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on Macroeconomics |
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Issue of 2019‒09‒30
108 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Guillermo A. Calvo |
| Abstract: | The paper discusses simple microfoundations for Liquidity Deflation (Calvo 2016, Chapter 2), which gives rise to liquidity trap under perfectly flexible prices/wages. Unlike Keynes (1936), this is a Supply Side Liquidity Trap, SSLT, not resolved by a fall in prices /wages, or massive helicopter increase in liquid government liabilities. However, escaping SSLT could be achieved by low policy interest rates on money (unless ZLB holds) and, more interestingly, higher inflation driven by administered prices/wages. Moreover, contrary to (Friedman 1969), under Liquidity Deflation the Optimal Quantity of Money does not call for liquidity satiation, and may be dangerously close to SSLT. |
| JEL: | E31 E4 E41 E5 E52 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26277&r=all |
| By: | Tsutomu Watanabe (Graduate School of Economics, University of Tokyo); Tomoyoshi Yabu (Faculty of Business and Commerce, Keio University) |
| Abstract: | This paper estimates a money demand function using Japanese data from 1985 to 2017, which includes the period of near-zero interest rates over the last two decades. We compare a log-log specification and a semi-log specification by employing the methodology proposed by Kejriwal and Perron (2010) on cointegrating relationships with structural breaks. Our main finding is that there exists a cointegrating relationship with a single break between the money-income ratio and the interest rate in the case of the log-log form but not in the case of the semi-log form. More specifically, we show that the substantial increase in the money-income ratio during the period of near-zero interest rates is well captured by the log-log form but not by the semi-log form. We also show that the demand for money did not decline in 2006 when the Bank of Japan terminated quantitative easing and started to raise the policy rate, suggesting that there was an upward shift in the money demand schedule. Finally, we find that the welfare gain from moving from 2 percent inflation to price stability is 0.10 percent of nominal GDP, which is more than six times as large as the corresponding estimate for the United States. |
| Keywords: | money demand function; cointegration; structural breaks; zero lower bound; welfare cost of inflation; log-log form; semi-log form; interest elasticity of money demand |
| JEL: | C22 C52 E31 E41 E43 E52 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:upd:utmpwp:013&r=all |
| By: | Francesco Bianchi; Leonardo Melosi; Matthias Rottner |
| Abstract: | Since the 2001 recession, average core inflation has been below the Federal Reserve’s 2% target. This deflationary bias is a predictable consequence of a low nominal interest rates environment in which the central bank follows a symmetric strategy to stabilize inflation. The deflationary bias increases if macroeconomic uncertainty rises or the natural real interest rate falls. An asymmetric rule according to which the central bank responds less aggressively to above-target inflation corrects the bias and allows inflation to converge to the central bank’s target. We show that adopting this asymmetric rule improves welfare and reduces the risk of self-fulfilling deflationary spirals. This approach does not entail any history dependence in setting the policy rate or any commitment to overshoot inflation after periods in which the lower bound constraint was binding. |
| JEL: | D84 E31 E51 E62 E63 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26279&r=all |
| By: | Roman Horvath (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague); Lorant Kaszab (Central Bank of Hungary; and Institute for International Economics and Development, Department of Economics, Vienna University of Economics and Business); Ales Marsal (Central Bank of Hungary; and Institute for International Economics and Development, Department of Economics, Vienna University of Economics and Business); Katrin Rabitsch (Institute for International Economics and Development, Department of Economics, Vienna University of Economics and Business) |
| Abstract: | We generalize a simple New Keynesian model and show that a flattening of the Phillips curve reduces the size of fiscal multipliers at the zero lower bound (ZLB) on the nominal interest rate. The factors behind the flatting are consistent with micro- and macroeconomic empirical evidence: it is a result of, not a higher level of price rigidity, but an increase in the degree of strategic complementarity in price-setting -- invoked by the assumption of a specific instead of an economy-wide labour market, and decreasing instead of constant-returns-to-scale. In normal times, the efficacy of fiscal policy and resulting multipliers tends to be small because negative wealth effects crowd out consumption, and because monetary policy endogenously reacts to fiscally-driven increases in inflation and output by raising rates, offsetting part of the stimulus. In times of a binding ZLB and a fixed nominal rate, an increase in (expected) inflation instead lowers the real rate, leading to larger fiscal multipliers. Conditional on being in a ZLB-environment, under a flatter Phillips curve, increases in expected inflation are lower, so that fiscal multipliers at the ZLB tend to be lower. Finally, we also discuss the role of solution methods in determining the size of fiscal multipliers. |
| Keywords: | Fiscal multipliers, strategic complementarity, Phillips curve, zero lower bound, New Keynesian model |
| JEL: | E52 E62 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp294&r=all |
| By: | Peter Hördahl; Oreste Tristani |
| Abstract: | We propose a regime-switching approach to deal with the lower bound on nominal interest rates in dynamic term structure modelling. In the "lower bound regime", the short term rate is expected to remain constant at levels close to the effective lower bound; in the "normal regime", the short rate interacts with other economic variables in a standard way. State-dependent regime switching probabilities ensure that the likelihood of being in the lower bound regime increases as short rates fall closer to zero. A key advantage of this approach is to capture the gradualism of the monetary policy normalization process following a lower bound episode. The possibility to return to the lower bound regime continues exerting an influence in the early phases of normalization, pulling expected future rates downwards. We apply our model to U.S. data and show that it captures key properties of yields at the lower bound. In spite of its heavier parameterization, the regime-switching model displays a competitive out-of-sample forecasting performance. It can also be used to gauge the risk of a return to the lower bound regime in the future. As of mid-2018, it provides a more benign assessment than alternative measures. |
| Keywords: | zero lower bound, term premia, term structure of interest rates, monetary policy rate expectations, regime switches |
| JEL: | E31 E40 E44 E52 E58 E62 E63 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:813&r=all |
| By: | Òscar Jordà; Alan M. Taylor |
| Abstract: | Interest rates in major advanced economies have drifted down and in greater unison over the past few decades. A country’s rate of interest can be thought of as reflecting movements in the global neutral rate of interest, the domestic neutral rate, and the stance of monetary policy. Only the latter is controlled by the central bank. Estimates from a state space New Keynesian model show that central bank policy explains less than half of the variation in interest rates. The rest of the time, the central bank is catching up to trends dictated by productivity growth, demography, and other factors outside of its control. |
| JEL: | E43 E44 E52 E58 F36 N10 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26262&r=all |
| By: | Jesus Fernandez-Villaverde (University of Pennsylvania, NBER, and CEPR); Federico Mandelman (Federal Reserve Bank of Atlanta); Yang Yu (Shanghai University of Finance and Economics); Francesco Zanetti (University of Oxford) |
| Abstract: | We develop a quantitative business cycle model with search complementarities in the inter-?rm 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 ?uctuations. The volatility of shocks is important for the selection and duration of each static equilibrium. Su?ciently 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. |
| Keywords: | Aggregate Auctuations, strategic complementarities, macroeconomic volatility, government spending |
| JEL: | C63 C68 E32 E37 E44 G12 |
| Date: | 2019–09–10 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:19-016&r=all |
| By: | Fatih Guvenen; Gueorgui Kambourov; Burhanettin Kuruscu; Sergio Ocampo-Diaz; Daphne Chen |
| Abstract: | How does wealth taxation differ from capital income taxation? When the return on investment is equal across individuals, a well-known result is that the two tax systems are equivalent. Motivated by recent empirical evidence documenting persistent heterogeneity in rates of return across individuals, we revisit this question. With such heterogeneity, the two tax systems have opposite implications for both efficiency and inequality. Under capital income taxation, entrepreneurs who are more productive, and therefore generate more income, pay higher taxes. Under wealth taxation, entrepreneurs who have similar wealth levels pay similar taxes regardless of their productivity, which expands the tax base, shifts the tax burden toward unproductive entrepreneurs, and raises the savings rate of productive ones. This reallocation increases aggregate productivity and output. In the simulated model parameterized to match the US data, replacing the capital income tax with a wealth tax in a revenue-neutral fashion delivers a significantly higher average lifetime utility to a newborn (about 7.5% in consumption-equivalent terms). Turning to optimal taxation, the optimal wealth tax (OWT) in a stationary equilibrium is positive and yields even larger welfare gains. In contrast, the optimal capital income tax (OCIT) is negative—a subsidy—and large, and it delivers lower welfare gains than the wealth tax. Furthermore, the subsidy policy increases consumption inequality, whereas the wealth tax reduces it slightly. We also consider an extension that models the transition path and find that individuals who are alive at the time of the policy change, on average, would incur large welfare losses if the new policy is OCIT but would experience large welfare gains if the new policy is an OWT. We conclude that wealth taxation has the potential to raise productivity while simultaneously reducing consumption inequality. |
| JEL: | D31 D60 E21 E22 E23 E24 E62 H21 H25 H3 K34 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26284&r=all |
| By: | Bersson, Betsy; Hürtgen, Patrick; Paustian, Matthias |
| Abstract: | At the zero lower bound (ZLB), expectations about the future path of monetary or fiscal policy are crucial. We model expectations formation under level-k thinking, a form of bounded rationality introduced by García-Schmidt and Woodford (2019) and Farhi and Werning (2017), consistent with experimental evidence. This process does not lead to a number of puzzling features from rational expectations models, such as the forward guidance and the reversal puzzle, or implausible large fiscal multipliers. Optimal monetary policy at the ZLB under level-k thinking prescribes keeping the nominal rate lower for longer, but short-run macroeconomic stabilization is less powerful compared to rational expectations. |
| Keywords: | expectations formation,optimal monetary policy,New Keynesian model,zero lower bound,forward guidance puzzle,reversal puzzle,fiscal multiplier |
| JEL: | E32 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:342019&r=all |
| By: | Horst, Maximilian; Neyer, Ulrike |
| Abstract: | In March 2015, the Eurosystem launched its QE-programme. The asset purchases induced a rapid and strong increase in excess reserves, implying a structural liquidity surplus in the euro area banking sector. Against this background, the first part of this paper analyses the Eurosystem's liquidity management during normal times, crisis times and times of too low in ation. With a focus on the latter, the second part of this paper develops a relatively simple theoretical model in which banks operate under a structural liquidity surplus. The model shows that increasing excess reserves have no or even a contractionary impact on bank loan supply. As the newly created excess reserves are heterogeneously distributed across euro area countries, the impact of QE on bank loan supply may differ across countries. Moreover, we derive implications for monetary policy implementation. Increases in the central bank's main refinancing rate as well as in the minimum reserve ratio and decreases in the central bank's deposit rate develop expansionary effects on loan supply - contrary to the case in which banks face a structural liquidity deficit. |
| Keywords: | monetary policy,quantitative easing (QE),monetary policy implementation,excess liquidity,loan supply,bank lending channel |
| JEL: | E43 E51 E52 E58 G21 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:325&r=all |
| By: | Bozhechkova Alexandra (Gaidar Institute for Economic Policy); Kiyutsevskaya Anna (RANEPA); Trunin Pavel (Gaidar Institute for Economic Policy); Knobel Alexander (Gaidar Institute for Economic Policy) |
| Abstract: | Russia’s central bank adopted a new monetary policy regime in 2018 by raising the key interest rate for the first time since December 2014. After slashing the key interest rate on February 9th and on March 23rd by 0.25 percentage points to 7.5 and 7.25 percent per annum, respectively, the central bank lifted the rate on September 14th by 0.25 percentage points to 7.5 percent per annum, with another hike on December 14th of 0.25 percentage points to 7.75 percent per annum. The transition to a neutral monetary policy regime2 slowed as far back as in 2017. There were more constraints to interest rate cuts in 2018 that came from new April and August anti-Russia sanctions that spurred capital outflows from the country and depreciation of the Russian ruble, a VAT hike decision scheduled for 2019, a late-year fall in energy prices, and concerns about possible heightening of inflation expectations. The key interest rate hike suggested that the Bank of Russia is committed to bring inflation back down to target in the medium term. For instance, according to a forecast of the central bank, end-of-year inflation for 2019 may reach 5–5.5 percent, and it is not until 2020 that inflation is back to its target. |
| Keywords: | Russian economy, monetary policy, money market, exchange rate, inflation, balance of payments |
| JEL: | E31 E43 E44 E51 E52 E58 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:gai:ppaper:ppaper-2019-960&r=all |
| By: | Donadelli, Michael; Jüppner, Marcus; Prosperi, Lorenzo |
| Abstract: | According to current regulation, European banks can apply zero risk weights to sovereign exposures in their balance sheet, irrespective of the assigned rating. We show that a zero risk weighting of sovereign bonds has implications by distorting banks' asset allocation decisions. Due to the lower regulatory cost of sovereign bonds, banks invest more in those bonds at the expense of lending to the real sector. To quantify the effect of this distortion, we build a standard RBC model featuring financial intermediation and a government sector calibrated to the euro area economy. Financial regulation is introduced via a penalty function that punishes banks if they deviate from the target capital ratio. We study the zero risk weight policy during normal times when there is no sovereign default risk and find that a policy introducing positive risk weights on government bonds has both long-run effects and stabilising properties with respect to the business cycle. This policy makes the steady state lending spread on loans to firms decline, stimulating investment and output. Also, it stabilises the lending spread, leading to a lower volatility of investment and output. |
| Keywords: | sovereign bonds,risk weighting,RBC,lending |
| JEL: | E44 E32 G21 G32 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:302019&r=all |
| By: | Hertrich, Markus |
| Abstract: | From 2014 until present, housing prices in Germany have been rising faster than consumer prices in all quarters except one, raising concerns about an excessive over-heating of the housing market. To assess the vulnerability of the German housing market to a future realignment of prices or even a housing bust, this paper develops a housing price misalignment indicator that is composed of seven indicators, which are commonly associated with the fundamental value of residential property. An empirical application to the most recent data suggests that the German housing market exhibits an overvaluation of approximately 11%, where interest rate risk and a relatively advanced stage of the housing cycle are identified as the main factors fueling these imbalances, while a rather solid debt-servicing capacity mitigates these imbalances since end-2009. |
