nep-mac New Economics Papers
on Macroeconomics
Issue of 2020‒03‒23
99 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The Impact of Expectations on IFRS 9 Loan Loss Provisions By Petr Polak; Jiri Panos
  2. 21st Century Macro By Narayana R. Kocherlakota
  3. Asset Prices and Unemployment Fluctuations By Patrick J. Kehoe; Pierlauro Lopez; Virgiliu Midrigan; Elena Pastorino
  4. Endogenous Productivity Dynamics in a Two-Sector Business Cycle Model By Fabio Massimo Piersanti; Patrizio Tirelli
  5. A fistful of dollars:Transmission of global funding shocks to EMs By Shekhar Hari Kumar; Aakriti Mathur
  6. Convex Supply Curves By Christoph Boehm; Nitya Pandalai-Nayar
  7. Central Bank Tone and the Dispersion of Views within Monetary Policy Committees By Paul Hubert; Fabien Labondance
  8. Supply Chain Disruptions, Time to Build, and the Business Cycle By Matthias Meier
  9. The Secular Stagnation of Productivity Growth By Servaas Storm
  10. Financial Variables as Predictors of Real Growth Vulnerability By Lucrezia Reichlin; Giovanni Ricco; Thomas Hasenzagl
  11. Dynamic Inefficiency and Fiscal Interventions in an Economy with Land and Transaction Costs By Martin F. Hellwig
  12. Financial Cycles in Asset Markets and Regions By Beirne, John
  13. Capital Flows, Real Estate, and Local Cycles: Evidence from German Cities, Banks, and Firms By Peter Bednarek; Daniel Marcel te Kaat; Chang Ma; Alessandro Rebucci
  14. Polish GDP Forecast Errors: A Tale of Ineffectiveness By Rybacki, Jakub
  15. Employment-output elasticities determinants: case of cross-section from AMEE By NEIFAR, MALIKA
  16. Online Estimation of DSGE Models By Michael D. Cai; Marco Del Negro; Edward P. Herbst; Ethan Matlin; Reca Sarfati; Frank Schorfheide
  17. Bargaining Shocks and Aggregate Fluctuations By Thorsten Drautzburg; Jesus Fernandez-Villaverde; Pablo Guerron-Quintana
  18. The Collateral Channel of Monetary Policy: Evidence from China By Hanming Fang; Yongqin Wang; Xian Wu
  19. Dynamic Impact of Unconventional Monetary Policy on International REITs By Hardik A. Marfatia; Rangan Gupta; Keagile Lesame
  20. Housing Wealth Effects: The Long View By Adam M. Guren; Alisdair McKay; Emi Nakamura; Jon Steinsson
  21. Measuring the size of the shadow economy using a dynamic general equilibrium model with trends: a new dataset By Chung, Federico; Purkey, Liam; Solis-Garcia, Mario
  22. Will \\"Quantitative Easing\\" Trigger Inflation? By Kenneth D. Garbade
  23. Monetary Policy and Bubbles in a New Keynesian Model with Overlapping Generations By Jordi Galí
  24. Can this time be different? Policy options in times of rising debt By M.Ayhan Kose; Peter S. O. Nagle; Franziska L. Ohnsorge; Naotaka Sugawara
  25. Global Macro-Financial Cycles and Spillovers By Jongrim Ha; M. Ayhan Kose; Christopher Otrok; Eswar S. Prasad
  26. Exchange Rate Pass-Through in Pakistan By Younus, Rijja Ali; Yucel, Eray
  27. Anchored inflation expectations By Carlos Carvalho; Stefano Eusepi; Emanuel Moench; Bruce Preston
  28. Gender Roles and the Gender Expectations Gap By Francesco D’Acunto; Ulrike Malmendier; Michael Weber
  29. Secured Credit Spread By Efraim Benmelech; Nitish Kumar; Raghuram Rajan
  30. Revisiting empirical studies on the liquidity effect: An identication-robust approach By Firmin Doko Tchatoka; Lauren Slinger; Virginie Masson
  31. The Slow Recovery in Consumer Spending By Jonathan McCarthy
  32. Managing Global Liquidity as a Global Public Good. A Report of an RTI Working Party By André Icard; Philip Turner
  33. Employment-output elasticities determinants: is there difference between Francophone and Anglophone countries from AMEE ? By NEIFAR, MALIKA
  34. Expanded GDP for Welfare Measurement in the 21st Century By Charles R. Hulten; Leonard I. Nakamura
  35. Standard Elements of a Monetary Policy Implementation Framework By Ylva Søvik; Emily Eisner; Antoine Martin
  36. Discretionary Services Expenditures in This Business Cycle By Jonathan McCarthy
  37. Empleo y emprendimiento en Bogotá By Cristina Fernández
  38. Counterparty and Collateral Policies of Central Bank Lending Facilities By Helene Lee; Asani Sarkar
  39. Benefits and Costs of Debt: The Dose Makes the Poison By M. Ayhan Kose; Franziska Ohnsorge; Naotaka Sugawara
  40. Economic Policy Uncertainty in Small Open Economies: a Case Study in Ireland By Rice, Jonathan
  41. Climate policies under dynamic international economic cycles: A heterogeneous countries DSGE model By Xiao, Bowen; Guo, Xiaodan; Fan, Ying; Voigt, Sebastian; Cui, Lianbiao
  42. Creating a History of U.S. Inflation Expectations By Jan J. J. Groen; Menno Middeldorp
  43. On the Non-Existence of a Zero-Tax Steady State with Incomplete Asset Markets By Tomoyuki Nakajima; Shuhei Takahashi
  44. A Closer Look at the Fed’s Balance Sheet Accounting By Jennifer Wolgemuth; Antoine Martin; Deborah Leonard
  45. What to Make of Market Measures of Inflation Expectations? By David O. Lucca; Ernst Schaumburg
  46. Consumer Debt and Default: A Macro Perspective By Exler, Florian; Tertilt, Michèle
  47. Understanding Inflation in Emerging and Developing Economies By Ha,Jongrim; Kose,Ayhan; Ohnsorge,Franziska Lieselotte
  48. Monetary Policy and Sovereign Risk in Emerging Economies (NK-Default) By Cristina Arellano; Yan Bai; Gabriel Mihalache
  49. Uncovered Interest Parity, Forward Guidance, and the Exchange Rate By Jordi Galí
  50. Optimal Taxation and Investment-Specific Technological Change By Nóbrega, Valter
  51. Is Stigma Attached to the European Central Bank's Marginal Lending Facility? By Helene Lee; Asani Sarkar
  52. Between Firm Changes in Earnings Inequality: The Dominant Role of Industry Effects By John C. Haltiwanger; James R. Spletzer
  53. Payment vs. Funding: The Law of Reflux for Today By Perry Mehrling
  54. How Do the Fed's MBS Holdings Affect the Economy? By Antoine Martin; Sam Schulhofer-Wohl
  55. Why (or Why Not) Keep Paying Interest on Excess Reserves? By Gara M. Afonso
  56. Is the Phillips curve dead? International evidence By Alexius, Annika; Lundholm, Michael; Nielsen, Linnea
  57. The Effect of Fed Funds Rate Hikes on Consumer Borrowing Costs By Nina Boyarchenko; Matthew Plosser; Sooji Kim
  58. Identifying Price Reviews by Firms: An Econometric Approach By Mark Harris; Hervé Le Bihan; Patrick Sevestre
  59. A Discussion of Thomas Piketty's Capital in the Twenty-First Century: Does More Capital Increase Inequality? By Maxim L. Pinkovskiy
  60. Exploring options to measure the climate consistency of real economy investments: The manufacturing industries of Norway By Alexander Dobrinevski; Raphaël Jachnik
  61. The Impact of Deunionization on the Growth and Dispersion of Productivity and Pay By Giovanni Dosi; Richard B. Freeman; Marcelo C. Pereira; Andrea Roventini; Maria Enrica Virgillito
  62. Rising Bank Concentration By Dean Corbae; Pablo D'Erasmo
  63. Markups, Labor Market Inequality and the Nature of Work By Greg Kaplan; Piotr Zoch
  64. How Do Central Bank Balance Sheets Change in Times of Crisis? By Ylva Søvik; Emily Eisner; Antoine Martin
  65. Interest-Bearing Securities When Interest Rates are Below Zero By James J. McAndrews; Kenneth D. Garbade
  66. How Does Credit Access Affect Job-Search Outcomes and Sorting? By Kyle F. Herkenhoff; Gordon Phillips
  67. Do Banks Price Environmental Risk? Evidence from a Quasi Natural Experiment in the People’s Republic of China By Huang, Bihong; Punzi, Maria Teresa; Wu, Yu
  68. Life Satisfaction of Employees, Labour Market Tightness and Matching Efficiency By de Pedraza, Pablo; Guzi, Martin; Tijdens, Kea
  69. Pré-évaluation de la participation du Maroc à l’union monétaire de la CEDEAO By Rabhi, Ayoub; Haoudi, Amina
  70. A Quantitative Analysis of Distortions in Managerial Forecasts By Yueran Ma; Tiziano Ropele; David Sraer; David Thesmar
  71. Productivity in Europe: Trends and drivers in a service-based economy By Peter Bauer; Igor Fedotenkov; Aurelien Genty; Issam Hallak; Peter Harasztosi; David Martinez Turegano; David Nguyen; Nadir Preziosi; Ana Rincon-Aznar; Miguel Sanchez Martinez
  72. Pecuniary Externalities, Bank Overleverage, and Macroeconomic Fragility By Ryo Kato; Takayuki Tsuruga
  73. Forward Guidance and Household Expectations By Coibion, Olivier; Georgarakos, Dimitris; Gorodnichenko, Yuriy; Weber, Michael
  74. Federal Reserve Liquidity Facilities Gross $22 Billion for U.S. Taxpayers By Michael Abrahams
  75. The FR-BDF Model and an Assessment of Monetary Policy Transmission in France, Working Paper Series no. 736, Banque de France By Matthieu Lemoine; Harri Turunen; Mohammed Chahad; Antoine Lepetit; Anastasia Zhutova; Pierre Aldama; Pierrick Clerc; Jean-Pierre Laffargue
  76. New York City’s Economic Recovery—Main Street Gets the Jump on Wall Street By Jason Bram; James A. Orr
  77. Is the 2005 Bankruptcy Reform Working? By Donald P. Morgan
  78. Large Bank Cash Balances and Liquidity Regulations By Asani Sarkar; Jeffrey Levine
  79. Estimating the Regional Economic Impacts of the 2017 to 2019 Drought on NSW and the Rest of Australia By Glyn Wittwer
  80. Will Demographic Headwinds Hobble China's Economy? By Hunter L. Clark; Thomas Klitgaard
  81. Cyber-Attacks and Cryptocurrencies By Guglielmo Maria Caporale; Woo-Young Kang; Fabio Spagnolo; Nicola Spagnolo
  82. Why Do Late Boomers Have So Little Retirement Wealth? By Anqi Chen; Wenliang Hou; Alicia H. Munnell
  83. Subdued potential growth: Sources and remedies By Sinem Kilic Celik; M.Ayhan Kose; Franziska L. Ohnsorge
  84. Time-Varying Influence of Household Debt on Inequality in United Kingdom By Edmond Berisha; David Gabauer; Rangan Gupta; Chi Keung Marco Lau
  85. Market Liquidity after the Financial Crisis By Or Shachar; Tobias Adrian; Michael J. Fleming
  86. The state-dependence of output revisions By Bruno Ducoudré; Paul Hubert; Guilhem Tabarly
  87. An estimated DSGE model with financial accelerator: the case of Tunisia By Hager Ben Romdhane
  88. Institucionalidad del financiamiento agropecuario By María I. Agudelo; Camila V. Moreno
  89. Popular Economic Narratives Advancing the Longest U.S. Economic Expansion 2009-2019 By Robert J. Shiller
  90. An Input-Output sectorial analysis of North Macedonia By Giovanni Mandras; Andrea Conte; Simone Salotti
  91. Conditional Political Budget Cycles: A Reconsideration of the Role of Economic Development By Kyriacou, Andreas P.; Okabe, Tomohito; Roca-Sagalés, Oriol
  92. Implementing Monetary Policy Post-Crisis: What Do We Need to Know? By Antoine Martin; Julie Remache; Patricia C. Mosser
  93. The impact of labor income tax progressivity on the fiscal multipliers in the context of fiscal consolidation programs By Santos, Mariana
  94. Japan’s Missing Wall of Money By Thomas Klitgaard
  95. Monetary Policy Transmission in Emerging Markets and Developing Economies By Luis Brandao-Marques; R. G Gelos; Thomas Harjes; Ratna Sahay; Yi Xue
  96. How Do Large Banks Manage Their Cash? By Jeffrey Levine; Asani Sarkar
  97. The Long-lasting Effects of Living under Communism on Attitudes towards Financial Markets By Christine Laudenbach; Ulrike Malmendier; Alexandra Niessen-Ruenzi
  98. Going Beyond GDP with a Parsimonious Indicator: Inequality-Adjusted Healthy Lifetime Income By Bloom, David E.; Fan, Victoria Y.; Kufenko, Vadim; Ogbuoji, Osondu; Prettner, Klaus; Yamey, Gavin
  99. General or Central Government? Empirical Evidence on Political Cycles in Budget Composition Using New Data for OECD Countries By Niklas Potrafke

  1. By: Petr Polak; Jiri Panos
    Abstract: This paper describes the implementation of the IFRS 9 accounting standard into a macroprudential (top-down) stress-testing framework. It sets out to present a possible way of overcoming data issues and discusses key assumptions which have an effect on the end results and which stress testers should be aware of. According to the results, macroeconomic expectations play a crucial role in the pass-through of impairment. The paper also presents evidence about the pro-cyclicality of the IFRS 9 approach.
