nep-mac New Economics Papers
on Macroeconomics
Issue of 2019‒11‒18
108 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Capacity Utilization and the NAIRCU - Evidences of Hysteresis in EU countries By Federico Bassi
  2. What measures of real economic activity slack are helpful for forecasting Russian inflation? By Ramis Khabibullin
  3. The vagaries of the sea: evidence on the real effects of money from maritime disasters in the Spanish Empire By Adam Brzezinski; Yao Chen; Nuno Palma; Felix Ward
  4. Central Bank Independence By Thomas I. Palley
  5. Anchored Inflation Expectations and the Flatter Phillips Curve By Jorgensen, Peter; Lansing, Kevin J.
  6. The LU-EAGLE model with disaggregated public expenditure By Pablo Garcia Sanchez; Alban Moura
  7. Non-standard monetary policy measures in the new normal By Anna Bartocci; Alessandro Notarpietro; Massimiliano Pisani
  8. Costly default and asymmetric real business cycles By Patrick Fève; Pablo Garcia Sanchez; Alban Moura; Olivier Pierrard
  9. Quarterly Projection Model for Ukraine By Anton Grui; Artem Vdovychenko
  10. Money Neutrality, Monetary Aggregates and Machine Learning By Gogas, Periklis; Papadimitriou, Theophilos; Sofianos, Emmanouil
  11. Employment Protection Legislation and Economic Resilience: Protect and Survive? By Nadav Ben Zeev; Tomer Ifergane
  12. Quantitative Easing and the Term Premium as a Monetary Policy Instrument By Etienne Vaccaro-Grange
  13. Uncertainty and non-linear macroeconomic effects of fiscal policy in the US: A SEIVAR-based analysis By Belke, Ansgar; Goemans, Pascal
  14. The Brexit vote, productivity growth and macroeconomic adjustments in the United Kingdom By Broadbent, Ben; Di Pace, Federico; Drechsel, Thomas; Harrison, Richard; Tenreyro, Silvana
  16. Thinking Outside the Box: Do SPF Respondents Have Anchored Inflation Expectations? By Binder, Carola; Janson, Wesley; Verbrugge, Randal
  17. Insights from OECD Phillips curve equations on recent inflation outcomes By David Turner; Thomas Chalaux; Yvan Guillemette; Elena Rusticelli
  18. Okun’s Law Across Time and Frequencies By Luís Aguiar-Conraria; Manuel M. F. Martins; Maria Joana Soares
  19. Characterizing the Luxembourg financial cycle: Alternatives to statistical filters By Rachida Hennani
  20. A Theory of Intrinsic Inflation Persistence By Kurozumi, Takushi; Van Zandweghe, Willem
  21. In the face of spillovers: prudential policies in emerging economies By Coman, Andra; Lloyd, Simon
  22. Braced for Fallout from Global Slowdown By Vasily Astrov; Alexandra Bykova; Rumen Dobrinsky; Vladimir Gligorov; Richard Grieveson; Doris Hanzl-Weiss; Gabor Hunya; Sebastian Leitner; Isilda Mara; Olga Pindyuk; Leon Podkaminer; Sandor Richter; Hermine Vidovic
  23. The effects of climate change on a small open economy By George Economides; Anastasios Xepapadeas
  24. Synchronization patterns in the European Union By Mattia Guerini; Duc Thi Luu; Mauro Napoletano
  25. The European Fund for Strategic Investments: The Rhomolo-EIB 2019 update By Martin Christensen; Georg Weiers; Andrea Conte; Marcin Wolski; Simone Salotti
  26. International digital currencies and their impact on monetary policy: An exploration of implications and vulnerability By Proettel, Thorsten
  27. Trend Fundamentals and Exchange Rate Dynamics By Florian, Huber; Kaufmann, Daniel
  28. Preferences over wealth By Sebastian Gechert; Jan Siebert
  29. Learning and Misperception: Implications for Price-Level Targeting By Martin Bodenstein; James Hebden; Fabian Winkler
  30. Short-Time Work and Unemployment in and after the Great Recession By Michael Siegenthaler; Daniel Kopp
  31. Exchange rate dynamics and monetary policy: Evidence from a non-linear DSGE-VAR approach By Huber, Florian; Rabithsc, Katrin
  32. Monetary Dynamics in a Network Economy By Antoine Mandel; Vipin P. Veetil
  33. Synthetic MMT: Old Line Keynesianism with an Expansionary Twist By Lance Taylor
  34. China's Shadow Banking: Bank's Shadow and Traditional Shadow Banking By Guofeng Sun
  35. Effective Lower Bound Risk By Timothy S. Hills; Taisuke Nakata; Sebastian Schmidt
  36. Towards a new monetary theory of exchange rate determination By Cesa-Bianchi, Ambrogio; Kumhof, Michael; Sokol, Andrej; Thwaites, Gregory
  38. Fiscal policy and ecological sustainability By Yannis Dafermos; Maria Nikolaidi
  39. The Roles of Price Points and Menu Costs in Price Rigidity By Knotek, Edward S.
  40. Optimal timing of calling in large-denomination banknotes under natural rate uncertainty By Link, Thomas
  41. Microsimulations of a dynamic SUT economy-wide Leontief-based model for the South African economy By Kambale Kavese; Andrew Phiri
  42. On the effects of the ECB’s funding policies on bank lending and the demand for the euro as an international reserve By Heather D. Gibson; Stephen G. Hall; Pavlos Petroulas; George S. Tavlas
  43. Keynesian capital theory: Declining interest rates and persisting profits By Spahn, Peter
  44. Desperate times call for desperate measures: government spending multipliers in hard times By Sokbae Lee; Yuan Liao; Myung Hwan Seo; Youngki Shin
  45. Recessions as Breadwinner for Forecasters State-Dependent Evaluation of Predictive Ability: Evidence from Big Macroeconomic US Data By Boriss Siliverstovs; Daniel Wochner
  46. Not Just a Work Permit: EU Citizenship and the Consumption Behavior of Documented and Undocumented Immigrants By Adamopoulou, Effrosyni; Kaya, Ezgi
  47. Is Inflation Fiscally Determined? By Lamia Bazzaoui
  48. Oil Prices and Consumption across Countries and U.S. States By Andrea De Michelis; Thiago Revil T. Ferreira; Matteo Iacoviello
  49. Measuring international uncertainty using global vector autoregressions with drifting parameters By Pfarrhofer, Michael
  50. On the Role of Finance in Sraffa’s System By Dvoskin, Ariel; Feldman, Germán David
  51. Investigating the cross currency basis in EURUSD and EURGBP By Heidorn, Thomas; Mamadalizoda, Nekruz
  52. LIBRA - a differentiated view on Facebook's virtual currency project By Brühl, Volker
  53. Credit easing versus quantitative easing: evidence from corporate and government bond purchase programs By D’Amico, Stefania; Kaminska, Iryna
  54. Shifts in Monetary Policy and Exchange Rate Dynamics: Is Dornbusch's Overshooting Hypothesis Intact, After all? By Rüth, Sebastian K.
  55. Estimation of maximum debt for emerging countries: An analysis by fiscal reaction function By Rai da Silva Chicoli; Siegfried Bender
  56. IMF programs and stigma in Emerging Market Economies By Claudia Maurini
  57. Revisions to Quarterly National Accounts data in Luxembourg By Bob Krebs
  59. Cooperation in Indefinitely Repeated Helping Games: Existence and Characterization By Gabriele Camera; Alessandro Gioffré
  60. Europe 1957 to 1979: From the Common Market to the European Monetary System By Joseph Halevi
  61. The Impact of EMU on European Transition Economies: Commitment, Institutional Capacity and the Monetary-Fiscal Mix By Begg, David
  62. A Macroeconomic Model of a Developing Country Endowed with a Natural Resource By Murshed, S. Mansoob
  64. The Political Economy of Europe since 1945: A Kaleckian perspective By Joseph Halevi
  65. Sri Lanka; Sixth Review Under the Extended Arrangement Under the Extended Fund Facility and Requests for Waiver of Nonobservance and Modification of Performance Criterion-Press Release; Staff Report; and Statement by the Executive Director for Sri Lanka By International Monetary Fund
  66. Heterogeneity in the Extraction of Labor from Labor Power and Persistence of Wage Inequality By Eduardo Monte Jorge Hey Martins; Jaylson Jair da Silveira, Gilberto Tadeu Lima
  67. Tax Progressivity, Economic Booms, and Trickle-Up Economics By Jackson, Laura E.; Otrok, Christopher; Owyang, Michael T.
  68. In Search of Lost Time Aggregation By Edmund Crawley
  69. Personal Bankruptcy as a Real Option By Zhu, Guozhong; Mikhed, Vyacheslav; Scholnick, Barry
  70. Trend and cycle shocks in Bayesian unobserved components models for UK productivity By Melolinna, Marko; Tóth, Máté
  71. The Effects of Price Endings on Price Rigidity: Evidence from VAT Changes By Knotek, Edward S.; Sayag, Doron; Snir, Avichai
  72. Macropolicy in the Rise and Fall of the Golden Age By Epstein, Gerald; Schor, Juliet
  73. Optimal Capital Income Taxes in the infinite horizon model with Progressive Income Taxes By Been-Lon Chen; Chih-Feng Lai
  74. Why do social networks introduce virtual currencies? By Gaston Giordana; Paolo Guarda
  75. Investor Sentiment and the Economic Policy Uncertainty Premium By Gilbert V. Nartea; Hengyu Bai; Ji Wu
  76. EU Exports to the United States: Effects on Employment By Jose Manuel Rueda-Cantuche; Robert Marschinski; Nuno Sousa
  77. Identification of Sign-Dependency of Impulse Responses By Nadav Ben Zeev
  78. Russian Federation; Fiscal Transparency Evaluation Update By International Monetary Fund
  79. Liquidity transformation, collateral assets and counterparties By de Roure, Calebe; McLaren, Nick
  80. On (bootstrapped) cointegration tests in partial systems By Sven Schreiber
  81. Local crowding out in China By Huang, Yi; Pagano, Marco; Panizza, Ugo
  82. A new proposal for the construction of a multi-period/multilateral price index By Consuelo R. Nava; Antonio Pesce; Maria Grazia Zoia
  83. Comparing Two Measures of Core Inflation: PCE Excluding Food & Energy vs. the Trimmed Mean PCE Index By Matteo Luciani; Riccardo Trezzi
  84. The Investement Decline in Transition Economies: Policy Versus Non-Policy Factors By Popov, Vladimir
  85. Employment and the collateral channel of monetary policy By Bahaj, Saleem; Foulis, Angus; Pinter, Gabor; Surico, Paolo
  86. On the Optimality of Differential Asset Taxation By Phelan, Tom
  87. Testing for a Threshold in Models with Endogenous Regressors By Rothfelder, Mario; Boldea, Otilia
  88. The Global Equilibrium Real Interest Rate: Concepts, Estimates, and Challenges By Michael T. Kiley
  89. Sustainable fiscal policy and economic growth in South Africa By Philippe Burger; Estian Calitz
  90. Expectations about the Federal Funds Rate in the Long Run By Kasper Joergensen; Andrew C. Meldrum
  91. No Man Is an Island By Williams, John C.
  92. Aggregate demand policy in mature and dual economies By Peter Skott
  93. Death to the Cobb-Douglas production function By Sebastian Gechert; Thomas Havranek; Zuzana Irsova; Dominika Kolcunova
  94. Does Trade Policy Uncertainty Affect Global Economic Activity? By Dario Caldara; Matteo Iacoviello; Patrick Molligo; Andrea Prestipino; Andrea Raffo
  95. Togo; Fifth Review under the Extended Credit Facility Arrangement-Press Release; Staff Report and Statement by the Executive Director for Togo By International Monetary Fund
  96. Why Climate Change Matters for Monetary Policy and Financial Stability : a speech at "The Economics of Climate Change" a research conference sponsored by the Federal Reserve Bank of San Francisco, San Francisco, California, November 8, 2019. By Brainard, Lael
  97. Are global value chains receding? The jury is still out. Key findings from the analysis of deflated world trade in parts and components By Guillaume Gaulier; Aude Sztulman; Deniz Ünal
  98. From the EMS to the EMU and... to China By Joseph Halevi
  99. Supervisory governance, capture and non‑performing loans By Fraccaroli, Nicolò
  100. Money and Monetary Stability in Europe, 1300-1914 By Kamil Kivanc Karaman; Sevket Pamuk; Secil Yildirim
  101. The Federal Reserve’s Review of Its Monetary Policy Strategy, Tools, and Communication Practices : A speech at "Fed Policy: A Shadow Review" Cato Institute’s 37th Annual Monetary Conference, Washington, D.C., November 14, 2019. By Clarida, Richard H.
  102. Real-time Historical Estimates of the Output Gap By Luke Van Cleve; Jean-Philippe Laforte; Andrea Stella
  103. Macroeconomic Stability and Economic Diversification in Oil-Dependent Countries By KAPSARC, King Abdullah Petroleum Studies and Research Center
  104. Federal Funds Rate Control with Voluntary Reserve Targets By Garth Baughman; Francesca Carapella
  105. The language of rules: textual complexity in banking reforms By Amadxarif, Zahid; Brookes, James; Garbarino, Nicola; Patel, Rajan; Walczak, Eryk
  106. Financial development and growth in European regions By Paola Rossi; Diego Scalise
  107. A New Way to Visualize the Evolution of Monetary Policy Expectations By Marcel A. Priebsch
  108. Securities settlement fails network and buy‑in strategies By Gurrola-Perez, Pedro; He, Jieshuang; Harper, Gary

  1. By: Federico Bassi (Centre d'Economie de l'Université de Paris Nord (CEPN))
    Abstract: Most empirical studies provide evidence that the rate of capacity utilization is stable around a constant Non-accelerating inflation rate of capacity utilization (NAIRCU). Nevertheless, available statistical series of the rate of capacity utilization, which is unobservable, are constructed by assuming that it is stable over time. Hence, the stability of the NAIRCU is an artificial artefact. In this paper, we develop a method to estimate the rate of capacity utilization without imposing stability constraints. Partially inspired to the Production function methodology (PFM), we estimate the parameters of a production function by imposing aggregate correlations between the rate of capacity utilization and a set of macroeconomic variables, namely investment, labor productivity and unemployment. Our results show that the NAIRCU is not a constant rate but a non-stationary time-varying trend, and that chronicle under-utilization of capacity with stable inflation is a plausible equilibrium. Hence, persistent deviations of GDP might reflect persistent shocks to capacity utilization rather than exogenous shocks to total factor productivity. As a corollary, expansionary demand policies do not necessarily create permanent inflationary pressures if the NAIRCU is below full-capacity output, namely in post-crisis periods.
