nep-mac New Economics Papers
on Macroeconomics
Issue of 2019‒12‒09
fifty-five papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Search Complementarities, Aggregate Fluctuations, and Fiscal Policy By Jesús Fernández-Villaverde; Federico Mandelman; Yang Yu; Francesco Zanetti
  3. Reasons for the Demise of Interest: Savings Glut and Secular Stagnation or Central Bank Policy? By Thomas Mayer; Gunther Schnabl
  4. Is government budget constraint binding? By Kim, Minseong
  5. Real and Nominal Effects of Monetary Shocks under Time-Varying Disagreement By Vania Esady
  6. Predicting interest rates in real-time By Alberto Caruso; Laura Coroneo
  7. Public and Private Pension Systems and Macroeconomic Volatility in OECD Countries By Mario Holzner; Stefan Jestl; David Pichler
  8. Spread the Word: International Spillovers from Central Bank Communication By Hanna Armelius; Christoph Bertsch; Isaiah Hull; Xin Zhang
  9. Recent improvements to the public finance block of the OECD’s long-term global model By Yvan Guillemette
  10. News Uncertainty in Brexit U.K By Renato Faccini; Edoardo Palombo
  11. Quantitative easing and exuberance in stock markets: Evidence from the euro area By Tom Hudepohl; Ryan van Lamoen; Nander de Vette
  12. Inflation Targeting Flexibility: The CNB's Reaction Function under Scrutiny By Jan Filacek; Ivan Sutoris
  13. Exchange Rate Risk and Business Cycles By Lloyd, S. P.; Marin, E. A.
  14. Long-term business relationships, bargaining and monetary policy By Mirko Abbritti; Asier Aguilera-Bravo; TommasoTrani
  15. Household Income, Portfolio Choice and Heterogeneous Consumption Responses to Monetary Policy Shocks By Fumitaka Nakamura
  16. A Re-Evaluation of the Choice of an Inflation Target in the Wake of the Global Financial Crisis By Richard T. Froyen; Alfred V. Guender
  17. Does Income Increase the Well–Being of Employees?: Evidence from Europe By Dominika Spolcova; Barbara Pertold-Gebicka
  18. Wage Inequality as a Source of Endogenous Macroeconomic Fluctuations By Jaylson Jair da Silveira; Gilberto Tadeu Lima
  19. Capital Flow Volatility: The Effects of Financial Development and Global Financial Conditions By Shiyi Wang
  20. The Czech Exchange Rate Floor: Depreciation without Inflation? By Jaromír Baxa; Tomáš Šestořád
  21. Does Central Bank Communication Signal Future Monetary Policy? The Case of the ECB By Hamza Bennani; Nicolas Fanta; Pavel Gertler; Roman Horvath
  22. Beveridgean Unemployment Gap By Pascal Michaillat; Emmanuel Saez
  23. Taming the gobal financial cycle: Central banks and the sterilization of capital flows in the first era of globalization By Bazot, Guillaume; Monnet, Eric; Morys, Matthias
  24. Populism, Political Risk and the Economy: Lessons from Italy By Pierluigi Balduzzi; Emanuele Brancati; Marco Brianti; Fabio Schiantarelli
  25. Modeling UK Mortgage Demand Using Online Searches By Jaroslav Pavlicek; Ladislav Kristoufek
  26. Risk-sensitive preferences and age-dependent risk aversion By Phitawat Poonpolkul
  27. The global financial cycle and us monetary policy in an interconnected world By Stéphane Dées; Alessandro Galesi
  28. The nexus of trade, employment and economic growth: evidence from Palestine By Abugamea, Gaber
  29. Redeemable Platform Currencies By Yang You; Kenneth S. Rogoff
  30. Monopolistic Competition and Nominal Stickiness in Generalized New Keynesian Model By Rui WANG
  31. The Effect of U.S. Stress Tests on Monetary Policy Spillovers to Emerging Markets By Emily Liu; Friederike Niepmann; Tim Schmidt-Eisenlohr
  32. Risk, Asset Pricing and Monetary Policy Transmission in Europe: Evidence from a Threshold-VAR approach By Joerg Schmidt
  33. The Knightian Uncertainty Hypothesis: Unforeseeable Change and Muth`s Consistency Constraint in Modeling Aggregate Outcomes By Roman Frydman; Soren Johansen; Anders Rahbek; Morten Tabor
  34. Where Do Profits and Jobs Come From? Employment and Distribution in the US Economy By Lance Taylor; Ozlem Omer
  35. What Do Survey Data Tell Us About US Businesses? By Anmol Bhandari; Serdar Birinci; Ellen McGrattan; Kurt See
  36. Czech BEERs with PEERs: Tackling the Uncertainty By Jaromir Baxa; Pavel Jancovic
  37. The Fiscal and Current Account Imbalances: An Empirical analysis of the Twin Deficits Hypothesis in Bangladesh By Murshed, Muntasir; Nijhum, Nawrin Khan
  38. Prolonged Low Interest Rates and Banking Stability By Kosuke Aoki; Ko Munakata; Nao Sudo
  39. The Effect of Higher Capital Requirements on Bank Lending: The Capital Surplus Matters By Dominika Kolcunová; Simona Malovaná
  40. Are Your Labor Shares Set in Beijing? The View through the Lens of Global Value Chains By Ariell Reshef; Gianluca Santoni
  41. Key Determinants of Net Interest Margin of EU Banks in the Zero Lower Bound of Interest Rates By Petr Hanzlík; Petr Teplý
  42. Monetary Unions and National Welfare By Cem Gorgun
  43. Public payroll expansion in Iraq: causes and consequences By Al-Mawlawi, Ali
  44. The Comparative African Regional Economics of Globalization in Financial Allocation Efficiency: Pre-Crisis Era Revisited By Simplice A. Asongu; Joseph Nnanna; Vanessa S. Tchamyou
  45. The Comparative African Regional Economics of Globalization in Financial Allocation Efficiency: Pre-Crisis Era Revisited By Simplice A. Asongu; Joseph Nnanna; Vanessa S. Tchamyou
  46. Detecting anomalous payments networks: A dimensionality reduction approach By Carlos León
  47. The ordinary business of macroeconometric modeling: working on the Fed-MIT-Penn model (1964-1974) By Cherrier, Beatrice; Backhouse, Roger
  48. Fragmentasi International Finance dan Peningkatan Proteksionisme By Reza Anglingkusumo; Berry A. Harahap; Fitria I. Triswati; Pakasa Bary; Anggita Cinditya M. Kusuma; M. Bagus Arya
  49. Economic Consequences of Housing Speculation By Zhenyu Gao; Michael Sockin; Wei Xiong
  50. The negative binomial-inverse Gaussian regression model with an application to insurance ratemaking By Tzougas, G.; Hoon, W. L.; Lim, J. M.
  51. A Partial Equilibrium Analysis of Current US Monetary Policy with a Prediction By Middleton, Elliott III
  52. Análisis a la problemática de financiación de las PyMEs: una crítica al régimen de metas de inflación By Elias, Alberto Ezequiel; Graña Colella, Santiago; Ianni, Juan Martin; Mauro, Lucía Mercedes
  53. Market Participants’ Forecasts of Financial Variables – Can Survey Data Outperform the Random Walk? By Kladivko, Kamil; Österholm, Pär
  54. Multi-tier tax competition on Gasoline By Marie-Laure BREUILLÉ; Emmanuelle TAUGOURDEAU
  55. The diversity and causality of pension reform pathways: a fuzzy-set qualitative comparative analysis By Carrera, Leandro N.; Angelaki, Marina

  1. By: Jesús Fernández-Villaverde (University of Pennsylvania); Federico Mandelman (Federal Reserve Bank of Atlanta); Yang Yu (Shanghai University of Finance and Economics); Francesco Zanetti (University of Oxford (E-mail: francesco.zanetti@
    Abstract: We develop a quantitative business cycle model with search complementarities in the inter-firm matching process that entails a multiplicity of equilibria. An active static equilibrium with strong joint venture formation, large output, and low unemployment can coexist with a passive static equilibrium with low joint venture formation, low output, and high unemployment. Changes in fundamentals move the system between the two static equilibria, generating large and persistent business cycle fluctuations. The volatility of shocks is important for the selection and duration of each static equilibrium. Sufficiently adverse shocks in periods of low macroeconomic volatility trigger severe and protracted downturns. The magnitude of government intervention is critical to foster economic recovery in the passive static equilibrium, while it plays a limited role in the active static equilibrium.
