nep-mac New Economics Papers
on Macroeconomics
Issue of 2020‒02‒24
93 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. State-level wage Phillips curves By George Kapetanios; Simon Price; Menelaos Tasiou; Alexia Ventouri
  2. The Importance of Hiring Frictions in Business Cycles By Faccini, Renato; Yashiv, Eran
  3. Inflation expectations in Phillips Curves models for the euro area By Dmitry Kulikov; Nicolas Reigl
  4. What’s on the ECB’s mind? – Monetary policy before and after the global financial crisis By Jonas Gross; Johannes Zahner
  5. Managing GDP Tail Risk By Thibaut Duprey; Alexander Ueberfeldt
  6. The Power of Helicopter Money Revisited: A New Keynesian Perspective By Thomas J. Carter; Rhys R. Mendes
  7. Risk Premium Shocks Can Create Inefficient Recessions By Sebastian Di Tella; Robert E. Hall
  8. Mismatch Cycles By Isaac Baley; Ana Figueiredo; Robert Ulbricht
  9. Making a Statement: How Did Professional Forecasters React to the August 2011 FOMC Statement? By Richard K. Crump; Stefano Eusepi; Emanuel Moench
  10. Opening the Red Budget Box: Nonlinear Effects of a Tax Shock in the UK By V. Colombo
  11. The Role of Imported Inputs in Pass-through Dynamics By Dilara Ertug; Pinar Ozlu; M. Utku Ozmen; Caglar Yunculer
  12. Monetary Policy and Government Debt Dynamics Without Commitment By Dmitry Matveev
  13. The Distributional Effects of Monetary Policy: Evidence from Local Housing Markets By Calvin He; Gianni La Cava
  14. An Assessment of the FRBNY DSGE Model's Real-Time Forecasts, 2010-2013 By Marco Del Negro; M. Henry Linder; Sara Shahanaghi; Marc Giannoni; Matthew Cocci; Stefano Eusepi
  15. Output Gap, Monetary Policy Trade-offs, and Financial Frictions By Francesco Furlanetto; Paolo Gelain; Marzie Sanjani
  16. Regional Monetary Policies and the Great Depression By Pooyan Amir-Ahmadi; Gustavo S. Cortes; Marc D. Weidenmier
  17. Escaping Unemployment Traps By Sushant Acharya; Keshav Dogra; Shu Lin Wee; Julien Bengui
  18. Towards a new architecture for the euro area: An early appraisal of the Juncker Commission By Christoph Bierbrauer
  19. Choosing the Right Policy in Real Time (Why That’s Not Easy) By Frank Schorfheide; Marco Del Negro; Raiden B. Hasegawa
  20. Shilnikov Chaos, Low Interest Rates, and New Keynesian Macroeconomics By William Barnett; Giovanni Bella; Taniya Ghosh; Paolo Mattana; Beatrice Venturi
  21. Macroeconomic Surprises and the Demand for Information about Monetary Policy By Peter Tillmann
  22. The Formation of Inflation Expectations: Micro-data Evidence from Japan By Junichi Kikuchi; Yoshiyuki Nakazono
  23. Does Financial Development Amplify Sunspot Fluctuations? By Takuma Kunieda; Kazuo Nishimura
  24. Debt and financial crises By Wee Chian Koh; M. Ayhan Kose; Peter S. Nagle; Franziska L. Ohnsorge; Naotaka Sugawara
  25. Business cycle dynamics after the Great Recession: An Extended Markov-Switching Dynamic Factor Model By Catherine Doz; Laurent Ferrara; Pierre-Alain Pionnier
  26. The Effect of Mortgage Rate Resets on Debt: Evidence from TransUnion (Part I) By Katya Kartashova
  27. "Challenges for the EU as Germany Approaches Recession" By George K. Zestos; Rachel N. Cooke
  28. Global macro-financial cycles and spillovers By Jongrim Ha; M. Ayhan Kose; Christopher Otrok; Eswar S. Prasad
  29. Global recessions By M. Ayhan Kose; Naotaka Sugawara; Marco E. Terrones
  30. Financial Linkages and Sectoral Business Cycle Synchronization: Evidence from Europe By Hannes Boehm; Julia Schaumburg; Lena Tonzer
  31. Do Treasury Term Premia Rise around Monetary Tightenings? By Tobias Adrian; Richard K. Crump; Emanuel Moench
  32. Differences in Rent Inflation by Cost of Housing By Jonathan McCarthy; Richard Peach
  33. Preparing for Takeoff? Professional Forecasters and the June 2013 FOMC Meeting By Emanuel Moench; Stefano Eusepi; Richard K. Crump
  34. "Ages of Financial Instability" By Mario Tonveronachi
  35. Reading the Tea Leaves of the U.S. Business Cycle—Part One By Richard K. Crump; Domenico Giannone; David O. Lucca
  36. A Bird's Eye View of the FRBNY DSGE Model By Argia M. Sbordone; Bianca De Paoli; Andrea Tambalotti
  37. Data Insight: Which Growth Rate? It’s a Weighty Subject By David O. Lucca; Stefano Eusepi; Richard K. Crump; Emanuel Moench
  38. "The Relationship between Technical Progress and Employment: A Comment on Autor and Salomons" By Jesus Felipe; Donna Faye Bajaro; Gemma Estrada; John McCombie
  39. Optimal monetary policy cooperation with a global shock and dollar standard By Xiaoyong Cui; Liutang Gong; Chan Wang; Heng-fu Zou
  40. Exploring Economic Conditions and the Implications for Monetary Policy By Eric S. Rosengren
  41. Should central banks communicate uncertainty in their projections? By Ryan Rholes; Luba Petersen
  42. Liquidity preference, capital accumulation and investment financing: Fernando Carvalho’s contributions to the Post-Keynesian paradigm By José Luis Oreiro; Luiz Fernando de Paula; João Pedro Heringer Machado
  43. How Has Germany's Economy Been Affected by the Recent Surge in Immigration? By Matthew Higgins; Thomas Klitgaard
  44. What If the U.S. Dollar's Global Role Changed? By Linda S. Goldberg; Hunter L. Clark; Mark Choi
  45. Quadratic-mean-of-order-r Indexes of Output, Input and Productivity By Hideyuki Mizobuchi; Valentin Zelenyuk
  46. Does the Added Worker Effect Matter? By Guner, Nezih; Kulikova, Yuliya; Valladares-Esteban, Arnau
  47. Why is Unemployment so Countercyclical? By Lawrence J. Christiano; Martin S. Eichenbaum; Mathias Trabandt
  48. Robert J. Gordon and the introduction of the natural rate hypothesis in the Keynesian framework By Aurélien Goutsmedt; Goulven Rubin
  49. Rational Bubbles in Non-Linear Business Cycle Models: Closed and Open Economies By Robert Kollmann
  50. House prices, private debt and the macroeconomics of comparative political economy By James Wood; Engelbert Stockhammer
  51. Blockchain structure and cryptocurrency prices By Zimmerman, Peter
  52. Public Employment Redux By Garibaldi, Pietro; Gomes, Pedro Maia; Sopraseuth, Thepthida
  53. Firm-Level Shocks and GDP Growth: The Case of Boeing’s 737 MAX Production Pause By Julian di Giovanni
  54. Is there a decreasing trend in capacity utilisation in the US economy? Some new evidence By Santiago J. Gahn
  55. Rising Household Debt: Increasing Demand or Increasing Supply? By Max Livingston; Wilbert Van der Klaauw; Basit Zafar
  56. Developing a Narrative: the Great Recession and Its Aftermath By Argia M. Sbordone; Andrea Tambalotti
  57. The FR 2420 Data Collection: A New Base for the Fed Funds Rate By Marco Cipriani; Jonathan Cohn
  58. Reading the Tea Leaves of the U.S. Business Cycle—Part Two By Richard K. Crump; Domenico Giannone; David O. Lucca
  59. The Moroccan New Keynesian Phillips Curve : A Structural Econometric Analysis By Tsoungui Belinga,Vincent De Paul; Doukali,Mohamed
  60. Perspectives on the U.S. Economic Outlook By Eric S. Rosengren
  61. Understanding the relationship between inequalities and poverty: mechanisms associated with crime, the legal system and punitive sanctions By Duque, Magali; Mcknight, Abigail
  62. The transmission of bank capital requirements and monetary policy to bank lending By Imbierowicz, Björn; Löffler, Axel; Vogel, Ursula
  63. How the High Level of Reserves Benefits the Payment System By Antoine Martin; James J. McAndrews; Morten L. Bech
  64. Estimating the optimal inflation target from trends in relative prices By Adam, Klaus; Weber, Henning
  65. Who Pays the Tax on Imports from China? By Michael Nattinger; Matthew Higgins; Thomas Klitgaard
  66. Optimal Bank Regulation In the Presence of Credit and Run-Risk By Anil K. Kashyap; Dimitrios P. Tsomocos; Alexandros P. Vardoulakis
  67. Affine Modeling of Credit Risk, Pricing of Credit Events and Contagion By Alain MONFORT; Jean-Paul RENNE; Guillaume ROUSSELLET
  68. Labor-augmenting technical change and the labor share: New microeconomic foundations By Daniele Tavani; Luca Zamparelli
  69. Exploring Economic Conditions and the Implications for Monetary Policy By Eric S. Rosengren
  70. How Easy Is It to Forecast Commodity Prices? By Jan J. J. Groen; Paolo Pesenti
  71. Revisiting the Case for International Policy Coordination By Sushant Acharya; Ozge Akinci; Bianca De Paoli; Julien Bengui
  72. How Should Credit Gaps Be Measured? An Application to European Countries By Chikako Baba; Salvatore Dell'Erba; Enrica Detragiache; Olamide Harrison; Aiko Mineshima; Anvar Musayev; Asghar Shahmoradi
  73. KGEMM: A Macroecnometric Model for Saudi Arabia By Fahkri Hasanov; Fred Joutz; Jeyhun Mikayilov; Muhammad Javid
  74. Euro Area Spending Imbalances and the Sovereign Debt Crisis By Thomas Klitgaard; Matthew Higgins
  75. Dual labor market, inflation, and aggregate demand in an agent-based model of the Japanese macroeconomy By Corrado Di Guilmi; Yoshi Fujiwara
  76. Exiting Financial Repression : The Case of Ethiopia By Chauffour,Jean-Pierre Christophe; Gobezie,Muluneh Ayalew
  77. Monetary Policy and Sovereign Risk in Emerging Economies (NK-Default) By Cristina Arellano; Yan Bai; Gabriel Mihalache
  78. Crisis Chronicles: The Hamburg Crisis of 1799 and How Extreme Winter Weather Still Disrupts the Economy By Donald P. Morgan; David R. Skeie; James Narron
  80. Tax Reform's Impact on Bank and Corporate Cyclicality By Vanesa Sanchez; Anna Kovner; Peter Van Tassel; Diego Aragon
  81. How Big are Fiscal Multipliers in Latin America? By Jorge Restrepo
  82. New Approaches to the Identification of Low-Frequency Drivers : An Application to Technology Shocks By Dieppe,Alistair Matthew; Neville,Francis; Kindberg Hanlon,Gene Joseph
  83. Identification robust empirical evidence on the Euler equation in open economies By Qazi Haque; Leandro M. Magnusson
  84. ¿Existe un régimen de acumulación financiarizado en Colombia? Análisis desde la escuela de la regulación francesa By Oscar Esteban Morillo Martínez
  85. Are survey data underestimating the inequality of wealth? By Jaanika Merikull; Tairi Room
  86. One Shock, Many Policy Responses By Rui Mano; Silvia Sgherri
  87. Intervention Under Inflation Targeting--When Could It Make Sense? By David J Hofman; Marcos d Chamon; Pragyan Deb; Thomas Harjes; Umang Rawat; Itaru Yamamoto
  88. Socioeconomic Decline and Death: Midlife Impacts of Graduating in a Recession By Schwandt, Hannes; Wachter, Till von
  89. "A Labor Market-Augmented Empirical Stock-Flow Consistent Model Applied to the Greek Economy" By Christos Pierros
  90. Pollution, Mortality and Time Consistent Abatement Taxes By Aditya Goenka; Lin Liu; William Pouliot
  91. Hours and Wages By Alexander Bick; Adam Blandin; Richard Rogerson
  92. Revisiting the monetary presentation of the euro area balance of payments By Picón Aguilar, Carmen; Soares, Rodrigo Oliveira; Adalid, Ramón
  93. Loan waivers and bank credit reflections on the evidence and the way forward By Sudha Narayanan; Nirupam Mehrotra

  1. By: George Kapetanios; Simon Price; Menelaos Tasiou; Alexia Ventouri
    Abstract: Two reduced-form versions of New Keynesian wage Phillips curves based on either sticky nominal wages or real-wage rigidity using monthly US state-level data for the period 1982-2016 are examined, taking account of the endogeneity of unemployment by instrumentation and the use of common correlated effects (CCE) and mean group (MG) methods. This is the first time that this methodology has been applied in this context. These are important issues, as ignoring them may lead to substantial biases. The results show that while the aggregate data do not provide estimates that are consistent with either of the theoretical models examined, the panel methods do. Moreover, use of an appropriate MG CCE estimator leads to economically significant changes in parameters (primarily a steeper Phillips curve) relative to those from inappropriate but widely used panel methods, and in the real-wage rigidity case is required to deliver results that have a theoretically admissible interpretation.