    Keywords: IFRS 9, impairments, loan loss provisions, macroprudential policy, stress testing
    JEL: E44 E62 G01 G21
    Date: 2019–12
  2. By: Narayana R. Kocherlakota
    Abstract: In the 21st century, many key macroeconomic variables in the developed world have been persistently low, including inflation, output, growth, interest rates (both real and nominal), and labor share. I consider a class of standard representative agent rational expectations models in which fundamentals are deterministic and constant over time. I show that for any level of nominal frictions (no matter how small) and for any monetary policy rule (regardless of how active), there is a large set of stochastic equilibria that exhibit permanently low inflation, low output, low labor share, and low nominal interest rates. If the Phillips curve is sufficiently flat, then these equilibria also exhibit low growth and real interest rates.
    JEL: E12 E31 E52
    Date: 2020–02
  3. By: Patrick J. Kehoe (Stanford University; University of Minnesota; Federal Reserve Bank of Minneapolis; Harvard University; National Bureau of Economic Research; University College London; Federal Reserve Bank; University of Pennsylvania); Pierlauro Lopez (Bank of France); Virgiliu Midrigan; Elena Pastorino
    Abstract: Recent critiques have demonstrated that existing attempts to account for the unemployment volatility puzzle of search models are inconsistent with the procylicality of the opportunity cost of employment, the cyclicality of wages, and the volatility of risk-free rates. We propose a model that is immune to these critiques and solves this puzzle by allowing for preferences that generate time-varying risk over the cycle, and so account for observed asset pricing fluctuations, and for human capital accumulation on the job, consistent with existing estimates of returns to labor market experience. Our model reproduces the observed fluctuations in unemployment because hiring a worker is a risky investment with long-duration surplus flows. Intuitively, since the price of risk in our model sharply increases in recessions as observed in the data, the benefit from creating new matches greatly drops, leading to a large decline in job vacancies and an increase in unemployment of the same magnitude as in the data.
    Keywords: Unemployment volatility puzzle; Shimer puzzle; Search model; Search and matching model; Diamond-Mortenson-Pissarides model
    JEL: E0 E20 E24 E32 J60 J63 J64
    Date: 2020–01–08
  4. By: Fabio Massimo Piersanti; Patrizio Tirelli
    Abstract: We develop a stylized two-sector business cycle model with endogenous firm dynamics in the investment goods sector. The positive correlation between firms profitability and the relative price of investment goods generates an endogenous persistence mechanism in productivity dynamics which drives the model response to shocks. A white noise permanent shock to the productivity of new entrants causes endogenous exit and subsequent rounds of productivity increases, due to the competitive pressure generated by falling relative prices of investment goods. The model internal propagation mechanism generates persistent dynamics and a large "multiplier effect" on the initial shock. Neutral productivity shocks affect long run firms productivity in the Investment-goods sector through their effect on relative prices. Firms productivity is also endogenous to shocks to the marginal efficiency of investment. The DSGE version of the model apparently survives the Barro-King curse.
    Keywords: Productivity shocks, Investment shocks, relative price of investment, DSGE model, Firms entry, Firms exit
    JEL: E13 E21 E22 E30 E32
    Date: 2020–02
  5. By: Shekhar Hari Kumar (IHEID, Graduate Institute of International and Development Studies, Geneva); Aakriti Mathur (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: In this paper, we study transmission of global funding shocks to emerging economies (EMs) from the perspective of interbank markets. Money markets enable banks to engage in risk-sharing against liquidity shocks and are sensitive to global funding conditions. Accordingly, we first show that interbank rates better reflect the magnitude of transmission of foreign liquidity shocks to EMs as compared to benchmark short-term bond yields. Next, we disentangle the transmission into its various channels, focusing in particular on two pull factors associated with the domestic banking microstructure: dependence on wholesale funding and share of foreign banks. Our results indicate that money market rates in EMs react to global shocks, and that in particular dependence on wholesale funding has a significant role to play. Finally, we provide evidence that tools of macro-prudential policy like reserve requirements can help alleviate liquidity shocks to the EM banking system, weakening this global transmission.
    Keywords: International transmission of liquidity shocks; quantitative easing; wholesale funding; interbank rates; macro-prudential policy; reserve requirements.
    JEL: E43 E44 E52 E58 F42 G15 G21
    Date: 2020–03–02
  6. By: Christoph Boehm; Nitya Pandalai-Nayar
    Abstract: We provide evidence that industries' supply curves are convex. To guide our empirical analysis, we develop a putty-clay model in which capacity constraints at the plant level generate convex supply curves at the industry level. The model's key insight is that an industry's capacity utilization rate is a sufficient statistic for the slope of its supply curve. Using data on capacity utilization and three different instruments, we estimate the supply curve and find robust evidence for convexity. Supply curves are essentially flat at low levels of capacity utilization but increasing at higher levels. Further, industries with low initial capacity utilization rates expand production twice as much after demand shocks as industries that produce close to their capacity limit. The nonlinearity we identify has a number of macroeconomic implications, including that responses to shocks are state-dependent, that the Phillips curve is convex, and that the welfare costs of business cycles are larger than in Lucas (1987).
    JEL: E22 E32 E52 E62 F44
    Date: 2020–03
  7. By: Paul Hubert (Sciences Po-OFCE); Fabien Labondance (Université de Bourgogne Franche-Comté - CRESE - Sciences Po-OFCE)
    Abstract: Does policymakers’ choice of words matter? We explore empirically whether central bank tone conveyed in FOMC statements contains useful information for financial market participants. We quantify central bank tone using computational linguistics and identify exogenous shocks to central bank tone orthogonal to the state of the economy. Using an ARCH model and a high-frequency approach, we find that positive central bank tone increases interest rates at the 1- year maturity. We therefore investigate which potential pieces of information could be revealed by central bank tone. Our tests suggest that it relates to the dispersion of views among FOMC members. This information may be useful to financial markets to understand current and future policy decisions. Finally, we show that central bank tone helps predicting future policy decisions.
    Keywords: Optimism, FOMC, Dissent, Interest rate expectations, ECB
    JEL: E43 E52 E58
    Date: 2020–01
  8. By: Matthias Meier
    Abstract: We provide new evidence that (i) time to build is volatile and countercyclical, and that (ii) supply chain disruptions lengthen time to build. Motivated by these findings, we develop a general equilibrium model in which heterogeneous firms face non-convex adjustment costs and multi-period time to build. In the model, supply chain disruptions lengthen time to build. Calibrating the model to US micro data, we show that disruptions, which lengthen time to build by 1 month, depress GDP by 1% and aggregate TFP by 0.2%. Structural vector autoregressions corroborate the quantitative importance of supply chain disruptions.
    Keywords: Time to build, supply chain disruptions, business cycles
    JEL: E01 E22 E32
    Date: 2020–03
  9. By: Servaas Storm (Delft University of Technology)
    Abstract: The concern that an economy could experience persistent stagnation, caused by a structural weakness of aggregate demand, goes back to Alvin HansenÕs (1939) thesis of `secular stagnation`. HansenÕs thesis has been revived in recent times, when it became clear that productivity and potential growth in the OECD countries have been declining for decades. However, in line with deep-rooted theoretical beliefs, that inadequate demand can only affect growth in the short run, secular stagnation (of potential growth) is treated as an exclusively supply-side problem, the root of which is a worrying steady decline in productivity growth. This paper argues that it is a mistake to dismiss secular demand stagnation as main cause of declining potential growth in the OECD. We argue that the theoretical case for demand-caused secular stagnation is strong and empirical evidence that it has affected the U.S. economy after the mid-1970s is entirely convincing. Demand is leading supply, also in the long run. Hansen had it right, after all.
    Keywords: Unbalanced growth, secular stagnation, total factor productivity, labor productivity growth, Solow residual, dual economy.
    JEL: E02 E12 E31 F02 F15
    Date: 2019–12
  10. By: Lucrezia Reichlin (London Business School, Now-Casting Economics, and CEPR); Giovanni Ricco (University of Warwick and OFCE-SciencesPo, and CEPR); Thomas Hasenzagl (University of Minnesota)
    Abstract: We evaluate the role of financial conditions as predictors of macroeconomic risk first in the quantile regression framework of Adrian et al. (2019b), which allows for non-linearities, and then in a novel linear semi-structural model as proposed by Hasenzagl et al. (2018). We distinguish between price variables such as credit spreads and stock variables such as leverage. We find that (i) although the spreads correlate with the left tail of the conditional distribution of GDP growth, they provide limited advanced information on growth vulnerability; (ii) nonfinancial leverage provides a leading signal for the left quantile of the GDP growth distribution in the 2008 recession; (iii) measures of excess leverage conceptually similar to the Basel gap, but cleaned from business cycle dynamics via the lenses of the semi-structural model, point to two peaks of accumulation of risks – the eighties and the first eight years of the new millennium, with an unstable relationship with business cycle chronology.
    Keywords: Financial cycle, business cycle, credit, financial crises, downside risk, entropy, quantile regressions
    JEL: E32 E44 C32 C53
    Date: 2020–02
  11. By: Martin F. Hellwig (Max Planck Institute for Research on Collective Goods)
    Abstract: The paper contributes to the discussion on whether real interest rates smaller than real growth rates can be taken as evidence of dynamic inefficiency that calls for fiscal interventions. A seemingly killing objection points to the presence of land, a non-produced durable asset whose value becomes arbitrarily large as interest rates go to zero. Such an asset, it is claimed, can accommodate any need for a store of value at interest rates above growth rates, so dynamic inefficiency cannot arise. The paper shows that this objection is not robust to the presence of an arbitrarily small per-unit-of-value transaction cost. The paper also gives conditions under which fiscal interventions provide for Pareto improvements even though the interventions themselves are also costly.
    Keywords: Dynamic inefficiency, fiscal policy, public debt, overlapping-generations models with land, transaction costs, pay-as-you-go retirement provision
    JEL: D61 E21 E62 H63
    Date: 2020–03
  12. By: Beirne, John (Asian Development Bank Institute)
    Abstract: We provide a comprehensive analysis of financial cycles in asset markets and regions. Using a large sample of 38 advanced and emerging economies to enable a comparative assessment, the analysis conforms with the prevailing literature on financial cycles pertaining to advanced economies, but finds that equity market cycles in emerging market economies in Asia, Latin America, and Eastern Europe may be a more useful gauge of the financial cycle compared to cycles in credit and property markets. Similar to more advanced economies, it is found that financial and business cycles in emerging economies are synchronized, albeit partially and with some cross-country heterogeneity. This underscores the importance for policy makers to be vigilant of interlinkages between real and financial sectors, pointing toward a need for carefully designed macroprudential policies. Finally, we find that financial cycles in emerging markets remain vulnerable to global risk aversion in financial markets and spillovers from the United States, thereby reinforcing the importance of continuing to strengthen domestic macroeconomic fundamentals, and develop further local financial sectors through targeted structural reforms.
    Keywords: financial cycle; business cycle; emerging markets
    JEL: C38 E32 E44
    Date: 2019–12–09
  13. By: Peter Bednarek; Daniel Marcel te Kaat; Chang Ma; Alessandro Rebucci
    Abstract: We study how an aggregate bank flow shock impacts German cities' GDP growth depending on the state of their local real estate markets. Identification exploits a policy framework assigning refugees to cities on a quasi-random basis and variation in non-developable area for the construction of a measure of exposure to local real estate market tightness. We estimate that the German cities most exposed to real estate market pressure grew 2.5-5.0 percentage points more than the least exposed ones, cumulatively, during the 2009-2014 period. Bank flow shocks shift credit to firms with more collateral. More collateral also leads firms to hire and invest more in response to these shocks.