    JEL: C32 C51 E22 E32 E61
    Date: 2019–10
  2. By: Ramis Khabibullin (Bank of Russia, Russian Federation)
    Abstract: This paper investigates inflation forecasting accuracy of several real activity slack measures for the Russian economy. Several Bayesian unobservable-components models using several real activity variables were considered. I show that real-activity slacks gain no improvement in Russian inflation forecasting. This is true for the monthly and for the quarterly data. The estimation was made in the period from the beginning of 2003 to the end of 2018 for monthly data and from the beginning of 1999 to the end of 2018 for the quarterly data. Moreover, their real-times estimates are unreliable in the sense of the magnitude of their revisions.
    Keywords: Phillips curve, factor model, unobserved components model, output gap, real activity slack, Bayesian estimation
    JEL: C32 C53 E31 E32 E37
    Date: 2019–10
  3. By: Adam Brzezinski (Department of Economics, University of Oxford); Yao Chen (Erasmus School of Economics, Erasmus University Rotterdam); Nuno Palma (Department of Economics, University of Manchester; Instituto de Ciências Sociais, Universidade de Lisboa; CEPR); Felix Ward (Erasmus School of Economics, Erasmus University Rotterdam)
    Abstract: We exploit a recurring natural experiment to identify the effects of money supply shocks: maritime disasters in the Spanish Empire (1531-1810) that resulted in the loss of substantial amounts of monetary silver. A one percentage point reduction in the money growth rate caused a 1.3% drop in real output that persisted for several years. The empirical evidence highlights nominal rigidities and credit frictions as the primary monetary transmission channels. Our model of the Spanish economy confirms that each of these two channels explain about half of the initial output response, with the credit channel accounting for much of its persistence.
    Keywords: Monetary Shocks, Natural Experiment, Nominal Rigidity, Financial Accelerator, DSGE, Minimum-Distance Estimation, Local Projection
    JEL: E43 E44 E52 N10 N13
    Date: 2019–11
  4. By: Thomas I. Palley
    Abstract: The case for central bank independence is built on an intellectual two-step. Step one argues there is a problem of inflation prone government. Step two argues independence is the solution to that problem. This paper challenges that case and shows it is based on false politics and economics. The paper argues central bank independence is a product of neoliberal economics and aims to institutionalize neoliberal interests. As regards economics, independence rests on a controversial construction of macroeconomics and also fails according to its own microeconomic logic. That failure applies to both goal independence and operational independence. It is a myth to think a government can set goals for the central bank and then leave it to the bank to impartially and neutrally operationalize those goals. Democratic countries may still decide to implement central bank independence, but that decision is a political one with non-neutral economic and political consequences. It is a grave misrepresentation to claim independence solves a fundamental public interest economic problem, and economists make themselves accomplices by claiming it does.
    Keywords: central bank independence, neoliberalism, class conflict, time consistency, operational independence, democracy
    JEL: E02 E42 E52 E58 E61 G18 G28
    Date: 2019
  5. By: Jorgensen, Peter (University of California, Berkeley); Lansing, Kevin J. (Federal Reserve Bank of San Francisco)
    Abstract: Conventional versions of the Phillips curve cannot account for inflation dynamics during and after the U.S. Great Recession, leading many to conclude that the Phillips curve relationship has weakened or even disappeared. We show that if agents solve a signal extraction problem to disentangle temporary versus permanent shocks to inflation, then agents’ inflation expectations should have become more “anchored” over the Great Moderation period. An estimated New Keynesian Phillips curve that accounts for the increased anchoring of expected inflation exhibits a stable slope coefficient over the period 1960 to 2019. Out-of-sample forecasts show that this model can account for the “missing disinflation” during the U.S. Great Recession and the “missing inflation” during the subsequent recovery. We use a simple three-equation New Keynesian model to show that an increase in the Taylor rule coefficient on inflation (or the output gap) serves to endogenously anchor agents’ subjective inflation expectations and thereby “flatten” the reduced-form Phillips curve.
    JEL: E31 E37
    Date: 2019–11–06
  6. By: Pablo Garcia Sanchez; Alban Moura
    Abstract: We augment the original LU-EAGLE model with disaggregated public expenditure, allowing for (i) a distinction between public consumption and investment expenditures, (ii) complementarity between public and private consumption, (iii) a productive role for public capital, and (iv) separate private and public employment. This extended model embeds a wide range of transmission channels from public expenditures and allows for a detailed analysis of the general-equilibrium effects of public demand in Luxembourg. Model simulations suggest that a rise in public employment induces the strongest GDP response in the short run, while a rise in public investment has the largest effects in the long run. The results also indicate that crowding-out effects through changes in net exports are essential in determining fiscal multipliers for small open economies such as Luxembourg.
    Keywords: DSGE models, open economy models, fiscal policy, Luxembourg
    JEL: C54 E17 E32 E37 E62 F47
    Date: 2019–11
  7. By: Anna Bartocci (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: We evaluate the macroeconomic effects of long-term sovereign bond purchases by the central bank in the ‘New Normal’, i.e. in an economy with a low equilibrium real interest rate and a high probability of hitting the zero lower bound (ZLB) on the short-term policy rate. Our analysis is based on the simulations of a dynamic general equilibrium model for the euro area. The main results are the following. First, long-term sovereign bond purchases reacting to a positive inflation gap help stabilize macroeconomic conditions when the monetary policy rate hits the ZLB. Second, these purchases are an effective stabilization tool following positive shocks to the sovereign term premium (financial shocks) and negative shocks to aggregate demand (real shocks). Third, purchases that also react to the long-term rates are effective in the case of recessionary financial shocks but not in the case of recessionary real shocks and fourth, to stabilize the effects of expansionary shocks, the central bank can increase the short-term monetary policy rate according to an ‘aggressive’ Taylor rule, instead of selling long-term sovereign bonds.
    Keywords: euro area, non-standard monetary policy, zero lower bound
    JEL: E31 E32 E58
    Date: 2019–11
  8. By: Patrick Fève; Pablo Garcia Sanchez; Alban Moura; Olivier Pierrard
    Abstract: We augment a simple Real Business Cycle model with financial intermediaries that may default on their liabilities and a financial friction generating social costs of default. We provide a closed-form solution for the general equilibrium of the economy under specific assumptions, allowing for analytic results and straightforward simulations. Endogenous default generates asymmetric business cycles and our model replicates both the negative skew of GDP and the positive skew of credit spreads found in US data. Stronger financial frictions cause a rise in asymmetry and amplify the welfare costs of default. A Pigouvian tax on financial intermediation mitigates most of these negative effects at the cost of a steady-state distortion.
    Keywords: Real Business Cycle model, default, financial frictions, asymmetry, skewness
    JEL: E32 E44 G21
    Date: 2019–11
  9. By: Anton Grui (National Bank of Ukraine); Artem Vdovychenko (National Bank of Ukraine)
    Abstract: This paper introduces the Quarterly Projection Model utilized by the National Bank of Ukraine to make its regular macroeconomic forecasts and monetary policy recommendations. The model is a semi-structural representation of an open-economy New-Keynesian general equilibrium model. It captures the transmission mechanism of monetary policy in the context of the Ukrainian economy. Among the economy’s key features are the disinflation agenda, heterogeneous prices, imperfect monetary policy credibility, high openness and dollarization.
    Keywords: National Bank of Ukraine, inflation targeting, monetary policy, projection model, monetary policy transmission mechanism in Ukraine.
    JEL: C52 C53 E37 E52
    Date: 2019–09
  10. By: Gogas, Periklis (Democritus University of Thrace, Department of Economics); Papadimitriou, Theophilos (Democritus University of Thrace, Department of Economics); Sofianos, Emmanouil (Democritus University of Thrace, Department of Economics)
    Abstract: The issue of whether or not money affects real economic activity (money neutrality) has attracted significant empirical attention over the last five decades. If money is neutral even in the short-run, then monetary policy is ineffective and its role limited. If money matters, it will be able to forecast real economic activity. In this study, we test the traditional simple sum monetary aggregates that are commonly used by central banks all over the world and also the theoretically correct Divisia monetary aggregates proposed by the Barnett Critique (Chrystal and MacDonald, 1994; Belongia and Ireland, 2014), both in three levels of aggregation: M1, M2, and M3. We use them to directionally forecast the Eurocoin index: A monthly index that measures the growth rate of the euro area GDP. The data span from January 2001 to June 2018. The forecasting methodology we employ is support vector machines (SVM) from the area of machine learning. The empirical results show that: (a) The Divisia monetary aggregates outperform the simple sum ones and (b) both monetary aggregates can directionally forecast the Eurocoin index reaching the highest accuracy of 82.05% providing evidence against money neutrality even in the short term.
    Keywords: Eurocoin; simple sum; Divisia; SVM; machine learning; forecasting; money neutrality
    JEL: E00 E27 E42 E51 E58
    Date: 2019–07–05
  11. By: Nadav Ben Zeev (BGU); Tomer Ifergane (BGU)
    Keywords: Employment protection, Factor Misallocation, Total Factor Productivity, Credit Supply Shocks, Economic resilience, Business cycles, Local projections
    JEL: E02 E24 E32 E60 J08
    Date: 2019
  12. By: Etienne Vaccaro-Grange (Aix-Marseille Univ, CNRS, EHESS, Ecole Centrale, AMSE, Marseille, France.)
    Abstract: The transmission of Quantitative Easing to aggregate macroeconomic variables through the yield curve is disentangled in two yield channels: the term premium channel, captured by a term premium series, and the signaling channel, that corresponds to the interest rate expectations counterpart. Both yield components are extracted from a term structure model and plugged into a Structural VAR with Euro Area macroeconomic variables in which shocks are identified using sign restrictions. With this set-up, I show how the central bank can use the term premium as a single monetary policy instrument to foster output and prices. However, I also show that there has been a cost channel in the transmission of QE to inflation between 2015 and 2017. This cost channel provides a new explanation as to why inflation has been so muted during this period, despite the easing monetary environment. Finally, a policy rule for the term premium is estimated.
    Keywords: quantitative easing, shadow-rate term structure model, BVAR, sign restrictions
    JEL: C32 E43 E44 E52
    Date: 2019–11
  13. By: Belke, Ansgar; Goemans, Pascal
    Abstract: We investigate whether the macroeconomic effects of government spending shocks vary with the level of uncertainty. Using postwar US data and a Self-Exciting Interacted VAR (SEIVAR) model, we find that fiscal spending has positive output effects in tranquil times but is contractionary during uncertain times. The endogenous reaction of macroeconomic uncertainty plays an important role in explaining the non-linear impact of government spending. In contrast to other types of government spending, research and development expenditures reduce uncertainty and have an expansionary effect on output during uncertain times.
    Keywords: Government spending shocks,uncertainty,non-linear structural vector autoregressions,interacted VAR,generalized impulse response functions,endogenous uncertainty
    JEL: E62 E32 C32
    Date: 2019
  14. By: Broadbent, Ben (Bank of England and Centre for Macroeconomics); Di Pace, Federico (Bank of England); Drechsel, Thomas (London School of Economics and Centre for Macroeconomics); Harrison, Richard (Bank of England and Centre for Macroeconomics); Tenreyro, Silvana (Bank of England, Centre for Macroeconomics, CEPR and London School of Economics)
    Abstract: The UK economy has experienced significant macroeconomic adjustments following the 2016 referendum on its withdrawal from the European Union. This paper develops and estimates a small open economy model with tradable and non-tradable sectors to characterise these adjustments. We demonstrate that many of the effects of the referendum result can be conceptualised as news about a future slowdown in productivity growth in the tradable sector. Simulations show that the responses of the model economy to such news are consistent with key patterns in UK data. While overall economic growth slows, an immediate permanent fall in the relative price of non-tradable output (the real exchange rate) induces a temporary ‘sweet spot’ for tradable producers before the slowdown in tradable sector productivity associated with Brexit occurs. Resources are reallocated towards the tradable sector, tradable output growth rises and net exports increase. These developments reverse after the productivity decline in the tradable sector materialises. The negative news about tradable sector productivity also leads to a decline in domestic interest rates relative to world interest rates and to a reduction in investment growth, while employment remains relatively stable. As a by-product of our analysis, we provide a quantitative analysis of the UK business cycle.
    Keywords: Brexit; small open economy; productivity; tradable sector; UK economy
    JEL: E13 E32 F17 F47 O16
    Date: 2019–08–27
  15. By: Nadav Ben Zeev (BGU)
    Keywords: Prime adjustable rate mortgages; Mortgage default rates; Systematic monetary policy; Bayesian local projections
    JEL: E32 E52 E58
    Date: 2019
  16. By: Binder, Carola (Haverford College); Janson, Wesley (Federal Reserve Bank of Cleveland); Verbrugge, Randal (Federal Reserve Bank of Cleveland)
    Abstract: Despite the stability of the median 10-year inflation expectations in the Survey of Professional Forecasters (SPF) near 2 percent, we show that not a single SPF respondent’s expectations have been anchored at the target since the Federal Open Market Committee’s (FOMC) enactment of an inflation target in January 2012, or even since 2015. However, we find significant evidence for “delayed anchoring,” or a move toward being anchored, particularly after the federal funds rate lifted off in December 2015.
