nep-mac New Economics Papers
on Macroeconomics
Issue of 2020‒07‒27
130 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Firm and Worker Dynamics in a Frictional Labor Market By Bilal, Adrien; Engbom, Niklas; Mongey, Simon; Violante, Giovanni L.
  2. Inflation Dynamics: Dead, Dormant, or Determined Abroad? By Forbes, Kristin
  3. Micro Jumps, Macro Humps: Monetary Policy and Business Cycles in an Estimated HANK Model By Auclert, Adrien; Rognlie, Matthew; Straub, Ludwig
  4. Aggregate Demand and Aggregate Supply Effects of COVID-19: A Real-time Analysis By Geert Bekaert; Eric Engstrom; Andrey Ermolov
  5. The Role of ECB Communication in Guiding Markets By Marc Anderes; Alexander Rathke; Sina Streicher; Jan-Egbert Sturm
  6. The optimal monetary and macroprudential policies for the South African economy By Guangling Liu; Thabang Molisey
  7. Does demand noise matter? Identification and implications By Benhima, Kenza; Poilly, Céline
  8. Quantitative easing in the euro area and SMEs’ access to finance: Who benefits the most? By Anne Kathrin Funk
  9. Gains from wage Flexibility and the Zero Lower Bound By Roberto M. Billi; Jordi Galí
  10. The Eurozone in crisis: A Kaleckian macroeconomic regime and policy perspective By Hein, Eckhard; Martschin, Judith
  11. Financial stress and the debt structure By Gauthier, David
  12. Macroeconomic Effects of Large-Scale Asset Purchases: New Evidence By Kyungmin Kim; Thomas Laubach; Min Wei
  13. The Natural Rate Puzzle: Global Macro Trends and the Market-Implied r* By Davis, Josh; Fuenzalida, Cristian; Taylor, Alan M.
  14. Total factor productivity and the measurement of neutral technology By Alban Moura
  15. Insider-Outsider Labor Markets, Hysteresis and Monetary Policy By Jordi Galí
  16. Fiscal Policy under Secular Stagnation: An Optimal Pump Priming Strategy By Jean-Baptiste MICHAU
  17. Household Balance Sheet Channels of Monetary Policy: A Back of the Envelope Calculation for the Euro Area By Slacalek, Jiri; Tristani, Oreste; Violante, Giovanni L.
  18. Fiscal Policy and COVID19 Restrictions in a Demand-Determined Economy By Alan J. Auerbach; Yuriy Gorodnichenko; Daniel Murphy
  19. The Global Impact of Brexit Uncertainty By Hassan, Tarek Alexander; Hollander, Stephan; Tahoun, Ahmed; van Lent, Laurence
  20. Global macroeconomic cooperation in response to the COVID-19 pandemic: a roadmap for the G20 and the IMF By Warwick McKibbin; David Vines
  21. Inflation with Covid Consumption Baskets By Alberto Cavallo
  22. Inflation expectations in euro area Phillips curves By Luis J. Álvarez; Mónica Correa-López
  23. Monetary Union and Financial Integration By Fornaro, Luca
  24. The Rise of US Earnings Inequality: Does the Cycle Drive the Trend? By Jonathan Heathcote; Fabrizio Perri; Giovanni L. Violante
  25. The Signalling Channel of Negative Interest Rates By de Groot, Oliver; Haas, Alexander
  26. Monetary policy and the management of uncertainty: a narrative approach By Tuckett, David; Holmes, Douglas; Pearson, Alice; Chaplin, Graeme
  27. Shocks, Frictions, and Inequality in US Business Cycles By Bayer, Christian; Born, Benjamin; Luetticke, Ralph
  28. The Nordhaus Test with Many Zeros By Kajal Lahiri; Yongchen Zhao
  29. The Elusive Gains from Nationally-Oriented Monetary Policy By Bodenstein, Martin; Corsetti, Giancarlo; Guerrieri, Luca
  30. The Dynamics of Non-Performing Loans during Banking Crises: A New Database By Anil Ari; Sophia Chen; Lev Ratnovski
  31. Flattening of the Wage Phillips Curve and Downward Nominal Wage Rigidity: The Japanese Experience in the 2010s By Wataru Hirata; Toshitaka Maruyama; Tomohide Mineyama
  32. Incorporating Scenario Analysis into the Federal Reserve’s Policy Strategy and Communications By Michael D. Bordo; Andrew T. Levin; Mickey D. Levy
  33. Macro-financial interactions in a changing world By Eddie Gerba; Danilo Leiva-Leon
  34. Real-time turning point indicators: Review of current international practices By Cyrille Lenoel; Garry Young
  35. Rational Bubbles in Non-Linear Business Cycle Models: Closed and Open Economies By Kollmann, Robert
  36. Duration-Based Stock Valuation By Jules H. van Binsbergen
  37. Non-linearities, asymmetries and dollar currency pricing in exchange rate pass-through: evidence from the sectoral level By Hjortsoe, Ida; Lewis, John
  38. Reallocation effects of monetary policy By Daisuke Miyakawa; Koki Oikawa; Kozo Ueda
  39. Identification of SVAR Models by Combining Sign Restrictions With External Instruments By Robin Braun; Ralf Brüggemann
  40. Fiscal transfers and inflation: Evidence from India By Girish Bahal; Anand Shrivastava
  41. Deciphering the Macroeconomic Effects of Internal Devaluations in a Monetary Union By Javier Andrés; Óscar Arce; Jesús Fernández-Villaverde; Samuel Hurtado
  42. Entendiendo, Modelando y Pronosticando los efectos de "El Niño" sobre los precios de los alimentos: el caso colombiano By Bejarano-Salcedo, Valeria; Cárdenas-Cárdenas, Julián Alonso; Julio-Román, Juan Manuel; Caicedo-García, Edgar
  43. Is it good to be bad or bad to be good?: Assessing the aggregate impact of abnormal weather on consumer spending By Boriss Siliverstovs; Anna Sandqvist
  44. The Role of Sentiment in the Economy of the 1920s By Ali Kabiri; Harold James; John Landon-Lane; David Tuckett; Rickard Nyman
  45. International spillovers of forward guidance shocks By Callum Jones; Mariano Kulish; Daniel Rees
  46. Shock-Dependent Exchange Rate Pass-Through in Russia By Ivan Khotulev
  47. The 3 E's of Central Bank Communication with the Public By Haldane, Andrew; Macaulay, Alistair; McMahon, Michael
  48. "Fiscal Policy in Argentina, Brazil, and Mexico and the 2030 Agenda for Sustainable Development" By Bendreff Desilus
  49. Can Forecast Errors Predict Financial Crises? Exploring the Properties of a New Multivariate Credit Gap By Elena Afanasyeva
  50. Monetary policy and intangible investment By Döttling, Robin; Ratnovski, Lev
  51. Exchange rate risk and business cycles By Lloyd, Simon; Marin, Emile
  52. Housing Cycle and Firm Investment: International Firm-level Evidence By Hyunduk Suh; Jin Young Yang
  53. Are Fiscal Multipliers Estimated with Proxy-SVARs Robust? By Giovanni Angelini; Giovanni Caggiano; Efrem Castelnuovo; Luca Fanelli
  54. Determinants of the credit cycle: a flow analysis of the extensive margin By Cuciniello, Vincenzo; di Iasio, Nicola
  55. Thinking ahead of the next big crash: Clues from Athens in classical times By Bitros, George C.
  56. Expansionary Yet Different: Credit Supply and Real Effects of Negative Interest Rate Policy By Bottero, Margherita; Minoiu, Camelia; Peydro, Jose-Luis; Polo, Andrea; Presbitero, Andrea; Sette, Enrico
  57. Do Monetary Policy Announcements Shift Household Expectations? By Lewis, Daniel; Makridis, Christos; Mertens, Karel
  58. Sources of knowledge flow between developed and developing nations By Florian Seliger; Gaéran de Rassenfosse
  59. The Price of BitCoin: GARCH Evidence from High Frequency Data By d’Artis Kancs; Pavel Ciaian; Miroslava Rajcaniova
  60. Production and Financial Networks in Interplay: Crisis Evidence from Supplier-Customer and Credit Registers By Kenan Huremovic; Gabriel Jiménez; Enrique Moral-Benito; José-Luis Peydró; Fernando Vega-Redondo
  61. Production and financial networks in interplay: Crisis evidence from supplier-customer and credit registers By Kenan Huremovic; Jiménez Gabriel; Enrique Moral-Benito; José-Luis Peydró; Fernando Vega-Redondo
  62. The Effect of the Central Bank Liquidity Support during Pandemics: Evidence from the 1918 Spanish Influenza Pandemic By Haelim Anderson; Jin-Wook Chang; Adam Copeland
  63. How to Design Subnational Fiscal Rules; A Primer By Luc Eyraud; Andrew Hodge; John Ralyea; Julien Reynaud
  64. Price elasticities and demand-side real rigidities in micro data and in macro models By Beck, Günter; Lein, Sarah
  65. The Rising Cost of Climate Change: Evidence from the Bond Market By Michael D. Bauer; Glenn D. Rudebusch
  66. Inflation volatility in small and large advanced open economies By Balatti, Mirco
  67. Government Spending Effects in a Policy Constrained Environment By Ruoyun Mao; Shu-Chun Susan Yang
  68. Does Policy Communication During Covid Work? By Olivier Coibion; Yuriy Gorodnichenko; Michael Weber
  69. An approximation of the distribution of learning estimates in macroeconomic models By Jaqueson Kingeski Galimberti
  70. Firms’ asset holdings and inflation expectations By Saten Kumar
  71. The Global Transmission of U.S. Monetary Policy By Riccardo Degasperi; Seokki Simon Hong; Giovanni Ricco
  72. Estimating the Optimal Inflation Target from Trends in Relative Prices By Adam, Klaus; Weber, Henning
  73. How Big are Fiscal Multipliers in Latin America? By Jorge Restrepo
  74. Does the Added Worker Effect Matter? By Guner, Nezih; Kulikova, Yuliy; Valladares Esteban, Arnau
  75. Inflation in the G7 Countries: Persistence and Structural Breaks By Guglielmo Maria Caporale; Luis A. Gil-Alana; Carlos Poza
  76. Global Uncertainty and Global Economic Policy Uncertainty: Different Implications for Firm Investment By Hyunduk Suh; Jin Young Yang
  77. Why Does Consumption Fluctuate in Old Age and How Should the Government Insure It? By Richard Blundell; Margherita Borella; Jeanne Commault; Mariacristina De Nardi
  78. Interest rate setting and communication at the ECB By Cour-Thimann, Philippine; Jung, Alexander
  79. A Model-based Fiscal Taylor Rule and a Toolkit to Assess the Fiscal Stance By Jean-Marc Fournier; Philipp Lieberknecht
  80. The Costs of Macroprudential Deleveraging in a Liquidity Trap By Jiaqian Chen; Daria Finocchiaro; Jesper Lindé; Karl Walentin
  81. Protecting Investors in Equity Crowdfunding: An Empirical Analysis of the Small Investor Protection Act By Maximilian Goethner; Lars Hornuf; Tobias Regner
  82. Measuring Output Gap: Is It Worth Your Time? By Jiaqian Chen; Lucyna Gornicka
  83. The Rise in Foreign Currency Bonds: The Role of US Monetary Policy and Capital Controls By Philippe Bacchetta; Rachel Cordonier; Ouarda Merrouche
  84. Real-Time Forecasting with a (Standard) Mixed-Frequency VAR During a Pandemic By Frank Schorfheide; Dongho Song
  85. Fiscal Rules and Discretion under Limited Enforcement By Halac, Marina; Yared, Pierre
  86. Bitcoin Is Not a New Type of Money By Michael Junho Lee; Antoine Martin
  87. High Order Openness By Jean Imbs; Laurent L. Pauwels
  88. Keeping track of global trade in real time By Jaime Martínez-Martín; Elena Rusticelli
  89. Fiscal Multipliers: Liquidity Traps and Currency Unions By Emmanuel Farhi; Ivan Werning
  90. Features of monetary policy at low rates By Nesterova, Kristina (Нестерова, Кристина)
  91. Corporate Bond Liquidity During the COVID-19 Crisis By Mahyar Kargar; Benjamin Lester; David Lindsay; Shuo Liu; Pierre-Olivier Weill; Diego Zúñiga
  92. Jumpstarting an international currency By Bahaj, Saleem; Reis, Ricardo
  93. Making a Breach: The Incorporation of Agent-Based Models into the Bank of England's Toolkit By Romain Plassard
  94. Monetary Policy Implementation: Operational Issues for Countries with Evolving Monetary Policy Frameworks By Nils Mæhle
  95. Mismatch in Online Job Search By Tara Sinclair; Martha Gimbel
  96. Real-time Probabilistic Nowcasts of UK Quarterly GDP Growth using a Mixed-Frequency Bottom-up Approach By Ana Beatriz Galvao; Marta Lopresto
  97. Share Buybacks, Monetary Policy and the Cost of Debt By Assia Elgouacem; Riccardo Zago
  98. Monetary Policy Transmission in Emerging Markets and Developing Economies By Luis Brandao-Marques; R. G Gelos; Thomas Harjes; Ratna Sahay; Yi Xue
  99. Human Capital Accumulation at Work: Estimates for the World and Implications for Development By Remi Jedwab; Asif Islam; Paul Romer; Robert Samaniego
  100. When are Google data useful to nowcast GDP? An approach via pre-selection and shrinkage By Laurent Ferrara; Anna Simoni
  101. How to Design a Financial Management Information System; A Modular Approach By Gerardo Uña; Richard I Allen; Nicolas M Botton
  102. A medium-sized, open-economy, fiscal DSGE model of South Africa By Johannes Hermanus Kemp; Hylton Hollander
  103. Drawing Conclusions from Structural Vector Autoregressions Identified on the Basis of Sign Restrictions By Baumeister, Christiane; Hamilton, James
  104. How Should Credit Gaps Be Measured? An Application to European Countries By Chikako Baba; Salvatore Dell'Erba; Enrica Detragiache; Olamide Harrison; Aiko Mineshima; Anvar Musayev; Asghar Shahmoradi
  105. The Macroeconomy as a Random Forest By Philippe Goulet Coulombe
  106. Toward a Macroprudential Regulatory Framework for Mutual Funds By Christos Argyropoulos; Bertrand Candelon; Jean-Baptiste Hasse; Ekaterini Panopoulou
  107. Loan types and the bank lending channel By Victoria Ivashina; Luc Laeven; Enrique Moral-Benito
  108. Business Reopening Decisions and Demand Forecasts During the COVID-19 Pandemic By Dylan Balla-Elliott; Zoë B. Cullen; Edward L. Glaeser; Michael Luca; Christopher T. Stanton
  109. Macroeconomic Policy, Product Market Competition, and Growth: The Intangible Investment Channel By JaeBin Ahn; Romain A Duval; Can Sever
  110. Income-Driven Labor-Market Polarization By Diego Comin; Ana Danieli; Martí Mestieri
  111. Climate-Related Scenarios for Financial Stability Assessment: an Application to France By Thomas Allen; Stéphane Dees; Jean Boissinot; Carlos Mateo Caicedo Graciano; Valérie Chouard; Laurent Clerc; Annabelle de Gaye; Antoine Devulder; Sébastien Diot; Noémie Lisack; Fulvio Pegoraro; Marie Rabaté; Romain Svartzman; Lucas Vernet
  112. How to Control the Fiscal Costs of Public-Private Partnerships By Timothy C Irwin; Samah Mazraani; Sandeep Saxena
  113. The effect of Emergency Liquidity Assistance (ELA) on bank lending during the euro area crisis By Heather D. Gibson; Stephen G. Hall; Pavlos Petroulas; Vassilis Spiliotopoulos; George S. Tavlas
  114. Multivariate Circulant Singular Spectrum Analysis By Juan B\'ogalo; Pilar Poncela; Eva Senra
  115. Japan’s Experience with Yield Curve Control By Matthew Higgins; Thomas Klitgaard
  116. Nowcasting German GDP By Andreini, Paolo; Charlotte Senftleben-König, Charlotte; Hasenzagl, Thomas; Reichlin, Lucrezia; Strohsal, Till
  117. Measuring Macroeconomic Convergence and Divergence within EMU Using Long Memory By Dräger, Lena, Kolaiti, Theoplasti, Sibbertsen, Philipp
  118. Capital Flows, Real Estate, and Local Cycles: Evidence from German Cities, Banks, and Firms By Bednarek, Peter; Ma, Chang; Rebucci, Alessandro; Te Kaat, Daniel Marcel
  119. Propagation of shocks in global value chains: the coronavirus case By Elie Gerschel; Alejandra Martinez; Isabelle Mejean
  120. Does Child Marriage Matter for Growth? By Pritha Mitra; Eric M. Pondi Endengle; Malika Pant; Luiz F. Almeida
  121. International Business Cycles in Emerging Markets By Jacek Rothert
  122. Riding the Storm: Fiscal Sustainability in the Caribbean By Serhan Cevik; Vibha Nanda
  123. Coalition-Proof Risk Sharing Under Frictions By Cole, Harold; Krueger, Dirk; Mailath, George J; Park, Yena
  124. What is the tipping point? Low rates and financial stability By Porcellacchia, Davide
  125. Time inconsistency and endogenous borrowing constraints By Joydeep Bhattacharya; Monisankar Bishnu; Min Wang
  126. Análisis macroeconómico de los impactos sectoriales del cambio climático en Colombia By Alvarez-Espinoza, Andrés Camilo; Calderón Díaz, Silvia Liliana; Romero Otálora, Germán; Ordoñez, Alejandro
  127. Guyana: Housing Market and Implications for Macroprudential Policies By Julian T Chow
  128. Measuring Trade in Value Added with Firm-Level Data By Bems, Rudolfs; Kikkawa, Ayumu Ken
  129. Would Population Aging Change the Output Effects of Fiscal Policy? By Jiro Honda; Hiroaki Miyamoto
  130. Theory to the Rescue of Large-scale Models: Edmond Malinvaud's Alternative View on the Search for Microfoundations By Matthieu Renault

