nep-mac New Economics Papers
on Macroeconomics
Issue of 2020‒07‒20
150 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Managing Households' Expectations with Unconventional Policies By Francesco D’Acunto; Daniel Hoang; Michael Weber
  2. Investment Tax Incentives and Their Big Time-to-Build Fiscal Multiplier By Dimitrios Bermperoglou; Yota Deli; Sarantis Kalyvitis
  3. Idiosyncratic Shocks, Lumpy Investment and the Monetary Transmission Mechanism By Reiter, Michael; Sveen, Tommy; Weinke, Lutz
  4. The long-run effects of monetary policy By Jordà, Òscar; Singh, Sanjay R.; Taylor, Alan M.
  5. Average Inflation Targeting and the Interest Rate Lower Bound By Budianto, Flora; Nakata, Taisuke; Schmidt, Sebastian
  6. Monetary and Macroprudential Policy with Endogenous Risk By Adrian, Tobias; Duarte, Fernando; Liang, Nellie; Zabczyk, Pawel
  7. Structural Unemployment, Underemployment, and Secular Stagnation By Ken-ichi Hashimoto; Yoshiyasu Ono; Matthias Schlegl
  8. An Update to the Economic Outlook: 2020 to 2030 By Congressional Budget Office
  9. Monetary Policy and Macroeconomic Stability Revisited By Yasuo Hirose; Takushi Kurozumi; Willem Van Zandweghe
  10. Optimal Monetary Policy According to HANK By Acharya, Sushant; Challe, Edouard; Dogra, Keshav
  11. A New Daily Federal Funds Rate Series and History of the Federal Funds Market, 1928-1954 By Sriya Anbil; Mark A. Carlson; Christopher Hanes; David C. Wheelock
  12. Reading between the lines - Using text analysis to estimate the loss function of the ECB By Paloviita, Maritta; Haavio, Markus; Jalasjoki, Pirkka; Kilponen, Juha; Vänni, Ilona
  13. Heterogeneity in Individual Expectations, Sentiment, and Constant-Gain Learning By Stephen J. Cole; Fabio Milani
  14. Financial Vulnerability and Risks to Growth in Emerging Markets By Viral V. Acharya; Soumya Bhadury; Jay Surti
  15. Unemployment and Endogenous Reallocation over the Business Cycle By Carrillo-Tudela, Carlos; Visschers, Ludo
  16. Financial Variables as Predictors of Real Growth Vulnerability By Hasenzagl, Thomas; Reichlin, Lucrezia; Ricco, Giovanni
  17. Uncertainty Shocks and Business Cycle Research By Fernández-Villaverde, Jesús
  18. The Side Effects of Safe Asset Creation By Acharya, Sushant; Dogra, Keshav
  19. Tighter Credit and Consumer Bankruptcy Insurance By Antunes, António; Cavalcanti, Tiago; Mendicino, Caterina; Peruffo, Marcel; Villamil, Anne
  20. The Economic Consequences of the Covid-19 Pandemic in Nigeria By Adesoji O. Farayibi; Simplice A. Asongu
  21. Causal Relationships between Inflation and Inflation Uncertainty By Barnett, William A.; Jawadi, Fredj; Ftiti, Zied
  22. Business cycle accounting for the German fiscal stimulus program during the Great Recession By Daniel Fehrle; Johannes Huber
  23. Measuring Labor-Force Participation and the Incidence and Duration of Unemployment By Hie Joo Ahn; James D. Hamilton
  24. The Economic Consequences of the Covid-19 Pandemic in Nigeria By Adesoji O. Farayibi; Simplice A. Asongu
  25. Banking Supervision, Monetary Policy and Risk-Taking: Big Data Evidence from 15 Credit Registers By Altavilla, Carlo; Boucinha, Miguel; Peydró, José Luis; Smets, Frank
  26. Does the Current State of the Business Cycle matter for Real-Time Forecasting? A Mixed-Frequency Threshold VAR approach. By Heinrich, Markus
  27. All You Need is Cash: Corporate Cash Holdings and Investment after the Financial Crisis By Joseph, Andreas; Kneer, Christiane; Saleheen, Jumana; Van Horen, Neeltje
  28. Raising the Inflation Target: How Much Extra Room Does It Really Give? By Jean-Paul L'Huillier; Raphael Schoenle
  29. 'Stall Speed' and 'Escape Velocity': Empty Metaphors or Empirical Realities? By Bartholomew, Luke; Diggle, Paul
  30. Debt and Financial Crises By Koh, Wee Chian; Kose, Ayhan; Nagle, Peter; Ohnsorge, Franziska; Sugawara, Naotaka
  31. Coronavirus: Impact on Stock Prices and Growth Expectations By Niels J. Gormsen; Ralph S. J. Koijen
  32. Why is the Euro Punching Below its Weight By Ilzetzki, Ethan; Reinhart, Carmen M.; Rogoff, Kenneth
  33. Global Macro-Financial Cycles and Spillovers By Ha, Jongrim; Kose, Ayhan; Otrok, Christopher; Prasad, Eswar
  34. Belief Distortions and Macroeconomic Fluctuations By Francesco Bianchi; Sydney C. Ludvigson; Sai Ma
  35. Impact of Negative Interest Rate Policy on Emerging Asian markets: An Empirical Investigation. By Anand, Abhishek; Chakraborty, Lekha
  36. Causal Relationships Between Inflation and Inflation Uncertainty By William Barnett; Fredj Jawadi; Zied Ftiti
  37. Rethinking Communication in Monetary Policy: Towards a Strategic leaning for the BCC By KIBADHI, Plante M; PINSHI, Christian P.
  38. Robustly Optimal Monetary Policy in a New Keynesian Model with Housing By Adam, Klaus; Woodford, Michael
  39. Has the Information Channel of Monetary Policy Disappeared? Revisiting the Empirical Evidence By Hoesch, Lukas; Rossi, Barbara; Sekhposyan, Tatevik
  40. Negative interest rates, capital flows and exchange rates By Romina Ruprecht
  41. Sectoral Fiscal Multipliers and Budget Inflexibility: The Role of Allocative Inefficiency By Gomez-Gonzalez, Jose Eduardo; Valencia, Oscar; Herrera, David; Zapata, Steven
  42. The Choice Channel of Financial Innovation By Iachan, Felipe Saraiva; Nenov, Plamen T.; Simsek, Alp
  43. Global shocks and emerging economies: disentangling the commodity roller coaster By Mauro Sayar Ferreira; André Cordeiro Valério
  44. Fiscal Rules and the Compliance debate: Why do Countries adopt Rules and fail to comply? By Martin Wafula Nandelenga; Mark J. Ellyne
  45. Twin Default Crises By Mendicino, Caterina; Nikolov, Kalin; Rubio-Ramírez, Juan Francisco; Suarez, Javier; Supera, Dominik
  46. Strengthening the Euro Area; The Role of National Structural Reforms in Building Resilience By John C Bluedorn; Shekhar Aiyar; Romain A Duval; Davide Furceri; Daniel Garcia-Macia; Yi Ji; Davide Malacrino; Haonan Qu; Jesse Siminitz; Aleksandra Zdzienicka
  47. Estimating the Neutral Interest Rate in the Kyrgyz Republic By Iulia Ruxandra Teodoru; Asel Toktonalieva
  48. Spillovers of the Conventional and Unconventional Monetary Policy from the US to South Africa By Alain Kabundi; Tumisang Loate; Nicola Viegi
  49. Global Recessions By E. Terrones, Marco; Kose, Ayhan; Sugawara, Naotaka
  50. Predicting Housing Market Sentiment: The Role of Financial, Macroeconomic and Real Estate Uncertainties By Hardik A. Marfatia; Christophe Andre; Rangan Gupta
  51. "Distribution and Gender Effects on the Path of Economic Growth: Comparative Evidence for Developed, Semi-Industrialized, and Low-Income Agricultural Economies" By Ruth Badru
  52. Casting Light on Central Bank Digital Currencies By Tommaso Mancini Griffoli; Maria Soledad Martinez Peria; Itai Agur; Anil Ari; John Kiff; Adina Popescu; Celine Rochon
  53. Marginal Propensity to Consume and the Housing Choice By Maiko Koga; Kohei Matsumura
  54. Predictable Financial Crises By Robin Greenwood; Samuel G. Hanson; Andrei Shleifer; Jakob Ahm Sørensen
  55. Relevance of Sovereign Bond Valuations Topic in the Speeches of ECB Officials By Linas Jurksas; Vitalijus Klincevicius
  56. Central Bank Digital Currency: Central Banking For All? By Fernández-Villaverde, Jesús; Sanches, Daniel; Schilling, Linda Marlene; Uhlig, Harald
  57. Crossing the Credit Channel: Credit Spreads and Firm Heterogeneity By Cesa-Bianchi, Ambrogio
  58. Different no more: Country spreads in advanced and emerging economies By Born, Benjamin; Müller, Gernot; Pfeifer, Johannes; Wellmann, Susanne
  59. Benefits and Costs of Debt: The Dose Makes the Poison By Kose, Ayhan; Ohnsorge, Franziska; Sugawara, Naotaka
  60. “Measuring and assessing economic uncertainty” By Oscar Claveria
  61. A Model of the Fed's View on Inflation By Thomas Hasenzagl; Filippo Pellegrino; Lucrezia Reichlin; Giovanni Ricco
  62. Global Imbalances and Policy Wars at the Zero Lower Bound By Caballero, Ricardo; Farhi, Emmanuel; Gourinchas, Pierre-Olivier
  63. Monetary Policies and Destabilizing Carry Trades under Adaptive Learning By Cyril Dell'eva; Eric Girardin; Patrick Pintus
  64. Inflation expectations and the pass-through of oil prices By Knut Are Aastveit; Hilde Christiane Bjørnland; Jamie L. Cross
  65. The Impact of CHF/EUR Exchange Rate Uncertainty on Swiss Exports to the Eurozone: Evidence from a Threshold VAR By Julius Loermann
  66. Housing prices and credit constraints in competitive search By Rincón-Zapatero, Juan Pablo; Jerez Garcia-Vaquero, Maria Belen; Diaz Rodriguez, Antonia
  67. On-the-job Search and the Productivity-Wage Gap By Acharya, Sushant; Wee, Shu Lin
  68. Nowcasting Unemployment Insurance Claims in the Time of COVID-19 By William D. Larson; Tara M. Sinclair
  69. The size, socio-economic composition and fiscal implications of the irregular immigration in Spain By Gálvez Iniesta, Ismael
  70. Synergies Between Monetary and Macroprudential Policies in Thailand By Ichiro Fukunaga; Manrique Saenz
  71. On the Distributional Effects of International Tariffs By Daniel R. Carroll; Sewon Hur
  72. Shock dependence of exchange rate pass-through: a comparative analysis of BVARs and DSGEs By Mariarosaria Comunale
  73. Consumer Debt and Default: A Macroeconomic Perspective By Exler, Florian; Tertilt, Michèle
  74. Cross-border lending and the international transmission of banking crises By Dieckelmann, Daniel
  75. Keynesian models of depression. Supply shocks and the COVID-19 Crisis By Ignacio Escanuela Romana
  76. Bank Risk Taking and Financial Stability: Evidence from Japan's Loan Market By Takuji Kawamoto; Taichi Matsuda; Koji Takahashi; Yoichiro Tamanyu
  77. Asymmetric Responses of Consumer Spending to Energy Prices: A Threshold VAR Approach By Edward S. Knotek; Saeed Zaman
  78. Hysteresis and Business Cycles By Valerie Cerra; A. Fatas; Sweta Chaman Saxena
  79. The Effect of Demographic Change on the Swiss Labor Market: The Role of Participation Rates By Buchmann, Manuel
  80. Did Globalization Kill Contagion? By Accominotti, Olivier; Brière, Marie; Burietz, Aurore; Oosterlinck, Kim; Szafarz, Ariane
  81. Do Business-Friendly Reforms Boost GDP? By Tamanna Adhikari; Karl Whelan
  82. Public Employment Redux By Garibaldi, Pietro; Gomes, Pedro; Sopraseuth, Thepthida
  83. The Political Costs of Reforms; Fear or Reality? By Davide Furceri; Jun Ge; Jonathan David Ostry; Chris Papageorgiou; Gabriele Ciminelli
  84. Surviving debt, survival debt in times of lockdown By Isabelle Guérin; Sébastien Michiels; Arnaud Natal; Christophe Jalil Nordman; Govindan Venkatasubramanian
  85. The Cost of Omitting the Credit Channel in DSGE Models: A Policy Mix Approach By Takeshi Yagihashi
  86. The Global Financial Resource Curse By Benigno, Gianluca; Fornaro, Luca; Wolf, Martin
  87. Family Planning and Development: Aggregate Effects of Contraceptive Use By Cavalcanti, Tiago; Kocharkov, Georgi; Santos, Cezar
  88. Measuring Global Macroeconomic Uncertainty By Graziano Moramarco
  89. Technology Boom, Labor Reallocation, and Human Capital Depreciation By Johan Hombert; Adrien Matray
  90. The Stability of Demand for Money in the Proposed Southern African Monetary Union By Asongu, Simplice; Folarin, Oludele; Biekpe, Nicholas
  91. Firm and Technology Dynamics in the Short- and Long-Run: A Macroeconomic Model for Research and Innovation Policy Evaluation By BENEDETTI FASIL Cristiana; IMPULLITTI Giammario; LICANDRO Omar; SEDLACEK Petr
  92. How Loose, How Tight? A Measure of Monetary and Fiscal Stance for the Euro Area By Nicoletta Batini; Alessandro Cantelmo; Giovanni Melina; Stefania Villa
  93. The Anatomy of the Transmission of Macroprudential Policies By Viral V. Acharya; Katharina Bergant; Matteo Crosignani; Tim Eisert; Fergal McCann
  94. Foreign Aid and Fiscal Resources Mobilization in WAEMU Countries: Ambiguous Effects and New Questions By Bayale, Nimonka
  95. Within-Job Wage Inequality: Performance Pay and Job Relatedness By Rongsheng Tang; Yang Tang; Ping Wang
  96. Dollar borrowing, firm-characteristics, and FX-hedged funding opportunities By Gambacorta, Leonardo; Mayordomo, Sergio; Serena Garralda, Jose-Maria
  97. Macroprudential Policies, Economic Growth, and Banking Crises By Mohamed Belkhir; Sami Ben Naceur; Bertrand Candelon; Jean-Charles Wijnandts
  98. Public Expenditure and Private Firm Performance: Using Religious Denominations for Causal Inference By Alpalhão, Henrique; Lopes, Marta; Pereira Santos, João; Tavares, José
  99. Financing low-carbon generation in the UK: The hybrid RAB model By David Newbery; Michael Pollitt; David M Reiner; Simon Taylor
  100. Model-Based Globally-Consistent Risk Assessment By Michal Andrle; Benjamin L Hunt
  101. When Banks Punch Back: Macrofinancial Feedback Loops in Stress Tests By Mario Catalan; Alexander W. Hoffmaister
  102. Effects of Macroprudential Policy: Evidence from Over 6,000 Estimates By Juliana Dutra Araujo; Manasa Patnam; Adina Popescu; Fabian Valencia; Weijia Yao
  103. Serving two masters: The effect of state religion on fiscal capacity By Adam, Antonis; Tsarsitalidou, Sofia
  104. Emerging and Developing Economies: Ten Years After the Global Recession By Kose, Ayhan; Ohnsorge, Franziska
  105. Forecasting Macroeconomic Risks By Adams, Patrick; Adrian, Tobias; Boyarchenko, Nina; Giannone, Domenico
  106. Patterns of Foreign Exchange Intervention under Inflation Targeting By Gustavo Adler; Kyun Suk Chang; Zijiao Wang
  107. Inflation and the Price of Real Assets By Leombroni, Matteo; Piazzesi, Monika; Rogers, Ciaran; Schneider, Martin
  108. Subsidies, Merit Goods and the Fiscal Space for Reviving Growth: An Aspect of Public Expenditure in India By Sudipto Mundle; Satadru Sikdar
  109. On the causal nature between financial development and economic growth in the Democratic Republic of the Congo: Is it supply leading or demand following? By PINSHI, Christian P.
  110. Consumer Taxes on Alcohol: An International Comparison over Time By Anderson, Kym
  111. Unemployment: The Coming Story, Who Gets Hit, Who Gets Hurt, and Policy Remedies By Jake Anders; Andy Dickerson; Paul Gregg; Lindsey Macmillan
  112. Estimates of Regional GDP in Great Britain in 1935 and 1938 By Frank Geary; Tom Stark
  113. Financialization increases inequality and leads economy to a dead end By Yashin, Pete
  114. Macroeconomic implications of insolvency regimes By Benjamin Hemingway
  115. Investors' Appetite for Money-Like Assets: The MMF Industry after the 2014 Regulatory Reform By Cipriani, Marco; La Spada, Gabriele
  116. Финансиалиация усиливает неравенство и заводит экономику в тупик By Yashin, Pete
  117. The Aggregate Consequences of Default Risk: Evidence from Firm-level Data By Besley, Timothy J.; Roland, Isabelle; Van Reenen, John
  118. Sir Oswald Mosley’s contribution to the Interwar Policy Debate and Fascist Economics By Emilio Ocampo
  119. The Welfare of Ramsey Optimal Policy Facing Auto-Regressive Shocks By Jean-Bernard Chatelain; Kirsten Ralf
  120. A Local-Spillover Decomposition of the Causal Effect of U.S. Defense Spending Shocks By Timothy G. Conley; Bill Dupor; Mahdi Ebsim; Jingchao Li; Peter B. McCrory
  121. Bad bank resolutions and bank lending By Brei, Michael; Gambacorta, Leonardo; Lucchetta, Marcella; Parigi, Bruno
  122. Drivers of Financial Access: the Role of Macroprudential Policies By Corinne Deléchat; Lama Kiyasseh; Margaux MacDonald; Rui Xu
  123. Cross-border spillover effects of macroprudential policies: a conceptual framework By Financial Stability Committee, Task Force on cross-border Spillover Effects of macroprudential measures; Kok, Christoffer; Reinhardt, Dennis
  124. COVID-19 and EU Climate Targets: Going Further with Less? By Tensay Meles; L. (Lisa B.) Ryan; Joe Wheatley
  125. A Monitoring Framework for Global Financial Stability By Tobias Adrian; Dong He; Nellie Liang; Fabio M Natalucci
  126. Does Hamilton’s OLS regression provide a “better alternative†to the Hodrick-Prescott filter? A New Zealand Business Cycle Perspective By Hall, Viv B; Thomson, Peter
  127. Economic uncertainty before and during the Covid-19 pandemic By Altig, Dave; Baker, Scott; Barrero, Jose Maria; Bloom, Nick; Bunn, Philip; Chen, Scarlet; Davis, Steven J; Leather, Julia; Meyer, Brent; Mihaylov, Emil; Mizen, Paul; Parker, Nick; Renault, Thomas; Smietanka, Pawel; Thwaites, Greg
  128. Finance and Inequality By Martin Cihak; Ratna Sahay
  129. The Fiscal State-Dependent Effects of Capital Income Tax Cuts By Alexandra Fotiou; Wenyi Shen; Shu-Chun Susan Yang
  130. Is capacity utilization variable in the long run? An agent-based sectoral approach tomodeling hysteresis in the normal rate of capacity utilization By Federico Bassi; Tom Bauermann; Dany Lang; Mark Setterfield
  131. Debt Intolerance : Threshold Level and Composition By Matsuoka,Hideaki
  132. Productivity Growth and Efficiency Dynamics of Korean Structural Transformation By Jeong,Hyeok
  133. Online Appendix to "Credit Booms, Financial Crises, and Macroprudential Policy" By Mark Gertler; Nobuhiro Kiyotaki; Andrea Prestipino
  134. Nowcasting Industrial Production Using Uncoventional Data Sources By Fornaro, Paolo
  135. Business Cycle Spatial Synchronization: Measuring a Synchronization Parameter By Shinya Fukui
  136. Credibility Dynamics and Disinflation Plans By Rumen Kostadinov; Francisco Roldán
  137. A Capital Market Union for Europe By Ashok Vir Bhatia; Srobona Mitra; Anke Weber; Shekhar Aiyar; Luiza Antoun de Almeida; Cristina Cuervo; Andre O Santos; Tryggvi Gudmundsson
  138. Credit, Income and Inequality By Manthos D. Delis; Fulvia Fringuellotti; Steven Ongena
  139. Asymmetric impact of renewable and non-renewable energy on economic growth in Pakistan: New evidence from a nonlinear analysis By Abbasi, Kashif; Jiao, Zhilun; Khan, Arman; Shahbaz, Muhammad
  140. The Economics of Sovereign Debt, Bailouts and the Eurozone Crisis By Pierre-Olivier Gourinchas; Philippe Martin; Todd E. Messer
  141. Monetary policy and borrowing costs for different household income groups By Kerschyl Singh; David Fowkes
  142. Describing Location Shifts with One Class Support Vector Machines By igescu, iulia
  143. The Relationship between Household Type and Consumption Patterns in Japan: evidence from Japan's National Survey of Family Income and Expenditure By Ito, Shinsuke; Dejima, Takahisa
  144. Climate Change and Green Finance in Emerging Market Economies: The Open Economy Dimension By Bortz, Pablo Gabriel; Toftum, Nicole
  145. Loss Rate Forecasting Framework Based on Macroeconomic Changes: Application to US Credit Card Industry By Sajjad Taghiyeh; David C Lengacher; Robert B Handfield
  146. Corruption: Microeconomic Foundations of Macroeconomic Determinants By Abderraouf Mtiraoui
  147. Fiscal Policy and Development; Human, Social, and Physical Investments for the SDGs By Vitor Gaspar; David Amaglobeli; Mercedes Garcia-Escribano; Delphine Prady; Mauricio Soto
  148. The impact of inflation on the poor By Chris Loewald; Konstantin Makrelov
  149. Global macroeconomic balances for mid-century climate analyses By REY LOS SANTOS Luis; WOJTOWICZ Krzysztof; TAMBA Marie; VANDYCK Toon; WEITZEL Matthias; SAVEYN Bert; TEMURSHO Umed
  150. Informality, Consumption Taxes and Redistribution By Bachas, Pierre; Gadenne, Lucie; Jensen, Anders

  1. By: Francesco D’Acunto; Daniel Hoang; Michael Weber
    Abstract: With a binding effective lower bound on interest rates and large government deficits, conventional policies are unviable and policymakers resort to unconventional policies, which target households' expectations directly. Using unique micro data and a difference-in-differences strategy, we assess the effectiveness of unconventional fiscal policy and forward guidance, both of which aim to stimulate consumption via raising households' inflation expectations. All households' inflation expectations and spending plans react to unconventional fiscal policy. Instead, households, contrary to experts, do not react to forward guidance. We argue that policies aiming to affect households directly are ineffective if (non-expert) households do not understand them.