    Keywords: Aggregate fluctuations, Strategic complementarities, Macroeconomic volatility, Government spending
    JEL: C63 C68 E32 E37 E44 G12
    Date: 2019–11
  2. By: Nur M. Adhi Purwanto (Bank Indonesia); Ina Nurmalia Kurniati (Bank Indonesia); Reni Indriani (Bank Indonesia)
    Abstract: Penelitian ini bertujuan untuk membangun model makrofinansial berbasis Dynamic Stochastic General Equilibrium (DSGE) yang digunakan untuk mempelajari transmisi kebijakan makroprudensial dan interaksinya dengan kebijakan moneter untuk mencapai stabilitas makroekonomi dan stabilitas sistem keuangan. Model dalam penelitian ini dibangun dengan asumsi bahwa small open economy dikalibrasi dengan menggunakan data Indonesia yang diambil pada periode mulai dari 2000Q3 sampai dengan 2107Q4. Instrumen kebijakan yang dimodelkan terdiri atas suku bunga kebijakan, LTV ratio, minimum CAR requirement, dan RIM. Hasil simulasi model menunjukkan bahwa instrumen kebijakan makroprudensial yang terdapat di dalam model dapat digunakan untuk meredam pertumbuhan kredit dan akan berdampak pada penurunan PDB (bersifat countercyclical). Hasil simulasi model juga menunjukkan bahwa penerapan bauran kebijakan moneter dan makroprudensial memiliki kinerja yang lebih baik dalam mencapai stabilitas makroekonomi dan sistem keuangan jika dibandingkan dengan implementasi kebijakan moneter dalam menghadapi technological shock.
    Keywords: DSGE, monetary policy, macroprudential policy
    JEL: E32 E44 E52 E58
    Date: 2018–11
  3. By: Thomas Mayer; Gunther Schnabl
    Abstract: In this paper we compare the Keynesian, neoclassical and Austrian explanations for low interest rates and sluggish growth. From a Keynesian and neoclassical perspective low interest rates are attributed to ageing societies, which save more for the future (global savings glut). Low growth is linked to slowing population growth and a declining marginal efficiency of investment as well as to declining fixed capital investment due to digitalization (secular stagnation). In contrast, from the perspective of Austrian business cycle theory, interest rates were step by step decreased by central banks to stimulate growth. This paralyzed investment and growth in the long term. We show that the ability of banks to extend credit ex nihilo and the need of time to produce capital invalidates the IS identity assumed in the Keynesian theory to hold permanently. Furthermore, we find no empirical evidence for the global savings glut and secular stagnation hypotheses. Instead, low growth can be explained by the emergence of quasi “soft budget constraints” as a result of low interest rates, which reduce the incentive for banks and enterprises to strive for efficiency.
    Keywords: Mises, Hayek, Keynes, Hansen, Summers, secular stagnation, aging societies, global savings glut, monetary policy, central banks, credit creation
    JEL: E12 E14 E32 E43
    Date: 2019
  4. By: Kim, Minseong
    Abstract: A common question against macroeconomics of public debts is: why should one think government budget constraint is binding when government, at least technically, can print out money to pay for debts. Out of compatible answers, we explore an answer that is not usually invoked. While in OLG models, government bonds can successfully exist as rational bubbles, concerns of time consistency leave trade-offs in exploiting breakdown of the economy-wise public debt transversality condition. Government budget constraint is one of most certain means to fight time consistency issues and ensure that market stability is achieved.
    Keywords: government budget constraint; transversality condition
    JEL: E13 E42 E52 E61 E62 E63
    Date: 2019–11–24
  5. By: Vania Esady
    Abstract: This paper investigates the heterogeneity of monetary policy transmission under time-varying disagreement regimes using a threshold VAR. Empirically, I establish that during times of high disagreement, prices respond more sluggishly in response to monetary shocks. These stickier prices cause a flatter Phillips curve, leading to the empirical result that monetary policy has stronger real (output) effects in high disagreement periods. I develop a tractable theoretical model that show rationally inattentive price-setters produce this result. The model also links disagreement and uncertainty – two fundamentally different concepts, and bridges the results of this paper to the literature on state-dependent monetary transmission. The main result highlights a role for improved central bank communications that reduce disagreement among economic agents, which lessens output falls when implementing disinflationary monetary policies.
    Keywords: time-varying disagreement, monetary policy, threshold VAR, rational inattention
    JEL: E32 E52 E58 D83
    Date: 2019
  6. By: Alberto Caruso; Laura Coroneo
    Abstract: We analyse the predictive ability of real-time macroeconomic information for the yield curve of interest rates. We specify a mixed-frequency macro-yields model in real-time that incorporates interest rate surveys and that treats macroeconomic factors as unobservable components. Results indicate that real-time macroeconomic information is helpful to predict interest rates, and that data revisions drive a superior predictive ability of revised macro data over real-time macro data. Moreover, we find that incorporating interest rate surveys in the model can significantly improve its predictive ability.
    Keywords: Government Bonds; Dynamic Factor Models; Real-time Forecasting; Mixed-frequencies.
    JEL: C33 C53 E43 E44 G12
    Date: 2019–11
  7. By: Mario Holzner (The Vienna Institute for International Economic Studies, wiiw); Stefan Jestl (The Vienna Institute for International Economic Studies, wiiw); David Pichler (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: This paper analyses the impact of public pension expenditures and pension funds’ assets as well as their benefits on economic volatility. To do so, we use panel data for 35 OECD countries for the period 1980-2018 and apply a set of state-of-the-art econometric estimators. Our results show weak evidence of a negative impact of public pension expenditures as well as weak evidence of a positive impact of pension funds’ benefits on volatility. Results were, however, found not to be very robust. In contrast, pension funds’ assets do not show any evidence of being associated with economic volatility. Unsystematic fiscal policy, banking crises and political (in)stability, however, are revealed to be somewhat more robust determinants of economic volatility.
    Keywords: Public pensions, private pensions, pension system, macroeconomic volatility, OECD
    JEL: H55 J32 E24 E32
    Date: 2019–12
  8. By: Hanna Armelius; Christoph Bertsch; Isaiah Hull; Xin Zhang
    Abstract: We construct a novel text dataset to measure the sentiment component of communications for 23 central banks over the 2002-2017 period. Our analysis yields three results. First, comovement in sentiment across central banks is not reducible to trade or financial flow exposures. Second, sentiment shocks generate cross-country spillovers in sentiment, policy rates, and macroeconomic variables; and the Fed appears to be a uniquely influential generator of such spillovers, even among prominent central banks. And third, geographic distance is a robust and economically significant determinant of comovement in central bank sentiment, while shared language and colonial ties have weaker predictive power.
    Keywords: communication, monetary policy, international policy transmission
    JEL: E52 E58 F42
    Date: 2019–12
  9. By: Yvan Guillemette
    Abstract: This paper documents recent extensions and revisions made to the model underlying the long-run global macroeconomic scenarios that are published every few years. First, a fiscal block is added for 11 countries that previously lacked one. Second, public pension expenditure projections are made endogenous to the projected ratio of retirees to workers and to a hypothesis on the future evolution of benefit ratios. Cross-country differences in projected public pension expenditure thus reflect many factors, including the speed of population ageing, the evolution of employment rates for older people, especially females, and rules regarding the evolution of statutory retirement ages. Third, revised public health expenditure projections introduce a higher income elasticity in middle-income than high-income countries and makes the excess of health care inflation over GDP inflation (Baumol effect) endogenous to the projected labour productivity growth rate. And fourth, the determination of long-term interest rates is revised to associate the fiscal risk premium to net, as opposed to gross, government debt, and make its size conditional on euro area membership, the quality of public governance and the occurrence of systemic banking crises, while allowing a flight-to-safety effect during such crises to lower bond yields in countries that are providers of global safe assets.
    Keywords: interest rates, long-term scenarios, public health expenditure, public pension expenditure
    JEL: E17 E43 H51 H55
    Date: 2019–12–04
  10. By: Renato Faccini (Centre for Macroeconomics (CFM); Danmarks Nationalbank; Queen Mary, University of London); Edoardo Palombo (Queen Mary, University of London)
    Abstract: After the Brexit referendum the behavior of the U.K. economy defied expectations, as it did notexhibit a V-shaped recession, but a slow decline in production. We address this puzzle through the lens of a setup with heterogeneous firms facing non-convex capital adjustment costs. We model the referendum as a news shock, with the time horizon and the content of the news being uncertain. Brexit uncertainty is informed by expectation data from the Decision Maker Panel, a novel survey of U.K. businesses, where each CFO provides probability distributions over the expected Brexit date and the long-run expected outcome of Brexit on firm-level sales, for different Brexit scenarios. We show that the long expected duration of the negotiations is key for the model to reproduce the post-referendum behavior of the U.K. economy. Intuitively, if the chances that uncertainty resolves in the short run are small, only relatively few firms find it worth to pay the inefficiency cost associated with an investment freeze. Concurrently, if the expected horizon of the news is longer, anticipation effects are smaller. The long-run effects of Brexit implied by U.K. business expectations are large, entailing losses of 4.8% and 7.7% of GDP for Soft and Hard Brexit, respectively. The transitional dynamics under policy uncertainty show that the referendum has produced significant economic damage, with a three-year cumulative loss of about 2% of GDP.