    JEL: D22 D53 E22 E3 E44 F3 G01 G15 G21 R3
    Date: 2020–03
  14. By: Rybacki, Jakub
    Abstract: The aim of this paper is to evaluate gross domestic product (GDP) forecast errors of Polish professional forecasters based on the individual data from the Rzeczpospolita daily newspaper. This dataset contains predictions on forecasting competitions during the years 2013–2019 in Poland. Our analysis shows a lack of statistical effectiveness of these predictions. First, there is a systemic negative bias, which is especially strong during the years of conservative PiS government rule. Second, the forecasters failed to correctly predict the effects of major changes in fiscal policy. Third, there is evidence of strategic behaviors; for example, the forecasters tended to revise their prognosis too frequently and too excessively. We also document herding behavior, i.e., an alignment of the most extreme forecasts towards market consensus with time, and an overly strong reliance on forecasts from NBP inflation projections in cases of estimates for longer horizons.
    Keywords: GDP forecasting
    JEL: E32 E37
    Date: 2020–01–28
    Abstract: Employment to production intensity is used as indicator for employment. The aim of this paper is to provide new estimates of employment-output elasticities and assess the effect of structural and macroeocnomic policies and demographic indicators on the employment-intensity of growth. Having a sample of 44 countries taken from AMEE (Africa and Middel East Erea; 20 francophone et 24 anglophone countries) over the priod 2000-2017, we propose linear and non linear specifications to assess the role of considered variables. Linear models results in majority do not confirm previous empirical results except that of Trade openness saying it contributes to explain cross-country variations in employment elasticities which tend to be higher in more open economies for Francophone countries. While for Anglophone countries, elasticities are effected only by 15 to 24 years old participant in active population (Tx1524). With non linear specifications (Quadratic, Cubic, and/or Augmented Cubic), Structural Policy variables (Labor market policy, Lmp, and Product market policy, Pmp) have increasing effect on elasticities. Structural reforms have to be complemented by macroeconomic stability policies (less GDP volatility) to maximize the effect of structural policies on employment responsiveness. In addition, macroeconomic policies aimed at promoting Foreign direct investment (FDI) have significant and positive impact on employment elasticities.
    Keywords: Employment to product elasticity, Linear model, Cubic model, Quadratic model, Cross section, Africa and Middel East Erea (AMEE).
    JEL: E2 E24 J21
    Date: 2020–03–05
  16. By: Michael D. Cai; Marco Del Negro; Edward P. Herbst; Ethan Matlin; Reca Sarfati; Frank Schorfheide
    Abstract: This paper illustrates the usefulness of sequential Monte Carlo (SMC) methods in approximating DSGE model posterior distributions. We show how the tempering schedule can be chosen adaptively, document the accuracy and runtime benefits of generalized data tempering for “online” estimation (that is, re-estimating a model as new data become available), and provide examples of multimodal posteriors that are well captured by SMC methods. We then use the online estimation of the DSGE model to compute pseudo-out-of-sample density forecasts and study the sensitivity of the predictive performance to changes in the prior distribution. We find that making priors less informative (compared to the benchmark priors used in the literature) by increasing the prior variance does not lead to a deterioration of forecast accuracy.
    JEL: C11 C32 C53 E32 E37 E52
    Date: 2020–03
  17. By: Thorsten Drautzburg; Jesus Fernandez-Villaverde; Pablo Guerron-Quintana
    Abstract: We argue that social and political risk causes significant aggregate fluctuations by changing bargaining power. To that end, we document significant changes in the capital share after large political events, such as political realignments, modifications in collective bargaining rules, or the end of dictatorships, in a sample of developed and emerging economies. These policy changes are associated with significant fluctuations in output. Using a Bayesian proxy-VAR estimated with U.S. data, we show how distribution shocks cause movements in output and unemployment. To quantify the importance of these political shocks for the U.S. as a whole, we extend an otherwise standard neoclassical growth model. We model political shocks as exogenous changes in the bargaining power of workers in a labor market with search and matching. We calibrate the model to the U.S. corporate non-financial business sector and we back out the evolution of the bargaining power of workers over time using a new methodological approach, the partial filter. We show how the estimated shocks agree with the historical narrative evidence. We document that bargaining shocks account for 28% of aggregate fluctuations and have a welfare cost of 2.4%in consumption units.
    Keywords: Redistribution risk; bargaining shocks; aggregate fluctuations; partial filter; histor-ical narrative.
    JEL: E32 E37 E44 J20
    Date: 2020–03–12
  18. By: Hanming Fang; Yongqin Wang; Xian Wu
    Abstract: Collateral-based monetary policy tools have been used extensively by major central banks. Lack of proper policy counterfactuals, however, makes it difficult to empirically identify their causal effects on the financial market and the real economy. We exploit a quasi-natural experiment in China, where dual-listed bonds are traded in two mostly segmented markets: the interbank market regulated by the Central Bank, and the exchange market regulated by the securities regulator. During a policy shift in our study period, China's Central Bank included a class of previously ineligible bonds in the interbank market to become eligible collateral for financial institutions to borrow money from its Medium-Term Lending Facility (MLF). This policy shift allows us to implement a triple-difference strategy to estimate the causal impact of the collateral-based unconventional monetary policy. We find that in the secondary market the policy reduced the spreads of the newly collateralizable bonds in the treatment market (the interbank market) by 42-62 basis points. We also find that there is a pass-through effect from the secondary market to the primary market: the spreads of the treated bonds newly issued in the interbank market were reduced by 54 basis points.
    JEL: E44 E52 E58 G12
    Date: 2020–02
  19. By: Hardik A. Marfatia (Department of Economics, Northeastern Illinois University, BBH 344G, 5500 N. St. Louis Ave., Chicago, IL 60625, USA); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa); Keagile Lesame (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa)
    Abstract: In this paper, we estimate the dynamic impact of unconventional monetary policy in the US on international REITs. Unlike existing studies which are limited to conventional policy tools and/or undertake a static approach, we estimate the dynamic time-varying impact of forward guidance and large-scale asset purchases (LSAP) shocks on the international REIT returns. We compare the effects of these unconventional tools with the effects of conventional federal funds rate shocks. Results show that the response of international REITs to the unconventional policy shocks significantly depends on the time under consideration. Forward guidance shocks have greater time variation in the impact on REIT returns compared to LSAP shocks, particularly in the case of Australia, Belgium, and the US REIT markets. We also find that in most countries, REITs time-varying response is related to the gold price changes.
    Keywords: Unconventional monetary policy, Forward guidance, LSAP, REITs, Time varying parameter model
    JEL: E44 E52 C32 F42 G14
    Date: 2020–02
  20. By: Adam M. Guren (NBER; Boston University); Alisdair McKay (Princeton University; National Bureau of Economic Research; Boston University); Emi Nakamura; Jon Steinsson
    Abstract: We provide new time-varying estimates of the housing wealth effect back to the 1980s. We use three identification strategies: OLS with a rich set of controls, the Saiz housing supply elasticity instrument, and a new instrument that exploits systematic differences in city-level exposure to regional house price cycles. All three identification strategies indicate that housing wealth elasticities were if anything slightly smaller in the 2000s than in earlier time periods. This implies that the important role housing played in the boom and bust of the 2000s was due to larger price movements rather than an increase in the sensitivity of consumption to house prices. Full-sample estimates based on our new instrument are smaller than recent estimates, though they remain economically important. We find no significant evidence of a boom-bust asymmetry in the housing wealth elasticity. We show that these empirical results are consistent with the behavior of the housing wealth elasticity in a standard life-cycle model with borrowing constraints, uninsurable income risk, illiquid housing, and long-term mortgages. In our model, the housing wealth elasticity is relatively insensitive to changes in the distribution of LTV for two reasons: First, low-leverage homeowners account for a substantial and stable part of the aggregate housing wealth elasticity; Second, a rightward shift in the LTV distribution increases not only the number of highly sensitive constrained agents but also the number of underwater agents whose consumption is insensitive to house prices.
    Keywords: Consumption; House prices; Leverage
    JEL: E21 E32 R21
    Date: 2020–01–31
  21. By: Chung, Federico; Purkey, Liam; Solis-Garcia, Mario
    Abstract: We provide estimates of the size and dollar value of shadow economy for a set of countries between 1950 and 2015, following the methodology of Solis-Garcia and Xie (2018).
    Keywords: informal sector; business cycles; DSGE models
    JEL: E26 E32 O17
    Date: 2020–02–28
  22. By: Kenneth D. Garbade (Federal Reserve Bank; Bankers Trust Company)
    Abstract: The Federal Reserve announced on November 3, 2010, that in the interest of stimulating economic recovery, it would purchase $600 billion of longer-term Treasury securities. The announcement led some commentators to conjecture that the Fed?s large-scale asset purchase (LSAP) program?popularly known as ?quantitative easing??is more likely to trigger inflation than stimulate recovery. This post discusses why those concerns may be misplaced, and also why they are not without some basis. A recent Liberty Street Economics post by Jamie McAndrews??Will the Federal Reserve's Asset Purchases Lead to Higher Inflation?? addressed the same issue from a broader perspective and came to a substantially similar conclusion.
    Keywords: Quantitative Easing
    JEL: E5
  23. By: Jordi Galí
    Abstract: I analyze an extension of the New Keynesian model that features overlapping generations of finitely-lived agents and (stochastic) transitions to inactivity. In contrast with the standard model, the proposed framework allows for the existence of rational expectations equilibria with asset price bubbles. I study the conditions under which bubble-driven fluctuations may emerge and the type of monetary policy rules that may prevent them. I conclude by discussing some of the model's welfare implications.
    JEL: E44 E52
    Date: 2020–02
  24. By: M.Ayhan Kose; Peter S. O. Nagle; Franziska L. Ohnsorge; Naotaka Sugawara
    Abstract: Episodes of debt accumulation have been a recurrent feature of the global economy over the past fifty years. Since 2010, emerging and developing economies have experienced another wave of historically large and rapid debt accumulation. Similar past debt buildups have often ended in widespread financial crises in these economies. This paper examines the factors that are likely to determine the outcome of the most recent debt wave, and considers policy options to help reduce the likelihood that it ends again in widespread crises. It reports two main results. First, the rapid increase in debt has made emerging and developing economies more vulnerable to shifts in market sentiment, notwithstanding historically low global interest rates. Second, policy options are available to lower the likelihood of financial crises, and to help manage the adverse impacts of crises when they do occur. These include sound debt management, strong monetary and fiscal frameworks, and robust bank supervision and regulation. The post crisis debt buildup has coincided with a period of subdued growth as well as the emergence of non-traditional creditors. As a result, policy priorities also need to ensure that debt is spent on productive purposes to improve growth prospects and that all debt related transactions are transparently reported.
    Keywords: Financial crises, currency crises, debt crises, banking crises, public debt, private debt, external debt.
    JEL: E32 E62 F34 G01 H12 H63 N20
    Date: 2020–03
  25. 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.
    JEL: C1 C32 E32 F4
    Date: 2020–02
  26. By: Younus, Rijja Ali; Yucel, Eray
    Abstract: Exchange rate pass-through, which is the degree of reflection of exchange rate movements on domestic inflation, is a crucial phenomenon especially for the developing economies. In this paper we study the exchange rate pass-through for the Pakistani economy from 2008 to 2019. Using quarterly data for consumer prices and the Pakistani Rupee – USD exchange rate and a simple econometric framework, we estimate the pass-through coefficients to various subgroup and item indices within Pakistani household consumption basket. Our findings indicate that pass-through behavior is limited to only some items, motivating us to develop an exchange rate sensitive items index to allow for better forecasting performance on the side of policymakers.
    Keywords: Exchange rate; ERPT; Pass-through; Pakistan; Inflation; Price level
    JEL: C51 E31 E58
    Date: 2020–03–04
  27. By: Carlos Carvalho; Stefano Eusepi; Emanuel Moench; Bruce Preston
    Abstract: We develop a theory of low-frequency movements in inflation expectations, and use it to interpret joint dynamics of inflation and inflation expectations for the United States and other countries over the post-war period. In our theory long-run inflation expectations are endogenous. They are driven by short-run inflation surprises, in a way that depends on recent forecasting performance and monetary policy. This distinguishes our theory from common explanations of low-frequency properties of inflation. The model, estimated using only inflation and short-term forecasts from professional surveys, accurately predicts observed measures of long-term inflation expectations and identifies episodes of unanchored expectations.
    Keywords: Anchored expectations, inflation expectations, survey data
    JEL: E32 D83 D84
    Date: 2020–03
  28. By: Francesco D’Acunto; Ulrike Malmendier; Michael Weber
    Abstract: Expectations about macro-finance variables, such as inflation, vary significantly across genders, even within the same household. We conjecture that traditional gender roles expose women and men to different economic signals in their daily lives, which in turn produce systematic variation in expectations. Using unique data on the contributions of men and women to household grocery chores, their resulting exposure to price signals, and their inflation expectations, we show that the gender expectations gap is tightly linked to participation in grocery shopping. We also document a gender gap in other economic expectations and discuss how it might affect economic choices.