  1. By: Bilal, Adrien; Engbom, Niklas; Mongey, Simon; Violante, Giovanni L.
    Abstract: This paper develops a random-matching model of a frictional labor market with firm and worker dynamics. Multi-worker firms choose whether to shrink or expand their employment in response to shocks to their decreasing returns to scale technology. Growing entails posting costly vacancies, which are filled either by the unemployed or by employees poached from other firms. Firms also choose when to enter and exit the market. Tractability is obtained by proving that, under a parsimonious set of assumptions, all workers' and firm decisions are characterized by their joint marginal surplus, which in turn only depends on the firm's productivity and size. As frictions vanish, the model converges to a standard competitive model of firm dynamics which allows a quantification of the misallocation cost of labor market frictions. An estimated version of the model yields cross-sectional patterns of net poaching by firm characteristics (e.g., age and size) that are in line with the micro data. The model also generates a drop in job-to-job transitions as firm entry declines, offering an interpretation to U.S. labor market dynamics around the Great Recession. All these outcomes are a reflection of the job ladder in marginal surplus that emerges in equilibrium.
    Keywords: Decreasing Returns to Scale; Firm Dynamics; frictions; Job turnover; Marginal Surplus; Net Poaching; On the job search; unemployment; Vacancies; worker flows
    JEL: D22 E23 E24 E32 J23 J63 J64 J69
    Date: 2019–12
  2. By: Forbes, Kristin
    Abstract: Inflation dynamics have been difficult to explain over the last decade. This paper explores if a more comprehensive treatment of globalization can help. CPI inflation has become more synchronized around the world since the 2008 crisis, but core and wage inflation have become less synchronized. Global factors (including commodity prices, world slack, exchange rates, and global value chains) are significant drivers of CPI inflation in a cross-section of countries, and their role has increased over the last decade, particularly the role of non-fuel commodity prices. These global factors, however, do less to improve our understanding of core and wage inflation. Key results are robust to using a less-structured trend-cycle decomposition instead of a Phillips curve framework, with the set of global variables more important for understanding the cyclical component of inflation over the last decade, but not the underlying slow-moving inflation trend. Domestic slack still plays a role for all the inflation measures, although globalization has caused some "flattening" of this relationship, especially for CPI inflation. Although CPI inflation is increasingly "determined abroad", core and wage inflation is still largely a domestic process.
    Keywords: commodity prices; Globalization; inflation; Phillips curve; price dynamics; trend-cycle
    JEL: E31 E37 E52 E58 F62
    Date: 2019–12
  3. By: Auclert, Adrien; Rognlie, Matthew; Straub, Ludwig
    Abstract: We estimate a Heterogeneous-Agent New Keynesian model with sticky household expectations that matches existing microeconomic evidence on marginal propensities to consume *and* macroeconomic evidence on the impulse response to a monetary policy shock. Our estimated model uncovers a central role for investment in the transmission mechanism of monetary policy, as high MPCs amplify the investment response in the data. This force also generates a procyclical response of consumption to investment shocks, leading our model to infer a central role for these shocks as a source of business cycles.
    Keywords: estimation; HANK; investment
    JEL: E21 E22 E23 E32 E43 E52
    Date: 2020–01
  4. By: Geert Bekaert; Eric Engstrom; Andrey Ermolov
    Abstract: We extract aggregate demand and supply shocks for the US economy from real-time survey data on inflation and real GDP growth using a novel identification scheme. Our approach exploits non-Gaussian features of macroeconomic forecast revisions and imposes minimal theoretical assumptions. After verifying that our results for U.S. post-World War II business cycle fluctuations are largely in line with the prevailing consensus, we proceed to study output and price fluctuations during the COVID-19 pandemic. We attribute two thirds of the decline in 2020:Q1 GDP to a negative shock to aggregate demand. In contrast, regarding the staggeringly large decline in GDP in 2020:Q2, we estimate two thirds of this shock was due to a reduction in aggregate supply. Statistical analysis suggests a slow recovery due to a persistent effects of the supply shock, but surveys suggest a somewhat faster rebound with a recovery in aggregate supply leading the way.
    Keywords: Business cycles; COVID-19; Macroeconomic volatility;
    JEL: E31 E32 E43 E44
    Date: 2020–06–22
  5. By: Marc Anderes (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Alexander Rathke (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Sina Streicher (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Jan-Egbert Sturm (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: Economists and central bankers nowadays believe that forward guidance has become more important in a world in which key interest rates have hit their effective lower bounds (ELB). In case of the European Central Bank (ECB), this should have increased the informational content of the introductory statements at the press conference following ECB policy meetings. We examine whether this form of ECB communication adds information to a shadow interest rate that summarises the overall policy stance as interpreted by financial markets. To measure communication, we use information based on ECB press releases distinguishing between topics like inflation, the real economy and monetary developments. We also look at the effect of communication on consensus expectations about key macroeconomic variables. Especially ECB’s assessment of the economy, i.e. communication related to economic growth, triggers movement in financial markets and thereby the shadow rate. Communication of the ECB through its press releases also causes professional forecasters to change their outlook. Not only their growth forecasts are affected, also their expectations for M3 growth and inflation are.
    Keywords: Central bank communication, shadow rates, consensus expectations, ECB, euro area, money growth
    JEL: E3 E43 E51 E52 E58
    Date: 2019–10
  6. By: Guangling Liu; Thabang Molisey
    Abstract: We investigate the optimal design and e ectiveness of monetary and macroprudential policies in promoting macroeconomic (price) and financial stability for the South African economy. We develop a New Keynesian dynamic stochastic general equilibrium model featuring a housing market, a banking sector and the role of macroprudential and monetary policies. Based on the parameter estimates from the estimation, we conduct an optimal rule analysis and an efficient policy frontier analysis, and compare the dynamics of the model under different policy regimes. We find that a policy regime that combines a standard monetary policy rule and a macroprudential policy rule delivers a more stable economic system with price and financial stability. A policy regime that combines an augmented monetary policy (policy rate reacts to nancial conditions) with macroprudential policy is better at attenuating the effects of financial shocks, but at a much higher cost of price instability. Our findings suggest that monetary policy should focus solely on its primary objective of price stability and let macroprudential policy facilitate financial stability on its own.
    Keywords: Monetary policy, Macroprudential policy, Financial Stability, Capital requirement, Financial shock, DSGE model.
    JEL: E32 E44 E52 E58 G28
    Date: 2020–02
  7. By: Benhima, Kenza; Poilly, Céline
    Abstract: We assess the role of demand noise (excessive optimism or pessimism about demand) together with supply noise (excessive optimism or pessimism about supply). To do so, we propose a methodology to decompose business cycles into supply, demand, supply noise and demand noise shocks, using a structural vector autoregression model. Key to our identification of both supply noise and demand noise is the use of sign restrictions on survey expectation errors about output growth and about inflation. We show that demand-related noise shocks have a negative effect on output and contribute substantially to its fluctuations. Monetary policy and private information seem to play a key role in the transmission of demand noise shocks.
    Keywords: Business cycle; Information Friction; Noise shock; SVAR with sign restrictions
    JEL: C32 D82 E31 E32
    Date: 2020–01
  8. By: Anne Kathrin Funk (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: After the global financial crisis and during the European sovereign debt crisis, bank lending to companies in the euro area slowed down dramatically bringing the economy close to a credit crunch. It was only after the start of the ECB’s quantitative easing programme in early 2015 that bank lending improved sustainably. The study analyses the impact of the ECB’s Public Sector Purchase Programme (PSPP) on the access to finance of small and medium sized enterprises (SME) using firm-level data of the Survey on the Access to Finance of Enterprises (SAFE) and a fixed effects model. The analysis comprises several measures of financial access such as credit availability, financial constraints and interest rates. The micro level nature of the data allows to distinguish between aggregate and heterogeneous effects across firm size, age, sector and country. The ECB’s government bond purchases improved financial access on the aggregate euro area level and particularly in the periphery of the euro area. Hence, countries which need the most stimulus benefit the most from the Public Sector Purchase Programme.
    Keywords: Unconventional monetary policy, credit channel, bank lending, ECB,SME
    JEL: E44 E51 E52 E58
    Date: 2018–12
  9. By: Roberto M. Billi; Jordi Galí
    Abstract: We analyze the welfare impact of greater wage flexibility in the presence of an occasionally binding zero lower bound (ZLB) constraint on the nominal interest rate. We show that the ZLB constraint generally amplifies the adverse effects of greater wage flexibility on welfare when the central bank follows a conventional Taylor rule. When demand shocks are the driving force, the ZLB implies that an increase in wage flexibility reduces welfare even under the optimal monetary policy with commitment.
    JEL: E24 E32 E52
    Date: 2020–06
  10. By: Hein, Eckhard; Martschin, Judith
    Abstract: The current Covid-19 Crisis 2020 has hit the Eurozone in a highly fragile situation, with a weak and asymmetric recovery from the Great Financial Crisis, the Great Recession and the following Eurozone Crisis. These crises have also revealed the weaknesses of the macroeconomic policy institutions and strategies of the Eurozone based on New Consensus Macroeconomics (NCM). Applying a Kaleckian/post-Keynesian analysis of the demand and growth regimes to the EA-12 countries, we show that the internal imbalances within the EA-12 before the Eurozone crisis, with the polarization of current account deficit debt-led private demand boom countries, on the one hand, and of current account surplus export-led mercantilist countries, on the other hand, have been externalized since then. Most of the countries and the EA-12 as a whole have now turned export-led mercantilist. For an economic policy alternative favouring a domestic demand-led regime, we turn towards Kalecki's macroeconomic policy proposals for achieving and maintaining full employment in a capitalist economy by government deficit expenditures, in combination with re-distribution policies in favour of labour and low-income households, assisted by central banks targeting low interest rates. This approach is then applied to the Eurozone, in order to derive a policy mix which should contribute to a more rapid recovery from the Covid-19 Crisis and to a medium- to long-run non-inflationary full employment domestic demand-led regime, on the one hand, and to sustainable catching-up of the periphery of the Eurozone with respect to the more mature centre, on the other hand.
    Keywords: Eurozone crisis,Kalecki,demand and growth regime,macroeconomic policies
    JEL: E11 E12 E61 E63 E65
    Date: 2020
  11. By: Gauthier, David (Bank of England)
    Abstract: This paper identifies shocks to credit conditions based on aggregate firms’ debt composition. I develop a model where firms fund production with bonds and loans. Only financial shocks imply opposite movements in the two types of debt as firms adjust their debt composition to new credit conditions. I use this result to inform a sign‑restriction VAR and identify the sources of US business cycles. Financial shocks account for a third of output fluctuations. I construct an index of financial stress to test the identification strategy.
    Keywords: Business cycles; financial shocks; firm funding; sign restrictions
    JEL: C11 E32 E44 G21
    Date: 2020–06–19
  12. By: Kyungmin Kim; Thomas Laubach; Min Wei
    Abstract: We examine the macroeconomic effect of large-scale asset purchases (LSAPs) and forward guidance (FG) using a proxy structural VAR estimated on data through 2015, where the stance of the LSAP policy is measured using primary dealer expectations of the Federal Reserve's asset holdings. Monetary policy shocks are identified using instruments constructed from event study yield changes, and additional assumptions are employed to separately identify LSAP and FG shocks. We find that unexpected expansions in the Federal Reserve's asset holdings during the ZLB period between 2008 and 2015 had significant expansionary effects on the macroeconomy, with real activity and inflation rising and unemployment declining notably following the shock. The policy accommodation appears to be transmitted to the economy both through financial markets-including Treasury yields, credit spreads and equity prices-and through bank lending. The effects on Treasury yields and term premiums appear to be longer-lived than previously documented, while the effects on credit spreads and especially bank lending also appear persistent. These results appear fairly robust to alternative identification and econometric methodologies, alternative policy indicators and instruments, and controlling for any possible Federal Reserve information effect. A counterfactual analysis shows that absent the LSAP3 program implemented between late 2012 and 2014, CPI inflation would have been about 1 percentage point lower, while the unemployment rate would have been about 4 percentage points higher, by the end of 2015.
    Keywords: Unconventional monetary policy; Macro effects; Quantitative easing (QE); Primary dealer survey; Forward guidance; External instruments; Identification; Structural VAR
    JEL: E44 E52 E58
    Date: 2020–06–17
  13. By: Davis, Josh; Fuenzalida, Cristian; Taylor, Alan M.
    Abstract: Benchmark finance models deliver estimates of bond risk premia based on components of Treasury bond yields. Benchmark macroeconomic models deliver estimates of the natural rate of interest based on growth, inflation, and other macro factors. But estimates of the natural rate implied by the former are wildly inconsistent with those of the latter; and estimates of risk premia implied by the latter are wildly inconsistent with those of the former. This is the natural rate puzzle, and we show that it applies not only in the United States but also across several advanced economies. A unified model should not fail such consistency tests. We estimate a unified macro-finance model with long-run trend factors which delivers paths for a market-implied natural rate r* consistent with inflation expectations Ï?* and bond risk premia. These paths are plausible and our factors improve the explanatory power of yield and return regressions. Trading strategies based on signals incorporating both r* and Ï?* trends outperform both yield- only strategies like level and slope and strategies which only add trend inflation. The estimates from our unified model satisfy consistency and deliver a resolution to the puzzle. They show that most of the variation in yields has come from shifts in r* and Ï?*, not from bond risk premia. Our market-implied natural rate differs from consensus estimates, and is typically lower, intensifying concerns about secular stagnation and proximity to the effective lower-bound on monetary policy in advanced economies.