    Keywords: News shocks, Uncertainty, Firms heterogeneity, Long-run productivity, Survey-data
    JEL: E22 E32 E65
    Date: 2019–12
  11. By: Tom Hudepohl; Ryan van Lamoen; Nander de Vette
    Abstract: In response to a prolonged period of low inflation, the European Central Bank (ECB) introduced Quantitative Easing (QE) in an attempt to steer inflation to its target of below, but close to, 2% in the medium term. This paper examines whether QE contributes to exuberance in euro area stock markets by using recent advances in bubble detection techniques (the GSADF-test). We do so by linking price developments in 10 euro area stock markets to a series of country specific macro fundamentals and QE. The results indicate that periods of QE coincide with exuberant investor behaviour, even after controlling for improving macro fundamentals.
    Keywords: exuberance; asset price bubbles; unconventional monetary policy; quantitative easing
    JEL: G12 G15 E52 E58
    Date: 2019–12
  12. By: Jan Filacek; Ivan Sutoris
    Abstract: This note deals with the issue of inflation targeting flexibility from the perspective of the Czech National Bank and other relevant central banks. We discuss possible ways of increasing the flexibility of the CNB's monetary policy, namely narrowing the targeted and communicated measure of inflation, prolonging the policy horizon, lowering the aggressivity of the rule to deviations of expected inflation from the target, increasing the smoothing of interest rates and responding to real economic developments. Our simulations show that these adjustments in the CNB's reaction function would slightly improve the stability of real output, while at the same time leading to large costs in terms of less stable and less anchored inflation.
    Keywords: Inflation targeting flexibility, monetary policy rules, optimal reaction function
    JEL: C32 E37 E47
    Date: 2019–11
  13. By: Lloyd, S. P.; Marin, E. A.
    Abstract: We show that currencies with a steeper yield curve tend to depreciate at business cycle horizons, in violation of uncovered interest parity (UIP), but the yield curve adds no explanatory power over and above interest differentials in explaining the exchange rate at longer horizons. We argue that exchange rate risk premia reallocate returns intertemporally to investors who value them relatively highly, reflecting transitory innovations to their stochastic discount factor consistent with business cycle risk. Using holding period returns, we identify a tent-shape relationship, across horizons, between dollar-bond excess returns for long maturity bonds and the relative slope. In addition, we find that short-horizon UIP deviations switch sign following yield curve inversions, consistent with the interpretation of inversions as indicators of changes in growth and inflation expectations. We show that accounting for liquidity yields does not alter our results, but rather contributes to explaining cross-sectional differences across currencies, consistent with permanent innovations to agents' stochastic discount factor.
    Keywords: Exchange rates, Risk premia, Uncovered interest parity, Yield curves
    JEL: E43 F31
    Date: 2019–12–03
  14. By: Mirko Abbritti (University of Navarra); Asier Aguilera-Bravo (Public University of Navarra and INARBE); TommasoTrani (University of Navarra)
    Abstract: A growing empirical literature documents the importance of long-term relationships and bargaining for price rigidity and firms' dynamics. This paper introduces long-term business-to-business (B2B) relationships and price bargaining into a standard monetary DSGE model. The model is based on two assumptions: first, both wholesale and retail producers need to spend resources to form new business relationships. Second, once a B2B relationship is formed, the price is set in a bilateral bargaining between firms. The model provides a rigorous framework to study the effect of long-term business relationships and bargaining on monetary policy and business cycle dynamics. It shows that, for a standard calibration of the product market, these relationships reduce both the allocative role of intermediate prices and the real effects of monetary policy shocks. We also find that the model does a good job in replicating the second moments and cross-correlations of the data, and that it improves over the benchmark New Keynesian model in explaining some of them.
    Keywords: Monetary Policy, PriceBargaining, ProductMarketSearch, B2B
    JEL: E52 E3 D4 L11
    Date: 2019–10–28
  15. By: Fumitaka Nakamura (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: In order to analyze the transmission mechanism of monetary policy, a recent body of literature combines nominal rigidities with heterogeneous agent models. The key property of these models is that the income level of agents is heterogeneous. This paper quantifies the roles played by income level heterogeneity in the response of consumption to monetary policy shocks using U.S. household data. We show empirically that the response of consumption to expansionary monetary policy shocks is larger for high income households than low income households. This result cannot be explained by standard Aiyagari-Bewley-Huggett type heterogeneous agent models, where low income households have a higher marginal propensity to consume due to borrowing constraints. Empirical facts related to household characteristics suggest two potential channels: the presence of illiquid assets and heterogeneity in government transfers. Motivated by these empirical findings, we develop a model that incorporates illiquid assets and heterogeneity in government transfers. Simulations based on the model indicate that the presence of illiquid assets is essential for explaining the heterogeneous consumption response.
    Keywords: Consumption, Household income, Monetary policy, Liquidity
    JEL: E21 E52
    Date: 2019–11
  16. By: Richard T. Froyen; Alfred V. Guender (University of Canterbury)
    Abstract: Through an appropriate choice of inflation objective – a real-exchange-rate-adjusted (REX) inflation target - the central bank can limit fluctuations in real economic activity which have become a cause of great concern in recent years in many small open economies. REX inflation targeting dominates CPI targeting from the standpoint of output gap stabilization. CPI inflation targeting dominates REX inflation targeting from the standpoint of stabilizing inflation, nominal interest rates and real exchange rates. These results help inform ongoing discussions of possible alternatives for the existing flexible inflation targeting framework.
    Keywords: CPI, REX, Domestic Inflation Targets, Broad vs. Narrow Mandate
    JEL: E3 E5 F3
    Date: 2019–11–01
  17. By: Dominika Spolcova (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic); Barbara Pertold-Gebicka (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic)
    Abstract: This paper addresses the well-known question of what drives people’s well–being using two alternative measures of subjective well-being and comparing two econometric approaches, thus providing results robust to the recent critique by Bond and Lang (2019). The classical OLS and ordered probit analysis of self-reported life satisfaction of employees from 32 European countries show results consistent with the previous literature. Analysis of the happiness index — a measure of hedonic well-being defined as frequency of experiencing specific emotions — provides similar results, with some exceptions. Most importantly, we show that the observed income effect on subjective well–being is much weaker for the happiness index than for life satisfaction, especially when controlling for satisfaction of basic needs. Quantile regression analysis brings additional insights: (1) median estimates are equivalent to mean estimates obtained by OLS (2) the correlates of subjective well–being are not stable over the whole distribution with most of the coefficients being the largest in their absolute value at low quantiles (3) the relationship between income and the happiness index is weak and stable over the whole distribution when basic needs satisfaction variables are included in the model.
    Keywords: Subjective well–being, income, social relationships, happiness index, life satisfaction
    JEL: E42 E52 E58
    Date: 2019–08
  18. By: Jaylson Jair da Silveira; Gilberto Tadeu Lima
    Abstract: There is extensive evidence on both the endogeneity of labor productivity to the wage remuneration and the persistence of wage inequality across observationally similar workers and firms. The paper builds an evolutionary micro-dynamic model having these two features of the labor market as interconnected, and explores the ensuing implications for the macro-dynamics of the distribution of income, capacity utilization and output growth. Firms periodically revise (and possibly switch) their choice of remunerating workers with a higher or lower wage, and the resulting labor productivity differential across workers is endogenous to the distribution of wage remuneration strategies across firms. The long run features wage inequality as a persistent outcome. Moreover, plausibly low levels of wage inequality suffice to cause the distribution of wage remuneration strategies across firms, and therefore the distribution of income, capacity utilization and output growth, all to experience self-sustaining cyclical fluctuations.