    Keywords: inflation expectations; persistent disagreement; credibility; delayed anchoring;
    JEL: E31 E37 E52
    Date: 2019–08–20
  17. By: David Turner; Thomas Chalaux; Yvan Guillemette; Elena Rusticelli
    Abstract: A statistically significant relationship between the unemployment gap and inflation can be found for a clear majority of OECD countries, but the magnitude of the effect is typically weak. A corollary is that the effect of labour market slack on inflation can often be dominated by other shocks, including imported inflation. The current Secretariat Phillips curve specification assumes inflation expectations are anchored at the central bank’s target, although some experimentation suggests that alternative proxies for expectations sometimes work better and there is some evidence that persistent under-shooting of inflation has led to some de-anchoring of expectations from the target, especially in the euro area. For most OECD countries, a measure of the global output gap is both statistically significant and strongly preferred to a domestic gap measure in explaining the wedge between headline and core inflation, although domestic gaps are strongly preferred in explaining core inflation. Various forms of non-linearity in the Phillips curve provide possible explanations for recent weak inflation outcomes, but statistical testing provides only limited support for such explanations.
    Keywords: anchored expectations, global output gap, inflation expectations, Phillips curve
    JEL: C22 E24 E31 J64
    Date: 2019–11–21
  18. By: Luís Aguiar-Conraria (NIPE and Department of Economics, University of Minho); Manuel M. F. Martins (Cef.up and Faculty of Economics, University of Porto); Maria Joana Soares (NIPE and Department of Mathematics and Applications, University of Minho)
    Abstract: We present the first assessment of U.S. Okun’s Law across time and frequencies, with a set of continuous wavelet tools that allows for estimating Okun’s coefficient and the lead/lag of output over unemployment at each moment of time for each cyclical frequency. We find similar results for the gaps and the first differences specifications at business cycles frequencies, but not at medium and long run cycles. Okun’s coefficient has increased (in absolute value) since the mid-1960s, except in 1985-1995, and is not particularly sensitive to recessions. The lead of output varies considerably along time and also at the different frequencies.
    Keywords: Okun’s Law; Unemployment; Business Cycles;Wavelet Gain; Time-Frequency Estimation; Continuous Wavelet Transform
    JEL: C49 E24 E32
    Date: 2019
  19. By: Rachida Hennani
    Abstract: This paper studies the cyclical properties of bank loans to non-financia corporations, bank loans to households, bank loans to the non-financial private sector and house prices in Luxembourg, by applying two methodologies to decompose and characterize the cycles. First, we use an unobserved components model (UCM) to extract classical cycles. We find evidence of medium-term cycles in the loan series over the sample 1980 Q1 to 2019 Q1. The nonfinancial corporation credit cycle is the most volatile and of larger duration compared to the other credit cycles. The length of the house price cycle in Luxembourg is estimated at 13.8 years. A dynamic synchronicity measure between households’ credit cycle and the house price cycle reveals that these cycles are sometimes synchronous. However, the early warning properties of the univariate unobserved components model are limited despite its good pseudo real-time estimates. A wavelet analysis complements the findings of the univariate UCM by providing growth cycles of financial variables. We show that these growth cycles could be useful as complementary information in financial cycle analysis. A coherence wavelet analysis is also conducted. The main findings show that the credit growth cycles of non-financial corporations and of the non-financial private sector are highly coherent with respect to households’ credit growth cycle. The household credit cycle often precedes house price growth. From a macroprudential policy perspective, these results support the use of complementary methodologies for assessing the financial cycle and confirm earlier studies on the limited role of the household credit cycle in the evolution of the house price cycle.
    Keywords: credit cycle, wavelet analysis, unobserved components model
    JEL: C30 E32 E51
    Date: 2019–11
  20. By: Kurozumi, Takushi (Bank of Japan); Van Zandweghe, Willem (Federal Reserve Bank of Cleveland)
    Abstract: We propose a novel theory of intrinsic inflation persistence by introducing trend inflation and variable elasticity of demand in a model with staggered price and wage setting. Under nonzero trend inflation, the variable elasticity generates intrinsic persistence in inflation through a measure of price dispersion stemming from staggered price setting. It also introduces intrinsic persistence in wage inflation under staggered wage setting, which affects price inflation. With the theory we show that inflation exhibits a persistent, hump-shaped response to a monetary policy shock. We also show that a credible disinflation leads to a gradual decline in inflation and a fall in output, and lower trend inflation reduces inflation persistence, as observed around the time of the Volcker disinflation.
    Keywords: Trend inflation; variable elasticity of demand; price dispersion; intrinsic inflation persistence; credible disinflation;
    JEL: E31 E52
    Date: 2019–08–29
  21. By: Coman, Andra (European Central Bank); Lloyd, Simon (Bank of England)
    Abstract: We examine whether emerging market prudential policies offset the macro-financial spillover effects of US monetary policy. We find that emerging markets with tighter overall prudential policy face significantly smaller, and less negative, spillovers to total credit from US monetary policy tightening shocks. Loan-to-value ratio limits and reserve requirements appear to be particularly effective prudential tools at mitigating the spillover effects of US monetary policy. Our findings indicate that prudential policies can dampen emerging markets’ exposure to US monetary policy and the associated global financial cycle, suggesting they may be a useful tool in the face of international macroeconomic policy trade-offs.
    Keywords: International spillovers; local projections; policy interactions; monetary policy; prudential policy
    JEL: E52 E58 E61 F44
    Date: 2019–09–27
  22. By: Vasily Astrov (The Vienna Institute for International Economic Studies, wiiw); Alexandra Bykova (The Vienna Institute for International Economic Studies, wiiw); Rumen Dobrinsky (The Vienna Institute for International Economic Studies, wiiw); Vladimir Gligorov (The Vienna Institute for International Economic Studies, wiiw); Richard Grieveson (The Vienna Institute for International Economic Studies, wiiw); Doris Hanzl-Weiss (The Vienna Institute for International Economic Studies, wiiw); Gabor Hunya (The Vienna Institute for International Economic Studies, wiiw); Sebastian Leitner (The Vienna Institute for International Economic Studies, wiiw); Isilda Mara (The Vienna Institute for International Economic Studies, wiiw); Olga Pindyuk (The Vienna Institute for International Economic Studies, wiiw); Leon Podkaminer (The Vienna Institute for International Economic Studies, wiiw); Sandor Richter (The Vienna Institute for International Economic Studies, wiiw); Hermine Vidovic (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Much of CESEE has so far weathered the slowdown in the global economy well, but signs of contagion are starting to emerge. Global economic growth is at its weakest level since the 2008-09 crisis, and there is no way that the region will be able to avoid this, given its high degree of reliance on exports and integration with Germany. Although the peak years are over, we expect a soft landing rather than an outright collapse for CESEE. Domestic demand will remain resilient, helped by strong wage growth, robust public investment, loose fiscal policy and plentiful credit. Downside risks to our projections are significant, and include a smaller post-Brexit EU budget, the fallout from global trade tensions, the impact of political developments in CESEE on institutions, and potential instability emanating from the financial sector.
    Keywords: CESEE, economic forecast, Europe, Central and Eastern Europe, Southeast Europe, Western Balkans, new EU Member States, CIS, Russia, Ukraine, Romania, Czech Republic, Hungary, Turkey, Serbia, convergence, business cycle, overheating, external risks, trade war, EU funds, private consumption, credit, investment, exports, FDI, labour markets, unemployment, employment, wage growth, migration, inflation, central banks
    JEL: E20 E31 E32 F15 F21 F22 F32 F51 G21 H60 J20 J30 J61 O47 O52 O57 P24 P27 P33 P52
    Date: 2019–11
  23. By: George Economides (Athens University of Economics and Business, and CESifo); Anastasios Xepapadeas (Athens University of Economics and Business and University of Bologna)
    Abstract: We investigate the impact of climate change on the macroeconomic performance of a small open economy. The setup is a new Keynesian dynamic stochastic general equilibrium model of a small open economy without monetary policy independence in which a climate module that interacts with the economy has been incorporated. The model is solved numerically using common parameter values, fiscal data and projections about temperature growth from the Greek economy. Our results, suggest that climate change implies a significant output loss and a deterioration of competitiveness. Moreover, it seems that the loss of monetary policy independence is not a big loss, when we investigate the short- and long-term implications of climate change for a small open economy.
    Keywords: Climate change; monetary policy; new Keynesian models
    JEL: E5 E1
    Date: 2019–09
  24. By: Mattia Guerini (Scuola Superiore Sant'Anna); Duc Thi Luu; Mauro Napoletano (Observatoire français des conjonctures économiques)
    Abstract: We propose a novel approach to investigate the synchronization of business cycles and we apply it to a Eurostat database of manufacturing industrial production time-series in the European Union (EU) over the 2000-2017 period. Our approach exploits Random Matrix Theory and extracts the latent information contained in a balanced panel data by cleaning it from possible spurious correlation. We employ this method to study the synchronization among different countries over time. Our empirical exercise tracks the evolution of the European synchronization patterns and identifies the emergence of synchronization clusters among different EU economies. We find that synchronization in the Euro Area increased during the first decade of the century and that it reached a peak during the Great Recession period. It then decreased in the aftermath of the crisis, reverting to the levels observable at the beginning of the 21st century. Second, we show that the asynchronous business cycle dynamics at the beginning of the century was structured along a East-West axis, with eastern European countries having a diverging business cycle dynamics with respect to their western partners. The recession brought about a structural transformation of business cycles co-movements in Europe. Nowadays the divide can be identified along the North vs. South axis. This recent surge in asynchronization might be harmful for the European Unio because it implies countries’ heterogeneous responses to common policies.
    Keywords: Business cycle synchronization ; Random matrix theory; European Union
    JEL: E32 F4 F45
    Date: 2019–11
  25. By: Martin Christensen (European Commission - JRC); Georg Weiers (European Investment Bank - EIB); Andrea Conte (European Commission - JRC); Marcin Wolski (European Investment Bank - EIB); Simone Salotti (European Commission - JRC)
    Abstract: The European Fund for Strategic Investments (EFSI) is the central pillar of the Investment Plan for Europe. It tackles the post-crisis investment gap in the EU and aims to revive investment in strategic projects in all EU Member States. EFSI was launched jointly by the European Investment Bank (EIB) Group and the European Commission. Every year, policy simulations are carried out using the RHOMOLO-EIB Computable General Equilibrium (CGE) model in order to assess the macroeconomic effects of EFSI-supported operations. This Policy Insight contains the result of the latest set of simulations quantifying the estimated macroeconomic impact on EU GDP and employment of all EFSI-supported operations approved as of June 13, 2019. The EFSI is contributing significantly to job creation and growth. The EIB-JRC estimates suggest that, by 2019, it has already, created more than 1 million jobs (1.7 million by 2022), with a positive contribution to GDP of 0.9% (1.8% by 2022) over the baseline. The results of the analysis highlight the importance of investments for jobs and economic growth.
    Keywords: rhomolo, region, growth, efsi, eib, investments
    JEL: C63 E61 E62
    Date: 2019–10
  26. By: Proettel, Thorsten
    Abstract: The objective of this discussion paper is to explore the consequences for monetary policy from the establishment of an international digital currency modeled like Libra. For this purpose, a basic assessment of the behavior of economic agents is conducted and possible conflicts with monetary policy are analyzed. Furthermore, a simple approach is developed to estimate the nature and extent of vulnerability for 42 currencies. The results suggest that currencies from developing countries and from developed nations are vulnerable in different ways. In the end, a stronger convergence of central bank policies could result. Thus, the introduction of an international digital currency represents a turning point for monetary policy.
    Keywords: monetary policy,digital currency,blockchain,effective lower bound
    JEL: E42 E52 E58
    Date: 2019
  27. By: Florian, Huber (University of Salzburg); Kaufmann, Daniel (Université de Neuchâtel)
    Abstract: We estimate a multivariate unobserved components stochastic volatility model to explain the dynamics of a panel of six exchange rates against the US Dollar. The empirical model is based on the assumption that both countries’ monetary policy strategies may be well described by Taylor rules with a time-varying inflation target, a time-varying natural rate of unemployment, and interest rate smoothing. Compared to the existing literature, our model simultaneously provides estimates of the latent components included in a typical Taylor rule specification and the model-based real exchange rate. Our estimates closely track major movements along with important time series properties of real and nominal exchange rates across all currencies considered, outperforming a benchmark model that does not account for changes in trend inflation and trend unemployment. More precisely, the proposed approach improves upon competing models in tracking the actual evolution of the real exchange rate in terms of simple correlations while it appreciably improves upon simpler competitors in terms of matching the persistence of the real exchange rate.
    Keywords: Exchange rate models; trend inflation; natural rate of unemployment; Taylor rule; unobserved components stochastic volatility model
    JEL: E31 E52 F31 F41
    Date: 2019–10–22
  28. By: Sebastian Gechert; Jan Siebert
    Abstract: Preferences over wealth can explain why households do not spend more when real interest rates fall, because they save more than optimal under a standard model. However, little is known about preferences over wealth empirically. We run an intentionally simple lab experiment on intertemporal spending and saving decisions with 180 students. Under a positive discount factor, zero interest and linear utility, maximizing behaviour would imply spending any funds instantaneously. While half of the participants behave optimally, we find a robust pattern where participants on average form and maintain a stock of wealth, consistent with wealth entering the utility function directly.
