paper uses a structural model to show that foreclosures played a crucial role in exacerbating the recent housing bust and to analyze foreclosure mitigation policy. We consider a dynamic search model in which foreclosures freeze the market for non-foreclosures and reduce price and sales volume by eroding lender equity, destroying the credit of potential buyers, and making buyers more selective. These effects cause price-default spirals that amplify an initial shock and help the model fit both national and cross-sectional moments better than a model without foreclosure. When calibrated to the recent bust, the model reveals that the amplification generated by foreclosures is significant: Ruined credit and choosey buyers account for 25.4 percent of the total decline in non-distressed prices and lender losses account for an additional 22.6 percent. For policy, we find that principal reduction is less cost effective than lender equity injections or introducing a single seller that holds foreclosures off the market until demand rebounds. We also show that policies that slow down the pace of foreclosures can be counterproductive.
    JEL: E30 R31
    Date: 2019–08
  50. By: Grajales Olarte, A. (Tilburg University, Center For Economic Research); Uras, Burak (Tilburg University, Center For Economic Research); Vellekoop, N. (Tilburg University, Center For Economic Research)
    Abstract: We study nominal wage rigidity in the Netherlands using administrative data, which has three key features: (1) high-frequency (monthly), (2) high-quality (administrative records), and (3) high coverage (the universe of workers and the universe of firms). We find wage rigidity patterns in the data that are similar to wage behavior documented for other European countries. In particular we find that the hazard function has two spikes, one at 12 months and another one at 24 months and wage changes have time and state dependency components. As a novel and important piece of evidence we also uncover substantial heterogeneity in the frequency of wage changes due to explicit terms of the labor contract. In particular, contracts featuring flexible hours, such as on-call contracts, exhibit a higher probability of a change in the contract wage compared to fixed hour contracts. Once we split the sample based on contract characteristics, we also find that the response of wage changes to the time and state component is heterogeneous across different type of contracts - with relatively more downward adjustments in flexible-hour contract wages in response to aggregate unemployment.
    Keywords: wage rigidity; microdata; time dependency; state dependency; flexible-hour contracts
    JEL: E24 J31
    Date: 2019
  51. By: van Rens, Thijs
    Abstract: As union membership is declining, it is natural to ask whether this decline results in slower wage growth. The paper by James Bishop and Iris Chan (2019) studies this question in the context of the recent slowdown in wage growth in Australia and argues the answer is a clear “No”. It is a pleasure to discuss this paper, which not only adds to the discussion about the recent slowing in wage growth in Australia but makes some interesting contributions to the academic literature on unions as well.
    Keywords: wage growth, unions
    JEL: E24 J51
    Date: 2019–04–15
  52. By: Maja Bacovic (University of Montenegro, Faculty of Economics)
    Abstract: Montenegro has started transition process from centrally planned to market oriented economy in late nineties of the XX century. Being still part of the Federal Republic of Yugoslavia, official currency was dinar in that period. Dinar, inherited currency from the Social Federal Republic of Yugoslavia, was not convertible currency (except for short period from 1990-1992), after which then actual monetary policy resulted in hyperinflation during 1992-1993. Afterword, although it was only legal tender until 1999, dinar was not used as currency in full capacity and in all transactions, but often replaced with Deutsche mark (DM), although unofficially. As result of such practice, in 1999, Montenegro introduced ?double currency? regime, officially allowing use of both, dinar and DM as legal tenders. In November 2000, dollarization regime has officially become implemented in Montenegro, introducing DM and later EURO (since January 2002) as only legal tender in Montenegro. Two decades later, we may summarize effects of such choice, and see whether decision to implement dollarization instead to issue national currency (perper was the one which was proposed) or remain using dinar was appropriate. We will make comparisons of selected indicators with Serbia, as it has decided to use dinar as national currency. Although there are many differences between Montenegrin and Serbian economy, both have many elements in common, which make reasonable to make comparisons. In addition, we did empirical analysis and analyzed economic performance of European countries that belongs to different monetary regimes, for period from 2000-2016.
    Keywords: Dollarization, EURO, National currency
    JEL: E50 E00
    Date: 2019–07
  53. By: Pulapre Balakrishnan (Ashoka University, Sonipat); M. Parameswaran (Centre for Development Studies, Thiruvananthapuram)
    Abstract: In mainstream macroeconomics today inflation is related to the ‘output gap’, defined as the deviation of output from its ‘natural’ level. This view of inflation has been adopted by the leading central banks, including India’s, underpinning the move to ‘inflation targeting’ as the sole objective of monetary policy. We present an alternative model of inflation based on features that would be considered typical of the Indian economy and a specific understanding of what drives the inflationary process here. We then test both the models across data from India over different periods and at differing frequencies. The exercise is conclusive, and bears significance for what will constitute an appropriate antiinflationary policy.