    JEL: D12 D84 D91 E21 E31 E52 E65
    Date: 2020–06
  2. By: Dimitrios Bermperoglou; Yota Deli; Sarantis Kalyvitis
    Abstract: This paper studies how investment tax incentives stimulate output in a medium-scale DSGE model, which allows for a variety of fiscal funding mechanisms. We find that the horizon following a positive shock in investment tax incentives is crucial. The shock is highly expansionary in the long run with the relevant fiscal multiplier substantially exceeding 1, but this effect only becomes visible after two to three years. Our analysis indicates that a rise in the marginal product of labor and the demand for labor trigger this expansion, which is an effect that partial equilibrium studies ignore. Our analysis also contributes to the time-to-build profile of the fiscal multiplier. The results suggest that investment tax incentives are even more effective when nominal wages adjust faster.
    Keywords: Private investment incentives; Investment tax credit; Fiscal multiplier
    JEL: E32 E60 E62
    Date: 2019–11
  3. By: Reiter, Michael (Institute for Advanced Studies, Vienna, and NYU Abu Dhabi); Sveen, Tommy (BI Norwegian Business School); Weinke, Lutz (Humboldt-Universitaet zu Berlin)
    Abstract: Standard (S,s) models of lumpy investment allow us to match many aspects of the micro data, but it is well known that the implied interest rate sensitivity of investment is unrealistically large. The monetary transmission mechanism is therefore a particularly clean experiment to assess the macroeconomic relevance of any investment theory. Our results show that lumpy investment can coexist with a realistic monetary transmission mechanism, but that we are nevertheless still a step away from a micro-founded theory of monetary policy.
    Keywords: Lumpy Investment, Sticky Prices
    JEL: E22 E31 E32
    Date: 2020–05
  4. By: Jordà, Òscar; Singh, Sanjay R.; Taylor, Alan M.
    Abstract: Is the effect of monetary policy on the productive capacity of the economy long lived? Yes, in fact we find such impacts are significant and last for over a decade based on: (1) merged data from two new international historical databases; (2) identification of exogenous monetary policy using the macroeconomic trilemma; and (3) improved econometric methods. Notably, the capital stock and total factor productivity (TFP) exhibit hysteresis, but labor does not. Money is non-neutral for a much longer period of time than is customarily assumed. A New Keynesian model with endogenous TFP growth can reconcile all these empirical observations.
    Keywords: hysteresis; instrumental vari- ables; local projections; monetary policy; money neutrality; trilemma
    JEL: E01 E30 E32 E44 E47 E51 F33 F42 F44
    Date: 2020–01
  5. By: Budianto, Flora; Nakata, Taisuke; Schmidt, Sebastian
    Abstract: A discretionary central bank with a mandate to stabilize an average inflation rate---rather than period-by-period inflation---increases welfare of a sticky-price economy in which nominal interest rates are occasionally constrained by a lower bound. The welfare gain is driven by two monetary policy motives that arise in the presence of an average inflation objective: the history-dependence motive makes expected future inflation an increasing function of current inflation shortfalls, and vice versa, acting as an automatic stabilizer; and the lower bound risk motive induces the central bank to raise inflation when the risk of hitting the lower bound constraint increases. Under rational expectations, the optimal averaging window is infinitely long, so that the optimal average inflation targeting framework is tantamount to price level targeting. Most of the welfare improvement can, however, be attained by a framework with a finite, but sufficiently long, averaging window. Under boundedly-rational expectations, if cognitive limitations are sufficiently strong, the optimal averaging window is finite, and the welfare gain of adopting an average inflation target can be small.
    Keywords: Average Inflation Targeting; Deflationary Bias; liquidity trap; Makeup Strategies; Monetary Policy Objectives
    JEL: E31 E52 E58 E61
    Date: 2020–02
  6. By: Adrian, Tobias; Duarte, Fernando; Liang, Nellie; Zabczyk, Pawel
    Abstract: We extend the New Keynesian (NK) model to include endogenous risk. Lower interest rates not only shift consumption intertemporally but also conditional output risk via the impact on risk-taking, giving rise to a vulnerability channel of monetary policy. The model fits the conditional output gap distribution and can account for medium-term increases in downside risks when financial conditions are loose. The policy prescriptions are very different from those in the standard NK model: monetary policy that focuses purely on inflation and output-gap stabilization can lead to instability. Macroprudential measures can mitigate the intertemporal risk-return tradeoff created by the vulnerability channel.
    Keywords: Macro-Finance; macroprudential policy; monetary policy
    JEL: E32 E44 E52 G28
    Date: 2020–02
  7. By: Ken-ichi Hashimoto; Yoshiyasu Ono; Matthias Schlegl
    Abstract: We introduce a preference for wealth into the standard search and matching model to analyze the labor market when there is persistent demand shortage. We show that, under some conditions, a secular stagnation steady state exists in which the economy permanently operates below capacity due to both structural unemployment and underemployment. The latter is a direct consequence of the lack of aggregate demand. Our findings are as follows. In the absence of demand shortage, the preference for wealth creates a new transmission channel for shocks and policy measures due to induced changes in the real interest rate, in addition to the job creation channel of the standard matching model. Turning to the stagnation equilibrium, the effects of demand and supply shocks are opposite to those of the standard case and result in a co-movement of unemployment and underemployment. In contrast, the effects of wage and cost shocks depend on the degree of aggregate demand shortage, but they can explain movements of unemployment and underemployment in opposite directions. Finally, we show that fluctuations in the total employment gap under stagnation are primarily driven by fluctuations in underemployment instead of structural unemployment. Our analysis helps to understand why the unemployment rate in Japan has been surprisingly low during its lost decades and highlights the need for further policy interventions in support of aggregate demand despite a seemingly decent employment record.
    Keywords: demand shortage, unemployment, underemployment, labor market frictions, secular stagnation
    JEL: E24 E31 E44 J20 J64
    Date: 2020
  8. By: Congressional Budget Office
    Abstract: The economic outlook for 2020 to 2030 has deteriorated significantly since CBO last published its 10-year baseline economic projections in January. The annual level of real GDP in those years is now projected to be 3.4 percent lower, on average, than it was projected to be in January. Similarly, the annual unemployment rate averages 6.1 percent over the period in the current projections, whereas it averaged 4.2 percent in the January projections.
    JEL: E20 E23 E60 E62 E66 H20
    Date: 2020–07–02
  9. By: Yasuo Hirose (Keio University); Takushi Kurozumi (Bank of Japan); Willem Van Zandweghe (Federal Reserve Bank of Cleveland)
    Abstract: A large literature has established the view that the Fed's change from a passive to an active policy response to inflation led to U.S. macroeconomic stability after the Great Inflation of the 1970s. We revisit this view by estimating a generalized New Keynesian model using a full-information Bayesian method that allows for indeterminacy of equilibrium and adopts a sequential Monte Carlo algorithm. The estimated model empirically outperforms canonical New Keynesian models that confirm the literature's view. It also points to substantial uncertainty about whether the policy response to inflation was active or passive during the Great Inflation. More importantly, a more active policy response to inflation alone does not suffice for explaining the U.S. macroeconomic stability, unless it is accompanied by a change in either trend inflation or policy responses to the output gap and output growth. This extends the literature by emphasizing the importance of the changes in other aspects of monetary policy in addition to its response to inflation.
    Keywords: Monetary policy; Great Inflation; Indeterminacy; Trend inflation; Sequential Monte Carlo
    JEL: C11 C52 C62 E31 E52
    Date: 2020–02–28
  10. By: Acharya, Sushant; Challe, Edouard; Dogra, Keshav
    Abstract: We study optimal monetary policy in a Heterogenous-Agent New-Keynesian economy. A utilitarian planner seeks to reduce consumption inequality, in addition to stabilizing output gaps and inflation. The planner does so both by reducing income risk faced by households, and by reducing the pass-through from income to consumption risk, trading-off the benefits of lower inequality against productive inefficiency and higher inflation. When income risk is countercyclical, policy curtails the fall in output in recessions to mitigate the increase in inequality. We uncover a new form of time-inconsistency of the Ramsey-plan - the temptation to exploit households' unhedged interest-rate exposure to lower inequality.
    Keywords: incomplete markets; New Keynesian Model; Optimal monetary policy
    JEL: E21 E30 E52 E62 E63
    Date: 2020–02
  11. By: Sriya Anbil; Mark A. Carlson; Christopher Hanes; David C. Wheelock
    Abstract: This article describes the origins and development of the federal funds market from its inception in the 1920s to the early 1950s. We present a newly digitized daily data series on the federal funds rate that covers the period from April 1928 through June 1954. We compare the behavior of the funds rate with other money market interest rates and the Federal Reserve discount rate. Our federal funds rate series will enhance the ability of researchers to study an eventful period in U.S. financial history and to better understand how monetary policy was transmitted to banking and financial markets. For the 1920s and 1930s, our series is the best available measure of the overnight risk-free interest rate, better than the call money rate which many studies have used for that purpose. For the 1940s-1950s, our series provides new information about the transition away from wartime interest-rate pegs culminating in the 1951 Treasury-Federal Reserve Accord.
    Keywords: federal funds rate; call loan rate; money market; Federal Reserve System
    JEL: E43 E44 E52 G21 N22
    Date: 2020–06–26
  12. By: Paloviita, Maritta; Haavio, Markus; Jalasjoki, Pirkka; Kilponen, Juha; Vänni, Ilona
    Abstract: We measure the tone (sentiment) of the ECB’s Governing Council regarding economic outlook at the time of each monetary policy meeting and use this information together with the Eurosystem/ECB staff macroeconomic projections to directly estimate the Governing Council’s loss function. Our results support earlier, more indirect findings, based on reaction function estimations, that the ECB has been either more averse to inflation above 2% ceiling or that the de facto inflation aim has been considerably below 2%. Our results suggest further that an inflation aim of 2% combined with asymmetry is a plausible specification of the ECB’s preferences.
    JEL: E31 E52 E58
    Date: 2020–07–06
  13. By: Stephen J. Cole; Fabio Milani
    Abstract: The adaptive learning approach has been fruitfully employed to model the formation of aggregate expectations at the macroeconomic level, as an alternative to rational expectations. This paper uses adaptive learning to understand, instead, the formation of expectations at the micro-level, by focusing on individual expectations and, in particular, trying to account for their heterogeneity. We exploit survey data on output and inflation expectations by individual professional forecasters. We link micro and macro by endowing forecasters with the same information set that they would have as economic agents in a benchmark New Keynesian model. Forecasters are, however, allowed to differ in the constant gain values that they use to update their beliefs. We estimate the best-fitting constant gain for each forecaster. We also extract individual measures of sentiment, defined as the degrees of excess optimism and pessimism that cannot be justified by the near-rational learning model, given the state of the economy and the updated beliefs. Our results highlight the heterogeneity in the gain coefficients adopted by forecasters, which is particularly pronounced at the beginning of the sample. The median values are consistent with those typically estimated using aggregate data, and display some moderate time variation: they occasionally jump to higher values in the 1970-80s, and stabilize in the 1990s and 2000s. Individual sentiment is persistent and heterogeneous. Differences in sentiment, however, don’t simply cancel out in the aggregate: the majority of forecasters exhibit excess optimism, or excess pessimism, at the same time.
    Keywords: individual survey forecasts, heterogeneous expectations, constant-gain learning, New Keynesian Model, sentiment shocks, waves of optimism and pessimism, evolving beliefs
    JEL: C52 D84 E32 E50 E60
    Date: 2020
  14. By: Viral V. Acharya; Soumya Bhadury; Jay Surti
    Abstract: This paper introduces a new financial vulnerability index for emerging market economies by exploiting key differences in their business cycles relative to those of advanced economies. Information on the domestic price of risk, cost of dollar hedging and market-based measures of bank vulnerability combine to generate indexes significantly more effective in capturing macro-financial vulnerability and stress compared to those based on information in trade and global factors. Our index significantly augments early warning surveillance capacity, as evidenced by out-of-sample forecasting gains around a majority of turning points in GDP growth, relative to distributed lag models that are augmented with information from macro-financial indexes that are custom-built to optimize such forecasts.
    JEL: C53 E32 E44
    Date: 2020–06
  15. By: Carrillo-Tudela, Carlos (University of Essex); Visschers, Ludo (University of Edinburgh)
    Abstract: This paper studies the extent to which the cyclicality of gross and net occupational mobility shapes that of aggregate unemployment and its duration distribution. Using the SIPP, we document the relation between workers' (gross and net) occupational mobility and unemployment duration over the long run and business cycle. To interpret this evidence, we develop an analytically and computationally tractable stochastic equilibrium model with heterogenous agents and occupations as well as aggregate uncertainty. The model is quantitatively consistent with several important features of the US labor market: procyclical gross and countercyclical net occupational mobility, the large volatility of unemployment and the cyclical properties of the unemployment duration distribution, among others. Our analysis shows that "excess" occupational mobility due to workers' changing career prospects interacts with aggregate conditions to drive fluctuations of aggregate unemployment and its duration distribution.
    Keywords: unemployment, business cycle, rest, search, occupational mobility
    JEL: E24 E30 J62 J63 J64
    Date: 2020–05
  16. By: Hasenzagl, Thomas; Reichlin, Lucrezia; Ricco, Giovanni
    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: Business cycle; credit; Downside risk; entropy; financial crises; financial cycle; quantile regressions
    JEL: C32 C53 E32 E44
    Date: 2020–01
  17. By: Fernández-Villaverde, Jesús
    Abstract: We review the literature on uncertainty shocks and business cycle research. First, we motivate the study of uncertainty shocks by documenting the presence of time-variation in the volatility of macroeconomic time series. Second, we enumerate the mechanisms that researchers have postulated to link uncertainty shocks and business cycles. Third, we outline how we can specify uncertainty shocks. Fourth, we postulate a real business cycle model augmented with financial frictions and uncertainty shocks. Fifth, we use the model to illustrate our previous discussions and to show how uncertainty shocks can be expansionary.
    Keywords: business cycles; Financial Frictions; Uncertainty shocks
    JEL: E30 E32 E50
    Date: 2020–02
  18. By: Acharya, Sushant; Dogra, Keshav
    Abstract: We present an incomplete markets model to understand the costs and benefits of increasing government debt when an increased demand for safety pushes the natural rate of interest below zero. A higher demand for safety widens spreads, causing the ZLB to bind and increasing unemployment. Higher government debt satiates the demand for safe assets, raising the natural rate, and restoring full employment. This entails permanently lower investment which reduces welfare, since our economy is dynamically efficient even when the natural rate is negative. Despite this, increasing debt is optimal if alternative instruments are unavailable. Alternative policies which permit negative real interest rates - higher inflation targets, negative nominal rates - achieve full employment without reducing investment.
    Keywords: Crowding out; liquidity traps; negative natural rate; Risk premium; safe assets
    JEL: E3 E4 E5 G1 H6
    Date: 2020–02
  19. By: Antunes, António; Cavalcanti, Tiago; Mendicino, Caterina; Peruffo, Marcel; Villamil, Anne
    Abstract: How does bankruptcy protection affect household balance sheet adjustments and aggregate consumption when credit tightens? Using a tractable model of unsecured consumer credit we quantify the trade-off between the insurance and the creditworthiness effects of bankruptcy in response to tighter credit. We show that bankruptcy dampens the effect of tighter credit on aggregate consumption on impact. This is because it allows borrowers to sustain consumption against severe financial distress. However, by leading to consumers' exclusion from the credit market for a certain period, bankruptcy also reduces their ability to smooth consumption over time, implying a slower recovery. The bankruptcy code establishes how costly it is to default, and, thus, plays a crucial role in determining consumers' bankruptcy decisions and in shaping consumption dynamics. We quantify that the 2005 BAPCPA reform, by making filing for bankruptcy more costly, worsened the negative welfare effects of the subsequent credit tightening.
    Keywords: BAPCPA; Chapter 7; Deleveraging
    JEL: E44 E52 E58 G21 G32
    Date: 2020–01
  20. By: Adesoji O. Farayibi (University of Ibadan, Ibadan, Nigeria); Simplice A. Asongu (Yaoundé, Cameroon)
    Abstract: The Covid-19 pandemic has generated shocks that have caused economic fluctuations globally, calling for an understanding of the behaviour of macroeconomic variables. This study presents an early review of the macroeconomic impact of the Covid-19 pandemic in Nigeria. The aggregate supply and aggregate demand (AS-AD) model provides the theoretical motivation for the study. From the findings, while the number of infected cases reflects significant correlations with economic activity from the perspective of a trend analysis, the estimates from dynamic ordinary least squares (DOLS) show that nexuses between the number of confirmed cases and attendant macroeconomic outcomes are largely insignificant with the expected signs. The study has therefore shown that the Covid-19 pandemic has insignificant negative impacts on basic macroeconomic variables in Nigeria such as inflation, employment, exchange rate, GDP growth, among others. In other words, time is required before the established correlations withstand empirical scrutiny in terms of causality. As the government has engaged the Economic Sustainable Plan (ESP, 2020), which is a post-Covid-19 recovery plan, it is hoped that the attendant policies would be properly implemented so as to provide the critical mass to repositioning the country’s economy on the path towards inclusive and sustained economic development.
    Keywords: Corona virus, Macroeconomics effects, Covid-19, AS-AD Model, Community Transmission, Nigeria
    JEL: E10 E12 E20 E23 I10 I18
    Date: 2020–06
  21. By: Barnett, William A.; Jawadi, Fredj; Ftiti, Zied
    Abstract: Since the publication of Friedman’s (1977) Nobel lecture, the relationships between the mean function of the inflation stochastic process and its uncertainty, and between inflation uncertainty (IU) and real output growth have been the subject of much research, with some studies justifying this causality and some reaching the opposite conclusion or finding an inverse correlation between mean inflation and inflation volatility with causation in either direction. We conduct a systematic econometric study of the relationships between the first two moments of the inflation stochastic process and between IU and output growth using state-of-the-art approaches and propose a time-varying inflation uncertainty measure based on stochastic volatility to consider unpredictable shocks. Further, we extend the literature by providing a new econometric specification of this relationship using two semi-parametric approaches: the frequency evolutionary co-spectral approach and continuous wavelet methodology. We theoretically justify their use through an extension of Ballʼs (1992) model. These frequency approaches have two advantages: they provide the analyses for different frequency horizons and do not impose restriction on the data. While the literature focused on the US data, our study explores these relationships for five major developed and emerging countries/regions (the US, the UK, the euro area, South Africa, and China) over the past five decades to investigate the robustness of our inferences and sources of inconsistencies among prior studies. This selection of countries permits investigation of the inflation versus inflation uncertainty relationship under different hypotheses, including explicit versus implicit inflation targets, conventional versus unconventional monetary policy, independent versus dependent central banks, and calm versus crisis periods. Our findings show a significant relationship between inflation and inflation uncertainty, which varies over time and frequency, and offer an improved comprehension of this ambiguous relationship. The relationship is positive in the short and medium terms during stable periods, confirming the Friedman–Ball theory, and negative during crisis periods. Additionally, our analysis identifies the phases of leading and lagging inflation uncertainty. Our general approach nests within it the earlier approaches, permitting explanation of the prior appearances of ambiguity in the relationship and identifies the conditions associated with the various outcomes.