    Keywords: Wage Phillips curves, state-level data, panel estimation, CCE
    JEL: E24 E31 E32
    Date: 2020–02
  2. By: Faccini, Renato (Queen Mary, University of London); Yashiv, Eran (Tel Aviv University)
    Abstract: Hiring is a costly activity reflecting firms' investment in their workers. Micro-data shows that hiring costs involve production disruption. Thus, cyclical fluctuations in the value of output, induced by price frictions, have consequences for the optimal allocation of hiring activities. We outline a mechanism based on cyclical markup fluctuations, placing emphasis on hiring frictions interacting with price frictions. This mechanism generates strong propagation and amplification of all key macroeconomic variables in response to technology shocks and mutes the traditional transmission of monetary policy shocks. A local projection analysis of aggregate U.S. data shows that the empirical results, including the cyclicality of markups, are consistent with the model's impulse response functions.
    Keywords: hiring as investment, intertemporal allocation, business cycles, confluence of hiring and price frictions, propagation and amplification, mark up cyclicality
    JEL: E22 E24 E32 E52
    Date: 2020–01
  3. By: Dmitry Kulikov; Nicolas Reigl
    Abstract: This paper takes a fresh look at the use of the Phillips curve and various in ation expectation proxies for tracking euro area in ation dynamics in the aftermath of the global nancial crisis of 2008. Because in ation expectations can be measured in a multitude of alternative ways and the Phillips curve model itself is subject to many potential speci cation choices, we employ a novel thick modelling perspective that is data and model-agnostic and estimate a large number of di erent Phillips curve models using di erent data series for di erent components of our models. We nd that Phillips curve models without any forward-looking expectational terms are uniformly the worst predictors of euro area in ation rates after 2013, when measured for the RMSE criterion across all models and speci cations. This result underlines the importance of in ation expectations in tracking the recent dynamics of euro area in ation and shows that in ation persistence alone or in combination with di erent slack and cost push terms cannot satisfactorily explain the euro area in ation story during the period of missing in ation after 2012. We also illustrate the usefulness of the thick modelling approach for practical modelling and forecasting of the euro area in ation series.
    Keywords: data-rich models, thick modelling, data and model uncertainty, Phillips curve, in ation expectations, in ation dynamics, euro area
    JEL: E31 E37 E58 C13 C15 C52
    Date: 2020–01–29
  4. By: Jonas Gross (University of Bayreuth); Johannes Zahner (Philipps-University Marburg)
    Abstract: This paper analyzes the interest rate setting of the European Central Bank (ECB) both before and after the outbreak of the global financial crisis. In the current monetary policy literature, researchers typically select one Taylor rule-based model in order to analyze the interest rate setting of central banks, but neglect uncertainty about the choice of this respective model. We apply a Bayesian model averaging (BMA) approach to extend the standard Taylor rule to account for model uncertainty driven by heterogeneity in the ECB decision-making body, the governing council. Our results suggest the following: First, the ECB acts according to its official mandate to maintain price stability and therefore to focus its decisions on the inflation rate. Second, economic activity measures have been in the focus of the ECB before the financial crisis broke out. Third, over the last decade, the role of economic activity for ECB monetary policy has decreased so that inflation seems to be the main driver of monetary policy decisions. Fourth, central bankers appear to consider more than one model when they decide about monetary policy measures.
    Keywords: European Central Bank, Taylor Rule, Bayesian Model Averaging, Model Uncertainty
    JEL: C11 E43 D81 E52 E58
    Date: 2020
  5. By: Thibaut Duprey; Alexander Ueberfeldt
    Abstract: We propose a novel framework to analyze how policy-makers can manage risks to the median projection and risks specific to the tail of gross domestic product (GDP) growth. By combining a quantile regression of GDP growth with a vector autoregression, we show that monetary and macroprudential policy shocks can reduce credit growth and thus GDP tail risk. So policymakers concerned about GDP tail risk would choose a tighter policy stance at the expense of macroeconomic stability. Using Canadian data, we show how our framework can add tail event information to projection models that ignore them and give policy-makers a tool to communicate the trade-offs they face.
    Keywords: Central bank research; Economic models; Financial stability; Financial system regulation and policies; Interest rates; Monetary Policy; Monetary policy framework
    JEL: E44 E52 E58 D8 G01
    Date: 2020–01
  6. By: Thomas J. Carter; Rhys R. Mendes
    Abstract: We analyze money financing of fiscal transfers (helicopter money) in two simple New Keynesian models: a “textbook” model in which all money is non-interest-bearing (e.g., all money is currency), and a more realistic model with interest-bearing reserves. In the textbook model with only non-interest-bearing money, we find the following: * A money-financed fiscal expansion can be more stimulative than a debt-financed fiscal expansion of equal magnitude. However, the extra stimulus requires that the central bank abandon its usual feedback rule for an extended period, allowing interest rates to instead be determined by the rate of money creation. * Moreover, the extra stimulus associated with money financing stems solely from its implications for the path of short-term interest rates and cannot be attributed to an oft-cited Ricardian-equivalence argument that money financing avoids the adverse wealth effects associated with higher taxes under debt financing. * Because the stimulative effects of money financing are driven by its implications for interest rates, a combination of debt financing and sufficiently accommodative forward guidance can replicate all welfare-relevant outcomes while bypassing the potential political-economic complications associated with helicopter money. * Apart from these complications, money financing also has the drawback that it would allow money-demand shocks to generate volatility in output and inflation, much as was the case under the money-targeting regimes of the 1970s and 1980s. In the model with interest-bearing reserves, we find the following: * The rate of money creation determines the interest rate on reserves, but broader interest rates are invariant across debt- and money-financing regimes. * As a result, money financing delivers no extra stimulus relative to debt financing. Overall, results suggest that helicopter money cannot be justified on the grounds that it would allow policy-makers to get more stimulus out of a given fiscal expansion: either money financing has no extra stimulative benefits to offer, or all potential benefits could be pursued more effectively and robustly using alternative policies.
    Keywords: Credibility; Economic models; Fiscal Policy; Inflation targets; Interest rates; Monetary Policy; Monetary policy framework; Transmission of monetary policy; Uncertainty and monetary policy
    JEL: E12 E41 E43 E51 E52 E58 E61 E63
    Date: 2020–02
  7. By: Sebastian Di Tella; Robert E. Hall
    Abstract: We develop an equilibrium theory of business cycles driven by spikes in risk premiums that depress business demand for capital and labor. Aggregate shocks increase firms’ uninsurable idiosyncratic risk and raise risk premiums. We show that risk shocks can create quantitatively realistic recessions, with contractions in employment, consumption, and investment. Business cycles are inefficient—output and employment fall too much during recessions, compared to the constrained-efficient allocation, and consumption should rise. Optimal policy involves stimulating employment and consumption during recessions.
    JEL: E21 E22 E32
    Date: 2020–01
  8. By: Isaac Baley; Ana Figueiredo; Robert Ulbricht
    Abstract: This paper studies the dynamics of skill mismatch over the business cycle. We build a tractable directed search model, in which workers differ in skills along multiple dimensions and sort into jobs with heterogeneous skill requirements along those dimensions. Skill mismatch arises due to information and labor market frictions. Estimated to the U.S., the model replicates salient business cyclic properties of mismatch. We show that job transitions in and out of bottom job rungs, combined with career mobility of workers, are important to account for the empirical behavior of mismatch. The predicted career dynamics provide a novel narrative for the scarring effect of unemployment. The model suggests significant welfare costs associated with mismatch due to learning frictions.
    Keywords: Business cycles, cleansing, learning about skills, multidimensional sorting, scarring effect of unemployment, search-and-matching, skill mismatch, sullying
    JEL: E24 E32 J24 J64
    Date: 2020–02
  9. By: Richard K. Crump; Stefano Eusepi; Emanuel Moench (Deutsche Bundesbank; Halle (Saale); Bank für Internationalen Zahlungsausgleich)
    Abstract: The Federal Open Market Committee (FOMC) statement released on August 9, 2011, was the first to incorporate language on ?forward guidance? with an explicit date tied to the Committee?s expected path of monetary policy. In this post, we exploit the timing of surveys taken before and after this statement?s release to investigate how professional forecasters changed their expectations of growth, inflation, and monetary policy. We find that the average forecast of the federal funds rate shifts considerably and closely aligns with the new language in the statement, while the average forecasts for growth and inflation change less. While there?s near unanimity among forecasters about the future path of the federal funds rate after the August 2011 FOMC statement, forecasters maintained differing views on the growth and inflation outlooks.
    Keywords: Professional Forecasters; FOMC communication; policy expectations
    JEL: E2 E5
  10. By: V. Colombo
    Abstract: This paper studies the real effects of an exogenous UK tax change in recessions and expansions. The tax shock is identified via the measure proposed by Cloyne (2013). Combining local projection techniques (Jordà, 2005) with smooth transition regressions (Granger and Teräsvirta, 1994), tax policy shock is found to affect UK macroeconomic variables depending on the phase of the business cycle the economy is when tax shock occurs. An exogenous tax cut in recessions triggers a large, persistent, positive, and statistically significant reaction in output, consumption, investment, exports, imports, and government consumption. The results suggest that the output tax multiplier is positive and above one (in absolute value) in recessions but not in expansions. The size and the sign of responses of a number of macroeconomic variables are also found to be state-contingent.
    JEL: E32 E62 H20
    Date: 2020–02
  11. By: Dilara Ertug; Pinar Ozlu; M. Utku Ozmen; Caglar Yunculer
    Abstract: In this paper, we analyze the extent to which the use of imported inputs affects exchange rate and import price pass-through into domestic producer and consumer prices for services in Turkey. We first calculate the use of imported inputs on sectoral level by analyzing the input-output tables. Then, by taking the sectoral heterogeneity regarding the use of imported inputs into account, we estimate import price and exchange rate pass-through by utilizing import prices, producer prices (consumer prices for services) and output gap on sectoral basis. Our results point to a substantial heterogeneity across sectors in terms of exchange rate and import price pass-through. While the import price (in foreign currency) pass-through is in line with the share of imported input to a large extent, the pass-through of exchange rate shocks to domestic prices are generally higher than the share of imported inputs in costs inclusive of labor. Our findings also reveal that this excess exchange rate pass-through has strengthened over the recent period. Additional analyses carried out reveal that the high share of foreign currency debt is associated with higher exchange rate pass-through, suggesting that the management of foreign exchange liability might play a critical role to enhance the effectiveness of monetary policy and to create room for maneuver to fight against inflation by reducing the excess exchange rate pass-through.
    Keywords: Imported inputs, Import price pass-through, Exchange rate pass-through, FX liability
    JEL: D57 E31 E52
    Date: 2020
  12. By: Dmitry Matveev
    Abstract: I show that maturity considerations affect the optimal conduct of monetary and fiscal policy during a period of government debt reduction. I consider a New Keynesian model and study a dynamic game of monetary and fiscal policy authorities without commitment, characterizing the incentives that drive the choice of interest rate. The presence of long-term bonds makes government budgets less sensitive to changes in interest rates. As a result, a reduction of government debt induced by a lack of policy commitment is associated with tight monetary policy. Furthermore, the long maturity of bonds slows down the speed of debt reduction up to the rate consistent with existing empirical evidence on the persistence of government debt. Finally, the long maturity of bonds brings down the welfare loss associated with debt reduction.
    Keywords: Fiscal Policy; Monetary Policy
    JEL: E52 E62 E63
    Date: 2019–12
  13. By: Calvin He (Reserve Bank of Australia); Gianni La Cava (Reserve Bank of Australia)
    Abstract: We document that the effect of monetary policy on housing prices varies substantially by local housing market. We show that this heterogeneity across local housing markets can be partly explained by variation in housing supply conditions – housing prices are typically more sensitive to changes in interest rates in areas where land is more expensive. But other factors are important too. Specifically, we find the sensitivity is greater in areas where incomes are relatively high, households are more indebted and there are more investors. Taken together, this suggests that the state of the economy can affect the sensitivity of housing prices to monetary policy. We also directly explore how monetary policy affects housing wealth inequality. We find that housing prices in more expensive areas are more sensitive to changes in interest rates than in cheaper areas. This suggests that lower interest rates increase housing wealth inequality, while higher rates do the opposite. However, these effects appear to be temporary.