    Keywords: Inflation in India, New Keynesian Phillips Curve, Structuralist macroeconomics
    Date: 2019–08
  54. By: Andrea Brandolini (Bank of Italy, DG Economics, Statistics and Research); Alfonso Rosolia (Bank of Italy, DG Economics, Statistics and Research)
    Abstract: We analyse the evolution of EU citizens’ living standards, considering the EU as a single country. Average living standards have improved considerably as the European integration process has unfolded. EU28 income inequality has steadily declined, mostly as a result of the macroeconomic convergence of new EU-accession countries. EU15 income inequality fell steadily until the mid-1980s, but picked up again during the economic turmoil following the Great Recession, largely reflecting the divergence between periphery and core countries in the euro area. Using a common EU standard reveals more progress in terms of poverty reduction. It also shows that the patterns of income convergence across member states differ across categories of residents, thus calling for a more careful consideration of the personal and national dimensions of EU policies.
    Keywords: European Union, Euro Area, European integration, income inequality, welfare analysis.
    JEL: D31 D63 E01 I32
    Date: 2019–05
  55. By: Emerson, Patrick M. (Oregon State University); Knabb, Shawn D. (Western Washington University); Sirbu, Anca-Ioana (Western Washington University)
    Abstract: Will an aging population lower economic growth? Economists are generally concerned that the increase in life expectancy could lower economic growth, however, theory does not make a prediction. As life expectancy increases, so should household savings, which results in more physical capital per worker. This will stimulate economic growth. However, as the retired population share increases, this may reduce spending on children as more resources are transferred to the elderly. This will likely reduce human capital accumulation and lower growth. The net effect of these competing influences is an empirical question. This paper constructs a stylized endogenous growth model that includes both human capital and government transfers to the elderly. The model is mapped into a linear statistical framework that allows us to estimate each of these potential responses using panel data for a set of OECD countries during the period 1975-2014. We find evidence that households do in fact increase savings in response to a longer retirement period and this effect is associated with a higher realized rate of growth per worker. However, we also find evidence that an aging population reduces spending on children (or other productive investments) placing a drag on growth. These results suggest it is the institutional response to population aging that will determine whether or not an aging population will place a drag on future growth, not population aging itself.
    Keywords: population aging, educational crowding-out, slow secular growth, cross-country panel data
    JEL: J11 J18 I21 I28 E66 E37 O43
    Date: 2019–08
  56. By: Dorothée Rouzet; Aida Caldera Sánchez; Theodore Renault; Oliver Roehn
    Abstract: This paper was prepared in support of Japan’s G20 Presidency. It takes stock of ongoing and projected population ageing across G20 economies and its far-reaching implications for economic growth, productivity, inequality within and between generations and the sustainability of public finances. Rising old-age dependency ratios will put the financing of adequate pensions, health and long-term care under high pressure. The paper provides recommendations on policy responses to address ageing-related challenges and highlights good practices. A comprehensive approach is needed, tailored to each country’s institutional and policy settings and social preferences, and may span many areas of public policy: improving the design of public pensions, incentivising private savings, enhancing the efficiency of health care provision, expanding the coverage of social security systems, promoting employability and skills of older workers, and striving for a better labour market inclusion of women, youth and migrants.
    Keywords: ageing, employment, fiscal sustainability, health, inequality, long-term care, pensions, skills
    JEL: E24 H51 H55 J11 J26
    Date: 2019–09–10
  57. By: Emilia Filippi; Sandro Trento
    Abstract: There is a rising concern for technological unemployment due to the current digital revolution. In order to estimate the probability of automation of occupations we applied two methods: occupation-based approach [Frey and Osborne (2017]) and task-based approach [Nedelkoska and Quintini (2018)]. We found that occupations with a high risk of automation require many routine activities, whereas occupations at low risk require abilities like perception, manipulation, creative intelligence and social intelligence. In Italy, based on the occupation-based approach, 33.2% of workers face a high risk of replacement; this percentage decrease at 18.1% if we apply the task-based approach. Male workers appear to face a higher risk of replacement than female ones. Actual automation may be lower than expected as it depends on many factors, such as technical feasibility, economic benefits that can be obtained and job creation thanks to technology itself. Finally, we stress the importance to adopt some policies; education and training of employees seems to be the most effective one.