    Keywords: Wage inequality; evolutionary micro-dynamics; distribution of income; capacity utilization; output growth
    JEL: J31 E25 E32 O41 C62
    Date: 2019–11–29
  19. By: Shiyi Wang
    Abstract: Volatile international capital flows increase the risk of financial crises and reduce economic growth. The theoretical literature predicts that financial globalization will make capital flows more volatile. Importantly, the deepening of financial globalization has led to the emergence of the global financial cycle, which makes taming capital flows even more challenging. It is important to measure capital flow volatility and examine what factors affect it. In this paper, I estimate the time-varying capital flow volatility of 39 countries, including both advanced and emerging economies since 2000, and find that bank flows are the most volatile while foreign direct investment flows are the most stable. Panel regressions show that higher local financial development and more volatile and riskier global financial conditions increase capital flow volatility. I also find that there exists a threshold effect: financial volatility and risk in the global financial center are transmitted more strongly to countries that are more financially developed. The impulse responses of state-dependent local projections confirm the threshold effect and indicate that it is stronger for bank flows than for FDI and portfolio flows. These empirical findings provide insights into international capital flow management.
    JEL: E44 E52 F32 F36
    Date: 2019–12–02
  20. By: Jaromír Baxa (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic; Academy of Sciences of the Czech Republic, Institute of Information Theory and Automation, Pod Vodárenskou věží 4, 182 08, Prague, Czech Republic); Tomáš Šestořád (Academy of Sciences of the Czech Republic, Institute of Information Theory and Automation, Pod Vodárenskou věží 4, 182 08, Prague, Czech Republic; Czech National Bank, Macroeconomic Forecasting Division, Na Příkopě 28, 115 03 Prague 1, Czech Republic)
    Abstract: After the introduction of an exchange rate commitment and an immediate 7% depreciation of the Czech koruna of in 2013, output growth resumed but inflation remained low. Consequently, the Czech National Bank did not return policy to normal for more than three years. Using a time-varying parameter VAR model with stochastic volatility, we show that this was not surprising. The exchange rate pass-through to prices had been rather low and gradually decreasing since the early 2000s, suggesting limited potential effects of the exchange rate commitment on inflation. On the other hand, the pass-through to output growth increased. These results hold even when the period of the exchange rate floor and the zero lower bound is excluded from the sample, and they are robust to other sensitivity checks. Our results are consistent either with a flattened Phillips curve, or rising quality of the Czech exports and participation in global value chains, or a small effect of the exchange rate commitment on inflation expectations when not paired with temporary price-level targeting. Moreover, we highlight the usefulness of models accounting for time variation of parameters for policy analysis.
    Keywords: Exchange rate commitment, exchange rate pass-through, time-varying parameters, VAR, zero lower bound
    JEL: C32 E52 F41
    Date: 2019–05
  21. By: Hamza Bennani (Universite Paris Nanterre, 200 Avenue de la République, 92000 Nanterre, France); Nicolas Fanta (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic); Pavel Gertler (National Bank of Slovakia, Imricha Karvasa 1, 813 25 Bratislava, Slovak Republic); Roman Horvath (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic)
    Abstract: We examine the European Central Bank's ad-hoc communication and explore how it informs future monetary policy decisions. Using the rich dataset of the inter-meeting verbal communication among the members of the European Central Bank's Governing Council between 2008 and 2014, we construct a measure of communication assessing its inclination towards easing, tightening or maintaining the monetary policy stance. We find that this measure provides useful additional information about future monetary policy decisions, even when we control for market-based interest rate expectations and lagged decisions. Our results also suggest that, in particular, communication shortly before monetary policy meetings, related to unconventional measures and/or by the ECB President explain the future ECB rate changes well. Overall, these results point to the importance of transparency in understanding the future course of monetary policy.
    Keywords: Central bank communication, ECB, monetary policy
    JEL: E52 E58
    Date: 2019–05
  22. By: Pascal Michaillat; Emmanuel Saez
    Abstract: This paper measures the unemployment gap (the difference between actual and efficient unemployment rates) using the Beveridge curve (the negative relationship between unemployment and job vacancies). We express the unemployment gap as a function of current unemployment and vacancy rates, and three sufficient statistics: elasticity of the Beveridge curve, recruiting cost, and nonpecuniary value of unemployment. In the United States, we find that the efficient unemployment rate started around 3% in the 1950s, steadily climbed to almost 6% in the 1980s, fell just below 4% in the early 1990s, and remained at that level until 2019. These variations are caused by changes in the level and elasticity of the Beveridge curve. Hence, the US unemployment gap is almost always positive and highly countercyclical—indicating that the labor market tends to be inefficiently slack, especially in slumps.
    JEL: E24 E32 J63 J64
    Date: 2019–11
  23. By: Bazot, Guillaume; Monnet, Eric; Morys, Matthias
    Abstract: Are central banks able to isolate their domestic economy by offsetting the effects of foreign capital flows? We provide an answer for the First Age of Globalization based on an exceptionally detailed and standardized database of monthly balance sheets of all central banks in the world (i.e. 21) over 1891-1913. Investigating the impact of a global interest rate shock on the exchange-rate, the interest rate and the central bank balance sheet, we find that not a single country played by the 'rules of the game.' Core countries fully sterilized capital flows, while peripheral countries also relied on convertibility restrictions to avoid reserve losses. In line with the predictions of the trilemma, the exchange rate absorbed the shock fully in countries off the gold standard (floating exchange rate): the central bank's ba - lance sheet and interest rate were not affected. In contrast, in the United States, a gold standard country without a central bank, the reaction of the money mar - ket rate was three times stronger than that of interest rates in countries with a central bank. Central banks' balance sheets stood as a buffer between domestic economy and global financial markets.
    JEL: N10 N20 E42 E50 F30 F44
    Date: 2019
  24. By: Pierluigi Balduzzi (Boston College); Emanuele Brancati (Sapienza University of Rome); Marco Brianti (Boston College); Fabio Schiantarelli (Boston College; IZA)
    Abstract: We study the effects on financial markets and real economic activity of changes in risk related to political events and policy announcements in Italy during the 2013-2019 period that saw the rise to power of populist parties. We focus on events that have implications for budgetary policy, debt sustainability and for Euro membership. We use changes in the Credit Default Swaps (CDS) spreads on governments bonds around those dates as an instrument for shocks to policy and institutional risk – political risk for short – in the context of Local Projections - IV. We show that shocks associated with the rise of populist forces or their policies have adverse and sizable effects on financial markets. These negative effects were moderated by the European institutions and domestic constitutional constraints. In addition, Italian political developments generate international spillover effects on the spreads of other eurozone countries. Finally, political risk shocks have a negative impact on the real economy, although the accommodating stance of monetary policy helped in cushioning them.
    Keywords: populism, political risk, policy uncertainty, sovereign debt, fiscal policy, CDS spread
    JEL: E44 G10 H62 H63
    Date: 2019–12–01
  25. By: Jaroslav Pavlicek (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic); Ladislav Kristoufek (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic)
    Abstract: The internet has become the primary source of information for most of the population in modern economies, and as such, it provides an enormous amount of readily available data. Among these are the data on the internet search queries, which have been shown to improve forecasting models for various economic and financial series. In the aftermath of the global financial crisis, modeling and forecasting mortgage demand and subsequent approvals have become a central issue in the banking sector as well as for governments and regulators. Here, we provide new insights into the dynamics of the UK mortgage market, specifically the demand for mortgages measured by new mortgage approvals, and whether or how models of this market can be improved by incorporating the online searches of potential mortgage applicants. Because online searches are expected to be one of the last steps before a customer’s actual application for a large share of the population, intuitive utility is an appealing approach. We compare two baseline models – an autoregressive model and a structural model with relevant macroeconomic variables – with their extensions utilizing online searches on Google. We find that the extended models better explain the number of new mortgage approvals and markedly improve their nowcasting and forecasting performance.
    Keywords: Mortgage, online data, Google Trends, forecasting
    JEL: C22 C52 C53 C82 E27 E51
    Date: 2019–07
  26. By: Phitawat Poonpolkul
    Abstract: People in different age groups have shown to differ in their degrees of risk aversion. This study investigates the macroeconomic implications of population aging when households are assumed to be increasingly risk-averse in future utility when they age. The model incorporates risk-sensitive preferences used in Hansen & Sargent (1995), which is the only recursive preferences that can separate risk aversion and intertemporal elasticity of substitution while being monotonic, into a 16-generation discrete-time OLG model with undiversifiable income risk. Compared to a time-additive counterpart, risk-sensitive preferences capture precautionary saving motive that exacerbates adverse responses of aggregate macroeconomic variables under a population aging scenario through demographic re-weighting and life-cycle redistribution channels. Varying risk aversion also allows households to internalize future uncertainties when evaluating their welfare impacts of demographic change, resulting in non-monotonic welfare dynamics with higher welfare loss under a high-risk environment and vice versa. Risk-sensitive preferences with age-dependent risk aversion can play an important role in optimal policy settings by introducing uncertainties into the welfare impact analysis, while taking into account more realistic risk-taking behavior of different age cohorts.