| Keywords: | composite indicator,fundamental value,housing market,imbalances,loose monetary policy,price misalignment |
| JEL: | C43 C51 E32 E37 E43 G12 R21 R28 R31 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:312019&r=all |
| By: | Gander, Sascha |
| Abstract: | This paper attempts to clarify how the European economic crisis from 2007 onwards can be understood from the perspective of a Marxian monetary theory of value that emphasizes in-trinsic, structural flaws regarding capitalist reproduction. Chapter two provides an empirical description of the European economic crisis, which to some extent already reflects the struc-tural theoretical framework presented in chapter three. Regarding the theoretical framework Michael Heinrich's interpretation of 'the' Marxian monetary theory of value will be presented. Heinrich identifies connections between production and realization, between profit and inter-est rate as well as between industrial and fictitious capital, which represent contradictory tendencies for which capitalism does not have simple balancing processes. In the context of a discussion of 'structural logical aspects' of Marx's Critique of the Political Economy, explana-tory deficits of Heinrich's approach are analyzed. In the following, it is argued that Fred Mose-ley's view of these 'structural logical aspects' allows empirical 'applications' of Marxian mon-etary theories of value. It is concluded that a Marxian monetary theory of value, with the characteristics of expansive capital accumulation and its limitations, facilitates a structural analysis of the European economic crisis from 2007 onwards. In this line of argument, expan-sive production patterns are expressed, among other things, in global restructuring processes, while consumption limitations are mitigated by expansive financial markets and shifts in ex-port destinations. |
| Keywords: | Marxian monetary theory of value,change in plan debate,ideal average,transfor-mation problem,European economic crisis,overproduction,Heinrich,Moseley |
| JEL: | B51 B59 D30 D46 E11 E21 E22 E23 E40 E50 F10 F21 G15 G18 G20 N10 N20 O52 P16 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ipewps:1252019&r=all |
| By: | Sindri Engilbertsson (University of Iceland); Gylfi Zoega (Birkbeck, University of London) |
| Abstract: | The political turmoil in the UK following the referendum on future membership of the European Union in 2016 provides a natural experiment for studying the effects of political uncertainty (in the Knightian sense) on the economy. We find that the subsequent confusion and infighting in British politics has not affected the real economy much – employment is at a historical high and output growth is positive – but there are some signs of slowing investment and house price increases. The stock market has also not been much affected although it did fall after the referendum of 2016. The main effect of the Brexit vote and the subsequent political developments is found in the currency market where news that make a hard Brexit more likely cause the currency to depreciate. We conclude that leaving the European Union without an agreement is likely to make the currency depreciate and the stock market fall while output declines. In contrast, leaving with an agreement that gives continued access to the Single Market would likely make the currency appreciate, the stock market rise and employment and output increase further |
| Keywords: | Brexit, growth, share price, currency market |
| JEL: | E24 E44 F31 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkcam:1907&r=all |
| By: | Athanasios Geromichalos (Department of Economics, University of California, Davis); Kuk Mo Jung (Department of Economics, Sogang University, Seoul) |
| Abstract: | We develop a monetary model that incorporates Over-the-Counter (OTC) asset trade. After agents have made their money holding decisions, they receive an idiosyncratic shock that affects their valuation for consumption and, hence, for the unique liquid asset, namely, money. Subse- quently, agents can choose whether they want to enter the OTC market in order to sell assets and, thus, boost their liquidity, or to buy assets and, thus, provide liquidity to other agents. In our model inflation affects not only the money holding decisions of agents, as is standard in monetary theory, but also the entry decision of these agents in the financial market. We use our framework to study the effect of inflation on welfare, asset prices, and OTC trade volume. In contrast to most monetary models, which predict a negative relationship between inflation and welfare, we find that inflation can be welfare improving within a certain range, because it mitigates a search externality that agents impose on one another when they make their OTC market entry decision. Also, an increase in the holding cost of money will lead to a decrease in asset prices, a regularity which is well-documented in the data and often considered anomalous. |
| Keywords: | monetary-search models, liquidity, asset prices, over-the-counter markets |
| JEL: | E31 E50 E52 G12 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:sgo:wpaper:1903&r=all |
| By: | Gächter, Martin; Geiger, Martin; Stöckl, Sebastian |
| Abstract: | We examine the transmission of global macro-financial uncertainty to economic activity depending on the current state of the banking sector. Previous literature suggests that credit supply and uncertainty shocks are important drivers of economic activity, but the distinction between the two is empirically challenging. In this paper, we introduce a new, but surprisingly simple measure of macro-financial uncertainty at the global level while the state of credit intermediation is being captured on the country level. Macro-financial uncertainty generally exerts adverse effects on economic growth in a sample of advanced economies. We find, however, that a shock to uncertainty is strongly reinforced when credit intermediation is distressed. In addition, we show that both macroeconomic and financial market uncertainty are associated with lower economic activity, although the latter exerts stronger effects. State-dependency of the effects is prevalent in both cases. Our findings have important policy implications, highlighting both the state of the banking sector as well as the origin of uncertainty as crucial factors in the transmission of uncertainty. |
| Keywords: | uncertainty,credit intermediation,local projection method,state-dependency |
| JEL: | D80 E32 E44 G21 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:204444&r=all |
| By: | Horvath, Roman; Kaszab, Lorant; Marsal, Ales; Rabitsch, Katrin |
| Abstract: | We generalize a simple New Keynesian model and show that a flattening of the Phillips curve reduces the size of fiscal multipliers at the zero lower bound (ZLB) on the nominal interest rate. The factors behind the flatting are consistent with micro- and macroeconomic empirical evidence: it is a result of, not a higher level of price rigidity, but an increase in the degree of strategic complementarity in price-setting -- invoked by the assumption of a specific instead of an economy-wide labour market, and decreasing instead of constant-returns-to-scale. In normal times, the efficacy of fiscal policy and resulting multipliers tends to be small because negative wealth effects crowd out consumption, and because monetary policy endogenously reacts to fiscally-driven increases in inflation and output by raising rates, offsetting part of the stimulus. In times of a binding ZLB and a fixed nominal rate, an increase in (expected) inflation instead lowers the real rate, leading to larger fiscal multipliers. Conditional on being in a ZLB-environment, under a flatter Phillips curve, increases in expected inflation are lower, so that fiscal multipliers at the ZLB tend to be lower. Finally, we also discuss the role of solution methods in determining the size of fiscal multipliers. |
| Keywords: | Fiscal multipliers, strategic complementarity, Phillips curve, zero lower bound, New Keynesian model |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wus005:7167&r=all |
| By: | Schön, Matthias; Stähler, Nikolai |
| Abstract: | In a three-region New Keynesian life-cycle model calibrated to Germany, the Euro area (without Germany) and the rest of the world, we analyze the impact of population ageing on net foreign asset and current account developments. Using unsynchronized demographic trends by taking those of Germany as given and assuming constant population everywhere else, we are able to generate German current account surpluses of up to 15% of GDP during the first half of this century. However, projected demographic trends from 2000 to 2080 in OECD countries (and China in an additional analysis) are much more synchronized. Feeding these into our model suggests that the average annual German current account surplus from 2000 to 2018 that should be attributed to ageing reduces to around 2.83% (1.23%) of GDP, with a maximum at 4.3% (2.7%) in 2006 (when taking into account China), turning negative around 2035. |
| Keywords: | Population Ageing,Net Foreign Assets,Global Imbalances,DSGE Models |
| JEL: | E43 E44 E52 E58 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:332019&r=all |
| By: | Jelena Zivanovic |
| Abstract: | I use a structural vector autoregression (SVAR) with sign restrictions to provide conditional evidence on the behavior of the US external finance premium (EFP). The results indicate that the excess bond premium, a proxy for the EFP, reacts countercyclically to supply and monetary policy shocks and procyclically to demand shocks. I confront my empirical evidence with the predictions from financial dynamic stochastic general equilibrium (DSGE) models with respect to the finance premium in order to identify an empirically relevant financial friction. The Bernanke, Gertler and Gilchrist (1999) model generates transmission mechanisms that are favored by the data. |
| Keywords: | Economic models; Financial markets; Recent economic and financial developments |
| JEL: | E32 E44 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:19-38&r=all |
| By: | María Victoria Landaberry (Banco Central del Uruguay) |
| Abstract: | In this paper we review the most used methodologies for the identification of credit boom episodes as ex post identification threshold techniques that can be used to identify episodes in Uruguay between 1985 and 2018. We estimate a Bayesian Model Average (BMA) that allows the identification and early prediction of credit booms based on the interrelation between these episodes and the macroeconomic aggregates. Considering the evolution of GDP, private consumption, investment, public spending, imports, exports, the exchange rate, the terms of trade, the current account and the capital account and financial information as a percentage of GDP, it is possible to determine the probability of being in an episode of credit boom up to two quarters in advance. Following this methodology, 3 episodes are identified, from the second quarter of 2000 to the first quarter of 2003, from the fourth quarter of 2008 to the second quarter of 2010 and from the second quarter of 2012 to the third quarter of 2015. |
| Abstract: | En el presente documento se revisan las metodologías más utilizadas para la identificación de episodios de boom de crédito, conocidas como técnicas de umbral o de identificación ex post, y se aplican para identificar dichos episodios en Uruguay entre 1985 y 2018. También se estima un modelo bayesiano promedio (BMA por sus siglas en inglés) que permite la identificación y predicción temprana de episodios de boom de crédito a partir de la interrelación entre estos y los agregados macroeconómicos. Considerando la evolución del PIB, el consumo privado, la inversión, el gasto público, las importaciones, las exportaciones, el tipo de cambio, los términos de intercambio, el saldo de la cuenta corriente, la cuenta de capital y financiera neta como porcentaje del PIB, es posible determinar la probabilidad de estar en un episodio de boom de crédito hasta con dos trimestres de anticipación. Siguiendo esta metodología se identifican 3 episodios, desde el segundo trimestre del año 2000 al primer trimestre del año 2003, desde el cuarto trimestre de 2008 hasta el segundo trimestre de 2010 y desde el segundo trimestre de 2012 hasta el tercer trimestre de 2015. |
| Keywords: | Early warning indicator, Credit Booms, financial stability, Uruguay; indicadores de alerta temprana, Boom de Crédito, estabilidad financiera |
| JEL: | E32 E37 R21 R31 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:bku:doctra:2019001&r=all |
| By: | Marina Sanches; Laura Carvalho |
| Abstract: | Based on Blanchard and Perotti (2002)’s Structural VAR approach, this paper estimates fiscal multipliers for different components of Brazilian federal government’s expenditures, as well as for different sub-periods. Results suggest a higher and more persistent expenditure multiplier in the full sample, which includes the country’s current economic crisis, than in the period 1997-2014. The difference arises from only two components – social benefits and public investments –, which generate the highest multiplier effects. On the basis of these results, several simulation exercises are performed. If central government’s investment was held constant since the beginning of the fiscal consolidation plan in 2015, our estimates suggest that the level of GDP would be 1.4% higher than what we observed in 2017. If federal investment had instead expanded at the same average pace as in the period 2006-2010, GDP would have been 6.7% higher than observed. Finally, output would be 2.53% lower if social benefits had not continued to grow in 2016 and 2017 due to constitutional obligations. |
| Keywords: | fiscal multipliers; fiscal policy; fiscal consolidation; public investment; SVAR |
| JEL: | E62 H30 H50 |
| Date: | 2019–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2019wpecon35&r=all |
| By: | Mathias Klein; Ludger Linnemann |
| Abstract: | We present evidence on the open economy consequences of US fiscal policy shocks identified through proxy-instrumental variables. Tax shocks and government spending shocks that raise the government budget deficit lead to persistent current account deficits. In particular, the negative response of the current account to exogenous tax reductions through a surge in the demand for imports is among the strongest and most precisely estimated effects. Moreover, we find that the reduction of the current account is amplified when the tax reduction is due to lower personal income taxes and when the government increases its consumption expenditures. Historically, a much larger share of current account dynamics has been due to tax shocks than to government spending shocks. |
| Keywords: | Tax policy, government spending, proxy-vector autoregressions, current account, twin deficits |
| JEL: | E32 E62 F41 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1821&r=all |
| By: | Jesus Fernandez-Villaverde (University of Pennsylvania, NBER, and CEPR); Samuel Hurtado (Banco de Espana); Galo Nuno (Banco de Espana) |
| Abstract: | This paper investigates how, in a heterogeneous agents model with ?nancial frictions, idiosyncratic individual shocks interact with exogenous aggregate shocks to generate time-varying levels of leverage and endogenous aggregate risk. To do so, we show how such a model can be e?ciently computed, despite its substantial nonlinearities, using tools from machine learning. We also illustrate how the model can be structurally estimated with a likelihood function, using tools from inference with di?usions. We document, ?rst, the strong nonlinearities created by ?nancial frictions. Second, we report the existence of multiple stochastic steady states with properties that di?er from the deterministic steady state along important dimensions. Third, we illustrate how the generalized impulse re-sponse functions of the model are highly state-dependent. In particular, we ?nd that the recovery after a negative aggregate shock is more sluggish when the economy is more lever-aged. Fourth, we prove that wealth heterogeneity matters in this economy because of the asymmetric responses of household consumption decisions to aggregate shocks. |
| Keywords: | Heterogeneous agents; aggregate shocks; continuous-time; machine learning; neural networks; structural estimation; likelihood functions |
| JEL: | C45 C63 E32 E44 G01 G11 |
| Date: | 2019–09–13 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:19-015&r=all |
| By: | Seungduck Lee (Department of Economics, Sungkyunkwan University, Seoul, Republic of Korea); Kuk Mo Jung (Department of Economics, Sogang University, Seoul) |