    JEL: C90 D14 D84 E31 E52 G11
    Date: 2020–03
  29. By: Efraim Benmelech; Nitish Kumar; Raghuram Rajan
    Abstract: Lenders are unwilling to accept lower credit spreads for secured debt relative to unsecured debt when a firm is healthy. However, they accept significantly lower credit spreads for secured debt when a firm’s credit quality deteriorates, the economy slows, or average credit spreads widen. This contingent valuation of collateral or security, coupled with the borrower perceiving a loss of operational and financial flexibility when issuing secured debt, may explain why firms issue secured debt on a contingent basis; they issue more when their credit quality deteriorates, the economy slows, and average credit spreads widen.
    JEL: E44 E51 G21 G23 G33
    Date: 2020–02
  30. By: Firmin Doko Tchatoka (School of Economics, University of Adelaide); Lauren Slinger (School of Economics, University of Adelaide); Virginie Masson (School of Economics, University of Adelaide)
    Abstract: The liquidity effect, the short run negative response of interest rates to an increase in the money supply, has been the subject of a large number of studies, most of which based on the estimation of structural vector autoregressive models using standard instrumental variable methods (see e.g. Gali, 1992, Quarterly Journal of Economics). Using data from both the United States and Australia, we show that these SVAR models are weakly identified, and therefore the standard IV estimates of the structural coefficients and impulse response functions are biased and inconsistent. We use statistical procedures robust to weak instruments, along with the projection method of Dufour and Taamouti (2005, Econometrica), to construct confidence sets with correct coverage rate for the structural parameters and impact response functions of Gali's four variable IS-LM SVAR model. We find that these confidence sets are in general unbounded or large, and further, contain zero, thus suggesting that the evidence of the liquidity effect found in previous studies is empirically fragile. Our findings align with Pagan and Robertson (1998, Review of Economics and Statistics) who first pointed out possible identification issues in SVAR models.
    Keywords: Corruption; Liquidity effect; weak instruments; AR-statistic; projection method; confidence sets; correct coverage rate
    JEL: C01 C36 E3 E4 E5
    Date: 2020–02
  31. By: Jonathan McCarthy
    Abstract: One contributor to the subdued pace of economic growth in this expansion has been consumer spending. Even though consumption growth has been somewhat stronger in the past couple of quarters, it has still been weak in this expansion relative to previous expansions. This post concentrates on consumer spending on discretionary and nondiscretionary services, which has been a subject of earlier posts in this blog. (See this post for the definition of discretionary versus nondiscretionary services expenditures and this post for a subsequent update.) Discretionary expenditures have picked up noticeably over recent quarters but, unlike spending on nondiscretionary services, they remain well below their pre-recession peak. Even so, the pace of recovery for both discretionary and nondiscretionary services in this expansion is well below that of previous cycles. One explanation is that weak income expectations continue to constrain household spending.
    Keywords: Consumer spending; Discretionary services expenditures
    JEL: E2
  32. By: André Icard (former Deputy Géneral Manager of BIS); Philip Turner (National Institute of Economic and Social Research (NIESR); University of Basel)
    Abstract: The cumulative balance sheet effects of a decade of low interest rates, long as well as short, have become very large. This report (of an RTI Working Party chaired by Bernard Snoy) examines the magnitudes of such effects through the many dimensions of global liquidity. This is not purely a monetary policy phenomenon as regulatory policies, restrictive fiscal policies in some advanced economies and structural factors have all had important impacts. Several indicators suggest increased financial vulnerabilities and higher risks of destabilising market dynamics. The dollar debt of non-banks outside the United States is at a new record: currency mismatches and leverage in the private sector have increased. The dollar funding of non-US banks looks fragile. Greater reliance on international bond markets has created new, opaque risks. There is widespread unease about the domination of the dollar, and about the inadequacy of the Global Financial Safety Net. The search for alternative multi-currency arrangements continues. But the need to address the risk of a new dollar liquidity crunch is urgent. International oversight of this issue is at present too fragmented. Policy responses at national level may require action by several bodies – central banks, regulators and Treasuries. The report therefore proposes that the Financial Stability Board, with inputs from the BIS, the IMF, the OECD and others, report regularly on global liquidity to G20 Ministers and Governors so they can act in time to avert a crisis.
    Keywords: Global liquidity, lender of last resort, currency mismatches, G20, Triffin dilemma, international monetary system
    JEL: E43 E58 F33 F38 F41 F42 G15
    Date: 2019–12
    Abstract: Employment to production intensity or elasticity is used as indicator for employment. The aim of this paper is to provide new estimates of this indicator by rolling regression and assess the effect of structural policies, macroeocnomic policies, and demographic factors on it. Using an unbalanced panel of 44 countries (20 Francophone and 24 Anglophone countries taken from AMEE (Africa and Middel East Erea) over the period 2000–2017, there is an important difference between Francophone and Anglophone countries. The results suggest that structural policies (Lmp and Pmp) aimed at increasing labor and product market flexibility have a significant and positive impact on employment elasticities for Francophone countries. While for Anglophone countries, macroeconomic policies aimed at promoting Foreign direct investment (FDI) and increasing government size have a significant and positive impact on employment elasticities. In addition for all countries, the results also suggest that in order to maximize the positive impact on the responsiveness of employment to economic activity, structural factors have to be complemented with macroeconomic policies aimed at increasing stability.
    Keywords: Rolling regression, Employment to product elasticity, Panel Data, static model, dynamic model, GMM, AMEE (Africa and Middel East Erea), Francophone countries, Anglophone countries.
    JEL: C23 E24 J21
    Date: 2020–03–05
  34. By: Charles R. Hulten (University of Maryland; Urban Institute; National Bureau of Economic Research); Leonard I. Nakamura
    Abstract: The information revolution currently underway has changed the economy in ways that are hard to measure using conventional GDP procedures. The information available to consumers has increased dramatically as a result of the Internet and its applications, and new mobile communication devices have greatly increased the speed and reach of its accessibility. An individual now has an unprecedented amount of information on which to base consumption choices, and the “free” nature of the information provided means that the resulting benefits largely bypass GDP and accrue directly to consumers. This disconnect introduces a wedge between the growth in real GDP and the growth in consumer well-being, with the result that a slower rate of growth of the former does not necessarily imply a slower rate of the latter. The conceptual framework for this analysis is developed in a previous paper (Hulten and Nakamura (2018)), which extended the conventional framework of GDP to include a separate technology for consumer decisions based on Lancaster (1966b) and developed the idea of Expanded GDP (or EGDP). In this paper, we use this framework to provide a detailed critique of existing GDP and price measurement procedures and summarize the existing evidence on the size of the wedge between GDP and EGDP.
    Keywords: National Accounts; Internet; Information; Inflation; Welfare
    JEL: O4 O3 E01
    Date: 2020–03–09
  35. By: Ylva Søvik; Emily Eisner (Research and Statistics Group); Antoine Martin
    Abstract: In the minutes of the July 2015 Federal Open Market Committee (FOMC) meeting, the chair indicated that Federal Reserve staff would undertake an extended effort to evaluate potential long-run monetary policy implementation frameworks. But what is a central bank?s monetary policy implementation framework? In a series of four posts, we provide an overview of the key elements that typically constitute such a framework.
    Keywords: monetary policy implementation
    JEL: E5
  36. By: Jonathan McCarthy
    Abstract: The pronounced weakness in personal consumption expenditures (PCE) for services has been an unusual feature of the 2007-09 recession and the slow recovery from it. Even in 2010:Q4, when real PCE increased at a relatively robust 4.1 percent annual rate, real PCE on services rose at only a 1.4 percent rate. This weakness has been especially evident in ?discretionary? services (to be defined below), which fell more in the recent recession than in previous recessions and since have rebounded more sluggishly. In this post, I suggest that the continued sluggishness in these expenditures lends a note of caution regarding the sustainability of recent PCE strength. Because consumption accounts for about 70 percent of output, this in turn raises some concern about the future strength of the recovery.
    Keywords: Recession; Personal consumption expenditures; Business cycle; Services expenditures
    JEL: E2
  37. By: Cristina Fernández
    Abstract: Con el fin de cumplir con los objetivos propuestos en esta investigación, el trabajo se estructura en cuatro secciones, la primera de las cuáles es esta introducción. La segunda sección analiza las tres amenazas mayores para el mercado laboral en Bogotá: la inactividad, el desempleo y la informalidad; estima cuáles son sus causas y sugiere políticas para controlarla. La tercera sección analiza en detalle las políticas de emprendimiento. La cuarta sección presenta las conclusiones.
    Keywords: Empleo, Emprendimiento, Mercado Laboral, Desempleo, Informalidad, Tasa de Participación Laboral, Bogotá, Employment, Entrepreneurship, Labor Market, Unemployment, Informality
    JEL: E24 E26 J21 J64
    Date: 2019–10–31
  38. By: Helene Lee (Markets Group); Asani Sarkar
    Abstract: In a previous post, we compared the Federal Reserve?s discount window with the standing lending facilities (SLFs) at the Bank of England (BoE), the European Central Bank (ECB), and the Bank of Japan (BoJ). We showed that the Fed?s discount window was less integrated with monetary policy than the SLFs of the other central banks. In this post, we observe that the counterparty and collateral policies of the Fed?s discount window are similarly less integrated with the practices involved in monetary policy operations, in comparison with the other central banks.
    Keywords: Collateral; Standing Lending Facilities; Counterparty; Central Banks
    JEL: E5
  39. By: M. Ayhan Kose (World Bank, Prospects Group; Brookings Institution; CEPR; and CAMA); Franziska Ohnsorge (World Bank, Prospects Group; CEPR; and CAMA); Naotaka Sugawara (World Bank, Prospects Group)
    Abstract: Government debt has risen substantially in emerging market and developing economies (EMDEs) since the global financial crisis. The current environment of low global interest rates and weak growth may appear to mitigate concerns about elevated debt levels. Considering currently subdued investment, additional government borrowing might also appear to be an attractive option for financing growth-enhancing initiatives such as investment in human and physical capital. However, history suggests caution. Despite low interest rates, debt was on a rising trajectory in half of EMDEs in 2018. In addition, the cost of rolling over debt can increase sharply during periods of financial stress and result in financial crises; elevated debt levels can limit the ability of governments to provide fiscal stimulus during downturns; and high debt can weigh on investment and long-term growth. Hence, EMDEs need to strike a careful balance between taking advantage of low interest rates and avoiding the potentially adverse consequences of excessive debt accumulation.
    Keywords: Debt sustainability; fiscal balance; government debt; optimal debt level; private debt.
    JEL: E62 H62 H63
    Date: 2020–03
  40. By: Rice, Jonathan (Allied Irish Banks)
    Abstract: The main contribution of this paper is the construction of a measure of Economic Policy Uncertainty (EPU) for Ireland, following the methodology of Baker, Bloom and Davis (2016). The paper also sheds light on the implications of heightened uncertainty for Ireland, a small open economy operating within monetary union. Exogenous domestic uncertainty shocks foreshadow persistent declines in Irish investment and employment, with no clear response by the ECB. On the other hand, no such decline in demand is observed following global uncertainty shocks, largely resulting from an accommodative monetary policy stance by the ECB. Results from this paper suggest that policy uncertainty shocks have negative and persistent effects on Irish real economic activity, only when interest rates do not react, or are constrained. Common identification problems in the literature are also discussed and suggestions are made for future work in the area.
    JEL: E5 G01 G17 G28 R39
    Date: 2020–01
  41. By: Xiao, Bowen; Guo, Xiaodan; Fan, Ying; Voigt, Sebastian; Cui, Lianbiao
    Abstract: In light of increased economic integration and global warming, addressing critical issues such as the role of multilateral climate policies and the strategic interaction of countries in climate negotiations becomes paramount. We thus established for this paper an open economy environmental dynamic stochastic general equilibrium model with heterogeneous production sectors, bilateral climate policies, asymmetric economies, and asymmetric stochastic shocks, using China and the EU as case studies in order to analyze the interaction and linking of international carbon markets under dynamic international economic cycles. This led us to some major conclusions. First, with various methods we verified that, due to deadweight loss, the efficiency of the separate carbon market is lower than that of the joint carbon market. Second, the intensity of the spillover effects depends partly on different climate policies. This means that, in terms of supply-side shocks, the EU's economy in a joint carbon market is more sensitive because its cross-border spillover effects are enhanced, while demand-side shocks have a stronger impact on the EU's economy under a separate carbon market. Third, the Ramsey policy rule revealed that both China's and the EU's emission quotas should be adjusted pro-cyclically under separate carbon markets. The cross-border spillover effects of the joint carbon market, however can change the pro-cyclical characteristics of foreign (EU's) optimal quotas.
    Keywords: International economic cycle,Carbon market,China,the European Union (EU),Dynamic Stochastic General Equilibrium (DSGE)
    JEL: E32 F41 Q53 Q56 Q58
    Date: 2020
  42. By: Jan J. J. Groen; Menno Middeldorp
    Abstract: Central bankers closely monitor inflation expectations because they?re an important determinant of actual inflation. Treasury inflation-protected securities (TIPS) are commonly used to measure bond market inflation expectations. Unfortunately, they were only introduced in 1997, so historical data are limited. We propose a solution to this problem by using the relationship between TIPS yields and other data with a longer history to construct synthetic TIPS rates going back to 1971.