    Keywords: Demographic change, risk-sensitive preferences, overlapping-generation model, precautionary savings, risk aversion
    JEL: D52 E21 E60
    Date: 2019–11
  27. By: Stéphane Dées (Banque de France and University of Bordeaux); Alessandro Galesi (Banco de España)
    Abstract: We assess the international spillovers of US monetary policy with a large-scale global VAR which models the world economy as a network of interdependent countries. An expansionary US monetary policy shock contributes to the emergence of a Global Financial Cycle, which boosts macroeconomic activity worldwide. We also find that economies with floating exchange rate regimes are not fully insulated from US monetary policy shocks and, even though they appear to be relatively less affected by the shocks, the differences in responses across exchange rate regimes are not statistically significant. The role of US monetary policy in driving these macrofinancial spillovers gets even reinforced by the complex network of interactions across countries, to the extent that network effects roughly double the direct impacts of US monetary policy surprises on international equity prices, capital flows, and global growth. This amplification increases as countries get more globally integrated over time, suggesting that the evolving network is an important driver for the increasing role of US monetary policy in shaping the Global Financial Cycle.
    Keywords: trilemma, Global Financial Cycle, monetary policy spillovers, network effects
    JEL: C32 E52 F40
    Date: 2019–12
  28. By: Abugamea, Gaber
    Abstract: The economies, trade and employment in the Palestinian territories (PTs) in the Gaza Strip and West Bank have undergone numerous shocks and instabilities over the past four decades. Palestinian External trade experienced numerous difficulties and in particular Israel imposing for restriction on Palestinian trade with the neighboring countries and the rest of the world as a whole. Meanwhile, employment rates in PTs decreased sharply by Israeli restrictions which imposed on Palestinian labor movement into Israel since 1994 and intensified with the Palestinian uprising in 2000 year., This study uses the cointegration and Granger causality tests to examine both the long run and short run relationships among trade, employment and economic growth of Palestine for the time period 1968-2017 . The econometrics results based on vector error correction models (VECM) confirm the existence of long run relation between trade, employment and economic growth and show that both employment and GDP are main determinants of trade but not trade and GDP determinants of employment or trade and employment determinants of GDP. Causality tests confirm VECM results that changes on economic growth in the long run cause change in trade in the short run. By reconciling causality results with that of VECM, we conclude an existence of marginal causality runs from GDP to employment and from trade to employment.
    Keywords: Trade, Employment, Economic growth, Cointegration, Granger causality tests, Palestine
    JEL: E24 F14 O47
    Date: 2019–11–21
  29. By: Yang You; Kenneth S. Rogoff
    Abstract: Can massive online retailers such as Amazon and Alibaba issue digital tokens that potentially compete with bank debit accounts? We explore whether a large platform’s ability to guarantee value and liquidity by issuing prototype digital tokens for in-platform purchases constitutes a significant advantage that could potentially be leveraged into wider use. Our central finding is that unless introducing tradability creates a significant convenience yield, platforms can potentially earn higher revenues by making tokens non-tradable. The analysis suggests that if platforms have any comparative advantage in issuing tradable tokens, it comes from other factors.
    JEL: E42 G23 L51
    Date: 2019–11
  30. By: Rui WANG (Department of Economics,Kanto Gakuen University)
    Abstract: In this paper, we extend the standard New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model to allow both staggered price setting and staggered wage setting and derive a gen-eralized version of New Keynesian model to study how these distortions affect the steady state and dynamics of model given different annual target inflation rates. The main finding is that the imperfec-tion of labor market has more distortionary power on aggregate output and aggregate welfare given positive target inflation rate. Sensitivity analysis of structural parameters in the context of static steady state provides us a macroeconomic structural model-based explanation for the stylized fact that many central banks set the target inflation rate within a range from 1% to 2%. Also, given positive target inflation rate, the dynamic responses of macroeconomic variables on exogenous shocks are more sen-sitive to the change of structural parameters related to labor market. By comparing the dynamics generated under different sets of calibration, we find that the structure of labor market with high de-gree of monopolistic competition, low wage stickiness and low wage indexation is more desirable in an economy with positive target inflation rate.
    Date: 2019–11
  31. By: Emily Liu; Friederike Niepmann; Tim Schmidt-Eisenlohr
    Abstract: This paper shows that monetary policy and prudential policies interact. U.S. banks issue more commercial and industrial loans to emerging market borrowers when U.S. monetary policy eases. The effect is less pronounced for banks that are more constrained through the U.S. bank stress tests, reflected in a lower minimum capital ratio in the severely adverse scenario. This suggests that monetary policy spillovers depend on banks’ capital constraints. In particular, during a period of quantitative easing when liquidity is abundant, banks are more flexible, and the scope for adjusting lending is larger when they have a bigger capital buffer. We conjecture that bank lending to emerging markets during the zero-lower bound period would have been even higher had the United States not introduced stress tests for their banks.
    Keywords: U.S. bank lending, stress tests, emerging markets, monetary policy spillovers
    JEL: E44 F31 G15 G21 G23
    Date: 2019
  32. By: Joerg Schmidt (Justus-Liebig-University Giessen)
    Abstract: This paper investigates in how far monetary policy shocks impact European asset markets, conditional on different risk states. It focuses on four different asset classes: equity of industrial firms, equity of banks, high-grade corporate bonds, and high-yielding corporate bonds. We distinguish between macroeconomic risk, political risk, and financial risk. In a first step, we separately extract three factors via principal component analysis from a set of candidate variables that are assumed to be driven by these latent types of risk. Next, these factors augment a threshold-VAR model that contains assets and a short-rate. Our model is estimated with Bayesian techniques and identified recursively. We illustrate that during periods of severe crisis, different risk regimes coincide. This impedes a clear delimitation among these three types of risk. Further on, impulse responses show that we indeed see state-dependency in the reaction of asset prices to monetary policy shocks. AA-rated corporate bond yields only show minor state-dependency if we distinguish between states of high and macroeconomic or financial risk, but show very pronounced state-dependency for political risk. Their sensitivity to monetary policy shocks is highest if political risk is . Non-investment-grade corporate bond yields as well as equity of industrial firms face the strongest state-dependency when we differentiate between macroeconomic or financial risk. If these risks are high, junk bond yields are very sensitive to monetary policy shocks while the opposite holds for equity of industrial corporations. Surprisingly, financial equity in general reacts positively or insignificant to hikes in short-rates. The positive reaction is most pronounced for states of high financial risk. As a consequence, monetary policy transmission via distinct asset markets highly depends on the degree of these different kinds of risk inherent in European asset markets. This also has strong implications for investors: they have to be aware of this varying degree of sensitivity of asset prices to changes in policy rates as they highly depend on the respective prevailing risk-regime.
    Keywords: state-dependency, asset pricing, monetary policy
    JEL: E44 G12 C11
    Date: 2019
  33. By: Roman Frydman (New York University); Soren Johansen (University of Copenhagen); Anders Rahbek (University of Copenhagen); Morten Tabor (University of Copenhagen)
    Abstract: This paper introduces the Knightian Uncertainty Hypothesis (KUH), a new approach to macroeconomics and finance theory. KUH rests on a novel mathematical framework that characterizes both measurable and Knightian uncertainty about economic outcomes. Relying on this framework and John Muth`s pathbreaking hypothesis, KUH represents participants`forecasts to be consistent with both uncertainties. KUH thus enables models of aggregate outcomes that 1) are premised on market participants` rationality, and 2) yet accord a role to both fundamental and psychological (and other non-fundamental) factors in driving outcomes. The paper also suggests how a KUH model`s quantitative predictions can be confronted with time series data.
    Keywords: Unforeseeable Change; Knightian Uncertainty; Muth`s Hypothesis; Model Ambiguity; REH; Behavioral Finance
    JEL: C02 C51 E00 D84 E00
  34. By: Lance Taylor (New School for Social Research); Ozlem Omer (New School for Social Research)
    Abstract: `Meso` level analysis of 16 producing sectors sheds light on broad forces shaping growth of employment and profits. In a growth decomposition from 1990 through 2016, employment responds positively to output increases and negatively to rising productivity. The macro profit share responds positively to sectoral productivity and demand shifts, and negatively to real wage increases. The decomposition weights suggest that wage repression raises profits in business services, education and health, wholesale and retail trade, and parts of manufacturing. Observed profit growth was robust in manufacturing, trade, finance and insurance, and information. The latter two (and wholesale trade) benefitted from favorable demand shifts. However, they generate less than a quarter of total profits. Owners of real estate receive more than a quarter but their share is not increasing. Growth of the remaining one-half of profits has been due to demand shifts and productivity growth which exceeded real wage increases. Market power matters in all sectors. The strongest effects may act against employment and real wages in labor markets.