| Abstract: | A new monetary theory is set out to resolve the “Uncovered Interest Parity (UIP)†Puzzle. It explores the possibility that liquidity properties of money and nominal bonds can account for the puzzle. A key concept in our model is that nominal bonds carry liquidity premia. We show that the UIP can fail to hold under the economic environment where collateral pledgeability and/or liquidity of nominal bonds and/or collateralized credit based transactions are relatively bigger. Our liquidity based theory can help understanding many empirical observations that risk based explanations find difficult to reconcile with. |
| Keywords: | uncovered interest parity puzzle, monetary search models, FOREX market |
| JEL: | E4 E31 E51 F31 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:sgo:wpaper:1902&r=all |
| By: | Naudé, Wim (Maastricht University) |
| Abstract: | Entrepreneurship in most advanced economies is in decline. This comes as a surprise: many scholars have expected an upsurge in entrepreneurship. What are the reasons for the decline? In this paper I first document the extent of the decline in terms of entrepreneurial entry rates; the share of young and small firms; and in terms of labor market mobility and in innovativeness. I then critically discuss the explanations that have been offered in the literature, which variously ascribes the decline to either the slowing of population growth, and/or growing market concentration, zombie-firm congestion, slower diffusion of knowledge, and burdensome business regulations. While having merit, these explanations tend to take a supply-side view and moreover fail to explain why the decline in entrepreneurship is largely confined to economies with high levels of economic complexity. I argue that we need to consider the potential of negative scale effects and evolutionary pressures from rising complexity, as well as long-run changes in aggregate demand and energy costs. Whether the decline in entrepreneurship and the ossification of the economy is undesirable, is a point for debate, calling for more research and more attention to entrepreneurship in growth theories. |
| Keywords: | development, start-ups, entrepreneurship, economic complexity, growth theory |
| JEL: | O47 O33 J24 E21 E25 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12602&r=all |
| By: | Emanuel Kohlscheen; Jouchi Nakajima |
| Abstract: | We compute steady-state economic growth - defined as the rate of growth that the economy would converge to in the absence of new shocks. This rate can be computed in real-time by means of a parsimonious time-varying parameter (TVP) VAR model. Our procedure offers a relatively agnostic estimation of benchmark equilibrium growth rates. Estimates show that the steady-state GDP growth rate in the case of the United States declined from just above 3% per year in the 1990s to 2.4% at present. Results for other six advanced economies and the euro area indicate that the steady-state growth rate, which is consistent with stable inflation and financial conditions, has been relatively stable since 2010 in most cases in spite of a recent slowdown in actual GDP growth rates. |
| Keywords: | economic growth, financial conditions, inflation, monetary policy, potential output, time-varying |
| JEL: | C11 C15 E30 O40 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:812&r=all |
| By: | Kosuke Aoki (University of Tokyo); Hibiki Ichiue (Bank of Japan); Tatsushi Okuda (Bank of Japan) |
| Abstract: | Many developed economies in recent years have been characterized by a tight labor market and a low inflation environment, a phenomenon referred to as "missing inflation." To explain this phenomenon, we develop a dispersed information model in which consumers' search for cheaper prices affects firms' pricing behavior. The model shows that firms are reluctant to pass through cost increases because they fear a disproportionate decline in their sales. A history of low and stable inflation amplifies this effect by decreasing consumers' inflation beliefs. In this case, enhancement of the central bank's communication regarding its inflation target more firmly anchors consumers' inflation beliefs and makes the Phillips curve flatter, while enhancement of the central bank's communication about the current aggregate price level has the opposite effect. |
| Keywords: | missing inflation; imperfect information; price search; communication |
| JEL: | D82 E31 E58 |
| Date: | 2019–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:wp19e14&r=all |
| By: | Kuk Mo Jung (Department of Economics, Sogang University, Seoul); Ju Hyun Pyun (Korea University Business School,) |
| Abstract: | Using data on 70 emerging countries for 1990-2011, we re-examine the validity of both traditional and recently proposed determinants of international reserves. The dynamic panel model considers panel unit root, endogeneity, and country heterogeneity and reveals that not only traditional determinants but also new financial variables—M2/GDP and foreign capital inflows through over-the-counter markets— have significant effects on reserves hoarding. More importantly, out-of-sample forecasts show that the dynamic model yields the best goodness-of-fit, and its predicted values successfully account for the recent patterns in reserve accumulations. |
| Keywords: | foreign exchange reserves, dynamic panel estimation, out-of-sample analysis, emerging economies, over-the-counter markets |
| JEL: | C23 E44 E58 F21 F31 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:sgo:wpaper:1904&r=all |
| By: | Cascaldi-Garcia, Danilo (Federal Reserve Board); Vukotic, Marija (University of Warwick) |
| Abstract: | In this paper we exploit firm-level data on patent grants and subsequent reactions of their stocks to identify technological news shocks. Changes in stock market valuations due to announcements of individual patent grants represent expected future increases in the technology level, which we refer to as patent-based news shocks. Our patent-based news shocks resemble diffusion news in that they do not affect total factor productivity in the short-run but account for about 20 percent of its variations after five years. These shocks induce positive comovement between consumption, output, investment and hours. Unlike the existing empirical evidence, patent-based news shocks generate a positive response in inflation and the federal funds rate, in line with a standard New Keynesian model. Patenting activity in electronic and electrical equipment industries within the manufacturing sector and computer programming and data processing services within the services sector play a crucial role in driving our results. |
| Keywords: | News Shocks ; Patents ; Patent-based news shocks |
| JEL: | E3 E32 L60 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:1225&r=all |
| By: | Michael Funke (Hamburg University Department of Economics and CESifo Munich); Danilo Leiva-Leon (Banco de España); Andrew Tsang (Hamburg University Department of Economics) |
| Abstract: | The recent increase in China’s house prices at the national level masks tremendous variation at the city level – a feature largely overlooked in the macroprudential literature. This paper measures the evolving heterogeneity in China’s house price dynamics across 70 major cities and assesses its relationship with housing market characteristics. We gauge the heterogeneity of house price dynamics using a novel regime-switching modelling approach to estimate the time-varying patterns of China’s city-level housing price synchronization. The estimates indicate an increasing synchronization leading up to 2015, and a decoupling pattern thereafter, which is associated to the heterogeneous strength of regional macroprudential policies. After sorting city-level housing prices into four clusters sharing similar cyclical features, we document high synchronization within clusters, but low synchronization among them. The empirical evidence suggests that differentials in the growth of population, income, and air quality are relevant explanatory factors of housing price synchronization among cities. |
| Keywords: | house prices, Markov-Switching models, synchronization, China |
| JEL: | E31 E32 C32 R11 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1930&r=all |
| By: | Andrea Giovanni Gazzani (Bank of Italy); Alejandro Vicondoa (Pontificia Universidad Catolica de Chile) |
| Abstract: | High frequency identification around key events has recently solved many puzzles in empirical macroeconomics. This paper proposes a novel methodology, the Bridge Proxy-SVAR, to identify structural shocks in Vector Autoregressions (VARs) by exploiting high frequency information in a more general framework. Our methodology comprises three steps: (I) identify the structural shocks of interest in high frequency systems; (II) aggregate the series of high frequency shocks at a lower frequency employing the correct filter; (III) use the aggregated series of shocks as a proxy for the corresponding structural shock in lower frequency VARs. Both analytically and through simulations, we show that our methodology significantly improves the identification of VARs, recovering the true impact effect. In a first empirical application on US data, we show that financial shocks identified at daily frequency produce unambiguously macroeconomic effects consistent with a demand shock. In a second application, we identify U.S. monetary policy shocks that are highly correlated with the series of monetary policy surprises but, contrary to the latter ones, are invertible and so valid external instruments for low-frequency VARs. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:855&r=all |
| By: | Chakraborty, Lekha; Chakraborty, Pinaki; Shrestha, Ruzel |
| Abstract: | Budget credibility, the ability of governments to accurately forecast the macro-fiscal variables, is crucial for effective Public Finance Management (PFM). Fiscal marksmanship analysis captures the extent of errors in the budgetary forecasting. The fiscal rules can determine fiscal marksmanship, as effective fiscal consolidation procedure affects the fiscal behaviour of the states in conducting the budgetary forecasts. Against this backdrop, applying Theil’s technique, we analyse the fiscal forecasting errors for 28 States (except Telengana) in India for the period 2011-12 to 2015-16. There is a heterogeneity in the magnitude of errors across subnational governments in India. The forecast errors in revenue receipts have been greater than revenue expenditure. Within revenue receipts, the errors are pronounced more significantly in grants component. Within expenditure budgets, the errors in capital spending are found greater than revenue spending in all the States. Partitioning the sources of errors, we identified that the errors were more broadly random than systematic bias, except for a few crucial macro-fiscal variables where improving the forecasting techniques can provide better estimates. |
| Keywords: | forecast errors, fiscal policies, fiscal forecasting, political economy, fiscal marksmanship |
| JEL: | C53 E62 H6 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:95921&r=all |
| By: | International Monetary Fund |
| Abstract: | Azerbaijan is recovering from a banking crisis and recession caused by a prolonged decline in oil prices since mid-2014. Monetary conditions remain tight under a de facto peg. Despite rising government spending, the fiscal position is projected to strengthen in 2019 mainly due to firmer oil prices and improvements in revenue administration. Weaknesses in bank balance sheets, structural and policy rigidities, and institutional and governance deficiencies hinder medium-term growth prospects and weaken resilience to shocks. |
| Date: | 2019–09–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfscr:19/301&r=all |
| By: | Sergei Guriev (Département d'économie); Biagio Speciale (Ecole d'Économie de Paris - Paris School of Economics (PSE)); Michele Tuccio (Université Paris-Dauphine) |
| Abstract: | We study wage adjustment during the recent crisis in Italy using a unique dataset on immigrant workers that includes those employed in formal and informal sector. We find that before the crisis immigrants’ wages in the formal and informal sectors moved in parallel (with a 15% premium in the formal labor market). During the crisis, however, formal wages did not adjust down while wages in the unregulated informal labor market fell so that by 2013 the gap had grown to 32%. The difference was particularly salient for workers in occupations where the minimum wage is likely to be binding, and in “simple” occupations where there is high substitutability between immigrant and native workers. Calibrating a simple partial equilibrium model of spillovers between formal and informal markets, we find that less than 10% of workers who lost a formal job during the crisis move to the informal sector. We also find that if the formal sector wages were fully flexible, the decline in formal employment would be in the range of 1.5–4.5%—much lower than 16% decline that we observe in the data. |
| JEL: | E24 E26 J31 J61 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/73bviabv8o80nrgh0mm5h3163q&r=all |
| By: | Anthony Edo (CEPII.); Jacques Melitz (CREST; CEPII.) |
| Abstract: | We perform the first econometric test to date of the influences of inflows of precious metals and population growth on the “Great Inflation” in Europe following the discovery of the New World. The English evidence strongly supports the near-equivalent importance of both influences. For 1500-1700, silver is the only relevant precious metal in the estimates. The study controls for urbanization, government spending, mortality crises and climatic changes. The series for inflows of the precious metals into Europe from America and European mining are newly constructed based on the secondary sources. |
| Keywords: | The Great Inflation, Demography, Precious metals, European economic history 1500-1700 |
| JEL: | E31 F00 J10 N13 N33 |
| Date: | 2019–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:crs:wpaper:2019-14&r=all |
| By: | Ufuk Akcigit; Yusuf Emre Akgunduz; Seyit Mumin Cilasun; Elif Ozcan Tok; Fatih Yilmaz |
| Abstract: | In this paper, we investigate various trends on competition and business dynamism in the Turkish manufacturing sector. More speci?cally, using micro level administrative data sets of ?rm balance sheets, credit registry and social security records, we focus on moments such as ?rm entry, exit, pro?tability, worker reallocation, labor share, labor productivity and credit distributions, among several others. Our results indicate that business dynamism in the Turkish manufacturing sector was relatively stable and even improving until 2012 but has been declining since then. We ?nd that market concentration and exit rates have started to rise, yet new business creation, labor share of output and economic activities of young ?rms have declined. Using a model with endogenous market competition, we show that an adverse shock to cost of R&D investment can explain these empirical trends. We identify increases in ?nancing costs after 2012 of followers as a potential mechanism for our ?ndings in Turkey. We next perform a policy analysis with our model which suggests that providing support (e.g., R&D subsidy) to immediate followers can undo the adverse effects of the negative shock to ?nancing costs and therefore foster competition and faster growth. |
| Keywords: | Business dynamism, Market concentration, Competition, Turkish economy |
| JEL: | E22 E25 L12 O31 O33 O34 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1930&r=all |
| By: | International Monetary Fund |
| Abstract: | Economic activity strengthened in 2018 with broad-based expansion across all major sectors. Inflation remains relatively low, and monetary stance accommodative. Oil production is expected to commence in early 2020, and additional oil discoveries have significantly improved the medium- and long-term outlook. This presents a momentous opportunity to boost inclusive growth by addressing human development needs and infrastructure gaps, provided the oil wealth is managed well. |
| Date: | 2019–09–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfscr:19/296&r=all |
| By: | International Monetary Fund |
| Abstract: | Economic growth in Bangladesh continues to be strong with stable inflation. Sustained growth in the ready-made garment sector with abundant low-cost labor has helped the economy to diversify away from the agricultural sector to a more manufacturing-based economy. Remittance inflows from Bangladeshis overseas continue to play an important role in promoting private consumption and external stability. While the economy still has significant potential with favorable demographics, to ensure sustainability and resilience of growth, the country needs to keep upgrading its macroeconomic policy framework and advance a range of structural measures. |
| Date: | 2019–09–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfscr:19/299&r=all |
| By: | Leilane de Freitas Rocha Cambara; Roberto Meurer, Gilberto Tadeu Lima |