    Keywords: Inflation, Inflation uncertainty, Output growth, Frequency approach, Wavelet, Semi-parametric approach, Stochastic volatility.
    JEL: C13 C14 C4 E3 E31 G1
    Date: 2020–06–19
  22. By: Daniel Fehrle (University of Augsburg, Department of Economics); Johannes Huber (University of Augsburg, Department of Economics)
    Abstract: We take the neoclassical perspective and apply the business cycle accounting method as proposed by Chari, Kehoe, and McGrattan (2007, Econometrica) for the Great Recession and the associated stimulus program in Germany 2008-2009. We include wedges to the variables government consumption, durables, investment, labor, net exports, and efficiency. The results suggest: The crisis was mainly driven by the efficiency wedge, followed by the net exports and the investment wedge. The government consumption wedge and in particular the durables wedge acted counter-cyclical. We attribute the latter to an internationally incomparably large cash for clunkers program and conclude that this subsidy on durable goods was more effective than pure government consumption. We introduce a strategy for likelihood maximization, which reliably and quickly locates the maximum; enables a detailed evaluation of the likelihood function and allows large robustness checks.
    Keywords: fiscal stimulus, great Recession, business cycle accounting, maximum-likelihood
    JEL: C32 E20 E32 H12 H31
    Date: 2020–06
  23. By: Hie Joo Ahn; James D. Hamilton
    Abstract: The underlying data from which the U.S. unemployment rate, labor-force participation rate, and duration of unemployment are calculated contain numerous internal contradictions. This paper catalogs these inconsistencies and proposes a unified reconciliation. We find that the usual statistics understate the unemployment rate and the labor-force participation rate by about two percentage points on average and that the bias in the latter has increased over time. The BLS estimate of the average duration of unemployment substantially overstates the true duration of uninterrupted spells of unemployment and misrepresents what happened to average durations during the Great Recession and its recovery.
    JEL: E24 E32 J01 J64
    Date: 2020–06
  24. By: Adesoji O. Farayibi (University of Ibadan, Ibadan, Nigeria); Simplice A. Asongu (Yaoundé, Cameroon)
    Abstract: The Covid-19 pandemic has generated shocks that have caused economic fluctuations globally, calling for an understanding of the behaviour of macroeconomic variables. This study presents an early review of the macroeconomic impact of the Covid-19 pandemic in Nigeria. The aggregate supply and aggregate demand (AS-AD) model provides the theoretical motivation for the study. From the findings, while the number of infected cases reflects significant correlations with economic activity from the perspective of a trend analysis, the estimates from dynamic ordinary least squares (DOLS) show that nexuses between the number of confirmed cases and attendant macroeconomic outcomes are largely insignificant with the expected signs. The study has therefore shown that the Covid-19 pandemic has insignificant negative impacts on basic macroeconomic variables in Nigeria such as inflation, employment, exchange rate, GDP growth, among others. In other words, time is required before the established correlations withstand empirical scrutiny in terms of causality. As the government has engaged the Economic Sustainable Plan (ESP, 2020), which is a post-Covid-19 recovery plan, it is hoped that the attendant policies would be properly implemented so as to provide the critical mass to repositioning the country’s economy on the path towards inclusive and sustained economic development.
    Keywords: Corona virus, Macroeconomics effects, Covid-19, AS-AD Model, Community Transmission, Nigeria
    JEL: E10 E12 E20 E23 I10 I18
    Date: 2020–06
  25. By: Altavilla, Carlo; Boucinha, Miguel; Peydró, José Luis; Smets, Frank
    Abstract: We analyse the effects of supranational versus national banking supervision on credit supply, and its interactions with monetary policy. For identification, we exploit: (i) a new, proprietary dataset based on 15 European credit registers; (ii) the institutional change leading to the centralisation of European banking supervision; (iii) high-frequency monetary policy surprises; (iv) differences across euro area countries, also vis-à-vis non-euro area countries. We show that supranational supervision reduces credit supply to firms with very high ex-ante and ex-post credit risk, while stimulating credit supply to firms without loan delinquencies. Moreover, the increased risk-sensitivity of credit supply driven by centralised supervision is stronger for banks operating in stressed countries. Exploiting heterogeneity across banks, we find that the mechanism driving the results is higher quantity and quality of human resources available to the supranational supervisor rather than changes in incentives due to the reallocation of supervisory responsibility to the new institution. Finally, there are crucial complementarities between supervision and monetary policy: centralised supervision offsets excessive bank risk-taking induced by a more accommodative monetary policy stance, but does not offset more productive risk-taking. Overall, we show that using multiple credit registers - first time in the literature - is crucial for external validity.
    Keywords: AnaCredit; Banking; euro area crisis; monetary policy; Supervision
    JEL: E51 E52 E58 G01 G21 G28
    Date: 2020–01
  26. By: Heinrich, Markus
    Abstract: Macroeconomic forecasting in recessions is not easy due to the inherent asymmetry of business cycle phases and the increased uncertainty about the future path of the teetering economy. I propose a mixed-frequency threshold vector autoregressive model with common stochastic volatility in mean (MF-T-CSVM-VAR) that enables to condition on the current state of the business cycle and to account for time-varying macroeconomic uncertainty in form of common stochastic volatility in a mixed-frequency setting. A real-time forecasting experiment highlights the advantage of including the threshold feature for the asymmetry as well as the common stochastic volatility in mean in MF-VARs of different size for US GDP, inflation and unemployment. The novel mixed-frequency threshold model delivers better forecasts for short-term point and density forecasts with respect to GDP and unemployment--particularly evident for nowcasts during recessions. In fact, it delivers a better nowcast than the US Survey of Professional Forecasters for the sharp drop in GDP during the Great Recession in 2008Q4.
    Keywords: Threshold VAR,Stochastic Volatility,Forecasting,Mixed-frequency Models,Business Cycle,Bayesian Methods
    JEL: C11 C32 C34 C53 E32
    Date: 2020
  27. By: Joseph, Andreas; Kneer, Christiane; Saleheen, Jumana; Van Horen, Neeltje
    Abstract: Firms with high pre-crisis cash holdings invested significantly more than their cash-poor rivals during the global financial crisis and especially so during the recovery phase. This resulted in a persistent and growing investment gap between cash-rich and cash-poor firms. Cash especially benefitted young and small firms and firms in industries where rivals became more financially constrained. The amplification effect of cash was absent in the period preceding the crisis. The ability to continue to invest allowed cash-rich firms to gain market share and accumulate more profits over the long-run. Having a liquid balance sheet when the credit cycle turns thus gives firms a competitive edge that lasts far beyond the crisis years.
    Keywords: cash holdings; credit constraints; financial crisis; Firm Investment
    JEL: E22 E32 E44 G32
    Date: 2020–01
  28. By: Jean-Paul L'Huillier; Raphael Schoenle
    Abstract: Some, but less than intended. The reason is a shift in the behavior of the private sector: Prices adjust more frequently, lowering the potency of monetary policy. We quantitatively investigate this channel across different models, based on a calibration using micro data. By raising the target from 2 percent to 4 percent, the monetary authority gets only between 0.51 and 1.60 percentage points of effective extra policy room for monetary policy (not 2 percentage points as intended). Getting 2 percentage points of effective extra room requires raising the target to more than 4 percent. Taking this channel into consideration raises the optimal inflation target by roughly 1 percentage points relative to earlier computations.
    Keywords: zero lower bound; price stability; timidity trap; liquidity traps; central bank design; inflation targeting; Lucas proof
    JEL: E52 E58 E31
    Date: 2020–06–16
  29. By: Bartholomew, Luke; Diggle, Paul
    Abstract: 'Stall speed' and 'escape velocity' are commonly heard but often vaguely defined physics metaphors used to describe apparent business cycle dynamics. Using GDP data for the OECD economies, we find evidence for the existence of a weak and a strong form of stall speed in the majority of these economies, but reject weak and strong form escape velocity everywhere. Specifically, we find higher probabilities of recession following periods of low growth, including non-linear increases in these probabilities around certain thresholds; but no equivalent decrease in recession probabilities after periods of high growth. We then employ Markov switching models as a secondary technique to test for distinct business cycle phases that might equate to stalls and escapes. This analysis rarely picks out stall speed and escape velocity as separate business cycle regimes, and instead points to a broader and more idiosyncratic suite of regimes rooted in individual economies' economic history. Taken together, these results suggest that stall speed dynamics are present in the GDP data generating process for many OECD economies, but they are not a strong enough feature to emerge as a defining characteristic of the business cycle. Our findings caution against the overuse of the stall speed and escape velocity metaphors in a macroeconomic context.
    Keywords: business cycle asymmetry; conditional probabilities; escape velocity; kernel densities; Markov switching; Stall speed
    JEL: C14 C22 E32
    Date: 2020–01
  30. By: Koh, Wee Chian; Kose, Ayhan; Nagle, Peter; Ohnsorge, Franziska; Sugawara, Naotaka
    Abstract: Emerging market and developing economies have experienced recurrent episodes of rapid debt accumulation over the past fifty years. This paper examines the consequences of debt accumulation using a three-pronged approach: an event study of debt accumulation episodes in 100 emerging market and developing economies since 1970; a series of econometric models examining the linkages between debt and the probability of financial crises; and a set of case studies of rapid debt buildup that ended in crises. The paper reports four main results. First, episodes of debt accumulation are common, with more than 500 episodes occurring since 1970. Second, around half of these episodes were associated with financial crises which typically had worse economic outcomes than those without crises-after 8 years, output per capita was typically 6-10 percent lower and investment 15-22 percent weaker in crisis episodes. Third, a rapid buildup of debt, whether public or private, increased the likelihood of a financial crisis, as did a larger share of short-term external debt, higher debt service, and lower reserves cover. Fourth, countries that experienced financial crises frequently employed combinations of unsustainable fiscal, monetary and financial sector policies, and often suffered from structural and institutional weaknesses.
    Keywords: banking crises; Currency Crises; Debt crises; External Debt; financial crises; private debt; public debt
    JEL: E32 E61 G01 H12 H61 H63
    Date: 2020–02
  31. By: Niels J. Gormsen; Ralph S. J. Koijen
    Abstract: We use data from the aggregate stock market and dividend futures to quantify how investors’ expectations about economic growth evolve across horizons in response to the coronavirus outbreak and subsequent policy responses until June 2020. Dividend futures, which are claims to dividends on the aggregate stock market in a particular year, can be used to directly compute a lower bound on growth expectations across maturities or to estimate expected growth using a forecasting model. We show how the actual forecast and the bound evolve over time. As of June 8, our forecast of annual growth in dividends is down 9% in the US and 14% in the EU compared to January 1, and our forecast of GDP growth is down by 2.0% in the US and 3.1% in the EU. The lower bound on the change in expected dividends is -18% in the US and -25% in the EU at the 2-year horizon. News about fiscal stimulus around March 24 boosts the stock market and long-term growth but did little to increase short-term growth expectations. Expected dividend growth has improved since April 1 in both the US and the EU. We conclude by developing and estimating a simple model of the crisis to understand the joint dynamics of short-term dividend futures, stock markets, and bond markets.
    JEL: E44 F3 G1
    Date: 2020–06
  32. By: Ilzetzki, Ethan; Reinhart, Carmen M.; Rogoff, Kenneth
    Abstract: On the twentieth anniversary of its inception, the euro has yet to expand its role as an international currency. We document this fact with a wide range of indicators including its role as an anchor or reference in exchange rate arrangements-which we argue is a portmanteau measure-and as a currency for the denomination of trade and assets. On all these dimensions, the euro comprises a far smaller share than that of the US dollar. Furthermore, that share has been roughly constant since 1999. By some measures, the euro plays no larger a role than the Deutschemark and French franc that it replaced. We explore the reasons for this underperformance. While the leading anchor currency may have a natural monopoly, a number of additional factors have limited the euro's reach, including lack of financial center, limited geopolitical reach, and US and Chinese dominance in technology research. Most important, in our view, is the comparatively scarce supply of (safe) euro-denominated assets, which we document. The European Central Bank' lack of policy clarity may have also played a role. We show that the euro era can be divided into a "Bundesbank-plus" period and a "Whatever it Takes" period. The first shows a smooth transition from the European Exchange Rate Mechanism and continued to stabilize German inflation. The second period is characterised by an expanding ECB arsenal of credit facilities to European banks and sovereigns.
    JEL: E5 F3 F4 N2
    Date: 2020–01
  33. By: Ha, Jongrim; Kose, Ayhan; Otrok, Christopher; Prasad, Eswar
    Abstract: We develop a new dynamic factor model that allows us to jointly characterize global macroeconomic and financial cycles and the spillovers between them. The model decomposes macroeconomic cycles into the part driven by global and country-specific macro factors and the part driven by spillovers from financial variables. We consider cycles in macroeconomic aggregates (output, consumption, and investment) and financial variables (equity and house prices, and interest rates). We find that the global macro factor plays a major role in explaining G-7 business cycles, but there are also spillovers from equity and house price shocks onto macroeconomic aggregates. These spillovers operate mainly through the global macro factor rather than the country-specific macro factors (i.e., these spillovers affect business cycles in all G-7 economies) and are stronger in the period leading up to and following the global financial crisis. We find little evidence of spillovers from macroeconomic cycles to financial cycles.
    Keywords: Common Shocks; Dynamic factor models; Global business cycles; global financial cycles; International spillovers
    JEL: C1 C32 E32 F4
    Date: 2020–02
  34. By: Francesco Bianchi; Sydney C. Ludvigson; Sai Ma
    Abstract: This paper combines a data rich environment with a machine learning algorithm to provide estimates of time-varying systematic expectational errors (“belief distortions”) about the macroeconomy embedded in survey responses. We find that such distortions are large on average even for professional forecasters, with all respondent-types over-weighting their own forecast relative to other information. Forecasts of inflation and GDP growth oscillate between optimism and pessimism by quantitatively large amounts. To investigate the dynamic relation of belief distortions with the macroeconomy, we construct indexes of aggregate (across surveys and respondents) expectational biases in survey forecasts. Over-optimism is associated with an increase in aggregate economic activity. Our estimates provide a benchmark to evaluate theories for which information capacity constraints, extrapolation, sentiments, ambiguity aversion, and other departures from full information rational expectations play a role in business cycles.
    JEL: E03 E17
    Date: 2020–06
  35. By: Anand, Abhishek (Harvard Kennedy School, Cambridge); Chakraborty, Lekha (National Institute of Public Finance and Policy)
    Abstract: In last few years, several central banks have implemented negative interest rate policies (NIRP) to boost domestic economy. However, such policies may have some unintended consequences for the emerging Asian markets (EAMs). The objective of this paper is to provide an assessment of the domestic and global implications of negative interest rate policy. We also present how the implications differ from that of quantitative easing (QE). The analysis shows that the impact NIRP is heterogeneous; with differential impacts for big Asian economies (India and Indonesia)and small trade dependent economies (STDE) (Hong Kong, Philippines, South Korea, Singapore and Thailand). Nominal GDP and exports are adversely impacted in EMs in response to NIRP, especially in India and Indonesia. The inflation goes significantly high in EMs in response to plausible negative interest rates but the impact is much more severe for India and Indonesia than in STDEs. The local currencies also depreciate in all EAMs in response to negative interest rates. QE, on the other hand, has no significant impact on inflation but nominal GDP growth declines in EAMs. The currency appreciates and exports decline. The impact is much more severe in big emerging economies like India and Indonesia.
    Keywords: Negative interest rate policy ; Quantitative easing ; emerging economies
    JEL: E52 E58
    Date: 2020–06
  36. By: William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Fredj Jawadi (University of Lille, Lille, 104 Avenue du Peuple Blege, 104 Avenue du Peuple Belge, 59043 Lille Cedex, Office B655, France); Zied Ftiti (EDC Paris Business School, Paris, France)
    Abstract: Since the publication of Friedman’s (1977) Nobel lecture, the relationships between the mean function of the inflation stochastic process and its uncertainty, and between inflation uncertainty (IU) and real output growth have been the subject of much research, with some studies justifying this causality and some reaching the opposite conclusion or finding an inverse correlation between mean inflation and inflation volatility with causation in either direction. We conduct a systematic econometric study of the relationships between the first two moments of the inflation stochastic process and between IU and output growth using state-of-the-art approaches and propose a time-varying inflation uncertainty measure based on stochastic volatility to consider unpredictable shocks. Further, we extend the literature by providing a new econometric specification of this relationship using two semi-parametric approaches: the frequency evolutionary co-spectral approach and continuous wavelet methodology. We theoretically justify their use through an extension of Ball's (1992) model. These frequency approaches have two advantages: they provide the analyses for different frequency horizons and do not impose restriction on the data. While the literature focused on the US data, our study explores these relationships for five major developed and emerging countries/regions (the US, the UK, the euro area, South Africa, and China) over the past five decades to investigate the robustness of our inferences and sources of inconsistencies among prior studies. This selection of countries permits investigation of the inflation versus inflation uncertainty relationship under different hypotheses, including explicit versus implicit inflation targets, conventional versus unconventional monetary policy, independent versus dependent central banks, and calm versus crisis periods. Our findings show a significant relationship between inflation and inflation uncertainty, which varies over time and frequency, and offer an improved comprehension of this ambiguous relationship. The relationship is positive in the short and medium terms during stable periods, confirming the Friedman–Ball theory, and negative during crisis periods. Additionally, our analysis identifies the phases of leading and lagging inflation uncertainty. Our general approach nests within it the earlier approaches, permitting explanation of the prior appearances of ambiguity in the relationship and identifies the conditions associated with the various outcomes.
    Keywords: Inflation, Inflation uncertainty, Output growth, Frequency approach, Wavelet, Semi-parametric approach, Stochastic volatility
    JEL: C14 E31
    Date: 2020–07
  37. By: KIBADHI, Plante M; PINSHI, Christian P.
    Abstract: The ability of a central bank to influence the economy depends on its ability to manage the expectations of the general public and the financial system regarding the future development of macroeconomic indicators. The communication strategy (in this time of crisis and uncertainty) increases transparency, improves public understanding and support for the monetary policy and democratic accountability of the Central Bank of Congo (BCC), serving to convergence towards the balance of expectations. This paper agrees that a strategic direction of communication, focused on coherent messages, can help break down pessimistic expectations, maintain confidence, reduce the cost of the crisis and stabilize the economy. In conclusion, the article suggests a dozen recommendations, to be able to strengthen and redirect the BCC’s communication strategy and contribute to the effectiveness of monetary policy.
    Keywords: Communication, Monetary policy
    JEL: E58
    Date: 2020–05
  38. By: Adam, Klaus; Woodford, Michael
    Abstract: We analytically characterize optimal monetary policy for an augmented New Keynesian model with a housing sector. With rational private sector expectations about housing prices and inflation, optimal monetary policy can be characterized by a standard 'target criterion' that refers to inflation and the output gap, without making reference to housing prices. When the policymaker is concerned with potential departures of private sector expectations from rational ones and seeks a policy that is robust against such possible departures, then the optimal target criterion must also depend on housing prices. For empirically realistic cases, the central bank should then 'lean against' housing prices, i.e., following unexpected housing price increases (decreases), policy should adopt a stance that is projected to undershoot (overshoot) its normal targets for inflation and the output gap. Robustly optimal policy does not require that the central bank distinguishes between `fundamental' and `non-fundamental' movements in housing prices.
    JEL: D81 D84 E52
    Date: 2020–02
  39. By: Hoesch, Lukas; Rossi, Barbara; Sekhposyan, Tatevik
    Abstract: Does the Federal Reserve have an "information advantage'' in forecasting macroeconomic variables beyond what is known to private sector forecasters? And are market participants reacting only to monetary policy shocks or also to future information on the state of the economy that the Federal Reserve communicates in its announcements via an "information channel''? This paper investigates the evolution of the information channel over time. Although the information channel appears to be important historically, we find no empirical evidence of its presence in the recent years once instabilities are accounted for.