    Keywords: income distribution, wealth, monopoly power, rents, low wages
    JEL: D31 D33 E2 E12 E24 J40 L11
  35. By: Anmol Bhandari; Serdar Birinci; Ellen McGrattan; Kurt See
    Abstract: This paper examines the reliability of survey data on business incomes, valuations, and rates of return, which are key inputs for studies of wealth inequality and entrepreneurial choice. We compare survey responses of business owners with available data from administrative tax records, brokered private business sales, and publicly traded company filings and document problems due to nonrepresentative samples and measurement errors across all surveys, subsamples, and years. We find that the discrepancies are economically relevant for the statistics of interest. We investigate reasons for these discrepancies and propose corrections for future survey designs.
    Keywords: Business fluctuations and cycles; Firm dynamics
    JEL: C83 E22 H25
    Date: 2019–12
  36. By: Jaromir Baxa (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic; The Czech Academy of Sciences, Institute of Information Theory and Automation, Pod Vodarenskou Vezi 4, 182 00, Prague, Czech Republic); Pavel Jancovic (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic)
    Abstract: The alternative specifications of the behavioural equilibrium exchange rate models (the BEERs) and their permanent counterparts (the PEERs) often deliver diverse estimates of the equilibrium exchange rate. In the case of the Czech koruna against the euro exchange rate, the discrepancy among the estimated BEERs often exceeds 10 %, and it had been wide before the introduction of the exchange rate commitment in November 2013 as well. Thus, the BEERs do not provide reliable guidance about the equilibrium exchange rate and the size of the equilibrium. To tackle the model uncertainty, we propose to learn about the BEERs and PEERs from the model combination to retain the information of all individual models. From a policy perspective, our results provide weak support to claims that the Czech koruna had been slightly overvalued before the introduction of the commitment in 2013. However, the koruna became increasingly undervalued since the mid of 2015, and this timing overlaps with the need to support the exchange rate commitment by the exchange rate interventions.
    Keywords: Equilibrium exchange rate, BEER, PEER, exchange rate commitment, model averaging
    JEL: F31 O24 E58 C52
    Date: 2019–10
  37. By: Murshed, Muntasir; Nijhum, Nawrin Khan
    Abstract: This paper aims to analyze the possibility of the twin deficits hypothesis existing in the context of Bangladesh using annual data from 1980 to 2017. Vector Error-Correction approach is tapped to estimate the short and long run coefficients while the pairwise Granger causality analysis is employed to understand the long run causal associations. The results suggest that budget and current account balances in Bangladesh behave as distant cousins rather than twins as perceived from a reverse causality that is found to be stemming from budget deficit to current account deficit. Moreover, budget deficit is found to deteriorate the national trade balance in Bangladesh.
    Keywords: twin deficits; trade deficit; budget deficit; current account deficit; VEC
    JEL: E62 F32 F41 H62
    Date: 2019
  38. By: Kosuke Aoki (Professor, University of Tokyo (E-mail:; Ko Munakata (Associate Director, Research and Statistics Department, Bank of Japan (E-mail:; Nao Sudo (Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: Banks in developed countries share a common concern that prolonged low nominal interest rates may pose a threat to their business, as the level of nominal interest rates is often positively correlated with bank profits in the data. It is not well understood, however, how low nominal interest rates impact bank profits and what they imply for banking stability. To address these issues, this study theoretically explores how the level of nominal interest rates affects bank profits and banking stability in the long run by extending a model of bank runs constructed by Gertler and Kiyotaki (American Economic Review, 2015). The model, calibrated to Japan and other developed countries, makes three predictions: (1) low interest rates do indeed reduce bank profits by compressing the deposit spread; (2) due to the presence of the effective lower bound of the policy rate and a slow recovery of bank net worth after a run, low interest rates bring the economy closer to a state where a bank run equilibrium can exist; (3) although there are quantitative differences across countries, a decline in nominal interest rates does not necessarily bring the economy to a state with a bank run equilibrium on its own, except for in severe cases where the TFP growth rate or the target inflation rate falls below zero.
    Keywords: Prolonged low interest rates, Bank profits, Banking stability
    JEL: E20 J11
    Date: 2019–11
  39. By: Dominika Kolcunová (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic); Simona Malovaná (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic)
    Abstract: This paper studies the impact of higher additional capital requirements on loan growth to private sector of banks in the Czech Republic. The empirical results indicate that there is a negative effect of higher additional capital requirements on loan growth of banks with relatively low capital surplus. In addition, the results confirm that the relationship between capital surplus and loan growth is important also in the period of stable capital requirements, i.e. it does not serve only as an intermediate channel of higher additional capital requirements.
    Keywords: Bank lending, banks’ capital surplus, regulatory capital requirements
    JEL: C22 E32 G21 G28
    Date: 2019–04
  40. By: Ariell Reshef; Gianluca Santoni
    Abstract: We study the evolution of labor shares in 1995-2014 while taking into account international trade based on value added concepts. On average, the decline in labor shares (starting around 1980) accelerates in 2001-2007, after which labor shares recover somewhat. In contrast, skilled labor shares consistently increase. The acceleration in the decline in labor shares is associated with increased intensity of intermediate input exporting; this manifests in a sharp increase in the foreign component in upstreamness of industries and countries in global value chains (GVCs). China's global integration accounts for much of this. Declines in the price of investment together with capital-skill complementarity can explain both the consistent increase in skilled labor shares and the reversal of trend in overall labor shares. Compared to shares in GDP, labor shares in gross national product (GNP) are higher in countries with positive net FDI positions; the uneven spread of multinational activity contributes to greater inequality through this channel.
    Keywords: Labor Share;Skilled Labor Share;Global Value Chains;Offshoring;Vertical Integration
    JEL: E25 F14 F15 F16 F66 J00
    Date: 2019–12
  41. By: Petr Hanzlík (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic); Petr Teplý (Department of Banking and Insurance, Faculty of Finance and Accounting, University of Economics in Prague, Winston Churchill Sq. 4, 130 67 Prague, Czech Republic)
    Abstract: In this paper, we analyse a relationship between net interest margin (NIM) of EU banks and market interest rates in a low-interest rate environment. We contribute to the literature when examining a large sample of annual data on 629 banks from EU member countries during the 2011-2016 period, which also covers the period of zero and negative rates. We test three hypotheses and come to the three main conclusions. First, NIM eroded during the whole observed period for all types of investigated banks. Second, a higher market concentration, proxied by the Herfindahl index, leads to higher NIM. Finally, we show a positive concave relationship of NIM with short-term interest rate observed in previous studies, which supports the suspected non-linearity in situation of zero lower bound of interest rates. Contrary to other researchers, we find a negative relationship between NIM and the yield curve slope.
    Keywords: banks, net interest margin, Herfindahl index, interest rates, profitability, system GMM
    JEL: C33 E43 G21
    Date: 2019–03
  42. By: Cem Gorgun (Koc University)
    Abstract: This paper studies monetary regime choice between monetary union and flexible exchange rate regime in a large open economy framework. The classical approach emphasizes that monetary unions are inherently costly because a single interest rate cannot respond effectively to different shocks of members of the union. Therefore, it is argued that countries with similar shocks should establish a monetary union so that the cost of one-size-fits-all monetary policy is minimized. This study reveals that when there are inefficient shocks (namely those which distort the economy asymmetrically and break the 'divine coincidence') and countries are large, the classical approach fails. In that case, monetary regime choice should depend on relative variation (mean preserving spread) of inefficient shocks rather than proximity of shocks. A union implicitly imposes cooperation in monetary policy between its members. This cooperation improves response to foreign inefficient shocks while it worsens responses to domestic inefficient shocks slightly less in terms of domestic welfare. Therefore, a country chooses monetary union over flexible exchange rate regime if variation of foreign shocks is close to or larger than variation of domestic shocks. That is on the condition that losing exchange rate flexibility is not costly or has a small cost. In this way, the domestic country 'ties the hand of the foreign country' and prevents foreign monetary policy actions which hurt domestic welfare. Both countries benefit from cooperation provided by the union, if variances (spreads) of domestic and foreign shocks are close enough. Then, a monetary union becomes Pareto Improvement. How close variances should be so that monetary union is welfare increasing or Pareto Improvement, and welfare loss or gain of losing exchange rate flexibility are contingent upon price rigidity and trade elasticity.