    Keywords: consumption; saving motives; wealth; experiment
    JEL: D12 E21 E62 H23
    Date: 2019
  29. By: Martin Bodenstein; James Hebden; Fabian Winkler
    Abstract: Monetary policy strategies that target the price level have been advocated as a more effective way to provide economic stimulus in a deep recession when conventional monetary policy is limited by the zero lower bound on nominal interest rates. Yet, the effectiveness of these strategies depends on a central bank's ability to steer agents' expectations about the future path of the policy rate. We develop a flexible method of learning about the central bank's policy rule from observed interest rates that takes into account the limited informational content at the zero lower bound. When agents learn, switching from an inflation targeting to a price-level targeting strategy at the onset of a recession does not yield the desired stabilization benefits. These benefits only materialize after the policy rule has been in place for a sufficiently long time. Temporary price-level targeting strategies are likely to be much less effective than their permanent counterparts.
    Keywords: Zero lower bound ; Imperfect information ; Learning ; Price level targeting
    JEL: E31 E52
    Date: 2019–11–13
  30. By: Michael Siegenthaler (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Daniel Kopp (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: Can governmental policies mitigate the effects of recessions on unemployment? We study whether the Swiss short-time work (STW) program reduced unemployment in the 2009–2015 period using quarterly establishment-level panel data linking several administrative data sources. We compare changes in permanent layoffs into unemployment, hiring from unemployment, establishment survival and size between establishments that applied successfully to establishments that applied unsuccessfully for STW at cantonal employment agencies. The latter appear to be a valid control group for the former among others because of substantial idiosyncrasies in cantonal approval practices. We find strong evidence that STW increases establishment survival and prevents rather than postpones dismissals: the 7,880 establishments treated in 2009 would have dismissed approximately 20,500 workers into unemployment (0.46% of the labor force) until 2012. Most workers would have been dismissed in the quarters immediately following application and more than a third would have become long-term unemployed. We estimate that the savings in terms of unemployment benefit payments may have been large enough to compensate the spending on STW benefits for the Swiss unemployment insurance.
    Keywords: Great Recession, Labor demand, Layoffs, Labor hoarding, Short-time work, Unemployment, Work sharing
    JEL: E24 J23 J63 J65
    Date: 2019–07
  31. By: Huber, Florian (University of Salzburg); Rabithsc, Katrin (WU Wien)
    Abstract: In this paper, we reconsider the question how monetary policy influences exchange rate dynamics. To this end, a vector autoregressive (VAR) model is combined with a two country dynamic stochastic general equilibrium (DSGE) model. Instead of focusing exclusively on how monetary policy shocks affect the level of exchange rates, we also analyze how they impact exchange rate volatility. Since exchange rate volatility is not observed, we estimate it alongside the remaining quantities in the model. Our findings can be summarized as follows. Contractionary monetary policy shocks lead to an appreciation of the home currency, with exchange rate responses in the short-run typically undershooting their long-run level of appreciation. They also lead to an increase in exchange rate volatility. Historical and forecast error variance decompositions indicate that monetary policy shocks explain an appreciable amount of exchange rate movements and the corresponding volatility.
    Keywords: Monetary policy; Exchange rate overshooting; stochastic volatility modeling; DSGE priors
    JEL: E43 E52 F31
    Date: 2019–10–22
  32. By: Antoine Mandel (Centre d'Economie de la Sorbonne - Paris School of Economics;; Vipin P. Veetil (Department of Humanities and Social Sciences, Indian Institute of Technology Madras)
    Abstract: We develop a tractable model of out-of-equilibrium dynamics in a general equilibrium economy with cash-in-advance constraints. The dynamics emerge from local interactions between firms governed by the production network underlying the economy. We analytically characterise the influence of network structure on the propagation of monetary shocks. In the long run, the model converges to general equilibrium and the quantity theory of money holds. In the short run, monetary shocks propagate upstream via nominal demand changes and downstream via real supply changes. Lags in the evolution of supply and demand at the micro level can give rise to arbitrary dynamics of the distribution of prices. Our model explains the long standing Price Puzzle: a temporary rise in the price level in response to monetary contractions. The Price Puzzle emerges under two assumptions about downstream firms: they are disproportionally affected by monetary contractions and they account for a sufficiently small share of the wage bill. Empirical evidence supports the two assumptions for the US economy. Our model calibrated to the US economy using a data set of more than fifty thousand firms generates the empirically observed magnitude of the price level rise after monetary contractions
    Keywords: Price Puzzle; Production Network; Money; Monetary Non-Neutrality; Out-of-Equilibrium Dynamics
    JEL: C63 C67 D80 E31 E52
    Date: 2019–10
  33. By: Lance Taylor (New School for Social Research)
    Abstract: Expansionary macroeconomic policy with a strong redistributive component is an attractive proposition, most recently launched on the basis of Modern Monetary Theory or MMT. The Theory is a synthesis of familiar ideas, newly relevant but scarcely path-breaking. Its basics \'96 Chartalist or fiat money, functional finance, and models based on consistent national accounting \'96 come straight from Maynard Keynes, Abba Lerner, and Wynne Godley. Functional finance is the heart of fiscalist Keynesianism built upon automatic stabilizers for the business cycle. MMT'92s job guarantee proposal is one more stabilizer which could be a modest helpful supplement to the system which exists. National accounting comparisons of a possible MMT package with the 2008 crash and the Trump tax cut are presented with emphasis on autonomous shifts in demand. The package could have problems with debt sustainability and external balance. Inflation is unlikely if wage repression in the USA is not reversed. But strong wage increases are presumably a goal of MMT.
    JEL: E5 E12 E17
    Date: 2019–10
  34. By: Guofeng Sun
    Abstract: Banks' shadow, or money creation by banks beyond traditional loans, plays an important role in China's money-creation process, posing a number of challenges to monetary policy operations and financial risk management. This paper analyzes the money-creation mechanisms of China's shadow banking sector in detail, provides accurate measurements, investigates its effects on financial risk, and surveys recent regulation. To strengthen supervision, China's regulators should closely track the evolution of various shadow banking channels, both on- and off-balance sheet. Specific macroprudential regulation tools, such as asset reserves and risk reserves, should be applied separately to banks' shadow and traditional shadow banking.
    Keywords: banks' shadow, traditional shadow banking, credit money creation, bank accounting, regulation
    JEL: E44 E51 G28
    Date: 2019–11
  35. By: Timothy S. Hills; Taisuke Nakata; Sebastian Schmidt
    Abstract: Even when the policy rate is currently not constrained by its effective lower bound (ELB), the possibility that the policy rate will become constrained in the future lowers today's inflation by creating tail risk in future inflation and thus reducing expected inflation. In an empirically rich model calibrated to match key features of the U.S. economy, we find that the tail risk induced by the ELB causes inflation to undershoot the target rate of 2 percent by as much as 50 basis points at the economy's risky steady state. Our model suggests that achieving the inflation target may be more difficult now than before the Great Recession, if the likely decline in long-run neutral rates has led households and firms to revise up their estimate of the frequency of future ELB events.
    Keywords: Deflationary Bias ; Disinflation ; Effective Lower Bound ; Inflation Targeting ; Risky Steady State ; Tail Risk
    JEL: E32 E52
    Date: 2019–11–04
  36. By: Cesa-Bianchi, Ambrogio (Bank of England and Centre for Macroeconomics); Kumhof, Michael (Bank of England, CEPR and Centre for Macroeconomics); Sokol, Andrej (European Central Bank, Bank of England and Centre for Macroeconomics); Thwaites, Gregory (Bank of England)
    Abstract: We study exchange rate determination in a 2-country model where domestic banks create each economy’s supply of domestic and foreign currency. The model combines the UIP-based and monetary theories of exchange rate determination, but the latter with a focus on private rather than public money creation. The model features an endogenous monetary spread or excess return in the UIP condition. This spread experiences sizeable changes when shocks affect the relative supplies (of bank loans) or demands (for bank deposits) of the two currencies. Under such shocks, monetary effects dominate traditional UIP effects in the determination of exchange rates and allocations, and this becomes stronger as domestic and foreign currencies become more imperfect substitutes. With these shocks, the model successfully addresses the UIP puzzle, and it is also consistent with the Meese-Rogoff and PPP puzzles.
    Keywords: Bank lending; money creation; money demand; endogenous money; uncovered interest parity; exchange rate determination; international capital flows; gross capital flows
    JEL: E44 E51 F41 F44
    Date: 2019–08–30
  37. By: Nadav Ben Zeev (BGU)
    Keywords: Business Cycles, Business Cycle Shock, General purpose technology, Investment-specific technology news shocks
    JEL: E32
    Date: 2019
  38. By: Yannis Dafermos; Maria Nikolaidi
    Abstract: Fiscal policy has a strong role to play in the transition to an ecologically sustainable economy. This paper critically discusses the way that green fiscal policy has been analysed in both conventional and post-Keynesian approaches. It then uses a recently developed post-Keynesian ecological macroeconomic model in order to provide a comparative evaluation of three different types of green fiscal policy: carbon taxes, green subsidies and green public investment. We show that (i) carbon taxes reduce global warming but increase financial risks due to their adverse effects on the profitability of firms and credit availability; (ii) green subsidies and green public investment improve ecological efficiency, but their positive environmental impact is partially offset by their macroeconomic rebound effects; and (iii) a green fiscal policy mix derives better outcomes than isolated policies. Directions for future heterodox macroeconomic research on the links between fiscal policy and ecological sustainability are suggested.
    Keywords: post-Keynesian economics, ecological economics, green fiscal policy, stock-flow consistent modelling
    JEL: E12 E62 Q54 Q57
    Date: 2019
  39. By: Knotek, Edward S. (Federal Reserve Bank of Cleveland)
    Abstract: Macroeconomic models often generate nominal price rigidity via menu costs. This paper provides empirical evidence that treating menu costs as a structural explanation for sticky prices may be spurious. Using scanner data, I note two empirical facts: (1) price points, embodied in nine-ending prices, account for approximately two-thirds of prices; and (2) at the conclusion of sales, post-sale prices return to their pre-sale levels more than three-fourths of the time. I construct a model that nests roles for menu costs and price points and estimate model variants. Excluding the two facts yields a statistically and economically significant role for menu costs in generating price rigidity. Incorporating the two facts yields an incentive to set nine-ending prices two orders of magnitude larger than the menu costs. In this setting, the price point model can match the two stylized facts, but menu costs are effectively irrelevant as a source of price rigidity. The choice of a mechanism for price rigidity matters for aggregate dynamics.
    Keywords: price rigidity; menu costs; price points; nine-ending prices;
    JEL: C15 D40 E31 L11 M31
    Date: 2019–11–12
  40. By: Link, Thomas
    Abstract: The elimination of large-denomination banknotes is one of several options to relax the effective-lower-bound constraint on nominal interest rates. We explore timing issues associated with the calling-in of large notes from a central banker's perspective and employ an optimal stopping model to show how the volatility and the expected path of the natural rate of interest determine an optimal timing strategy. Our model shows that such a strategy can involve a wait-and-see component analogously to an optimal exercise rule for a perpetual American option. In practice, a wait-and-see component might induce a central banker not to call in large notes until the natural rate has fallen to an exceptionally low level.
    Keywords: cashless economy,phase-out of paper currency,wait-and-see policy,optionvalue
    JEL: E42 E58
    Date: 2019
  41. By: Kambale Kavese (Eastern Cape Socio Economic Consultation Council); Andrew Phiri (Department of Economics, Nelson Mandela University)
    Abstract: An “Economy-Wide Leontief Multiplier Based Model” calibrated on Supply and Use Framework, and a “Micro-Simulation Model” is used to assess post-recession trends in macroeconomic, labour, and fiscal multipliers for South Africa. The simulations show that during the post-reces¬sion era, the effect of exogenous shock in the economy, like increases in investment spending, although positive, yielded a smaller return in terms of tax revenue, job creation and economic growth. At sector level, these results demonstrate how the inter-industry and industry-consumer links have weakened in the post-recession period. At policy level, the findings imply that the persisting low growth trajectory associated with weaker inter-industry linkages could be exacerbated, while the fiscal austerity measures associated with weaker forward and backword tax linkages could be prolonged. We recommend government should follow a priorities-based spending policy that yields optimal socioeconomic returns.
    Keywords: Supply and Use (SUT) tables; Fiscal multipliers; Ficscal multipliers; employmetn multipliers; South Africa.
    JEL: C67 D57 E62 J21 R15
    Date: 2019–11
  42. By: Heather D. Gibson (Bank of Greece); Stephen G. Hall (University of Leicester, Bank of Greece and University of Pretoria); Pavlos Petroulas (Bank of Greece); George S. Tavlas (Bank of Greece and University of Leicester)
    Abstract: The euro-area financial crisis that erupted in 2009 was marked by negative confidence effects that had both domestic and international ramifications. Domestically, bank lending declined sharply. Internationally, the demand for the euro as a reserve currency fell precipitously. We investigate the effects of ECB policies on banks’ lending, taking account of national and regional spillovers. We also assess the effects of ECB policies on euro reserve holdings. The results suggest that those policies were important for rebuilding confidence, thus supporting both bank lending and the use of the euro as a reserve asset.
    Keywords: euro area financial crisis; monetary policy operations; European banks; spatial panel model
    JEL: E3 G01 G14 G21
  43. By: Spahn, Peter
    Abstract: The current debate whether zero interest rates are caused by a saving glut or a liquidity glut is resolved by the distinction between the market and the natural rate, where saving affects only the latter variable, and monetary policy mainly the first. This topic is linked to a second one: the monetary determination of the rate of profit in Keynesian capital theory. Both topics merge in a critical review of Keynes's vision of the "euthanasia of the rentier". The data show however that we have not reached a state of capital satiation. The rising gap between the rate of profit and the rate of interest poses a challenge for capital theory.