    Keywords: affine models; Bond risk premia; Inflation expectations; Natural rate of interest; term structure
    JEL: C13 C32 E43 E44 E47 G12
    Date: 2019–12
  14. By: Alban Moura
    Abstract: TFP measures constructed from chain-aggregated output, such as those published by the Bureau of Labor Statistics or Fernald (2014), confound contributions from neutral and sector-specifc technology. Therefore, they should not be used to infer the path of neutral technology in presence of investment-specific technical change. Two theory-consistent, utilization-adjusted measures of neutral technology at the quarterly frequency are proposed for the US business sector. Both indicate that neutral technology progress declined dramatically after the mid-1970s. In particular, its contribution to US growth fell from more than 85% before 1973 to less than 25% afterward. The associated welfare loss is enormous: if neutral technology had continued on its pre-1970s trend, 2017 US output would have been 70% higher.
    Keywords: total factor productivity, neutral technology, investment-specific technology, sources of growth.
    JEL: E22 E23 E32 O41 O47
    Date: 2020–05
  15. By: Jordi Galí
    Abstract: I develop a version of the New Keynesian model with insider-outsider labor markets and hysteresis that can account for the high persistence of European unemployment. I study the implications of that environment for the design of monetary policy. The optimal policy calls for strong emphasis on (un)employment stabilization which a standard interest rate rule fails to deliver, with the gap between the two increasing in the degree of hysteresis. Two simple targetiing rules are shown to approximate well the optimal policy. The properties of the model and effects of different policies are analyzed through the lens of the labor wedge and its components.
    JEL: E24 E31 E32
    Date: 2020–06
  16. By: Jean-Baptiste MICHAU (Ecole Polytechnique, France)
    Abstract: This paper provides a new perspective on …scal policy. A permanent depression in aggregate demand results in multiple equilibria: a secular stagnation equilibrium characterized by a binding zero lower bound, low in‡ation, and underemployment; and a neoclassical equilibrium where in‡ation is su¢ ciently high for the zero lower bound to be non-binding at the (very low) natural real interest rate, resulting in full employment. The optimal …scal policy under secular stagnation consists in moving the economy to the neoclassical equilibrium. This requires a temporary, but massive, amount of government spending to overheat the economy such as to raise the in‡ation anchor. The lack of …scal space cannot prevent the government from pump priming the economy through …scal policy. It may in fact help spur in‡ation. To keep a tight control over the price level, the government can …nance the stimulus through a sufficiently long maturity structure of government debt.
    Keywords: Fiscal policy, Liquidity trap, Ponzi scheme, Secular stagnation.
    JEL: E12 E62 E63 H63
  17. By: Slacalek, Jiri; Tristani, Oreste; Violante, Giovanni L.
    Abstract: This paper formulates a back of the envelope approach to study the effects of monetary policy on household consumption expenditures. We analyze several transmission mechanisms operating through direct, partial equilibrium channels-intertemporal substitution and net interest rate exposure-and indirect, general equilibrium channels-net nominal exposure, as well as wealth, collateral and labor income channels. The strength of these forces varies across households depending on their marginal propensities to consume, their balance sheet composition, the sensitivity of their own earnings to fluctuations in aggregate labor income, and the responsiveness of aggregate earnings, asset prices and inflation to monetary policy shocks. We quantify all these channels in the euro area by combining micro data from the HFCS and the EU-LFS with structural VARs estimated on aggregate time series. We find that the indirect labor income channel and the housing wealth effect are strong drivers of the aggregate consumption response to monetary policy and explain the cross-country heterogeneity in these responses.
    Keywords: Consumption; Euro Area; Household Balance Sheets; marginal propensity to consume; monetary policy; wealth distribution
    JEL: D14 D31 E21 E52 E58
    Date: 2019–12
  18. By: Alan J. Auerbach; Yuriy Gorodnichenko; Daniel Murphy
    Abstract: We evaluate the effects of COVID19 restrictions and fiscal policy in a model featuring economic slack. The restrictions can reduce current-period GDP by more than is directly associated with the restrictions themselves even if prices and wages are flexible, households can smooth consumption, and workers are mobile across sectors. The most effective fiscal policies depend on (a) the joint distribution of capital operating costs with respect to firm revenues, (b) the extent to which the price of capital adjusts, and (c) additional factors that determine whether the economy will enter a boom or a slump after the restrictions are lifted, such as the effect of the restrictions on inequality and on spending by high-income households.
    JEL: E32 E62 H2
    Date: 2020–06
  19. By: Hassan, Tarek Alexander; Hollander, Stephan; Tahoun, Ahmed; van Lent, Laurence
    Abstract: Using tools from computational linguistics, we construct new measures of the impact of Brexit on listed firms in the United States and around the world; these measures are based on the proportion of discussions in quarterly earnings conference calls on the costs, benefits, and risks associated with the UK's intention to leave the EU. We identify which firms expect to gain or lose from Brexit and which are most affected by Brexit uncertainty. We then estimate effects of the different types of Brexit exposure on firm-level outcomes. We find that the impact of Brexit-related uncertainty extends far beyond British or even European firms; US and international firms most exposed to Brexit uncertainty lost a substantial fraction of their market value and have also reduced hiring and investment. In addition to Brexit uncertainty (the second moment), we find that international firms overwhelmingly expect negative direct effects from Brexit (the first moment) should it come to pass. Most prominently, firms expect difficulties from regulatory divergence, reduced labor mobility, limited trade access, and the costs of post-Brexit operational adjustments. Consistent with the predictions of canonical theory, this negative sentiment is recognized and priced in stock markets but has not yet significantly affected firm actions.
    Keywords: Brexit; cross-country effects; Machine Learning; sentiment; uncertainty
    JEL: D8 E22 E24 E32 E6 F0 G18 G32 G38 H32
    Date: 2019–12
  20. By: Warwick McKibbin; David Vines
    Abstract: The COVID-19 crisis has caused the greatest collapse in global economic activity since 1720. Some advanced countries have mounted a massive fiscal response, both to pay for disease-fighting action and to preserve the incomes of firms and workers until the economic recovery is under way. But there are many emerging market economies which have been prevented from doing what is needed by their high existing levels of public debt and—especially—by the external financial constraints which they face. We argue in the present paper that there is a need for international cooperation to allow such countries to undertake the kind of massive fiscal response that all countries now need, and that many advanced countries have been able to carry out. We show what such cooperation would involve. We use a global macroeconomic model to explore how extraordinarily beneficial such cooperation would be. Simulations of the model suggest that GDP in the countries in which extra fiscal support takes place would be around two and a half per cent higher in the first year, and that GDP in other countries in the world be more than one per cent higher. So far, such cooperation has been notably lacking, in striking contrast with what happened in the wake of the Global Financial Crisis in 2008. The necessary cooperation needs to be led by the Group of Twenty (G20), just as happened in 2008–9, since the G20 brings together the leaders of the world’s largest economies. This cooperation must also necessarily involve a promise of international financial support from the International Monetary Fund, otherwise international financial markets might take fright at the large budget deficits and current account deficits which will emerge, creating fiscal crises and currency crises and so causing such expansionary policies which we advocate to be brought to an end.
    Keywords: COVID-19, risk, macroeconomics, DSGE, CGE, G-Cubed (G20)
    JEL: C54 C68 E27 E61 E62 F41 F42
    Date: 2020–07
  21. By: Alberto Cavallo
    Abstract: The Covid-19 Pandemic has led to changes in consumer expenditure patterns that can introduce significant bias in the measurement of inflation. I use data collected from credit and debit transactions in the US to update the official basket weights and estimate the impact on the Consumer Price Index (CPI). I find that the Covid inflation rate is higher than the official CPI in the US, for both headline and core indices. I also find similar results with Covid baskets in 10 out of 16 additional countries. The difference is significant and growing over time, as social-distancing rules and behaviors are making consumers spend relatively more on food and other categories with rising inflation, and relatively less on transportation and other categories experiencing significant deflation.
    JEL: C43 E21 E31
    Date: 2020–06
  22. By: Luis J. Álvarez (Banco de España); Mónica Correa-López (Banco de España)
    Abstract: We analyze the information content of alternative inflation expectations measures, including those from consumers, firms, experts and financial markets, in the context of open economy Phillips curves. We adopt a thick modeling approach with rolling regressions and we assess the results of an out-of sample conditional forecasting exercise by means of meta regressions. The information content varies substantially across inflation expectations measures. In particular, we find that those from consumers and firms are better at predicting inflation if compared to those from experts and, especially, those from financial markets.
    Keywords: inflation dynamics, inflation expectations, Phillips curve, euro area, thick modeling, meta regressions
    JEL: E31 E37 E52
    Date: 2020–07
  23. By: Fornaro, Luca
    Abstract: Since the creation of the euro, capital flows among member countries have been large and volatile. Motivated by this fact, I provide a theory connecting the exchange rate regime to financial integration. The key feature of the model is that monetary policy affects the value of collateral that creditors seize in case of default. Under flexible exchange rates, national governments can expropriate foreign investors by depreciating the exchange rate. Anticipating this, investors impose tight limits on international borrowing. In a monetary union this source of exchange rate risk is absent, because national governments do not control monetary policy. Forming a monetary union thus increases financial integration by boosting borrowing capacity toward foreign investors. This process, however, does not necessarily lead to higher welfare. The reason is that a high degree of financial integration can generate multiple equilibria, with bad equilibria characterized by inefficient capital flights. Capital controls or fiscal transfers can eliminate bad equilibria, but their implementation requires international cooperation.
    Keywords: capital flights; Euro Area; Exchange Rates; International financial integration; monetary union; Optimal Currency Area
    JEL: E44 E52 F33 F34 F36 F41 F45
    Date: 2019–12
  24. By: Jonathan Heathcote; Fabrizio Perri; Giovanni L. Violante
    Abstract: We document that declining hours worked are the primary driver of widening inequality in the bottom half of the male labor earnings distribution in the United States over the past 52 years. This decline in hours is heavily concentrated in recessions: hours and earnings at the bottom fall sharply in recessions and do not fully recover in subsequent expansions. Motivated by this evidence, we build a structural model to explore the possibility that recessions cause persistent increases in inequality; that is, that the cycle drives the trend. The model features skill-biased technical change, which implies a trend decline in low-skill wages relative to the value of non-market activities. With this adverse trend in the background, recessions imply a potential double-whammy for low skilled men. This group is disproportionately likely to experience unemployment, which further reduces skills and potential earnings via a scarring effect. As unemployed low skilled men give up job search, recessions generate surges in non-participation. Because non-participation is highly persistent, earnings inequality remains elevated long after the recession ends.
    JEL: E24 E32 J24 J31 J64 J65
    Date: 2020–06
  25. By: de Groot, Oliver; Haas, Alexander
    Abstract: Negative interest rates are a new (and controversial) monetary policy tool. This paper studies a novel signalling channel and asks whether negative rates can be 1) an effective and 2) an optimal policy tool. 1) We build a financial-friction new-Keynesian model in which monetary policy can set a negative reserve rate, but deposit rates are constrained by zero. All else equal, a negative rate contracts bank net worth and increases credit spreads (the costly "interest margin" channel). However, it also signals lower future deposit rates, even with current deposit rates constrained, boosting aggregate demand and net worth. Quantitatively, we find the signalling channel dominates, but the effectiveness of negative rates depends crucially on three factors: i) degree of policy inertia, ii) level of reserves, iii) zero lower bound duration. 2) In a simplied model we prove two necessary conditions for the optimality of negative rates: i) time-consistent policy setting, ii) preference for policy smoothing.
    Keywords: forward guidance; liquidity trap; monetary policy; Taylor rule
    JEL: E44 E52 E61
    Date: 2020–01
  26. By: Tuckett, David (UCL Centre for the Study of Decision-Making Uncertainty, University College London); Holmes, Douglas (Binghamton University); Pearson, Alice (University of Cambridge); Chaplin, Graeme (Bank of England)
    Abstract: In this paper we explore how macroeconomic theory might be augmented, and the practice of monetary policy better understood, if approached through ideas from social and psychological science. A modern, inflation-targeting central bank faces ‘radical’ uncertainty both in understanding the economy and in knowing how best to communicate policy decisions to influence behaviour. We make use of narrative theory to explore these challenges, drawing on fieldwork with the Bank’s regional Agencies and conversations with staff and policy-makers. We find that the intelligence gathered from conversations with businesses is uniquely useful for both the analysis and communication of monetary policy. Such intelligence embodies knowledge about the plans which are making the future. It also provides insights into how economic agents understand the economy they are creating. These insights can help the Monetary Policy Committee to communicate its policy as a narrative the public understands and commits to. We propose further research to advance and test these ideas.
    Keywords: Monetary policy; narrative theory; uncertainty; inflation-targeting; central bank communication; macroeconomic theory; economic knowledge
    JEL: E52 E58
    Date: 2020–06–05
  27. By: Bayer, Christian; Born, Benjamin; Luetticke, Ralph
    Abstract: How much does inequality matter for the business cycle and vice versa? Using a Bayesian likelihood approach, we estimate a heterogeneous-agent New-Keynesian (HANK) model with incomplete markets and portfolio choice between liquid and illiquid assets. The model enlarges the set of shocks and frictions in Smets and Wouters (2007) by allowing for shocks to income risk and taxes. We find that adding data on inequality does not materially change the estimated shocks and frictions driving the US business cycle. The estimated shocks, however, have significantly contributed to the evolution of US wealth and income inequality. The systematic components of monetary and fiscal policy are important for inequality as well, while policy shocks have smaller effects on inequality.
    Keywords: Bayesian estimation; business cycles; Income inequality; incomplete markets; Monetary and Fiscal Policy; Wealth Inequality
    JEL: C11 E32 E63
    Date: 2020–01
  28. By: Kajal Lahiri; Yongchen Zhao
    Abstract: We reformulate the Nordhaus test as a friction model where the large number of zero revisions are treated as censored, i.e., unknown values inside a small region of “imperceptibility.” Using Blue Chip individual forecasts of U.S. real GDP growth, inflation, and unemployment over 1985-2020, we find pervasive overreaction to news at most of the monthly forecast horizons from 24 to 1, but the degree of inefficiency is very small. The updaters, i.e., those who make non-zero revisions, are not found to perform better than their “inattentive” peers do.
    Keywords: Nordhaus test, expectations updating, forecast efficiency, fixed-event forecasts, inattentive forecasters
    JEL: C53 E27 E37
    Date: 2020
  29. By: Bodenstein, Martin; Corsetti, Giancarlo; Guerrieri, Luca
    Abstract: The consensus in the recent literature is that the gains from international monetary cooperation are negligible, and so are the costs of a breakdown in cooperation. However, when assessed conditionally on empirically-relevant dynamic developments of the economy, the welfare cost of moving away from regimes of explicit or implicit cooperation may rise to multiple times the cost of economic fluctuations. In economies with incomplete markets, the incentives to act non-cooperatively are driven by the emergence of global imbalances, i.e., large net-foreign-asset positions; and, in economies with complete markets, by divergent real wages.
    Keywords: global imbalances; monetary policy cooperation; open-loop Nash games
    JEL: E44 E61 F42
    Date: 2020–01
  30. By: Anil Ari (IMF); Sophia Chen (IMF); Lev Ratnovski (ECB)
    Abstract: This paper presents a new dataset on the dynamics of non-performing loans (NPLs) during 88 banking crises since 1990. The data show similarities across crises during NPL build-ups but less so during NPL resolutions. We find a close relationship between NPL problems—elevated and unresolved NPLs—and the severity of post-crisis recessions. A machine learning approach identifies a set of pre-crisis predictors of NPL problems related to weak macroeconomic, institutional, corporate, and banking sector conditions. Our findings suggest that reducing pre-crisis vulnerabilities and promptly addressing NPL problems during a crisis are important for post-crisis output recovery.