    Keywords: monetary unions, fl exible exchange rate, monetary policy, national welfare.
    JEL: E52 E58 F33 F41 F42
    Date: 2019–11
  43. By: Al-Mawlawi, Ali
    Abstract: The public payroll in Iraq has grown unchecked since 2003, commensurate with the country’s vastly expanding oil wealth. With few alternative sources of government income, the state budget’s growth poses worrying questions about whether this ongoing trend can be sustained without risking economic ruin. Based on an analysis of publicly available reports and unpublished government documents, and informed by interviews with officials in Baghdad, this paper quantifies the extent of the expansion in spending on public sector salaries and sheds light on aspects of the state’s budgetary allocations that lack a significant degree of transparency. Notably, the paper focuses on spending trends within key ministries and the state-owned enterprises and offers recommendations on how spending could be curtailed through greater accountability and long-term investment in reform measures that could lead to a more robust approach to managing the country’s economy.
    JEL: E6 N0
    Date: 2019–10–01
  44. By: Simplice A. Asongu (Yaoundé/Cameroon); Joseph Nnanna (The Development Bank of Nigeria, Abuja, Nigeria); Vanessa S. Tchamyou (Yaoundé, Cameroon)
    Abstract: The study assesses the role of globalization-fuelled regionalization policies on financial allocation efficiency in four economic and monetary regions in Africa for the period 1980 to 2008. Banking system and financial system efficiency proxies are used as dependent variables whereas seven bundled and unbundled globalization variables are employed as independent indicators. The bundling exercise is achieved by means of principal component analysis while the empirical evidence is based on interactive Fixed Effects regressions. The following findings are established. First, financial allocation efficiency is more sensitive to financial openness compared to trade openness and most sensitive to globalization. The relationship between allocation efficiency and globalization-fuelled regionalization policies is: (i) Kuznets or inverted U-shape in the UEMOA and CEMAC zones (evidence of decreasing returns to allocation efficiency from globalization-fuelled regionalization) and (ii) U-shape overwhelmingly in the COMESA and scantily in the EAC (increasing returns to allocation efficiency from globalization-fuelled regionalization). Established shapes are relevant to specific globalization dynamics within regions. Economic and monetary regions are more prone to surplus liquidity than purely economic regions. Policy implications and measures of fighting surplus liquidity are discussed.
    Keywords: Globalization; Financial Development; Regional Integration; Panel; Africa
    JEL: A10 D60 E40 O10 P50
    Date: 2019–01
  45. By: Simplice A. Asongu (Yaoundé/Cameroon); Joseph Nnanna (The Development Bank of Nigeria, Abuja, Nigeria); Vanessa S. Tchamyou (Yaoundé, Cameroon)
    Abstract: The study assesses the role of globalization-fuelled regionalization policies on financial allocation efficiency in four economic and monetary regions in Africa for the period 1980 to 2008. Banking system and financial system efficiency proxies are used as dependent variables whereas seven bundled and unbundled globalization variables are employed as independent indicators. The bundling exercise is achieved by means of principal component analysis while the empirical evidence is based on interactive Fixed Effects regressions. The following findings are established. First, financial allocation efficiency is more sensitive to financial openness compared to trade openness and most sensitive to globalization. The relationship between allocation efficiency and globalization-fuelled regionalization policies is: (i) Kuznets or inverted U-shape in the UEMOA and CEMAC zones (evidence of decreasing returns to allocation efficiency from globalization-fuelled regionalization) and (ii) U-shape overwhelmingly in the COMESA and scantily in the EAC (increasing returns to allocation efficiency from globalization-fuelled regionalization). Established shapes are relevant to specific globalization dynamics within regions. Economic and monetary regions are more prone to surplus liquidity than purely economic regions. Policy implications and measures of fighting surplus liquidity are discussed.
    Keywords: Globalization; Financial Development; Regional Integration; Panel; Africa
    JEL: A10 D60 E40 O10 P50
    Date: 2019–01
  46. By: Carlos León (Banco de la República de Colombia)
    Abstract: Anomaly detection methods aim at identifying observations that deviate manifestly from what is expected. Such methods are usually run on low dimensional data, such as time series. However, the increasing importance of high dimensional payments and exposures data for financial oversight requires methods able to detect anomalous networks. To detect an anomalous network, dimensionality reduction allows measuring to what extent its main connective features (i.e. the structure) deviate from those regarded as typical or expected. The key to such measure resides in the ability of dimensionality reduction methods to reconstruct data with an error; this reconstruction error serves as a yardstick for deviation from what is expected. Principal component analysis (PCA) is used as dimensionality reduction method, and a clustering algorithm is used to classify reconstruction errors into normal and anomalous. Based on data from Colombia’s large-value payments system and a set of synthetic anomalous networks created by means of intraday payments simulations, results suggest that detecting anomalous payments networks is feasible and promising for financial oversight purposes. **** RESUMEN: Los métodos para detección de anomalías buscan identificar observaciones que se desvían ostensiblemente de lo esperado. Esos métodos suelen utilizarse con datos de baja dimensionalidad, tales como las series de tiempo. Sin embargo, la creciente importancia de las series de redes de pagos y exposiciones –series de alta dimensionalidad- en el seguimiento de los mercados financieros exige métodos aptos para detectar redes anómalas. Para detectar una red anómala, la reducción de dimensiones permite cuantificar qué tan diferentes son las características conectivas de una red (i.e. su estructura) con respecto a aquellas que pueden ser consideradas como normales. Esto se consigue gracias a que la reducción de dimensiones permite reconstruir los datos con un error; ese error sirve de parámetro para determinar qué tan diferentes son las características conectivas de las redes. La descomposición por componentes principales es utilizada como método para reducir dimensionalidad, y un algoritmo de agrupamiento clasifica los errores de reconstrucción en normales o anómalos. Con base en datos del sistema de pagos de alto valor colombiano y un conjunto de redes de pagos anómalas creadas artificialmente a partir de métodos de simulación de pagos intradía, los resultados sugieren que la detección de redes de pagos anómalas es posible y prometedor para propósitos de seguimiento de los mercados financieros.
    Keywords: Anomaly, payments, network, dimensionality, clustering, anomalías, pagos, redes, dimensionalidad, agrupamiento
    JEL: E42 C38 C53
    Date: 2019–12
  47. By: Cherrier, Beatrice; Backhouse, Roger
    Abstract: The FMP model exemplifies the Keynesian models later criticized by Lucas, Sargent and others as conceptually flawed. For economists in the 1960s such models were “big science”, posing organizational as well as theoretical and empirical problems. It was part of an even larger industry in which the messiness for which such models were later criticized was endorsed as providing enabling modelers to be guided by data and as offering the flexibility needed to undertake policy analysis and to analyze the consequences of events. Practices that critics considered fatal weaknesses, such as intercept adjustments or fudging, were what clients were what clients paid for as the macroeconometric modeling industry went private.
    Date: 2018–10–15
  48. By: Reza Anglingkusumo (Bank Indonesia); Berry A. Harahap (Bank Indonesia); Fitria I. Triswati (Bank Indonesia); Pakasa Bary (Bank Indonesia); Anggita Cinditya M. Kusuma (Bank Indonesia); M. Bagus Arya (Bank Indonesia)
    Abstract: Penelitian ini memetakan kondisi fragmentasi internasional finance, memahami dampak proteksionisme hubungan finansial antarnegara melalui dual gravity model serta mengevaluasi risiko peningkatan fragmentasi terhadap makroekonomi melalui Global VECM, khususnya terhadap shock eksternal. Beberapa temuan antara lain adalah (i) terdapat tendensi fragmentasi setelah krisis finansial global: foreign direct investment dan portofolio investment dari negara utama lebih terkonsentrasi, serta adanya penurunan cross-border claims yang belum kembali ke tingkat semula; (ii) terdapat hubungan positif antara arus perdagangan dan arus finansial secara bilateral sehingga penurunan perdagangan akan berimplikasi pada penurunan hubungan finansial; (iii) ada proteksi perdagangan terindikasi akan menurunkan perdagangan antarnegara, dan menurunkan FDI dari negara ketiga: dan (iv) fragmentasi finansial membuat dampak spillover shock eksternal terhadap perekonomian Indonesia berubah, antara lain adalah dampak kenaikan suku bunga AS ke output Indonesia menjadi lebih besar.