    Keywords: Forecasting; Information Channel of Monetary Policy; Instabilities; monetary policy
    JEL: C11 C14 C22 E52 E58
    Date: 2020–02
  40. By: Romina Ruprecht
    Abstract: This paper develops a dynamic general equilibrium model with two currencies to study the effect of negative interest rates on domestic money demand and exchange rates. Money demand for a currency depends on the relative ratio of the money market rate and the deposit rate of the central bank. If agents choose to hold only domestic currency, a decrease in the deposit rate of the central bank will not affect the exchange rate. If agents choose to hold both currencies, a decrease in the deposit rate will cause an appreciation (depreciation) if the money market rate decreases to a larger (smaller) extent. If agents are subject to bank deposit rates that are sticky below zero, then a decrease of the central bank deposit rate leads to a depreciation of the currency regardless of the size of the effect on the money market rate.
    Keywords: Monetary policy, negative interest rates, exchange rates
    JEL: E52 E58 F31
    Date: 2020–06
  41. By: Gomez-Gonzalez, Jose Eduardo; Valencia, Oscar; Herrera, David; Zapata, Steven
    Abstract: This paper studies fiscal multipliers in Colombia, an emerging economy with a high degree of inflexibility of expenditure at the sectoral level. The results show that the multiplier is almost twice as large in sectors in which the execution of flexible expenditure is favored over inflexible expenditure. This result is closely related to the fact that flexible expenditure is done in capital intensive sectors. Microsimulation estimations show that the reallocation of a 1% from inflexible to flexible spending has a positive effect of approximately 17% on the total fiscal multiplier. We provide empirical evidence of an inverted U-shaped fiscal multiplier on the reallocation effect across sectors.
    Keywords: Fiscal multipliers; Spending reallocation; Emerging market economies; Colombia
    JEL: E62 O23
    Date: 2020–07
  42. By: Iachan, Felipe Saraiva; Nenov, Plamen T.; Simsek, Alp
    Abstract: Financial innovation in recent decades has expanded portfolio choice. We investigate how greater choice affects investors' savings and asset returns. We establish a choice channel by which greater portfolio choice increases investors' savings---by enabling them to earn the aggregate risk premium or to take speculative positions. In equilibrium, portfolio customization (access to risky assets beyond the market portfolio) reduces the risk-free rate. Participation (access to the market portfolio) reduces the risk premium but typically increases the risk-free rate. Empirically, stock market participants in the U.S. save more than nonparticipants, and have increasingly dispersed portfolio returns, consistent with the choice channel.
    Keywords: belief disagreements; Customization; financial innovation; interest rate; Risk premium; Savings; Speculation; Stock Market Participation
    JEL: E21 E43 E44 G11 G12
    Date: 2020–01
  43. By: Mauro Sayar Ferreira (Cedeplar-UFMG); André Cordeiro Valério (EPGE-FGV)
    Abstract: Shocks in commodity prices have been viewed as a major driver of emerging economies’ business cycle. We show this is not the case for Brazil, Chile, Colombia, and Peru (all commodity exporters) after allowing for a full macro-finance linkage, at world and domestic level, in a structural VAR. To achieve our results, the international bloc of the VAR includes a measure of global GDP, an aggregate commodity price index, and a volatility index (VIX). The presence of this last variable, from which we capture global economic uncertainty shock, is responsible for modifying established results. Global demand shocks have been the main international driver of the business cycle in Brazil, Chile, and Peru, while global economic uncertainty shocks have been the most important international driver of the Colombian GDP. Aggregate shocks to the world commodity market become more relevant only when a less structured model of the global economy is in place, since commodity prices react endogenously to innovations elsewhere, playing a major role as a propagator. The econometric models also include the following domestic variables: GDP, CPI, sovereign spread, nominal exchange rate, and policy interest rate.
    Keywords: Global shocks; business cycle; uncertainty; commodity price; global activity; emerging economies; Bayesian SVAR.
    JEL: C32 E32 F41 F44 F62 F63 O54
    Date: 2020–06
  44. By: Martin Wafula Nandelenga; Mark J. Ellyne
    Abstract: We study the compliance with fiscal rules via various national numeric rules. Based on 20 sub-Sahara African countries with 57 fiscal rules in force from 1997 to 2016, our analysis identifies determinants among the rule specific characteristics, as well as their macroeconomic and political environments. To meet the objectives of our study, we employ a logistic model. Our analysis reveals that, while the average compliance rate is around 54 percent, there is significant heterogeneity among both individual rules and national compliance rates. The analysis shows that the debt rule has a higher probability of compliance compared to balanced budget and revenue rules, respectively. Furthermore, the analysis shows that rules supported with independent monitoring institutions, as well as those covering the central government, have a higher probability of compliance. Moreover, the findings show that GDP per capita and grants enhance the probability of compliance, while corruption increases a country's probability of non-compliance. To address endogeneity that may arise in our analysis, we employ an IV Probit model, and our results still stand.
    Keywords: Numeric fiscal rules, compliance, Deficit bias, institutions
    JEL: E62 H60 H11
    Date: 2020–04
  45. By: Mendicino, Caterina; Nikolov, Kalin; Rubio-Ramírez, Juan Francisco; Suarez, Javier; Supera, Dominik
    Abstract: We study the interaction between borrowers' and banks' solvency in a quantitative macroeconomic model with financial frictions in which bank assets are a portfolio of defaultable loans. We show that ex-ante imperfect diversification of bank lending generates bank asset returns with limited upside but significant downside risk. The asymmetric distribution of these returns and their implications for the evolution of bank net worth are important for capturing the frequency and severity of twin default crises -simultaneous rises in firm and bank defaults associated with sizeable negative effects on economic activity. As a result, our model implies higher optimal capital requirements than common specifications of bank asset returns, which neglect or underestimate the impact of borrower default on bank solvency.
    Keywords: Bank Fragility; Capital requirements; Default Risk; loan returns; non-diversifiable risk
    JEL: E3 E44 G01 G21
    Date: 2020–02
  46. By: John C Bluedorn; Shekhar Aiyar; Romain A Duval; Davide Furceri; Daniel Garcia-Macia; Yi Ji; Davide Malacrino; Haonan Qu; Jesse Siminitz; Aleksandra Zdzienicka
    Abstract: Cross-country differences in economic resilience—in an economy’s ability to withstand and adjust to shocks—remain significant in the euro area. In part, the differences reflect the lack of a national nominal exchange rate as a mechanism to adjust to shocks. The IMF staff has argued that union-wide architectural changes such as the banking union, the capital markets union, and a central fiscal capacity can help foster greater international risk sharing. Yet even these changes cannot insure against all shocks. National policies thus have a vital role to play. This IMF staff discussion note analyzes how national structural policies can help euro area countries better deal with economic shocks. Using a mix of empirical and modeling approaches, the note finds that growth-enhancing reforms to labor and product market regulations, tailored to country-specific circumstances, would help individual euro area economies weather adverse shocks. Higher-quality insolvency regimes are associated with more efficient factor reallocation following a shock. The note also finds that structural and cyclical policies interact. Greater rigidities make economies more fragile, putting a higher burden on fiscal policy. This is especially true for members of a monetary union. Countries should build fiscal space in good times and tackle rigidities, reducing their need for countercyclical policies in bad times while making countercyclical policies more effective when deployed.
    Keywords: Business cycles;Euro Area (EA);Labor market reforms;Business cycles; Resilience; Structural policies; Reforms; Labor market; Product market; Corporate insolvency regime; Monetary union
    Date: 2019–06–17
  47. By: Iulia Ruxandra Teodoru; Asel Toktonalieva
    Abstract: This paper estimates the neutral interest rate in the Kyrgyz Republic using a range of methodologies. Results indicate that the real neutral rate is about 4 percent based on an average of models and 3.7 percent based on a Quarterly Projection Model. This is higher than in many emerging markets and is likely explained by higher public debt and an elevated risk premium, low creditor rights and contractual enforcement, and low domestic savings. The use of an estimate of the neutral interest rate provides useful guidance to monetary policy and enhances transparency and independence of the central bank. Our estimate provides a quantitative benchmark for the monetary policy stance in the context of a central bank that is building analytical capacity, integrating additional insights in its decision-making process, and working to improve its communication. Strengthening the monetary transmission mechanism will be critical to enhance the effectiveness of monetary policy, including by allowing more exchange rate flexibility to support the transition to a full-fledged inflation targeting regime, and reducing excess liquidity to enhance the credit channel, reducing dollarization and high interest rate spreads that adversely affect the transmission of the policy rate to the economy.
    Date: 2020–06–05
  48. By: Alain Kabundi; Tumisang Loate; Nicola Viegi
    Abstract: This paper assesses the effect of US monetary policy on South Africa during the period 1990- 2018. We separately analyse and compare the effect of conventional monetary policy, before the Global Financial Crisis, and unconventional monetary policy, after the US monetary policy reached the zero-lower bound. Our impulse response function results indicate that monetary policy in South Africa is somewhat independent, responding to local inflation, economic activity and financial conditions. However, the variance decomposition also indicates that the US monetary policy accounts for some variation of the South African policy rate. Finally, we find a sluggish response of industrial production and credit differ post the global financial crisis. We see this as an indication of the effects of structural issues to the real economy, political uncertainty and constrained households; balance sheet which has prevented the local economy to take advantage of low local interest rates and the global economic recovery after the crisis.
    Keywords: International spillovers, unconventional monetary policy, zero-lower bound, South Africa
    JEL: E52 F36
    Date: 2020–04
  49. By: E. Terrones, Marco; Kose, Ayhan; Sugawara, Naotaka
    Abstract: The world economy has experienced four global recessions over the past seven decades: in 1975, 1982, 1991, and 2009. During each of these episodes, annual real per capita global GDP contracted, and this contraction was accompanied by weakening of other key indicators of global economic activity. The global recessions were highly synchronized internationally, with severe economic and financial disruptions in many countries around the world. The 2009 global recession, set off by the global financial crisis, was by far the deepest and most synchronized of the four recessions. As the epicenter of the crisis, advanced economies felt the brunt of the recession. The subsequent expansion has been the weakest in the post-war period in advanced economies as many of them have struggled to overcome the legacies of the crisis. In contrast, most emerging market and developing economies weathered the 2009 global recession relatively well and delivered a stronger recovery than after previous global recessions.
    Keywords: financial markets; global economy; global expansion; global recovery; Real activity; synchronization of cycles
    JEL: E32 F44 N10 O47
    Date: 2020–02
  50. By: Hardik A. Marfatia (Department of Economics, Northeastern Illinois University, 5500 N St Louis Ave, BBH 344G, Chicago, IL 60625, USA); Christophe Andre (Economics Department, Organisation for Economic Co-operation and Development (OECD), 75775 Paris, Cedex 16, France); Rangan Gupta
    Abstract: Sentiment indicators have long been closely monitored by economic forecasters, notably to predict short-term moves in consumption and investment. Recently, housing sentiment indices have been developed to forecast housing market developments. Sentiment indices partly reflect economic determinants, but also more subjective factors, thereby adding information, particularly in periods of uncertainty, when economic relations are less stable than usual. While many studies have investigated the relevance of sentiment indicators for forecasting, few have looked at the factors which shape sentiment. In this paper, we investigate the role of different types of uncertainty in predicting housing sentiment, controlling for a wide set of economic and financial factors. We use a dynamic model averaging/selection (DMA/DMS) approach to assess the relevance of uncertainty and other factors in forecasting housing sentiment at different points in time. We find that housing sentiment forecast errors from models incorporating uncertainty measures are up to 40% lower at a two-year horizon, compared with models ignoring uncertainty. We also show, by examining DMS posterior inclusion probabilities, that uncertainty has become more relevant since the 2008 global financial crisis, especially at longer forecast horizons.
    Keywords: Housing sentiments, Uncertainty, DMA, DMS
    JEL: C53 E44 R31
    Date: 2020–06
  51. By: Ruth Badru
    Abstract: This paper applies a robust empirical methodology, which considers issues relating to cross-country heterogeneity and cross-sectional dependence, to inspect the contributions of gender equality and factor income distribution to an economy's growth path. A dynamic model of aggregate demand is estimated on a unique panel dataset from 46 countries that are further grouped into developed (DC), semi-industrialized (SIEs), and low-income agricultural economies (LIAEs). The empirical findings suggest that, overall, growth is driven by investment in the short run and domestic demand in the long run. In the short run, the results suggest that low female wages act as a stimulus to growth in SIEs but may promote contractionary pressures on demand in the long run. For LIAEs and DCs, the effect of improved labor market conditions for women--leaving men's constant--on demand-led growth conditions are positive in the short run but may harm long-term growth prospects. In all, the empirical evidence, combined with the stylized facts about institutional and economic inequality, suggests that the impact of gender and income inequality on macroeconomic outcomes will differ depending on the economic structure and level of economic development.
    Keywords: Gender Equality; Demand-led Growth; Aggregate Demand; Functional Income Distribution; Economic Development; Autoregressive Distributed Lag Models (ARDL)
    JEL: E02 E12 E20 F41 I30
  52. By: Tommaso Mancini Griffoli; Maria Soledad Martinez Peria; Itai Agur; Anil Ari; John Kiff; Adina Popescu; Celine Rochon
    Abstract: Digitalization is reshaping economic activity, shrinking the role of cash, and spurring new digital forms of money. Central banks have been pondering wheter and how to adapt. One possibility is central bank digital currency (CBDC)-- a widely accessible digital form of fiat money that could be legal tender. This discussion note proposes a conceptual framework to assess the case for CBDC adoption from the perspective of users and central banks. It discusses possible CBDC designs, and explores potential benefits and costs, with a focus on the impact on monetary policy, financial stability, and integrity. This note also surveys research and pilot studies on CBDC by central banks around the world.
    Keywords: Money;Central banking;Currencies;Monetary policy;Central banks;Bank rates;Bank liquidity;Lender of last resort;Bank accounting;Central Bank Digital Currencies,financial integrity,central bank,token-based,intermediation,bank deposit
    Date: 2018–11–12
  53. By: Maiko Koga (School of Economics, Senshu University); Kohei Matsumura (Bank of Japan)
    Abstract: We study the MPC heterogeneity of households in Japan both theoretically and empirically. We build a heterogeneous-agent overlapping-generations general equilibrium model with an illiquid and indivisible housing asset. We show that mortgage debtor exhibits high MPC and households about to upgrade their house exhibit low MPC. Using Japanese household survey data, we empirically support our theoretical predictions.
    Keywords: Consumption; Heterogeneity; Housing choices; Liquidity constraints; Marginal propensity to consume
    JEL: E21 E50 R21
  54. By: Robin Greenwood; Samuel G. Hanson; Andrei Shleifer; Jakob Ahm Sørensen
    Abstract: Using historical data on post-war financial crises around the world, we show that crises are substantially predictable. The combination of rapid credit and asset price growth over the prior three years, whether in the nonfinancial business or the household sector, is associated with about a 40% probability of entering a financial crisis within the next three years. This compares with a roughly 7% probability in normal times, when neither credit nor asset price growth has been elevated. Our evidence cuts against the view that financial crises are unpredictable “bolts from the sky” and points toward the Kindleberger-Minsky view that crises are the byproduct of predictable, boom-bust credit cycles. The predictability we document favors macro-financial policies that “lean against the wind” of credit market booms.
    JEL: E44 G01
    Date: 2020–06
  55. By: Linas Jurksas (Bank of Lithuania); Vitalijus Klincevicius (Strata)
    Abstract: The aim of this paper is to assess how relevant is the topic of sovereign bond valuations in official ECB Executive Board member speeches and, in particular, under what circumstances do ECB officials begin communicating the driving factors of sovereign bond pricing. For this purpose, we downloaded over 2000 public ECB Executive Board member speeches and applied various text mining techniques. The visual analysis revealed that the importance of the topic of sovereign bond pricing and related risk factors in ECB officials’ speeches has greatly fluctuated over time. The main structural break points were linked to the financial market turbulences, but this topic, possibly due to the introduction of sovereign bond purchases, remained relatively popular even after stress episodes. The linkages between the publicly communicated terms of sovereign bond pricing and related risk factors were rather complex and change in respect to the market situation. Meanwhile, the sentiment balance of the credit risk factor was usually on the negative side, while the ones of other terms were much more neutral.
    Keywords: ECB Executive Board, speeches, sovereign bonds, risk factors, correspondence analysis, sentiment analysis
    JEL: C80 E43 E58 G12
    Date: 2020–06–01
  56. By: Fernández-Villaverde, Jesús; Sanches, Daniel; Schilling, Linda Marlene; Uhlig, Harald
    Abstract: The introduction of a central bank digital currency (CBDC) allows the central bank to engage in large-scale intermediation by competing with private financial intermediaries for deposits. Yet, since a central bank is not an investment expert, it cannot invest in long-term projects itself, but relies on investment banks to do so. We derive an equivalence result that shows that absent a banking panic, the set of allocations achieved with private financial intermediation will also be achieved with a CBDC. During a panic, however, we show that the rigidity of the central bank's contract with the investment banks has the capacity to deter runs. Thus, the central bank is more stable than the commercial banking sector. Depositors internalize this feature ex-ante, and the central bank arises as a deposit monopolist, attracting all deposits away from the commercial banking sector. This monopoly might endangered maturity transformation.
    Keywords: bank runs; Central bank digital currency; central banking; intermediation; lender of last resort; maturity transformation
    JEL: E58 G21
    Date: 2020–01
  57. By: Cesa-Bianchi, Ambrogio
    Abstract: We show that credit spreads rise after a monetary policy tightening, yet spread reactions are heterogeneous across firms. Exploiting information from a unique panel of corporate bonds matched with balance sheet data for US non-financial firms, we document that firms with high leverage experience a more pronounced increase in credit spreads than firms with low leverage. A large fraction of this increase is due to a component of credit spreads that is in excess of firms' expected default -- the excess bond premium. Consistent with the spreads response, we also document that high-leverage firms experience a sharper contraction in debt and investment than low-leverage firms. Our results provide evidence that balance sheet effects are crucial for understanding the transmission mechanism of monetary policy.
    Keywords: Credit channel; credit spreads; event study; Excess Bond Premium; financial accelerator; Heterogeneity; identification; monetary policy
    JEL: E44 F44 G15
    Date: 2020–02
  58. By: Born, Benjamin; Müller, Gernot; Pfeifer, Johannes; Wellmann, Susanne
    Abstract: Interest-rate spreads fluctuate widely across time and countries. We characterize their behavior using some 3,200 quarterly observations for 21 advanced and 17 emerging economies since the early 1990s. Before the financial crisis, spreads are 10 times more volatile in emerging economies than in advanced economies. Since 2008, the behavior of spreads has converged across country groups, largely because it has adjusted in advanced economies. We also provide evidence on the transmission of spread shocks and find it similar across sample periods and country groups. Spread shocks have become a more important source of output fluctuations in advanced economies after 2008.
    Keywords: Average treatment effect; Business cycle; Country risk; Country spreads; financial crisis; Interest-rate shocks; Spread shocks
    JEL: E32 F41 G15
    Date: 2020–02
  59. By: Kose, Ayhan; Ohnsorge, Franziska; Sugawara, Naotaka
    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: 2020–02
  60. By: Oscar Claveria (AQR-IREA, University of Barcelona)
    Abstract: TThis paper evaluates the dynamic response of economic activity to shocks in agents’ perception of uncertainty. The study focuses on the comparison between manufacturers 'and consumers' perception of economic uncertainty. Since uncertainty is not directly observable, we approximate it using the geometric discrepancy indicator of Claveria et al. (2019). This approach allows us quantifying the proportion of disagreement in business and consumer expectations of eleven European countries and the Euro Area. First, we compute three independent indices of discrepancy corresponding to three dimensions of uncertainty (economic, inflation and employment) and we average them to obtain aggregate disagreement measures for businesses and for consumers. Next, we use a bivariate Bayesian vector autoregressive framework to estimate the impulse response functions to innovations in disagreement in every country. We find that the effect on economic activity of shocks to the perception of uncertainty differ markedly between manufacturers and consumers. On the one hand, shocks to consumer discrepancy tend to be of greater magnitude and duration than those to manufacturer discrepancy. On the other hand, innovations in disagreement between the two collectives have an opposite effect on economic activity: shocks to manufacturer discrepancy lead to a decrease in economic activity, as opposed to shocks to consumer discrepancy. This finding is of particular relevance to researchers when using cross-sectional dispersion of surveybased expectations, since the effect on economic growth of shocks to disagreement depend on the type of agent.
    Keywords: Economic uncertainty, Production, Inflation, Employment, Expectations, Disagreement JEL classification: C32, E23, E24, E31.