    Keywords: non-performing loans, debt, banking crises, recessions, crisis resolution
    JEL: E32 E44 G21 N10 N20
    Date: 2020–05–06
  31. By: Wataru Hirata (Bank of Japan); Toshitaka Maruyama (Bank of Japan); Tomohide Mineyama (Bank of Japan)
    Abstract: In this paper, we examine from both a theoretical and an empirical perspective the validity of the hypothesis that downward nominal wage rigidity (DNWR) induced upward rigidity in wage setting, thereby contributing to the flattening of the wage Phillips curve. We focus in particular on Japanese regular workers, those workers who are characteristically employed on long-term contracts. Our theoretical study, which incorporates long-term employment contracts, indicates that DNWR induces upward wage rigidity through the following two channels: first, due to the lack of sufficient downward wage adjustments during economic downturns, firms may become reluctant to increase wages in economic recovery phases; second, firms contain wage increases even in economic expansion phases as they take into account the risk of pay cuts in the future. The strength of the latter channel largely depends on expected economic growth and its uncertainty. As a result, the wage Phillips curve becomes flatter than would be the case without DNWR. In line with the theoretical result, our empirical study using the panel data of Japanese regular workers reveals that the slower growth of monthly earnings, which excludes bonuses but includes overtime pay, for workers who display a strong degree of DNWR pushed down the growth of monthly earnings at the aggregate level by 0.4 percentage points per year (a range of 0.2 to 0.6 percentage points, given uncertainty regarding the identification of DNWR) between 2010-17. In particular, the channel arising from future pay cut risks became relatively stronger in the late 2010s, when labor market conditions became markedly tighter.
    Keywords: Wage Phillips curve; Downward nominal wage rigidity; Long-term employment contracts
    JEL: E24 E31 J30
    Date: 2020–07–20
  32. By: Michael D. Bordo; Andrew T. Levin; Mickey D. Levy
    Abstract: The U.S. economy currently faces a truly extraordinary degree of uncertainty as a consequence of the COVID-19 pandemic. In these circumstances, the Federal Reserve could begin highlighting alternative scenarios to illustrate key risks to the economic outlook, and such scenarios could inform the Fed’s policy strategy and public communications. In this paper, we present a set of illustrative scenarios, including a baseline scenario with a rapid but incomplete recovery this year (an upward-tilting checkmark), a benign scenario in which an effective cure or vaccine becomes available and facilitates a nearly complete recovery by mid-2021, and a severely adverse scenario involving persistently high unemployment and disinflationary pressures. Insights into these scenarios can be drawn from key historical episodes, including the Spanish flu, the Great Depression, the end of World War II, and the global financial crisis. We conclude by identifying key challenges that the Federal Reserve might face in adjusting its monetary policy and emergency credit facilities under each of these alternative scenarios.
    JEL: E52 E58 N10 N11 N12
    Date: 2020–06
  33. By: Eddie Gerba (Danmarks Nationalbank); Danilo Leiva-Leon (Banco de España)
    Abstract: We measure the time-varying strength of macro-financial linkages within and across the US and euro area economies by employing a large set of information for each region. In doing so, we rely on factor models with drifting parameters where real and financial cycles are extracted, and shocks are identified via sign and exclusion restrictions. The main results show that the euro area is disproportionately more sensitive to shocks in the US macroeconomy and financial sector, resulting in an asymmetric cross-border spillover pattern between the two economies. Moreover, while macro-financial interactions have steadily increased in the euro area since the late 1980s, they have oscillated in the US, exhibiting very long cycles of macro-financial interdependence.
    Keywords: macro-financial linkages, dynamic factor models, TVP-VAR
    JEL: E44 C32 C55 F44 E32 F41
    Date: 2020–07
  34. By: Cyrille Lenoel; Garry Young
    Abstract: This paper presents the results of a survey that identifies real-time turning point indicators published by international statistical and economic institutions. It reports the evidence on past and present indicators used, the methodology underlying their construction and the way the indicators are presented. We find that business and consumer surveys are the most popular source of data and composite indicators like diffusion or first component are the most popular types of indicators. The use of novel databases, big data and machine learning has been limited so far but has a promising future.
    Keywords: business cycles, turning points, recession, leading indicator, composite indicator, diffusion index, bridge model, Markow-switching model
    JEL: C22 C25 C35 E32 E37
    Date: 2020–04
  35. By: Kollmann, Robert
    Abstract: This paper studies rational bubbles in non-linear dynamic general equilibrium models of the macroeconomy. The term 'rational bubbles' refers to multiple equilibria arising from the absence of a transversality condition (TVC) for capital. The lack of TVC can be due to an overlapping generations structure. Rational bubbles reflect self-fulfilling fluctuations in agents' expectations about future investment. In contrast to explosive rational bubbles in linearized models (Blanchard (1979)), the rational bubbles in non-linear models here are stable and bounded. Bounded bubbles can generate persistent fluctuations of real activity, and capture key business cycle stylized facts. Both closed and open economies are analyzed. In a non-linear two-country model with integrated financial markets, bubbles must be perfectly correlated across countries.
    Keywords: Boom-bust cycles; business cycles in closed and open economies; Dellas model; Long-Plosser model; non-linear DSGE models; Rational bubbles
    JEL: C6 E1 E3 F3 F4
    Date: 2020–01
  36. By: Jules H. van Binsbergen
    Abstract: Interest rates across maturities have dropped to all-time low levels around the world. These unexpected shocks to discount rates have an important effect on the valuation of long duration assets. To quantify this effect, I construct a number of counterfactual fixed income portfolios that match the duration of the dividend strips of the aggregate stock market. I show that such fixed income portfolios have performed as well, if not better, than the U.S. stock market in the past five decades, while exhibiting similar (or higher) levels of volatility. Therefore, investors have received little to no compensation for taking long duration nominal dividend risk in the past half century. Further, if anything, stocks seem to have too little volatility (not excess volatility) compared to these fixed income counterfactuals. I discuss several explanations for these findings, including a secular decline in economic growth rates, dividends' potential to hedge against inflation, as well as the diversification of dividend risk across maturities. These results also have important implications for research on the cross-section of stock returns and capital structure.
    JEL: E2 E21 E4 G1 G11 G12 G15 G31 G32 O4
    Date: 2020–06
  37. By: Hjortsoe, Ida (Bank of England); Lewis, John (Bank of England)
    Abstract: We investigate pass-through of exchange rate changes into UK import prices for 55 sectors using sector-specific exchange rate indices. Estimating a separate error correction model for each sector, we document substantial sectoral variation in pass-through, but find that compositional effects have not generated much variation in aggregate pass-through over time. Aggregating our sectoral results, we find that 74% of exchange rate changes are passed through to aggregate import prices in the long run. Pass-through is faster for larger exchange rate changes than smaller ones; and for movements driven by the US dollar than for broader based exchange rate changes. This greater sensitivity to the dollar exchange rate changes suggests the US dollar is used as a vehicle currency for invoicing some imports from non-US countries. We find no evidence of a comparable role for the euro nor for asymmetries in pass-through at the aggregate level.
    Keywords: Exchange rate pass-through; import prices; vehicle currencies; non-linearities
    JEL: E31 E44
    Date: 2020–06–05
  38. By: Daisuke Miyakawa; Koki Oikawa; Kozo Ueda
    Abstract: Responding to the increased attention on the distributional aspects of monetary policy, we investigate the reallocation among heterogeneous firms triggered by nominal growth. Japanese firm-level data show that large firms invest more in R&D and grow faster than small firms under higher inflation. We then construct a model that introduces nominal rigidity into R&D-driven endogenous growth with heterogeneous firms. The model shows that high nominal growth leads to an increase in the market share of innovative firms because menu-cost burdens are relatively heavier for less innovative firms. This reallocation effect yields a positive effect of monetary expansion on both real growth and welfare. The optimal nominal growth can be strictly positive even under nominal rigidity. Moreover, the presence of menu costs can improve welfare.
    Keywords: Reallocation, firm dynamics, creative destruction, menu cost, optimal inflation rate
    JEL: E5 O3 O4
    Date: 2020–06
  39. By: Robin Braun (Bank of England, Centre for Macroeconomics); Ralf Brüggemann (Department of Economics, University of Konstanz)
    Abstract: We discuss combining sign restrictions with information in external instruments (proxy variables) to identify structural vector autoregressive (SVAR) models. In one setting, we assume the availability of valid external instruments. Sign restrictions may then be used to identify further orthogonal shocks, or as an additional infor-mation on the shocks identified by the external instruments. In the latter case, the additional restrictions may be overidentifying and checked against the data. In a sec-ond setting, we assume that proxy variables are only ‘plausibly exogenous’. In this case, various inequality restrictions based e.g. on correlations or variance contribu-tions can be used for set-identification. This can be combined with conventional sign restrictions to further narrow down the set of admissible models. For our B-model type Proxy SVAR setup, we develop Bayesian inference and discuss the computation of Bayes factors to check overidentifying restrictions. We illustrate the usefulness of our methodology in estimating the effects of oil market and monetary policy shocks.
    Keywords: Structural vector autoregressive model, sign restrictions, external instru-ments, Proxy VAR
    JEL: C32 C11 E32 E52
    Date: 2020–05–15
  40. By: Girish Bahal (Economics Discipline, Business School, University of Western Australia); Anand Shrivastava (Azim Premji University, Bangalore, India)
    Keywords: Fiscal Transfers; Welfare programs; Government spending; Inflation
    JEL: E31 E62 H53 I38
    Date: 2020
  41. By: Javier Andrés; Óscar Arce; Jesús Fernández-Villaverde; Samuel Hurtado
    Abstract: We study the macroeconomic effects of internal devaluations undertaken by a periphery of countries belonging to a monetary union. We find that internal devaluations have large and positive output effects in the long run. Through an expectations channel, most of these effects carry over to the short run. Internal devaluations focused on goods markets reforms are generally more powerful in stimulating growth than reforms aimed at moderating wages, but the latter are less deflationary. For a monetary union with a periphery the size of the euro area's, the countries at the periphery benefit from internal devaluations even at the zero lower bound (ZLB) of the nominal interest rate. Nevertheless, when the ZLB binds, there is a case for a sequencing of reforms that prioritizes labor policies over goods markets reforms.
    JEL: D42 E44 E63
    Date: 2020–06
  42. By: Bejarano-Salcedo, Valeria; Cárdenas-Cárdenas, Julián Alonso; Julio-Román, Juan Manuel; Caicedo-García, Edgar
    Abstract: Proponemos nuevos modelos para el efecto de “El Niño Southern Oscillation”, ENSO, sobre los precios de los alimentos en Colombia. Estudiamos el efecto del “Oceanic Niño Index”, ONI, la medida de ENSO preferida, y de las precipitaciones locales sobre los precios de los alimentos perecederos. Estos modelos surgen de hechos estilizados conocidos, los cuales resumimos en este escrito, y admiten representaciones tiempo-variantes espacio-estado, de las que derivamos las reglas óptimas de pronóstico. Encontramos que una función de transferencia simple, condicional a la intensidad de ENSO, es suficiente para explicar estas relaciones. En adición al bien conocido hecho que la Niña tiene un efecto distinto al del Niño sobre los precios de los alimentos, también hallamos que el efecto de ENSO cambia con su intensidad. Reconocer que el ONI es un indicador imperfecto de las condiciones climáticas locales mejora el ajuste de nuestro modelo, lo cual se refleja en sus pronósticos. El modelo para la precipitación, sin embargo, no necesita de este recurso. También surgen ganancias en eficiencia debido al modelamiento de la heterocedasticidad. Finalmente, estos modelos pueden servir para entender el efecto de ENSO en otras variables como el PIB.
    Keywords: Inflación de alimentos; El Niño; Pronóstico de inflación; Política Monetaria
    JEL: C53 E31 E37 E58
    Date: 2020–06
  43. By: Boriss Siliverstovs (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Anna Sandqvist (ifo Zentrum für Makroökonomik)
    Abstract: Although the influence of exceptional weather on individual behaviour has already been acknowledgedin finance, psychology, and marketing, the literature examining weather effects at more aggregate levelis still limited. Further, there is a lot of anecdotal evidence that weather anomalies affect consumerspending and retail business. The main aim of this analysis is to investigate and quantify the effectsof unusual weather in consumer spending at macro-level. Using aggregate retail sales data for Switzer-land, our findings reveal that weather deviations from seasonal norms, especially, unusually high or lowtemperatures in a given month, do cause sizeable intertemporal shifts in consumer spending at countrylevel. Furthermore, the effects of abnormal weather are found to differ across seasons, both with respectto sign and magnitude. In particular, our findings indicate that weather effects manifest mainly throughthe seasons change channel: weather conditions in line with the coming season boost the purchases earlyin the season.
    Keywords: Consumer spending, intertemporal shifts, retail sales, unusual weather
    JEL: E21 E32 D12 C22
    Date: 2018–08
  44. By: Ali Kabiri; Harold James; John Landon-Lane; David Tuckett; Rickard Nyman
    Abstract: John Maynard Keynes composed The General Theory as a response to the Great Crash and Great Depression with all their devastating consequences for the US macro economy and financial markets, as well as the rest of the world. The role of expectations his new theory set out has been widely accepted. The role of “animal spirits” he proscribed (i.e. the role of emotion in cognition) has remained much more controversial. We analyse over two million digitally stored news articles from The Wall St Journal to construct a sentiment series that we use to measure the role of emotion at the time Keynes wrote. An eight variable vector error correction model is then used to identify shocks to sentiment that are orthogonal to the fundamentals of the economy. We show that the identified “pure” sentiment shocks do have statistically and economically significant effects on output, money supply (M2), and the stock market for periods of the 1920s.
    Keywords: Great Depression, general theory, algorithmic text analysis, behavioural economics
    JEL: D89 E32 N10 N30
    Date: 2020
  45. By: Callum Jones; Mariano Kulish; Daniel Rees
    Abstract: We estimate a two-country model of the US and Canada over the post 2009 sample to study the cross-country spillovers of forward guidance shocks. To do so, we propose a method to identify forward guidance shocks during the fixed interest rate regime. US forward guidance shocks have a larger impact than conventional monetary policy shocks. A 2 quarter expansionary forward guidance shock decreases Canadian output by about 0.2% to 0.4% on impact. The effect of US forward guidance shocks on Canadian output, unlike conventional policy shocks, depends crucially on the state of the US risk premium shock. The estimated forward guidance shocks coincide with significant US monetary policy announcements such as the introduction of calendar based guidance.
    Keywords: forward guidance shocks, identification, spillovers, zero lower bound
    JEL: E2 E4 E5 F4
    Date: 2020–07
  46. By: Ivan Khotulev (Bank of Russia, Russian Federation)
    Abstract: In this note, we study shock-dependent exchange rate pass-through (ERPT) to consumer prices in Russia. First, we estimate a traditional "shock-independent" ERPT on aggregate quarterly time series of the exchange rate, CPI, and control variables. Estimated coefficients confirm previous studies and official statements by the Bank of Russia. Rolling regression in different periods shows that the ERPT becomes more stable and more precisely estimated after 2014-2015 when the Bank of Russia switched to inflation targeting. We compare results with the ERPT from an estimated structural model. We obtain a forecast of macroeconomic time series from a DSGE model conditional on foreign variables observed. We run the same regression on forecasted data and obtain estimates of the "shock-independent" ERPT from the structural model. We compute shock-dependent ERPT from model impulse responses. The magnitude of the ERPT varies for different shocks with the highest value attributed to domestic monetary policy shocks. When estimating the pass-through of the exchange rate to prices, care must be taken of which shock caused changes in the exchange rate. Since monetary policy shocks appear to be associated with the highest ERPT, and the ERPT becomes more stable after 2014-2015, the Russian economy may be reaping an additional benefit of inflation targeting in the form of reduced monetary policy shocks and a more stable ERPT.