    Keywords: saving vs. liquidity,zero interest rates,capital satiation
    JEL: B1 E4 E5
    Date: 2019
  44. By: Sokbae Lee; Yuan Liao; Myung Hwan Seo; Youngki Shin
    Abstract: We investigate state-dependent effects of fiscal multipliers and allow for endogenous sample splitting to determine whether the US economy is in a slack state. When the endogenized slack state is estimated as the period of the unemployment rate higher than about 12 percent, the estimated cumulative multipliers are significantly larger during slack periods than non-slack periods and are above unity. We also examine the possibility of time-varying regimes of slackness and find that our empirical results are robust under a more flexible framework. Our estimation results points out the importance of the heterogenous effects of fiscal policy.
    Keywords: fiscal policy; threshold regression; recession
    JEL: C32 E62 H20 H62
    Date: 2019–09
  45. By: Boriss Siliverstovs (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Daniel Wochner (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This article re-examines the findings of Stock and Watson (2012b) who assessed the predictive performance of dynamic factor models (DFM) over autoregressive (AR) bench-marks for hundreds of target variables by focusing on possible business cycle performance asymmetries in the spirit of Chauvet and Potter (2013) and Siliverstovs (2017a, 2017b, 2019). Our forecasting experiment is based on a novel big macroeconomic dataset (FRED-QD) comprising over 200 quarterly indicators for almost 60 years (1960-2018; cf. e.g. McCracken & Ng, 2019b). Our results are consistent with this nascent state-dependent evaluation literature and generalize their relevance to a large number of indicators: We document systematic model performance differences across business cycles (longitudinal) as well as variable groups (cross-sectional). While the absolute size of prediction errors tend to be larger in busts than in booms for both DFMs and Arts, DFMs relative im-provement over Arts is typically large and statistically significant during recessions but not during expansions (cf. e.g. Chauvet & Potter, 2013). Our findings further suggest that the widespread practice of relying on full sample forecast evaluation metrics may not be ideal: For at least two thirds of all 216 macroeconomic indicators full sample relative RMSFEs systematically over-estimate performance in expansionary subsamples and under-estimate it in recessionary subsamples (cf. e.g. Siliverstovs, 2017a, 2019). These findings are robust to several alternative specifications and have high practical relevance for both consumers and producers of model-based economic forecasts.
    Keywords: Forecast Evaluation, Dynamic Factor Models, Business Cycle Asymmetries, Big Macroeconomic Datasets, United States
    JEL: C32 C45 C52 E17
    Date: 2019–10
  46. By: Adamopoulou, Effrosyni (University of Mannheim); Kaya, Ezgi (Cardiff Business School)
    Abstract: This paper explores the impact of the 2007 European Union enlargement on the consumption behavior of immigrant households. Using data from a unique Italian survey and a difference-in-differences approach, we find that the enlargement induced a significant consumption increase for the immigrant households from new member states both in the short- and in the medium-run. This enlargement effect cannot be attributed to the mere legalization as it concerns both undocumented and documented immigrants, albeit through different channels. Detailed information on immigrants' legal status (undocumented/documented) and sector of employment (informal/formal) allows us to shed light on the exact mechanisms. Following the enlargement, previously undocumented immigrants experienced an increase in the labor income by moving from the informal towards the formal economy, whereas immigrants who were already working legally in Italy benefitted from the increased probability of getting a permanent contract. Enhanced employment stability in turn reduced the uncertainty about future labor income leading to an increase in documented immigrants' consumption expenditure.
    Keywords: consumption; citizenship; informality; (un)documented immigrants; work permit
    JEL: D12 E21 F22
    Date: 2019–07
  47. By: Lamia Bazzaoui
    Abstract: The aim of the present paper is to study the relationship between fiscal variables and the inflation rate for a sample of countries, over the period 1960-2017, based on a linearized equation derived from a households 'budget constraint. This equation links the inflation rate to both fiscal and monetary policy, in addition to the growth rate. We follow the same approach as Cochrane (2019a) and analyze the impact of shocks to these three variables. Impacts from fiscal and monetary policy to the inflation rate are then decomposed between different monetary policy regimes and fiscal space categories. Results indicate that the short-term interest rate is the most significant determinant of inflation. Fiscal policy also affects the inflation rate negatively through the fiscal balance, but this effect is not robust across all mon- etary policy frameworks (this relation only holds in unstructured or loosely structured discretionary monetary policy regimes). The vari- able of fiscal space on the other hand proves to be an important factor as inflation appears to be more sensitive to both fiscal and monetary policy when fiscal space is limited. Finally, we also find that, as pre- dicted by Sargent & Wallace (1981), fiscal policy can cause inflation only when the growth rate is lower than the interest rate.
    Date: 2019–07
  48. By: Andrea De Michelis; Thiago Revil T. Ferreira; Matteo Iacoviello
    Abstract: We study the effects of oil prices on consumption across countries and U.S. states, by exploiting the time-series and cross-sectional variation in oil dependency of these economies. We build two large datasets: one with 55 countries over the years 1975-2018, and another with all U.S. states over the period 1989-2018. We then show that oil price declines generate positive effects on consumption in oil-importing economies, while depressing consumption in oil-exporting economies. We also document that oil price increases do more harm than the good afforded by oil price decreases both in the world and U.S. aggregates.
    Keywords: Oil prices ; Consumption ; Cross-country ; U.S. states ; Oil dependency
    JEL: Q43 E32 F40
    Date: 2019–11–07
  49. By: Pfarrhofer, Michael (University of Salzburg)
    Abstract: This paper investigates the time-varying impacts of international macroeconomic uncertainty shocks. We use a global vector autoregressive (GVAR) specification with drifting coefficients and factor stochastic volatility in the errors to model six economies jointly. The measure of uncertainty is constructed endogenously by estimating a scalar driving the innovation variances of the latent factors, and is included also in the mean of the process. To achieve regularization, we use Bayesian techniques for estimation, and introduce a set of hierarchical global local shrinkage priors. The adopted priors center the model on a constant parameter specification with homoscedastic errors, but allow for time-variation if suggested by likelihood information. Moreover, we assume coefficients across economies to be similar, but provide sufficient flexibility via the hierarchical prior for country-specific idiosyncrasies. The results point towards pronounced real and financial effects of uncertainty shocks in all countries, with differences across economies and over time.
    Keywords: Bayesian global vector autoregressive model; state space modeling; hierarchical priors; factor stochastic volatility; stochastic volatility in mean
    JEL: C11 C55 E32 E66 G15
    Date: 2019–08–19
  50. By: Dvoskin, Ariel (National University of San Martín); Feldman, Germán David (National University of San Martín)
    Abstract: We critically review the previous attempts to introduce money and finance into Sraffa’s price system, whose main difference is, we argue, their conception of the interest rate, either as an opportunity cost or as an effective cost of production. We examine the implications on three different grounds: (i) the formal consistency of the system; (ii) the possibilities to explicitly treat the financial industry as any other productive sector; and (iii) the validity of the so-called “monetary theory of distribution” (MTD). We then suggest a possible route, inspired by Schumpeter’s ideas on economic development, to introduce the banking sector through its role of granting credit to innovation. Unlike previous contributions, this reformulation allows us both to justify the basic nature of the financial sector and simultaneously preserve the validity of MTD.
    Keywords: Banking industry; Innovation; Monetary theory of distribution; Sraffa; Surplus approach.
    JEL: E11 E43 E52
    Date: 2019–10–16
  51. By: Heidorn, Thomas; Mamadalizoda, Nekruz
    Abstract: The fundamental premise upon which the pricing of major FX derivatives rests is the Covered Interest Parity (CIP), and a violation is seen as a reflection of potential capital market inefficiencies. CIP postulates that FX forward prices simply reflect the interest rate differential between the two currencies. This has been the case before the global financial crisis. During the 2008 financial and 2011 European debt crises, market prices deviated significantly from the theoretical CIP-implied prices, and the deviations persist at noticeable levels until present. This paper documents and analyzes the pronounced nature of the EURUSD and EURGBP CIP violations from 2007 to 2019. We explain the basis in terms of five driving factors: credit risk differential, funding liquidity differences, measurement error, hedging demand imbalance, and new constraints to arbitrage. Furthermore, we carry out a term structure analysis, showing the varying dynamics of CIP violations across maturities and over time. Lastly, we test a statistical approach to adjust the interest rate differential formula bringing the theoretical prices closer to market (i.e., reducing CIP deviation).
    Keywords: cross-currency basis,covered interest parity,CIP deviation,EURUSD basis,EURGBP basis,FX swaps,FX forwards,cross-currency basis swaps
    JEL: E30 E42 E44 G15
    Date: 2019
  52. By: Brühl, Volker
    Abstract: Libra - a global virtual currency project initiated by Facebook - has been the subject of many controversial discussions since its announcement in June 2019. This paper provides a differentiated view on Libra, recognising that different development scenarios of Libra are conceivable. Libra could serve purely as an alternative payment system in combination with a dedicated payment token, the Libra coin. Alternatively, the Libra project could develop into a broader financial infrastructure for advanced financial services such as savings and loan products operating on the Libra blockchain. Based on a comparison of the Libra architecture with other cryptocurrencies, the opportunities and challenges for the development of the respective Libra ecosystems are investigated form a commercial, regulatory and monetary policy perspective.
    JEL: E42 E52 G20
    Date: 2019
  53. By: D’Amico, Stefania (Federal Reserve Bank of Chicago); Kaminska, Iryna (Bank of England)
    Abstract: Using security-level data, we analyse the effects of the Bank of England’s multiple rounds of gilt purchases (aka Quantitative Easing, QE) and its Corporate Bond Purchase Scheme (aka Credit Easing, CE) on corporate bond prices and issuance. This allows direct estimation of (i) QE’s cross-asset supply effects and (ii) the joint supply effects of QE and CE. We show that in the case of QE alone, the pass-through of the gilt supply shock to corporate bond prices is significant, is larger in the longer-run than at announcement, and is often limited to the default-free component of the corporate yield. In the case of the joint conduct of QE and CE, we find that the CE is more effective than QE in reducing credit spreads, especially for higher-rated bonds, and in stimulating corporate bond issuance, which responds quite rapidly to the corporate bond supply shock.
    Keywords: Quantitative easing; Corporate Bond Purchase Scheme; monetary transmission mechanism; corporate bonds
    JEL: E52 E58 E65 G12
    Date: 2019–09–20
  54. By: Rüth, Sebastian K.
    Abstract: How do nominal exchange rates adjust after surprise contractions in monetary policy? While the seminal contribution by Dornbusch provides concise predictions -exchange rates appreciate, i.e., overshoot on impact before depreciating gradually - empirical support for his hypothesis is at best mixed. I argue that the failure to discover overshooting may result from assumptions researchers have imposed to recover structural VARs. Specifically, simultaneous feedback effects between interest rates and exchange rates, which are inherently forward-looking variables, are often excluded or modeled alongside with strong restrictions. In this paper, I identify U.S. monetary policy shocks using surprises in Federal funds futures around policy announcements as external instruments, which recent literature has established to represent the appropriate laboratory in settings encompassing macroeconomic and financial variables. Resulting adjustments of the dollar, conditional on shifts in policy, generally align with Dornbusch's predictions during the post-Bretton-Woods era, including Volcker's tenure as Fed Chair.
    Keywords: Nominal exchange rate; monetary policy shock; external instrument; structural vector autoregression
    Date: 2019–11–13
  55. By: Rai da Silva Chicoli; Siegfried Bender
    Abstract: Through a fiscal reaction function that verifies the hypothesis of fiscal fatigue, for a group of 19 emerging countries over the period 2003-2016, and with hypothesis about the difference between interest rate and economic growth, this article seeks to obtain the debt limit for this group of countries. As a result, we confirm the hypothesis of fiscal fatigue, even for robustness exercises, with a reduction of marginal primary result to levels of debt around 70% of GDP and negative marginal primary result around 110% of GDP, well below the results for advanced economies around 100% and 150% of GDP, respectively. In addition, we observed average debt limit around 154% and 128% of GDP for deterministic and stochastic cases, with a significant fiscal space for most countries, except for Croatia, Brazil and Hungary, where a fiscal adjustment must be done to reduce current debt.
    Keywords: Debt Limit; Fiscal Fatigue; Fiscal Policy
    JEL: H63 H62 E62
    Date: 2019–11–05
  56. By: Claudia Maurini (Bank of Italy)
    Abstract: This paper investigates the existence and estimates the magnitude of a financial market stigma associated with the International Monetary Fund’s non-concessional programmes. In particular, it focuses on the impact of IMF non-concessional loans on Emerging Markets’ sovereign spreads, using the propensity score matching methodology to deal with the selection bias problem. We find evidence of higher spreads for countries supported by a non-concessional IMF programme with respect to comparable countries that are not supported by such a programme. This effect may be linked to both a pure financial stigma and the (low) probability of the programme succeeding, as it tends to dissipate towards the end of the programme and to be smaller and less significant if we restrict the sample to non-repeated programmes (more likely to be successful). Finally, we find that precautionary programmes (such as the Flexible Credit Line) have a negative impact on sovereign spreads.
    Keywords: International Monetary Fund, propensity score matching, sovereign spreads, emerging market economies
    JEL: E44 F33 F44 F55 G15
    Date: 2019–11
  57. By: Bob Krebs
    Abstract: This study examines the revision histories of national accounts data in Luxembourg. I analyse first releases and revisions in the quarterly national accounts (QNA) published by the National Institute of Statistics (STATEC). Reliability is evaluated by measuring revision size, variability as well as the frequency in sign changes and acceleration/deceleration switches. In addition, the predictability of revisions is assessed by applying regression analysis. Overall, the results point to high uncertainty surrounding early QNA estimates, also in international comparison. I find that revisions to GDP and its components are substantial. While there is no clear evidence of a bias in year-on-year real GDP growth, this does not hold for some GDP components.