    Date: 2020–07
  61. By: Thomas Hasenzagl; Filippo Pellegrino; Lucrezia Reichlin; Giovanni Ricco
    Abstract: We develop a medium-size semi-structural time series model of inflation dynamics that is consistent with the view - often expressed by central banks - that three components are important: a trend anchored by long-run expectations, a Phillips curve and temporary fluctuations in energy prices. We find that a stable long-term inflation trend and a well identified steep Phillips curve are consistent with the data, but they imply potential output declining since the new millennium and energy prices affecting headline inflation not only via the Phillips curve but also via an independent expectational channel. A high-frequency energy price cycle can be related to global factors affecting the commodity market, and often overpowers the Phillips curve thereby explaining the inflation puzzles of the last ten years.
    Date: 2020–06
  62. By: Caballero, Ricardo; Farhi, Emmanuel; Gourinchas, Pierre-Olivier
    Abstract: This paper explores the consequences of extremely low real interest rates in a world with integrated but heterogenous capital markets and nominal rigidities. We establish four main results: (i) Liquidity traps spread to the rest of the world through the current account, which we illustrate with a new Metzler diagram in quantities; (ii) Beggar-thy-neighbor currency and trade wars provide stimulus to the undertaking country at the expense of other countries; (iii) (Safe) public debt issuances and increases in government spending anywhere are expansionary everywhere; (iv) At the ZLB, net issuers of safe assets experience a disproportionate share of the global stagnation.
    JEL: E0 F3 F4 G1
    Date: 2020–02
  63. By: Cyril Dell'eva (University of Pretoria [South Africa]); Eric Girardin (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); Patrick Pintus (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)
    Abstract: This paper investigates how different monetary policy designs alter the effect of carry trades on a host small open economy. Capital inflows are expansionary, leading the central bank to raise the interest rate, increasing carry trades' returns, and generating further capital inflows (carry trades' vicious circle). This paper shows how monetary authorities can mitigate or suppress this vicious circle, when agents do not have full information about the central bank's objectives. The best way to deal with the destabilizing effect of carry trades is to target both inflation and capital inflows.
    Keywords: Index terms-Capital inflows,Carry trades,interest rate differential,Vicious circle,Inflation targeting JEL classification: E44,E52,E58,F31,G15
    Date: 2020–06
  64. By: Knut Are Aastveit; Hilde Christiane Bjørnland; Jamie L. Cross
    Abstract: Do inflation expectations and the associated pass-though of oil price shocks depend on demand and supply conditions underlying the global market for crude oil? We answer this question with a novel structural vector autoregressive model of the global oil market that jointly identifies transmissions of oil demand and supply shocks through the real price of oil to both expected and realized inflation. Our main insight is that US households form their expectations of inflation differently when faced with long sustained increases in the price of oil, such as the early millennium oil price surge of 2003 to 2008, as compared to short and sharp price fluctuations that characterized much of the twentieth century. We also find that oil demand and supply shocks can explain a large proportion of expected and realized inflation dynamics during multiple periods of economic significance, and resolve disagreements around the role of oil prices in explaining the missing deflation puzzle of the Great Recession.
    Keywords: Inflation expectations, inflation pass-through, oil prices
    Date: 2020–06
  65. By: Julius Loermann
    Abstract: In light of the recent discussion regarding the measurement of uncertainty and its impact on economic activity, this paper derives forward-looking measures of uncertainty and directional expectations for the CHF/EUR exchange rate based on over-the-counter option data and analyses its impact on exports. First, risk-neutral option-implied probability density functions are estimated and corrected for risk aversion. Second, the standard deviations of the densities are purged from uncertainty spillovers from the Eurozone. The resulting time series serves as a forwardlooking measure of exchange rate uncertainty, while the densities’ skewness serves as a measure of directional expectations. Within a nonlinear threshold VAR framework, it is found that the exchange rate uncertainty measure defines a high uncertainty regime during recessions and market turmoil, and a low uncertainty regime during expansionary phases. Nonlinear impulse response analysis demonstrates that shocks to the exchange rate, the uncertainty and the directional expectations exhibit different dynamic impacts on exports during times of high and low uncertainty
    Keywords: Swiss franc/Euro exchange rate, uncertainty shock, option-implied PDF, threshold VAR
    JEL: C58 D84 E44 F31
    Date: 2018–12
  66. By: Rincón-Zapatero, Juan Pablo; Jerez Garcia-Vaquero, Maria Belen; Diaz Rodriguez, Antonia
    Abstract: We embed a competitive search model of the real estate market into a heterogeneous agentsetting where hoeholds face credit constraints and idiosyncratic turnover shocks. Householdscan accumulate a risk-free asset to build a down payment and to smooth non-housing consumption.There is an inelastic supply of identical homes. The model is "block recursive". Inequilibrium wealthier home buyers sort into submarkets with higher prices and shorter buyingtimes. We identify a novel amplification mechanism, arising from sorting, by which demandshocks can substantially affect housing prices. In particular, lowering down payment requirementsinduces entry of new buyers in the market and higher asset accumulation by currentsearchers, as these agents target more expensive (less congested) submarkets. This affects thedistribution of prices and trading probabilities, and thereby the wealth distribution. Our quantitativeresults suggest that the effects on the long-run level and dispersion of housing pricescan be significant.
    Keywords: Sorting; Wealth Inequality; Inelastic Housing Supply; Price Dispersion; Competitive Search; Credit Constraints; Housing Prices
    JEL: R30 R21 E21 D83 D31
    Date: 2020–06–19
  67. By: Acharya, Sushant; Wee, Shu Lin
    Abstract: We examine how worker and firm on-the-job search have differential impacts on the productivity-wage gap. While an increase in both worker and firm on-the-job search raise productivity, they have opposing effects on wages. Increased worker on-the-job search raises workers' outside options, allowing them to demand higher wages. Increased firm on-the-job search improves firms' bargaining position relative to workers' by raising job insecurity and the wedge between hiring and meeting rates. This allows firms to pass-through a smaller share of productivity to wages, enlarging the productivity-wage gap. Quantitatively, the model can account for the observed widening US productivity-wage gap over time.
    Keywords: Labor Share; on-the-job search; Productivity-wage gap; Replacement hiring; unemployment
    JEL: E24 J63 J64
    Date: 2020–02
  68. By: William D. Larson (Federal Housing Finance Agency); Tara M. Sinclair (The George Washington University)
    Abstract: Near term forecasts, also called nowcasts, are most challenging but also most important when the economy experiences an abrupt change. In this paper, we explore the performance of models with different information sets and data structures in order to best nowcast US initial unemployment claims in spring of 2020 in the midst of the COVID-19 pandemic. We show that the best model, particularly near the structural break in claims, is a state-level panel model that includes dummy variables to capture the variation in timing of state-ofemergency declarations. Autoregressive models perform poorly at first but catch up relatively quickly. Models including Google Trends are outperformed by alternative models in nearly all periods. Our results suggest that in times of structural change there may be simple approaches to exploit relevant information in the cross sectional dimension to improve forecasts
    Keywords: panel forecasting, time series forecasting, forecast evaluation, structural breaks, Google Trends
    JEL: C53 E24 E27 J64 R23
    Date: 2020–06
  69. By: Gálvez Iniesta, Ismael
    Abstract: This paper estimates the total number of irregular immigrants residing in Spain from 2002 to2019 and studies their nationality, sex, gender and sectoral composition. Using the residualmethod and combining microdata sources from the Spanish Labour Force Survey and SocialSecurity registers I find that by the end of 2019 there was around 390,000-470,000 irregularimmigrants in Spain, which account for 11-13% of the total non-EU immigrants. Irregularimmigrants are younger than the regular ones, they are predominantly from South and CentralAmerica and they are concentrated in the accommodation and food activities and the activitieshousehold sector. Using the most updated wave of the EU-SILC data for Spain, I find a positivedirect fiscal impact of the non-EU immigration. This impact is 75% higher than for the natives'households, mainly explained by their younger age structure. Once education and health publicsystems are taken into account, the fiscal impact gap between the two type of householdsvanishes. I also find large fiscal costs associated to maintaining the irregularity status. Last,my estimates suggest that the potential positive gains from legalising the current status of theirregular immigrants are around 3,300 euros yearly by regularized worker.
    Keywords: Fiscal; Irregular Immigrants; Immigration
    JEL: E62 J61 J32
    Date: 2020–07–24
  70. By: Ichiro Fukunaga; Manrique Saenz
    Abstract: A dynamic stochastic general equilibrium (DSGE) model tailored to the Thai economy is used to explore the performance of alternative monetary and macroprudential policy rules when faced with shocks that directly impact the financial cycle. In this context, the model shows that a monetary policy focused on its traditional inflation and output objectives accompanied by a well targeted counter-cyclical macroprudential policy yields better macroeconomic outcomes than a lean-against-the-wind monetary policy rule under a wide range of assumptions.
    Date: 2020–06–05
  71. By: Daniel R. Carroll; Sewon Hur
    Abstract: What are the distributional consequences of tariffs? We build a trade model with incomplete asset markets and households that are heterogeneous in their income, wealth, and labor skill. We increase tariffs by 5 percentage points and examine several budget-neutral fiscal policies for redistributing tariff revenue. Without redistribution, tariffs hurt all households, but higher tradables prices disproportionately harm the poor and the ensuing decline in the skill premium disproportionately harms the skilled. With redistribution, lowering the labor income tax leads to lower economic activity but higher average welfare relative to lowering the capital income tax; nevertheless, both policies reduce average welfare with retaliatory tariffs. Finally, when tariff revenue is rebated to households as lump-sum transfers, tariffs can be welfare improving even with full retaliation.
    Keywords: tariffs; consumption; taxation; inequality; welfare
    JEL: E21 F10 F62 H21
    Date: 2020–06–22
  72. By: Mariarosaria Comunale (Bank of Lithuania)
    Abstract: In this paper, we make use of the results from Structural Bayesian VARs taken from several studies for the euro area, which apply the idea of a shock-dependent Exchange Rate Pass-Through, drawing a comparison across models and also with respect to available DSGEs. On impact, the results are similar across Structural Bayesian VARs. At longer horizons, the magnitude in DSGEs increases because of the endogenous response of monetary policy and other variables. In BVARs particularly, shocks contribute relatively little to observed changes in the exchange rate and in HICP. This points to a key role of systematic factors, which are not captured by the historical shock decomposition. However, in the APP announcement period, we do see demand and exogenous exchange rate shocks countribute significantly to variations in exchange rates. Nonetheless, it is difficult to find a robust characterization across models. Moreover, the modelling challenges increase when looking at individual countries, because exchange rate and monetary policy shocks (also taken relative to the US) are common to the whole euro area. Hence, we provide a local projection exercise with common euro area shocks, identified in euro area-specific Structural Bayesian VARs and in DSGE, extrapolated and used as regressors. For common exchange rate shocks, the impact on consumer prices is the largest in some new member states, but there are a wide range of estimates across models. For core consumer prices, the coefficients are smaller. Regarding common relative monetary policy shocks, the impact is larger than for exchange rate shocks in any case. Generally, euro area monetary policy plays a big role for consumer prices, and this is especially so for new member states and the euro area periphery.
    Keywords: euro area, exchange rate pass-through, Bayesian VAR, local projections, monetary policy
    JEL: E31 F31 F45
    Date: 2020–03–26
  73. By: Exler, Florian; Tertilt, Michèle
    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: bankruptcy; Chapter 7; Charge-Offs; Consumer Debt; Credit cards; default
    JEL: C60 E20 G20 O30
    Date: 2020–02
  74. By: Dieckelmann, Daniel
    Abstract: This paper introduces a new transmission channel of banking crises where sizable cross-border bank claims on foreign countries with high domestic crisis risk enable contagion to the home economy. This asset-side channel opposes traditional views that see banking crises originating from either domestic credit booms or from cross-border borrowing. I propose a combined model that predicts banking crises using both domestic and foreign factors. For developed economies, the channel is predictive of crises irrespective of other types of capital ows, while it is entirely inactive for emerging economies. I show that policy makers can significantly enhance current early warning models by incorporating exposure-based risk from cross-border lending.
    Keywords: cross-border bank lending,banking crises,systemic risk,financial linkages
    JEL: C53 E44 F34 G01 G21
    Date: 2020
  75. By: Ignacio Escanuela Romana
    Abstract: The objective of this work is twofold: to expand the depression models proposed by Tobin and analyse a supply shock, such as the Covid-19 pandemic, in this Keynesian conceptual environment. The expansion allows us to propose the evolution of all endogenous macroeconomic variables. The result obtained is relevant due to its theoretical and practical implications. A quantity or Keynesian adjustment to the shock produces a depression through the effect on aggregate demand. This depression worsens in the medium/long-term. It is accompanied by increases in inflation, inflation expectations and the real interest rate. A stimulus tax policy is also recommended, as well as an active monetary policy to reduce real interest rates. On the other hand, the pricing or Marshallian adjustment foresees a more severe and rapid depression in the short-term. There would be a reduction in inflation and inflation expectations, and an increase in the real interest rates. The tax or monetary stimulus measures would only impact inflation. This result makes it possible to clarify and assess the resulting depression, as well as propose policies. Finally, it offers conflicting predictions that allow one of the two models to be falsified.
    Date: 2020–07
  76. By: Takuji Kawamoto (Bank of Japan); Taichi Matsuda (Bank of Japan); Koji Takahashi (Bank of Japan); Yoichiro Tamanyu (Bank of Japan)
    Abstract: We examine banks' risk taking in lending to small and medium-sized enterprises under the prolonged low interest rate environment in Japan. Specifically, we identify "low-return borrowers," whose borrowing interest rates are low relative to their financial soundness. Using bank-firm level data for millions of Japanese small and medium-sized enterprises, we find that bank loans to low-return borrowers have increased more than those to other normal firms in recent years and such risk taking by banks has been driven by the low interest rate environment as well as the increase in competition among banks. In addition, we show that highly capitalized banks with low profitability increased loans to such vulnerable borrowers more than lowly capitalized banks. These results suggest riskiness of credit allocation has increased in Japan's loan market, but it does not seem to pose an immediate threat to financial stability.
    Keywords: risk-taking channel; bank competition; credit allocation; low interest rate
    JEL: G21 E52 E44
    Date: 2020–02–13
  77. By: Edward S. Knotek; Saeed Zaman
    Abstract: We document asymmetric responses of consumer spending to energy price shocks: Using a multiple-regime threshold vector autoregressive model estimated with Bayesian methods on US data, we find that positive energy price shocks have a larger negative effect on consumption compared with the increase in consumption in response to negative energy price shocks. For large shocks, the cumulative consumption responses are three to five times larger for positive than for negative shocks. Digging into disaggregated spending, we find that the estimated asymmetric responses are strongest for durable goods, but asymmetries are also present in the responses of nondurables and services.
    Keywords: consumption; nonlinear structural impulse response; multivariate threshold models; asymmetry; energy prices
    JEL: C11 Q43 C32 E21
    Date: 2020–06–16
  78. By: Valerie Cerra; A. Fatas; Sweta Chaman Saxena
    Abstract: Traditionally, economic growth and business cycles have been treated independently. However, the dependence of GDP levels on its history of shocks, what economists refer to as “hysteresis,” argues for unifying the analysis of growth and cycles. In this paper, we review the recent empirical and theoretical literature that motivate this paradigm shift. The renewed interest in hysteresis has been sparked by the persistence of the Global Financial Crisis and fears of a slow recovery from the Covid-19 crisis. The findings of the recent literature have far-reaching conceptual and policy implications. In recessions, monetary and fiscal policies need to be more active to avoid the permanent scars of a downturn. And in good times, running a high-pressure economy could have permanent positive effects.
    Date: 2020–05–29
  79. By: Buchmann, Manuel (University of Basel)
    Abstract: The ongoing demographic change is expected to negatively affect the effective labor supply of various developed countries. In order to counteract these developments, many suggested policy measures target the participation rate of women and old workers. In this paper, I develop a multi-sectoral CGE-OLG model where workers of different ages and skills are assumed to be imperfect substitutes and calibrate it to the Swiss economy. I use this model to evaluate the effects of the demographic change on the Swiss labor market and the potential of reforms targeting different participation rates. I find that a yearly decrease of old workers' preference towards leisure by 2% between 2022 and 2030 yields macroeconomic results that are comparable to an increase in the statutory retirement age by 2 years. While the increase of the retirement age succeeds in increasing net income by more than both participation rate increases, it also leads to an increase in wage levels and thereby labor shortages. This result highlights the importance of reducing scarcity on the labor markets for macroeconomic performance and shows the potential of reforms targeting labor market participation.
    Keywords: overlapping generations, demographic change, participation rates, switzerland
    JEL: D58 E24 E66 J11 J21 J26
    Date: 2020–06–22
  80. By: Accominotti, Olivier; Brière, Marie; Burietz, Aurore; Oosterlinck, Kim; Szafarz, Ariane
    Abstract: Does financial globalization lead to contagion? We scrutinize linkages between international stock markets in a long historical perspective (1880-2014). Our results highlight that without globalization, contagion cannot exist. However, if cross-market correlations are very high, globalization kills contagion. We show that financial contagion was absent from stock markets in both the period of deglobalization of 1918-1971 and the era of "extreme" globalization of 1972-2014 but was present in the period of "moderate" globalization of 1880-1914. Our results suggest that contagion could become a significant problem if financial markets return to a more moderate level of globalization.
    Keywords: contagion; economic integration; Financial history; Globalization; market interdependence; Stock market
    JEL: E44 F36 F65 G15 N20
    Date: 2020–02
  81. By: Tamanna Adhikari; Karl Whelan
    Abstract: We use the time series variation in the World Bank’s “distance to frontier” estimates of the ease of doing business to assess the effects of changes in this variable on real GDP per capita. The use of Vector Autoregression techniques allows us to identify shocks to the ease of doing business that are initially uncorrelated with GDP, thus addressing an important endogeneity problem that affects the cross-sectional literature on this topic. The results are surprising. We report a robust finding that improvements to the ease of doing business have at least a temporary negative impact on GDP and find little evidence for a positive effect in the years following these improvements.
    Keywords: Economic growth; Business environment; Doing business
    JEL: O43 O47
    Date: 2019–12
  82. By: Garibaldi, Pietro; Gomes, Pedro; Sopraseuth, Thepthida
    Abstract: The public sector hires disproportionately more educated workers. Using US microdata, we show that the education bias also holds within industries and in two thirds of 3-digit occupations. To rationalize this finding, we propose a model of private and public employment based on two features. First, alongside a perfectly competitive private sector, a cost-minimizing government acts with a wage schedule that does not equate supply and demand. Second, our economy features heterogeneity across individuals and jobs, and a simple sorting mechanism that generates underemployment -- educated workers performing unskilled jobs. The equilibrium model is parsimonious and is calibrated to match key moments of the US public and private sectors. We find that the public-sector wage differential and excess underemployment account for 15 percent of the education bias, with the remaining accounted for by technology. In a counterintuitive fashion, we find that more wage compression in the public sector raises inequality in the private sector. A 1 percent increase in unskilled public wages raises skilled private wages by 0.07 percent and lowers unskilled private wages by 0.06 percent.
    Keywords: education; Public-sector employment; public-sector wage; Underemployment
    JEL: E24 J20 J24 J31 J45
    Date: 2020–01
  83. By: Davide Furceri; Jun Ge; Jonathan David Ostry; Chris Papageorgiou; Gabriele Ciminelli
    Abstract: Many countries are experiencing persistent, weak medium-term growth and limited fiscal space. Against this background, economic policy agendas—in both advanced and developing economies—are focusing increasingly on structural reforms. While there is broad agreement on the economic benefits of structural reforms, the political-economy of reform is less settled. This is because reforms may generate gains only in the longer term while distributional effects may be sizable in the short run, and because governments may lack political capital to confront vocal interest groups. In these circumstances, politicians may hold back on reforms, fearing they will be penalized at the ballot box. The aim of this Staff Discussion Note is to examine whether the fear of a political cost associated with structural reforms is justified by the available evidence, and whether there are lessons from the data about how reform strategies might be designed to mitigate potential political costs. It provides a major addition to recent IMF analysis examining the output and employment effect of reforms
    Date: 2019–10–18
  84. By: Isabelle Guérin; Sébastien Michiels; Arnaud Natal; Christophe Jalil Nordman; Govindan Venkatasubramanian
    Abstract: This article focuses on the consequences of the Indian lockdown in terms of debt. It is based on an ongoing study in a rural area of Tamil Nadu, South India. It draws on a long-term knowledge of this region, longitudinal quantitative household survey data on employment, debt and assets (2010-2016/17) as well as qualitative surveys conducted by telephone since the beginning of the lockdown in March 2020. Our results show: (i) the drying up of part of farm income and the bulk of off-farm income; (ii) the limited role of cash saving and cash transfers; (iii) the debt burden, since the population has faced massive debt growth over the past decade and some households are already very financially fragile; (iv) a predominance of informal finance with, however, a rise in finance; (v) a suspension of repayments, including for most informal lenders; (vi) a halt to unsecured debt and an erosion of the trust that cements most transactions; (vii) finally, the emergence of new forms of secured debt that threaten household assets. The sharp rise in debt observed over the last decade is the result of a widening of credit opportunities, partly formal but mostly informal. These have been made possible by building new relationships of trust but also of confidence in the future, based on strong economic growth that was believed to be sustainable. The lockdown highlights the fragility of these dynamics. For the poorest (mostly, but not only, Dalits), neither the state nor intra-caste or kinship solidarity are sufficient as a safety net. Impoverishment and a return to old forms of dependency seem to be the only way out.