    Keywords: exchange rate pass-through, monetary policy, Russia
    Date: 2020–06
  47. By: Haldane, Andrew; Macaulay, Alistair; McMahon, Michael
    Abstract: In this paper we explore both theoretical and empirical evidence on communication with the general public. The model provides guidance for policy makers by high- lighting some potentially important risks in communicating simply with a broader audience. In particular, in a model where trust and engagement are low, there are benefits to engaging a wider audience. But doing so risks ultimately lowering welfare unless guided by the 3 E's of public communication: Explanation, Engagement and Education. Central banks have made great strides in all three, but numerous challenges remain.
    Keywords: communication; General Public; monetary policy
    JEL: E52 E58
    Date: 2020–01
  48. By: Bendreff Desilus
    Abstract: Fiscal policy is useful as a government instrument for supporting the economy, contributing to an increase in employment, and reducing inequality through more egalitarian income distribution. Over the past 30 years, developing countries have failed to increase their real wages due to the lack of domestic value-added in the era of globalization, where global supply chains are the driving factor for attracting foreign direct investment. Under such circumstances, the role of fiscal policy has become an important factor in creating the necessary conditions for boosting the economy. With the end of commodity-export-led growth, Mexico experienced a moderate reduction of 5 percent in poverty between 2014 and 2018 due to the structural adjustment of social policies and its economic and trade relationship with the United States; during the same period there has been no change in poverty in Argentina, and Brazil has suffered a rise in poverty. Following the global financial crisis, greater attention has been paid to fiscal policy in developed and developing countries--specifically Argentina, Brazil, and Mexico (ABM)--in order to attain macroeconomic stability. One of the consequences of the financial crisis is rising income inequality and its negative effects on economic growth. Over the past decade, fiscal policy has been adopted for the economic recovery. However, the recovery has been accompanied by a decrease in real wages of the middle class. The purpose of the present research is to critically examine the results of fiscal policy in ABM and the United Nations' 2030 Agenda for Sustainable Development.
    Keywords: Wages; Inequality; Productivity; Full Employment; Sustainability; Government Policy
    JEL: E24 D63 J21 Q56 I38
  49. By: Elena Afanasyeva
    Abstract: Yes, they can. I propose a new method to detect credit booms and busts from multivariate systems -- monetary Bayesian vector autoregressions. When observed credit is systematically higher than credit forecasts justified by real economic activity variables, a positive credit gap emerges. The methodology is tested for 31 advanced and emerging market economies. The resulting credit gaps fit historical evidence well and detect turning points earlier, outperforming the credit-to-GDP gaps in signaling financial crises, especially at longer horizons. The results survive in real time and can shed light on the drivers of credit booms.
    Keywords: Credit gap; Early warning; Credit boom; Conditional forecast; Financial crisis; Bayesian VAR
    JEL: E58 C11 C53 C13 E51
    Date: 2020–06–12
  50. By: Döttling, Robin; Ratnovski, Lev
    Abstract: We contrast how monetary policy affects intangible relative to tangible investment. We document that the stock prices of firms with more intangible assets react less to monetary policy shocks, as identified from Fed Funds futures movements around FOMC announcements. Consistent with the stock price results, instrumental variable local projections confirm that the total investment in firms with more intangible assets responds less to monetary policy, and that intangible investment responds less to monetary policy compared to tangible investment. We identify two mechanisms behind these results. First, firms with intangible assets use less collateral, and therefore respond less to the credit channel of monetary policy. Second, intangible assets have higher depreciation rates, so interest rate changes affect their user cost of capital relatively less. JEL Classification: E22, E52, G32
    Keywords: heterogeneity, intangible investment, monetary policy, stock returns
    Date: 2020–07
  51. By: Lloyd, Simon (Bank of England); Marin, Emile (University of Cambridge)
    Abstract: We show that currencies with a steeper yield curve tend to depreciate at business cycle horizons, in violation of uncovered interest parity. The yield curve adds no explanatory power over and above spot yield differentials in explaining exchange rates at longer horizons. Analysing bond holding period returns, we identify a tent-shaped relationship between the exchange rate risk premium and the relative slope across horizons. We derive this relationship analytically within an asset pricing framework and show it is driven by differences in transitory innovations to investors’ stochastic discount factor, captured by the relative yield curve slope and consistent with business cycle risk. Our mechanism is robust to the inclusion of liquidity yields, which instead contribute to explaining cross-sectional differences across currencies and reflect permanent innovations to investors’ stochastic discount factor.
    Keywords: Business cycle risk; exchange rates; risk premia; stochastic discount factor; uncovered interest parity; yield curves
    JEL: E43 F31 G12
    Date: 2020–06–12
  52. By: Hyunduk Suh (Inha University); Jin Young Yang (Zayed University)
    Abstract: We analyze international firm-level data to examine the relationship between housing cycle and firm capital expenditure or R&D spending. We use the housing price component independent of firms’ investment opportunity and credit supply shocks, obtained by historical decomposition of a structural VAR, as the key explanatory variable. The baseline results support the existence of the collateral channel as housing price growth and firm investment exhibit a positive relationship. This collateral channel is more distinct for capital expenditure than R&D spending, and in housing market downturns than booms. Another notable finding is that despite the collateral channel, large housing price booms are detrimental to investment, which suggests a possible reallocation of resources from the production sector to the housing sector during those phases. Moreover, various firm-specific and country-specific characteristics are found to affect the housing price-investment relationship. Small firms and firms with stronger investment opportunities respond more sensitively to housing price shocks. Countries that rely more on bank financing, collateralized lending, and with higher LTV restraint, display a larger collateral effect in capital expenditure.
    Keywords: Housing cycle, Investment, R&D, Housing price, Collateral channel
    JEL: E22 E32 G31
    Date: 2020–05
  53. By: Giovanni Angelini; Giovanni Caggiano; Efrem Castelnuovo; Luca Fanelli
    Abstract: How large are government spending and tax multipliers? The fiscal proxy-SVAR literature provides heterogenous estimates, depending on which proxies - fiscal or non-fiscal - are used to identify fiscal shocks. We reconcile the existing estimates via a flexible vector autoregressive model that allows to achieve identification in presence of a number of structural shocks larger than that of the available instruments. Our two main findings are the following. First, the estimate of the tax multiplier is sensitive to the assumption of orthogonality between total factor productivity (non-fiscal proxy) and tax shocks. If this correlation is assumed to be zero, the tax multiplier is found to be around one. If such correlation is non-zero, as supported by our empirical evidence, we find a tax multiplier three times as large. Second, we find the spending multiplier to be robustly larger than one across different models that feature different sets of instruments. Our results are robust to the joint employment of different fiscal and non-fiscal instruments.
    JEL: C52 E62
    Date: 2020–07
  54. By: Cuciniello, Vincenzo; di Iasio, Nicola
    Abstract: We use monthly data on individual loans from the Italian Credit Register over the period from 1997 to 2019 and show that bank credit expansions in the non-financial private sector are mostly explained by variations in the extensive margin calculated either in credit flows or headcount of new borrowers. We then build on a flow approach to decompose changes in the net creation of borrowers into gross flows across three states: (i) borrowers, (ii) applicants and (iii) others (neither debtors nor applicants). The paper investigates the macroeconomic dimension of these gross flows and documents three key cyclical facts. First, entries in the credit market by new obligors (“inflows”) account for the bulk of volatility in the net creation of borrowers. Second, the volatility of borrower inflows is two times as large as the volatility of obligors exiting from the credit market (“outflows”). Third, borrower inflows are highly pro-cyclical, lead the economic cycle, and their fluctuations are mainly driven by the probability of getting a loan from new banks. We read these results in light of the macrofinance literature on search frictions and on competition with lender-lender informational asymmetries. Overall, our findings support theoretical predictions of these models, but search frictions seem to play a major role in shaping movements along the extensive margin. JEL Classification: E51, E32, E44
    Keywords: applicant, borrower, business cycle, credit cycle, gross flows
    Date: 2020–07
  55. By: Bitros, George C.
    Abstract: Credible analyses and evidence submitted by experts from universities, international organizations and independent think tanks show that the trends which led to the 2008 worldwide financial crisis remain intact. As a result, central for responsible leaderships should be the concern how to forestall the next big one which might prove uncontrollable. Given the world dominance of the U.S. dollar, in a 2015 paper I discussed two paths of possible reforms: One bold but gradual, which would entail altering the present institutional setup of the U.S. Federal Open Market Committee (“the Fed”), provided that it maintains control over the Federal Funds Rate (FFR); and, if not, a radical one, which would entail replacing the Fed with a monetary regime based on free banking. In this paper I go a step further in the latter direction by drawing on the model of free banking that emerged in Athens in classical times and enabled the Athenian “empire” to turn the Attic drachma into the dollar of today, throughout the eastern Mediterranean and beyond, without causing major financial crises for over two centuries. More specifically, I argue that, even if the said model had not proved its potential as a highly successful historical precedent, as banker of the world, the U.S. ought to consider it as a benchmark for reference and adaptation, before an unexpected international financial crisis and/or the revolutionary technological developments in the front of gold-like digital currencies, precipitate a monetary regime change.
    Keywords: Classical Athens, Democracy, Central banks, Free banking, Athenian model of money and banking.
    JEL: D7 E4 E5 E6 G2 N4
    Date: 2020–06–16
  56. By: Bottero, Margherita; Minoiu, Camelia; Peydro, Jose-Luis; Polo, Andrea; Presbitero, Andrea; Sette, Enrico
    Abstract: We show that negative interest rate policy (NIRP) has expansionary effects on bank credit supply-and the real economy-through a portfolio rebalancing channel, and that, by shifting down and flattening the yield curve, NIRP differs from rate cuts just above the zero lower bound. For identification, we exploit ECB's NIRP and matched administrative datasets-including the credit register-from Italy, severely hit by the Eurozone crisis. NIRP affects banks with higher ex-ante net short-term interbank positions or, more broadly, more liquid balance-sheets. NIRP-affected banks rebalance their portfolios from liquid assets to lending, especially to ex-ante riskier and smaller firms-without higher ex-post delinquencies-and cut loan rates (even to the same firm), inducing sizable firm-level real effects. By contrast, there is no evidence of a retail deposits channel associated with NIRP.
    Keywords: bank lending channel of monetary policy; eurozone crisis; Liquidity management; Negative Interest Rates; Portfolio rebalancing
    JEL: E52 E58 G01 G21 G28
    Date: 2019–12
  57. By: Lewis, Daniel; Makridis, Christos; Mertens, Karel
    Abstract: We use a decade of daily survey data from Gallup to study how monetary policy influences households' beliefs about economic conditions. We first document that public confidence in the state of the economy reacts instantaneously to certain types of macroeconomic news. Next, we show that surprises to the Federal Funds target rate are among the news that have statistically significant and instantaneous effects on economic confidence. Specifically, we find that a surprise increase in the target rate robustly leads to an immediate decline in household confidence, at odds with previous findings that suggest consumers are largely inattentive to economic developments. Monetary policy news about forward guidance and asset purchases does not have similarly clear and robust immediate effects on household beliefs. We document heterogeneity across demographics in the responsiveness of macroeconomic beliefs to aggregate news, and we relate our findings to existing evidence on informational rigidities.
    Keywords: central bank communication; consumer con dence; high frequency identi cation; informational rigidities; monetary policy shocks
    Date: 2020–01
  58. By: Florian Seliger (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Gaéran de Rassenfosse (EPFL Lausanne, Switzerland)
    Abstract: This paper provides a long-term view on the sources of knowledge flow between developed and developing nations. It relies on patent data to explore three potential sources: R&D collaboration, technology sourcing, and technology transfer. All three sources provide a very consistent message. First, knowledge flows with East Asia, particularly China, are occurring more frequently. Second, knowledge flows are increasingly concentrateded in information and communication technologies. Third, the United States & Canada had traditionally larger patenting activity with Asia than Europe, but the share of activity between Europe and Asia has been increasing in recent years. Fourth, larger patenting activity between the United States & Canada and Asia implies that the U.S./Canada region is more likely to benefit from reverse knowledge flows as China progresses towards becoming a technological leader.
    Keywords: international technology sourcing; R&D offshoring; R&D collaboration;technology transfer; patent
    JEL: E21 E32 D12 C22
    Date: 2019–02
  59. By: d’Artis Kancs (European Commission - JRC); Pavel Ciaian (European Commission - JRC); Miroslava Rajcaniova (SAU, Department of Economic Policy)
    Abstract: This is the first paper that estimates the price determinants of BitCoin in a Generalised Autoregressive Conditional Heteroscedasticity framework using high frequency data. Derived from a theoretical model, we estimate BitCoin transaction demand and speculative demand equations in a GARCH framework using hourly data for the period 2013-2018. In line with the theoretical model, our empirical results confirm that both the BitCoin transaction demand and speculative demand have a statistically significant impact on the BitCoin price formation. The BitCoin price responds negatively to the BitCoin velocity, whereas positive shocks to the BitCoin stock, interest rate and the size of the BitCoin economy exercise an upward pressure on the BitCoin price.
    Keywords: Virtual currencies; BitCoin returns; volatility; price formation; GARCH; Digital Economy
    JEL: E31 E42 G12
    Date: 2019–02
  60. By: Kenan Huremovic; Gabriel Jiménez; Enrique Moral-Benito; José-Luis Peydró; Fernando Vega-Redondo
    Abstract: We show that bank shocks originating in the financial sector propagate upstream and downstream along the production network and triple the impact of direct bank shocks. Our identification relies on the universe of both supplier-customer transactions and bank loans in Spain, a standard operationalization of credit-supply shocks during the 2008-09 global crisis, and the proposed theoretical framework. The impact on real effects is strong, and similarly so, when considering: (i) direct bank shocks to firms versus first-order interfirm contagion; (ii) first-order versus higher-order network effects; (iii) downstream versus upstream propagation; (iv) firm-specific versus economy-wide shocks. Market concentration amplifies these effects.
    Keywords: Networks, supply chains, shock propagation, credit supply, real effects of finance
    JEL: D85 E44 E51 G01 G21
    Date: 2020–07
  61. By: Kenan Huremovic; Jiménez Gabriel; Enrique Moral-Benito; José-Luis Peydró; Fernando Vega-Redondo
    Abstract: We show that bank shocks originating in the financial sector propagate upstream and downstream along the production network and triple the impact of direct bank shocks. Our identification relies on the universe of both supplier-customer transactions and bank loans in Spain, a standard operationalization of credit-supply shocks during the 2008-09 global crisis, and the proposed theoretical framework. The impact on real effects is strong, and similarly so, when considering: (i) direct bank shocks to firms versus first-order interfirm contagion; (ii) first-order versus higher-order network effects; (iii) downstream versus upstream propagation; (iv) firm-specific versus economy-wide shocks. Market concentration amplifies these effects.
    Keywords: networks; supply chains; shock propagation; credit supply; real effects of finance
    JEL: D85 E44 E51 G01 G21
    Date: 2020–07
  62. By: Haelim Anderson; Jin-Wook Chang; Adam Copeland
    Abstract: The coronavirus outbreak raises the question of how central bank liquidity support affects financial stability and promotes economic recovery. Using newly assembled data on cross-county flu mortality rates and state-charter bank balance sheets in New York, we investigate the effects of the 1918 Influenza Pandemic on the banking system and the role of the Federal Reserve during the pandemic. We find that banks located in more severely affected areas experienced deposit withdrawals. Banks which were members of the Federal Reserve were able to access central bank liquidity and so continue or even expand lending. Banks which were not members, however, did not borrow on the interbank market but rather curtailed lending, suggesting there was little-to-no pass-through of central bank liquidity. Further, in the counties most affected by the 1918 Influenza, even banks with direct access to the discount window liquidated assets so as to meet large deposit withdrawals, suggesting limits to the effectiveness of the liquidity provision by the Federal Reserve. Finally, we show that the pandemic caused only a short-term disruption on the financial sector. Over the long-term, deposits returned and banks restored their asset portfolios.