    Keywords: housing; monetary policy; mortgage debt; inequality; heterogeneity
    JEL: D31 E21 E52
    Date: 2020–02
  14. By: Marco Del Negro; M. Henry Linder; Sara Shahanaghi (Research and Statistics Group); Marc Giannoni; Matthew Cocci; Stefano Eusepi
    Abstract: The previous post in this series showed how the Federal Reserve Bank of New York?s DSGE model can be used to provide an interpretation of the Great Recession and the slow recovery. In this post, we look at the role of the model as a forecasting tool and evaluate its forecasting performance since 2010. This analysis will give context for the last post, which will present the model?s current forecast for the U.S. economy.
    Keywords: Forecasting; DSGE models
    JEL: E2 E5
  15. By: Francesco Furlanetto (BI Norwegian Business School; Norges Bank); Paolo Gelain; Marzie Sanjani (International Monetary Fund)
    Abstract: This paper investigates how the presence of pervasive financial frictions and large financial shocks changes the optimal monetary policy prescriptions and the estimated dynamics in a New Keynesian model. We find that financial factors affect the optimal policy only to some extent. A policy of nominal stabilization (with a particular focus on targeting wage inflation) is still the optimal policy, although the central bank is now unable to fully stabilize economic activity around its potential level. In contrast, the presence of financial frictions and financial shocks crucially changes the size and shape of the estimated output gap and the relative importance of different shocks in driving economic fluctuations, with financial shocks absorbing explanatory power from labor supply shocks.
    Keywords: Financial frictions; output gap; monetary policy
    JEL: E32 C51 C52
    Date: 2020–02–15
  16. By: Pooyan Amir-Ahmadi; Gustavo S. Cortes; Marc D. Weidenmier
    Abstract: The Great Depression provides a unique setting to test the impact of monetary policies on economic activity in a monetary union within the same country during a severe crisis. Until the mid-1930s, the 12 Federal Reserve banks had the ability to set their own discount rates and conduct independent monetary policy. Using a structural VAR with sign restrictions and new monthly data for each Federal Reserve district between 1923-33, we extract a national monetary policy factor from the 12 discount rates of the Federal Reserve banks. We then identify the region-specific component for each Fed district by subtracting the common factor component of monetary policy from the discount rate of each Federal Reserve bank. Our findings suggest that there was significant variation in regional monetary policy and that the district reserve banks played a key role in the economic contraction.
    JEL: E52 E58 N1 N12
    Date: 2020–01
  17. By: Sushant Acharya; Keshav Dogra; Shu Lin Wee; Julien Bengui
    Abstract: Economic activity has remained subdued following the Great Recession. One interpretation of the listless recovery is that recessions inflict permanent damage on an economy?s productive capacity. For example, extended periods of high unemployment can lead to skill losses among workers, reducing human capital and lowering future output. This notion that temporary recessions have long-lasting consequences is often termed hysteresis. Another explanation for sluggish growth is the influential secular stagnation hypothesis, which attributes slow growth to long-term changes in the economy?s underlying structure. While these explanations are observationally similar, they have very different policy implications. In particular, if structural factors are responsible for slow growth, then there might be little monetary policy can do to reverse this trend. If instead hysteresis is to blame, then monetary policy may be able to reverse slowdowns in potential output, or even prevent them from occurring in the first place.
    Keywords: hysteresis; unemployment; monetary policy
    JEL: E2 E5
  18. By: Christoph Bierbrauer (University of Osnabrueck, Department of Economics, Rolandstr. 8, 49069 Osnabrueck, Germany)
    Abstract: We provide an early assessment of the Juncker Commission's contributions to the ongoing reform of the euro area. In doing so, we present a chronological summary of the reform process up to 2014. At the time, the euro area architecture had undergone many changes. These were mainly focused on risk prevention in the tradition of the original Stability and Growth Pact. The self-proclaimed priority of Juncker was the translation of already agreed upon reforms into European law and to add mechanisms for risk sharing in the public and private sector. Other objectives included kick-starting investment in Europe, increase transparency and democratic accountability and to make the workings of the Commission more visible to improve public support for the common institution. The Juncker Commission faced a Sisyphean task. A slow bur steady euro areawide economic upturn, positive for member states, eased their economic pressures and led to a general reform fatigue. Moreover, the Brexit decision in the United Kingdom absorbed resources as well as attention and made reform decisions that require unanimity among the member states difficult. In Juncker's term, reforms moved at glacial speed, a major breakthrough with regard to adding risk sharing to the euro area architecture could not be achieved. In his term however, the Commission was able to provide considerable support for investment in Europe and to increase public support for the European project which was at a record low when Juncker took office.
    Keywords: European Union; European Economic and Monetary Union; European Commission; Jean-Claude Juncker; Euro area reform; European Integration; European debt crisis; Public Debt; Decentralized fiscal policy;
    JEL: E00 E02 E69 F36 F45 F53 F59 H00 H12
    Date: 2020–02–05
  19. By: Frank Schorfheide; Marco Del Negro; Raiden B. Hasegawa
    Abstract: As an economist, you make policy recommendations at any point in time that depend on what model of the economy you have in mind and on your assessment of the state of the economy. One can see these points play out in the current discussion about the timing of interest rate liftoff and the speed of the subsequent renormalization. If you think nominal rigidities are not all that important, you are likely to conclude that accommodative policies won?t do much for growth but will generate inflation. Similarly, if you are convinced that the economy is already firing on all cylinders, you may see little need for prolonged accommodation. The problem is, you are not quite sure about the state of the economy or what the right model is. If you are a Bayesian, you may want to try to put probabilities on different models/states of the world and take it from there. The first post in this series, ?Combining Models for Forecasting and Policy Analysis,? introduced a procedure called dynamic pools that shows how to do just that. In this post, we apply that procedure to a policy exercise. We can?t publicly discuss current policies, so we will instead apply our method to consider alternative monetary policies at the onset of the Great Recession.
    Keywords: DSGE; Model Uncertainty; Monetary Policy; Model Combination
    JEL: E2 E5
  20. By: William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Giovanni Bella (Department of Economics and Business, University of Cagliari, Italy); Taniya Ghosh (Indira Gandhi Institute of Development Research, Mumbai, India); Paolo Mattana (Department of Economics and Business, University of Cagliari, Italy); Beatrice Venturi (Department of Economics and Business, University of Cagliari, Italy)
    Abstract: The paper shows that in a New Keynesian (NK) model, an active interest rate feedback monetary policy, when combined with a Ricardian passive fiscal policy, à la Leeper-Woodford, may induce the onset of a Shilnikov chaotic attractor in the region of the parameter space where uniqueness of the equilibrium prevails locally. Implications, ranging from long-term unpredictability to global indeterminacy, are discussed in the paper. We find that throughout the attractor, the economy lingers in particular regions, within which the emerging aperiodic dynamics tend to evolve for a long time around lower-than-targeted inflation and nominal interest rates. This can be interpreted as a liquidity trap phenomenon, produced by the existence of a chaotic attractor, and not by the influence of an unintended steady state or the Central Bank's intentional choice of a steady state nominal interest rate at its lower bound. In addition, our finding of Shilnikov chaos can provide an alternative explanation for the controversial “loanable funds” over-saving theory, which seeks to explain why interest rates and, to a lesser extent inflation rates, have declined to current low levels, such that the real rate of interest is below the marginal product of capital. Paradoxically, an active interest rate feedback policy can cause nominal interest rates, inflation rates, and real interest rates unintentionally to drift downwards within a Shilnikov attractor set. Policy options to eliminate or control the chaotic dynamics are developed.
    Keywords: Shilnikov chaos criterion, global indeterminacy, long-term un-predictability, liquidity trap
    JEL: C61 C62 E12 E52 E63
    Date: 2020–01
  21. By: Peter Tillmann (University of Giessen)
    Abstract: This paper studies the demand for information about monetary policy, while the literature on central bank transparency and communication typically studies the supply of information by the central bank or the reception of the information provided. We use a new data set on the number of views of the Federal Reserve's website to measure the demand for information. We show that exogenous news about the state of the economy as re flected in U.S. macroeconomic news surprises raise the demand for information about monetary policy. Surprises trigger an increase in the number of views of the policy-relevant sections of the website, but not the other sections. Hence, market participants do not only revise their policy expectations after a surprise, but actively acquire new information. We also show that attention to the Fed matters: a high number of views on the day before the news release weakens the high-frequency response of interest rates to macroeconomic surprises.
    Keywords: macroeconomic announcements, nonfarm payroll, attention, event study, central bank communication
    Date: 2020
  22. By: Junichi Kikuchi; Yoshiyuki Nakazono
    Abstract: Using a unique survey of 50,000 households for 4 years, this study examines how households form inflation expectations. There are three findings. First, disagreements on inflation forecasts among households are larger for the shorter-term than those for the longer-term horizon; additionally, disagreements are predicted by how frequently households collect information about overall inflation rates. Inflation forecasts for the 1-year horizon are widely dispersed, while those for the 10-year horizon are anchored below 2%. Second, households heterogeneously update their information sets on prices. 46% of the households collect information about the consumer price index at least once a quarter, while the remaining households less frequently or never obtain this information. Third, forecast revisions are sensitive to a change in food prices. We show that more than half of households are attentive only to a change in food prices and may form their inflation expectations using food price changes as a signal of fluctuations in the overall inflation rates. The existence of numerous households that are inattentive to the nationwide inflation rates casts doubt on the transmission mechanism of the monetary policy through the management of expectations.
    Date: 2020–01
  23. By: Takuma Kunieda (School of Economics, Kwansei Gakuin University); Kazuo Nishimura (Research Institute for Economics and Business Administration, Kobe University)
    Abstract: Does financial development amplify or contract sunspot fluctuations? To address this question, we explore a two-sector dynamic general equilibrium model with financial frictions and sector-specific production externalities. We first derive a condition for indeterminacy of equilibria to occur, and then, a sunspot variable is introduced in the economy with financial frictions. The outcome shows that if labor intensity in the consumption good sector from the social perspective is very large, financial development is more likely to magnify sunspot fluctuations, whereas if labor intensity in the intermediate good sector from the social perspective is very large, financial development is more likely to contract sunspot fluctuations
    Keywords: Two production sectors; financial frictions; sector-specific production externalities; sunspots
    JEL: E32 E44 O41
    Date: 2020–02
  24. By: Wee Chian Koh; M. Ayhan Kose; Peter S. Nagle; Franziska L. Ohnsorge; Naotaka Sugawara
    Abstract: Emerging market and developing economies have experienced recurrent episodes of rapid debt accumulation over the past fifty years. This paper examines the consequences of debt accumulation using a three-pronged approach: an event study of debt accumulation episodes in 100 emerging market and developing economies since 1970; a series of econometric models examining the linkages between debt and the probability of financial crises; and a set of case studies of rapid debt buildup that ended in crises. The paper reports four main results. First, episodes of debt accumulation are common, with more than 500 episodes occurring since 1970. Second, around half of these episodes were associated with financial crises which typically had worse economic outcomes than those without crises— after 8 years output per capita was typically 6-10 percent lower and investment 15-22 percent weaker in crisis episodes. Third, a rapid buildup of debt, whether public or private, increased the likelihood of a financial crisis, as did a larger share of short-term external debt, higher debt service, and lower reserves cover. Fourth, countries that experienced financial crises frequently employed combinations of unsustainable fiscal, monetary and financial sector policies, and often suffered from structural and institutional weaknesses.
    Keywords: Financial crises, currency crises, debt crises, banking crises, public debt, private debt, external debt
    JEL: E32 E61 G01 H12 H61 H63
    Date: 2020–02
  25. By: Catherine Doz (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PSE - Paris School of Economics); Laurent Ferrara (SKEMA Business School - Université Côte d'Azur); Pierre-Alain Pionnier (OCDE - Organisation de Coopération et de Développement Economiques)
    Abstract: The Great Recession and the subsequent period of subdued GDP growth in most advanced economies have highlighted the need for macroeconomic forecasters to account for sudden and deep recessions, periods of higher macroeconomic volatility, and fluctuations in trend GDP growth. In this paper, we put forward an extension of the standard Markov-Switching Dynamic Factor Model (MS-DFM) by incorporating two new features: switches in volatility and time-variation in trend GDP growth. First, we show that volatility switches largely improve the detection of business cycle turning points in the low-volatility environment prevailing since the mid-1980s. It is an important result for the detection of future recessions since, according to our model, the US economy is now back to a low-volatility environment after an interruption during the Great Recession. Second, our model also captures a continuous decline in the US trend GDP growth that started a few years before the Great Recession and continued thereafter. These two extensions of the standard MS-DFM framework are supported by information criteria, marginal likelihood comparisons and improved real-time GDP forecasting performance.