    Keywords: financial integration, cross border banking, gravity, spillover, global VECM
    JEL: E60 F30
    Date: 2018–11
  49. By: Zhenyu Gao; Michael Sockin; Wei Xiong
    Abstract: By exploiting variation in state capital gains taxation as an instrument, we analyze the economic consequences of housing speculation during the U.S. housing boom in the 2000s. We find that housing speculation, anchored, in part, on extrapolation of past housing price changes, led not only to greater price appreciation, economic expansions, and housing construction during the boom in 2004-2006, but also to more severe economic downturns during the subsequent bust in 2007-2009. Our analysis supports supply overhang and local household demand as two key channels for transmitting these adverse effects.
    JEL: E3 R31
    Date: 2019–11
  50. By: Tzougas, G.; Hoon, W. L.; Lim, J. M.
    Abstract: This paper presents the Negative Binomial-Inverse Gaussian regression model for approximating the number of claims as an alternative to mixed Poisson regression models that have been widely used in various disciplines including actuarial applications. The Negative Binomial-Inverse Gaussian regression model can be considered as a plausible model for highly dispersed claim count data and this is the first time that it is used in a statistical or actuarial context. The main achievement is that we propose a quite simple Expectation-Maximization type algorithm for maximum likelihood estimation of the model. Finally, a real data application using motor insurance data is examined and both the a priori and a posteriori, or Bonus-Malus, premium rates resulting from the Negative Binomial-Inverse Gaussian model are calculated via the net premium principle and compared to those determined by the Negative Binomial Type I and the Poisson-Inverse Gaussian regression models that have been traditionally used for a priori and a posteriori ratemaking.
    Keywords: Negative binomial-inverse Gaussian regression model; EM algorithm; Motor third party liability insurance; Ratemaking
    JEL: E6
    Date: 2019–07
  51. By: Middleton, Elliott III
    Abstract: A partial equilibrium analysis of US credit markets reveals that the Federal Reserve System’s current mechanism for raising short-term interest rates has placed the US short-term markets in a position that is far from apparent equilibria achieved over the postwar period.
    Date: 2018–11–16
  52. By: Elias, Alberto Ezequiel; Graña Colella, Santiago; Ianni, Juan Martin; Mauro, Lucía Mercedes
    Abstract: Desde de la década del 70, el capitalismo mutó, a partir del agotamiento del modelo fordista, hacia un tipo de capitalismo "financiarizado". Dentro de este esquema surgieron los regímenes de Metas de Inflación, como aparato no sólo teórico, sino orientador de políticas públicas. Este modelo fue utilizado para disminuir o neutralizar procesos inflacionarios en distintos países del mundo y en nuestro país, se comenzó a utilizar a partir del reciente cambio de gobierno, a finales de 2015. Estos regímenes operan de la siguiente manera: ante un nivel de inflación que sobrepasa una meta previamente establecida por el Banco Central, se aumenta la tasa de interés nominal. Esto provoca un incremento de la tasa de interés real y, por tanto, una caída de la inversión. A su vez, se genera una disminución de la demanda agregada lo cual desactiva las presiones sobre los precios. En términos de la economía real, el aumento de la tasa de interés para contener y/o erradicar el fenómeno inflacionario, sumado a problemáticas asociadas a las asimetrías de información y el riesgo moral, podrían llevar a que las PyMEs argentinas enfrenten dificultades a la hora de acceder a financiamiento. Dado que este tipo de empresas son sumamente relevantes para la economía en términos de generación de empleo, bienes y servicios, este trabajo se propuso documentar la relación inherente que existe entre la adopción de un régimen de Metas de Inflación y su impacto en el financiamiento a PyMEs, mediante una revisión bibliográfica Los resultados parecerían indicar que la aplicación de este régimen, en conjunto con otros factores, puede haber generado una reducción de los créditos bancarios recibidos por las PyMEs, así como, en contrapartida, un aumento del financiamiento con fondos propios. Más específicamente, luego de la implementación de estos regímenes en 2015, el autofinanciamiento creció de un 54% a un 68% en 2016, mientras que el financiamiento bancario cayó del 35% al 22% en el mismo año. Además, en el 2017 el 58% de las firmas reconocieron que el principal obstáculo a la hora de acceder a un crédito productivo fueron las elevadas tasas de interés. Estas dificultades podrían tener severas consecuencias en el rendimiento económico del país, y especialmente en el rendimiento de las PyMEs. En términos generales, un panorama adverso como el descripto previamente podría imposibilitar la creación de nuevas empresas, así como evitar que se lleven adelante nuevos proyectos de inversión. Además, el mismo podría generar problemas en la adquisición de bienes de capital necesarios para desarrollar actividades innovativas, como también inconvenientes para subsistir en momentos de inestabilidad macroeconómica. En consecuencia, en este trabajo se plantearon políticas antiinflacionarias alternativas a las Metas de Inflación (aquellas que persiguen la estabilización inflacionaria sin afectar negativamente el financiamiento de las PyMEs). Por otro lado, también se plantearon políticas de apoyo al financiamiento PyME propiamente dichas, recomendando de este modo lineamientos que favorezcan la generación de políticas de asistencia financiera a este tipo de empresas en la coyuntura actual. Es necesario aclarar que estas últimas políticas deberían enmarcarse en programas de carácter integral, que contemplen no sólo los problemas crediticios, sino también los relativos a los aspectos productivos, tecnológicos, de gerenciamiento, y de inserción en el comercio internacional. Asimismo, es de importancia destacar que no es posible reactivar el crecimiento de este sector sin la conjunción de otras medidas; a saber, políticas tecnológicas destinadas a fomentar el desarrollo de innovaciones y políticas industriales orientadas a la mejora de la competitividad de las empresas y el desarrollo de las cadenas de valor.
    Keywords: Financiamiento de Empresas; Pequeñas y Medianas Empresas; Ciencias Económicas; Inflación; Financiarización;
    Date: 2018–09
  53. By: Kladivko, Kamil (Örebro University School of Business); Österholm, Pär (Örebro University School of Business)
    Abstract: In this paper, we evaluate the forecasting precision of survey expectations of the four financial variables in the Prospera survey commissioned by Sveriges Riksbank – one of Sweden’s most important economic surveys. Our analysis shows that the market participants in the survey are able to significantly outperform the random walk for only one horizon and variable, namely the three-month horizon for the repo rate. At the longest horizon for the repo rate, and at all horizons for the five-year government bond yield, the random walk signif-icantly outperforms the market participants. For the exchange-rate data studied – SEK/USD and SEK/EUR – no significant differences in forecasting precision can be established. It accordingly seems that while the Prospera survey might be informative regarding the market participants’ expectations, it does not carry much information about the actual future developments of the exchange rates and interest rates covered by the survey.
    Keywords: Out-of-sample forecasts; Exchange rates; Interest rates
    JEL: E47 G17
    Date: 2019–11–27
  54. By: Marie-Laure BREUILLÉ (CESAER, INRA.); Emmanuelle TAUGOURDEAU (CREST, University of Paris-Saclay, ENS Paris-Saclay.)
    Abstract: This paper analyzes the fiscal interactions arising from gasoline taxation in a federation. We adopt a general theoretical model for studying simultaneous vertical and horizontal tax competition by i) introducing a specific monetary cost of refueling ii) assuming that the price of gasoline is affected by either excise taxes (regional and federal) and the VAT rate, ii) considering elastic demand for gasoline. We show that at the symmetric equilibrium, horizontal taxes are strategic complements but vertical taxes are strategic may be substitutes. Moreover, horizontal excise taxes are strategic substitutes with VAT whereas the result is unclear for the reaction between regional and federal excise taxes. Finally, we show that the tax reaction functions and thus the equilibria crucially differ according to the pattern of decision-making (social planner, Nash or defederalized leadership).
    Keywords: Fiscal Federalism, Gasoline Taxation, Horizontal and Vertical Tax Interactions.
    JEL: E62 H7 Q48
    Date: 2019–11–19
  55. By: Carrera, Leandro N.; Angelaki, Marina
    Abstract: Pension reform is one of the top public policy priorities in advanced industrialized countries due to population ageing and the significant weight of pension spending in governments’ budgets. As a result of these concerns European countries have engaged in varying degrees of pension reforms over the last three decades. The extant literature on pension reform focuses on structural, institutional and blame avoidance theories to explain how pension reform take place. Yet, how do different conditions combine to lead to significant pension reform outcomes? To answer this question we analyze a set of 48 pension reform cases in eight European countries since the late 1980s up until 2014 by using fuzzy set qualitative comparative analysis (fsQCA). Our main finding is that institutional, structural or blame avoidance theories cannot account by themselves for instances of significant pension reform. Rather, we find three pathways that combine structural and institutional conditions to lead to significant pension reform.
    Keywords: pension policy; reform; fsqca; politics; institutions
    JEL: E6 J1 R14 J01
    Date: 2019–11–04

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