| Abstract: | The aim of this paper is to investigate whether inflation expectations in Brazil have characteristics and statistical properties that can be correlated (possibly in a causal way) with observed variables of interest and expectations about them. We test the hypothesis of perfect foresight in the formation of inflation expectations by the respondents of the official survey conducted by the Central Bank of Brazil, examining the behavior of the possible forecast errors. As these errors are biased and can be predicted, we reject the hypothesis of perfect foresight. We also test models of noisy and sticky information, and we cannot conclude that the deviations from perfect foresight can be explained by information rigidity. Additionally, with a Vector Error Correction model, we find evidence that the expectations about the related macroeconomic variables respond to each other as predicted by a theoretically-grounded macroeconomic model. Therefore, inflation expectations in Brazil are to an important extent consistent with more general expectations about the future performance of the economy. |
| Keywords: | Inflation expectations in Brazil; forecast errors in surveys; deviations from perfect foresight |
| JEL: | D84 E10 E31 |
| Date: | 2019–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2019wpecon36&r=all |
| By: | Stone, Joe A.; Jacobs, David |
| Abstract: | Unique evidence presented in this study challenges previous findings about presidential politics and business cycles. Prior studies find strong evidence for a Democratic economic growth advantage of about 1.8 percent per year over the course of a term but only weak evidence for a pre- election surge in growth for incumbent Presidents of either party. This study finds a much smaller Democratic advantage and strong evidence for a pre-election growth surge for Republican Presidents relative to Democratic Presidents. The novelty of these results is attributable to the use of repeated party-change reversals in adjacent terms for identification in place of binary changes in isolated terms separated by as much as a half-century in prior studies. We find a strongly partisan Federal Reserve effect on growth as well. Results are insensitive to an extensive battery of robustness checks including a placebo test. |
| Keywords: | political business cycles; Presidents; Economic Growth |
| JEL: | E6 E60 H5 |
| Date: | 2019–09–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:96064&r=all |
| By: | Danial Lashkari (Boston College); Arthur Bauer (ENSAE-CREST); Jocelyn Boussard (Banque de France) |
| Abstract: | This paper investigates the role of IT in shaping recent trends in market concentration, factor income shares, and market competition. Relying on a novel dataset on hardware and software investments in the universe of French firms, we document a robust within-industry correlation between firm size and the intensity of IT demand. To explain this fact, we argue that the relative marginal product of IT inputs may rise with firm scale, since IT specifically helps firms deal with organizational limits to scale. We propose a general equilibrium model of industry dynamics that features firm-level production functions compatible with this mechanism. We estimate the production function and find evidence for the nonhomotheticity of IT demand and for an elasticity of substitution between IT and other inputs that falls below unity. Under the estimated model parameters, the cross-sectional predictions of the model match the observed relationship of firm size with IT intensity (positive) and labor share (negative). In addition, as a response to the fall in the relative price of IT inputs in post-1990 France, the model can explain about half of both the observed rise in market concentration and the observed market reallocations toward low-labor-share firms. |
| Keywords: | Information Technology, Labor Share, Industry Concentration, Production Function Estimation, Nonhomotheticity, Firm Heterogeneity |
| JEL: | O3 O4 E2 |
| Date: | 2019–09–26 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:984&r=all |
| By: | Aditya Aladangady; Shifrah Aron-Dine; Wendy Dunn; Laura Feiveson; Paul Lengermann; Claudia Sahm |
| Abstract: | Access to timely information on consumer spending is important to economic policymakers. The Census Bureau’s monthly retail trade survey is a primary source for monitoring consumer spending nationally, but it is not well suited to study localized or short-lived economic shocks. Moreover, lags in the publication of the Census estimates and subsequent, sometimes large, revisions diminish its usefulness for real-time analysis. Expanding the Census survey to include higher frequencies and subnational detail would be costly and would add substantially to respondent burden. We take an alternative approach to fill these information gaps. Using anonymized transactions data from a large electronic payments technology company, we create daily estimates of retail spending at detailed geographies. Our daily estimates are available only a few days after the transactions occur, and the historical time series are available from 2010 to the present. When aggregated to the national level, the pattern of monthly growth rates is similar to the official Census statistics. We discuss two applications of these new data for economic analysis: First, we describe how our monthly spending estimates are useful for real-time monitoring of aggregate spending, especially during the government shutdown in 2019, when Census data were delayed and concerns about the economy spiked. Second, we show how the geographic detail allowed us quantify in real time the spending effects of Hurricanes Harvey and Irma in 2017. |
| JEL: | E21 E27 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26253&r=all |
| By: | Rincón-Zapatero, Juan Pablo; Jerez, Belén; Díaz, Antonia |
| Abstract: | In this paper we embed a directed search model of the real estate market into a heterogeneous agents setting to study the effect of credit on housing prices. Households can either rent or own their home and face idiosyncratic turnover shocks which make them want to change residence. They can accumulate financial assets to put a down payment on a home and to smooth consumption. Search and matching frictions generate frictional dispersion in housing prices and financial assets in equilibrium. Our model is “block recursive” and highly tractable. We calibrate it to reproduce selected statistics for the US. We extend the Endogenous Grid Method with non-convexities to our environment to compute it. In our framework the distribution of wealth, housing prices, and trading probabilities (e.g. liquidity of housing assets) are crucially affected by credit conditions. Our mechanism greatly amplifies the effect of changes in financial conditions on housing prices. |
| Keywords: | Endogenous Grid Method; Block-Recursivity; Price Dispersion; Housing Prices; Directed Search; Incomplete Markets; Wealth Inequality |
| JEL: | R30 R21 E21 D83 D31 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:28874&r=all |
| By: | Victor Dorofeenko; Gabriel Lee; Kevin Salyer; Johannes Strobel |
| Abstract: | This paper demonstrates that risk (uncertainty) along with the monetary (interest rates) shocks to thehousing production sector that is subject to nominal frictions in prices and wages are a quantitativelyimportant impulse mechanism for the business and housing cycles. Our model framework is that ofthe housing supply/banking/monetary sector model as developed in Dorofeenko, Lee, Salyer and Strobel(2016) with the model of housing demand with sticky pricing (Calvo) presented in Iacoviello and Neri(2010). We provide empirical evidence that large housing price and residential investment boom and bustcycles over the last few years are driven largely by economic fundamentals and financial constraints. Wefind the impact of risk and monetary shocks are the main impulse in explaining the aggregate and sectoralfluctuations. Moreover, in the presence of nominal frictions in prices and wages, the Loan to Value ratiothat affects the household borrowing constraint plays a critical role for real aggregate variables. Thiscomparison carries over to housing market variables such as the price of housing, the risk premium onloans, and the bankruptcy rate of housing producers. |
| Keywords: | credit constraint; hetrogenous households; Monetary Policy; residential investment; uncertainty and demand shocks |
| JEL: | R3 |
| Date: | 2019–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:arz:wpaper:eres2019_214&r=all |
| By: | Anson T. Y. Ho; Mikael Khan; Monica Mow; Brian Peterson |
| Abstract: | We use rich microdata to measure home equity extraction in Canada and track its evolution over time. We find home equity extraction has been rising in recent years and has likely contributed materially to dynamics in household spending. |
| Keywords: | Financial stability; Housing |
| JEL: | D12 E21 G20 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocsan:19-27&r=all |
| By: | Marcos R. Castro |
| Abstract: | We develop and estimate a closed economy DSGE model with banking sector to assess the impact of introducing sectoral countercyclical capital buffers as a macroprudential tool. The model is developed to represent Brazilian bank credit markets. It features three types of bank credit — housing, consumer and commercial — as well as loans provided by a development bank. Loans are long-term, and government regulates housing loans, influencing both interest rates and loan supply. Banks are subject to bank capital requirement, and both broad (CCyB) and sectoral (SCCyB) countercyclical buffers can be introduced by macroprudential authorities. We simulate alternative policies using SCCyBs and CCyB with implementable nonlinear rules using broad and sectoral credit gaps as indicators, and compared the resulting performances. We conclude that, compared with CCyB alone, SCCyBs provide a more flexible set of instruments that allows achieving better macroeconomic stabilization in terms of variances of credit, total capital requirement and capital adequacy ratio. However, the marginal benefit of those SCCyB policies relative to the CCyB-only policy is lower than the improvements obtained by this latter policy compared with the reference scenario with no buffer. Also, SCCyB policies imply more frequent intervention, suggesting that in practice introducing these additional instruments may require more complex implementation procedures. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:503&r=all |
| By: | Mariano Kulish; Adrian Pagan |
| Abstract: | The early history of cycles research involved locating turning points in the data. Later, the development of methods such as spectral analysis led to a focus on oscillations. A distinction between cycles and oscillations is needed - both imply turning points, but turning points do not necessarily imply oscillations. Comin and Gertler (2006) argue that attention should be paid to medium term oscillations of 8-30 years rather than the standard 2-8 years of the business cycle, while Beaudry et al. (2019) suggest that there is a cycle of 9/10 years in series such as hours per capita. We investigate what the evidence is for the latter and find that it explains little of the variance of the data. We then show that some of the fillters being used to locate either turning points or oscillations in the series are not appropriate for the nature of the series being analyzed, specifically whether they are I(1) or I(0). Finally, we assess if the concepts of medium term and 9/10 year cycles are useful for comparing models and data. This is done by examining models of endogenous versus exogenous technology as well as limit cycles due to accumulation and complementarity mechanisms. |
| Keywords: | Medium-term cycles, band-pass filter, business cycles |
| JEL: | C52 E32 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2019-74&r=all |
| By: | Florin Bilbiie (University of Lausanne) |
| Abstract: | An analytical (heterogeneous-agent New-Keynesian) HANK model allows a closed-form treatment of a wide range of NK topics: determinacy properties of interest-rate rules, resolving the forward guidance FG puzzle, amplification and fiscal multipliers, liquidity traps, and optimal monetary policy. The key channel shaping all the model's properties is that of cyclical inequality: whether the income of constrained agents moves less or more than proportionally with aggregate income. With countercyclical inequality, good news on aggregate demand gets compounded, making determinacy less likely and aggravating the FG puzzle (the resolution of which requires procyclical inequality)---a Catch-22, because countercyclical inequality is what HANK (and TANK) models need to deliver desirable amplification. The dilemma can be resolved if a distinct, "cyclical-risk" channel is procyclical enough. Even when both channels are countercyclical a Wicksellian rule of price-level targeting ensures determinacy and cures the puzzle. Optimal monetary policy is isomorphic to RANK and TANK but calls for less inflation stabilization. In a liquidity trap, even with countercyclical inequality and FG amplification, optimal policy does not imply larger FG duration because as FG power increases, so does its welfare cost. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:178&r=all |
| By: | Adam, Klaus; Weber, Henning |
| Abstract: | We document a new stylized fact for the life-cycle behavior of consumer prices: relative to a narrowly defined set of competing products, the price of individual products tends to fall over the product lifetime. This holds true for more than 90% of the expenditure items underlying the U.K. consumer price index and has important normative implications. Constructing a sticky price model featuring a product life cycle and rich amounts of heterogeneity, we explain how the optimal in ation target can be estimated from the observed trends in relative prices. The optimal inflation target for the U.K. is found to range between 2.6% and 3.2% and to have steadily increased over the period 1996 to 2016. We show how changes in relative price trends contributed to this development. |
| Keywords: | Optimal Inflation Rate,Product Life Cycle,U.K. Micro Price Data |
| JEL: | E31 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:322019&r=all |
| By: | Pierre Mabille (New York University) |
| Abstract: | This paper studies households' precautionary savings when they face macroeconomic shocks, a channel that complements the traditional microeconomic precautionary savings motive. I incorporate continuous aggregate income and credit supply shocks, two prominent sources of risk, into a Bewley-Huggett-Aiyagari model calibrated to the U.S. economy. I then propose a novel solution method that quantifies if and how much the economy departs from certainty equivalence. The precautionary motive associated with movements in credit supply is substantial. Its negative effect on the equilibrium risk-free rate is one fourth as large as for idiosyncratic income changes, and much larger than for aggregate income changes. Therefore, in the long-run, large movements in credit generate a low risk-free rate, low debt environment like the post-Great Recession period. They persistently, albeit mildly, depress consumption and employment, leading to higher estimates of the costs of business cycles. Over time, the model assigns about half of the volatility of consumption and the risk-free rate to credit supply shocks. When inverted to recover the sequence of structural shocks around the Great Recession, it suggests that households' borrowing constraints have remained tight during the recovery, despite rising aggregate consumption. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:344&r=all |
| By: | Franziska Bremus; Melina Ludolph |
| Abstract: | Since the global financial crisis and the related restructuring of banking systems, bank concentration is on the rise in many countries. Consequently, bank size and its role for macroeconomic volatility (or: stability) is the subject of intense debate. This paper analyzes the effects of financial regulations on the link between bank size, as measured by the volume of the loan portfolio, and volatility. Using bank-level data for 1999 to 2014, we estimate a power law that relates bank size to the volatility of loan growth. The effect of regulation on the power law coefficient indicates whether regulation weakens or strengthens the size-volatility nexus. Our analysis reveals that more stringent capital regulation and the introduction of bank levies weaken the size-volatility nexus; in countries with more stringent capital regulation or levies in place, large banks show, ceteris paribus, lower loan portfolio volatility. Moreover, we find weak evidence that diversification guidelines weaken the link between size and volatility. |
| Keywords: | Bank size, regulation, volatility, diversification, moral hazard, power law |
| JEL: | G21 G28 E32 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1822&r=all |
| By: | John Duffy (University of California, Irvine); Daniela Puzzello (Indiana University) |