    Keywords: backcasting; inflation expectations; PLS regression
    JEL: E2 G1
  43. By: Tomoyuki Nakajima (Faculty of Economics, University of Tokyo); Shuhei Takahashi (Institute of Economic Research, Kyoto University)
    Abstract: Previous analyses suggest that a government can finance its expenditure by only using its asset income without taxes in the long run. We show that uninsured idiosyncratic earnings risk may overturn this result. In an Aiyagari-type model, we theoretically show that increasing government assets eventually decreases the interest rate below zero, suggesting an upper bound on government asset income. Hence, when government expenditure exceeds a threshold, there exists no zero-tax steady-state equilibrium, and the zero-tax policy is infeasible. Quantitatively, a government can raise small revenues without taxes. Increasing government assets may also generate rational asset price bubbles.
    Keywords: Government assets, Equilibrium existence, Zero taxes, Bubbles, Incomplete markets, Heterogeneous agents
    JEL: D52 E62 H63
    Date: 2020–03
  44. By: Jennifer Wolgemuth; Antoine Martin; Deborah Leonard
    Abstract: An earlier post on how the Fed changes the size of its balance sheet prompted several questions from readers about the Federal Reserve?s accounting of asset purchases and the payment of principal by the Treasury on Treasury securities owned by the Fed. In this post, we provide a more detailed explanation of the accounting rules that govern these transactions.
    Keywords: Federal Reserve; Accounting; Balance Sheet
    JEL: E5
  45. By: David O. Lucca (Federal Reserve Bank); Ernst Schaumburg
    Abstract: Central banks and investors around the world closely monitor developments in financial markets to gauge expectations of future interest rates and inflation. In this post, we argue that two of the most commonly used market-based inflation expectations measures?TIPS breakevens and inflation swaps?are noisy. Although movements in both measures provide policymakers with valuable information, readings should always be interpreted with care.
    Keywords: TIPS breakevens; Inflation swaps; inflation expectations
    JEL: E2 G1
  46. By: Exler, Florian (University of Vienna); Tertilt, Michèle (University of Mannheim)
    Abstract: In this survey, we review the quantitative macroeconomic literature analyzing consumer debt and default. We start by providing an overview of consumer bankruptcy law in the US and document the relevant institutional changes over time. We proceed with a comprehensive empirical section, describing key facts about consumer debt, defaults and delinquencies, as well as charge-off and interest rates for the United States. In addition to the evolution of these variables over time, we construct life-cycle profiles using data from the Survey of Consumer Finances and show that debt and defaults display a clear hump-shaped profile by age. Third, we show how credit card debt has evolved along the income distribution. Finally, we document a large amount of heterogeneity in credit card interest rates across consumers. In the second part of the survey, we describe what has by now become the workhorse model of consumer credit and default. We discuss a quantitative version of the model and use it to decompose the main reasons for default. We also use the model to illustrate how the details of default costs matter. The remainder of the survey then discusses the literature centered around two questions. First, what are the welfare implications of various bankruptcy laws? And second, what caused the rise in filings over time? We end with a discussion of open questions and fruitful avenues for future research
    Keywords: consumer debt, bankruptcy, chapter 7, default, credit cards, charge-offs
    JEL: C60 E20 G20 O30
    Date: 2020–02
  47. By: Ha,Jongrim; Kose,Ayhan; Ohnsorge,Franziska Lieselotte
    Abstract: Emerging market and developing economies (EMDEs) have experienced an extraordinary decline in inflation since the early 1970s. After peaking in 1974 at 17.3 percent, inflation in these economies declined to 3.5 percent in 2017. Despite a checkered history of managing inflation among many EMDEs, disinflation occurred across all regions. This paper presents a summary of a recent book,"Inflation in Emerging and Developing Economies: Evolution, Drivers, and Policies,"that analyzes this remarkable achievement. The findings suggest that many EMDEs enjoy the benefits of stability-oriented and resilient monetary policy frameworks, including central bank transparency and independence. Such policy frameworks need to be complemented by strong macroeconomic and institutional arrangements. Inflation expectations are more weakly anchored in EMDEs than in advanced economies. In EMDEs that do not operate inflation targeting frameworks, exchange rate movements tend to have larger and more persistent effects on inflation.
    Keywords: Inflation,Macroeconomic Management,Inequality,Financial Structures,International Trade and Trade Rules
    Date: 2019–02–28
  48. By: Cristina Arellano; Yan Bai; Gabriel Mihalache (State University of New York at Stony Brook)
    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.
    Keywords: Monetary policy; Inflation; Sovereign default; Interest rates
    JEL: E52 F34 F41
    Date: 2020–01–10
  49. By: Jordi Galí
    Abstract: Under uncovered interest parity (UIP), the size of the effect on the real exchange rate of an anticipated change in real interest rate differentials is invariant to the horizon at which the change is expected. Empirical evidence using US, euro area and UK data points to a substantial deviation from that invariance prediction: expectations of interest rate differentials in the near (distant) future are shown to have much larger (smaller) effects on the real exchange rate than is implied by UIP. Some possible explanations are discussed.
    JEL: E43 E58 F41
    Date: 2020–02
  50. By: Nóbrega, Valter
    Abstract: In this paper, we look at the relationship between Investment Specific Technological Change (ISTC) and optimal level of labor income progressivity. We develop an incomplete markets overlapping generations model that matches relevant features of the US economy and find that the observed drop in the relative price of investment since the 1980's leads optimal progressivity to increase. This result hinges on ISTC increasing the wage premium through an increase in the variance of the permanent component of labor income. This result is supported by recent findings in the literature that highlight the increasing role of the permanent component of labor income in the observed increase in income inequality.
    Keywords: Optimal taxation; Technological Change; Income Inequality
    JEL: E21 H21 J0
    Date: 2020–01–22
  51. By: Helene Lee (Markets Group); Asani Sarkar
    Abstract: The European Central Bank (ECB)?s marginal lending facility has been used by banks to borrow funds both in normal times and during the crisis that started in 2007. In this post, we argue that how a central bank communicates the purpose of a facility is important in determining how users of the facility are perceived. In particular, the ECB never refers to the marginal lending facility as a back-up source of funds. The ECB?s neutral approach may be a key factor in explaining why financial institutions are less reluctant to use the marginal lending facility than the Fed?s discount window.
    Keywords: Crisis; ECB; Standing Lending Facility
    JEL: E5
  52. By: John C. Haltiwanger; James R. Spletzer
    Abstract: We find that most of the rising between firm earnings inequality that dominates the overall increase in inequality in the U.S. is accounted for by industry effects. These industry effects stem from rising inter-industry earnings differentials and not from changing distribution of employment across industries. We also find the rising inter-industry earnings differentials are almost completely accounted for by occupation effects. These results link together the key findings from separate components of the recent literature: one focuses on firm effects and the other on occupation effects. The link via industry effects challenges conventional wisdom.
    JEL: E24 J24 J31 L22
    Date: 2020–02
  53. By: Perry Mehrling (Pardee School of Global Studies, Boston University)
    Abstract: The analytical tension in post-Keynesian thought between the theory of endogenous (credit) money and the theory of liquidity preference, brought to our attention by Dow and Dow (1989), can be viewed through the lens of the money view (Mehrling 2013) as a particular case of the balance between the elasticity of payment and the discipline of funding. Further, updating FullartonÕs 1844 Òlaw of refluxÓ for the modern condition of financial globalization and market based credit, the same money view lens offers a critical entry point into TobinÕs fateful 1963 intervention ÒCommercial Banks as Creators of ÔMoneyÕÓ which established post-war orthodoxy, and also to the challenge offered by so-called Modern Money Theory.
    Keywords: credit creation, financial intermediation, law of reflux
    JEL: B2 E5
    Date: 2020–01
  54. By: Antoine Martin; Sam Schulhofer-Wohl
    Abstract: In our previous post, we discussed the meaning of the term ?credit allocation? and how it relates to the Federal Reserve?s holdings of agency mortgage-backed securities (MBS). We concluded that the Fed?s MBS holdings do not pose significant credit risk but that the Fed does influence the relative market price of credit when it purchases agency MBS, and this indirectly influences decisions by investors. Today, we take the next step and discuss how the Fed?s MBS purchases affect the U.S. economy and, in particular, how the effect of MBS purchases can differ from the effect of purchases of Treasury securities.
    Keywords: Federal Reserve; MBS; economy
    JEL: E5
  55. By: Gara M. Afonso
    Abstract: In the fall of 2008, the Fed added new policy tools to its portfolio of techniques for implementing monetary policy. In particular, since October 9, 2008, depository institutions in the United States have been paid interest on the balances they hold overnight at Federal Reserve Banks (see Federal Reserve Board announcement). Several other central banks, such as the European Central Bank (ECB) and the central banks of Canada, England, and Australia, have somewhat similar deposit facilities allowing banks to earn overnight rates on their balances. In this post, I discuss the benefits and costs of this new tool in an environment where excess reserves in the United States have now exceeded $1.4 trillion and account for close to 95 percent of all reserves.
    JEL: E5 G2
  56. By: Alexius, Annika (Dept. of Economics, Stockholm University); Lundholm, Michael (Dept. of Economics, Stockholm University); Nielsen, Linnea (Wahlstedt Sageryd)
    Abstract: As the struggle against low inflation intensifies, renewed attention is focusing on the potential instability of the relationship between labor market demand pressure and inflation. A weaker Phillips curve has mainly been documented for the United States. Since it is unlikely that this phenomenon is limited to a single country, more international evidence is required. We analyse changes in the slope of the Phillips curve in eleven OECD countries (including the United States for comparison). Bayesian VAR models with time varying parameters indicate that relationship between inflation and unemployment has strengthened rather than weakened. Shocks to unemployment typically have significant effects on inflation in 2018, indicating that the Phillips curve is still alive and well. The statistical method may matter for the results as rolling window estimation shows a weakened relationship in six out of ten non-US countries.
    Keywords: Inflation; Phillips Curve; Bayesian time-varying parameter VARs;
    JEL: E31 F41
    Date: 2020–03–10
  57. By: Nina Boyarchenko; Matthew Plosser; Sooji Kim
    Abstract: The target federal funds rate has hovered around zero for nearly a decade, and observers are questioning what effect an increase could have on both the financial markets and the real economy. In this post, we examine the historical reaction of loan rates to target rate increases. Specifically, we examine the interest rates that banks offer on residential mortgages and home equity lines of credit (HELOCs).
    Keywords: Federal Funds; Consumer Lending; Monetary Policy; Taper Tantrum
    JEL: D1 E5
  58. By: Mark Harris (Curtin Univ, Sch Econ Finance & Property); Hervé Le Bihan (Centre de recherche de la Banque de France - Banque de France); Patrick Sevestre (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique, Curtin Univ, Sch Econ Finance & Property)
    Abstract: Price reviews are a potentially costly activity. A significant fraction of unchanged prices may stem from firms not reviewing prices, rather than from obstacles to changing prices per se, such as menu costs. In this paper, we disentangle these two causes of price stickiness by estimating an inflated ordered probit model on a panel of French manufacturing firms. The results point to a low frequency of price reviews, suggestive of the relevance of information costs as a determinant of the observed price stickiness. In view of the "inattentive producers" literature, pointing that the source of price rigidity matters, this is suggestive of a large real effect of monetary policy.
    Keywords: price stickiness,price reviews,price changes,inflated ordered probit model
    Date: 2019–12–03
  59. By: Maxim L. Pinkovskiy
    Abstract: My aim in the second post of this series on Thomas Piketty?s Capital in the Twenty-First Century is to talk about the economist?s research accomplishment in reconstructing capital-output ratios for developed countries from the Industrial Revolution to the present and using them to explain why wealth inequality will rise in developed countries. I will then provide a critical discussion of his interpretation of the history of capital in the developed world. Finally, I?ll end by discussing Piketty?s main policy proposal: the global tax on capital.
    Keywords: Piketty; depreciation; capital-output ratio
    JEL: E2 R3 N2
  60. By: Alexander Dobrinevski (OECD); Raphaël Jachnik (OECD)
    Abstract: This paper presents results from a first pilot study to measure the consistency of real economy investments with climate change mitigation objectives. The analysis focuses on investments in infrastructure and equipment in the manufacturing industries in Norway between 2010 and 2017, estimated at USD 2.5 billion per year on average. The consistency or inconsistency of these investments is then measured at subsector level based on two readily available reference points: the European Union Taxonomy for Sustainable Activities, and a 2°C scenario for the Nordic region from the International Energy Agency. The analysis further identifies sources of financing in these subsectors and discusses future investment and financing challenges, in light of more ambitious forward-looking decarbonisation targets and needs. Finally, the study draws methodological conclusions and calls for further pilot studies in order to improve and scale up such analysis at international level, including in terms of using different or complementary reference points specifically aligned to the temperature goal of the Paris Agreement.