    Keywords: Debt; lockdown; caste; employment; India; Trust
    JEL: I13 E24 O18 R20 Z13
    Date: 2020–07–09
  85. By: Takeshi Yagihashi (Senior Economist, Policy Research Institute)
    Abstract: This paper examines whether the omission of the credit channel from policy models used by both monetary and fiscal policymakers would lead to a noticeably gbad h policy outcome through model simulation. First, we simulate a financial crisis in which the financial market friction grows and the risk premium becomes more volatile. Next, both monetary and fiscal policymakers readjust their policy to stabilize the economy using an approximating DSGE model that does not feature the credit channel. We show that while the model misspecification does not affect much how policymakers perceive the crisis, the newly adopted policy based on the approximating model would cause further destabilization of the economy. We also show that the destabilization of the economy could be prevented if the fiscal policymaker is equipped with the correctly-specified credit channel model and chooses its new policy while taking into account the decision-making of the monetary policymaker. Finally, under the scenario that the correctlyspecified model is unknown, we show that the destabilization of the economy could still be prevented if both policymakers can apply judgement to unreasonable parameter estimates during the crisis period. In sum, prediction of policy outcomes and cautiousness in interpreting estimation results can help in mitigating the credit channel misspecification.
    Keywords: DSGE model, Lucas Critique, Bayesian estimation, Financial Accelerator model, monetary policy, fiscal policy, policy mix
    Date: 2020–03
  86. By: Benigno, Gianluca; Fornaro, Luca; Wolf, Martin
    Abstract: Since the late 1990s, the United States have received large capital flows from developing countries and experienced a productivity growth slowdown. Motivated by these facts, we provide a model connecting international financial integration and global productivity growth. The key feature is that the tradable sector is the engine of growth of the economy. Capital flows from developing countries to the United States boost demand for U.S. non-tradable goods. This induces a reallocation of U.S. economic activity from the tradable sector to the non-tradable one. In turn, lower profits in the tradable sector lead firms to cut back investment in innovation. Since innovation in the United States determines the evolution of the world technological frontier, the result is a drop in global productivity growth. We dub this effect the global financial resource curse. The model thus offers a new perspective on the consequences of financial globalization, and on the appropriate policy interventions to manage it.
    Keywords: Bretton Woods II; Capital Flows; export-led growth; global productivity growth; International financial integration; low global interest rates; U.S. productivity growth slowdown
    JEL: E44 F21 F41 F43 F62 O24 O31
    Date: 2020–02
  87. By: Cavalcanti, Tiago; Kocharkov, Georgi; Santos, Cezar
    Abstract: What is the role of family planning interventions on fertility, savings, human capital investment, and development? To examine this, endogenous unwanted fertility is embedded in an otherwise standard quantity-quality overlapping generations model of fertility and growth. The model features costly fertility control and families can (partially) insure against a fertility risk by using costly modern contraceptives. In the event of unexpected pregnancies, households can also opt to abort some pregnancies, at a cost. Given the number of children born, parents decide how much education to provide and how much to save out of their income. We fit the model to Kenyan data, implement several family planning policies and decompose their aggregate effects. Our results suggest that with a small government budget (say, up to 0.5 percent of GDP), family planning interventions might be more cost-effective in improving longrun living standards than policies that subsidise basic education.
    Keywords: Abortion; Contraception; education; Income per capita
    JEL: E24 I15 J13 O11
    Date: 2020–01
  88. By: Graziano Moramarco
    Abstract: This paper provides new indices of global macroeconomic uncertainty and investigates the cross-country transmission of uncertainty using a global vector autoregressive (GVAR) model. The indices measure the dispersion of forecasts that results from parameter uncertainty in the GVAR. Relying on the error correction representation of the model, we distinguish between measures of short-run and long-run uncertainty. Over the period 2000Q1-2016Q4, global short-run macroeconomic uncertainty strongly co-moves with financial market volatility, while long-run uncertainty is more highly correlated with economic policy uncertainty. We quantify global spillover effects by decomposing uncertainty into the contributions from individual countries. On average, over 40% of country-specific uncertainty is of foreign origin.
    JEL: C15 C32 E17 D80 F44 G15
    Date: 2020–06
  89. By: Johan Hombert (HEC Paris and CEPR); Adrien Matray (Princeton University)
    Abstract: We study the long-run effect on productivity of labor reallocation during a technology boom. Using French matched employer-employee data, we examine the large cohort of workers who enter the information and communication technology sector during the late 1990s boom. Despite starting with 5% higher wages, these workers experience lower wage growth and end up with 6% lower wages fifteen years out, relative to similar workers who started in other sectors. The long-run wage discount is concentrated on STEM occupations, consistent with a skill obsolescence mechanism. Other moments of the wage distribution are inconsistent with selectioneffects and negative demand shocks.
    JEL: L86 E24 J24
    Date: 2091–09
  90. By: Asongu, Simplice; Folarin, Oludele; Biekpe, Nicholas
    Abstract: This study investigates the stability of demand for money in the proposed Southern African Monetary Union (SAMU). The study uses annual data for the period 1981 to 2015 from ten countries making-up the Southern African Development Community (SADC). A standard function of demand for money is designed and estimated using a bounds testing approach to co-integration and error-correction modeling. The findings show divergence across countries in the stability of money. This divergence is articulated in terms of differences in cointegration, CUSUM (cumulative sum) and CUSUMSQ (CUSUM squared) tests, short run and long-term determinants and error correction in event of a shock. Policy implications are discussed in the light of the convergence needed for the feasibility of the proposed SAMU. This study extends the debate in scholarly and policy circles on the feasibility of proposed African monetary unions.
    Keywords: Stable; demand for money; bounds test
    JEL: C22 E41
    Date: 2019–01
  91. By: BENEDETTI FASIL Cristiana (European Commission - JRC); IMPULLITTI Giammario; LICANDRO Omar; SEDLACEK Petr
    Abstract: We develop a dynamic stochastic general equilibrium model with firm and technology dynamics to assess the impact of a rich set of innovation policies. We explore the aggregate and cross-sectional effects of an R&D tax credit, corporate taxes, and policies affecting firms’ access to credit. Two main results emerge. First, the aggregate impact of these policies is driven by general equilibrium effects operating via the government budget, the labor market and via equilibrium entry of firms. In contrast, their stimulating effect on innovation and productivity growth has a negligible impact on aggregate income and employment. Second, we find that uniform policies have heterogeneous effects on firms and their size distribution which generate rich feedbacks to the aggregate economy.
    Keywords: Firm dynamics, innovation policy, endogenous growth, business cycles
    Date: 2020–06
  92. By: Nicoletta Batini; Alessandro Cantelmo; Giovanni Melina; Stefania Villa
    Abstract: This paper builds a model-based dynamic monetary and fiscal conditions index (DMFCI) and uses it to examine the evolution of the joint stance of monetary and fiscal policies in the euro area (EA) and in its three largest member countries over the period 2007-2018. The index is based on the relative impacts of monetary and fiscal policy on demand using actual and simulated data from rich estimated models featuring also financial intermediaries and long-term government debt. The analysis highlights a short-lived fiscal expansion in the aftermath of the Global Financial Crisis, followed by a quick tightening, with monetary policy left to be the “only game in town” after 2013. Individual countries’ DMFCIs show that national policy stances did not always mirror the evolution of the aggregate stance at the EA level, due to heterogeneity in the fiscal stance.
    Date: 2020–06–05
  93. By: Viral V. Acharya; Katharina Bergant; Matteo Crosignani; Tim Eisert; Fergal McCann
    Abstract: We analyze how regulatory constraints on household leverage—in the form of loan-to-income and loan-to-value limits—a?ect residential mortgage credit and house prices as well as other asset classes not directly targeted by the limits. Supervisory loan level data suggest that mortgage credit is reallocated from low-to high-income borrowers and from urban to rural counties. This reallocation weakens the feedback loop between credit and house prices and slows down house price growth in “hot” housing markets. Consistent with constrained lenders adjusting their portfolio choice, more-a?ected banks drive this reallocation and substitute their risk-taking into holdings of securities and corporate credit.
    Keywords: Financial crises;Macroprudential policies and financial stability;Bank credit;Central banks;Economic conditions;Macroprudential Regulation,Household Leverage,Residential Mortgage Credit,House Prices,WP,mortgage credit,reallocation,borrower,LTV,central bank of Ireland
    Date: 2020–05–22
  94. By: Bayale, Nimonka
    Abstract: This paper analyzes the effect of different types of foreign aid on tax revenues in West African Economic and Monetary Union (WAEMU) countries. A fixed-effects panel model with instrumental variables was developed over the period spanning from 1985 to 2016. The results indicate that multilateral aid affects positively and significantly tax revenues while bilateral aid does not. Moreover, the analysis of the decomposed effect of aid revealed that concessional aid and technical assistance enhance fiscal resources mobilization. However, grants reduce tax effort. The results also show that when aid is aggregated, its effect on tax revenues is ambiguous. These results justify for many reasons the reorientation of foreign aid towards investment for effective tax systems in WAEMU countries in compliance with Addis Ababa Action Agenda 2015 of the third international conference on Financing for Development. Strengthening multilateral partnership is advocated in accordance with the 17th Sustainable Development Goals. Also, an improvement of institutional quality could make foreign aid more efficient for tax collection in the study areas.
    Keywords: Foreign aid types; Tax revenues; Panel data analysis; WAEMU
    JEL: C30 E62 F35
    Date: 2020–07–04
  95. By: Rongsheng Tang; Yang Tang; Ping Wang
    Abstract: Over the past few decades, we find that about 80% of the widening residual wage inequality to be within jobs. We propose performance-pay incidence and job relatedness as two primary factors driving within-job inequality and embed them into a sorting equilibrium framework. We show that equilibrium sorting is positive assortative both within-job and across jobs. While performance-pay position amplifies within-job wage inequality through self-selection, the overall relationship between job relatedness and within-job wage inequality is found generally ambiguous. To quantify the role played by these factors, we calibrate the model to the US economy in 2000, where the model can account around 92% of the changes in within-job inequality among the highly educated from 1990 to 2000. Counterfactual analysis shows the contributions of performance-pay incidence and job relatedness are about 42% and 26%, respectively, both higher than that of job-specific productivity. While performance-pay incidence is particularly crucial for within-job wage dispersion in business/professional industry and professional occupation, job relatedness is the most important for mining/goods/construction industry and sales occupation.
    JEL: E24 I24 J31
    Date: 2020–06
  96. By: Gambacorta, Leonardo; Mayordomo, Sergio; Serena Garralda, Jose-Maria
    Abstract: We explore the link between firms' dollar bond borrowing and their FX-hedged funding opportunities, as reflected in a positive corporate basis (the relative cost of local to synthetic currency borrowing). Consistent with previous research, we first document that firms substitute domestic for dollar borrowing when they have higher dollar revenues or long-term assets and when the corporate basis widens. Importantly, our novel firm-level dataset enables to show that when these funding opportunities appear, the currency substitution is stronger for high-grade firms, as they can offer to investors close substitutes for safe dollar assets. However, firms with higher dollar revenues or long-term assets do not react to changes in the corporate basis. Altogether, the composition of dollar borrowers shifts when the basis widens, as high-grade firms gain importance, relative to firms with operational needs.
    Keywords: Covered interest rate parity; credit spread; debt issuance; dollar convenience yield; foreign exchange rate hedge; Limits of arbitrage
    JEL: E44 F3 F55 G12 G15 G23 G28 G32
    Date: 2020–02
  97. By: Mohamed Belkhir; Sami Ben Naceur; Bertrand Candelon; Jean-Charles Wijnandts
    Abstract: Using a sample that covers more than 100 countries over the 2000-2017 period, we assess the impact of macroprudential policies on financial stability. In particular, we examine whether the activation of macroprudential policies is conducive to a lower incidence of systemic banking crises. Our empirical setup is designed to account for the potential direct and indirect effects that macroprudential policies can have on banking crises. We find that while macro-prudential policies exert a direct stabilizing effect, they also have an indirect destabilizing effect, which works through the depressing of economic growth. A Generalized Impulse Response Function analysis of a dynamic system composed of the probability of a banking crisis and economic growth reveals, however, that macroprudential policies have a positive net effect on financial stability (lower likelihood of systemic banking crises).
    Keywords: Real sector;Financial crises;Macroprudential policies and financial stability;Financial institutions;Financial systems;Macroprudential Policies,Banking crises,Economic Growth,WP,emerge market economy,bank crisis,advanced economy,MPI,basis point
    Date: 2020–05–22
  98. By: Alpalhão, Henrique; Lopes, Marta; Pereira Santos, João; Tavares, José
    Abstract: We investigate the causal relationship between local government expenditure and private firm performance, using the quantity and naming of civil parishes within each municipality as an instrumental variable. Religious denominations are taken as a proxy for strong local identity, which likely increases competition for resources between neighboring parishes. We explore a dataset on the universe of private firms, local government expenditure categories and socio-economic indicators for all mainland Portuguese municipalities, in a period encompassing both normal and crisis times. The number of parishes per municipality, as exogenously set by the central government, and the number of parishes that display religious denominations are both used as instruments that explain local government spending, indirectly impacting firm performance. We find that both display considerable power in determining total primary and current spending, which then positively impacts private firms' sales and value added. Using religious denominations is found to yield a particularly potent instrument, confirming and expanding the baseline results. In a field that mostly relies on natural experiments for instrumental variable frameworks, our proposed instruments are both easily obtainable and powerful.
    Keywords: firm performance; fragmentation; instrumental variables; Local fiscal multiplier; local governments; Local identity; religion
    JEL: D72 E62 H72
    Date: 2020–02
  99. By: David Newbery (Faculty of Economics, University of Cambridge); Michael Pollitt (EPRG, CJBS, University of Cambridge); David M Reiner (EPRG, CJBS, University of Cambridge); Simon Taylor (EPRG, CJBS, University of Cambridge)
    Keywords: Nuclear power, financing, RAB, WACC, risk
    JEL: C54 D53 E43 G11 H54 L94
    Date: 2019–07
  100. By: Michal Andrle; Benjamin L Hunt
    Abstract: This paper outlines an approach to assess uncertainty around a forecast baseline as well as the impact of alternative policy rules on macro variability. The approach allows for non-Gaussian shock distributions and non-linear underlying macroeconomic models. Consequently, the resulting distributions for macroeconomic variables can exhibit skewness and fat tails. Several applications are presented that illustrate the practical implementation of the technique including confidence bands around a baseline forecast, the probabilities of global growth falling below a specified threshold, and the impact of alternative fiscal policy reactions functions on macro variability.
    Keywords: Economic models;Economic policy;Business cycles;Monetary policy;Fiscal policy;DSGE models,predictive density,nonlinear,non-Gaussian,skew,fat tails,WP,economic shock,policy space,ELB,nominal interest rate,risk assessment
    Date: 2020–05–22
  101. By: Mario Catalan; Alexander W. Hoffmaister
    Abstract: In the presence of adverse macroeconomic shocks, simultaneous capital losses in multiple banks can prompt them to contract their balance sheets. These bank responses generate externalities that propagate in the form of macro-financial feedback loops. This paper develops a credit response and externalities analysis model (CREAM) that integrates a disaggregated banking sector into an otherwise standard macroeconomic structural vector autoregressive model. It shows that accounting for macro-financial feedback loops can significantly affect macroeconomic outcomes and bank-specific stress tests results. The heterogeneity in bank lending responses matters: it determines how each bank fares under adverse conditions and the external effects that banks impose on each other and on economic activity. The model can thus be used to assess the contributions of individual banks to systemic risk along the time dimension.
    Date: 2020–05–29
  102. By: Juliana Dutra Araujo; Manasa Patnam; Adina Popescu; Fabian Valencia; Weijia Yao
    Abstract: This paper builds a novel database on the effects of macroprudential policy drawing from 58 empirical studies, comprising over 6,000 results on a wide range of instruments and outcome variables. It encompasses information on statistical significance, standardized magnitudes, and other characteristics of the estimates. Using meta-analysis techniques, the paper estimates average effects to find i) statistically significant effects on credit, but with considerable heterogeneity across instruments; ii) weaker and more imprecise effects on house prices; iii) quantitatively stronger effects in emerging markets and among studies using micro-level data; and iii) statistically significant evidence of leakages and spillovers. Other findings include relatively stronger impacts for tightening than loosening actions and negative effects on economic activity in the near term.
    Keywords: Systemically important financial institutions;Financial crises;Reserve requirements;Domestic credit;Credit demand;Macroprudential Policy,financial stability,Meta-analysis.,WP,outcome variable,average effect,MPM,micro-level,Claessens
    Date: 2020–05–22
  103. By: Adam, Antonis; Tsarsitalidou, Sofia
    Abstract: In this paper, we examine the effect of having a state religion on fiscal capacity. Our analysis extends the legitimization argument, which postulates that state religion legitimizes the revenue-raising motives of the state. We estimate (i) a simple OLS model, and (ii) potential outcome models, to model the selection to observables, using both recent and historical data. Our empirical results suggest that countries with a state religion have lower levels of fiscal capacity. We then build a simple theoretical model, consistent with our empirical results, and show that countries with a state religion face lower incentives to invest in fiscal capacity as they are able to raise revenue through the legitimizing power of the church.
    Keywords: Fiscal Capacity, State Religion
    JEL: E62 H20
    Date: 2019–09–24
  104. By: Kose, Ayhan; Ohnsorge, Franziska
    Abstract: Although emerging market and developing economies (EMDEs) weathered the global recession a decade ago relatively well, they now appear less well placed to cope with the substantial downside risks facing the global economy. In many EMDEs, the room for monetary and fiscal policies to respond to shocks has eroded; underlying growth potential has slowed; and the momentum for improving policy frameworks, institutions, and business climates seems to have slackened. The experience of the 2009 global recession highlights once again the critical role of policy room in shielding economic activity during adverse shocks. The subsequent decade of anemic growth underlines the need for sound policy frameworks, institutions, and business environments to promote sustained growth. With the global growth outlook weakening and vulnerabilities rising, the policy priority for EMDEs is now to improve resilience to shocks and to lift long-term growth prospects.
    Keywords: economic integration; financial crises; International Business Cycles; Macroeconomic Policy
    JEL: E60 F36 F44 G01
    Date: 2020–02
  105. By: Adams, Patrick; Adrian, Tobias; Boyarchenko, Nina; Giannone, Domenico
    Abstract: We construct risks around consensus forecasts of real GDP growth, unemployment and inflation. We find that risks are time-varying, asymmetric and partly predictable. Tight financial conditions forecast downside growth risk, upside unemployment risk and increased uncertainty around the inflation forecast. Growth vulnerability arises as the conditional mean and conditional variance of GDP growth are negatively correlated: downside risks are driven by lower mean and higher variance when financial conditions tighten. Similarly, employment vulnerability arises as the conditional mean and conditional variance of unemployment are positively correlated, with tighter financial conditions corresponding to higher forecasted unemployment and higher variance around the consensus forecast.
    Date: 2020–02
  106. By: Gustavo Adler; Kyun Suk Chang; Zijiao Wang
    Abstract: The paper documents the use of foreign exchange intervention (FXI) across countries and monetary regimes, with special attention to its use under inflation targeting (IT). We find significant differences between advanced and emerging market economies, with the former group conducting FXI limitedly and broadly symmetrically, while the use of this policy instrument in emerging market countries is pervasive and mostly asymmetric (biased towards purchasing foreign currency, even after taking into account precautionary motives). Within emerging markets, the use of FXI is common both under IT and non-IT regimes. We find no evidence of FXI being used in response to inflation developments, while there is strong evidence that FXI responds to exchange rates, indicating that IT central banks in EMDEs have dual inflation/exchange rate objectives. We also find a higher propensity to overshoot inflation targets in emerging market economies where FXI is more pervasive.
    Date: 2020–05–29
  107. By: Leombroni, Matteo; Piazzesi, Monika; Rogers, Ciaran; Schneider, Martin
    Abstract: In the 1970s, U.S. asset markets witnessed (i) a 25% dip in the ratio of aggregate household wealth relative to GDP and (ii) negative comovement of house and stock prices that drove a 20% portfolio shift out of equity into real estate. This study uses an overlapping generations model with uninsurable nominal risk to quantify the role of structural change in these events. We attribute the dip in wealth to the entry of baby boomers into asset markets, and to the erosion of bond portfolios by surprise inflation, both of which lowered the overall propensity to save. We also show that the Great Inflation led to a portfolio shift by making housing more attractive than equity. Disagreement about inflation across age groups matters for the size of tax effects, the volume of nominal credit, and the price of housing as collateral.