    Keywords: National accounts data, real-time analysis, data revisions
    JEL: C82 E01 E66
    Date: 2019–11
  58. By: Tomer Blumkin (BGU); David Lagziel (BGU)
    Keywords: secrecy; wages; relative wage; labor contracts; wage compression; wage dispersion
    JEL: E24 D82 J30 J31 J71
    Date: 2019
  59. By: Gabriele Camera (Economic Science Institute, Chapman University; University of Bologna); Alessandro Gioffré (University of Florence)
    Abstract: Experiments that investigate the spontaneous emergence of money in laboratory so cieties rely on inde?nitely repeated helping games with random matching (Camera et al., 2013; Camera and Casari, 2014). An important open issue is the lack of a general proof of existence of an equilibrium capable of supporting the e?cient allocation under private monitoring, without money. Here, we ?ll this gap by o?ering a general proof, as well as by characterizing the e?cient non-monetary equilibrium. This technique can be extended to study games with simultaneous actions.
    Keywords: Tacit coordination; Random matching; Social norms
    JEL: E4 E5 C7
    Date: 2019
  60. By: Joseph Halevi (International University College of Turin)
    Abstract: This essay deals with the contradictory dynamics that engulfed Europe from 1959 to 1979, the year of the launching of the European Monetary System. It focuses on how the macroeconomic framework of stop-go policies in the 1960s ended up privileging external \'96 intra-European - exports at the expense of domestic demand. The paper offers a very tentative explanation as to why stop-go policies, by weakening domestic demand, did not put an end to the to the \'91long boom\'92 earlier as they should have. The French crisis of 1968-69 leading to the demise of De Gaulle is discussed at length, as is the renewal of the German export drive in the wake of a nominal revaluation of the D-Mark in 1969. Finally, the revival of labor struggles in Italy in the same year is put in the context of the structural weaknesses of the Italian economy as analyzed by the late Marcello de Cecco. The conclusion is that European countries had neither the political culture nor the institutional mechanisms to coordinate mutually advantageous policies. Their so-called cooperation was an exercise in establishing hegemony while defending the interests specific to the dominant economic groups of each country. The essay then deals with the formation of the EMS as an expression of efforts to establish and enforce economic dominance.
    Keywords: European Monetary System, Common Market, France, Germany, Italy, Netherlands, currency depreciation, European Monetary Union
    JEL: E02 F02 F5 N14 N24
    Date: 2019–06
  61. By: Begg, David
    Abstract: An interesting theory of transition must give a convincing account of structural adjustment and supply side improvement. In this paper, I discuss the incentives for government to undertake costly supply side improvement and how these relate to incentives governing the design of monetary and fiscal policy during transition. The government cares about deviations of inflation, output and government spending from their ideal levels, is subject to a budget constraint in which inflation yields some real revenue, and recognizes the distortionary effects of excess levels of taxation. Costly structural adjustment enhances future output by reducing supply side distortions.Within this framework, optimal policies are derived. For a given level of inherited structural capacity, optimal levels of inflation, output and government spending are derived. A poor structural inheritance forces high tax distortions, low output, and heavy reliance on the inflation tax. Hence there is a negative cross-country correlation of output and inflation, because of differences in structural inheritance, even though each country faces a vertical long run Phillips curve. Relative to the first best, failures of monetary precommitment lead to an inflation bias. Joining EMU may improve matters by solving this problem, but may induce two other difficulties: it may reduce the inflation tax too much, and it may lead to stabilization of the wrong shocks. It need not be welfare enhancing.The incentive for structural adjustment is then examined. Compared with the first best speed of adjustment, a failure of monetary discretion, by raising distortions, increases the marginal benefit of reform and induces more rapid adjustment. If transition economies willingly enter EMU, their distortions are reduced and in consequence they will reform more slowly. Since this seems at variance with current perceptions, the paper then introduces two further failures, namely in fiscal commitment and in commitment to reform itself. It is shown that these can interact to make complete stagnation of reform the optimal policy conditional on the failures remaining. In those circumstances, EMU membership, or even its prospect, may be a powerful force for speeding up the pace of reform in countries that otherwise would have stagnated.
    Keywords: International Development
  62. By: Murshed, S. Mansoob
    Abstract: The present paper presents a short-run theoretical macroeconomic model of the type suggested in Sachs (1996), attempting to differentiate economic development in East Asia with Latin America. Latin America, when compared to East Asia is said to exhibit a pattern of growth associated with relative natural-resource abundance. The economy in the model that follows is comprised of 3 sectors, two of which involve traded goods and one non-traded commodity. A monetary sector is also incorporated. The first traded good is the natural resource based sector whose output is entirely exogenous and purely for export. The other traded commodity is a manufactured good, consumed at home and exported abroad. In the Latin American case devaluation might be contractionary, and a resource boom could lead to the rise of the non-traded sector at the expense of the traded good. The effect of an expansion in the money supply induced by capital inflows is to expand the economy. When the model is tuned to the East Asian case, resource booms might even expand the traded sector, and devaluation may be expansionary. This suggests two major policy implications. First, a policy-induced devaluation, or policies to prevent exchange rate appreciation should accompany a resource boom. Secondly, policies of taxing non-traded goods aimed at fostering traded goods production may also be considered under some circumstances.
    Keywords: International Development
  63. By: Tomer Blumkin (BGU); David Lagziel (BGU)
    Keywords: secrecy; wage signaling; matching friction; tacit collusion
    JEL: E24 D82 J30 J31 J71
    Date: 2019
  64. By: Joseph Halevi (International University College of Turin)
    Abstract: This paper analyzes the early stages of the formation of the Common Market. The period covered runs from the end of WW2 to 1959, which is the year in which the European Payments Union ceased to operate. The essay begins by highlighting the differences between the prewar political economy of Europe and the new dimensions and institutions brought in by the United States after 1945. It focuses on the marginalization of Britain and on the relaunching of French great power ambitions and how the latter determined, in a very problematical way, the European complexion of France. Because of France '92s imperial aspirations, France, not West Germany, emerged as the politically crisis prone country of Europe acting as a factor of instability thereby jeopardizing the process of European integration, Among the large European nations, Germany and Italy appear, for opposite economic reasons, as the countries most focused on furthering integration. Germany expressed the strongest form of neomercantilism while Italy the weakest.
    Keywords: European Monetary System, Common Market, France, Germany, Italy, Netherlands, currency depreciation, European Monetary Union
    JEL: E02 F02 F5 N14 N24
    Date: 2019–07
  65. By: International Monetary Fund
    Abstract: Recent developments and outlook. The Sri Lankan economy is gradually recovering from the severe impact of the Easter Sunday terrorist attacks. Real GDP growth was revised to 2.7 percent in 2019, from 3.6 percent at the fifth review, and is expected to strengthen to 3.5 percent in 2020 as tourism and related activities normalize. The slowdown in growth and decline in imports have significantly impacted fiscal revenues. Program performance. The authorities remain committed to complete the EFFsupported program, despite recent setbacks. While the fiscal targets are no longer within reach, due to the significant revenue shortfalls after the attacks, they are taking corrective actions to mitigate the fiscal underperformance. The end-June net international reserve target was met and the Central Bank of Sri Lanka (CBSL) is committed to rebuild reserves, while allowing for greater exchange rate flexibility. The authorities have also made significant progress on their structural reform agenda, implementing five key structural benchmarks under the program, albeit with some delays.
    Date: 2019–11–04
  66. By: Eduardo Monte Jorge Hey Martins; Jaylson Jair da Silveira, Gilberto Tadeu Lima
    Abstract: There is evidence that labor intensity is endogenous to wage compensation and that inter- and intra-industry wage differentials are non-negligible and persistent. We explore the implications of firms periodically choosing between alternative wage compensation strategies to extract labor from labor power more effectively. The frequency distribution of labor extraction strategies across firms is endogenously time-varying as driven by satisficing evolutionary dynamics that generate wage inequality as a stable long-run equilibrium under plausible conditions. Firms willing to extract more labor from labor power remunerate workers with a higher wage. Yet a larger proportion of firms following such strategy does not necessarily result in a lower (higher) unit labor cost (profit share) and hence in higher rates of profit and saving-determined output growth. The larger the proportion of firms that attempt to extract more labor from labor power by remunerating workers with a higher wage, the less these firms are successful. This result can be seen as characterizing another contradiction of the capitalist economy.
    Keywords: Labor power; work intensity; wage differential; evolutionary dynamics; income Distribution; output growth
    JEL: E1 O41 J31
    Date: 2019–11–12
  67. By: Jackson, Laura E. (Bentley University); Otrok, Christopher (University of Missouri ; Federal Reserve Bank of St. Louis); Owyang, Michael T. (Federal Reserve Bank of St. Louis)
    Abstract: We propose a method to decompose changes in the tax structure into a component measuring the level of taxes and a component orthogonal to the level that measures progressivity. While our focus is on the progessivity results, we find that the level shock is similar to standard tax shocks found in the empirical literature in that a rise in the level is contractionary. An increase in tax progressivity sets off an economic boom. Those at the bottom of the income distribution (who are constrained hand-to-mouth consumers) set off a consumption boom that expands the overall economy. Those at the top of the income distribution benefit disproportionately from expansions, and their income gains more than offset the increases in tax from higher marginal rates. The net result is that an increase in progressivity leads to an increase in inequality, not a decrease as conventional wisdom would suggest. We interpret these results as evidence in favor of trickle-up, not trickle-down, economics.
    Keywords: Taxes; Gini coefficient; income and consumption inequality
    JEL: C32 E62
    Date: 2019–11–14
  68. By: Edmund Crawley
    Abstract: In 1960, Working noted that time aggregation of a random walk induces serial correlation in the first difference that is not present in the original series. This important contribution has been overlooked in a recent literature analyzing income and consumption in panel data. I examine Blundell, Pistaferri and Preston (2008) as an important example for which time aggregation has quantitatively large effects. Using new techniques to correct for the problem, I find the estimate for the partial insurance to transitory shocks, originally estimated to be 0.05, increases to 0.24. This larger estimate resolves the dissonance between the low partial consumption insurance estimates of Blundell, Pistaferri and Preston (2008) and the high marginal propensities to consume found in the natural experiment literature.
    Keywords: Consumption ; Income ; Time Aggregation
    JEL: D12 D91 D31 C18 E21
    Date: 2019–11–01
  69. By: Zhu, Guozhong (University of Alberta); Mikhed, Vyacheslav (Federal Reserve Bank of Philadelphia); Scholnick, Barry (Federal Reserve Bank of Philadelphia)
    Abstract: We provide a novel explanation to the longstanding puzzle of the “missing bankruptcy filings.” Even though a household with a negative net worth will receive contemporaneous benefit from bankruptcy, there may be greater insurance value from delaying the filing. Household bankruptcy is thus an American-style put option, which is not necessarily exercised even if the option is "in the money." Based on the value functions in the household’s dynamic programming problem, we formulate the value of the bankruptcy option as well as the exercise price. We estimate a life-cycle model in which households choose the optimal time to exercise their bankruptcy option.
    Keywords: personal bankruptcy; option value; life cycle; secured and unsecured debts
    JEL: E21 R21
    Date: 2019–11–13
  70. By: Melolinna, Marko (Bank of England); Tóth, Máté (European Central Bank)
    Abstract: This paper presents a range of unobserved components models to study productivity dynamics in the United Kingdom. We introduce a set of univariate and bivariate models that allow for shocks between the trend and the cycle to be correlated, and use Bayesian sampling techniques to estimate the models. We show that the size of the priors on the trend and cycle shock has an effect on the results, suggesting that a range of priors need to be considered for policy-making purposes. If the prior is set to a smooth trend, then models with little correlation between the trend and cycle shocks are the likeliest to fit the data. On the other hand, if there is a prior belief that the trend shock is allowed to vary relatively freely, the results suggest that there is a negative correlation between trend and cycle shocks to LIK productivity. This is consistent with real-business cycle type narratives, where trend shocks are the main driver of productivity dynamics. Finally, our evidence suggests that the trend productivity growth rate in the UK has been weaker since the financial crisis. There is also a significant positive correlation between shocks to UK trend productivity and those of other advanced economies.
    Keywords: Business cycle; Markov Chain Monte Carlo; productivity puzzle
    JEL: C11 C32 E32
    Date: 2019–09–20
  71. By: Knotek, Edward S. (Federal Reserve Bank of Cleveland); Sayag, Doron (Israel Central Bureau of Statistics); Snir, Avichai (Netanya Academic College)
    Abstract: We document a causal role for price endings in generating micro and macro price rigidity. Based on micro price data underlying the consumer price index in Israel, we document that most stores have a favored price ending—a final digit, usually a zero or nine, used by a majority of prices in that store—and that these favored price endings are utilized extensively. Using changes to the VAT rate as exogenous cost shocks that affect prices regardless of ending, we find that the frequency of price adjustment for nonfavored endings increases by twice as much as the frequency of adjustment for favored endings in months when the VAT rate changes. In the aggregate, sluggish pass-through of VAT rate changes is due to favored endings; changes in the VAT rate are passed through fully and immediately to nonfavored endings.
    Keywords: sticky prices; favored price endings; zero-ending prices; nine-ending prices; pass-through;
    JEL: E3 L11
    Date: 2019–11–12
  72. By: Epstein, Gerald; Schor, Juliet
    Abstract: The Golden Age was the era of demand management. Originally with monetary, and then fiscal policy, the governments of the advanced capitalist economies attempted to enhance and guide the accumulation process. They allocated credit, manipulated interest rates, and presided over a dramatic expansion in state expenditure. As the Golden Age eroded, and stagnation replaced prosperity, governments tried to manage the decline. Policy was actively used to reduce inflation and labor costs, enhance international competitiveness, or maintain employment. This paper is a brief analysis of macropolicy in six countries during the Golden Age and its erosion. It begins with a general account of the structural determinants of policy. Next we turn to a discussion of policy during the Golden Age. We argue that our six countries divide into two groups. Germany, Japan, France and Italy all pursued expansionary policies aimed at maximizing the rate of accumulation. The U.S. and the U.K. were less expansionary, on account of the international position of their currencies, the power of internationally-oriented finance capital, and the independence of the central bank. In the last section of the Paper we analyse policy in the wake of economic decline. We are particularly interested in the degree of convergence and divergence among the six countries. The policy differences shed light on our own theory of policy determination, as well as the alternative explanations.