| Abstract: | We explore the celebrated Friedman rule for optimal monetary policy in the context of a laboratory economy based on the Lagos-Wright model. The rule that Friedman proposed can be shown to be optimal in a wide variety of different monetary models, including the Lagos-Wright model. However, we are not aware of any prior empirical evidence evaluating the welfare consequences of the Friedman rule. We explore two implementations of the Friedman rule in the laboratory. The first is based on a deflationary monetary policy where the money supply contracts to offset time discounting. The second implementation pays interest on money removing the private marginal cost from holding money. We explore the welfare consequences of these two theoretically equivalent implementations of the Friedman Rule and compare results with two other policy regimes, a constant money supply regime and another regime advocated by Friedman, where the supply of money grows at a constant k-percent rate. We find that, counter to theory, the Friedman rule is not welfare improving, performing no better than a constant money regime. By one welfare measure, we find that the k-percent money growth rate regime performs best. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:541&r=all |
| By: | Galassi, Gabriela (Bank of Canada); Koll, David (European University Institute); Mayr, Lukas (University of Essex) |
| Abstract: | We document a substantial positive correlation of employment status between mothers and their children in the United States, linking data from the National Longitudinal Survey of Youth 1979 (NLSY79) and the NLSY79 Children and Young Adults. After controlling for ability, education, and wealth, a one-year increase in a mother's employment is associated with six weeks more employment of her child on average. The intergenerational transmission of maternal employment is stronger to daughters than to sons, and it is higher for low-educated and low-income mothers. Potential mechanisms we were able to rule out include networks, occupation-specific human capital and conditions within the local labor market. By contrast, we provide suggestive evidence for a role-model channel through which labor force participation is transmitted. |
| Keywords: | intergenerational transmission, preferences for work, female employment |
| JEL: | E24 J21 J22 J62 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12595&r=all |
| By: | James Bullard (Federal Reserve Bank of St. Louis); Riccardo DiCecio (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. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:347&r=all |
| By: | Perekunah B. Eregha (Pan-Atlantic University, Lekki-Lagos. Nigeria); Arcade Ndoricimpa (University of Burundi, Burundi) |
| Abstract: | The study applies a BEKK GARCH-M model to examine the effect of uncertainty on the levels of inflation and output growth in Nigeria. The results suggest a significant positive effect of inflation uncertainty on the level of inflation, supporting the Cukierman and Meltzer (1986) hypothesis. In addition, uncertainty about inflation is found to be detrimental to output growth, supporting the Friedman’s (1977) hypothesis of a negative effect of inflation uncertainty on output growth. Uncertainty about growth does not have a significant effect on both the levels of inflation and output growth. The evidence in this study suggests that Nigeria should put in place policies minimizing inflation uncertainty to avoid its adverse effects on the economy. In addition, the independence relationship between output growth and its uncertainty in Nigeria suggest that they can be treated separately as suggested by business cycle models. |
| Keywords: | Inflation, Inflation Uncertainty, Output, Output Uncertainty, BEKK GARCH-M |
| JEL: | C22 E0 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:exs:wpaper:19/060&r=all |
| By: | Emile van Ommeren; Giulia Piccillo |
| Abstract: | This paper examines the role of central bank governors in monetary policy decisions taken by a committee. To carry out this analysis, we constructed a novel dataset of committee voting behaviour for six OECD countries for up to three decades. Using a range of Taylor-rule specifications, we show that a change in governor significantly affects the interest rate setting of the whole committee. We also observe systematic differences in the responsiveness to recent changes in the state of the economy based on the political party appointing the governor, with higher responsiveness under governors that are appointed by a left-wing political authority. In contrast, right wing appointed governors are more likely to consider expected economic developments in the future when deciding on the appropriate interest rate. |
| Keywords: | monetary policy, Taylor rule, central bank governors |
| JEL: | E00 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7822&r=all |
| By: | Bhadury, Soumya; Ghosh, Saurabh; Kumar, Pankaj |
| Abstract: | In India, the first official estimate of quarterly GDP is released approximately 7-8 weeks after the end of the reference quarter. To provide an early estimate of the current quarter GDP growth, we construct a Coincident Economic Indicator for India (CEII) using 6, 9 and 12 high-frequency indicators. These indicators represent various sectors, display high contemporaneous correlation with GDP, and track GDP turning points well. While CEII-6 includes domestic economic activity indicators, CEII-9 combines indicators on trade and services along with the indicators used in CEII-6. Finally, CEII-12 adds financial indicators to the indicators used in CEII-9. In addition to the conventional economic activity indicators, we include a financial block in CEII-12 to reflect the growing influence of the financial sector on economic activity. CEII is estimated using a dynamic factor model to extract a common trend underlying the highfrequency indicators. We use the underlying trend to gauge the state of the economy and to identify sectors contributing to economic fluctuations. Further, CEIIs are used to nowcast GDP growth, which closely tracks the actual GDP growth, both in-sample and out-of-sample. |
| Keywords: | Nowcast, Gross Domestic Product, Economic Cycle, Dynamic Factor Model, Turning Point Analysis, Jagged Edge Data |
| JEL: | C32 C51 C53 |
| Date: | 2019–09–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:96007&r=all |
| By: | Frank Bohn (Radboud University, Institute for Management Research, Department of Economics); Francisco José Veiga (NIPE and Economics Department, University of Minho.) |
| Abstract: | By forecasting overly optimistic revenues opportunistic governments can increase spending in order to appear more competent prior to elections. Ex post deficits emerge in election years, thereby producing political forecast cycles - as also found for US states in the empirical literature. In our theoretical moral hazard model we obtain three additional results which are tested with panel data for Portuguese municipalities. The extent of manipulations is reduced when (i) the winning margin is expected to widen; (ii) the incumbent is not re-running; and/or (iii) the share of informed voters (proxied by education) goes up. |
| Keywords: | opportunistic political cycles; political budget cycles; revenue forecasts; deficit; transfers; asymmetric information; political economy. |
| JEL: | D72 H68 E32 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:12/2019&r=all |
| By: | Richard Blundell; Ran Gu; Søren Leth-Petersen; Hamish Low; Costas Meghir |
| Abstract: | We specify an equilibrium model of car ownership with private information where individuals sell and purchase new and second-hand cars over their life-cycle. Private information induces a transaction cost and distorts the market reducing the value of a car as a savings instrument. We estimate the model using data on car ownership in Denmark, linked to register data. The lemons penalty is estimated to be 18% of the price in the first year of ownership, declining with the length of ownership. It leads to large reductions in the turnover of cars and in the probability of downgrading at job loss. |
| JEL: | D12 D14 D4 E21 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26281&r=all |
| By: | Lorenzo Bretscher (London Business School); Alex Hsu (Georgia Institute of Technology); Andrea Tamoni (London School of Economics) |
| Abstract: | Uncertainty shocks are also risk premium shocks. With countercyclical risk aversion (RA), a positive shock to uncertainty not only increases risk, but it also elevates RA as consumption growth falls. The combination of high RA and high uncertainty produces significant risk premia in bad times, which in turn exacerbate the decline of macroeconomic aggregates and equity prices. Empirically, we document that local projection coefficients capturing the data response to the interaction of risk aversion and uncertainty are statistically significant and economically large. Indeed, heightened levels of RA during the 2008 crisis amplified the drop in output and investment by 41% and 28%, respectively, at the recession trough. Theoretically, we show that a New-Keynesian model with endogenously time-varying risk aversion via Campbell and Cochrane (1999) can produce large falls in output and investment close to matching their data counterparts following positive uncertainty shocks. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1567&r=all |
| By: | Sergio Salgado (University of Minnesota); Fatih Guvenen (University of Minnesota); Nicholas Bloom (Stanford University) |
| Abstract: | We show in panels of US Census and international firm data that the cross-sectional skewness of employment and sales growth distributions are procyclical. In particular, during recessions they display a large left-tail of negative growth rates (and during booms a large right tail of positive growth rates). These results are extremely robust to different selection criteria, across countries, industries, and measures. We build a heterogeneous-agents model in which entrepreneurs face shocks with time varying skewness risk that matches the firm-level distributions we document for the US. This model shows that a negative shock to skewness (that keeps the mean and variance constant) to firms’ productivity growth generates significant and persistent decreases in investment, hiring, growth and consumption. Hence, we argue that periods of heightened left-tail risk help to drive business cycle fluctuations. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1189&r=all |
| By: | Pooya Molavi (Massachusetts Institute of Technology) |
| Abstract: | This paper explores a form of bounded rationality where agents learn about the economy with possibly misspecified models. I consider a recursive general-equilibrium framework that nests a large class of macroeconomic models. Misspecification is represented as a constraint on the set of beliefs agents can entertain. I introduce the solution concept of constrained-rational expectations equilibrium (CREE), in which each agent selects the belief from her constrained set that is closest to the endogenous distribution of observables in the Kullback–Leibler divergence. If the set of permissible beliefs contains the rational-expectations equilibria (REE), then the REE are CREE; otherwise, they are not. I show that a CREE exists, that it arises naturally as the limit of adaptive and Bayesian learning, and that it incorporates a version of the Lucas critique. I then apply CREE to a particular novel form of bounded rationality where beliefs are constrained to factor models with a small number of endogenously chosen factors. Misspecification leads to amplification or dampening of shocks and history dependence. The calibrated economy exhibits hump-shaped impulse responses and co-movements in consumption, output, hours, and investment that resemble business-cycle fluctuations. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1584&r=all |
| By: | Tsutomu Watanabe (Graduate School of Economics, University of Tokyo); Tomoyoshi Yabu (Faculty of Business and Commerce, Keio University) |
| Abstract: | This paper estimates a money demand function using Japanese data from 1985 to 2017, which includes the period of near-zero interest rates over the last two decades. We compare a log-log specification and a semi-log specification by employing the methodology proposed by Kejriwal and Perron (2010) on cointegrating relationships with structural breaks. Our main finding is that there exists a cointegrating relationship with a single break between the money-income ratio and the interest rate in the case of the log-log form but not in the case of the semi-log form. More specifically, we show that the substantial increase in the money-income ratio during the period of near-zero interest rates is well captured by the log-log form but not by the semi-log form. We also show that the demand for money did not decline in 2006 when the Bank of Japan terminated quantitative easing and started to raise the policy rate, suggesting that there was an upward shift in the money demand schedule. Finally, we find that the welfare gain from moving from 2 percent in ation to price stability is 0.10 percent of nominal GDP, which is more than six times as large as the corresponding estimate for the United States. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf465&r=all |
| By: | Davide Debortoli (Universitat Pompeu Fabra, CREI and BGSE); Pierre Yared (Columbia University); Ricardo Nunes (University of Surrey) |
| Abstract: | According to the Lucas-Stokey result, a government can structure its debt maturity to guarantee commitment to optimal fiscal policy by future governments. In this paper, we overturn this conclusion, showing that it does not generally hold in the same model and under the same definition of time-consistency as in Lucas-Stokey. Our argument rests on the existence of an overlooked commitment problem that cannot be remedied with debt maturity: a government in the future will not tax on the downward slopping side of the Laffer curve, even if it is ex-ante optimal to do so. In light of this finding, we propose a new framework to characterize time-consistent policy. We consider a Markov Perfect Competitive Equilibrium where a government reoptimizes sequentially and may deviate from the optimal commitment policy. We find that, in a deterministic economy, any stationary distribution of debt maturity must be flat, with the government owing the same amount at all future dates. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:926&r=all |
| By: | Andrea Brandolini; Alfonso Rosolia |
| 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 |
| JEL: | D31 D63 E01 I32 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp1052&r=all |
| By: | Gee Hee Hong (International Monetary Fund); Ernesto Pasten (Banco Central de Chile); Matthew Klepacz (College of William and Mary); Raphael Schoenle (Brandeis University) |
| Abstract: | We propose a new methodology to discriminate among models that uses both micro and macro moments to discipline model choice. The key insight lies in using macro moments conditional on micro moments to discipline the response of the main variable of interest following a key policy shock. Some of the micro moments may be sufficient statistics. In an application to discriminate among leading price-setting models, Calvo and menu cost, we show that both Calvo and menu cost models match key micro price moments. However, only Calvo replicates the irrelevance of kurtosis for monetary non-neutrality following a monetary policy shock. Our menu cost model can match the irrelevance of kurtosis, but at the cost of missing key micro price moments. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:906&r=all |
| By: | Enrique Alberola (BIS); Carlos Urrutia (ITAM) |
| Abstract: | Informality is an entrenched structural trait in emerging market economies, despite of the progresses achieved in macroeconomic management. Informality determines the behavior of labour markets, financial access and the productivity of the overall economy. Therefore it influences the transmission of shocks and also of monetary policy. This paper develops a simple general equilibrium closed economy model with nominal rigidities, labor and financial frictions. Informality is captured by a dual labour market where the share of informal workers is endogenous. Only formal sector firms have access to financing, which is instrumental in their production process. Informality has a bu↵ering e↵ect on the propagation of demand and supply shocks to prices; the financial feature of the model boosts the impact of financial shocks in the formal sector while the informal sector is in principle unaffected. As a result informality dampens the impact of demand and financial shocks on wages and inflation but heighten the impact of technology shocks. Informality also increases the sacrifice ratio of monetary policy actions. From a Central Bank perspective, the results imply that the presence of an informal sector mitigates inflation volatility for some type of shocks but makes monetary policy less effective. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:216&r=all |
| By: | Sushant Acharya; Edouard Challe (CREST & Ecole Polytechnique); Keshav Dogra (Federal Reserve Bank of New York) |