    Keywords: Markov-Switching Dynamic Factor Model (MS-DFM),Great Moderation,Great Recession,Turning-Point Detection,Macroeconomic Forecasting
    Date: 2020–01
  26. By: Katya Kartashova
    Abstract: This note studies how decreases in mortgage rates affect the behaviour of borrowers in terms of spending on durable goods and repaying debt. It focuses on borrowers with the prevailing five-year fixed-rate mortgage term in Canada who renewed their contracts at lower interest rates between January 2015 and December 2016.
    Keywords: Credit and credit aggregates; Housing; Interest rates; Monetary Policy; Transmission of monetary policy
    JEL: D12 D14 E43 E52 G21 R31
    Date: 2020–01
  27. By: George K. Zestos; Rachel N. Cooke
    Abstract: This paper analyzes recent macroeconomic developments in the eurozone, particularly in Germany. Several economic indicators are sending signals of a looming German recession. Geopolitical tensions caused by trade disputes between the United States and China, plus the risk of a disorderly Brexit, began disrupting the global supply chain in manufacturing. German output contraction has been centered on manufacturing, particularly the automobile sector. Despite circumstances that call for fiscal intervention to rescue the economy, Chancellor Angela Merkel's government was overdue with corrective measures. This paper explains Germany's hesitancy to protect its economy, which has been based on a political and historical ideology that that rejects issuing new public debt to increase public spending, thus leaving the economy exposed to the doldrums. The paper also considers serious shortcomings in the European Union’s (EU) foreign and defense policies that recently surfaced during the Syrian refugee crisis. The eurocrisis revealed near-fatal weaknesses of the European Monetary Union (EMU), which is still incomplete without a common fiscal policy, a common budget, and a banking union. Unless corrected, such deficiencies will cause both the EU and the EMU to dissolve if another asymmetric shock occurs. This paper also analyzes recent geopolitical developments that are crucial to the EU/eurozone's existential crisis.
    Keywords: Balanced Budget; Fiscal Stimulus; Debt Brake; Recession; Austerity; Geopolitical Tensions; Syria; Libya
    JEL: B22 E50 E60 F02 F15 F45 H30 H60
  28. By: Jongrim Ha; M. Ayhan Kose; Christopher Otrok; Eswar S. Prasad
    Abstract: We develop a new dynamic factor model that allows us to jointly characterize global macroeconomic and financial cycles and the spillovers between them. The model decomposes macroeconomic cycles into the part driven by global and country-specific macro factors and the part driven by spillovers from financial variables. We consider cycles in macroeconomic aggregates (output, consumption, and investment) and financial variables (equity and house prices, and interest rates). We find that the global macro factor plays a major role in explaining G-7 business cycles, but there are also spillovers from equity and house price shocks onto macroeconomic aggregates. These spillovers operate mainly through the global macro factor rather than the country-specific macro factors (i.e., these spillovers affect business cycles in all G-7 economies) and are stronger in the period leading up to and following the global financial crisis. We find little evidence of spillovers from macroeconomic cycles to financial cycles.
    Keywords: Global business cycles, global financial cycles, common shocks, international spillovers, dynamic factor models
    JEL: E32 F4 C32 C1
    Date: 2020–02
  29. By: M. Ayhan Kose; Naotaka Sugawara; Marco E. Terrones
    Abstract: The world economy has experienced four global recessions over the past seven decades: in 1975, 1982, 1991, and 2009. During each of these episodes, annual real per capita global GDP contracted, and this contraction was accompanied by weakening of other key indicators of global economic activity. The global recessions were highly synchronized internationally, with severe economic and financial disruptions in many countries around the world. The 2009 global recession, set off by the global financial crisis, was by far the deepest and most synchronized of the four recessions. As the epicenter of the crisis, advanced economies felt the brunt of the recession. The subsequent expansion has been the weakest in the post-war period in advanced economies as many of them have struggled to overcome the legacies of the crisis. In contrast, most emerging market and developing economies weathered the 2009 global recession relatively well and delivered a stronger recovery than after previous global recessions.
    Keywords: Global economy, global expansion, global recession, global recovery, synchronization of cycles, financial markets, real activity
    JEL: E32 F44 N10 O47
    Date: 2020–02
  30. By: Hannes Boehm (Halle Institute for Economic Research); Julia Schaumburg (Vrije Universiteit Amsterdam); Lena Tonzer (Halle Institute for Economic Research)
    Abstract: We analyze whether financial integration between countries leads to converging or diverging business cycles using a dynamic spatial model. Our model allows for contemporaneous spillovers of shocks to GDP growth between countries that are financially integrated and delivers a scalar measure of the spillover intensity at each point in time. For a financial network of ten European countries from 1996-2017, we find that the spillover effects are positive on average but much larger during periods of financial stress, pointing towards stronger business cycle synchronization. Dismantling GDP growth into value added growth of ten major industries, we observe that some sectors are strongly affected by positive spillovers (wholesale & retail trade, industrial production), others only to a weaker degree (agriculture, construction, finance), while more nationally influenced industries show no evidence for significant spillover effects (public administration, arts & entertainment, real estate).
    Keywords: Financial Integration, Business Cycle Synchronization, Industry Dynamics, Spatial Model
    JEL: E32 F44 G10
    Date: 2020–02–04
  31. By: Tobias Adrian; Richard K. Crump; Emanuel Moench (Deutsche Bundesbank; Halle (Saale); Bank für Internationalen Zahlungsausgleich)
    Abstract: Some commentators have expressed concern that Treasury yields might rise sharply once the Federal Open Market Committee (FOMC) begins to raise the federal funds rate (FFR), worrying, in particular, about a sudden increase in Treasury term premia. In this post, we analyze the dynamics of Treasury term premia over the last fifty years and discuss their evolution around recent tightening cycles, paying special attention to the 1994 episode when bond prices dropped sharply around the world. We find that term premia don?t typically rise when monetary policy tightens. We also conclude, based on the behavior of term premia and survey evidence, that the sharp rise in Treasury yields in 1994 was in large part due to an upward shift in the expected path of future short-term interest rates.
    Keywords: tightening cycles; Term premia; monetary policy
    JEL: E2 G1
  32. By: Jonathan McCarthy; Richard Peach
    Abstract: We know that different people experience different inflation rates because the bundle of goods and services that they consume is different from that of the \\"typical\\" household. This phenomenon is discussed in this publication from the Bureau of Labor Statistics (BLS), and this article from the New York Fed. But did you know that there are substantial differences in inflation experience depending on the level of one's housing costs? In this post, which is based upon our updated staff report on ?The Measurement of Rent Inflation,? we present evidence that price changes for rent, which comprises a large share of consumer spending, can vary considerably across households. In particular, we show that rent inflation is consistently higher for lower-cost housing units than it is for higher-cost units. Note that since owners' equivalent rent inflation is estimated from observed changes in rent of rental units, this finding applies to homeowners as well. While we cannot be certain about why this is the case, it appears to be at least partly related to how additional units are supplied to the housing market: in higher-price segments additional units primarily come from new construction, while most of the increase in lower-price segments comes from units that previously were occupied by higher-income households.
    Keywords: differences in rent inflation by rent level; measuring rent inflation
    JEL: E2 R3
  33. By: Emanuel Moench (Deutsche Bundesbank; Halle (Saale); Bank für Internationalen Zahlungsausgleich); Stefano Eusepi; Richard K. Crump
    Abstract: Following the June 18-19 Federal Open Market Committee (FOMC) meeting different measures of short-term interest rates increased notably. In the chart below, we plot two such measures: the two-year Treasury yield and the one-year overnight indexed swap (OIS) forward rate, one year in the future. The vertical line indicates the final day of the June FOMC meeting. To what extent did this rise in rates following the June FOMC meeting reflect a shift in the expected future path of the federal funds rate (FFR)? Market participants and policy makers often directly read the expected path from financial market data such as the OIS contracts. In this post, we take an alternative approach by looking at surveys of professional forecasters to assess how expectations changed.
    Keywords: FOMC; Professional Forecasts; Monetary Policy
    JEL: E2 E5
  34. By: Mario Tonveronachi
    Abstract: Starting from the mid-nineteenth century, this paper analyzes two periods of financial instability connected with financial globalization. The first culminates with the 1929 crisis, while the second characterizes the more recent experience starting from the 1970s. The period in between is divided into two subperiods. The first goes up to World War II and sees a retrenchment from globalization and the affirmation of a statist approach to national policy autonomy in pursuing domestic goals, for which we take as examples the New Deal, financial regulation, and the new international cooperative approach finally leading to Bretton Woods. The second subperiod, marked by the new international monetary order and limited globalization, although appearing as a relatively calm interlude, conceals the seeds of a renewed push toward financial fragility. The above periods are synthetically analyzed in terms of the development and mutual fertilization of theories, institutions, and vested public and private interests. The narrative is based on two interpretative keys: the Minskyan theory of financial fragility and changes in the public-private partnership, mainly with reference to the financial sector for which the role of the State as guarantor of last resort necessarily ensues. The lesson that can be derived is that a laissez-faire approach to globalization strengthens asymmetric powers and necessarily leads to overglobalization, as well as to financial and economic instability, rendering it extremely difficult and socially costly for the State to comply with its role of financial guarantor.
    Keywords: Financial Instability; Financial Fragility Theory; Globalization; International Cooperation; Financial Regulation; Public-Private Partnership
    JEL: B00 E1 E31 E32 E4 F33 G18
  35. By: Richard K. Crump; Domenico Giannone (Solvay Brussels School of Economics and Management; Federal Reserve Bank of New York; La Trobe University; Université Libre de Bruxelles; Libera Universität Internazionale degli Studi Sociali; European Central Bank; University of Aston in Birmingham; European Centre for Advanced Research in Economics and Statistics; Centre for Economic Policy Research (CEPR)); David O. Lucca (Federal Reserve Bank)
    Abstract: The study of the business cycle—fluctuations in aggregate economic activity between times of widespread expansion and contraction—is one of the foremost pursuits in macroeconomics. But even distinguishing periods of expansion and recession can be challenging. In this post, we discuss different conceptual approaches to dating the business cycle, study their past performance for the U.S. economy, and highlight the informativeness of labor market indicators.
    Keywords: Business cycle dating; recessions; expansions; labor market
    JEL: E2
    Date: 2020–02–10
  36. By: Argia M. Sbordone; Bianca De Paoli; Andrea Tambalotti (Federal Reserve Bank of New York; Research and Statistics Group; Princeton University; New York University; National Bureau of Economic Research)
    Abstract: Dynamic stochastic general equilibrium (DSGE) models provide a stylized representation of reality. As such, they do not attempt to model all the myriad relationships that characterize economies, focusing instead on the key interactions among critical economic actors. In this post, we discuss which of these interactions are captured by the FRBNY model and describe how we quantify them using macroeconomic data. For more curious readers, this New York Fed working paper provides much greater detail on these and other aspects of the model.
    Keywords: financial frictions; DSGE models
    JEL: E2 E5
  37. By: David O. Lucca (Federal Reserve Bank); Stefano Eusepi; Richard K. Crump; Emanuel Moench (Deutsche Bundesbank; Halle (Saale); Bank für Internationalen Zahlungsausgleich)
    Abstract: The growth rate in real gross domestic product (GDP) is a conventional indicator of the economy?s health. But the two ways of measuring annual GDP growth can give very different answers. In 2013, GDP grew 2.2 percent on a year-over-year basis, but at a faster 3.1 percent rate on a Q4-over-Q4 basis. So, which measure is more meaningful? We show in this post that the Q4/Q4 metric is better since it only considers quarterly growth rates during the current year, while the Year/Year measure depends on quarterly growth rates in both the current and previous year and puts considerable weight on growth around the turn of the year.
    Keywords: Summary of Economic Projections; Growth rates; Business cycles
    JEL: E2
  38. By: Jesus Felipe; Donna Faye Bajaro; Gemma Estrada; John McCombie
    Abstract: We show that Autor and Salomons' (2017, 2018) analysis of the impact of technical progress on employment growth is problematic. When they use labor productivity growth as a proxy for technical progress, their regressions are quasi-accounting identities that omit one variable of the identity. Consequently, the coefficient of labor productivity growth suffers from omitted-variable bias, where the omitted variable is known. The use of total factor productivity (TFP) growth as a proxy for technical progress does not solve the problem. Contrary to what the profession has argued for decades, we show that this variable is not a measure of technical progress. This is because TFP growth derived residually from a production function, together with the conditions for producer equilibrium, can also be derived from an accounting identity without any assumption. We interpret TFP growth as a measure of distributional changes. This identity also indicates that Autor and Salomons' estimates of TFP growth’s impact on employment growth are biased due to the omission of the other variables in the identity. Overall, we conclude that their work does not shed light on the question they address.