    Keywords: International Development
  73. By: Been-Lon Chen (Institute of Economics, Academia Sinica, Taipei, Taiwan); Chih-Feng Lai (Department of Economics, Soochow University)
    Abstract: In infinitely lived, representative-agent models with linear income taxes, the influential studies by Chamley (1986) and Judd (1985) have shown that the optimal capital tax is zero in the long run. Our paper studies otherwise the same model except for progressive taxes and the results are as follow. First, the long-run optimal capital income tax is positive under progressive income taxes. Second, the welfare gain of tax reforms from current tax rates toward positive optimal income taxes under progressive tax rates is larger than that toward a zero capital income tax under linear income taxes. Our findings lend support to positive capital income taxes under a system of progressive income taxes adopted in developed countries since the late 19th century.
    Keywords: : infinite horizon model, optimal capital income taxation, progressive taxes
    JEL: E1 E6 H2
    Date: 2018–08
  74. By: Gaston Giordana; Paolo Guarda
    Abstract: This paper models how internet platforms decide whether to introduce virtual currencies. Since platforms operate two-sided markets, virtual currencies may attract users who buy goods/services as well as external firms who accept virtual currency as payment. We find that platform incentives to introduce virtual currencies depend on the distribution of wages across the population of users as well as the distribution of preferences for online activities ("digital" preferences). We use Luxembourg data from the EU Survey on Information and Communication Technologies to test model predictions on user time allocation. In particular, we identify various individual socio-economic characteristics linked to time spent on social networks. Then, we use the user net income distribution (conditional on digital preferences) to evaluate conditions determining the platform’s choice of virtual currency design.
    Keywords: Private virtual currencies, social networks, retail payments
    JEL: E42 E5 G23 L5 L82 L86
    Date: 2019–10
  75. By: Gilbert V. Nartea (University of Canterbury); Hengyu Bai; Ji Wu
    Abstract: Motivated by recent studies documenting an equity premium associated with economic policy uncertainty (EPU), we test the hypothesis that the EPU premium is stronger (weaker) following periods of low (high) investor sentiment. We estimate stock sensitivity to an economic policy uncertainty (EPU) index and show that stocks in the Australian equities market in the highest uncertainty beta tertile underperform stocks in the lowest tertile, similar to US stocks. However, we find that this negative uncertainty premium remains significant only following periods of low investor sentiment as it disappears following periods of high sentiment. Our results complement the US evidence in that uncertainty averse investors are willing to pay high prices for stocks with positive uncertainty beta and require extra compensation to hold stocks with negative beta, but only in low sentiment periods. These results are consistent with strong (weak) intertemporal hedging demand for positive EPU beta stocks in low (high) sentiment periods. It is also consistent with limited (full) participation of pessimistic investors and investors with high aversion to uncertainty in low (high) sentiment periods. Our results suggest that betting against EPU as a trading strategy would be relatively more profitable when executed during low sentiment periods.
    Keywords: Economic policy uncertainty, Investor sentiment, Cross-sectional stock returns, Australian stock market
    JEL: G11 G12 C13 E20
    Date: 2019–11–01
  76. By: Jose Manuel Rueda-Cantuche (European Commission – JRC); Robert Marschinski (European Commission – JRC); Nuno Sousa (European Commission - TRADE)
    Abstract: The present report contributes to the European Commission’s aim to gather comprehensive, reliable and comparable information to support evidence-based policymaking. The promotion of deeper commercial ties across the Atlantic is key in the European Commission’s strategy to create the conditions for a more dynamic and innovative European Union (EU) economy. This is why the 2015 Communication “Trade for all: Towards a more responsible trade and investment policy†points to the conclusion of the Transatlantic Trade and Investment Agreement as a priority for the EU trade policy. Against this background this reports focuses on the contribution of transatlantic trade to the creation of job opportunities in Europe. For this it offers an ample set of indicators related to the quantification of the employment supported by EU exports to the United States (US). This work builds on the report “EU Export to the World: Effects on Employment and Income†that was published in June 2015 by the European Commission's Joint Research Centre (JRC) and Directorate General for Trade. It is grounded on the same methodology and on the same World Input-Output Database (WIOD) database.
    Keywords: Employment, international trade, exports, European Union
    JEL: C67 F14 F15 F16 D33 E01 E24
    Date: 2019–10
  77. By: Nadav Ben Zeev (BGU)
    Keywords: Sign-dependency of impulse responses, Local projections, Second-order specification, Dichotomous specification
    JEL: E32
    Date: 2019
  78. By: International Monetary Fund
    Abstract: Russia was one of the first countries (and first G20 country) to volunteer to pilot the IMF’s new Fiscal Transparency Evaluation (FTE). The evaluation was conducted in October 2013 on the basis of a draft version of the IMF’s revised Fiscal Transparency Code released for consultation in July 2013. The evaluation report was finalized following comments from the authorities and internal reviews and published in May 2014. In light of feedback from consultation and experience from the pilot FTEs, the Fiscal Transparency Code (“the Code”) was further refined, approved by the IMF Executive Board, and published in June 2014.1 As part of the IMF Article IV surveillance mission in May 2019, Russia’s progress in improving fiscal transparency and responding the recommendations over the past five years was evaluated. This report provides a summary of the changes to Russia’s fiscal transparency practices since 2014 and makes recommendations for further improvements.
    Date: 2019–10–30
  79. By: de Roure, Calebe (Reserve Bank of Australia); McLaren, Nick (Bank of England)
    Abstract: We investigate how counterparties’ characteristics, and the collateral they use, interact with their demand for liquidity in the Bank of England’s (BoE) operations. Between 2010 and 2016 there was regular usage of two BoE facilities: Indexed Long-Term Repos (ILTR) and the Funding for Lending Scheme (FLS). Using BoE proprietary data, we show that participation in ILTR is not skewed towards riskier counterparties, and is instead consistent with safe counterparties using the facilities to meet their liquidity needs. Collateral assets used for FLS are less liquid, since almost all assets are loan portfolios. Riskier and larger institutions are more likely to pre-position collateral in the FLS, but these counterparties do not subsequently draw upon FLS more than others do. Overall, our study points to no systemic misincentives; rather banks react to incentives in the manner intended by the policy objectives. Our results support the view that the central bank can provide market liquidity without absorbing undue risks onto its balance sheet.
    Keywords: Money demand; collateral assets; counterparties
    JEL: E41 E58 G21 G28
    Date: 2019–09–27
  80. By: Sven Schreiber
    Abstract: As applied cointegration analysis faces the challenge that (a) potentially relevant variables are unobservable and (b) it is uncertain which covariates are relevant, partial systems are often used and potential (stationary) covariates are ignored. Recently it has been argued that a nominally significant cointegration outcome using the bootstrapped rank test (Cavaliere, Rahbek, and Taylor, 2012) in a bivariate setting might be due to test size distortions when a larger data-generating process (DGP) with covariates is assumed. This study reviews the issue systematically and generally finds noticeable but only mild size distortions, even when the specified DGP includes a large borderline stationary root. The previously found drastic test size problems in an application of a long-run Phillips curve (inflation and unemployment in the euro area) appear to hinge on the particular construction of a time series for the output gap as a covariate. We conclude that the problems of the bootstrapped rank test are not severe and that it is still to be recommended for applied research.
    Keywords: bootstrap, cointegration rank test, empirical size
    JEL: C32 C15 E31
    Date: 2019
  81. By: Huang, Yi; Pagano, Marco; Panizza, Ugo
    Abstract: In China, between 2006 and 2013, local public debt crowded out the investment of private firms by tightening their funding constraints, while leaving state-owned firms' investment unaffected. We establish this result using a purpose-built dataset for Chinese local public debt. Private firms invest less in cities with more public debt, the reduction in investment being larger for firms located farther from banks in other cities or more dependent on external funding. Moreover, in cities where public debt is high, private firms' investment is more sensitive to internal cash flow, also when cash-flow sensitivity is estimated jointly with the probability of being credit-constrained.
    Keywords: investment,local public debt,crowding out,credit constraints,China
    JEL: E22 H63 H74 L60 O16
    Date: 2019
  82. By: Consuelo R. Nava (Dipartimento di Economia e Scienze Politiche, Università della Valle d'Aosta - Dipartimento di Politica Economica, DISCE, Università Cattolica del Sacro Cuore); Antonio Pesce (Dipartimento di Politica Economica, DISCE, Università Cattolica del Sacro Cuore); Maria Grazia Zoia (Dipartimento di Politica Economica, DISCE, Università Cattolica del Sacro Cuore)
    Abstract: Price indexes in time and space is a most relevant topic in statistical analysis from both the methodological and the application side. In this paper a price index providing a novel and effective solution to price indexes over several periods and among several countries, that is in both a multi-period and a multilateral framework, is devised. The reference basket of the devised index is the union of the intersections of the baskets of all periods/countries in pairs. As such, it provides a broader coverage than usual indexes. Index closed-form expressions and updating formulas are provided and properties investigated. Last, applications with real and simulated data provide evidence of the performance of the index at stake.
    Keywords: multi-period price index, multilateral price index, stochastic approach, updating process, OLS
    JEL: C43 E31 C01
    Date: 2019–10
  83. By: Matteo Luciani; Riccardo Trezzi
    Abstract: The goal of this note is to provide an assessment of two of the most commonly used indicators of core inflation: the PCE price index excluding food and energy (an exclusion index), and the Dallas Fed trimmed mean PCE price index (a central-tendency statistical measure).
    Date: 2019–08–02
  84. By: Popov, Vladimir
    Abstract: All centrally planned economies suffered from over-investment. Due to low capital productivity, reasonable growth rates in output could be maintained only with high investment/GDP ratios. Nevertheless, the sharp reduction in investment during transformational recession and its slow growth during subsequent recovery are viewed as negative phenomena, since transition economies offer numerous opportunities to increase output with relatively small targeted investment.This paper seeks to develop the hypothesis that the performance of aggregate investment during transition is a result of the impact of initial conditions, the external environment and policy-related factors. Strong evidence is found for the argument that the reduction of output and investment observed in most post-communist countries is associated with the supply-side recession, which in turn is linked mostly to the initial conditions, such as the level of development (GDP per capita) and pre-transition disproportions in industrial structure and trade patterns.However, declines in investment/GDP ratios, i.e more pronounced declines in investment as compared to GDP, may be only partially explained by the initial distortions in trade and in industrial structure. Equally important are such factors as the unfavourable external environment, as measured by changes in the current account balance, and macroeconomic policy developments, as measured by changes in government budget deficits. Predictably, progress in liberalisation does not have any impact on patterns of change in investment. The unexpected result is that investment changes do not seem to depend on rates of inflation.
    Keywords: International Development
  85. By: Bahaj, Saleem (Bank of England); Foulis, Angus (Bank of England); Pinter, Gabor (Bank of England); Surico, Paolo (London Business School)
    Abstract: This paper uses detailed firm-level data to show that monetary policy affects employment through housing collateral and corporate debt. Our research design exploits the fact that many small and medium-sized enterprises use their directors' homes as a key source of collateral for corporate loans, but directors typically live in a different region to their firm. This spatial separation of firms from their collateral allows us to distinguish the collateral channel from local demand effects. We find that younger and more levered firms with higher exposure to housing collateral fluctuations adjust employment the most following a change in monetary policy. The collateral channel explains a sizeable share of the aggregate employment response.
    Keywords: Firm heterogeneity; residential collateral; financial accelerator
    JEL: D22 E52 R30
    Date: 2019–09–20
  86. By: Phelan, Tom (Federal Reserve Bank of Cleveland)
    Abstract: How should a utilitarian government balance redistributive concerns with the need to provide incentives for business creation and investment? Should they tax business profits, the (risk-free) savings of owners, or some combination of both? To address this question, this paper presents a model in which the desirability of differential asset taxation emerges endogenously from the presence of agency frictions. I consider an environment in which entrepreneurs hire workers and rent capital to produce output subject to privately observed shocks and have the ability to both divert capital to private consumption and abscond with a fraction of assets. To provide incentives to invest, the wealth of an agent must depend on the performance of his/her firm, leading to ex-post inequality in all efficient allocations. I show that the efficient stationary distribution of wealth exhibits a thick right (Pareto) tail, with the degree of inequality monotonically increasing in the number of workers per entrepreneur. The efficient allocation is then implemented in a general equilibrium model using history-independent linear taxes on risk-free savings and (reported) business profits. The tax on entrepreneurs’ savings may be positive or negative, while the tax on business profits depends solely upon the degree of private information and is independent of all technological and preference parameters.
    Keywords: Optimal taxation; moral hazard; optimal contracting; entrepreneurship;
    JEL: D61 D63 E62
    Date: 2019–08–29
  87. By: Rothfelder, Mario (Tilburg University, Center For Economic Research); Boldea, Otilia (Tilburg University, Center For Economic Research)
    Abstract: We propose two new parametric tests for an unknown threshold in models with endogenous regressors. They are both based on unconventional 2SLS estimators that use additional information about the linearity of the first stage. This information leads to more accurate residuals and therefore tests with better size properties than the Wald GMM test in Caner and Hansen (2004), which we show exhibits severe size distortions in small samples pertinent to empirical applications. We prove the bootstrap validity of our tests and evaluate their empirical relevance by revisiting the question whether government spending multipliers are larger in recessions. As Ramey and Zubairy (2018), we cannot rule out that they are the same in recessions or expansions.