    Keywords: 1918 Spanish influenza; Pandemics; Financial stability; Bank lending; Economic recovery
    JEL: E32 G21 N22
    Date: 2020–06–24
  63. By: Luc Eyraud; Andrew Hodge; John Ralyea; Julien Reynaud
    Abstract: This note discusses how to design subnational fiscal rules, including how to select them and calibrate them. It expands on the guidance provided at the national level on rule selection and calibration in IMF (2018a) and IMF (2018b). Thinking on subnational fiscal rules is still evolving, including their effectiveness (for example, Heinemann, Moessinger, and Yeter 2018; Kotia and Lledó 2016; Foremny 2014), and this note only provides a first analysis based on international experiences and the technical assistance provided by the IMF. Main findings are summarized in Box 1. The note is divided into five sections. The first section defines fiscal rules. The second section discusses the rationale for subnational rules. The third section provides some guidance on how to select the appropriate rule(s) and whether they should differ across individual jurisdictions. The fourth section explores the issue of flexibility by looking at how rules should adjust to shocks. Finally, the last section focuses on the “calibration” of the rules.
    Keywords: Fiscal rules;Fiscal rules and institutions;Economic stabilization;Public financial management;Economic policy;Regional economics;Economic cooperation;subnational,debt service,public borrowing,how to,institutional arrangements,investments,local taxation,tax policy,rainy day fund,local government,public debt,public expenditure,golden rule,market discipline,direct controls,cooperative arrangements,transfers,countercyclical policy,macroeconomic stabilization,debt anchor,fiscal balance,borrowing limits,FADHTN,subnational level,Subnational government,escape clause
    Date: 2020–02–25
  64. By: Beck, Günter; Lein, Sarah
    Abstract: High degrees of demand-side real rigidities are able to generate the large monetary non-neutrality found in aggregate data. This paper provides micro-based evidence on the key parameters governing this rigidity using European homescan data. We find strong evidence for demand-side real rigidity, which is, however, significantly lower than that normally assumed in macro models. In a menu-cost model calibrated to our estimates, we show that our estimates are associated with reasonable values for production-side parameters, but they are not able to generate the degree of monetary non-neutrality observed in macro data.
    Keywords: Demand curve; monetary non-neutrality; Price elasticity; Price Setting; Real rigidities; super-elasticity
    JEL: C3 D12 E30 E31 E50
    Date: 2020–01
  65. By: Michael D. Bauer; Glenn D. Rudebusch
    Abstract: The level of the social discount rate (SDR) is a crucial factor for evaluating the costs of climate change. We demonstrate that the equilibrium or steady-state real interest rate is the fundamental anchor for market-based SDRs. Much recent research has pointed to a decrease in the equilibrium real interest rate since the 1990s. Using new estimates of this decline, we document a pronounced downward shift in the entire term structure of SDRs in recent decades. This lower new normal for interest rates and SDRs has substantially boosted the estimated economic loss from climate change and the social cost of carbon.
    Keywords: social discount rate; cost of carbon; natural rate of interest; r-star
    JEL: E43 E44 Q54 H43
    Date: 2020–07–07
  66. By: Balatti, Mirco
    Abstract: Inflation volatility is clearly important for structural analysis, forecasting and policy purposes, yet it is often overlooked in the literature. This paper compares inflation volatility among advanced open economies with inflation targeting monetary policy frameworks. The results of the empirical exercise using a panel dataset suggest that, over the last two decades, the volatility of inflation was similar among countries, even when controlling for monetary policy activity and other factors. In particular, there is only a weak and statistically not significant correlation between inflation volatility and country size. Also, point-targeting central banks (in contrast with range-targeters) and commodity exporters are only weakly associated with higher inflation swings. Equivalent conclusions are reached when decomposing inflation volatility in a transitory and a permanent component. I thus argue that small and large advanced open economies are exposed to global fluctuations to a comparable extent. A range of robustness tests confirm that the results are not sensitive to methodological choices and the relationship was not altered by the Great Recession or the low interest rate environment. JEL Classification: E31, E42, E50, F10, F41
    Keywords: globalisation, inflation targeting, prices, volatility
    Date: 2020–07
  67. By: Ruoyun Mao; Shu-Chun Susan Yang
    Abstract: The theoretical literature generally finds that government spending multipliers are bigger than unity in a low interest rate environment. Using a fully nonlinear New Keynesian model, we show that such big multipliers can decrease when 1) an initial debt-to-GDP ratio is higher, 2) tax burden is higher, 3) debt maturity is longer, and 4) monetary policy is more responsive to inflation. When monetary and fiscal policy regimes can switch, policy uncertainty also reduces spending multipliers. In particular, when higher inflation induces a rising probability to switch to a regime in which monetary policy actively controls inflation and fiscal policy raises future taxes to stabilize government debt, the multipliers can fall much below unity, especially with an initial high debt ratio. Our findings help reconcile the mixed empirical evidence on government spending effects with low interest rates.
    Date: 2020–06–12
  68. By: Olivier Coibion; Yuriy Gorodnichenko; Michael Weber
    Abstract: Using a large-scale survey of U.S. households during the Covid-19 pandemic, we study how new information about fiscal and monetary policy responses to the crisis affects households’ expectations. We provide random subsets of participants in the Nielsen Homescan panel with different combinations of information about the severity of the pandemic, recent actions by the Federal Reserve, stimulus measures, as well as recommendations from health officials. This experiment allows us to assess to what extent these policy announcements alter the beliefs and spending plans of households. In short, they do not, contrary to the powerful effects they have in standard macroeconomic models.
    JEL: C83 E31
    Date: 2020–06
  69. By: Jaqueson Kingeski Galimberti (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: Adaptive learning under constant-gain allows persistent deviations of beliefs from equilibrium so as to more realistically reflect agents’ attempt of tracking the continuous evolution of the economy. A characterization of these beliefs is therefore paramount to a proper understanding of the role of expectations in the determination of macroeconomic outcomes. In this paper we propose a simple approximation of the first two moments (mean and variance) of the asymptotic distribution of learning estimates for a general class of dynamic macroeconomic models under constant-gain learning. Our approximation provides renewed convergence conditions that depend on the learning gain and the model’s structural parameters. We validate the accuracy of our approximation with numerical simulations of a Cobweb model, a standard New-Keynesian model, and a model including a lagged endogenous variable. The relevance of our results is further evidenced by an analysis of learning stability and the effects of alternative specifications of interest rate policy rules on the distribution of agents’ beliefs.
    Keywords: expectations, adaptive learning, constant-gain, policy stability
    JEL: D84 E03 E37 C62 C63
    Date: 2019–03
  70. By: Saten Kumar
    Abstract: This paper investigates the relationship between firms’ inflation expectations and their holdings of liquid assets. We implement a new quantitative survey of firms’ expectations about inflation in New Zealand. We find that firms that hold more shares of liquid assets systematically report lower inflation expectations. Moreover, we implement an experiment by providing firms new exogenous information about recent inflation dynamics. This experiment allows us to assess how firms respond to new information in terms of belief revisions and firm-level decisions.
    Keywords: liquid assets, illiquid assets, expectations, survey, inattention
    JEL: E2 E3
    Date: 2020–06
  71. By: Riccardo Degasperi; Seokki Simon Hong; Giovanni Ricco
    Abstract: This paper studies the transmission of US monetary shocks across the globe by employing a high-frequency identification of policy shocks and large VAR techniques, in conjunction with a large macro- financial dataset of global and national indicators covering both advanced and emerging economies. Our identification controls for the information effects of monetary policy and allows for the separate analysis of tightenings and loosenings of the policy stance. First, we document that US policy shocks have large real and nominal spillover effects that affect both advanced economies and emerging markets. Policy actions cannot fully isolate national economies, even in the case of advanced economies with exible exchange rates. Second, we investigate the channels of transmission and find that both trade and financial channels are activated and that there is an independent role for oil and commodity prices. Third, we show that effects are asymmetric and larger in the case of contractionary US monetary policy shocks. Finally, we contrast the transmission mechanisms of countries with different exchange rates, exposure to the dollar, and capital control regimes.
    Keywords: Monetary policy, Trilemma, exchange rates, Foreign Spillovers
    JEL: E5 F3 F4 C3
    Date: 2020–03
  72. By: Adam, Klaus; Weber, Henning
    Abstract: Using the official micro price data underlying the U.K. consumer price index, we document a new stylized fact for the life-cycle behavior of consumer prices: relative to a narrowly defined set of competing products, the price of individual products tends to fall over the product lifetime. We show that this data feature has important implications for the optimal inflation target. Constructing a sticky-price model featuring a product life cycle and heterogeneous relative-price trends, we derive closed-form expressions for the optimal inflation target under Calvo and menu-cost frictions. We show how the optimal target can be estimated from the observed trends in relative prices. For the U.K. economy, we find the optimal target to be equal to 2.6% in 2016. It has steadily increased over the period 1996 to 2016 due to changes in relative price trends over this period.
    Keywords: Micro price data; optimal inflation; U.K. inflation target
    JEL: E31
    Date: 2020–01
  73. By: Jorge Restrepo
    Abstract: This paper uses the strategy and data of Blanchard and Perotti (BP) to identify fiscal shocks and estimate fiscal multipliers for the United States. With these results, it computes the cumulative multiplier of Ramey and Zubairy (2018), now common in the literature. It finds that, contrary to the peak and through multipliers reported by BP, the cumulative tax multiplier is much larger than the cumulative spending one. Hence, the conclusions depend on the definition of multiplier. This methodology is also used to estimate the effects of fiscal shocks on economic activity in eight Latin American countries. The results suggest that the fiscal multipliers vary significantly across countries, and in some cases multipliers are larger than previously estimated.
    Keywords: Tax revenue;Fiscal policy;Tax bases;National income accounts;Tax collection;Macroeconomic Policy,Stabilization,Multipliers,WP,e t,VAR,impulse response,Haver,government spend
    Date: 2020–01–31
  74. By: Guner, Nezih; Kulikova, Yuliy; Valladares Esteban, Arnau
    Abstract: The added worker effect (AWE) measures the entry of individuals into the labor force due to their partners' job loss. We propose a new method to calculate the AWE, which allows us to estimate its effect on any labor market outcome. We show that without the AWE reduces the fraction of households with two non-employed members. The AWE also accounts for why women's employment is less cyclical and symmetric compared to men. In recessions, while some women lose their employment, others enter the labor market and find jobs. This keeps the female employment relatively stable.
    Keywords: Cyclicality; female employment; Household Labor Supply; Intra-household Insurance; Skewness
    JEL: D1 E32 J21 J22
    Date: 2020–01
  75. By: Guglielmo Maria Caporale; Luis A. Gil-Alana; Carlos Poza
    Abstract: This paper examines long-range dependence in the inflation rates of the G7 countries by estimating their (fractional) order of integration d over the sample period January 1973 - March 2020. The results indicate that the series are very persistent, the estimated value of d being equal to or higher than 1 in all cases. Possible non-linearities in the form of Chebyshev polynomials in time are ruled out. Endogenous break tests are then carried out, and the degree of integration is estimated for each of the subsamples corresponding to the detected break dates. Significant differences are found between subsamples and countries in terms of the estimated degree of integration of the series.
    Keywords: inflation rates, G7, persistence, long memory, long-range dependence
    JEL: C22 E31
    Date: 2020
  76. By: Hyunduk Suh (Inha University); Jin Young Yang (Zayed University)
    Abstract: Global Economic Policy Uncertainty (EPU) and non-EPU global uncertainty measures exhibit heterogenous behavior, especially in 2010s. Using firm-level data from 36 countries, we estimate the effect of global uncertainty on corporate investment in 1997-2016. Eleven global uncertainty measures, including global EPU, are employed to encompass macro, micro, and higher-order dimensions of uncertainty. We find different effect of EPU and non-EPU global uncertainty measures on investment. Only EPU measures negatively affect investment, while non-EPU measures have positive effects. The negative effects of EPU measures on investment are stronger for firms with high investment irreversibility and high leverage, but no such effect is observed from non-EPU measures.
    Keywords: Global uncertainty; Economic Policy Uncertainty, Investment
    JEL: E22 F30 G31
    Date: 2020–05
  77. By: Richard Blundell; Margherita Borella; Jeanne Commault; Mariacristina De Nardi
    Abstract: In old age, consumption can fluctuate because of shocks to available resources and because health shocks affect utility from consumption. We find that even temporary drops in income and health are associated with drops in consumption and most of the effect of temporary drops in health on consumption stems from the reduction in the marginal utility from consumption that they generate. More precisely, after a health shock, richer households adjust their consumption of luxury goods because their utility of consuming them changes. Poorer households, instead, adjust both their necessary and luxury consumption because of changing resources and utility from consumption.
    JEL: D1 D11 D12 D14 E2 E21 H2 H31 H51
    Date: 2020–06
  78. By: Cour-Thimann, Philippine; Jung, Alexander
    Abstract: Based on ordered Probit models and twenty years of euro area data, we estimate empirical reaction functions for the ECB´s monetary policy and augment them with communication indicators. First, we find that the ECB responded to risks to price stability in line with its primary objective, and that the account of post-meeting communications about risks to price stability and to growth significantly enhances the modelling of its reaction function. Second, we detect that the ECB also responded to the evolution of the federal funds rate, thereby confirming the importance of international interest rate linkages or the global cycle that it reflects. Third, while confirming Gerlach’s (2007) finding on the relevance of M3 growth for explaining future interest rate changes, we show that this result only holds for the period before the global financial crisis. JEL Classification: E43, E52, C22, C25
    Keywords: communication indicators, monetary policy reaction function, Probit model, staff projections, Survey of Professional Forecasters
    Date: 2020–07
  79. By: Jean-Marc Fournier; Philipp Lieberknecht
    Abstract: This paper presents a model-based fiscal Taylor rule and a toolkit to assess the fiscal stance, defined as the change in the structural primary balance. This is built on the normative buffer-stock model of the government (Fournier, 2019) which includes key channels like hysteresis, cycle-dependent multipliers and a risk premium. A simple fiscal Taylor rule prescribes the fiscal stance as a function of past government debt, past output gap and the past structural primary balance. Applications suggest several advanced economies could have better managed their fiscal stance over the last 20 years. Simulations provide fiscal stance recommendations over the medium-term.
    Keywords: Economic stabilization;Interest rate increases;Business cycles;Financial crises;Economic forecasting;Fiscal Taylor Rule,Model,Toolkit,WP,output gap,Taylor rule,primary balance,debt level,hysteresis
    Date: 2020–02–14
  80. By: Jiaqian Chen; Daria Finocchiaro; Jesper Lindé; Karl Walentin
    Abstract: We examine the effects of various borrower-based macroprudential tools in a New Keynesian environment where both real and nominal interest rates are low. Our model features long-term debt, housing transaction costs and a zero-lower bound constraint on policy rates. We find that the long-term costs, in terms of forgone consumption, of all the macroprudential tools we consider are moderate. Even so, the short-term costs differ dramatically between alternative tools. Specifically, a loan-to-value tightening is more than twice as contractionary compared to loan-to-income tightening when debt is high and monetary policy cannot accommodate.