    Keywords: Employment; Labor Productivity; Technical Progress; Total Factor Productivity
    JEL: E24 O30 O47
  39. By: Xiaoyong Cui (School of Economics, Peking University); Liutang Gong (Guanghua School of Management, Peking University); Chan Wang (School of Finance, Central University of Finance and Economics); Heng-fu Zou (China Economics and Management Academy, Central University of Finance and Economics)
    Abstract: Contrary to the consensus in the literature, we demonstrate that there exist the welfare gains from monetary policy cooperation when the world is hit by a global shock. We reach our conclusion in a two-country New Keynesian model with a global oil price shock and dollar standard. When exporters in both countries and oil producer which is modeled as a third party such as OPEC price goods in the home currency, the U.S. dollar, the status of home and foreign monetary policy is asymmetric. Speciffically, home monetary policy can influence the welfare levels of the households in the world while foreign monetary policy can only affect the welfare level of the domestic household. By internalizing the negative externality of home monetary policy to foreign country, world planner can achieve the welfare gains from monetary policy cooperation. In addition, unlike what is found in the literature, we show that not all countries are willing to take part in monetary policy cooperation, unless the world planner transfers part of the welfare gains from the country which benefits from the monetary policy cooperation to the one which loses.
    Keywords: A global shock, Dollar standard, Monetary policy cooperation, Welfare gains
    JEL: E5 F3 F4
    Date: 2020
  40. By: Eric S. Rosengren
    Abstract: I would note that after two recent rate easings of 25 basis points each, monetary policy is already accommodative. Sustaining growth at potential depends on the U.S. consumer continuing to offset the weakness we are seeing in exports and business fixed investment. To me, it seems appropriate to continue to closely monitor incoming data to determine if the forecast of growth around potential is likely to be achieved, or if the risks I have outlined are indeed materializing. While the risks to the global and U.S. economies remain, there are also risks to easing too aggressively, as I’ve highlighted in previous speeches. Ever-lower interest rates could encourage reaching-for-yield behavior at exactly the wrong stage of the economic cycle. This remains an important consideration factoring into my views on the elements policymakers must weigh and balance at this complex time for our economy.
    Keywords: monetary policy; economic conditions; global economy; employment report; risks to the economic outlook; interest rates; financial indicators; reaching for yield
    Date: 2019–10–11
  41. By: Ryan Rholes (Texas A&M University); Luba Petersen (Simon Fraser University)
    Abstract: This paper provides original empirical evidence on the emerging practice by central banks of communicating uncertainty in their inflation projections. We compare the effects of point and density projections in a learning-to-forecast laboratory experiment where participants' aggregated expectations about one- and two-period-ahead inflation influence macroeconomic dynamics. Precise point projections are more effective at managing inflation expectations. Point projections reduce disagreement and uncertainty while nudging participants to forecast rationally. Supplementing the point projection with a density forecast mutes many of these benefits. Relative to a point projection, density forecasts lead to larger forecast errors, greater uncertainty about own forecasts, and less credibility in the central bank's projections. We also explore expectation formation in individual-choice environments to understand the motives for responding to projections. Credibility in the projections is significantly lower when strategic considerations are absent, suggesting that projections are primarily effective as a coordination device. Overall, our results suggest that communicating uncertainty through density projections reduces the ecacy of inflation point projections.
    Keywords: expectations, monetary policy, inflation communication, credibility, laboratory experiment, experimental macroeconomics, uncertainty, strategic, coordination, group versus individual choice
    Date: 2020–01
  42. By: José Luis Oreiro (None); Luiz Fernando de Paula; João Pedro Heringer Machado
    Abstract: This paper assesses the main theoretical contributions by Fernando Cardim de Carvalho to the Post-Keynesian Economics Paradigm: his elucidation of the fundamental principles that define the concept of a monetary production economy; his analysis of decision-making under non-probabilistic uncertainty; his development of a portfolio choice theory in which the decision to invest is regarded as one of possible wealth accumulation strategies; his liquidity preference theory, including its application to banks’ portfolio allocations under uncertainty; and finally his analysis of the finance-funding circuit and its implications for the functioning of monetary economies.
    Keywords: Post-Keynesian theory; Keynes; monetary economics
    JEL: B59 E12 E44
    Date: 2020–02
  43. By: Matthew Higgins (National Bureau of Economic Research; Georgia Institute of Technology; Federal Reserve Bank of New York; College of Management); Thomas Klitgaard
    Abstract: Germany emerged as a leading destination for immigration around 2011, as the country's labor market improved while unemployment climbed elsewhere in the European Union. A second wave began in 2015, with refugees from the Middle East adding to already heavy inflows from Eastern Europe. The demographic consequences of the surge in immigration include a renewed rise in Germany's population and the stabilization of the country's median age. The macroeconomic consequences are hard to measure but look promising, since per capita income growth has held up and unemployment has declined. Data on labor-market outcomes specific to immigrants are similarly favorable through 2015, but reveal challenges in how well the economy is adjusting to the second immigration wave.
    Keywords: germany european union europe demographics employment labor markets migration immigrants foreign workers employment unemployment
    JEL: E2
  44. By: Linda S. Goldberg; Hunter L. Clark (Research and Statistics Group); Mark Choi (Emerging Markets and International Affairs Group)
    Abstract: It isn?t surprising that the dollar is always in the news, given the prominence of the United States in the global economy and how often the dollar is used in transactions around the world (as discussed in a 2010 Current Issues article). But the dollar may not retain this dominance forever. In this post, we consider and catalog the implications for the United States of a potential lessening of the dollar?s primacy in international transactions. The circumstances surrounding such a possibility are important for the effects. As long as U.S. fundamentals remain strong, key consequences could be somewhat higher funding costs and somewhat lower seigniorage revenues (the excess returns to the government of creating money), some reduced U.S. spillovers to the rest of the world, and enhanced sensitivity of the domestic economy to foreign economic conditions.
    Keywords: Dollar; reserves; currency; international role; rmb; euro
    JEL: E2 F00
  45. By: Hideyuki Mizobuchi (Faculty of Economics, Ryukoku University); Valentin Zelenyuk (CEPA - School of Economics, The University of Queensland)
    Abstract: The use of appropriate index numbers is indispensable for measuring economic phenomena precisely. Various indexes have been proposed in the literature, spanning several centuries. In this paper, we propose the quadratic-mean-of-order-𝑟 indexes of output, input and productivity. Each index is a family of indexes that unify many of the existing indexes, including the most popular ones. We also show that all index number formulae belonging to these families are superlative indexes. This is considered as a generalization of the equivalence of Fisher and Malmquist indexes, shown by Diewert (1992). Our results also give new justifications for output and input comparison and productivity measurement via other interesting indexes such as the implicit Walsh index. We also apply the discussed indexes to the US industry production accounts.
    Keywords: index numbers, superlative index, quadratic-mean-of-order-𝑟 index, Fisher index, Malmquist index, implicit Walsh index, time reversal test
    JEL: C14 D24 E31 O47
    Date: 2020–02
  46. By: Guner, Nezih (CEMFI, Madrid); Kulikova, Yuliya (Banco de España); Valladares-Esteban, Arnau (University of St. Gallen)
    Abstract: The added worker effect (AWE) measures the entry of individuals into the labor force due to their partners' job loss. We propose a new method to calculate the AWE, which allows us to estimate its effect on any labor market outcome. We show that the AWE reduces the fraction of households with two non-employed members. The AWE also accounts for why women's employment is less cyclical and more symmetric compared to men. In recessions, while some women lose their employment, others enter the labor market and find jobs. This keeps the female employment relatively stable.
    Keywords: household labor supply, intra-household insurance, female employment, cyclicality, skewness
    JEL: D1 E32 J21 J22
    Date: 2020–01
  47. By: Lawrence J. Christiano; Martin S. Eichenbaum; Mathias Trabandt
    Abstract: We argue that wage inertia plays a pivotal role in allowing empirically plausible variants of the standard search and matching model to account for the large countercyclical response of unemployment to shocks.
    JEL: E0
    Date: 2020–01
  48. By: Aurélien Goutsmedt (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, UP1 - Université Panthéon-Sorbonne, Chaire Energie & Prospérité - ENS Paris - École normale supérieure - Paris - X - École polytechnique - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique - Institut Louis Bachelier); Goulven Rubin (LEM - Lille économie management - LEM - UMR 9221 - Université de Lille - UCL - Université catholique de Lille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This article studies the dissemination of the Natural Rate of Unemployment Hypothesis (NRH) in macroeconomics during the 1970s, by studying the reaction of Robert J. Gordon to the argument of Milton Friedman (1968). In the early 1970s, Gordon displayed an empirical opposition to the NRH, arguing that the estimated parameter on expected inflation was below one, meaning that the adjustment of inflation in wages was not total. Confronting to new data and to the rise of inflation, Gordon adopted the NRH after 1973. Nevertheless the adoption anticipated any empirical proof of a parameter close to one. We explain that this conversion was due to Friedman's influence on Gordon, but also to the fact it did not prevent Gordon to support active stabilization policies. The article shows how a complex explanation of the 1960s and 1970s inflation was little by little replaced by the simpler accelerationist Phillips Curve. It enables to understand the dissemination of this particular Phillips Curve, relying on the NRH, as a process mainly led by economists close to the Keynesian framework.
    Keywords: Expectations,Natural rate of unemployment,Phillips curve,Stagflation
    Date: 2018–05
  49. By: Robert Kollmann
    Abstract: This paper studies rational bubbles in non-linear dynamic general equilibrium models of the macroeconomy. The term ‘Rational bubble’ refers to multiple equilibria due to the absence of a transversality condition (TVC) for capital. The lack of TVC can be due to an OLG population structure. If a TVC is imposed, the macro models considered here have a unique solution. Bubbles reflect self-fulfilling fluctuations in agents’ expectations about future investment. In contrast to explosive rational bubbles in linearized models (Blanchard (1979)), the rational bubbles in non-linear models here are bounded. Bounded rational bubbles provide a novel perspective on the drivers and mechanisms of business cycles. I construct bubbles (in non-linear models) that feature recurrent boom-bust cycles characterized by persistent investment and output expansions which are followed by abrupt contractions in real activity. Both closed and open economies are analyzed. In a non-linear two-country model with integrated financial markets, bubbles must be perfectly correlated across countries. Global bubbles may, thus, help to explain the synchronization of international business cycles.
    Keywords: rational bubbles, boom-bust cycles, business cycles in closed and open economies, non-linear DSGE models, Long-Plosser model, Dellas model
    Date: 2020–01
  50. By: James Wood; Engelbert Stockhammer
    Abstract: Prevailing Comparative Political Economy accounts conceptualise the macroeconomic role of the financial sector in advanced economies either through the Varieties of Capitalism’s (VoC) emphasis on corporate finance or on the growth model perspective’s focus on household debt to support consumption. As neither framework accounts for the important macroeconomic influence of house prices and mortgage credit, we suggest the prevailing Comparative Political Economy accounts of the financial sector remain underdeveloped. Through an econometric evaluation of 18 advanced economies from 1980 to 2017, we demonstrate that household debt has larger and more statistically significant effects on GDP growth than business debt, and household debt volumes are largely determined by house price inflation. These results are consistent across the varieties of capitalism and advanced banking systems, suggesting the VoC’s focus on corporate finance is misplaced and the macroeconomic effects of household debt and house prices are underappreciated, especially in non-Anglo-American advanced economies.
    Keywords: Comparative political economy, macroeconomics; household debt, house prices
    JEL: N10
    Date: 2020–02
  51. By: Zimmerman, Peter (Bank of England)
    Abstract: I present a model of cryptocurrency price formation that endogenizes both the financial market for coins and the fee-based market for blockchain space. A cryptocurrency has two distinctive features: a price determined by the extent of its usage as money, and a blockchain structure that restricts settlement capacity. Limited settlement space creates competition between users of the currency, so speculative activity can crowd out monetary usage. This crowding-out undermines the ability of a cryptocurrency to act as a medium of payment, lowering its value. Higher speculative demand can reduce prices, contrary to standard economic models. Crowding-out also raises the riskiness of investing in cryptocurrency, explaining high observed price volatility.
    Keywords: Blockchain; cryptocurrency; global games; price volatility
    JEL: D04 E42 G13
    Date: 2020–02–14
  52. By: Garibaldi, Pietro (University of Turin); Gomes, Pedro Maia (Birkbeck, University of London); Sopraseuth, Thepthida (University of Cergy-Pontoise)
    Abstract: The public sector hires disproportionately more educated workers. Using US microdata, we show that the education bias also holds within industries and in two thirds of 3-digit occupations. To rationalize this finding, we propose a model of private and public employment based on two features. First, alongside a perfectly competitive private sector, a cost-minimizing government acts with a wage schedule that does not equate supply and demand. Second, our economy features heterogeneity across individuals and jobs, and a simple sorting mechanism that generates underemployment – educated workers performing unskilled jobs. The equilibrium model is parsimonious and is calibrated to match key moments of the US public and private sectors. We find that the public-sector wage differential and excess underemployment account for 15 percent of the education bias, with the remaining accounted for by technology. In a counterintuitive fashion, we find that more wage compression in the public sector raises inequality in the private sector. A 1 percent increase in unskilled public wages raises skilled private wages by 0.07 percent and lowers unskilled private wages by 0.06 percent.