    Keywords: 2SLS; GMM; threshold; bootstrap; government spending
    JEL: C12 C13 E0
    Date: 2019
  88. By: Michael T. Kiley
    Abstract: Real interest rates have been persistently below historical norms over the past decade, leading economists and policymakers to view the equilibrium real interest rate as likely to be low for some time. Various definitions and approaches to estimating the equilibrium real interest rate are examined, including approaches based on the term-structure of interest rates and small macroeconomic models. The individual-country approaches common in the literature are extended to allow for global trend and cyclical factors. The analysis finds that global factors dominate the downward trend in the equilibrium interest rate across 13 advanced economies. A corollary of this finding is that the U.S. equilibrium rate may be substantially lower than estimated in U.S.-only studies. The analysis also highlights how the common global trend confounds empirical assessments of the determinants of movements in the equilibrium rate and the need to better integrate term-structure and macroeconomic approaches.
    Keywords: Global Factors ; Natural Rate ; World Interest Rate
    Date: 2019–11
  89. By: Philippe Burger (Pro Vice-Chancellor: Poverty: Inequality and Economic Development, University of the Free State); Estian Calitz (Professor Emeritus, Department of Economics, Stellenbosch University)
    Abstract: Following years of fast-rising public debt levels and low economic growth, how can the South African government re-establish fiscal sustainability? To assess the sustainability of South African fiscal policy, we use Markov-Switching VARs to estimate fiscal reaction functions. The fiscal variables considered are the primary balance, total non-interest expenditure, total expenditure and total revenue. The MS-VAR also considers the impact of fiscal policy on economic growth. We subsequently consider what size of primary balance adjustment is required to stabilise the public debt/GDP ratio, followed by an assessment of the various revenue and expenditure adjustment options open to government to achieve the required primary balance adjustment. We find little scope to increase revenue, and that government’s salary bill and goods-and-services budget should carry the load of the adjustment. In addition, state-owned enterprises (SOEs) should be restructured urgently to arrest the fiscal risk SOE debts and guarantees hold for government finances.
    Keywords: Public debt; budget deficit; primary balance; economic growth; government expenditure; tax revenue
    JEL: E62 E63 H62 H63
    Date: 2019
  90. By: Kasper Joergensen; Andrew C. Meldrum
    Abstract: To what extent does the persistent relatively low level of the federal funds rate reflect a decline in its long-run equilibrium? In this Note, we examine how views have evolved on that question among professional forecasters, Federal Open Market Committee (FOMC) participants, and investors in bond markets.
    Date: 2019–10–09
  91. By: Williams, John C. (Federal Reserve Bank of New York)
    Abstract: Remarks at 2019 Asia Economic Policy Conference, Federal Reserve Bank of San Francisco, San Francisco, California.
    Keywords: slowing global growth; geopolitical tensions; r-star; data dependent; monetary policy; demographics; productivity growth; global economy
    Date: 2019–11–14
  92. By: Peter Skott (University of Massachusetts - Amherst)
    Abstract: Aggregate demand is important, both in the short and the long run, but a basic distinction must be made between dual and mature economies. Mature economies may suffer from a structural aggregate problem ('secular stagnation'): full-employment growth may be impossible in the absence of sustained fiscal stimulus. Dual economies with high levels of open or hidden unemployment, by contrast, do not face long-run structural aggregate demand problems. They require public investment in key areas, including education and infrastructure, but the key problems concern the composition of demand and the need to expand the modern sector. These economies face structural transformation problems.
    Date: 2019
  93. By: Sebastian Gechert; Thomas Havranek; Zuzana Irsova; Dominika Kolcunova
    Abstract: We show that the large elasticity of substitution between capital and labor estimated in the literature on average, 0.9, can be explained by three factors: publication bias, use of aggregated data, and omission of the first-order condition for capital. The mean elasticity conditional on the absence of publication bias, disaggregated data, and inclusion of information from the first-order condition for capital is 0.3. To obtain this result, we collect 3,186 estimates of the elasticity reported in 121 studies, codify 71 variables that reflect the context in which researchers produce their estimates, and address model uncertainty by Bayesian and frequentist model averaging. We employ nonlinear techniques to correct for publication bias, which is responsible for at least half of the overall reduction in the mean elasticity from 0.9 to 0.3. The weight of evidence accumulated in the empirical literature emphatically rejects the Cobb-Douglas specification.
    Keywords: Elasticity of substitution, capital, labor, publication bias, model uncertainty
    JEL: D24 E23 O14
    Date: 2019
  94. By: Dario Caldara; Matteo Iacoviello; Patrick Molligo; Andrea Prestipino; Andrea Raffo
    Abstract: In this note, we first document the recent rise in trade policy uncertainty, henceforth TPU, by using two complementary measures based on text-search analysis: one focusing on newspapers articles, and another constructed from transcripts of firms' earning calls. We then use econometric evidence on the joint movements in aggregate TPU, industrial production, and other macroeconomic variables in order to provide an estimate of the effects of the recent spikes in TPU on U.S. GDP, as well as GDP in advanced foreign economies (AFEs) and emerging market economies (EMEs).
    Date: 2019–09–04
  95. By: International Monetary Fund
    Abstract: The economic recovery seems to be taking hold. Inflation stood at 0.6 percent at end-July 2019. The fiscal consolidation was sustained through the first half of 2019; the overall fiscal deficit is estimated at 0.2 percent of GDP at end-June 2019. Reforms are progressing on revenue and customs administration as well as public expenditure management. While the authorities are committed to privatize the two public banks, the tenders for both banks were launched with a delay in September 2019 (prior action). Socio-political tensions have abated but uncertainty remains high, particularly considering the presidential election scheduled for 2020.
    Date: 2019–10–31
  96. By: Brainard, Lael (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2019–11–08
  97. By: Guillaume Gaulier (Banque de France, Centre de recherche de la Banque de France - Banque de France); Aude Sztulman (DIAL - Développement, institutions et analyses de long terme, LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine); Deniz Ünal (CES - Centre d'économie de la Sorbonne - CNRS - Centre National de la Recherche Scientifique - UP1 - Université Panthéon-Sorbonne, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique)
    Abstract: In this article, we examine the dynamics of Global Value Chains (GVCs) since the 2000s. Did itshow a marked expansion up to the Great Recession and did GVCs begin a downturn in the2010s? To better understand the evolution of GVCs at the world level, we use very detailed tradedata for 2000 to 2016, which distinguishes different production stages along the GVC. Inparticular, among intermediate goods, we focus on Parts and Components (P&C) rather thansemi-finished products since the manufacture of P&C corresponds to activities more embedded inGVCs. We control, also, for the global business cycle and price effects using an originalproduction stages deflator based on detailed bilateral trade unit-values. This new GVC indicatorshows moderate growth over the study period with no trend reversal.
    Keywords: global value chains,parts and components – P&C,trade in volume,electronics
    Date: 2019–10–14
  98. By: Joseph Halevi (University College of Turin)
    Abstract: This essay deals with the EMS experience and its failure, with the Maastricht Treaty, and with the interregnum leading to the formation of the EMU in 1999. The paper highlights the position of German authorities, showing that they were quite lucid about the fundamental weaknesses inherent in a process that separated monetary from fiscal policies by giving priority to the centralization of the former. Instead of repeating the well known critiques leveled against the EMU '96 for which readers are referred to the unsurpassed treatment by Stiglitz, the essay highlights the splintering of Europe in the way in which it has unfolded during the 1990s and in the first decade of the present millennium. In particular the early economic and political origins of the terminal crisis of Italy are located between the late 1980s and the 1990s. France is shown to belong increasingly to the so-called European periphery by virtue of a weakening industrial structure and persistent balance of payments deficits. The paper argues that France regains its central role by political means and through its weight as an active nuclear military power centered on maintaining its imperial interests and posture especially in Africa. The first decade of the present millennium is portrayed as the period in which a distinct German economic area had been formed in the midst of Europe with a strong drive to the east with an increasingly powerful gravitational pull towards the People '92s Republic of China.
    Keywords: European Monetary System, Common Market, France, Germany, Italy, Netherlands, currency depreciation, European Monetary Union
    JEL: E02 F02 F5 N14 N24
    Date: 2019–09
  99. By: Fraccaroli, Nicolò (Bank of England and University of Rome Tor Vergata)
    Abstract: Scholars have long believed the governance of banking supervision to affect financial stability. Although the literature has identified at length the pros and cons of having either a central bank or a separate agency responsible for microprudential banking supervision, the advantages of having this task shared by both institutions (shared supervision) have received considerably less attention. This paper fills this void by comparing the impact of three supervisory governance models — supervision by the central bank, by an agency or by both of them — on bank non‑performing loans. Using a new database on supervisory governance in 116 countries from 1970 to 2016, it finds that supervisory governance per se does not significantly affect non‑performing loans. However, it also finds that, where the risk of capture is high, shared supervision is associated with a significant reduction in non‑performing loans. This is in line with the supervisory capture theory, whereby it is more costly to capture two supervisors rather than one. Overall, these results provide new evidence in support of the relevance of supervisory governance in hampering supervisory capture from the banking sector.
    Keywords: Banking supervision; supervisory governance; supervisory capture; non-performing loans
    JEL: D73 E58 G18 G38 P16
    Date: 2019–09–06
  100. By: Kamil Kivanc Karaman; Sevket Pamuk; Secil Yildirim
    Date: 2018–05
  101. By: Clarida, Richard H. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2019–11–14
  102. By: Luke Van Cleve; Jean-Philippe Laforte; Andrea Stella
    Abstract: The purpose of this note is to highlight the recent availability of an expanded set of historical data of the staff's estimates of the real-time output gap at the Real-Time Data Research Center of the Federal Reserve Bank of Philadelphia.
    Date: 2019–10–15
  103. By: KAPSARC, King Abdullah Petroleum Studies and Research Center (King Abdullah Petroleum Studies and Research Center)
    Abstract: Oil-dependent economies are vulnerable to macroeconomic fiscal instability stemming from high oil price volatility in the short – run and the exhaustibility of oil in the long – run. The workshop discussed the main challenges confronting oil-dependent economies that could stop them from achieving their long-term economic objectives.
    Keywords: Economic Diversification, National Wealth Accounting, Resource Curse, Resource rich countires, Sovereign wealth funds, Stabilization funds
    Date: 2019–10–16
  104. By: Garth Baughman; Francesca Carapella
    Abstract: This note describes a framework for implementing monetary policy, dubbed a voluntary reserve targets framework, that could reintroduce significant margins in the federal funds market, reviving the market no matter the aggregate quantity of reserves, while simultaneously limiting the volatility of rates.
    Date: 2019–08–26
  105. By: Amadxarif, Zahid (Bank of England); Brookes, James (Bank of England); Garbarino, Nicola (Bank of England); Patel, Rajan (Bank of England); Walczak, Eryk (Bank of England and University College London)
    Abstract: The banking reforms that followed the financial crisis of 2007–08 led to an increase in UK banking regulation from almost 400,000 to over 720,000 words, and to concerns about their complexity. We define complexity in terms of the difficulty of processing linguistic units, both in isolation and within a broader context, and use natural language processing and network analysis to calculate complexity measures on a novel dataset that covers the near universe of prudential regulation for banks in the United Kingdom before (2007) and after (2017) the reforms. Linguistic, ie textual and network, complexity in banking regulation is concentrated in a relatively small number of provisions, and the post-crisis reforms have accentuated this feature. In particular, the comprehension of provisions within a tightly connected ‘core’ requires following long chains of cross-references.
    Keywords: Complexity; CRR; natural language processing; networks; regulation; supervision
    JEL: D85 E58 G18 G28 K23
    Date: 2019–10–24
  106. By: Paola Rossi (Banca d'Italia); Diego Scalise
    Abstract: In this paper we study the relationship between financial development and economic growth across European regions, exploiting the within-country variability of our data. First, we collect a number of indicators to capture the financial structure for each of the 110 EU27 regions. Then, the multiplicity of indicators (the number of bank branches, the presence of bank headquarters, the value added by the financial sector and the presence of a stock exchange) is decreased through a principal component analysis to show summary measures capturing the capillarity of bank branches and the agglomeration and complexity of the financial industry at large. In order to establish a causal nexus, we control for country fixed effects and we instrument financial variables. We use two instruments derived from the historical religious affiliations across European regions: the presence of Protestant communities in the 16th century (the Peace of Augsburg in 1555 allocated each region within the Holy Roman Empire to a different faith according the Prince’s religion) and the presence of Jewish communities in the 18th century. Our estimates point to a positive nexus between financial development and economic growth, showing that what matters most is the presence of a complex and diversified financial sector rather than the capillarity of bank branches.
    Keywords: growth, financial development, European Regions
    JEL: O16 E44 R11
    Date: 2019–11
  107. By: Marcel A. Priebsch
    Abstract: Using information from financial market quotes and surveys, this article analyzes the evolution from January to July 2019 of probabilities attached to different policy rate outcomes using "probability simplex" diagrams.
    Date: 2019–09–20
  108. By: Gurrola-Perez, Pedro (Bank of England); He, Jieshuang (The Chinese University of Hong Kong); Harper, Gary (Bank of England)
    Abstract: In the context of securities settlement, a trade is said to fail if on the settlement date either the seller does not deliver the securities or the buyer does not deliver funds. Settlement fails may have consequences for the parties directly involved and for the system as a whole. Chains of fails, for example, could lead to gridlock situations and large volume of fails can affect the liquidity and smooth functioning of financial markets. In this paper, we consider UK government bonds (gilts) and UK equities settlement data to examine the determinants of settlement fails and to explore the network characteristics of chains of settlement fails with the aim of identifying an optimal strategy to conduct a buy‑in process that could resolve cascades of fails.
    Keywords: Settlement; post-trade process; settlement discipline; cascade effects; buy-in
    JEL: E42 G23
    Date: 2019–09–06

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