| Abstract: | In this paper, we study the positive and normative implications for monetary policy of cross-sectional wealth dispersion due to uninsured, idiosyncratic labor-income risk. To this purpose we develop a tractable Heterogenous-Agent New Keynesian (HANK) model based on CARA (Constant Absolute Risk Aversion) utility functions and Normally distributed labor-income risk. The distributions of wealth, earnings and consumptions, as well as their dynamics over time, can be solved in closed form, which informs us about the precise impact of monetary policy on those cross-sectional distributions. The Social Welfare Function (SWF) that aggregates agents utility can also be solved in closed form. Besides its usual determinants, the optimal policy response to aggregate shocks gives a central role to (i) the redistribution of wealth through inflation (as emphasized by Bhandari et al., 2018), and (ii) the impact of policy on the marginal propensity to consume out of wealth, which determines the pass-through from income risk to consumption risk |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:381&r=all |
| By: | Chao Gu (University of Missouri); Cyril Monnet (Universitat Bern); Ed Nosal (Federal Reserve Bank of Atlanta); Randall Wright (University of Wisconsin) |
| Abstract: | Are fi nancial intermediaries inherently unstable? If so, why? What does this suggest about government intervention? To address these issues we analyze whether model economies with fi nancial intermediation are particularly prone to multiple, cyclic, or stochastic equilibria. Four formalizations are considered: a dynamic version of Diamond-Dybvig incorporating reputational considerations; a model with delegated monitoring as in Diamond; one with bank liabilities serving as payment instruments similar to currency in Lagos-Wright; and one with Rubinstein-Wolinsky intermediaries in a decentralized asset market as in Duffie et al. In each case we fi nd, for different reasons, that fi nancial intermediation engenders instability in a precise sense. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:352&r=all |
| By: | Watzka, Klaus |
| Abstract: | Es gibt gute Gründe, die jahrzehntelang eingespielten Muster der Tarifpolitik kritisch zu hinterfragen. Für einen besonders problematischen Aspekt liefert das aktuelle Jahr 2019 ein gutes Beispiel: Die Ergebnisse von Tarifvertragsverhandlungen weisen aus betriebswirtschaftlicher Sicht ein kontraproduktives zeitliches Muster auf. Die höchsten Tarifabschlüsse werden nämlich oftmals in Jahren getätigt, in denen sich die Wachstumsraten der Wirtschaft deutlich reduzieren. Unternehmen bräuchten in dieser Phase eigentlich eine Kostenentlastung. Stattdessen gehen sie mit sockelwirksam erhöhten Personalkosten in eine Abschwungphase. Diese kontraproduktive Antizyklik kann potenziell zu einer Gefährdung der Arbeitsplätze in einzelnen Betrieben führen. Die Zahl der Betriebe in Kurzarbeit belegt dies deutlich. Weitere problematische Aspekte der üblichen tarifpolitischen Mechanismen sind: Kosten und Störpotenzial von Arbeitskämpfen, Belastung des öffentlichen Lebens und des Betriebsfriedens durch Streiks, Inflexibilität von Tarifverträgen, Kompliziertheit und Antiquiertheit von Verhandlungsritualen, finanzielle Überforderung einzelner Unternehmen durch Betriebsferne der Tarifverträge. Die Diskussion aller Aspekte führt zur Schlussfolgerung, dass die Suche nach alternativen Mechanismen in der Tarifpolitik sinnvoll ist. Es wird dazu ein Lastenheft entwickelt. Im Ergebnis wird ein neues Paradigma in der Tarifpolitik vorgeschlagen und diskutiert, das im Dauerbetrieb stärker durch eine betriebswirtschaftlich sinnhafte Zyklik, Standardisierung, Automatisierung und Einfachheit geprägt ist. Im Kern besteht der Ansatz aus zwei Komponenten. Alle Beschäftigten erhalten zunächst in jedem Jahr automatisch einen Ausgleich für die Inflationsrate. Dies schafft Kaufkraftstabilität. In einem nächsten Schritt wird die Gesamtbelegschaft dann zu einem langfristig vereinbarten Prozentsatz automatisch am Vorjahresgewinn des eigenen Unternehmens beteiligt. Dieses zweite Element sichert eine höhere Flexibilität der Personalkosten und führt zu betriebsnäheren Tarifergebnissen. Im Detail sind dabei eine Fülle von Einzelfragen zu diskutieren, unter anderem muss eine Lösung für nicht gewinnorientierte Organisationen gefunden werden. |
| Keywords: | Arbeitgeberverbände,Entgeltpolitik,Gewerkschaften,Gewinnbeteiligung,Personalkosten,Tarifpolitik,Tarifvertrag,Vergütung |
| JEL: | E24 E64 J30 J31 J50 J51 J52 J81 M52 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fhjbwf:20192&r=all |
| By: | Mehmet Selman Colak; Ibrahim Ethem Guney; Ahmet Senol; Muhammed Hasan Yilmaz |
| Abstract: | Credit growth rate deviating from its long-run trend or equilibrium value holds importance for policymakers given the implications on economic activity and macro-financial interactions. In the first part of this study, the main aim is to construct indicators for determining the episodes of moderate-to-excessive credit slowdown and expansion by utilizing time-series filtering methods such as Hodrick-Prescott filter, Butterworth filter, Christiano-Fitzgerald filter and Hamilton filter over the time period 2007-2019. In addition to filtering choices, four different credit ratios (which are credit-to-GDP ratio, real credit growth, logarithm of real credit, credit impulse ratio) are included in the methodology to ensure the robustness. This framework enables one to generate monitoring tools for not only total loans, but also for financial intermediation activities with different loan breakdowns regarding type, sector and currency denomination. Moreover, industry-based dynamics of commercial loans are examined by using micro-level Credit Registry data set. In the following part, the credit cycle implied by macroeconomic dynamics are investigated by using factor-augmented predictive regression models. In this context, factors representing the global economic developments, banking sector outlook, local financial conditions and economic growth tendencies are created from large data set of 107 time series by utilizing principal component analysis. Analysis conducted for January 2009-April 2019 interval seems to be in line with exogenous shocks affecting the credit market in the corresponding period. To gain more knowledge about the predictive power of factor-augmented regression models, out-of-sample forecasting exercises are performed. It is found that global forces and economic activity provide substantial improvement in terms of predictive power over simple autoregressive benchmark models given low level of relative forecast errors. |
| Keywords: | Credit cycle, Macroeconomic dynamics, Filtering, Factor models, Forecasting |
| JEL: | G21 E51 C38 C53 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1929&r=all |
| By: | Indaco, Agustín |
| Abstract: | Using all geo-located image tweets shared on Twitter in 2012-2013, I find that the volume of tweets is a valid proxy for estimating current GDP in USD at the country level. Residuals from my preferred model are negatively correlated to a data quality index, indicating that my estimates of GDP are more accurate for countries with more reliable GDP data. Comparing Twitter with more commonly-used proxy of night-light data, I find that variation in Twitter activity explains slightly more of the cross-country variance in GDP. I also exploit the continuous time and geographic granularity of social media posts to create monthly and weekly estimates of GDP for the US, as well as sub- national estimates, including those economic areas that span national borders. My findings suggest that Twitter can be used to measure economic activity in a more timely and more spatially disaggregate way than conventional data and that governments’ statistical agencies could incorporate social media data to complement and further reduce measurement error in their official GDP estimates. |
| Keywords: | National Accounts, Big Data |
| JEL: | C53 E01 Q11 |
| Date: | 2019–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:95885&r=all |
| By: | International Monetary Fund |
| Abstract: | Namibia’s economy is rebalancing, but significant challenges remain. The fiscal and current account deficits have narrowed, and credit and house prices growth has decelerated. However, public debt remains on a rising path, reserve coverage is below adequate levels, and growth has recently halted. Past years of strong growth masked slowing productivity and deteriorating external competitiveness, hindering the country’s development prospects; while income inequality and unemployment remain persistently high. |
| Date: | 2019–09–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfscr:19/295&r=all |
| By: | Carlos Carrillo-Tudela (Essex); David Wiczer (Stony Brook University); Ludo Visschers (The University of Edinburgh/Universidad) |
| Abstract: | Recessions increase unemployment risk and decrease job and occupation flows. This paper connects cyclical differences in the earnings change distribution with cyclical differences in workers flows. Earnings changes are typically larger when workers change jobs and even larger when switching occupation. This implies that the incidence of flows directly affects earnings changes. However, the business cycle also affects earnings outcomes conditional on a job, employment status and/or occupation change. We formally decompose cyclical movements in the earnings change distribution into worker-flow components and ``returns'' components. Then, because job and occupation switching are endogenous, we look through the lens of a business cycle model with on-the-job search and occupational mobility to rationalize observed behaviour, thereby distinguishing who moves and why, and how this relates to the underlying risks workers face. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1548&r=all |
| By: | Congressional Budget Office |
| Abstract: | In 1995, 33 percent of people ages 55 to 79 worked. By 2018, that share rose to 44 percent. That growth was the result of continued increases in employment for women and a reversal of previously declining employment for men. The changes in employment of people ages 55 to 79—the period during which many people stop working—were related to changes in their demographic characteristics and the jobs they held, as well as to changes in Social Security. |
| JEL: | E24 J00 J10 J11 J26 |
| Date: | 2019–09–26 |
| URL: | http://d.repec.org/n?u=RePEc:cbo:report:55454&r=all |
| By: | International Monetary Fund |
| Abstract: | Since the start of the IMF-supported program in early 2017, the economy has recovered significantly and is now more resilient due to a stronger policy framework, significant official financing, and a rebound in external demand. Nonetheless, fiscal, financial, and external buffers remain insufficient, particularly given Mongolia’s vulnerability to shocks. Moreover, the IMF-supported program is currently delayed. The near-term priority is addressing outstanding prior actions under the program and passing a 2020 budget consistent with continued debt reduction. |
| Date: | 2019–09–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfscr:19/297&r=all |
| By: | International Monetary Fund |
| Abstract: | The economy has grown strongly since 2015, bolstered by large investments and tourism. While the construction of the first phase of a major highway project has boosted growth, it has also raised government debt. To preserve fiscal sustainability, the authorities embarked on a medium-term adjustment strategy in 2017. The financial sector has been stable and two non-systemic banks were placed into bankruptcy this year. |
| Date: | 2019–09–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfscr:19/293&r=all |
| By: | Renato Faccini (Queen Mary University); Leonardo Melosi (Chicago Fed) |
| Abstract: | Since 2014 the U.S. economy has been characterized by (i) a tight labor market with a record-low unemployment rate and very high job finding rates, (ii) disappointing labor productivity growth, and (iii) low inflation. We propose a model with the job ladder that can reconcile these three facts. In the model inflation picks up only when most jobs are concentrated at the high rung of the ladder: as firms compete for efficiently allocated employed workers, outside offers are declined and matched, triggering an increase in production costs that is not backed by an increase in productivity. The model is estimated using unemployment and quit rates, which allow the model to precisely identify the distribution of the quality of jobs. After the Great Recession, the observed structural drop in the job-to-job rate has slowed down the pace at which the U.S. labor market turns bad jobs into good jobs. As a result, inflation has not escalated even though the labor market appears to be very tight. Furthermore, the model predicts that labor productivity persistently fell by up to 70 bps in the post-Great Recession recovery owing to this protracted misallocation in the labor market. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:970&r=all |
| By: | Maxime Menuet (CERDI - Centre d'Études et de Recherches sur le Développement International - UdA - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique); Alexandru Minea (CERDI - Centre d'Études et de Recherches sur le Développement International - UdA - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique); Patrick Villieu (LEO - Laboratoire d'Économie d'Orleans - UO - Université d'Orléans - Université de Tours - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | This paper develops a limit-cycle-based theory of debt fluctuations through a simple endogenous growth model. Public debt and deficit are introduced by relaxing the balanced-budget rule hypothesis, and assuming a simple fiscal rule. Our main result is that fiscal rules can be destabilizing, leading to (i) multiple equilibria-four balanced-growth paths can emerge-, (ii) endogenous public debt cycles, which appear both in the short and the long run, and (iii) hysteresis phenomena arising from extreme sensitivity of changes in parameters. We also reveal that a balanced-budget rule does not preclude large aggregate fluctuations. Finally, our calibration exercise highlights that our model produces asymmetric cycles consistent with observed stylized facts. |
| Keywords: | Fiscal rules,Indeterminacy,Limit cycle,Public Debt,Bifurcation |
| Date: | 2019–09–18 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02291307&r=all |
| By: | Christian R. Proaño; Benjamin Lojak |
| Abstract: | In this paper we investigate the risk-related effects of monetary policy in normal times, as well as in periods where the zero lower bound (ZLB) binds, in a stylized macroeconomic model with boundedly rational beliefs. In our model, financial market participants use heuristics to assess the risk premium over the policy rate in accordance to an “implicit Taylor rule” that measures the stance of conventional monetary policy and which serves as an informative instrument during times when the funds rate is constrained by the ZLB. In such a case, conventional monetary policy is exhausted so that the central bank is forced to use unconventional types of policy. We propose alternative monetary policy measures to help the economy out of the liquidity trap which take into account this assumed form of bounded rationality. |
| Keywords: | Behavioral Macroeconomics, Monetary Policy, Zero Lower Bound, Bounded Rationality |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2019-73&r=all |
| By: | Nicolas Caramp (UC Davis); Dejanir Silva (UIUC) |
| Abstract: | We revisit the monetary paradoxes of standard monetary models in a liquidity trap and study the channels through which they occur. We focus on two paradoxes: the Forward Guidance Puzzle and the Para- dox of Flexibility. First, we propose a decomposition of consumption into substitution and wealth effects, both of which take into account the general equilibrium effects on output and ination, and we show that the substitution effect cannot account for the puzzles. Instead, mon- etary paradoxes are the result of strong wealth effects which, generi- cally, are solely determined by the expected scal response to the mon- etary shocks. We estimate the scal response to monetary policy shocks with US data and nd responses with the opposite sign to the ones im- plied by the standard equilibrium. Finally, we introduce the estimated scal responses into a medium-size DSGE model. We nd that the impulse-response of consumption and ination do not match the data, suggesting that wealth effects induced by scal policy may be impor- tant even outside of the liquidity trap. We show that models with con- strained agents can produce strong wealth effects if gross private debt is different than zero. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1281&r=all |
| By: | Guangyu PEI (The Chinese University of Hong Kong) |