    Date: 2020–06–12
  81. By: Maximilian Goethner; Lars Hornuf; Tobias Regner
    Abstract: During the past decade, equity crowdfunding (ECF) has emerged as an alternative funding channel for startup firms. In Germany, the Small Investor Protection Act became binding in July 2015, with the legislative goal to protect investors engaging in this new asset class. Since then, investors pledging more than 1,000 EUR now must self-report their income and wealth. Investing more than 10,000 EUR in a single ECF issuer is only possible through a corporate entity. We examine how the Small Investor Protection Act has affected investor behavior at Companisto, Germany’s largest ECF portal for startup firms. The results show that after the new law became binding, sophisticated investors invest less on average while casual investors invest more. Moreover, the signaling capacity of large investments has disappeared.
    Keywords: equity crowdfunding, crowdinvesting, investor protection
    JEL: E22 G18 G38 K22 L26
    Date: 2020
  82. By: Jiaqian Chen; Lucyna Gornicka
    Abstract: We apply a range of models to the U.K. data to obtain estimates of the output gap. A structural VAR with an appropriate identification strategy provides improved estimates of output gap with better real time properties and lower sensitivity to temporary shocks than the usual filtering techniques. It also produces smaller out-of-sample forecast errors for inflation. At the same time, however, our results suggest caution in basing policy decisions on output gap estimates.
    Keywords: Potential output;Supply and demand;Economic theory;Real interest rates;Business cycles;output gaps,real time estimation,business cycles.,WP,output gap,supply shock,filter method,type of shock,GFC
    Date: 2020–02–07
  83. By: Philippe Bacchetta (University of Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Rachel Cordonier (Swiss National Bank); Ouarda Merrouche (University of Lausanne)
    Abstract: An unintended consequence of loose US monetary policy is the increase in currency risk exposure abroad. Using firm-level data on corporate bond issuances in 17 emerging market economies (EME) between 2003 and 2015, we find that EME companies are more likely to issue bonds in foreign currency when US interest rates are low. This increase occurs across the board, including for firms more vulnerable to foreign exchange exposure, and is particularly strong for bonds issued in local markets. Interestingly, capital controls on bond inflows significantly decrease the likelihood of issuing in foreign currency and can even eliminate the adverse impact of low US interest rates. In contrast, macroprudential foreign exchange regulations tend to increase foreign currency issuances of non-financial corporates, although this effect can be significantly reduced using capital controls.
    Keywords: foreign currency, corporate bonds, emerging markets, capital controls, currency risk
    JEL: G21 G30 E44
    Date: 2020–06
  84. By: Frank Schorfheide; Dongho Song
    Abstract: In this paper we resuscitate the mixed-frequency vector autoregression (MF-VAR) developed in Schorfheide and Song (2015) to generate real-time macroeconomic forecasts for the U.S. during the COVID-19 pandemic. The model combines eleven time series observed at two frequencies: quarterly and monthly. We deliberately do not modify the model specification in view of the recession induced by the COVID-19 outbreak. We find that forecasts based on a pre-crisis estimate of the VAR using data up until the end of 2019 appear to be more stable and reasonable than forecasts based on a sequence of recursive estimates that include the most recent observations. Overall, the MF-VAR outlook is quite pessimistic. The estimated MF-VAR implies that level variables are highly persistent, which means that the COVID-19 shock generates a long-lasting reduction in real activity. Regularly updated forecasts are available at
    Keywords: Bayesian inference; COVID-19; Macroeconomic Forecasting; Minnesota Prior
    JEL: C11 C32 C53
    Date: 2020–07–08
  85. By: Halac, Marina; Yared, Pierre
    Abstract: We study a fiscal policy model in which the government is present-biased towards public spending. Society chooses a fiscal rule to trade off the benefit of committing the government to not overspend against the benefit of granting it flexibility to react to privately observed shocks to the value of spending. Unlike prior work, we examine rules under limited enforcement: the government has full policy discretion and can only be incentivized to comply with a rule via the use of penalties which are joint and bounded. We show that optimal incentives must be bang-bang. Moreover, under a distributional condition, the optimal rule is a maximally enforced deficit limit, triggering the largest feasible penalty whenever violated. Violation optimally occurs under high enough shocks if and only if available penalties are weak and such shocks are rare. If the rule is self-enforced in a dynamic setting, penalties take the form of temporary overspending.
    Keywords: deficit bias; Enforcement Constraints; Fiscal policy; private information
    JEL: C73 D02 D82 E6 H1 P16
    Date: 2019–12
  86. By: Michael Junho Lee; Antoine Martin
    Abstract: Bitcoin, and more generally, cryptocurrencies, are often described as a new type of money. In this post, we argue that this is a misconception. Bitcoin may be money, but it is not a new type of money. To see what is truly new about Bitcoin, it is useful to make a distinction between “money,” the asset that is being exchanged, and the “exchange mechanism,” that is, the method or process through which the asset is transferred. Doing so reveals that monies with properties similar to Bitcoin have existed for centuries. However, the ability to make electronic exchanges without a trusted party—a defining characteristic of Bitcoin—is radically new. Bitcoin is not a new class of money, it is a new type of exchange mechanism, and this type of exchange mechanism can support a variety of forms of money as well as other types of assets.
    Keywords: exchange mechanism; cryptocurrencies; crypto assets; payments; bitcoin; classification; money
    JEL: E42 E5 G21
    Date: 2020–06–18
  87. By: Jean Imbs (NYU Abu Dhabi, PSE (CNRS),CEPR); Laurent L. Pauwels (University of Sydney)
    Abstract: Conventional measures of openness are based on direct trade. They imply foreign shocks are irrelevant to sectors that do not trade directly across borders, e.g., services. But shocks propagate via the supply chain: Sectors that trade indirectly across borders via downstream linkages are affected by foreign shocks. We introduce a measure of openness based on indirect trade, computing the fraction of downstream linkages that cross a border. The measure, labeled “High Order Trade” (HOT), is computed using recently released data on international input-output linkages for 50 sectors in 43 countries, including services. HOT correlates positively with conventional trade measures across countries, much less across sectors as many more are open according to our measure. Some services are among the most open sectors in some economies, and services generally rank at the middle of the distribution. HOT correlates significantly with sector productivity, growth, and synchronization; conventional measures of trade do not. We introduce an instrument for HOT using network theory. We show HOT causes productivity and synchronization, but not growth.
    Keywords: Measuring Openness, Global supply chains, Growth, Productivity, Synchronisation
    JEL: E32 F44
    Date: 2020–04–29
  88. By: Jaime Martínez-Martín (Banco de España); Elena Rusticelli (OECD)
    Abstract: This paper builds an innovative composite world trade cycle index (WTI) by means of a dynamic factor model to perform short-term forecasts of world trade growth of both goods and (usually neglected) services. The selection of trade indicator series is made using a multidimensional approach, including Bayesian model averaging techniques, dynamic correlations and Granger non-causality tests in a linear VAR framework. To overcome the real-time forecasting challenges, the dynamic factor model is extended to account for mixed frequencies, to deal with asynchronous data publication and to include hard and survey data along with leading indicators. Nonlinearities are addressed with a Markov switching model. In the empirical application, simulations analysis in pseudo real-time suggest that: i) the global trade index is a very useful tool for tracking and forecasting world trade in real time; ii) the model is able to infer global trade cycles very precisely and better than several competing alternatives; and iii) global trade finance conditions seem to lead the trade cycle, in line with the theoretical literature.
    Keywords: real-time forecasting, world trade, dynamic factor models, markov switching models
    JEL: E32 C22 E27
    Date: 2020–07
  89. By: Emmanuel Farhi; Ivan Werning
    Abstract: We provide explicit solutions for government spending multipliers during a liquidity trap and within a fixed exchange regime using standard closed and open-economy New Keynesian models. We confirm the potential for large multipliers during liquidity traps. For a currency union, we show that self-financed multipliers are small, always below unity, unless the accompanying tax adjustments involve substantial static redistribution from low to high marginal propensity to consume agents, or dynamic redistribu- tion from future to present non-Ricardian agents. But outside-financed multipliers which require no domestic tax adjustment can be large, especially when the average marginal propensity to consume on domestic goods is high or when government spending shocks are very persistent. Our solutions are relevant for local and national multipliers, providing insight into the economic mechanisms at work as well as the testable implications of these models.
  90. By: Nesterova, Kristina (Нестерова, Кристина) (The Russian Presidential Academy of National Economy and Public Administration)
    Abstract: The paper analyses a number of monetary rules helping to decrease the probability of the nominal interest rate hitting the zero lower bound. Such measures include integral stabilization, NGDP targeting, price level targeting, raising the inflation target, introducing negative nominal interest rates etc. Discretion such as sharp preventive drop in the interest rate and LSAP to “lower for longer” are also considered. According to up-to-date New-Keynesian general equilibrium models, the major advantage of rules such as NGDP and price level targeting is their capacity to prevent zero lower bound episodes mainly by managing expectations of the public efficiently, which is a drawback of discretionary policy.
    Keywords: monetary policy, zero lower bound, inflation targeting, price level targeting, NGDP targeting.
    Date: 2020–03
  91. By: Mahyar Kargar; Benjamin Lester; David Lindsay; Shuo Liu; Pierre-Olivier Weill; Diego Zúñiga
    Abstract: We study liquidity conditions in the corporate bond market since the onset of the COVID-19 pandemic. We find that in mid-March 2020, as selling pressure surged, dealers were wary of accumulating inventory on their balance sheets, perhaps out of concern for violating regulatory requirements. As a result, the cost to investors of trading immediately with a dealer surged. A portion of transactions migrated to a slower, less costly process wherein dealers arranged for trades directly between customers without using their own balance sheet space. Interventions by the Federal Reserve appear to have relaxed balance sheet constraints: soon after they were announced, dealers began absorbing inventory, bid-ask spreads declined, and market liquidity started to improve. Interestingly, liquidity conditions improved for bonds that were eligible for the Fed’s lending/purchase programs and for bonds that were ineligible. Hence, by allowing dealers to unload certain assets from their balance sheet, the Fed’s interventions may have helped dealers to better intermediate a wide variety of assets, including those not directly targeted.
    JEL: E5 E58 E65 G0 G01 G12 G21 G23
    Date: 2020–06
  92. By: Bahaj, Saleem (Bank of England); Reis, Ricardo (London School of Economics)
    Abstract: Monetary and financial policies that lower the cost of credit for working capital in a currency outside of its country can provide the impetus for that currency to be used in international trade. This paper shows this in theory, by exploring the complementarity in the currency used for financing working capital and the currency used for invoicing sales. Financial policies by a central bank can jump-start the use of its currency outside a country’s borders. In the data, the creation of 38 swap lines by the People’s Bank of China between 2009 and 2018 provides a test of the theory. Signing a swap line with a country is significantly associated with increases in the use of the RMB in payments to and from that country in the following months.
    Keywords: Trade credit; RMB internationalisation; swap lines
    JEL: E42 F13 F33
    Date: 2020–06–12
  93. By: Romain Plassard (Université Côte d'Azur, France; GREDEG CNRS)
    Abstract: After the financial crisis of 2008, several central banks incorporated agent-based models (ABMs) into their toolkit. The Bank of England (BoE) is a case in point. Since 2008, it has developed four ABMs. Under which conditions could ABMs breach the walls of the BoE? Then, there is the issue of the size of the breach. In which divisions economists used ABMs? Was agent-based modeling used to inform a wide range of policies? Last but not least, there is the issue of the fate of ABMs at the BoE. Is the breach going to narrow or, on the contrary, to widen? What are the forces underlying the deployment of ABMs at the BoE? My article aims to address these issues. I show that institutional reforms were central to the use of ABMs at the BoE. I also show that so far, ABMs have been a marginal tool at the BoE. They were not used to inform monetary policy. Neither were they used to coordinate the BoE's microprudential, macroprudential, and monetary policies. ABMs were only used to inform the BoE's macroprudential policy. I conclude the article by examining the conditions for a broader use of ABMs at the BoE.
    Keywords: Bank of England, agent-based models, macroprudential policy, monetary policy, DSGE models
    Date: 2020–06
  94. By: Nils Mæhle
    Abstract: This paper discusses operational issues for countries that want to reform their monetary policy frameworks. It argues that stabilizing short-term interest rates on a day-to-day basis has significant advantages, and thus that short-term interest rates, not reserve money, in most cases should be the daily operating target, including for countries relying on a money targeting policy strategy. The paper discusses how a policy formulation framework based on monetary aggregates can be combined with an operational framework that ensures more stable and predictable short-term rates to enhance policy transmission. It also discusses how to best configure an interest-rate-based operational framework when markets are underdeveloped and liqudity management capacity is weak.
    Keywords: Central banking and monetary issues;Bank rates;Financial crises;Financial instruments;Central bank operations;monetary policy operations,monetary targeting,monetary policy transmission,liqudity management,interest rate determination,WP,interbank,operational framework,excess reserve,short-term interest rate,policy stance
    Date: 2020–02–07
  95. By: Tara Sinclair (George Washington University); Martha Gimbel (Schmidt Futures)
    Abstract: Labor market mismatch is an important measure of the health of the economy but is notoriously hard to measure since it requires information on both employer needs and job seeker characteristics. In this paper we use data from a large online job search website which has detailed information on both sides of the labor market. Mismatch is measured as the dissimilarity between the distribution of job seekers across a set of predefined categories and the distribution of job vacancies across the same categories. We produce time series measures of mismatch for the US and a set of English-speaking countries from January of 2014 through December of 2019. We find that title-level mismatch is substantial, with about 33% of the labor force needing to change job titles for the US to have zero mismatch in 2019, but that it declined from 40% in 2014 as the labor market has tightened. Furthermore, over the same time period, the mix of job opportunities has shifted substantially, but in a way that has made the overall distribution of jobs more similar to the distribution of job seekers. We interpret this finding as evidence that mismatch between job seekers and employers eased due to jobs coming back in the slow recovery after the Great Recession.
    Keywords: Job search, vacancies, employment, unemployment
    JEL: E24 J11 J21 J24 J40 J62
    Date: 2020–01
  96. By: Ana Beatriz Galvao; Marta Lopresto
    Abstract: We propose a nowcasting system to obtain real-time predictive intervals for the first release of UK quarterly GDP growth that can be implemented in a menu-driven econometric software. We design a bottom-up approach: forecasts for GDP components (from the output and the expenditure approaches) are inputs into the computation of probabilistic forecasts for GDP growth. For each GDP component considered, mixed-data sampling regressions are applied to extract predictive content from monthly and quarterly indicators. We find that predictions from the nowcasting system are accurate, in particular when nowcasts are computed using monthly indicators 30 days before the GDP release. The system is also able to provide well-calibrated predictive intervals.
    Keywords: nowcasting, GDP growth, mixed frequency regression, forecast combination, probabilistic forecasts
    JEL: C53 E32
    Date: 2020–05
  97. By: Assia Elgouacem; Riccardo Zago
    Abstract: Share buybacks have become common practice across U.S corporations. This paper shows that firms finance these operations mostly through newly issued corporate bonds, and that the exogenous variation in the cost of debt -due to innovations in monetary policy- is key in explaining managers' incentives to repurchase their own shares. Under our identification strategy, we find that firms are more likely to repurchase in periods of accommodative monetary policy when the yield on bond adjusts in the same direction. This behavior has macroeconomic implications as it diverts resources from investment and employment, thus reducing the transmission of accommodative monetary policy at firm-level.
    Keywords: Share Buybacks, Monetary Policy, Corporate Yield, EPS Targeting .
    JEL: E52 G11 G35 G32
    Date: 2020
  98. By: Luis Brandao-Marques; R. G Gelos; Thomas Harjes; Ratna Sahay; Yi Xue
    Abstract: Central banks in emerging and developing economies (EMDEs) have been modernizing their monetary policy frameworks, often moving toward inflation targeting (IT). However, questions regarding the strength of monetary policy transmission from interest rates to inflation and output have often stalled progress. We conduct a novel empirical analysis using Jordà’s (2005) approach for 40 EMDEs to shed a light on monetary transmission in these countries. We find that interest rate hikes reduce output growth and inflation, once we explicitly account for the behavior of the exchange rate. Having a modern monetary policy framework—adopting IT and independent and transparent central banks—matters more for monetary transmission than financial development.