    Keywords: capital expenditure, climate change, emissions, energy efficiency, finance, investment, low-greenhouse gas development, manufacturing, measurement, scenarios, taxonomy, tracking
    JEL: E01 E22 F31 G32 L60 H54 Q54 Q56
    Date: 2020–03–17
  61. By: Giovanni Dosi (Scuola Superiore Sant’Anna); Richard B. Freeman (Harvard University and NBER); Marcelo C. Pereira (University of Campinas and Scuola Superiore Sant’Anna); Andrea Roventini (Scuola Superiore Sant’Anna and OFCE, Sciences Po); Maria Enrica Virgillito (Scuola Superiore Sant’Anna)
    Abstract: This paper presents an Agent-Based Model (ABM) that seeks to explain the concordance of sluggish growth of productivity and of real wages found in macro-economic statistics, and the increased dispersion of firm productivity and worker earnings found in micro level statistics in advanced economies at the turn of the 21st century. It shows that a single market process unleashed by the decline of unionization can account for both the macro and micro economic phenomena, and that deunionization can be modeled as an endogenous outcome of competition between high wage firms seeking to raise productive capacity and low productivity firms seeking to cut wages. The model highlights the antipodal competitive dynamics between a “winner-takes-all economy” in which corporate strategies focused on cost reductions lead to divergence in productivity and wages and a “social market economy” in which competition rewards the accumulation of firm-level capabilities and worker skills with a more egalitarian wage structure.
    Keywords: Unionisation, productivity slowdown, market selection, reallocation, agent-based model
    JEL: J51 E02 E24 C63
    Date: 2020–02
  62. By: Dean Corbae (University of Wisconsin-Madison; University of Pittsburgh; University of Iowa; National Bureau of Economic Research; University of Texas); Pablo D'Erasmo
    Abstract: Concentration of insured deposit funding among the top four commercial banks in the U.S. has risen from 15% in 1984 to 44% in 2018, a roughly three-fold increase. Regulation has often been attributed as a factor in that increase. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 removed many of the restrictions on opening bank branches across state lines. We interpret the Riegle-Neal act as lowering the cost of expanding a bank's funding base. In this paper, we build an industry equilibrium model in which banks endogenously climb a funding base ladder. Rising concentration occurs along a transition path between two steady states after branching costs decline.
    Keywords: Banking industry dynamics; Imperfect competition; Bank concentration
    JEL: E44 G21 L11 L13
    Date: 2020–03–02
  63. By: Greg Kaplan; Piotr Zoch
    Abstract: We demonstrate the importance of distinguishing between the traditional use of labor for production, versus alternative uses of labor for overhead, marketing and other expansionary activities, for studying the distribution of both factor income and labor income. We use our framework to assess the impact of changes in markups on the overall labor share and on labor income inequality across occupations. We identify the production and expansionary content of different occupations from the co-movement of occupational income shares with markup-induced changes in the labor share. We find that around one-fifth of US labor income compensates expansionary activities, and that occupations with larger expansionary content have experienced the fastest wage and employment growth since 1980. Our framework can rationalize a counter-cyclical labor share in the presence of sticky prices and can be used to study the distributional effects of demand shocks, monetary policy and secular changes in competition.
    JEL: D2 D3 D4 E3 E5 J2 L1
    Date: 2020–02
  64. By: Ylva Søvik; Emily Eisner (Research and Statistics Group); Antoine Martin
    Abstract: The 2007-09 financial crisis, and the monetary policy response to it, have greatly increased the size of central bank balance sheets around the world. These changes were not always well understood and some were controversial. We discuss these crisis-induced changes, following yesterday?s post on the composition of central bank balance sheets in normal times, and explain the policy intentions behind some of them.
    Keywords: Central bank balance sheet
    JEL: E5
  65. By: James J. McAndrews; Kenneth D. Garbade (Federal Reserve Bank; Bankers Trust Company)
    Abstract: Negative interest rates have evolved, over the past few years, from a topic of modest academic interest to a practical reality. Short- and intermediate-term sovereign debt of several European countries, including Germany, Denmark, the Netherlands, Sweden, Austria, and Switzerland, now trades at negative yields.
    Keywords: Equation; Research; Garbade; Math
    JEL: E5 G2
  66. By: Kyle F. Herkenhoff (University of Minnesota); Gordon Phillips (Center for Private Equity and Venture Capital at Dartmouth’s Tuck School of Business)
    Abstract: How does access to consumer credit affect the job finding behavior of displaced workers? Are these workers looking for jobs at larger and more productive firms? What is the impact of consumer credit on the amount of time it takes to find a job? In recent work with Ethan Cohen-Cole we explore these questions by building a new data set of individual credit reports (from TransUnion) merged with administrative earnings data. We describe our approach and our results in this post.
    Keywords: Unemployment; Credit
    JEL: E24 J01
    Date: 2020–03–04
  67. By: Huang, Bihong (Asian Development Bank Institute); Punzi, Maria Teresa (Asian Development Bank Institute); Wu, Yu (Asian Development Bank Institute)
    Abstract: This paper maps the risk arising from the transition to a low-emission economy and studies its transmission channels within the financial system. The environmental dynamic stochastic general equilibrium (E-DSGE) model shows that tightening environmental regulations deteriorates firms' balance sheets as it internalizes the pollution costs, which consequentially accelerates the risks that the financial system faces. This empirical study, which employs the Clean Air Action that the Chinese government launched in 2013 as a quasi-experiment, supports the theoretical implications. The analysis of a unique dataset containing 1.3 million loans shows that the default rates of high-polluting firms rose by around 50% along their environmental policy exposure. At the same time, the loan spread charged to such firms increased by 5.5% thereafter.
    Keywords: environmental DSGE Model; Clean Air Action; lending spread; default rate
    JEL: E32 E50 H23 Q43
    Date: 2019–07–05
  68. By: de Pedraza, Pablo (European Commission, DG Joint Research Centre); Guzi, Martin (Masaryk University); Tijdens, Kea (University of Amsterdam)
    Abstract: Di Tella et al. (2001) show that temporary fluctuations in life satisfaction (LS) are correlated with macroeconomic circumstances such as gross domestic product, unemployment, and inflation. In this paper, we bring attention to labour market measures from search and matching models (Pissarides 2000). Our analysis follows the two-stage estimation strategy used in Di Tella et al. (2001) to explore sectoral unemployment levels, labour market tightness, and matching efficiency as LS determinants. In the first stage, we use a large sample of individual data collected from a continuous web survey during the 2007-2014 period in the Netherlands to obtain regression-adjusted measures of LS by quarter and economic sector. In the second-stage, we regress LS measures against the unemployment level, labour market tightness, and matching efficiency. Our results are threefold. First, the negative link between unemployment and an employee's LS is confirmed at the sectoral level. Second, labour market tightness, measured as the number of vacancies per job-seeker rather than the number of vacancies per unemployed, is shown to be relevant to the LS of workers. Third, labour market matching efficiency affects the LS of workers differently when they are less satisfied with their job and in temporary employment. No evidence of this relationship has been documented before Our results give support to government interventions aimed at activating demand for labour, improving the matching of job-seekers to vacant jobs, and reducing information frictions by supporting match-making technologies.
    Keywords: life satisfaction, matching efficiency, tightness, unemployment
    JEL: E24 J21
    Date: 2020–02
  69. By: Rabhi, Ayoub; Haoudi, Amina
    Abstract: According to the theory of the optimal currency area (OCA), the choice of a country to join a monetary union is a relevant decision if the different members fulfill a set of criteria. In this context, the possible decision of Morocco to join the planned monetary union of ECOWAS requires a subtle analysis in order to assess the economic pre positioning of Morocco in relation to the other major members of ECOWAS. Our article brings some reflections on the advantages and limits of this possible participation in the monetary union of ECOWAS based on different relations that exist between Morocco and four major ECOWAS economies, namely: Nigeria, Senegal, Ghana and Ivory Coast.
    Keywords: Optimal Currency Area, Monetary union, ECOWAS, Exchange rate regime.
    JEL: E50 E6
    Date: 2020
  70. By: Yueran Ma; Tiziano Ropele; David Sraer; David Thesmar
    Abstract: This paper quantifies the economic costs of distortions in managerial forecasts. We match a unique managerial survey run by the Bank of Italy with administrative data on firm balance sheets and income statements. The resulting dataset allows us to observe a long panel of managerial forecast errors for a sample of firms representative of the Italian economy. We show that managerial forecast errors are positively and significantly autocorrelated. This persistence in forecast error is consistent with managerial underreaction to new information. To quantify the economic significance of this forecasting bias, we estimate a dynamic equilibrium model with heterogeneous firms and distorted expectations. The estimated model matches not only the persistence of forecast errors, but the empirical link between investment and managerial forecasts. Relative to a counterfactual with rational expectations, we find that managers exhibit large forecasting biases, which lead to significant distortions in firm-level investment. These distortions, however, imply limited loss in firm value. In general equilibrium, the estimated model leads to negligible aggregate efficiency losses from distorted forecasts.
    JEL: E03 E22 G02 G3 G31
    Date: 2020–03
  71. By: Peter Bauer (European Commission - JRC); Igor Fedotenkov (European Commission - JRC); Aurelien Genty (European Commission - JRC); Issam Hallak (European Commission - JRC); Peter Harasztosi (European Commission - JRC); David Martinez Turegano (European Commission - JRC); David Nguyen (National Institute of Economic and Social Research); Nadir Preziosi (European Commission - JRC); Ana Rincon-Aznar (National Institute of Economic and Social Research); Miguel Sanchez Martinez (European Commission - JRC)
    Abstract: High levels of labour productivity growth are a key element to maintaining high standards of living in the long run in Europe. However, the EU has been experiencing a significant slowdown in labour productivity and total factor productivity growth, a phenomenon which has even exacerbated over the last decade, contrary to what would be expected in the recovery from the financial crisis. The trends and driving forces of the current sluggish productivity growth in Europe are analysed in this report with a special emphasis on services. After reviewing the literature in the field, the report zooms in on the role played by factors such as structural change, intangible investments, firm size distribution, firm demography, labour dynamics, zombie firms, business cycle dynamics and public expenditure and assesses their impact on productivity growth based on a variety of data sources and methodologies. The report focusses on the main results at EU level and includes some cross-country and cross-sectoral comparisons wherever possible.
    Keywords: productivity puzzle, structural change, intangible assets, public expenditure, business cycles, creative job destruction, firm entry, firm exit, firm size, zombie firms, Member States, service sectors
    Date: 2020–03
  72. By: Ryo Kato; Takayuki Tsuruga
    Abstract: Pecuniary externalities in models with financial friction justify macroprudential policies for preventing economic agents’ excessive risk taking. We extend the Diamond and Rajan (2012) model of banks with the production factors and explore how a pecuniary externality affects a bank’s leverage. We show that the laissez-faire banks in our model take on excessive risks compared with the constrained social optimum. Our numerical simulations suggest that the crisis probability is 2--3 percentage points higher in the laissez-faire economy than in the constrained social optimum.
    Date: 2020–03
  73. By: Coibion, Olivier (University of Texas at Austin); Georgarakos, Dimitris (European Central Bank); Gorodnichenko, Yuriy (University of California, Berkeley); Weber, Michael (World Bank)
    Abstract: We compare the causal effects of forward guidance communication about future interest rates on households' expectations of inflation, mortgage rates, and unemployment to the effects of communication about future inflation in a randomized controlled trial using more than 25,000 U.S. individuals in the Nielsen Homescan panel. We elicit individuals' expectations and then provide 22 different forms of information regarding past, current and/or future inflation and interest rates. Information treatments about current and next year's interest rates have a strong effect on household expectations but treatments beyond one year do not have any additional impact on forecasts. Exogenous variation in inflation expectations transmits into other expectations. The richness of our survey allows us to better understand how individuals form expectations about macroeconomic variables jointly and the non-response to long-run forward guidance is consistent with models in which agents have constrained capacity to collect and process information.
    Keywords: expectations management, inflation expectations, surveys, communication, randomized controlled trial
    JEL: E31 C83 D84
    Date: 2020–02
  74. By: Michael Abrahams
    Abstract: During the 2007-09 crisis, the Federal Reserve took many measures to mitigate disruptions in financial markets, including the introduction or expansion of liquidity facilities. Many studies have found that the Fed?s lending via the facilities helped stabilize financial markets. In addition, because the Fed?s loans were well collateralized and generally priced at a premium to the cost of funds, they had another, less widely noted benefit: they made money for U.S. taxpayers. In this post, I bring information together from various sources and time periods to show that the facilities generated $21.7billion in interest and fee income.