    Date: 2020–02
  108. By: Sudipto Mundle; Satadru Sikdar (National Council of Applied Economic Research)
    Abstract: Budget subsidies have been defined as the unrecovered cost of economic and social services. The incidence of these implicit and explicit budget subsidies provided by the central and state governments has declined from about 12.9 % of GDP in 1987-88 to 10.3 % at present. The bulk of these subsidies is provided by the states and about half is spent on non-merit subsidies. The paper finds an inverse relationship between subsidy incidence and per capita income and also finds that subsidies are important determinant of the consumption of many public services though not all. There are large variations across states in the efficiency of subsidy use and the paper identifies the states which lie on the subsidy efficiency frontier for several key public services. The paper also argues that rationalisng non-merit subsidies is one of several deep fiscal reform measures that could together free up massive fiscal space, conservatively estimated at 6% of GDP, and outlines a proposal for using this fiscal space to finance an inclusive growth revival strategy that could simultaneously reduce the fiscal deficit even without raising any tax rates.
    Keywords: Subsidies, Merit Subsidies, Non-merit Subsidies, Subsidy and Public Services, Subsidy Efficiency Frontier, Indian Economy, Public Expenditure Policy, Growth Revival Strategy, Income Support Policy
    JEL: H2 E6 H5 O2
    Date: 2019–11
  109. By: PINSHI, Christian P.
    Abstract: This paper seeks to study and answer the question on the nature and direction of the causality between financial development and economic growth in the Democratic Republic of the Congo (DRC) using data from 2004 to 2019. The long-term relationship not being robust, we opted for the short-term dynamics with the causality test in the sense of Granger to support this question. The results indicated the existence of a one-way causality from economic growth to financial development. This result is in line with the Demand following hypothesis, given the country’s economic and financial landscape, which presents a less deep financial system. Consequently, choices of growth policies (increase in knowledge, infrastructure, pleasant business climate, structural reforms, etc.) should be adopted to enhance and develop the Congolese financial system. However, we recognize that once growth is restored and becomes sustainable, financial development could lead to sustained and resilient economic growth.
    Keywords: Economic growth, financial development
    JEL: C32 E44 G20 O16 O38 O44
    Date: 2020–07–10
  110. By: Anderson, Kym
    Abstract: Rates of alcohol taxation, and the types of tax instruments used, vary enormously between countries and have tended to rise in recent times. Within each country they also vary between beverages, and often between qualities and styles of each beverage. This paper computes consumer tax equivalents in US dollars per litre of alcohol and as percentages of wholesale prices of representative beverages for 42 high-and middle-income countries. That allows comparisons across countries of taxes not just for each product on its own but also relative to those for other alcoholic beverages. The wide dispersion of rates and differences in tax instruments across countries and products suggest differing strengths of health and welfare lobbyists and industry groups in influencing government decision-making.
    Keywords: alcohol import tariffs; Consumer tax equivalents; Excise taxes
    JEL: D12 D62 E62 H23 I18 P46
    Date: 2020–02
  111. By: Jake Anders (Centre for Education Policy and Equalising Opportunities, UCL Institute of Education, University College London); Andy Dickerson (Department of Economics, University of Sheffield); Paul Gregg (Department of Social and Policy Sciences, University of Bath); Lindsey Macmillan (Centre for Education Policy and Equalising Opportunities, UCL Institute of Education, University College London)
    Abstract: While recent forecasts have pointed to an employment shock of a similar magnitude to that seen in the previous Great Recession, many of the circumstances this time round suggest we may be facing a more severe experience. This is likely to disproportionately affect young people, those from deprived families both in adulthood and in childhood, ethnic minorities, and those with low levels of education. Evidence shows that there are long-term costs to spells out of work, including reduced employment opportunities and wages, alongside lower job satisfaction, health and happiness. A combined response of macro-level interventions, alongside individually-targeted education, skills and active labour market policy responses are required. Targeted cuts to National Insurance, changing the incentives of the Coronavirus Job Retention Scheme (CJRS), increasing access courses to higher education, funding further education routes, and combined interventions including targeted job support schemes and high quality work placements are all policies that can aid recovery and minimise the costs of scarring.
    Keywords: unemployment, COVID-19, scarring, ALMP, education policy
    JEL: E24 I28 J68
    Date: 2020–07
  112. By: Frank Geary; Tom Stark
    Abstract: Historical regional GDP series for the United Kingdom and for Great Britain for each of the census years between 1861 and 1961 are now largely complete though with no estimate for the wartime year, 1941. In the absence of data for this year, this note reports the data sources for and resulting estimates of regional GDP for the two years 1935 and 1938. Estimates are presented for both GB and the UK. They suggest that the worsening regional inequality observed between 1911 and 1931 continued to the mid-1930s with a reversal of this trend by 1938 that continued through to 1951. In addition we take the opportunity to consider two issues that arise from making long-term real terms estimates: first, what differences would emerge in the estimates had we used nominal data (where available); second what is the likely impact of base year on the long-term real estimates.
    Keywords: Economic History, Regional GDP, Real and Nominal Estimates
    JEL: E01 N13 O47
    Date: 2020–03
  113. By: Yashin, Pete
    Abstract: Modern capitalists multiply their income and wealth largely due to revaluation of the financial assets, which often has no roots in the real sector of the economy. The assets’ market price may exceed the corresponding liabilities of their issuers. Such excessive part of the assets’ value is not secured by anything; it forms an unsecured component of their owners’ wealth. This unsecured component is one of the main reasons for the observed wealth-to-income growth. We have shown that the increase in unsecured wealth necessarily increases inequality. So, the large wealth-to-income ratio indicates inequality strengthening. The rising inequality leads to the impoverishment of the poorest households and inhibition of economic growth. This is facilitated by an imbalance between the total savings and investment which unsecured income causes. A part of the capitalists' huge savings is absorbed by the unsecured growth in the financial assets’ value and do not materialize as capital investments. In fine, the consequence of financialization is the growth of unsecured income and wealth, which entail the rising inequality due to the outstripping growth of the largest fortunes. This causes an imbalance in economic growth and drives the economy into a dead end.
    Keywords: New stylized facts; wealth residuals, unearned income; unsecured wealth;
    JEL: E00 G01
    Date: 2020–06–12
  114. By: Benjamin Hemingway (Bank of Lithuania & Vilnius University)
    Abstract: The impact of creditor and debtor rights following firm insolvency are studied in a firm dynamics model where defaulting firms choose between restructuring or exit. The model accounts for differing effects of productivity shocks across economies that differ in the credit/debtor rights. Following a negative shock labour productivity falls sharply in a creditor-friendly regime such as the UK while in a debtor-friendly regime such as the US, there is a larger employment response. This paper suggests a possible explanation for the different employment and labour productivity response in the UK and US since the financial crisis.
    Keywords: Bankruptcy, Insolvency, Firm Financing
    JEL: D21 E22 G33
    Date: 2020–06–18
  115. By: Cipriani, Marco; La Spada, Gabriele
    Abstract: This paper uses a quasi-natural experiment to estimate the premium for money-likeness. The 2014 SEC reform of the money market fund (MMF) industry reduced the money-likeness of prime MMFs by increasing their information sensitivity, while leaving government MMFs unaffected. Investors fled from prime to government MMFs, with total outflows exceeding 1 trillion dollars. Using a difference-in-differences design, we estimate the premium for money-likeness to be between 20 and 30 basis points. These premiums are not due to changes in investors' risk tolerance or funds' risk taking. Our results support recent developments in monetary theory identifying information insensitivity as a key feature of money.
    Keywords: information sensitivity; Money market funds; Money Market Funds Reform; Money-like Assets
    JEL: E41 G23 G28
    Date: 2020–02
  116. By: Yashin, Pete
    Abstract: Modern capitalists multiply their income and wealth largely due to revaluation of the financial assets, which often has no roots in the real sector of the economy. The assets’ market price may exceed the corresponding liabilities of their issuers. Such excessive part of the assets’ value is not secured by anything; it forms an unsecured component of their owners’ wealth. This unsecured component is one of the main reasons for the observed wealth-to-income growth. We have shown that the increase in unsecured wealth necessarily increases inequality. So, the large wealth-to-income ratio indicates inequality strengthening. The rising inequality leads to the impoverishment of the poorest households and inhibition of economic growth. This is facilitated by an imbalance between the total savings and investment which unsecured income causes. A part of the capitalists' huge savings is absorbed by the unsecured growth in the financial assets’ value and do not materialize as capital investments. In fine, the consequence of financialization is the growth of unsecured income and wealth, which entail the rising inequality due to the outstripping growth of the largest fortunes. This causes an imbalance in economic growth and drives the economy into a dead end.
    Keywords: New stylized facts; wealth residuals, unearned income; unsecured wealth;
    JEL: E00 G01
    Date: 2020–06–12
  117. By: Besley, Timothy J.; Roland, Isabelle; Van Reenen, John
    Abstract: This paper studies the implications of perceived default risk for aggregate output and productivity. Using a model of credit contracts with moral hazard, we show that a firm's probability of default is a sufficient statistic for capital allocation. The theoretical framework suggests an aggregate measure of the impact of credit market frictions based on firm-level probabilities of default which can be applied using data on firm-level employment and default risk. We obtain direct estimates of firm-level default probabilities using Standard and Poor's PD Model to capture the expectations that lenders were forming based on their historical information sets. We implement the method on the UK, an economy that was strongly exposed to the global financial crisis and where we can match default probabilities to administrative data on the population of 1.5 million firms per year. As expected, we find a strong correlation between default risk and a firm's future performance. We estimate that credit frictions (i) cause an output loss of around 28% per year on average; (ii) are much larger for firms with under 250 employees and (iii) that losses are overwhelmingly due to a lower overall capital stock rather than a misallocation of credit across firms with heterogeneous productivity. Further, we find that these losses accounted for over half of the productivity fall between 2008 and 2009, and persisted for smaller (although not larger) firms.
    Keywords: Credit frictions; Default Risk; Misallocation; productivity
    JEL: D24 E32 L11 O47
    Date: 2020–01
  118. By: Emilio Ocampo
    Abstract: After being dormant for decades, in the last two decades, right-wing populism resurfaced strongly in Europe and the US channeling a reaction against globalization. This resurgence has prompted economists to pay increasing attention to populist economics. Current versions of right wing populism share many elements with early fascism, particularly the type that developed by the British Union of Fascists (BUF) in the UK under the leadership of Sir Oswald Mosley. Less aggressive and racist than its continental counterparts, one of its pillars was isolationism, which figures prominently in the platforms of modern populist parties in Europe and North America. Although more sophisticated in his economic thinking than Hitler and Mussolini, Mosley’s was less successful politically. His stubborn obnoxiousness and inability to acknowledge his mistakes cemented his status as a political pariah and contributed to the academic neglect of his 1930 program of radical economic reform which he later incorporated into the BUF’s platform. The study of Mosleynomics also has historical value. Mosley’s proposals not only contributed to the interwar policy debate but also anticipated many key elements of the economic policies of fascist and non-fascist regimes on both sides of the Atlantic, not only in the US, Germany and Italy in the 1930s but also in the UK under the Labor Party and Argentina under Perón in the immediate postwar. This essay seeks to contribute to fill a gap in the literature, by tracing the intellectual roots and evolution of Mosley’s economic policy proposals.
    Keywords: Peronism, Fascism, Economic Policy, Argentina
    JEL: B00 B29 E60 E65 N14 N16 O23 P40 P47
    Date: 2020–06
  119. By: Jean-Bernard Chatelain (PJSE); Kirsten Ralf
    Abstract: With non-controllable auto-regressive shocks, the welfare of Ramsey optimal policy is the solution of a single Riccati equation of a linear quadratic regulator. The existing theory by Hansen and Sargent (2007) refers to an additional Sylvester equation but miss another equation for computing the block matrix weighting the square of non-controllable variables in the welfare function. There is no need to simulate impulse response functions over a long period, to compute period loss functions and to sum their discounted value over this long period, as currently done so far. Welfare is computed for the case of the new-Keynesian Phillips curve with an auto-regressive cost-push shock. JEL classification numbers: C61, C62, C73, E47, E52, E61, E63.
    Date: 2020–06
  120. By: Timothy G. Conley; Bill Dupor; Mahdi Ebsim; Jingchao Li; Peter B. McCrory
    Abstract: This paper decomposes the causal effect of government defense spending into: (i) a local (or direct) effect, and (ii) a spillover (or indirect) effect. Using state-level defense spending data, we show that a negative cross-state spillover effect explains the existing simultaneous findings of a low aggregate multiplier and a high local multiplier. We show that enlisting disaggregate data improves the precision of aggregate effect estimates, relative to using aggregate time series alone. Moreover, we compare two-step efficient GMM with two alternative moment weighting approaches used in existing research.
    Keywords: local-spillover decomposition; fiscal multiplier; GMM
    JEL: E00
    Date: 2020–06–16
  121. By: Brei, Michael; Gambacorta, Leonardo; Lucchetta, Marcella; Parigi, Bruno
    Abstract: The paper investigates whether impaired asset segregation tools, otherwise known as bad banks, and recapitalisation lead to a recovery in the originating banks' lending and a reduction in non-performing loans (NPLs). Results are based on a novel data set covering 135 banks from 15 European banking systems over the period 2000-16. The main finding is that bad bank segregations are effective in cleaning up balance sheets and promoting bank lending only if they combine recapitalisation with asset segregation. Used in isolation, neither tool will suffice to spur lending and reduce future NPLs. Exploiting the heterogeneity in asset segregation events, we find that asset segregation is more effective when: (i) asset purchases are funded privately; (ii) smaller shares of the originating bank's assets are segregated; and (iii) asset segregation occurs in countries with more efficient legal systems. Our results continue to hold when we address the potential endogeneity problem associated with the creation of a bad bank.
    Keywords: bad banks; lending; Non-performing loans; recapitalisations; rescue packages; resolutions
    JEL: E41 G01 G21
    Date: 2020–02
  122. By: Corinne Deléchat; Lama Kiyasseh; Margaux MacDonald; Rui Xu
    Abstract: This study analyzes the drivers of the use of formal vs. informal financial services in emerging and developing countries using the 2017 Global FINDEX data. In particular, we investigate whether individuals’ choice of financial services correlates with macro-financial and macro-structural policies and conditions, in addition to individual and country characteristics. We start our analysis on middle and low-income countries, and then zoom in on sub-Saharan Africa, currently the region that most relies on informal financial services, and which has the largest uptake of mobile banking. We find robust evidence of an association between macroprudential policies and individuals’ choice of financial access after controlling for personal and country-level characteristics. In particular, macroprudential policies aimed at controlling credit supply seem to be associated with greater resort to informal financial services compared with formal, bank-based access. This highlights the importance for central bankers and financial sector regulators to consider the potential spillovers of monetary policy and financial stability measures on financial inclusion.
    Date: 2020–05–29
  123. By: Financial Stability Committee, Task Force on cross-border Spillover Effects of macroprudential measures; Kok, Christoffer; Reinhardt, Dennis
    Abstract: Due to the international dimension of the financial sector within the EU and beyond, domestically oriented macroprudential policies have the potential to create material cross-border spillover effects. This occasional paper provides a detailed overview of the academic and empirical literature on cross-border effects of macroprudential policies. It also summarises a stocktaking exercise, conducted by a task force of the ESCB’s Financial Stability Committee (FSC), on existing national approaches within the EU for assessing and monitoring such cross-border spillover effects. The paper accompanies an FSC report presenting a framework to be used by macroprudential authorities when assessing cross-border spillover effects induced by enacted or planned policy measures. JEL Classification: E42, E58, F36, G21
    Keywords: banking union, cross-border spillovers, European Central Bank, financial stability, macroprudential policies, systemic risks
    Date: 2020–06
  124. By: Tensay Meles; L. (Lisa B.) Ryan; Joe Wheatley
    Abstract: The COVID-19 crisis comes at a complex moment for European climate policy as it pivots from a 40% 2030 emissions reduction target to a European Green Deal that is in better alignment with long-term Paris Agreement goals. Here, the implications of the dramatic fall in economic output associated with the crisis are examined using a representative range of growth scenarios. With lower economic activity resulting from the COVID-19 crisis, existing policy measures could achieve the 40% target sooner than 2030. However, we find that even in the most severe economic scenario examined, this falls well short of the 50-55% emissions reduction target under the Green Deal. Maintaining the existing 40% target in 2030 with reduced policy measures on the other hand would move European climate policy away from the required path. This analysis indicates the feasibility of increased climate ambition in the wake of the pandemic and supports the Green Deal 50-55% targets in 2030.
    Keywords: Climate change policy; Greenhouse gas emissions; Economic recovery; COVID-19 economic effects; Energy demand
    JEL: Q5 Q54 Q58 E6 Q43
    Date: 2020–05
  125. By: Tobias Adrian; Dong He; Nellie Liang; Fabio M Natalucci
    Abstract: This paper describes the conceptual framework that guides assessments of financial stability risks for multilateral surveillance, as currently presented in the Global Financial Stability Report (GFSR). The framework emphasizes consistency in measuring financial vulnerabilities across countries and over time and offers a summary statistic to quantify aggregate financial stability risks. The two parts of the empirical approach—a matrix of specific vulnerabilities and a summary measure of financial stability risks—are distinct but highly complementary for monitoring and policymaking.
    Keywords: Financial stability;Macroprudential Policy;Financial crises;Real sector;Macroprudential policies and financial stability;Financial institutions;Financial markets;financial conditions,financial condition,Gar,fire sale,financial firm,vulnerability
    Date: 2019–08–26
  126. By: Hall, Viv B; Thomson, Peter
    Abstract: Within a New Zealand business cycle context, we assess whether Hamilton’s (H84) OLS regression methodology produces stylised business cycle facts which are materially different from HP1600 measures, and whether using the H84 predictor and other forecast extensions improves the HP filter’s properties at the ends of series. In general, H84 produces exaggerated volatilities and less credible trend movements during key economic periods so there is no material advantage in using H84 de-trending over HP1600. At the ends, the forecast-extended HP filter almost always performs better than the HP filter with no extension which performs slightly better than H84 forecast extension.
    Keywords: Hamilton regression filter, Stylised business cycle facts, New Zealand, End-point issues,
    Date: 2020
  127. By: Altig, Dave (Federal Reserve Bank of Atlanta); Baker, Scott (Kellogg School of Management, Northwestern University); Barrero, Jose Maria (ITAM Business School); Bloom, Nick (Stanford University); Bunn, Philip (Bank of England); Chen, Scarlet (Stanford University); Davis, Steven J (University of Chicago Booth School of Business); Leather, Julia (University of Nottingham); Meyer, Brent (Federal Reserve Bank of Atlanta); Mihaylov, Emil (Federal Reserve Bank of Atlanta); Mizen, Paul (University of Nottingham); Parker, Nick (Federal Reserve Bank of Atlanta); Renault, Thomas (University Paris 1 Panthéon-Sorbonne); Smietanka, Pawel (Bank of England); Thwaites, Greg (LSE Centre for Macroeconomics)
    Abstract: We consider several economic uncertainty indicators for the US and UK before and during the Covid-19 pandemic: implied stock market volatility, newspaper-based economic policy uncertainty, twitter chatter about economic uncertainty, subjective uncertainty about future business growth, and disagreement among professional forecasters about future GDP growth. Three results emerge. First, all indicators show huge uncertainty jumps in reaction to the pandemic and its economic fallout. Indeed, most indicators reach their highest values on record. Second, peak amplitudes differ greatly — from a rise of around 100% (relative to January 2020) in two-year implied volatility on the S&P 500 and subjective uncertainty around year-ahead sales for UK firms to a 20-fold rise in forecaster disagreement about UK growth. Third, time paths also differ: implied volatility rose rapidly from late February, peaked in mid-March, and fell back by late March as stock prices began to recover. In contrast, broader measures of uncertainty peaked later and then plateaued, as job losses mounted, highlighting the difference in uncertainty measures between Wall Street and Main Street.
    Keywords: Forward-looking uncertainty measures; volatility; Covid-19; coronavirus
    JEL: D80 E22 E66 G18 L50
    Date: 2020–06–26
  128. By: Martin Cihak; Ratna Sahay
    Abstract: The study examines empirical relationships between income inequality and three features of finance: depth (financial sector size relative to the economy), inclusion (access to and use of financial services by individuals and firms), and stability (absence of financial distress). Using new data covering a wide range of countries, the analysis finds that the financial sector can play a role in reducing inequality, complementing redistributive fiscal policy. By expanding the provision of financial services to low-income households and small businesses, it can serve as a powerful lever in helping create a more inclusive society but—if not well managed—it can amplify inequalities.