    Keywords: public-sector employment, public-sector wages, underemployment, education
    JEL: E24 J20 J24 J31 J45
    Date: 2019–12
  53. By: Julian di Giovanni
    Abstract: Large firms play an integral role in aggregate economic activity owing to their size and production linkages. Events specific to these large firms can thus have significant effects on the macroeconomy. Quantifying these effects is tricky, however, given the complexity of the production process and the difficulty in identifying firm-level events. The recent pause in Boeing’s 737 MAX production is a striking example of such an event or “shock” to a large firm. This post applies a basic framework that is grounded in economic theory to provide a back-of-the envelope calculation of how the “737 MAX shock” could impact U.S. GDP growth in the first quarter of 2020.
    Keywords: Boeing; GDP
    JEL: E2
    Date: 2020–02–13
  54. By: Santiago J. Gahn (Univeristà degli Studi di Roma Tre (IT))
    Abstract: Recent contributions have mentioned the possibility of a decreasing trend in capacity utilisation in the US since the 70's. However, no consensus has emerged on the empirical evidence. Comparing the rate of capacity utilisation of the Federal Reserve Board [FRB] with the Full Utilisation Rate [FUR] and the National Emergency Rate [NER] of the Census Bureau, new empirical evidence is shown confirming that there exists such a decreasing trend in capacity utilisation in the US economy, at least since 1989.
    Keywords: Capacity utilisation, growth
    JEL: D24 E32
    Date: 2020–02
  55. By: Max Livingston; Wilbert Van der Klaauw; Basit Zafar (Bank of Italy; Federal Reserve Bank of New York; Forschungsinstitut zur Zukunft der Arbeit; Arizona State University)
    Abstract: Total consumer debt continued to increase in the first quarter of this year, marking the first time since the recession that aggregate debt had grown for three consecutive quarters, according to the May 2014 Quarterly Report on Household Debt and Credit. Is this increase in household debt driven by changes in supply or demand? The January 2014 and April 2014 Senior Loan Officer Opinion Surveys (SLOOS) show an increase in lenders? willingness to make consumer loans over the last several quarters and an increase in the number of lenders reporting looser lending standards, which indicates that credit supply is increasing. To get a better sense of the underlying factors in the evolution of household credit conditions, in February we surveyed 1,110 respondents of the New York Fed?s Survey of Consumer Expectations (SCE) about their ability to obtain credit over the past twelve months and their expectations about future credit access.
    Keywords: credit demand; credit expectations; household debt
    JEL: D1
  56. By: Argia M. Sbordone; Andrea Tambalotti (Federal Reserve Bank of New York; Research and Statistics Group; Princeton University; New York University; National Bureau of Economic Research)
    Abstract: The severe recession experienced by the U.S. economy between December 2007 and June 2009 has given way to a disappointing recovery. It took three and a half years for GDP to return to its pre-recession peak, and by most accounts this broad measure of economic activity remains below trend today. What precipitated the U.S. economy into the worst recession since the Great Depression? And what headwinds are holding back the recovery? Are these headwinds permanent, calling for a revision of our assessment of the economy?s speed limit? Or are they transitory, although very long-lasting, as the historical record on the persistent damages inflicted by financial crisis seems to suggest? In this post, we address these questions through the lens of the FRBNY DSGE model.
    Keywords: Slow Recovery; DSGE; Great Recession; Headwinds; Historical Decomposition
    JEL: E2
  57. By: Marco Cipriani (New York University; Federal Reserve Bank; Federal Reserve Bank of New York; George Washington University; National Bureau of Economic Research); Jonathan Cohn (Markets Group)
    Abstract: On April 1, 2014, the Federal Reserve began collecting transaction-level data on federal funds, Eurodollars, and certificates of deposits from a large set of domestic banks and agencies of foreign banks operating in the United States. Previously, the Fed had only received fed funds and Eurodollar data from major brokers, and not directly from the banks borrowing in these markets. These new data, collected on form FR 2420, have helped the Fed better understand activity in the fed funds and Eurodollar markets. In this post, we focus on the new data on fed funds, in light of the Federal Reserve Bank of New York?s Trading Desk announcement that it plans to use these data to calculate and publish the fed funds effective rate. We plan to publish other posts on the fed funds and Eurodollar markets over the next several months.
    Keywords: fed funds; FFER; FR2420
    JEL: E5 G1
  58. By: Richard K. Crump; Domenico Giannone (Solvay Brussels School of Economics and Management; Federal Reserve Bank of New York; La Trobe University; Université Libre de Bruxelles; Libera Universität Internazionale degli Studi Sociali; European Central Bank; University of Aston in Birmingham; European Centre for Advanced Research in Economics and Statistics; Centre for Economic Policy Research (CEPR)); David O. Lucca (Federal Reserve Bank)
    Abstract: In our previous post, we presented evidence suggesting that labor market indicators provide the most reliable information for dating the U.S. business cycle. In this post, we further develop the case. In fact, the unemployment rate has provided an almost perfect record of distinguishing the beginning of recessions in the post-war U.S. economy. We also show that using more granular labor market data, such as by region or industry, also provides valuable information about the state of the business cycle.
    Keywords: Business cycle dating; recessions; expansions; labor market
    JEL: E2
    Date: 2020–02–12
  59. By: Tsoungui Belinga,Vincent De Paul; Doukali,Mohamed
    Abstract: The Phillips curve is central to discussions of inflation dynamics and monetary policy. In particular, the New Keynesian Phillips Curve is a valuable tool to describe how past inflation, expected future inflation, and real marginal cost or an output gap drive the current inflation rate. However, economists have had difficulty applying the New Keynesian Phillips Curve to real-world data due to empirical limitations. This paper overcomes these limitations by using an identification-robust estimation method called the Tikhonov Jackknife instrumental variables estimator. Data from Morocco are used to examine the ability of the New Keynesian Phillips Curve to explain Moroccan inflation dynamics. The analysis finds that by adding more information to the hybrid version of the New Keynesian Phillips Curve model by increasing the number of moment conditions, the inflation dynamics in Morocco can be well-described by the New Keynesian Phillips Curve. This framework suggests that the New Keynesian Phillips Curve would be a strong candidate for short-run inflation forecasting.
    Keywords: Macroeconomic Management,Inflation,Financial Structures,International Trade and Trade Rules,Economic Stabilization
    Date: 2019–09–17
  60. By: Eric S. Rosengren
    Abstract: My view is that the economy is currently in a good place. Labor markets are strong, inflation is moving to target, and growth is likely to be somewhat above potential. Particularly given the recent cuts in the federal funds rate, and the fact that monetary actions take effect with some lag, I would say that this is a good time to patiently assess the economy. In the short run, I do not see a need for additional policy easing unless there is a material change to the forecast.
    Keywords: global economy; inflation; inverted yield curve; U.S. economic outlook; monetary policy easing; risks to the outlook; consumer spending; PCE inflation
    Date: 2019–12–17
  61. By: Duque, Magali; Mcknight, Abigail
    Abstract: This paper outlines the various issues pertaining to how crime, the legal system and punitive sanctions may provide a mechanism through which inequality is positively related to poverty. We analyse trends in crime rates, review evidence on the determinants of criminal activity, trends in incarceration rates and prison populations, and the profile of prisoners. We explore relevant aspects of criminal justice policies, changes to Legal Aid, and legal reforms, and finish by outlining how the evidence suggests that crime, the legal system and punitive sanctions is one of the mechanisms that contributes to the positive link between economic inequality and poverty, before reviewing policy options.
    Keywords: poverty; inequality; crime; law; punishment; criminal justice; police
    JEL: I32 D31 E62
    Date: 2019–07–03
  62. By: Imbierowicz, Björn; Löffler, Axel; Vogel, Ursula
    Abstract: We investigate the transmission of changes in bank capital requirements and supranational monetary policy, and their interaction effect, on euro area bank lending and lending rates. Our results show that - for weakly capitalized banks - increases in capital requirements are in the short-run associated with a decrease in the total of domestic and cross-border bank lending. In addition, we find that there is no similar effect of capital requirements for strongly capitalized banks. Furthermore, changes in the monetary policy stance are positively related to lending rates. Regarding the interacting effect of national capital requirements and supranational monetary policy, we observe that increases in capital requirements attenuate the general effects of monetary policy on interest rates. Overall, the transmission of an accommodating monetary policy to lending rates is attenuated by contemporaneous increases in bank capital requirements which additionally imply a transitory decrease of the loan growth of weakly capitalized banks.
    Keywords: Bank Lending,Lending Rates,Capital Requirements,Monetary Policy,International Policy Interaction
    JEL: E52 F30 G28
    Date: 2019
  63. By: Antoine Martin; James J. McAndrews; Morten L. Bech (Bank für Internationalen Zahlungsausgleich; Federal Reserve Bank; Federal Reserve Bank of New York)
    Abstract: Since October 2008, the Federal Reserve has increased the size of its balance sheet by lending to financial intermediaries and purchasing assets on a large scale. While these actions have increased the amount of reserves in the U.S. banking system and therefore raised concerns about excessive bank lending and inflation, we can document an important and overlooked benefit of the high level of reserves: a significantly earlier settlement of payments on Fedwire, the Federal Reserve?s large-value payment system. Quicker settlement on Fedwire improves liquidity throughout the economy, reducing uncertainty and risk for people and firms that rely on banks. At the same time, the Fed has been extending less intraday credit, which reduces the public?s risk exposure.
    Keywords: Large balance sheet; payment system
    JEL: E4 E5 G2
  64. By: Adam, Klaus; Weber, Henning
    Abstract: Using the official micro price data underlying the U.K. consumer price index, we document a new stylized fact for the life-cycle behavior of consumer prices: relative to a narrowly defined set of competing products, the price of individual products tends to fall over the product lifetime. We show that this data feature has important implications for the optimal inflation target. Constructing a sticky-price model featuring a product life cycle and heterogeneous relative-price trends, we derive closed-form expressions for the optimal inflation target under Calvo and menu-cost frictions. We show how the optimal target can be estimated from the observed trends in relative prices. For the U.K. economy, we find the optimal target to be equal to 2.6% in 2016. It has steadily increased over the period 1996 to 2016 due to changes in relative price trends over this period. JEL Classification: E31
    Keywords: micro price data, optimal inflation, U.K. inflation target
    Date: 2020–02
  65. By: Michael Nattinger; Matthew Higgins (National Bureau of Economic Research; Georgia Institute of Technology; Federal Reserve Bank of New York; College of Management); Thomas Klitgaard
    Abstract: Tariffs are a form of taxation. Indeed, before the 1920s, tariffs (or customs duties) were typically the largest source of funding for the U.S. government. Of little interest for decades, tariffs are again becoming relevant, given the substantial increase in the rates charged on imports from China. U.S. businesses and consumers are shielded from the higher tariffs to the extent that Chinese firms lower the dollar prices they charge. U.S. import price data, however, indicate that prices on goods from China have so far not fallen. As a result, U.S. wholesalers, retailers, manufacturers, and consumers are left paying the tax.
    Keywords: United States; Thomas Klitgaard; tariffs; U.S. import prices; Michael Nattinger; Matthew Higgins; China; tax; trade policy
    JEL: E2 F1 F00
  66. By: Anil K. Kashyap; Dimitrios P. Tsomocos; Alexandros P. Vardoulakis
    Abstract: We modify the Diamond and Dybvig (1983) model so that, besides offering liquidity services to depositors, banks also raise equity funding, make loans that are risky, and can invest in safe, liquid assets. The bank and its borrowers are subject to limited liability. When profitable, banks monitor borrowers to ensure that they repay loans. Depositors may choose to run based on conjectures about the resources that are available for people withdrawing early and beliefs about banks’ monitoring. We use a new type of global game to solve for the run decision. We find that banks opt for a more deposit-intensive capital structure than a social planner would choose. The privately chosen asset portfolio can be more or less lending-intensive, while the scale of intermediation can also be higher or lower depending on a planner’s preferences between liquidity provision and credit extension. To correct these three distortions, a package of three regulations is warranted.