    Keywords: Federal Reserve; Liquidity Facilities; crisis; lender-of-last-resort
    JEL: E5 G1
  75. By: Matthieu Lemoine (Centre de recherche de la Banque de France - Banque de France); Harri Turunen (Centre de recherche de la Banque de France - Banque de France); Mohammed Chahad (Centre de recherche de la Banque de France - Banque de France); Antoine Lepetit (Centre de recherche de la Banque de France - Banque de France); Anastasia Zhutova (Centre de recherche de la Banque de France - Banque de France); Pierre Aldama (Centre de recherche de la Banque de France - Banque de France); Pierrick Clerc (Centre de recherche de la Banque de France - Banque de France); Jean-Pierre Laffargue (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper presents the new model for France of the Banque de France (FR-BDF), as well as its key implications for the analysis of monetary policy transmission in France. Relative to our former model, this new semi-structural model has been improved along three dimensions: financial channels are richer, expectations now have an explicit role and simulations now converge toward a balanced growth path. We follow the approach of the FRB/US model, where agents can form their expectations in two different ways, VARbased or model-consistent, and where non-financial behavior react with polynomial adjustment costs. For standard monetary policy shocks, FR-BDF shows a stronger sensitivity than our former model, due to the widespread influence of expectations. Then, we show that, under model-consistent expectations, FR-BDF does not suffer from the forward guidance puzzle. Finally, Eurosystem asset purchase programmes have notable effects in FR-BDF, with a stronger transmission through exchange rates than term premia.
    Keywords: forward guidance,monetary policy,expectations,semi-structural modeling
    Date: 2019–10
  76. By: Jason Bram; James A. Orr
    Abstract: After bottoming out in late 2009, New York City?s economy has been on the road to recovery. In this post, we call attention to an unprecedented feature of the current economic recovery: overall employment in the city began to rebound from the recession well before Wall Street started adding jobs. We also consider some questions that this development naturally raises: What took Wall Street employment so long to recover? What?s been driving job generation on Main Street? What does the recent pickup in Wall Street employment suggest about the outlook for the city?s economy?
    Keywords: Financial Sector; Wall Street; Employment; New York (City); Securities
    JEL: E2
  77. By: Donald P. Morgan
    Abstract: While the name of the Bankruptcy Abuse Prevention and Consumer Protection Act suggests two goals, BAPCPA seemed to be more about abuse prevention than consumer protection. The abuse alleged by proponents of BAPCPA, particularly credit card lenders, was that filers were using Chapter 7 bankruptcy to avoid paying credit card debt they could afford to pay. BAPCPA aimed to curb the alleged abuse through a variety of obstacles, most notably a means test intended to divert better off filers from Chapter 7, where credit card and other unsecured debts are discharged (forgiven), to Chapter 13, where unsecured debts may be rescheduled. In this post, I investigate whether BAPCPA is working, where by ?working? I mean reducing the overall bankruptcy rate, and reducing that ratio of Chapter 7-to-Chapter 13 filings. Some observers have argued that the reform failed on both counts, but my analysis suggests that conclusion may be only half right.
    Keywords: Ch. 13; Bankruptcy reform; credit cards; Ch. 7
    JEL: D1
  78. By: Asani Sarkar; Jeffrey Levine (Markets Group)
    Abstract: The liquidity needs of the largest U.S. commercial banks play an important role in understanding the banking system?s appetite for actual reserve holdings?bank reserve demand. In this post, the authors discuss the recent evolution of large bank cash balances, the effect of liquidity regulations on these balances, and how banks might react to changes in the supply of reserves.
    Keywords: cash management; large banks; LCR
    JEL: E5 G2
  79. By: Glyn Wittwer
    Abstract: Much of New South Wales and southern Queensland suffered from extreme drought conditions from 2017 to 2019. In 2017, rainfall anomalies over 12 months were not extreme, but maximum temperatures across northern New South Wales and southern Queensland were far above normal. There was also a marked deficit in winter rainfall so that there were severe shortfalls in effective rainfall. The drought worsened in 2018 through a combination of marked winter rainfall deficits and continuing temperatures far above average. Regions which in the past have rarely experienced drought, notably the Liverpool Plains in New South Wales, were in throes of extreme drought. Conditions only worsened in 2019, the hottest and driest year recorded in Australia. This study models the marginal impacts of drought on the regional NSW and national economies of Australia using VU-TERM, a multi-regional, dynamic model of the regions of Australia. It does not include losses arises from the catastrophic bushfires which started in Queensland in September 2019 and flared in all states and territories in the following months. From the national perspective, prolonged drought had substantial impacts on national productivity. It was sufficient to force real GDP to more than 1.0% below base in 2018-19 and 2019-20. The marginal contribution of drought to national real wages growth was as much as minus 1%. Modelling results indicate that NSW real GDP fell relative to forecast by 0.7% or $2.6 billion in 2017-18, and more than 1.3% or $5.5 billion in 2018-19 and 2019-20. These impacts reflect a severe diminution of farm output, given that agriculture accounts for around 1.6% and downstream processing for around 3.5% of NSW's income. NSW job losses due to drought were around 0.55% or 17,500 FTE jobs in 2017-18 and more than 1.0% or 34,000 jobs in 2018-19. The state-wide jobs outcome in 2019-20 was slightly better due to real wages falling further relative to base. At the regional level, relatively farm-intensive parts of the state suffer proportionally greater drought-induced losses. All inland regions were affected severely by drought. The worst affected region was New England-North West, in which real GDP in both 2018-19 and 2019- 20 fell almost 15% below forecast, with an accompanying drop in employment of more than 5.0%. Other hard-hit regions include Far West-Orana, in which 2018-19 and 2019-20 real GDP fell 12% and employment fell 4.0% below forecast. The economic losses spread into regions not directly affected by drought. In the composite coastal region spanning Wollongong, Sydney and Newcastle, real GDP fell 0.6% below forecast and employment as much as 0.8% below forecast. Jobs in the coastal region which accounts for 78% of baseline state-wide employment fall by more than 21,000 FTE, with jobs in other regions falling by around 13,000 FTE in 2018-19 relative to base. In this scenario, we assume that there is a full recovery in seasonal conditions in 2020 which impacts on 2020-21 economic outcomes. However, prolonged drought depletes farm capital through two mechanisms. First, reduced farm income depresses investment during drought years. Second, prolonged drought leads to a depletion of herd numbers. This extends beyond additional slaughtering to culling. Consequently, drought depletes the income earning capacity of farms in recovery relative to no drought. At the sectoral level, there are some farm output losses in the recovery phase relative to forecast due to the depleted capital base following drought. The drought diminishes national welfare. Lost productivity depresses income in drought. Even with NSW and national employment rising above forecast in recovery, real GDP remains slightly below base in recovery and does not compensate for drought-induced losses. The net present value of national welfare is $43 billion, equivalent to a loss in annualised terms of $1740 million at a 3% discount rate. The NSW welfare loss is around $685 million annualised, equivalent to permanent annual welfare loss of $88 per NSW resident. A modelled compensation package consists of direct transfers to households in droughtaffected regions. This results in a slight increase in welfare in NSW. This is because compensation stimulates consumption, which in turn stimulates employment slightly, thereby reducing drought-induced job losses relative to no compensation.
    Keywords: regional drought impacts welfare seasonal recovery
    JEL: Q11 Q15 C68
    Date: 2020–03
  80. By: Hunter L. Clark (Research and Statistics Group); Thomas Klitgaard
    Abstract: China?s population is only growing at a 0.5 percent annual rate, its working-age cohort (ages 15 to 64) is shrinking, and the share of the population that is 65 and over is rising rapidly. Together, these trends will act as a significant restraint on the country?s economic growth. Nonetheless, there are reasons to conclude that growth will remain relatively strong going forward, most notably because the ongoing shift from rural to urban jobs will continue to boost labor productivity for some time to come.
    Keywords: China demographics growth dependency ratio working-age population
    JEL: E2
  81. By: Guglielmo Maria Caporale; Woo-Young Kang; Fabio Spagnolo; Nicola Spagnolo
    Abstract: This paper provides some comprehensive evidence on the effects of cyber-attacks on the returns, realized volatility and trading volume of five of the main cryptocurrencies (Bitcoin, Ethereum, Litecoin, XRP and Stellar) in 99 developed and developing countries. More specifically, it investigates the effects of four different types of cyber-attacks (cyber-crime, cyber-espionage, hacktivism and cyber-warfare) on four target sectors (government, industry, finance and cryptocurrency exchange). We find that in the US cyber security firms tend to overreact to cyberattacks affecting cryptocurrencies and more wealth is spent on cyber security compared to other countries. Both hacktivism and cyber-warfare have a significant impact on cryptocurrencies. Cryptocurrency exchanges are more vulnerable to cyber-attacks in non-US countries and in the presence of high economic uncertainty and less so if the industry sector is already being targeted. Finally, cryptocurrency investors exhibit risk-loving behaviour when the hash rate and cryptocurrency returns increase and risk-averse one when cyber-attacks target the financial and industry sectors and economic uncertainty is high.
    Keywords: cyber security, cyber-attacks, cryptocurrencies, return and volatility jumps
    JEL: C22 E40 G10
    Date: 2020
  82. By: Anqi Chen; Wenliang Hou; Alicia H. Munnell
    Abstract: Over the last 40 years, the retirement system has shifted from defined benefit plans to defined contribution plans, primarily 401(k)s and Individual Retirement Accounts (IRAs). This shift has been accompanied by a decline in Social Security benefits relative to pre-retirement earnings as the program’s Full Retirement Age has moved from 65 to 67. Thus, the expected pattern when examining retirement wealth across cohorts is relatively less wealth from defined benefit plans and Social Security and much more from 401(k)s and IRAs. However, the numbers for the most recent cohort in the Health and Retirement Study – the Late Boomers – show not only the predicted declines in defined benefit plans and Social Security but also an unexpected drop in 401(k)/IRA assets. This drop is alarming given that Late Boomers, who were ages 51-56 in 2016, would have spent the majority of their careers in a defined contribution world. This brief is a first pass at trying to explain why this younger cohort has less in 401(k)/IRA assets than older cohorts had at the same age and what that means for the future of retirement security. The discussion proceeds as follows. The first section identifies the cohorts that are examined and the calculation of retirement wealth. The second section identifies a turn in the fortunes of Late Boomers during the Great Recession, when a significant share stopped working. But lack of employment does not explain the whole problem, so the third section follows working households and finds that after the Great Recession they had lower earnings, less 401(k) participation, and flat 401(k) balances, ending up well below earlier cohorts. A look at more recent cohorts offers a mixed picture for the future. The final section concludes that the Late Boomers’ low 401(k)/IRA wealth can be explained by particularly high levels of unemployment during the Great Recession and more reliance on lower-paid jobs when they re-entered the labor market. Why they were so hard hit, why they were unable to recover, and the fate of future cohorts remain open questions.
    Date: 2020–03
  83. By: Sinem Kilic Celik; M.Ayhan Kose; Franziska L. Ohnsorge
    Abstract: Global potential output growth has been flagging. At 2.5 percent in 2013-17, post-crisis potential growth is 0.5 percentage point below its longer-term average and 0.9 percentage point below its average a decade ago. Compared with a decade ago, potential growth has declined 0.8 percentage point in advanced economies and 1.1 percentage point in emerging market and developing economies. The slowdown mainly reflected weaker capital accumulation but is also evidence of decelerating productivity growth and demographic trends that dampen labor supply growth. Unless countered, these forces are expected to continue and to depress global potential growth further by 0.2 percentage point over the next decade. A menu of policy options is available to help reverse this trend, including comprehensive policy initiatives to lift physical and human capital and to encourage labor force participation by women and older workers.
    Keywords: Potential growth, potential output, advanced economies, emerging market and developing economies
    JEL: O40 O47 E20
    Date: 2020–03
  84. By: Edmond Berisha (Feliciano School of Business, Montclair State University, Montclair, NJ 07043, USA); David Gabauer (Institute of Applied Statistics, Johannes Kepler University, Altenbergerstraße 69, 4040 Linz, Austria; Department of Business and Management, Webster Vienna Private University, Praterstraße 23, 1020 Vienna, Austria); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Chi Keung Marco Lau (Huddersfield Business School, University of Huddersfield, Huddersfield, HD1 3DH, UK)
    Abstract: The United Kingdom (UK) in terms of income inequality is ranked among the highest in Europe. Likewise, within the last four decades, UK is characterized with drastic increases in household debt. In this paper, we analyze time-varying predictability of growth in household debt for growth in income (and consumption) inequality based on a high-frequency (quarterly) data set over 1975:Q2 to 2016:Q1. Results indicate that the growth in household debt has a strong predictive power, both for within and out-of-samples, on growth rate of income (and consumption) inequality in the UK. Interestingly, the strength of the predictive power is found to have increased after 2008. Based on time-varying impulse response functions, we also find that higher growth rate in household debt corresponds with subsequent increases in income inequality.