    Keywords: technological change and unemployment; automation of occupations; skills and human capital
    JEL: E24 J24 J62 J64 O33 O39
    Date: 2019
  58. By: Pelin Öge Güney (Hacettepe University, Faculty of Economics and Administrative Sciences, Department of Economics)
    Abstract: In the literature it is suggested that, in addition to many factors such as macroeconomic and microeconomic polices, financial institutions and property rights; macroeconomic uncertainties are affecting the investment decisions. In this paper, we analyzed the effect of the real exchange rate, inflation and growth uncertainties on private investment in a developing country; Turkey. We used a generalized autoregressive conditional heteroskedasticity (GARCH) model to measure uncertainties. Then, we investigated the longterm relationship of the variables using bound testing approach. Finally, we adopt an error correction model to capture the dynamic relationship. According to our results macroeconomic uncertainties have a significant negative effect on private investments in Turkey. Therefore, our findings showed the importance of the macroeconomic stability for the continuity of investments in Turkey.
    Date: 2019–08–21
  59. By: Xiao,Tim
    Abstract: This article presents a new model for valuing financial contracts subject to credit risk and collateralization. Examples include the valuation of a credit default swap (CDS) contract that is affected by the trilateral credit risk of the buyer, seller and reference entity. We show that default dependency has a significant impact on asset pricing. In fact, correlated default risk is one of the most pervasive threats in financial markets. We also show that a fully collateralized CDS is not equivalent to a risk-free one. In other words, full collateralization cannot eliminate counterparty risk completely in the CDS market.
    Keywords: asset pricing,credit risk modeling,collateralization,comvariance,comrelation,correlation,CDS
    JEL: E44 G21 G12 G24 G32 G33 G18 G28
    Date: 2018
  60. By: Carlo Perroni; Davide Suverato
    Abstract: We describe a model of trade with input based product differentiation and non-proportional trade costs that is capable of predicting a positive correlation between firms’ export intensity, the price of their exports, and the wages they pay to their workers. These correlations arise in the model solely from comparative input scarcity and independently of any productivity differentials: in equilibrium, firms that employ workers with comparatively scarcer skills, other things equal, export a larger proportion of their output, pay higher wages and charge higher prices.
    Keywords: export intensity and wages, input based product differentiation
    JEL: F12 F16 E24
    Date: 2019
  61. By: Yan Bai; Keyu Jin; Dan Lu
    Abstract: This paper incorporates firm-level distortions into a Melitz model and characterizes welfare under misallocation. We derive an analogue to the well-known ACR result in an economy with distortions. We highlight a channel through which trade can reduce welfare by exacerbating misallocation. A key statistic to infer welfare is the gap between input and output shares. Using Chinese manufacturing data for quantitative analysis, we show that trade integration can lead to a 18% welfare loss coming from a reduction in allocative efficiency. The overall gains to trade is substantially smaller than implied by standard calculations.
    JEL: E23 F12 F14 L25 O47
    Date: 2019–08
  62. By: De Cao, Elisabetta (London School of Economics); McCormick, Barry (Nuffield College, Oxford); Nicodemo, Catia (University of Oxford)
    Abstract: We study the effect of unemployment on birth outcomes by exploiting geographical variation in the unemployment rate across local areas in England, and comparing siblings born to the same mother via family fixed effects. Using rich individual data from hospital administrative records between 2003 and 2012, babies' health is found to be strongly pro-cyclical. A one-percentage point increase in the unemployment rate leads to an increase in low birth weight and preterm babies of respectively 1.3 and 1.4%, and a 0.1% decrease in foetal growth. We find heterogenous responses: unemployment has an effect on babies' health which varies from strongly adverse in the most deprived areas, to mildly favourable in the most prosperous areas. We provide evidence of three channels that can explain the overall negative effect of unemployment on new-born health: maternal stress; unhealthy behaviours - namely excessive alcohol consumption and smoking; and delays in the take-up of prenatal services. While the heterogenous effects of unemployment by area of deprivation seem to be explained by maternal behaviour. Most importantly, we also show for the first time that selection into fertility is the main driver for the previously observed, opposite counter-cyclical results, e.g., Dehejia and Lleras-Muney (2004). Our results are robust to internal migration, different geographical aggregation of the unemployment rate, the use of gender-specific unemployment rates, and potential endogeneity of the unemployment rate which we control for by using a shift-share instrumental variable approach.