| Abstract: | This paper develops a novel theory of uncertainty-driven business cycles that accommodates the notion of non-inflationary aggregate demand shocks out of variations in uncertainty. Instead of thinking uncertainty as risk, we regard uncertainty as ambiguity. We demonstrate that within the real business cycle model, ambiguity shocks, namely shock to the variance of agents' prior belief over possible models, can generate co-movements across real quantities without commensurate movements in labor productivity under the condition that agents are ambiguity averse and there exists a certain type of coordination friction among them. In response to a positive ambiguity, agents behave as if they believe aggregate demand is turning bad and becoming more volatile. The former translates into depressed market confidence, which makes all real quantities plummets. While the latter incentivizes agents use more of their private information both when making economic decisions and forecasts, which heightens the cross-sectional dispersions of beliefs. These predictions regarding agents' belief in our theory are consistent with survey data evidence. Finally, the quantitative potential of our theory is illustrated within a dynamic RBC model. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1494&r=all |
| By: | Sophie van Huellen (Department of Economics, SOAS University of London, UK); Duo Qin (Department of Economics, SOAS University of London, UK); Shan Lu (School of Economics and Management, Beihang University, China PR.); Huiwen Wang (School of Economics and Management, Beihang University, China PR.); Qingchao Wang (Department of Economics, SOAS University of London, UK); Thanos Moraitis (Department of Economics, SOAS University of London, UK) |
| Abstract: | We apply a novel model-based approach to constructing composite international financial indices (CIFIs) as measures of opportunity cost effects that arise due to openness in money demand models. These indices are tested on the People’s Republic of China (PRC) and Taiwan Province of China (TPC), two economies which differ substantially in size and degree of financial openness. Results show that a) stable money demand equations can be identified if accounting for foreign opportunity costs through CIFIs, b) the monetary policy intervention in the PRC over the global financial crisis period temporarily mitigated disequilibrating foreign shocks to money demand, c) CIFIs capture opportunity costs due to openness more adequately than commonly used US interest rates and d) CIFI construction provides valuable insights into the channels through which foreign financial markets affect domestic money demand. |
| Keywords: | money demand, opportunity cost, open economy |
| JEL: | E41 F41 C22 O53 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:soa:wpaper:225&r=all |
| By: | Adrien Auclert (Stanford); Frederic Martenet (Stanford University); Hannes Malmberg (University of Minnesota) |
| Abstract: | Macroeconomists agree that population aging is likely to reduce equilibrium real interest rates. However, there is disagreement regarding the magnitude of this effect, and the mechanisms through which it operates. In this paper, we reconsider the pressure of demographic change on interest rates. Using a rich overlapping generation model, we show that this effect can be expressed as a function of a few interpretable elasticities. We calculate some of these elasticities directly using empirical age-wealth profiles and projected population age distributions. Our results suggest that, if interest rates were to remain constant, the twenty-first century would see a very large increase in the wealth-to-GDP ratios of rich countries. We use our decomposition framework to guide our calibration of the remaining parameters of our model and to bound the decline in equilibrium interest rates we should expect from this phenomenon. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:952&r=all |
| By: | Gert Peersman; Sebastian K. Rüth; Wouter Van der Veken |
| Abstract: | Using time-varying BVARs, we find that oil price increases caused by oil supply shocks did not affect food commodity prices before the start of the millennium, but had positive spillover effects in more recent periods. Likewise, shortfalls in global food commodity supply—resulting from bad harvests—have positive effects on crude oil prices since the early 2000s, in contrast to the preceding era. Remarkably, we also document greater spillover effects of both supply shocks on metals and minerals commodity prices in recent periods, as well as a stronger impact on the own price compared to earlier decades. This (simultaneous) time variation of commodity price dynamics cannot be explained by the biofuels revolution and is more likely the consequence of heightened informational frictions and information discovery in more globalized and financialized commodity markets. |
| Keywords: | commodity markets, food prices, oil prices, spillovers |
| JEL: | E31 F30 G15 Q11 Q41 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7826&r=all |
| By: | Mariarosaria Comunale (Bank of Lithuania & ECB) |
| Abstract: | In this paper, we investigate the Exchange Rate Pass-Through (ERPT) to import and consumer prices in the three Baltic states. We apply reduced form equations ?rst. Then, to look at measures of shock-dependent ERPT, we use Bayesian VARs with zero and sign restrictions and a local projection exercise, using common euro area shocks. We ?nd that results from reduced form equations are in line with the ERPT literature. As for shock-dependent ERPTs, the magnitudes are overall bigger than in the literature in the case of import prices. They get smaller for consumer prices and even smaller if we remove energy and food prices. |
| Keywords: | Exchange Rate Pass-Through, Baltic states, Shock dependence. |
| JEL: | E31 F3 F41 |
| Date: | 2019–09–17 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:469&r=all |
| By: | Maurício S. Bugarin; Fabia A. de Carvalho |
| Abstract: | This paper analyzes a signaling model of monetary policy when inflation targets are not set by the monetary authority. The most important implication of the model’s solution is that a higher ex-ante dispersion in central bankers’ preferences, referred to as heterogeneity in policy orientation, increases the signaling cost of commitment to inflation targets. The model allows for a comparison of two distinct institutional arrangements regarding the tenure in office of the central banker and the head of government. We find that staggered terms yield superior equilibria when opportunistic political business cycles can arise from presidential elections. This is a consequence of a reduction of information asymmetry about monetary policy and gives theoretic support to the observed practice of staggered terms among independent central banks |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:501&r=all |
| By: | Oscar Jorda (Federal Reserve Bank of San Francisco an); Alan Taylor (University of California, Davis); Sanjay Singh (University of California, Davis) |
| Abstract: | A well-worn tenet holds that monetary policy does not affect the long-run productive capacity of the economy. Merging data from two new international historical databases, we find this not to be quite right. Using the trilemma of international finance, we find that exogenous variation in monetary policy affects capital accumulation, and to a lesser extent, total factor productivity, thereby impacting output for a much longer period of time than is customarily assumed. We build a quantitative medium- scale DSGE model with endogenous TFP growth to understand the mechanisms at work. Following a monetary shock, lower output temporarily slows down TFP growth. Internal propagation of the monetary shock extends the slow down in productivity, and eventually lowers trend output. Yet the model replicates conventional textbook results in other dimensions. Monetary policy can have long-run effects. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1307&r=all |
| By: | Ewa Wróbel (Narodowy Bank Polski) |
| Abstract: | Basing on the notion that “true” changes in credit standards set by commercial banks are these which do not result from a variation in the Net Present Value (NPV) of a loan, we suggest a method to verify whether the currently observed lending standards are too tight (soft). In this aim we use (S)VAR models which employ macroeconomic data and information contained in the Senior Loan Officer Opinion Survey. We argue that forecasts of credit standards obtained from these models may be identified with the level of standards congruent with the NPV. If actual credit standards systematically differ from forecasts, they provide a signal of a potential development of a credit cycle. |
| Keywords: | lending standards, Net Present Value, (S)VAR models |
| JEL: | E5 G21 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:317&r=all |
| By: | Christopher Henry; Kim Huynh; Angelika Welte |
| Abstract: | La Banque du Canada sonde les Canadiens afin de mieux comprendre comment ils paient les biens et services qu’ils achètent. Elle a mené trois enquêtes sur les modes de paiement – en 2009, 2013 et 2017. Ces enquêtes comprennent un questionnaire et un journal où les participants consignent leurs paiements et retraits d’argent sur une période de trois jours. Nous utilisons cette information pour calculer la part des paiements effectués au moyen d’argent comptant, de cartes de crédit, de cartes de débit et d’autres méthodes. Les résultats de l’enquête de 2017 montrent que l’usage de l’argent comptant recule. Les espèces sont utilisées dans une plus petite part de toutes les transactions et représentent une plus petite proportion des sommes totales dépensées. Parallèlement, les Canadiens utilisent de plus en plus les cartes de crédit et de débit sans contact, de même que les paiements mobiles et en ligne, y compris les virements Interac. Nous étudions les raisons qui expliquent ces tendances, comme les facteurs démographiques et les perceptions. Pour la première fois, en 2017, l’enquête s’intéresse aussi au rôle des connaissances financières et aux fraudes en matière de paiements dont les participants ont été victimes. |
| Keywords: | Billets de banque; Monnaies numériques et technologies financières; Services financiers |
| JEL: | D83 E41 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:18-17fr&r=all |
| By: | Alberto Bagnai (Department of Economics, Gabriele d'Annunzio University); Christian Alexander Mongeau Ospina (Department of Economics, Università ‘Gabriele D’Annunzio’) |
| Abstract: | The productivity slowdown in European countries is among the major stylized facts of the last two decades. Several explanations have been proposed: some focus on demand-side effects, working through Kaldor’s second law of economic growth (also known as Verdoorn’s law), others on supply-side effects determined by misallocation of factors of production, caused either by labour market reforms or by perverse effects of financial integration (in Europe, related to adoption of the euro). The latter explanation is put forward by some recent studies that indicate how low interest rates brought about by monetary union may have lowered productivity by inducing capital misallocation. The aim of this paper is to investigate the robustness of the latter empirical findings and to compare them with the alternative explanation offered by the post-Keynesian growth model, which instead emphasizes the relation between foreign trade and productivity, along lines that go back to Adam Smith. To do so, we use a panel of industry-level data extracted from the EU KLEMS database, comparing these alternative explanations by panel cointegration techniques. The results shed some light on the role played by the single currency in structural divergences between euro area member countries. |
| Keywords: | firm behaviour, productivity, post-Keynesian model, economic integration, foreign exchange. |
| JEL: | D22 D24 E12 F15 F31 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:ais:wpaper:1704&r=all |
| By: | Kolev, Atanas; Maurin, Laurent; Ségol, Matthieu |
| Abstract: | We use the association between non-financial firms and their banks, an information available in the European Investment Bank Investment Survey (EIBIS), to disentangle the effects of borrowers' and lenders' financial weakness on the satisfaction with the loan contracted. The dataset matches survey data of non-financial firms about their satisfaction with bank lending with their financial data and the financial data of their banks. We find evidence of both demand and supply factors determining firm satisfaction with bank loan financing: non-financial firms with weaker finances and those financed by weaker banks are less satisfied with their bank financing. We also find that the impact of supply factors differs across regions within the EU: the effect of bank's financial weakness on borrower satisfaction is not significant in core countries but is in periphery countries. |
| Keywords: | financial constraints,bank lending,survey data,bank-firm matching,satisfaction with bank loans,bank weakness,EU regions |
| JEL: | E44 G01 G32 L25 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:eibwps:201907&r=all |
| By: | Xiao, Tim |
| Abstract: | This article presents a generic model for pricing financial derivatives subject to counterparty credit risk. Both unilateral and bilateral types of credit risks are considered. Our study shows that credit risk should be modeled as American style options in most cases, which require a backward induction valuation. To correct a common mistake in the literature, we emphasize that the market value of a defaultable derivative is actually a risky value rather than a risk-free value. Credit value adjustment (CVA) is also elaborated. A practical framework is developed for pricing defaultable derivatives and calculating their CVAs at a portfolio level. |
| Keywords: | credit value adjustment (CVA),credit risk modeling,financial derivative valuation,collateralization,margin and netting |
| JEL: | E44 G21 G12 G24 G32 G33 G18 G28 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:204279&r=all |
| By: | Mehrdad Esfahani (Arizona State University); Bart Hobijn (Arizona State University); John Fernald (INSEAD/FRBSF) |
| Abstract: | We account for the sources of world GDP growth using data for 40 major economies and 36 industries from the World Input-Output Database from 1996 to 2014. We nd that the contribution of productivity growth at the country-industry level to world GDP growth is relatively constant and that the recent productivity slowdown in industrialized countries is largely oset, at the world level, by productivity growth in emerging economies. Most of the fluctuations in world productivity growth are the result of shifts in the distribution of employment across countries and industries. This shift in employment to countries with lower average labor productivity and wages is a drag on the growth of aggregate productivity in the world. Using new data on PPP-based value-added measures by country and industry, we show that about a third of this shift, however, seems to reect employment growing in countries, most notably China and India, and industries that benet from an international cost advantage in terms of deviations from PPP. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:539&r=all |
| By: | Tong Zhang |
| Abstract: | This paper contributes to the literature on the effect of financial frictions on business cycle activity. We follow the "leverage cycles" approach in the spirit of Geanakoplos (2010) which argues that equilibrium fluctuations in collateral rates (equivalently haircuts, margins, or leverage), rather than just in interest rates, are a key driver of persistent fluctuations in economic activity. In particular, we focus on how adverse economic shocks can be amplified and prolonged by endogenous variations in haircuts in the standard macrofinance framework à la Kiyotaki and Moore (1997). In our model, collateral constraints are motivated by no-recourse loans, and the interest rate and the haircut are jointly determined as general equilibrium objects. We highlight the difference between the risk and the illiquidity of the collateral in determining the credit market equilibrium: an increase in risk increases both the interest rate and the haircut, while an increase in illiquidity increases the haircut but decreases the interest rate. Compared with the previous literature, our model allows us to decompose the transmission of adverse shocks through the credit market into the interest rate channel and the haircut channel, and evaluate their relative importance. The numerical exercises illustrate that risk shocks can generate sizable business cycle fluctuations through the credit market, and the haircut channel is dominant in times of low market liquidity. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:124&r=all |
| By: | Alan Hevner (USF - University of South Florida); Nicolas Prat (Essec Business School); Isabelle Comyn-Wattiau (Essec Business School); Jacky Akoka (CEDRIC - Centre d'études et de recherche en informatique et communications - ENSIIE - Ecole Nationale Supérieure d'Informatique pour l'Industrie et l'Entreprise - CNAM - Conservatoire National des Arts et Métiers [CNAM], DSI - Département Systèmes d'Information - TEM - Télécom Ecole de Management - Institut Mines-Télécom [Paris] - IMT-BS - Institut Mines-Télécom Business School) |