    Keywords: Household Debt; Inequality; Time-Varying Predictions
    JEL: C32 C53 D63 E30 E40 R31
    Date: 2020–02
  85. By: Or Shachar; Tobias Adrian; Michael J. Fleming
    Abstract: The possible adverse effects of regulation on market liquidity in the post-crisis period continue to garner significant attention. In a recent paper, we update and unify much of our earlier work on the subject, following up on three series of earlier Liberty Street Economics posts in August 2015, October 2015, and February 2016. We find that dealer balance sheets have continued to stagnate and that various measures point to less abundant funding liquidity. Nonetheless, we do not find clear evidence of a widespread deterioration in market liquidity.
    Keywords: dealers; market liquidity; crisis
    JEL: G1
  86. By: Bruno Ducoudré (Sciences Po-OFCE); Paul Hubert (Sciences Po-OFCE); Guilhem Tabarly (Paris-Dauphine University)
    Abstract: This paper investigates whether economic activity dynamics predict GDP revisions using panel data from 15 OECD countries. We find that economic activity predicts GDP revisions: early releases tend to overestimate GDP growth during slowdowns – and vice-versa. We also find that the source of the predictability could be related to the sampling of information collection. Finally, the predictability comes from short-term economic activity dynamics rather than business cycle position.
    Keywords: Gross Domestic Product, National Accounts, Revision analysis
    JEL: C23 C53 C82
    Date: 2020–01
  87. By: Hager Ben Romdhane (Central Bank of Tunisia)
    Abstract: This paper estimates an open economy DSGE model with financial accelerator à la Bernanke et al. (1999)2, enriched with wage rigidities and imperfect exchange rate pass through. The objective of this paper is to assess the importance of financial frictions and their role in the transmission of transitory shocks in the Tunisian Economy. The model is estimated by Bayesian technics via Metropolis Hasting algorithm. Using Tunisian data, we obtain an estimate for the external risk premium, indicating the importance of the financial accelerator and the potential balance sheet vulnerabilities for macroeconomic fluctuations. Furthermore, results of the impulse responses functions model support that the inclusion of the financial accelerator magnifies the impact of shocks thereby increasing real fluctuations.
    Keywords: DSGE, Financial frictions, Bayesian estimation
    Date: 2020–03–03
  88. By: María I. Agudelo; Camila V. Moreno
    Abstract: A lo largo de los años, los diferentes gobiernos han hecho grandes esfuerzos por atender la profundización financiera del sector agropecuario. A primera vista la institucionalidad es fuerte y trata de atender las fallas de mercado que existen. Sin embargo, existe un amplio espacio para mejorar: en el caso de Finagro, la alta dependencia de su fondeo en los TDA puede poner en riesgo la atención de los medianos y pequeños productores en la medida en que la cartera sustitutiva le quita recursos a Finagro y atiende especialmente a los grandes productores. El Banco Agrario ha venido perdiendo importancia frente a los bancos privados. El FAG ha sido un instrumento que en su concepción atiende una falla importante para el desarrollo del sector agropecuario en la medida en que otorga garantías a la población que no tiene respaldo. Sin embargo, su aplicación ha llevado a que se desvirtúe su uso al inducir a los bancos, incluido el Banco Agrario, a ser menos rigurosos en la evaluación del riesgo. El FAG está siendo deficitario y solo mantiene un flujo constante de recursos gracias a la obligación de transferir parte de las utilidades de Finagro hacia el Fondo. Esta dependencia de Finagro tiene otra implicación y es que el FAG presenta un estancamiento tanto en el número de garantías expedidas como en el valor de las garantías. La mujer y los jóvenes rurales están claramente identificados como personas a las que es necesario atender con políticas diferenciadas y así lo establece la CNCA. Sin embargo, los recursos destinados a esta población son mínimos. A pesar de que se observa un mayor dinamismo crediticio, en particular de parte del sector privado, una mirada más detallada hacia los pequeños y medianos productores y la población más vulnerable permite concluir que la política pública debe fortalecer su atención hacia esta población, dada la dependencia que se tiene de los recursos redescontables que muestran poco dinamismo en esta década.
    Keywords: Crédito Agropecuario, Financiamiento Agropecuario, Fondo Agropecuario de Garantías, Institucionalidad del Sector Agropecuario, Sector Agropecuario, Colombia
    JEL: E51 H81 O13 Q10
    Date: 2019–09–30
  89. By: Robert J. Shiller (Cowles Foundation, Yale University)
    Abstract: The U.S. economic expansion since 2009 is the longest on record since 1854, according to the National Bureau of Economic Research Business Cycle Dating Committee. This paper seeks to understand this phenomenon better by looking at the time paths of popular narratives over this interval, of stories that people have been telling that offer clues into their economic behavior. Six constellations of narratives are studied, identiï¬ ed by keywords “Great Depression,†“secular stagnation,†“sustainability,†“housing bubble,†“strong economy,†and “save more.â€
    Keywords: Economic fluctuations, Narratives, Stories, Great Depression, Secular stagnation, Sustainability, Housing bubble, Strong economy, Save more
    Date: 2020–03
  90. By: Giovanni Mandras (European Commission - JRC); Andrea Conte (European Commission - JRC); Simone Salotti (European Commission - JRC)
    Abstract: The European Commission's Joint Research Centre (JRC) is supporting an Innovation Agenda for the Western Balkans (Albania, Bosnia and Herzegovina, Kosovo*, Montenegro, North Macedonia and Serbia). Smart Specialisation is the European Union (EU) place-based policy aiming at more thematic concentration in research and innovation (R&I) investments via the evidence-based identification of the strengths and potential of a given economy. Access to data and economic analysis are key to a better identification of both current and future socio-economic policy challenges. The EU Instrument for Pre-accession Assistance (IPA) supports reforms in the enlargement countries with financial and technical help. Out of the almost €4000 million of EU financial support to Western Balkans over the programming period 2014-2022, €664 are destined to North Macedonia. Economic modelling simulations using national Input-Output data for North Macedonia show the potential benefits related to investments in the country. The analysis uses a detailed sectorial disaggregation.
    Keywords: rhomolo, region, growth, smart specialisation, western balkans
    JEL: C67 C82 E61
    Date: 2020–02
  91. By: Kyriacou, Andreas P.; Okabe, Tomohito; Roca-Sagalés, Oriol
    Abstract: We revisit work that has indicated that the presence and strength of Political Budget Cycles depends on a range of conditioning factors. We focus on the mediating effect of economic development. Our results, based on a sample of up to 67 developing and developed countries over the period 1995 to 2016, indicate that budget cycles emerge in countries with a GDP per capita below a threshold ranging from 21,000 to 25,000 U.S. dollars. To explain this we suggest that GDP per capita may be capturing for the effect of time preference. Specifically, in relatively poorer countries, high discount rates will lead voters to value immediate consumption over the future costs from fiscally irresponsible policies. This goes beyond previous explanations of budget cycles based on voters with short memories who underestimate the costs of expansionary policies, voters with little experience with democracy or voters who are poorly informed about the competence or policy preferences of political candidates.
    Keywords: Political budget cycles, conditional effect, economic development, time preference
    JEL: D72 H62 O10
    Date: 2020–03
  92. By: Antoine Martin; Julie Remache; Patricia C. Mosser
    Abstract: Columbia University?s School of International and Public Affairs and the New York Fed co-sponsored a recent workshop to discuss important issues related to monetary policy implementation. The May 4 event, held at Columbia, supports the extended effort that the Federal Reserve has undertaken to evaluate potential long-run monetary policy implementation frameworks, which was announced at a Federal Open Market Committee meeting last July.
    Keywords: Monetary policy implementation
    JEL: E5
  93. By: Santos, Mariana
    Abstract: Fiscal multipliers depend on several structural characteristics of each economy. In this work project it is argued that labor income tax progressivity lowers fiscal multipliers of fiscal consolidation programs. By calibrating a model with incomplete-markets and overlapping generations for the United States, for different values of the labor income tax progressivity, it is shown that as progressivity increases, the recessionary impacts of fiscal consolidation programs are lower in the case of consolidation through decrease of government spending and are more recessionary in the case of consolidation financed with tax hikes. The first case is explained through the positive relationship between labor tax progressvity and the percentage of borrowing constrained agents in the economy. In the second case the results are linked to the distortionary effects in the economy of increasing tax progressivity.
    Keywords: Fiscal Multipliers; Labor Income Tax Progressivity; Government Spending; Taxation
    JEL: H30
    Date: 2020–01–06
  94. By: Thomas Klitgaard
    Abstract: The Bank of Japan announced an open-ended asset purchase program in January 2013 and an unexpectedly ramped-up version of the program was implemented in early April. Market commentary at that time suggested that flooding the economy with liquidity would lead to a ?wall of money? flowing out of Japan in search of higher yields, affecting asset prices worldwide. So far, however, Japan?s wall of money remains missing in action, with no pickup in Japanese foreign investment since the April policy shift. Why is this? Here we explain that while economic theory does not offer clear guidance on how financial outflows might respond to the injection of cash from central bank asset purchases, it does point to an important constraint on the potential size. In particular, monetary expansion will not cause a surge in financial outflows unless it also induces a similar surge in capital flowing into the country.
    Keywords: monetary policy balance of payments financial account current account
    JEL: F00
  95. By: Luis Brandao-Marques; R. G Gelos; Thomas Harjes; Ratna Sahay; Yi Xue
    Abstract: Central banks in emerging and developing economies (EMDEs) have been modernizing their monetary policy frameworks, often moving toward inflation targeting (IT). However, questions regarding the strength of monetary policy transmission from interest rates to inflation and output have often stalled progress. We conduct a novel empirical analysis using Jordà’s (2005) approach for 40 EMDEs to shed a light on monetary transmission in these countries. We find that interest rate hikes reduce output growth and inflation, once we explicitly account for the behavior of the exchange rate. Having a modern monetary policy framework—adopting IT and independent and transparent central banks—matters more for monetary transmission than financial development.
    Date: 2020–02–21
  96. By: Jeffrey Levine (Markets Group); Asani Sarkar
    Abstract: As the aggregate supply of reserves shrinks and large banks implement liquidity regulations, they may follow a variety of liquidity management strategies depending on their business models and the interest rate differences between alternative liquid instruments. In this post, the authors provide new evidence on how large banks have managed their cash?the largest component of reserves?on a daily basis since the implementation of liquidity regulations.
    Keywords: cash management; large banks; LCR
    JEL: E5 G2
  97. By: Christine Laudenbach; Ulrike Malmendier; Alexandra Niessen-Ruenzi
    Abstract: We analyze the long-term effects of living under communism and its anticapitalist doctrine on households’ financial investment decisions and attitudes towards financial markets. Utilizing comprehensive German brokerage data and bank data, we show that, decades after Reunification, East Germans still invest significantly less in the stock market than West Germans. Consistent with communist friends-and-foes propaganda, East Germans are more likely to hold stocks of companies from communist countries (China, Russia, Vietnam) and of state-owned companies, and are unlikely to invest in American companies and the financial industry. Effects are stronger for individuals exposed to positive “emotional tagging,” e.g., those living in celebrated showcase cities. Effects reverse for individuals with negative experiences, e.g., environmental pollution, religious oppression, or lack of (Western) TV entertainment. Election years trigger further divergence of East and West Germans. We provide evidence of negative welfare consequences due to less diversified portfolios, higher-fee products, and lower risk-adjusted returns.
    JEL: D03 D14 D83 D84 E21 G11
    Date: 2020–03
  98. By: Bloom, David E. (Harvard University); Fan, Victoria Y. (University of Hawaii at Manoa); Kufenko, Vadim (University of Hohenheim); Ogbuoji, Osondu (Duke University); Prettner, Klaus (University of Hohenheim); Yamey, Gavin (Duke University)
    Abstract: Per capita GDP has limited use as a well-being indicator because it does not capture many dimensions that imply a "good life," such as health and equality of opportunity. However, per capita GDP has the virtues of easy interpretation and can be calculated with manageable data requirements. Against this backdrop, a need exists for a measure of well-being that preserves the advantages of per capita GDP, but also includes health and equality. We propose a new parsimonious indicator to fill this gap and calculate it for 149 countries.
    Keywords: beyond GDP, well-being, health, inequality, human development, lifetime income
    JEL: I31 I15 D63 O10 E01
    Date: 2020–02
  99. By: Niklas Potrafke
    Abstract: Previous studies used general government data to examine whether national governments’ electoral motives and ideology influenced budget composition in OECD countries. General government data includes, however, the state and local level. Using new data for general and central government over the period 1995-2016, I reexamine political cycles in budget composition. The results suggest that, both at the general and central government level, leftwing governments spent more on education and less on public services than rightwing governments. Defense expenditure was somewhat lower under leftwing than rightwing governments and in election years; especially in federal states. Effects of government ideology on the individual expenditure categories are larger at the central than general government level. Scholars need to re-examine results on ideology-induced effects that have been derived from general government data where central government data should have been used.
    Keywords: general and central government, budget composition, partisan politics, government ideology, electoral cycles, OECD countries, panel data models
    JEL: D72 D78 E60 H30 H50 C23 P16
    Date: 2020

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