    JEL: E44 G01 G21 G28
    Date: 2020–01
  67. By: Alain MONFORT (CREST); Jean-Paul RENNE (University of Lausanne, HEC); Guillaume ROUSSELLET (Desautels Faculty of Management, McGill University)
    Abstract: We propose a discrete-time affi ne pricing model that simultaneously allows for (i) the presence of systemic entities by departing from the no-jump condition on the factors'conditional distribution, (ii) contagion effects, (iii) and the pricing of credit events. Our a ffine framework delivers explicit pricing formulas for default-sensitive securities like bonds and credit default swaps (CDS). We estimate a multi-country version of the model and address economic questions related to the pricing of sovereign credit risk. Speci cally, using euro-area data, we explore the in fluence of allowing for the pricing of credit events, we compare frailty and contagion channels, and we extract measures of depreciation-at-default from CDS denominated indifferent currencies.
    Keywords: a ffine credit risk model, Gamma-zero distribution, no-jump condition, contagion, credit-eventrisk, sovereign credit risk and exchange rates.
    JEL: E43 G12
    Date: 2019–12–31
  68. By: Daniele Tavani (Colorado State University (US)); Luca Zamparelli
    Abstract: An important question in alternative economic theories has to do with the relationship between the functional income distribution and the growth rate of labor productivity. According to both the induced innovation hypothesis and Marx-biased technical change, labor productivity growth should be an increasing function of the labor share. In this paper, we first discuss the shortcomings of both theories and then provide a novel microeconomic foundation for a direct relationship between the labor share and labor productivity growth. The result arises because of profit-seeking behavior by capitalist firms that face a trade-off between investing in new capital stock and innovating to save on labor costs. Embedding this finding in the Goodwin (1967) growth cycle model, we show that: i) the resulting steady state is locally stable, and ii) unlike in the original Goodwin model, the long-run employment rate is sensitive to investment decisions. Finally, iii) we numerically identify parametric configurations that establish whether convergence to the long-run growth path is cyclical or monotonic.
    Keywords: Endogenous Technical Change, Income Shares, Employment.
    JEL: E32 O33
    Date: 2020–02
  69. By: Eric S. Rosengren
    Abstract: Eric Rosengren’s comments were delivered at the Boston Fed’s Annual Regional & Community Bankers Conference, and were a based on a speech he delivered on October 11, 2019.
    Keywords: monetary policy; economic conditions; global economy; employment report; risks to the economic outlook; interest rates; financial indicators; reaching for yield
    Date: 2019–10–15
  70. By: Jan J. J. Groen; Paolo Pesenti (Centre for Economic Policy Research (CEPR); National Bureau of Economic Research; Yale University; Research and Statistics Group; Federal Reserve Bank of New York)
    Abstract: Over the last decade, unprecedented spikes and drops in commodity prices have been a recurrent source of concern to both policymakers and the general public. Given all the recent attention, have economists and analysts made any progress in their ability to predict movements in commodity prices? In this post, we find there is no easy answer. We consider different strategies to forecast near-term commodity price inflation, but find that no particular approach is systematically more accurate and robust. Additionally, the results warn against interpreting current forecasts of commodity prices upswings as reliable and dependable signals of future inflationary pressure.
    Keywords: commodity prices; PLS regression; forecasting; exchange rates; factor models
    JEL: E2 F00
  71. By: Sushant Acharya; Ozge Akinci; Bianca De Paoli; Julien Bengui
    Abstract: Prompted by the U.S. financial crisis and subsequent global recession, policymakers in advanced economies slashed interest rates dramatically, hitting the zero lower bound (ZLB), and then implemented unconventional policies such as large-scale asset purchases. In emerging economies, however, the policy response was more subdued since they were less affected by the financial crisis. As a result, capital flows from advanced to emerging economies increased markedly in response to widening interest rate differentials. Some emerging economies reacted by adopting measures to slow down capital inflows, acting under the presumption that these flows were harmful. This type of policy response has reignited the debate over how to moderate international spillovers.
    JEL: F00 E5 G1
  72. By: Chikako Baba; Salvatore Dell'Erba; Enrica Detragiache; Olamide Harrison; Aiko Mineshima; Anvar Musayev; Asghar Shahmoradi
    Abstract: Assessing when credit is excessive is important to understand macro-financial vulnerabilities and guide macroprudential policy. The Basel Credit Gap (BCG) – the deviation of the credit-to-GDP ratio from its long-term trend estimated with a one-sided Hodrick-Prescott (HP) filter—is the indicator preferred by the Basel Committee because of its good performance as an early warning of banking crises. However, for a number of European countries this indicator implausibly suggests that credit should go back to its level at the peak of the boom after the credit cycle turns, resulting in large negative gaps that might delay the activation of macroprudential policies. We explore two different approaches—a multivariate filter based on economic theory and a fundamentals-based panel regression. Each approach has pros and cons, but they both provide a useful complement to the BCG in assessing macro-financial vulnerabilities in Europe.
    Keywords: Real interest rates;Interest rate policy;Credit booms;Credit expansion;Credit aggregates;Credit Cycle,Credit Gap,Countercyclical Capital Buffer,Macroprudential Policies,WP,BCG,real interest rate,output gap,fundamental variable
    Date: 2020–01–17
  73. By: Fahkri Hasanov; Fred Joutz; Jeyhun Mikayilov; Muhammad Javid (King Abdullah Petroleum Studies and Research Center)
    Abstract: The KAPSARC Global Energy Macroeconometric Model (KGEMM), is a policy analysis tool for examining the impacts of domestic policy measures and global economic and energy shocks on the Kingdom of Saudi Arabia.
    Keywords: Autometrics, Energy Price Reform, Equillibrium correction, General to Specific Modeling Strategy, Macroeconomics, Vision 2030
    Date: 2020–02–13
  74. By: Thomas Klitgaard; Matthew Higgins (National Bureau of Economic Research; Georgia Institute of Technology; Federal Reserve Bank of New York; College of Management)
    Abstract: Euro area periphery countries borrowed heavily from abroad in the run-up to the sovereign debt crisis. How were these funds used? In this post, we recap our recent Current Issues study, showing that pre-crisis borrowing by the periphery countries (Greece, Ireland, Portugal, and Spain) went mainly to finance private consumption or housing booms rather than productivity-enhancing investments. Most analysis of the crisis has focused on the need for fiscal adjustment in the periphery. A look at the drivers of the run-up in foreign borrowing, however, suggests that private spending in the periphery will also need to move to a lower plane. The fact that debts were built up without adding to these countries? productive capacity is likely to make the needed adjustment in spending all the more difficult.
    Keywords: euro area sovereign debt crisis current account balance external borrowing
    JEL: E2 F3
  75. By: Corrado Di Guilmi; Yoshi Fujiwara
    Abstract: This paper presents a stock-flow-consistent agent-based model calibrated on Japanese data. The goal is to investigate the effects on the joint dynamics aggregate demand and price of the use by Japanese firms of secondary employees (temporary, part-time, or agency). Empirical evidence point to financial distress and market uncertainty as factors affecting firms’ hiring decisions, but their connections with inflation and its sensitivity to employment and output are still under-investigated. In particular, the hiring of secondary workers with lower wages can result in sluggish inflation even during boom periods. The paper aims to provide three main contributions. The first is to identify and test a possible cause of deflation, which is related to firm-level financial distress and uncertain business environment. The study of firms’ hiring policies can also shed light on the modifications in the relationship between wage and employment dynamics testified by the flattening of the Phillips curve. The second contribution is the analysis of a range of possible countervailing policies, alternative or complementary to the conventional interest rate policy pursued by the monetary authority. Finally, the paper contributes to the recent developments in the estimation of agent-based models by presenting an original technique, which relies on the identification and optimization of meta-models. The numerical results of the model are quantitatively comparable to the main features of the Japanese economy in the last twenty years. The flattening of the Phillips curve appears to be mostly due to the use of secondary employment as a buffer to reduce financial distress in an uncertain business climate. In terms of policy indications, a strong indexation of minimum wage emerges as the most effective policy to increase inflation. The sensitivity analysis also sheds light on possible reasons why monetary policy may have uncertain effects on inflation.
    Date: 2020–02
  76. By: Chauffour,Jean-Pierre Christophe; Gobezie,Muluneh Ayalew
    Abstract: Ethiopia's framework for managing its monetary and foreign exchange policy has relied on some standard instruments of financial repression. Over time, the framework has led to the buildup of large macro-financial imbalances. Exiting financial repression while maintaining macroeconomic stability would require solid control over the macro-financial flows and good anticipation of the immediate financial effects of the reform. The paper presents and quantifies such a gradual liberalization reform scenario of Ethiopia's monetary and foreign exchange system.
    Keywords: Inflation,International Trade and Trade Rules,Banks&Banking Reform,Macroeconomic Management,Legal Institutions of the Market Economy
    Date: 2019–12–12
  77. By: Cristina Arellano; Yan Bai; Gabriel Mihalache
    Abstract: This paper develops a New Keynesian model with sovereign default risk (NK-Default). We focus on the interaction between monetary policy, conducted according to an interest rate rule that targets inflation, and external defaultable debt issued by the government. Monetary policy and default risk interact since both affect domestic consumption, production, and inflation. We find that default risk amplifies monetary frictions and generates a tension for monetary policy, which increases the volatility of inflation and nominal rates. These monetary frictions in turn discipline sovereign borrowing, slowing down debt accumulation and lowering sovereign spreads. Our framework replicates the positive comovements of spreads with nominal domestic rates and inflation, a salient feature of emerging markets data, and can rationalize the experience of Brazil during the 2015 downturn, with high inflation, nominal rates, and spreads.
    Date: 2020
  78. By: Donald P. Morgan; David R. Skeie; James Narron (Executive Office)
    Abstract: With intermittent war raging across much of Western Europe near the end of the eighteenth century, by about 1795, Hamburg had replaced Amsterdam as an important hub for commodities trade. And from 1795 to 1799, Hamburg boomed. Prices for goods increased, the harbor was full, and warehouses were bulging. But when a harsh winter iced over the harbor, excess demand and speculation drove up prices. By spring, demand proved lower than supply, and prices started falling, credit tightened, and the decline in prices accelerated. So when a ship bound for Hamburg laden with gold sunk off the coast, an act meant to avert a crisis failed to do so. In this issue of Crisis Chronicles, we use some diverse sources from the American Machinist and Mary Lindemann?s Patriots and Paupers to explore the Hamburg crisis of 1799 and describe how harsh winter weather still impacts the economy today.
    Keywords: war; Amsterdam; Hamburg; contraction; storms; housing; harvest; winter; weather
    JEL: N2 E2
  79. By: Denis Bulygin (National Research University Higher School of Economics); Ilya Musabirov (National Research University Higher School of Economics)
    Abstract: With virtual purchases being a leading source of revenue for game developers, it is still unclear how players evaluate non-functional goods and the experiences those goods grant. With the use of structural topic models, this work demonstrates the dimensions of players’ experience extracted from discussions in association with price changes. This work contributes to the field by decomposing virtual goods values into experience dimensions in their relationship between extracted experience dimensions and the item’s price, and by a detailed description of expectation mismatch.
    Keywords: virtual goods, virtual consumption, online games, purchase, evaluation
    JEL: M31 D90 E21 Z13
    Date: 2020
  80. By: Vanesa Sanchez (Supervision Group); Anna Kovner (Harvard University; Federal Reserve Bank); Peter Van Tassel; Diego Aragon
    Abstract: The Tax Cuts and Jobs Act (TCJA) is expected to increase after-tax profits for most companies, primarily by lowering the top corporate statutory tax rate from 35 percent to 21 percent. At the same time, the TCJA provides less favorable treatment of net operating losses and limits the deductibility of net interest expense. We explain how the latter set of changes may heighten bank and corporate borrower cyclicality by making bank capital and default risk for highly levered corporations more sensitive to economic downturns.
    Keywords: Corporate Finance; Banks; Financial Stability; Taxes
    JEL: E6 G2 G3
  81. By: Jorge Restrepo
    Abstract: This paper uses the strategy and data of Blanchard and Perotti (BP) to identify fiscal shocks and estimate fiscal multipliers for the United States. With these results, it computes the cumulative multiplier of Ramey and Zubairy (2018), now common in the literature. It finds that, contrary to the peak and through multipliers reported by BP, the cumulative tax multiplier is much larger than the cumulative spending one. Hence, the conclusions depend on the definition of multiplier. This methodology is also used to estimate the effects of fiscal shocks on economic activity in eight Latin American countries. The results suggest that the fiscal multipliers vary significantly across countries, and in some cases multipliers are larger than previously estimated.