| Abstract: | The effectiveness of a Design Science Research (DSR) project is judged both by the fitness of the designed artifact as a solution in the application environment and by the level of new research contributions. An important and understudied challenge is how to translate DSR project research goals into discrete and measurable evaluation criteria for use in the DSR processes. This position paper proposes an inclusive approach for articulating DSR goals and then identifying project evaluation criteria for these goals. The goals are organized hierarchically as utilitarian goals, safety goals, interaction and communication goals, cognitive and aesthetic goals, innovation goals, and evolution goals. Goals in a DSR project are identified pragmatically by considering the components of the context coupled with the hierarchy of goals. Based on the identified goals, the associated evaluation criteria are determined and organized along the same hierarchy. These criteria measure the ability of the artifact to meet its goals in itscontext (immediate fitness). Moreover, our approach also supports the innovation and research contributions of the project. The apex of the goal hierarchy addresses the identification of criteria measuring the fitness for evolution of the designed artifact, to accommodate for changes in goals or context. |
| Keywords: | Design Science Research,Goals,Fitness,Evolution,Innovation |
| Date: | 2018–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-02283783&r=all |
| By: | Ibrahim D. Raheem (EXCAS, Liège, Belgium); Aviral K. Tiwari (Rajagiri Business School, Kochi, India); Daniel Balsalobre-lorente (Ciudad Real, Spain) |
| Abstract: | This study explores the role of the information and communication Technology (ICT) and financial development (FD) on both carbon emissions and economic growth for the G7 countries for the period 1990-2014. Using PMG, we found that ICT has a long run positive effect on emissions, while FD is a weak determinant. The interactive term between the ICT and FD produces negative coefficients. Also, both variables are found to impact negatively on economic growth. However, their interactions show they have mixed effects on economic growth (i.e., positive in the short-run and negative in the long-run). Policy implications were designed based on these results. |
| Keywords: | ICT; Financial development; Carbon emissions; Economic growth and G7 countries |
| JEL: | E23 F21 F30 O16 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:agd:wpaper:19/058&r=all |
| By: | Giacomo Candian (HEC Montréal); Mikhail Dmitriev (Florida State University) |
| Abstract: | We document that default recovery rates in the United States are highly volatile and strongly pro-cyclical. These facts are hard to reconcile with the existing financial friction literature. Indeed, models with limited enforceability a la Kiyotaki and Moore (1997) do not have defaults and recovery rates, while agency costs models following Bernanke, Gertler, and Gilchrist (1999) underestimate the volatility of recovery rates by one order of magnitude. We extend the standard agency costs model allowing liquidation costs for creditors to depend on the tightness of the market for physical capital. Creditors do not have expertise in selling entrepreneurial assets, but when buyers are plentiful, this disadvantage is minimal. Instead when sellers are abundant, the disadvantage of being an outsider is higher. Following a negative shock, entrepreneurs sell capital and liquidation costs for creditors increase. Creditors cut lending and cause entrepreneurs to sell more capital. This liquidity channel works independently from standard balance sheet effects and amplifies the impact of financial shocks on output by up to 50 percent. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1185&r=all |
| By: | Heise, Arne |
| Abstract: | [Introduction] Over the past three decades, a small but very productive Post-Keynesian and Marxian research community has engaged in the elaboration of a scientific research programme (SRP) that has come to be known as wage and profit-led regime research.1 In dozens of journal articles in almost every heterodox economic journal, particularly the Cambridge Journal of Economics, the primary aim has been to reiterate the classical political economy conception of functional income distribution as a major determinant of economic development and employment, from both a Keynesian (effective demand) and Marxian (class struggle) perspective. Only recently, the Review of Keynesian Economics (RoKE) dedicated - convening almost the entire 'wage and profit-led regime' community - an incredible four (consecutive) issues to delineating and discussing this Denkstil. The International Labour Office (ILO), meanwhile, commissioned a major research initiative investigating the relationship between functional income distribution and growth (see Lavoie/Stockhammer 2013a).2 Since only very few critical voices (such as Peter Skott (2017) joined this illustrious debate, I would like to re-open this discussion about the scientific and political merits of the 'wage and profit-led regime' approach. My intention is to examine whether this SRP can fill an obvious gap in Post-Keynesian theory. In accordance with Keynes' considerable neglect of distributional questions in his General Theory, most Post-Keynesians have underemphasised a phenomenon that has become one of the most socially and politically concerning problems of our times: growing income inequality. This article is structured as follows: in the next section, the main arguments of the wage and profit-led regime approach will be delineated and scrutinised with reference to the Bhaduri-Marglin model, which is regarded as 'a widely used workhorse model' (Stockhammer 2017: 25). I will subsequently question its theoretical bases, its empirical validity, and its policy applicability. Finally, I offer a number of concluding remarks on the merits of the distributional regime approach. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cessdp:74&r=all |
| By: | Bart Hobijn (Arizona State University); Adam Shapiro (Federal Reserve Bank of San Francisco); Fernanda Nechio (Federal Reserve Bank of San Francisco) |
| Abstract: | Using price quote data that underpin the official U.K. consumer price index (CPI), we analyze the effects of the unexpected passing of the Brexit referendum to the dynamics of price adjustments. The sizable depreciation of the British pound that immediately followed Brexit works as a quasi-experiment, enabling us to study the transmission of a large common marginal cost shock to inflation as well as the distribution of prices within granular product categories. A large portion of the inflationary effect is attributable to the size of price adjustments, implying that a time-dependent price-setting model can match the response of aggregate inflation reasonably well. The state-dependent model fares better in capturing the endogenous selection of price changes at the lower end of the distribution, however, it misses on the magnitude of the adjustment conditional on selection. In the state-dependent model, prices at the higher end of the distribution change by larger amounts, which is inconsistent with the data. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:693&r=all |
| By: | Athanasios Geromichalos (Department of Economics, University of California, Davis); Kuk Mo Jung (Department of Economics, Sogang University, Seoul); Seungduck Lee (Department of Economics, Sungkyunkwan University, Seoul, Republic of Korea); 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 ofliquidityoftenemployedinmonetarytheory), orthattheycanbeeasilysoldinasecondary 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 exis- tence (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 , Searchnd Matxhg, Liquidity, Asset prices, Monary policy |
| JEL: | E4 G11 G12 G14 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:sgo:wpaper:1905&r=all |
| By: | Mehrdad Vahabi (Centre d'Economie de l'Université de Paris Nord (CEPN)) |
| Abstract: | The authors, Péter Mihályi and Iván Szelényi, set themselves the ambitious task of formulating an alternative discourse about inequality in which the extent of inequality per se is not the problem but rather where inequalities stem from? Herein lies their fundamental divergence with Piketty (2014) for whom the excessive growth of “profits” is assumed to be the source of inequalities. The problem with mainstream economics and Piketty is that “profit” and “rent” are lumped together. A critical distinction between the two is warranted to grasp the relationship between inequalities, innovation and economic growth. In line with Kornai’s criticism of Piketty (2016), the authors insist on the source of inequality. Are they engendered by wages and profits earned on competitive markets or are they originated from rents due to imposed restrictions on market competition? In contrast with Piketty, the general assumption of the authors is that higher profits and wages often add to the annual growth or national income. Rents on the other hand lower annual growth. Although some forms of rent may even be useful, excessive rents breeds economic stagnation. |
| Keywords: | Inequalities, rents, profits, wages, patrimonial capitalism, political capitalism |
| JEL: | E02 E25 H27 P10 P16 P29 Z13 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:upn:wpaper:2019-07&r=all |
| By: | Dejanir Silva (UIUC) |
| Abstract: | This paper studies, in the context of a New Keynesian open-economy model, the optimal response of fiscal policy to a risk premium shock for a country in a currency union. First, I show that the planner should not use government spending to stimulate the economy. Instead of distorting the provision of public goods, it is optimal to use simple tax instruments, as consumption, sales, and payroll tax, to achieve stabilization goals. Second, it is optimal to front-load taxes, i.e., the overall level of taxes increase in response to a positive risk premium shock, and it declines over time. The composition of taxes is also time-varying. Consumption tax is increasing, while either VAT or payroll taxes decline over time after an initial increase. Under downward nominal wage rigidities, it is optimal to implement a form of fiscal appreciation, a decline in the VAT accompained by an increase in the payroll tax. Government debt is smaller under the optimal policy than under a passive fiscal policy where the government does not react to the shock. Under some circumstances, it may be optimal to stabilize the government debt at its pre-shock level. Therefore, under the optimal policy, there is no necessary trade off between stabilization policy and fiscal consolidation. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1338&r=all |
| By: | Léleng Kebalo (Université de Lomé [Togo]); Akilou Amadou (Université de Lomé [Togo]) |
| Abstract: | L'une des critiques adressées aux Banques centrales de la zone franc CFA est la dépendance de leurs politiques monétaires à celle de la Banque Centrale Européenne (BCE) à cause de l'arrimage du franc CFA à l'euro. Le biais de cette critique est le manque d'analyse scientifique effectuée sur un tel sujet qui laisse les économistes souverainistes controverser et mener le débat. Ce papier cherchè a confirmer ou infirmer les déclarations de la Banque Centrale de l'Afrique de l'Ouest (BCEAO) selon lesquelles la BCE et le Trésor français n'influencent pas sa politique monétaire. En utilisant les indicateurs appropriés de politiques monétaires, cet article analyse l'incidence de court et de long terme de la politique monétaire de la BCE sur celle de la BCEAO, ceci depuis le lancement officiel de la zone euro. En adoptant l'approche de cointégration de Engle et Granger (1987), les résultats révèlent que la BCE,à travers sa politique de taux, influence seulement à long terme et non à court terme la politique monétaire de la BCEAO. Cela est purement et simplement dû à l'arrimage du franc CFA à l'euro. Comme la politique monétaire est plus une politique d'intervention de court terme, les résultats obtenus amènent à conclure que la BCEAO gère de façon autonome sa politique monétaire. Outre cela, les résultats confirment que la maîtrise de l'inflation reste à court terme l'objectif principal de politique monétaire de la BCEAO, tandis que la stabilité des prix reste la préoccupation majeur de la BCEAO à long terme. Le papier discute des possibles extensions que la BCEAO peut apporter à la gestion de sa politique monétaire pour répondre davantage aux réalités des pays de l'UEMOA et pour être en phase avec les projets économiques de la région ouest-africaine. |
| Keywords: | Politique monétaire,BCEAO,Banque Centrale Européenne,Inflation |
| Date: | 2019–08–19 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-02282948&r=all |
| By: | Kassem, Mohamad; Ali, Amjad; Audi, Marc |
| Abstract: | This article has examined the impact of unemployment, population density and amount of remittances, industrialization on crime rate among the districts of Punjab, Pakistan. The data has been composed from Pakistan Bureau of Statistics, the Multiple Indicator Cluster survey (MICS), Punjab Development Statistics (2018). The Johansen cointegration method has been applied for examining the relationship among variables. The results show that unemployment and population density have a positive impact on crime rate among the districts of Punjab, Pakistan. The outcomes reveal that the amount of remittances, industrialization and social infrastructure have a negative and significant impact on crime rate among the districts of Punjab. This study recommends that for reduction in crimes, the government of Punjab should control unemployment and population density and the same time enhance industrialization, social infrastructure with the amount of remittances. On the basis of previous literature and our findings, it has been concluded that unemployment is the mother of crime. |
| Keywords: | unemployment rate, population density, crime rate, industrialization |
| JEL: | E24 Q56 Z19 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:95964&r=all |
| By: | Franklin Allen (University of Pennsylvania); Douglas Gale (New York University); Gadi Barlevy (Federal Reserve Bank of Chicago) |
| Abstract: | This paper uses risk-shifting models to analyze some potential policy responses to asset price booms and bubbles. We argue that the presence of risk shifting can generate many of the features of such booms and so is a reasonable framework to explore these issues. Our analysis offers several insights. First, we find that determining whether there is indeed a bubble in asset markets is unimportant, since risk-shifting leads to the same inefficiencies regardless of whether it gives rise to a bubble or not. Second, while risk shifting offers a reason for intervention, we find the leading proposals for interventions against booms have ambiguous welfare implications in our model. Specifically, we show tighter monetary policy may exacerbate some inefficiencies due to risk shifting even as it mitigates others, and that leverage restrictions may fan asset prices and exacerbate excessive leverage rather than curb it. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:587&r=all |
| By: | Esteban Rossi-Hansberg; Pierre-Daniel Sarte; Felipe Schwartzman |
| Abstract: | In the U.S., cognitive non-routine (CNR) occupations associated with higher wages are disproportionately represented in larger cities. To study the allocation of workers across cities, we propose and quantify a spatial equilibrium model with multiple industries that employ CNR and alternative (non-CNR) occupations. Productivity is city-industry-occupation specific and partly determined by externalities across local workers. We estimate that the productivity of CNR workers in a city depends significantly on both its share of CNR workers and total employment. Together with heterogeneous preferences for locations, these externalities imply equilibrium allocations that are not efficient. An optimal policy that benefits workers equally across occupations incentivizes the formation of cognitive hubs, leading to larger fractions of CNR workers in some of today's largest cities. At the same time, these cities become smaller to mitigate congestion effects while cities that are initially small increase in size. Large and small cities end up expanding industries in which they already concentrate, while medium-size cities tend to diversify across industries. The optimal allocation thus features transfers to non-CNR workers who move from large to small cities consistent with the implied change in the industrial composition landscape. Finally, we show that the optimal policy reinforces equilibrium trends observed since 1980. However, these trends were in part driven by low growth in real-estate productivity in CNR-abundant cities that reduced welfare. |
| JEL: | E23 E24 H23 H71 J61 R13 R23 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26267&r=all |