    Keywords: Financial crises;Financial systems;Financial services;Macroprudential policies and financial stability;Financial institutions;SDN,inequality,Sahay,high inequality,financial service,develop economy
    Date: 2020–01–17
  129. By: Alexandra Fotiou; Wenyi Shen; Shu-Chun Susan Yang
    Abstract: Using the post-WWII data of U.S. federal corporate income tax changes, within a Smooth Transition VAR, this paper finds that the output effect of capital income tax cuts is government debt-dependent: it is less expansionary when debt is high than when it is low. To explore the mechanisms that can drive this fiscal state-dependent tax effect, the paper uses a DSGE model with regime-switching fiscal policy and finds that a capital income tax cut is stimulative to the extent that it is unlikely to result in a future fiscal adjustment. As government debt increases to a sufficiently high level, the probability of future fiscal adjustments starts rising, and the expansionary effects of a capital income tax cut can diminish substantially, whether the expected adjustments are through a policy reversal or a consumption tax increase. Also, a capital income tax cut need not always have large revenue feedback effects as suggested in the literature.
    Date: 2020–05–29
  130. By: Federico Bassi (Dipartimento di Scienze Sociali ed Economiche - Università degli Studi di Roma "La Sapienza" [Rome]); Tom Bauermann; Dany Lang (CEPN - Centre d'Economie de l'Université Paris Nord - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique - Université Sorbonne Paris Nord); Mark Setterfield
    Abstract: ost Keynesian macrodynamic models make various assumptions about the normal rate of capacity utilization. Those rooted in the Classical and neo-Keynesian traditions assume the normal rate is fixed, whereas Kaleckian models treat it as a variable that is endogenous to the actual rate of capacity utilization. This paper contributes to the debate about the normal rate of capacity utilization by developing a model of strong or genuine hysteresis, in which firms make discrete decisions about the normal rate depending on the degree of uncertainty about demand conditions. An agent-based model based on empirical analysis of 25 sectors of the US economy is used to show that hysteresis can cause variation in the normal rate of capacity utilization within a subset of the range of observed variation in the actual capacity utilization rate. This suggests that the economy exhibits both constancy and (endogenous) variability in the normal rate of utilization over different ranges of variation in the actual rate. More broadly speaking, the genuine hysteresis model is shown to provide the basis for a synthesis of Post Keynesian macrodynamics that draws on both the Classical/neo-Keynesian and Kaleckian modeling traditions.
    Date: 2020–06–11
  131. By: Matsuoka,Hideaki
    Abstract: Fiscal vulnerabilities depend on both the level and composition of government debt. This study examines the role of debt thresholds and debt composition in driving the non-linear behavior of long-term interest rates through a novel approach, a panel smooth transition regression with a general logistic model. The main findings are threefold. First, the impact of the expected public debt level on interest rates rises exponentially when the share of foreign private holdings exceeds approximately 20 percent of government debt denominated in local currency. Second, when the share of foreign private investors is 30 percent, an increase in the share of foreign private holdings of government debt could raise long-term interest rates once the public debt-to-GDP ratio exceeds 60 percent of GDP, offsetting the downward pressure on long-term interest rates from higher market liquidity. Third, out-of-sample forecasts of this novel non-linear model are more accurate than those of previous methods.
    Date: 2020–06–11
  132. By: Jeong,Hyeok
    Abstract: This paper documents the sources of the Republic of Korea's economic growth, as well as the associated productivity growth and efficiency dynamics during its process of structural transformation from 1970 to 2016. The analysis includes land as a separate production factor to sort out the significant effect of changes in intersectoral land allocation, which makes significant differences in measuring the magnitudes and directions of change in sectoral total factor productivity (TFP). Input-based growth and structural changes contributed to the early take-off stage of growth in the 1970s. However, the growth regime switched to a productivity-based one, mainly engineered by the industry sector, for the following three decades, which was the reason behind the country's sustained growth and escape from the middle-income trap. Furthermore, agricultural TFP growth also made an important contribution to structural transformation by promoting to push out factors from agriculture to industry. But since 2011 when Korean economy seemed to reach its steady state being recognized by the constant capital-output ratio, the economy has faced sudden stagnation of TFP. The wedge analysis suggests that the intersectoral allocation was biased toward agriculture or labor, but toward industry for capital and land, compared to efficient allocation. The inter-temporal wedge analysis suggests that Korean economy was in over-investment throughout the structural transformation. The analysis also shows that the period of growth promotion is not always associated with the enhancement of allocative efficiency. Further, growth-disturbing external macroeconomic shocks, such as joining WTO and the Asian financial crisis, improved either the economy's allocative efficiency or TFP.
    Date: 2020–06–18
  133. By: Mark Gertler (New York University); Nobuhiro Kiyotaki (Princeton University); Andrea Prestipino (Federal Reserve Board)
    Abstract: Online appendix for the Review of Economic Dynamics article
    Date: 2020
  134. By: Fornaro, Paolo
    Abstract: Abstract In this work, we rely on unconventional data sources to nowcast the year-on-year growth rate of Finnish industrial production, for different industries. As predictors, we use real-time truck traffic volumes measured automatically in different geographical locations around Finland, as well as electricity consumption data. In addition to standard time-series models, we look into the adoption of machine learning techniques to compute the predictions. We find that the use of non-typical data sources such as the volume of truck traffic is beneficial, in terms of predictive power, giving us substantial gains in nowcasting performance compared to an autoregressive model. Moreover, we find that the adoption of machine learning techniques improves substantially the accuracy of our predictions in comparison to standard linear models. While the average nowcasting errors we obtain are higher compared to the current revision errors of the official statistical institute, our nowcasts provide clear signals of the overall trend of the series and of sudden changes in growth.
    Keywords: Flash Estimates, Machine Learning, Big Data, Nowcasting
    JEL: C33 C55 E37
    Date: 2020–06–30
  135. By: Shinya Fukui (Graduate School of Economics, Kobe University / Senior Researcher, Osaka Prefectural Government, Japan)
    Abstract: With decreasing comprehensive transportation costs, business cycle synchronization seems to be increasing. In such circumstances, we estimate business cycle synchronization of the Asia-Pacific region and European region. We apply the spatial generalized autoregressive score (Spatial GAS) method to measure the time-varying business cycle synchronization. Estimated business cycle synchronization parameters show positive high values in periods of economic turmoil, such as the collapse of the Lehman Brothers in 2008 by which high volatility is accompanied. With the recent increase in economic integration, exogenous shocks increased geographically and economically closer countries’ business cycle synchronization to each other, and such shocks cause economic instability.
    Date: 2020–06
  136. By: Rumen Kostadinov; Francisco Roldán
    Abstract: We study the optimal design of a disinflation plan by a planner who lacks commitment. Having announced a plan, the Central banker faces a tradeoff between surprise inflation and building reputation, defined as the private sector's belief that the Central bank is committed to the plan. Some plans are harder to sustain: the planner recognizes that paving out future grounds with temptation leads the way for a negative drift of reputation in equilibrium. Plans that successfully create low inflationary expectations balance promises of lower inflation with dynamic incentives that make them more credible. When announcing the disinflation plan, the planner takes into account these anticipated interactions. We find that, even in the zero reputation limit, a gradual disinflation is preferred despite the absence of inflation inertia in the private economy.
    Date: 2020–06–05
  137. By: Ashok Vir Bhatia; Srobona Mitra; Anke Weber; Shekhar Aiyar; Luiza Antoun de Almeida; Cristina Cuervo; Andre O Santos; Tryggvi Gudmundsson
    Abstract: This note weighs the merits of a capital market union (CMU) for Europe, identifies major obstacles in its path, and recommends a set of carefully targeted policy actions. European capital markets are relatively small, resulting in strong bank-dependence, and are split sharply along national lines. Results include an uneven playing field in terms of corporate funding costs, the rationing out of collateral-constrained firms, and limited shock absorption. The benefits of integration center on expanding financial choice, ultimately to support capital formation and resilience. Capital market development and integration would support a healthy diversity in European finance. Proceeding methodically, the note identifies three key barriers to greater capital market integration in Europe: transparency, regulatory quality, and insolvency practices. Based on these findings, the note urges three policy priorities, focused on the three barriers. There is no roadblock—such steps should prove feasible without a new grand bargain.
    Keywords: Capital markets;Monetary unions;Financial integration;Bilateral payments arrangements;Capital flows;Europe;Financial crises;Economic integration;Economic conditions;Macroprudential policies and financial stability;Financial infrastructure;Capital market union,bilateral portfolio flows,monetary union,euro area,insolvency,Esma,capital market,NCAs
    Date: 2019–09–10
  138. By: Manthos D. Delis; Fulvia Fringuellotti; Steven Ongena
    Abstract: Analyzing unique data on loan applications by individuals who are majority owners of small firms, we detail how a bank’s credit decisions affect their future income. We use the bank’s cutoff rule, which is based on the applicants’ credit scores, as the discontinuous locus providing exogenous variation in the decision to grant loans. We show that application acceptance increases recipients’ income five years later by more than 10 percent compared to denied applicants. This effect is mostly driven by the use of borrowed funds to undertake investments, and is stronger when individuals are more credit-constrained.
    Keywords: regression discontinuity design; income; credit constraints; business loans; income inequality; economic mobility
    JEL: D31 E24 G21 O15
    Date: 2020–06–01
  139. By: Abbasi, Kashif; Jiao, Zhilun; Khan, Arman; Shahbaz, Muhammad
    Abstract: This paper explores the asymmetric relationship between renewable energy consumption, non-renewable energy, and terrorism on economic growth of Pakistan. We applied a novel econometric cointegration method known as a nonlinear autoregressive distributed lag modeling (NARDL). Our empirical findings indicate that positive and negative changes have a significant long-run asymmetric relationship between renewable energy, and terrorism on economic growth. We also found a negative and significant effect of non-renewable energy consumption on economic growth. To keep our environment clean and free of emissions, the study specifies policies that rely on renewable energy sources to boost economic growth. However, reduces terrorism has a positive impact on economic growth in the long-run and shows as an influential tool to combat terrorism in Pakistan. These novel results will help policy-makers and government officials to understand better the role of renewable energy and economic growth in Pakistan's development.
    Keywords: Renewable Energy, Non-renewable, Terrorism, Economic Growth, NARDL, Pakistan
    JEL: E0
    Date: 2020–07–01
  140. By: Pierre-Olivier Gourinchas; Philippe Martin; Todd E. Messer
    Abstract: Despite a formal ‘no-bailout clause’, we estimate significant net present value transfers from the European Union to Cyprus, Greece, Ireland, Portugal and Spain, ranging from roughly 0.5% (Ireland) to 43% (Greece) of 2011 output during the recent Eurozone crisis. We propose a model to analyze and understand bailouts in a monetary union, and the large observed differences across countries. We characterize bailout size and likelihood as a function of the economic fundamentals (economic activity, debt-to-gdp ratio, default costs). Our model embeds a ‘Southern view’ of the crisis (transfers did not help) and a ‘Northern view’ (transfers weaken fiscal discipline). While a stronger no-bailout commitment reduces risk-shifting, it may not be optimal from the perspective of the creditor country, even ex-ante, if it increases the risk of immediate insolvency for high debt countries. Hence, the model provides a potential justification for the often decried policy of ‘kicking the can down the road’.
    JEL: F34 F45
    Date: 2020–06
  141. By: Kerschyl Singh; David Fowkes
    Date: 2020–06–17
  142. By: igescu, iulia
    Abstract: The evolution of variables during location shifts (structural breaks) is of high interest to policy makers. I propose a novel approach to describe location shifts. I use two business surveys in the industry sector (faster soft indicators) to target the industrial production index (a slower hard indicator). Then I use One-Class Support Vector Machines on combinations of these two variables to identify if new observations act as ’novelties’ for the target variable, as observations coming from a different distribution. In that case, one would expect the onset/end of a location shift. Moreover, that gives insights into what role animal spirit, as manifested in survey data, plays in equilibrium formation (location shifts).
    Keywords: SVM, location shifts, novelites
    JEL: C25 C5 C55 E65
    Date: 2020–02–13
  143. By: Ito, Shinsuke; Dejima, Takahisa
    Abstract: The availability of non-labor income (including asset income and labor income from other household members) can reduce individuals’ willingness to work. In general, when non-labor income increases, the demand for leisure increases due to the income effect, and as a result the supply of labor decreases. Ito and Dejima (2016) examined the influence of asset and rental income on employment (i.e. individuals’ choice to work) of youths in Japan using anonymized microdata from the National Survey of Family Income and Expenditure from the years of 1989, 1994, 1999, and 2004. However, this anonymized microdata does not contain detailed information on household assets, which limited the ability to perform an in-depth analysis of employment and household assets. Ito and Dejima (2017) examined the impact of residential area and real estate prices on employment using individual data from the 2009 National Survey of Family Income and Expenditure. Results suggested a theoretical possibility that higher ownership of household assets increases the likelihood that household members choose not to work. This research also found geographic differences in the impact of real asset ownership on employment. Recently, two models for household decision-making have received attention. The Unitary Model assumes that consumption decisions are made by the household unit and with the aim of maximizing overall household utility, whereas the Collective Model assumes that consumption decisions are made through negotiations between household members where each member seeks to maximize their own utility. The Unitary Model stipulates that households’ consumption decisions are not impacted by household members’ individual incomes, as it assumes that the household unit seeks to maximize overall household utility. On the other hand, the Collective Model suggests that household members with higher incomes have increased negotiation power and therefore greater influence on household consumption decisions. The Unitary Model has not been widely adopted as a model for household consumption behavior, while for the Collective Model no strong empirical relationship between household members' individual negotiating power and household consumption decisions has been identified. This research examines the relationship between household type and consumption behavior based on individual data from the National Survey of Family Income and Expenditure in order to evaluate whether the Unitary Model or Collective Model should be adopted as the model for household consumption behavior in Japan. The use of individual data allows analysis based on a broader range of household attributes including household members' employment, household members' individual incomes, and household size and structure, and therefore enables analysis into how household members’ incomes act as proxies of their negotiating power.
    Keywords: Collective Model, National Survey of Family Income and Expenditure, Household Type, Consumption Function
    JEL: D12 D13 E21
    Date: 2020–06
  144. By: Bortz, Pablo Gabriel; Toftum, Nicole
    Abstract: The paper reviews the alternatives available to Emerging Market Economies (EMEs) to finance investment required to mitigate and adapt to climate change. It also takes into account the financial needs to achieve the Sustainable Development Goals (SDGs). Since the requirements dwarfs the financial capabilities of the public sector in EMEs, the paper explores possible funding channels focusing on international financial markets. The paper identifies potential obstacles to a smooth and sustainable finance provision, including the influence of the global financial cycle on credit supply, risks related to currency mismatch and creditworthiness assessment, and mispricing of risks. The review also identifies the challenges to the exporting profile and therefore the sustainability of the balance of payments of EMEs. Finally, the paper provides some reflections on the limits of domestic private capital markets to bridge the “environmental financial gap”, and calls for the deeper involvement of specialized and official financial institutions.
    Keywords: Climate Change, Sustainable Development Goals, Financial requirements, international capital markets, green bonds, sustainable finance
    JEL: E44 F64 G23 O13 Q58
    Date: 2020–07–09
  145. By: Sajjad Taghiyeh; David C Lengacher; Robert B Handfield
    Abstract: A major part of the balance sheets of the largest US banks consists of credit card portfolios. Hence, managing the charge-off rates is a vital task for the profitability of the credit card industry. Different macroeconomic conditions affect individuals' behavior in paying down their debts. In this paper, we propose an expert system for loss forecasting in the credit card industry using macroeconomic indicators. We select the indicators based on a thorough review of the literature and experts' opinions covering all aspects of the economy, consumer, business, and government sectors. The state of the art machine learning models are used to develop the proposed expert system framework. We develop two versions of the forecasting expert system, which utilize different approaches to select between the lags added to each indicator. Among 19 macroeconomic indicators that were used as the input, six were used in the model with optimal lags, and seven indicators were selected by the model using all lags. The features that were selected by each of these models covered all three sectors of the economy. Using the charge-off data for the top 100 US banks ranked by assets from the first quarter of 1985 to the second quarter of 2019, we achieve mean squared error values of 1.15E-03 and 1.04E-03 using the model with optimal lags and the model with all lags, respectively. The proposed expert system gives a holistic view of the economy to the practitioners in the credit card industry and helps them to see the impact of different macroeconomic conditions on their future loss.
    Date: 2020–06
  146. By: Abderraouf Mtiraoui (Université de Sousse)
    Date: 2020–04–06
  147. By: Vitor Gaspar; David Amaglobeli; Mercedes Garcia-Escribano; Delphine Prady; Mauricio Soto
    Abstract: The goal of this paper is to estimate the additional annual spending required for meaningful progress on the SDGs in these areas. Our estimates refer to additional spending in 2030, relative to a baseline of current spending to GDP in these sectors. Toward this end, we apply an innovative costing methodology to a sample of 155 countries: 49 low- income developing countries, 72 emerging market economies, and 34 advanced economies. And we refine the analysis with five country studies: Rwanda, Benin, Vietnam, Indonesia, and Guatemala.
    Keywords: Sustainable development;Sustainable Development Goals (SDG);Development;Fiscal policy;Economic growth;Tax revenues;Government expenditures;Poverty reduction;Low-income developing countries;Emerging markets;Development policy;National income;Economic conditions;Sustainable Development Goals,Structure and Scope of Government,General,International Fiscal Issues,Fiscal and Monetary Policy in Development,Health and Economic Development,Education and Economic Development,Railroads and Other Surface Transportation: Autos,Buses,Trucks,and Water Carriers,Electric Utilities,low-income develop country,emerge market economy,SDG,advanced economy,world GDP
    Date: 2019–01–23
  148. By: Chris Loewald; Konstantin Makrelov
    Date: 2020–06–17
  149. By: REY LOS SANTOS Luis (European Commission - JRC); WOJTOWICZ Krzysztof (European Commission - JRC); TAMBA Marie (European Commission - JRC); VANDYCK Toon (European Commission - JRC); WEITZEL Matthias (European Commission - JRC); SAVEYN Bert (European Commission - JRC); TEMURSHO Umed
    Abstract: In this document the economic balances for the Baseline scenario used in the Global Energy and Climate Outlook (GECO) 2018 are presented. The Baseline scenario represents a projection of the world economy with corresponding energy demand and GHGs emissions under the assumption of current climate and energy policies and also realization of Nationally Determined Contributions (NDC) in line with Paris agreement. As this scenario still does not allow avoiding catastrophic climate change in the future, it is used as a reference to compare alternative scenarios with more stringent policy measures. Economic balances are supplemented by energy balances, where the latter are coming from energy models, but are consistent with economic data. Finally we show GHGs evolution over time that comes from economic activity presented in the Baseline. The procedure that was used to generate Baseline scenario is called PIRAMID which stands for: Platform to Integrate, Reconcile and Align Model-based Input-output Data. PIRAMID is a new methodology to project Multi-Regional Input-Output tables over time. This approach allows for integrating data from external models and databases. The result is a series of consistent and transparent IO tables.
    Keywords: Baseline, CGE, Input-Output tables, Macroeconomic projections
    Date: 2018–12
  150. By: Bachas, Pierre (World Bank Research); Gadenne, Lucie (University of Warwick, Institute for Fiscal Studies and CEPR); Jensen, Anders (Harvard Kennedy School and NBER)
    Abstract: Can consumption taxes reduce inequality in developing countries? We combine household expenditure data from 31 countries with theory to shed new light on the redistributive potential and optimal design of consumption taxes. We use the type of store in which purchases occur to proxy for informal (untaxed) consumption. This enables us to characterize the informality Engel curve: we find that the budget share spent in the informal sector steeply declines with income, in all countries. The informal sector thus makes consumption taxes progressive: households in the richest quintile face an effective tax rate that is twice that of the poorest quintile. We extend the standard optimal commodity tax model to allow for informal consumption and calibrate it to the data to study the effects of different tax policies on inequality. Contrary to consensus, we show that consumption taxes are redistributive, lowering inequality by as much as personal income taxes. Once informality is taken into account, commonly used redistributive policies, such as reduced tax rates on necessities, have a limited impact on inequality. In particular, subsidizing food cannot be justified on equity or efficiency grounds in several poor countries.
    Keywords: Household Budget Surveys ; Inequality ; Informality ; Redistribution ; Taxes JEL codes: E26 ; H21 ; H23 ; 023
    Date: 2020

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