    Keywords: unemployment rate, birth outcomes, birth weight, fertility, England
    JEL: E24 I10 I12 J13
    Date: 2019–08
  63. By: Jean-Claude Trichet (Former president of the European Central Bank)
    Date: 2019–08
  64. By: Nagendra Kumar (Indian Institute of Technology Roorkee)
    Abstract: The birth of two independent nations India and Pakistan from Hindustan in 1947 was not an easy process. The partition which was conceived for peace, harmony and order brought only violence and hostility on both parts of the country at that point in time. The repercussion of the partition can be seen in the present day also as durable peace since then has never been achieved between the two countries. The poignant partition inspired literature, which has collected the partition experiences of common folk. The partition literature which emerged as a separate genre of literature is a medium of cultural memory which helps in shaping the sensibility of contemporary readers. The present article seeks to examine the role of partition in degenerating the relationship between India and Pakistan and the collective memory shared by the contemporary people by a reading of Khushwant Singh?s Train to Pakistan, a masterpiece of partition literature.
    Keywords: Partition, collective memory, India, Literature, Pakistan, Khushwant Singh.
    JEL: E01
    Date: 2019–07
  65. By: Liss, Erik (The Ratio Institute); Korpi, Martin (The Ratio Institute); Wennberg , Karl (The Ratio Institute)
    Abstract: Despite a sizeable literature on relative income mobility across generations, there is a dearth of studies of absolute mobility across generations, i.e. whether current generations earn more or less than their parents did at the same age, as well as how to explain the level of absolute mobility. We use individual micro data to study the trend in intergenerational absolute income mobility measured as the share of sons and daughters earning more than their fathers and mothers, respectively, for eleven Swedish birth cohorts between 1970 and 1980. We find that absolute mobility in Sweden significantly exceeds that of the United States and is largely on par with Canada. The rate of absolute mobility for women exceeds that of men throughout the study period, however the trend has been stronger for men. Using an augmented decomposition model which supplements standard models by accounting for differences in the income distribution of every birth cohort’s parent generation, we find that heterogeneity in the parent income distribution strongly determines how much economic growth contributes to absolute mobility across birth cohorts. If income inequality is high in the parent generation, more growth is required if children that move downward in the relative income distribution are to earn more than their parents.
    Keywords: Absolute mobility; income decomposition; intergenerational income mobility; social mobility
    JEL: D31 D63 E24 J62
    Date: 2019–09–02
  66. By: Stefania Albanesi; Domonkos F. Vamossy
    Abstract: We develop a model to predict consumer default based on deep learning. We show that the model consistently outperforms standard credit scoring models, even though it uses the same data. Our model is interpretable and is able to provide a score to a larger class of borrowers relative to standard credit scoring models while accurately tracking variations in systemic risk. We argue that these properties can provide valuable insights for the design of policies targeted at reducing consumer default and alleviating its burden on borrowers and lenders, as well as macroprudential regulation.
    Date: 2019–08
  67. By: van den Berg, Gerard J. (University of Bristol); Vikström, Johan (IFAU - Institute for Evaluation of Labour Market and Education Policy)
    Abstract: We propose and implement a new method to estimate treatment effects in settings where individuals need to be in a certain state (e.g. unemployment) to be eligible for a treatment,treatments may commence at different points in time, and the outcome of interest is realized after the individual left the initial state. An example concerns the effect of training on earnings in subsequent employment. Any evaluation needs to take into account that some of those who are not trained at a certain time in unemployment will leave unemployment before training while others will be trained later. We are interested in effects of the treatment at a certain elapsed duration compared to “no treatment at any subsequent duration”. We prove identification under unconfoundedness and propose inverse probability weighting estimators. A key feature is that weights given to outcome observations of non-treated depend on the remaining time in the initial state. We study earnings effects of WIA training in the US and long-run effects of a training program for unemployed workers in Sweden. Estimates are positive and sizeable, exceeding those obtained by using common static methods, and suggesting a reappraisal of training.
    Keywords: Treatment effects; dynamic treatment evaluation; program evaluation; duration analysis; matching; unemployment; employment.
    JEL: E24
    Date: 2019–08–14
  68. By: Zachary Mahone; Filippo Rebessi
    Abstract: We propose a general equilibrium model of industry where consumers learn about firms' unobserved product quality over time. Because consumers learn through purchase decisions, price setting is a crucial lever through which firms manipulate future demand. We map equilibrium policies to a range of empirical evidence on industry, firm, product and price dynamics. We then study how firms respond as consumer information varies. Specifically, we show that firms exacerbate information problems by constraining learning more aggressively in those markets where consumers are less informed. Developing an indicator of consumer information by product category, we find these are typically markets for consumer durables. Finally, the efficiency implications of this behavior and interaction with size-dependent policies are explored.
    Keywords: Learning; Firm Dynamics; Product Quality; Welfare
    JEL: E23 D83 L11
    Date: 2019–08

This nep-mac issue is ©2019 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.