    Date: 2020–01–31
  82. By: Dieppe,Alistair Matthew; Neville,Francis; Kindberg Hanlon,Gene Joseph
    Abstract: This paper addresses the identification of low-frequency macroeconomic shocks, such as technology, in Structural Vector Autoregressions. Whilst identification issues with long-run restricted VARs are well documented, the recent attempt to overcome said issues using the Max-Share approach of Francis et al. (2014) and Barsky and Sims (2011) has its own shortcomings, primarily that they are vulnerable to bias from confounding non-technology shocks. A modification to the Max-Share approach and two further spectral methods are proposed to improve empirical identification. Performance directly hinges on whether these confounding shocks are of high or low frequency. Applied to US and emerging market data, spectral identifications are most robust across specifications, and non-technology shocks appear to be biasing traditional methods of identifying technology shocks. These findings also extend to the SVAR identification of dominant business-cycle shocks, which are shown will be a variance-weighted combination of shocks rather than a single structural driver.
    Keywords: Labor Markets,Macroeconomic Management,National Governance,Social Analysis,Quality of Life&Leisure,Youth and Governance,Government Policies,Public Finance Decentralization and Poverty Reduction,Macro-Fiscal Policy,Taxation&Subsidies,Public Sector Economics,Economic Adjustment and Lending
    Date: 2019–10–24
  83. By: Qazi Haque; Leandro M. Magnusson
    Abstract: We investigate the empirical evidence on the Euler equation models using methods that are robust to weak instruments and structural changes for a set of eight countries. We start with the conventional closed economy model and consider extensions that include habits and hand-to-mouth consumers. We then extend the analysis to allow for each country to behave like an open economy. We find that structural changes are informative for the identification of the Euler equation models in some countries. However, in all countries, there is limited responsiveness of output to changes in the interest rate and no evidence of parameter instability, but otherwise aggregate data provide limited information to learn about Euler equation models.
    Keywords: Euler equation, Weak identification, Open economy
    JEL: C1 C2 E1 F4
    Date: 2020–02
  84. By: Oscar Esteban Morillo Martínez
    Abstract: El predominio de las finanzas en los regímenes de acumulación en el capitalismo del siglo XXI es un proceso, por lo general, descrito como financiarización: fenómeno muy estudiado por diferentes escuelas de la heterodoxia económica, entre ellas la escuela de la regulación francesa. Así las cosas, se busca comprender si Colombia ha convergido en este régimen de acumulación, siguiendo las categorías de la escuela de la regulación francesa; dando cuenta de las estadísticas, los procesos y sus resultados en materia de distribución e impacto. Se realiza el análisis de acuerdo a un principio dialectico que da cuenta de las diferentes contradicciones presentes en el patrón de acumulación y en la articulación de la esfera privada con la pública a través de un marco institucional siempre cambiante de acuerdo a los intereses económicos y el contexto internacional. Las observaciones indican que el sector financiero ha ganado terreno en Colombia vía precarización laboral y conflicto distributivo gracias a la influencia institucional que este sector y la ideología dominante ha venido instaurando en los diferentes espacios de poder. No obstante, después del análisis expuesto, se pone en duda si Colombia ha convergido completamente o simplemente se mantiene en hibridación con el régimen de acumulación financiarizado o patrimonial. Pues no se evidencia un mercado de capitales desarrollado, ni hay un amplio desarrollo de sectores de alta tecnología, no hay mucha facilidad para que la población entre a cotizar títulos del mercado financiero y el crédito no es el principal factor de apalancamiento del consumo; rasgos característicos de este tipo de régimen de acumulación.
    Keywords: deuda, regímenes de acumulación, finanzas, regulación
    JEL: B14 E11 E12 F02 N16
    Date: 2020–02–12
  85. By: Jaanika Merikull; Tairi Room
    Abstract: This paper uses administrative data from registers and survey data from interviews to analyse unit and item non-response in a wealth survey. It draws on the Estonian Household Finance and Consumption Survey dataset, where the survey data on income and wealth are complemented by information on the same variables from administrative sources for all the people sampled. The results show that the non-response contributes to the underestimation of wealth inequality in the survey data, as the Gini coefficient is underestimated by 6 percentage points and also the top wealth shares are substantially underestimated. The downward bias is originating from item non-response and not from unit non-response. Imputation can address the problems caused by item non-response across most of the net wealth distribution, but does not eliminate the downward bias at the top of the wealth distribution.
    Keywords: wealth distribution, unit non-response, item non-response, participation bias, wealth survey, income survey, Household Finance and Consumption Survey, Estonia
    JEL: D31 E21
    Date: 2019–10–29
  86. By: Rui Mano; Silvia Sgherri
    Abstract: Policymakers have relied on a wide range of policy tools to cope with capital flow shocks. And yet, the effects and interaction of these policies remain under debate, as does the motivation for using them. In this paper, quantile local projections are used to estimate the entire distribution of future policy responses to portfolio flow shocks for 20 emerging markets and understand the variety of policy choices across the sample. To assuage endogeneity concerns, estimates rely on the fact that global capital flows are exogenous from the viewpoint of any one of these countries. The paper finds that: (i) policy responses to capital flow shocks are heterogeneous across countries, fat-tailed—“extreme” responses tend to be more elastic than “typical” responses—and asymmetric—“extreme” responses tend to be more elastic with respect to outflows than to inflows; (ii) country characteristics are linked to policy choices—with cross-country differences in forex intervention relating to the size of balance sheet vulnerabilities and the depth of the forex market; (iii) the use of targeted macroprudential policy and capital flows management measures can help “free the hands” of monetary policy by allowing it to focus more squarely on domestic cyclical developments.
    Keywords: Exchange rate policy;International investment position;Foreign exchange reserves;Foreign exchange intervention;Central banks;Capital flows,emerging markets,macroprudential policies,capital flows management.,WP,policy response,policy tool,flow pressure,forex,policy action
    Date: 2020–01–17
  87. By: David J Hofman; Marcos d Chamon; Pragyan Deb; Thomas Harjes; Umang Rawat; Itaru Yamamoto
    Abstract: We investigate the motives inflation-targeting central banks in emerging markets may have for intervening in foreign exchange markets and evaluate the case for such interventions based on the existing literature. Our findings suggest that the rationale for interventions depends on initial conditions and country-specific circumstances. The case is strongest in the presence of large currency mismatches or underdeveloped markets. While interventions can have benefits in the short-term, sustained over time they could entrench unfavorable initial conditions, though more work is needed to establish this empirically. A first effort to measure the cost of interventions to the credibility of policy frameworks suggests that the negative impact may be smaller than often assumed—at least for the set of more sophisticated inflation-targeting emerging-market central banks considered here.
    Keywords: Central banks;Exchange rate policy;Central bank policy;Exchange markets;Central banking and monetary issues;emerging markets,monetary and exchange rate policies,inflation targeting,foreign exchange intervention,capital flows,WP,EME,inflation target,policy instrument,exchange rate,targeter
    Date: 2020–01–17
  88. By: Schwandt, Hannes; Wachter, Till von (University of California, Los Angeles)
    Abstract: This paper uses several large cross-sectional data sources and a new approach to estimate midlife effects of entering the labor market in a recession on mortality by cause and various measures of socioeconomic status. We find that cohorts coming of age during the deep recession of the early 1980s suffer increases in mortality that appear in their late 30s and further strengthen through age 50. We show these mortality impacts are driven by disease-related causes such as heart disease, lung cancer, and liver disease, as well as drug overdoses. At the same time, unlucky middle-aged labor market entrants earn less and work more while receiving less welfare support. They are also less likely to be married, more likely to be divorced, and experience higher rates of childlessness. Our findings demonstrate that temporary disadvantages in the labor market during young adulthood can have substantial impacts on lifetime outcomes, can affect life and death in middle age, and go beyond the transitory initial career effects typically studied.
    Keywords: labor market entry conditions, long-term effects, mortality
    JEL: E32 I10 J10
    Date: 2020–01
  89. By: Christos Pierros
    Abstract: This paper extends the empirical stock-flow consistent (SFC) literature through the introduction of distributional features and labor market institutions in a Godley-type empirical SFC model. In particular, labor market institutions, such as the minimum wage and the collective bargaining coverage rate, are considered as determinants of the wage share and, in turn, of the distribution of national income. Thereby, the model is able to examine both the medium-term stability conditions of the economy via the evolution of the sectoral financial balances and the implications of functional income distribution on the growth prospects of the economy at hand. The model is then applied to the Greek economy. The empirical results indicate that the Greek economy has a significant structural competitiveness deficit, while the institutional regime is likely debt-led. The policies implemented in the context of the economic adjustment programs were highly inappropriate, triggering private sector insolvency. A minimum wage increase is projected to have a positive impact on output growth and employment. However, policies that would enhance the productive sector's structural competitiveness are required in order to ensure the growth prospects of the Greek economy.
    Keywords: Stock-Flow Consistent; Labor Market Institutions; Internal Devaluation; Functional Income Distribution; Greece
    JEL: E25 F47 J08
  90. By: Aditya Goenka (University of Birmingham); Lin Liu (University of Liverpool); William Pouliot (University of Birmingham)
    Abstract: We study dynamically consistent policy in a neoclassical overlapping generations growth model where pollution externalities undermine health but are mitigated via tax-financed abatement. With arbitrarily constant taxation, two steady states arise: an unstable 'poverty trap' and a 'neoclassical' steady state near which the dynamics might either be monotonically convergent or oscillating. When the planner chooses a time consistent abatement path that maximises a weighted intergenerational sum of expected utility, the optimal tax is zero at low levels of capital and then a weakly increasing function of the capital stock. The non-homogeneity of the tax function along with its feedback effect on savings induces additional steady states, stability reversals and oscillations.
    Keywords: Time consistency, pollution, mortality, overlapping generations model, poverty traps, endogenous fluctuations, optimal environmental policy.
    JEL: O11 O13 O23 O44 E32 H21 H23
    Date: 2019–10
  91. By: Alexander Bick; Adam Blandin; Richard Rogerson
    Abstract: We develop and estimate a static model of labor supply that can account for two robust features of the cross-sectional distribution of usual weekly hours and hourly wages. First, usual weekly hours are heavily concentrated around 40 hours, while at the same time a substantial share of total hours come from individuals who work more than 50 hours. Second, mean hourly wages are non-monotonic across the usual hours distribution, with a peak for those working 50 hours. The novel feature of the model is that earnings are non-linear in hours and the nature of the nonlinearity varies over the hours distribution. We estimate the model on a sample of older males for whom human capital considerations are plausibly not of first order importance. Our estimates imply that an individual who chooses to work either less than 40 hours or more than 40 hours faces a wage penalty. As a consequence, individuals working typically 40 hours are not very responsive to variation in productivity. This has significant implications for the role of labor supply as a mechanism for self-insurance in a standard heterogeneous agent-incomplete markets model and for strategies designed to estimate the intertemporal elasticity of substitution.
    JEL: E24 J22
    Date: 2020–01
  92. By: Picón Aguilar, Carmen; Soares, Rodrigo Oliveira; Adalid, Ramón
    Abstract: We explain how the external counterpart of the euro area M3 can be analysed by using the euro area balance of payments (b.o.p.). This is possible because the net external assets of the monetary financial institutions (MFIs) are present in two statistical frameworks that follow similar conventions: the balance sheet items (BSI) of MFIs and the balance of payments statistics. The first step to including external flows in the monetary analysis is to understand the nature of the flows between resident money holders and the rest of the world. This is possible thanks to the monetary presentation of the b.o.p, which provides information on the nature of external transactions and therefore guidance on the persistence of the monetary signal stemming from external flows.Over the past five years, the increase in the euro area’s external competitiveness has given rise to a sustained current account surplus that has consistently supported monetary inflows into the euro area. At the same time, portfolio transactions, which closely reflect financial and monetary policy conditions, have fluctuated significantly, increasing monetary inflows in the period from mid-2012 to mid-2014 and turning them into net outflows during the asset purchase programme (APP) period. JEL Classification: E51, E52, F45, F41, F43, F32, F34
    Keywords: balance of payments, balance sheet items, cross-border flows, monetary aggregates, monetary financial institutions, net external assets
    Date: 2020–02
  93. By: Sudha Narayanan (Indira Gandhi Institute of Development Research); Nirupam Mehrotra (National Bank for Agriculture and Rural Development)
    Abstract: In the past decade, farm loan waivers have become a policy instrument to alleviate financial distress of farmers. Despite agreement on the theoretical rationale for such debt forgiveness and its deep contextual relevance, many fear that in the long run, loan waivers might vitiate the repayment culture in the farm sector and undermine the financial status of banks. At present, implications of large-scale loan waivers rests on limited evidence, although empirical work in this area has been growing. This papers reviews and synthesizes existing research and available data on the implications of loan waivers, especially for the flow of credit to farmers from banks. This paper concludes that even if loan waivers are an inappropriate strategy to support farm incomes in sustainable ways, the wide-ranging negative impacts on the formal banking sector are perhaps overstated. The paper identifies areas that need further research and outlines possible ways forward in designing a debt relief policy.
    Keywords: India, loan waiver, agriculture, debt, formal credit, default
    JEL: Q14 E5
    Date: 2019–12

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