    Keywords: Financial and Monetary Sector;Central bank independence;Nominal effective exchange rate;Monetary policy instruments;Exchange rate policy;Monetary Policy,Emerging markets,Exchange rate channel,Inflation targeting,Financial structure,WP,financial development,monetary policy framework,policy framework,Taylor rule,projection method
    Date: 2020–02–21
  99. By: Remi Jedwab (George Washington University); Asif Islam (World Bank); Paul Romer (New York University); Robert Samaniego (George Washington University)
    Abstract: In this paper, we: (i) study wage-experience profiles and obtain measures of returns to potential work experience using data from about 24 million individuals in 1,084 household surveys and census samples across 145 countries; (ii) show that returns to work experience are strongly correlated with economic development - workers in developed countries appear to accumulate twice more human capital at work than workers in developing countries; and (iii) use a simple accounting framework to find that the contribution of work experience to human capital accumulation and economic development might be as important as the contribution of education itself.
    Keywords: Returns to Work Experience, Returns to Education, Human Capital Accumulation, Economic Development, Labor Markets, Development Accounting
    JEL: O11 O12 O15 O47 E24 J11 J31
    Date: 2020–03
  100. By: Laurent Ferrara; Anna Simoni
    Abstract: We analyse whether, and when, a large set of Google search data can be useful to increase euro area GDP nowcasting accuracy once we control for information contained in official variables. To deal with these data we propose an estimator that combines variable pre-selection and Ridge regularization and study its theoretical properties. We show that in a period of cyclical stability Google data convey useful information for real-time nowcasting of GDP growth at the beginning of the quarter when macroeconomic information is lacking. On the other hand, in periods that exhibit a sudden downward shift in GDP growth rate, including Google search data in the information set improves nowcasting accuracy even when official macroeconomic information is available.
    Date: 2020–07
  101. By: Gerardo Uña; Richard I Allen; Nicolas M Botton
    Abstract: A well-functioning financial management information system (FMIS) provides timely, reliable, and comprehensive reports that support implementation of the government’s fiscal policies and fiscal rules, and the formulating, controlling, monitoring, and executing of the budget. The architecture of FMISs has undergone a transformation since these systems were first developed in the 1980s. Rather than attempting to cover all or most public financial management (PFM) functions, many FMISs now focus on a few core functions such as accounting and reporting, budget execution, and cash management. Yet a survey of 46 countries shows that many face severe challenges in transforming their FMIS into an effective tool of fiscal governance. These challenges relate to weaknesses in the system’s core functions, its institutional coverage, the information technology platforms it uses, and the ease of sharing data with other IT systems. This How to Note discusses how to address these chal-lenges. Replacing an FMIS with an entirely new system may not be an optimal strategy. By utilizing the latest technology, a better approach may be to update or replace one or more core modules of the system: the so-called modular approach. Implementation of an effective FMIS, however, depends on two critical preconditions: strong political motivation and commitment, and the system’s ability to meet ongoing and anticipated PFM needs.
    Keywords: Financial management information systems;Financial Management Information Systems, fiscal policy, fiscal rules, accounting, reporting, budget execution, cash management
    Date: 2019–05–15
  102. By: Johannes Hermanus Kemp; Hylton Hollander
    Abstract: Much of the research on fiscal multipliers has used reduced form modelling approaches. While these models have been extended to include richer controls and identification approaches, it remains unclear whether shocks identified capture the true structural shocks. An alternative way to identify these shocks is through dynamic stochastic general equilibrium models. This paper estimates an open-economy dynamic stochastic general equilibrium model for South Africa, but with a more detailed fiscal block, to measure the impact of fiscal policy shocks on macroeconomic outcomes.
    Keywords: dynamic stochastic general equilibrium model, Fiscal policy, Fiscal multipliers, Bayesian influence
    Date: 2020
  103. By: Baumeister, Christiane; Hamilton, James
    Abstract: This paper discusses the problems associated with using information about the signs of certain magnitudes as a basis for drawing structural conclusions in vector autoregressions. We also review available tools to solve these problems. For illustration we use Dahlhaus and Vasishtha's (2019) study of the effects of a U.S. monetary contraction on capital flows to emerging markets. We explain why sign restrictions alone are not enough to allow us to answer the question and suggest alternative approaches that could be used.
    Keywords: Bayesian inference; Capital Flows; identified set; informative priors; monetary policy; sign restrictions; structural vector autoregressions
    JEL: C30 E5 F2
    Date: 2020–01
  104. By: Chikako Baba; Salvatore Dell'Erba; Enrica Detragiache; Olamide Harrison; Aiko Mineshima; Anvar Musayev; Asghar Shahmoradi
    Abstract: Assessing when credit is excessive is important to understand macro-financial vulnerabilities and guide macroprudential policy. The Basel Credit Gap (BCG) – the deviation of the credit-to-GDP ratio from its long-term trend estimated with a one-sided Hodrick-Prescott (HP) filter—is the indicator preferred by the Basel Committee because of its good performance as an early warning of banking crises. However, for a number of European countries this indicator implausibly suggests that credit should go back to its level at the peak of the boom after the credit cycle turns, resulting in large negative gaps that might delay the activation of macroprudential policies. We explore two different approaches—a multivariate filter based on economic theory and a fundamentals-based panel regression. Each approach has pros and cons, but they both provide a useful complement to the BCG in assessing macro-financial vulnerabilities in Europe.
    Keywords: Real interest rates;Interest rate policy;Credit booms;Credit expansion;Credit aggregates;Credit Cycle,Credit Gap,Countercyclical Capital Buffer,Macroprudential Policies,WP,BCG,real interest rate,output gap,fundamental variable
    Date: 2020–01–17
  105. By: Philippe Goulet Coulombe
    Abstract: Over the last decades, an impressive amount of non-linearities have been proposed to reconcile reduced-form macroeconomic models with the data. Many of them boil down to have linear regression coefficients evolving through time: threshold/switching/smooth-transition regression; structural breaks and random walk time-varying parameters. While all of these schemes are reasonably plausible in isolation, I argue that those are much more in agreement with the data if they are combined. To this end, I propose Macroeconomic Random Forests, which adapts the canonical Machine Learning (ML) algorithm to the problem of flexibly modeling evolving parameters in a linear macro equation. The approach exhibits clear forecasting gains over a wide range of alternatives and successfully predicts the drastic 2008 rise in unemployment. The obtained generalized time-varying parameters (GTVPs) are shown to behave differently compared to random walk coefficients by adapting nicely to the problem at hand, whether it is regime-switching behavior or long-run structural change. By dividing the typical ML interpretation burden into looking at each TVP separately, I find that the resulting forecasts are, in fact, quite interpretable. An application to the US Phillips curve reveals it is probably not flattening the way you think.
    Date: 2020–06
  106. By: Christos Argyropoulos (Lancaster University); Bertrand Candelon (Université Catholique de Louvain); Jean-Baptiste Hasse (Aix-Marseille University); Ekaterini Panopoulou (University of Essex)
    Abstract: This paper highlights the procyclical and unstable behaviour of mutual fund returns. It proposes a novel factor model that allows for regime changes associated with macroeconomic variables. Estimated on a panel covering 825 US equity mutual funds over a period of 30 years, it appears that the yield curve, the dividend yield and the industrial production coincide with regimes switches in the Fama-French factors. Furthermore, the estimated regimes perfectly match financial crises and economic downturns, thus confirming the procyclical behaviour of mutual funds' returns. These findings, coupled with the emerging systemic role of mutual funds, promote the consideration for a specific macroprudential regulatory framework.
    Keywords: Financial Stability; MutualFundIndustry; Regulation; Macroprudential Framework
    JEL: G18 G23 G28
    Date: 2020–04–29
  107. By: Victoria Ivashina (Harvard Business School, CEPR and NBER); Luc Laeven (European Central Bank and CEPR); Enrique Moral-Benito (Banco de España)
    Abstract: Using credit-registry data for Spain and Peru, we document that four main types of commercial credit –asset-based loans, cash flow loans, trade finance and leasing–are easily identifiable and represent the bulk of corporate credit. We show that credit growth dynamics and bank lending channels vary across these loan types. Moreover, aggregate credit supply shocks previously identified in the literature appear to be driven by individual loan types. The effects of monetary policy and the effects of the financial crisis propagating through banks’ balance sheets are primarily driven by cash flow loans, whereas asset-based credit is mostly insensitive to these types of effects.
    Keywords: bank credit, loan types, bank lending channel, credit registry
    JEL: E5 G21
    Date: 2020–07
  108. By: Dylan Balla-Elliott; Zoë B. Cullen; Edward L. Glaeser; Michael Luca; Christopher T. Stanton
    Abstract: How quickly will American businesses reopen after COVID-19 lockdowns end? We use a nationwide survey of small businesses to measure firms’ expectations about their re-opening and future demand. A plurality of firms in our sample expect to reopen within days of the end of legal restrictions, but a sizable minority expect to delay their reopening. While health-related variables, such as COVID-19 case rates and physical proximity of workers, do explain the prevalence and expected duration of regulated lockdown, these variables have little or no correlation with post-lockdown reopening intentions. Instead, almost one half of closed or partially open businesses said that their reopening would depend on the reopening of related businesses, including customers and suppliers. Owners expect demand to be one-third lower than before the crisis through autumn. Firms with more pessimistic expectations about demand predict a later reopening. Using an instrumental variables strategy, we estimate the relationship between demand expectations and reopening. These estimates suggest that post-lockdown delays in reopening can be explained by low levels of expected demand.
    JEL: D22 E32 I15 L23
    Date: 2020–06
  109. By: JaeBin Ahn; Romain A Duval; Can Sever
    Abstract: While there is growing evidence of persistent or even permanent output losses from financial crises, the causes remain unclear. One candidate is intangible capital – a rising driver of economic growth that, being non-pledgeable as collateral, is vulnerable to financial frictions. By sheltering intangible investment from financial shocks, counter-cyclical macroeconomic policy could strengthen longer-term growth, particularly so where strong product market competition prevents firms from self-financing their investments through rents. Using a rich cross-country firm-level dataset and exploiting heterogeneity in firm-level exposure to the sharp and unforeseen tightening of credit conditions around September 2008, we find strong support for these theoretical predictions. The quantitative implications are large, highlighting a powerful stabilizing role for macroeconomic policy through the intangible investment channel, and its complementarity with pro-competition product market deregulation.
    Keywords: Financial crises;Supply and demand;Economic theory;Economic growth;Economic policy;Financial frictions,Intangible investment,Competition,Product Market,Monetary policy,Growth,Hysteresis,WP,pre-crisis,counter-cyclical,post-crisis,Aghion,macroeconomic policy
    Date: 2020–02–07
  110. By: Diego Comin; Ana Danieli (Northwestern University); Martí Mestieri (Northwestern University)
    Abstract: We propose a mechanism for labor-market polarization based on the nonhomotheticity of demand that we call the income-driven channel. Our mechanism builds on a novel empirical fact: expenditure elasticities and production intensities in low- and high-skill occupations are positively correlated across sectors. Thus, as income grows, demand shifts towards expenditure-elastic sectors, and the relative demand for low- and high-skill occupations increases, causing labor-market polarization. A calibrated general-equilibrium model suggests this mechanism accounts for 90% and 35% of the increase in the wage-bill share of low- and high-skill occupations observed in the US during 1980-2016, and for 64% and 28% of the rise in the employment shares of low- and high-skill occupations. This mechanism is similarly important for the polarization of labor markets in Western Europe during 1980-2016, as well as in the US during earlier decades and, possibly, the near future.
    Keywords: labor-market polarization, nonhomothetic demand
    JEL: E21 E23 J23 J31
    Date: 2020–06
  111. By: Thomas Allen; Stéphane Dees; Jean Boissinot; Carlos Mateo Caicedo Graciano; Valérie Chouard; Laurent Clerc; Annabelle de Gaye; Antoine Devulder; Sébastien Diot; Noémie Lisack; Fulvio Pegoraro; Marie Rabaté; Romain Svartzman; Lucas Vernet
    Abstract: This paper proposes an analytical framework to quantify the impacts of climate policy and transition narratives on economic and financial variables necessary for financial risk assessment. Focusing on transition risks, the scenarios considered include unexpected increases in carbon prices and productivity shocks to reflect disorderly transition processes. The modelling framework relies on a suite of models, calibrated on the high-level reference scenarios of the Network for Greening the Financial System (NGFS). Relying on this approach, the ACPR has selected a number of quantitative scenarios to be submitted to agroup of voluntary banks and insurance companies to conduct the first bottom-up pilot climate-related risk assessment.
    Keywords: Climate Change, Scenario Analysis, Economic Modelling, Financial Stability .
    JEL: C60 E50 G32 O44 Q40 Q54
    Date: 2020
  112. By: Timothy C Irwin; Samah Mazraani; Sandeep Saxena
    Abstract: This note discusses what finance ministries can do to ensure that public-private partnerships (PPPs) are used wisely. By inviting private participation in infrastructure development and service provision, PPPs can help improve public services. Yet, strong governance institutions are needed to manage risks and avoid unexpected costs from PPPs. While in the short term, PPPs may appear cheaper than traditional public investment, over time they can turn out to be more expensive and undermine fiscal sustainability, particularly when governments ignore or are unaware of their deferred costs and associated fiscal risks. To use PPPs wisely governments should (1) develop and implement clear rules for their use; (2) identify, quantify, and disclose PPP risks and expected costs; and (3) reform budget and government accounting frameworks to capture all fiscal costs comprehensively.
    Keywords: Fiscal risk;Fiscal sustainability;Fiscal policy;Fiscal management;Risk management;Fiscal rules;Accounting for Public-Private Partnerships (PPPs);Public services;Public-private partnership;Fiscal rules and institutions;public-private partnerships, finance ministers, fiscal costs
    Date: 2018–10–16
  113. By: Heather D. Gibson (Bank of Greece); Stephen G. Hall (Bank of Greece); Pavlos Petroulas (Bank of Greece); Vassilis Spiliotopoulos (Bank of Greece); George S. Tavlas (Bank of Greece)
    Abstract: We examine the impact of emergency liquidity assistance (ELA) on bank lending in eleven euro area countries during the financial crisis. With the intensification of the crisis, ELA took on a pivotal role in some countries. However, assessments of the quantitative impact of ELA in the literature are non-existent. We estimate a structural panel model for the determination of bank lending, which includes the amount of ELA received by each bank, allowing us to investigate the direct effect of ELA on lending. Our model corrects a mis-specification found in the prototype model used in the literature. We then undertake a VAR analysis, which allows us to address the effect of ELA on GDP. Finally, we examine spillover effects among banks, indicating that ELA generated positive spillovers to other banks.
    Keywords: euro area financial crisis; emergency liquidity assistance (ELA); European banks; spatial panel model
    JEL: E3 G01 G14 G21
    Date: 2020–01
  114. By: Juan B\'ogalo; Pilar Poncela; Eva Senra
    Abstract: Multivariate Circulant Singular Spectrum Analysis (M-CiSSA) is a non-parametric automated technique that allows to extract signals of time series at any frequency specified beforehand. It is useful to uncover co-movements at different frequencies and understand their commonalities and specificities. We apply M-CiSSA to understand the main drivers and co-movements of energy commodity prices at trend and cyclical frequencies that are key to assess energy policy at different time horizons. We clearly distinguish the detached behaviour of US natural gas from the rest of energy commodities at both frequencies while coals and Japan natural gas only decouple at the cyclical frequency.
    Date: 2020–07
  115. By: Matthew Higgins; Thomas Klitgaard
    Abstract: In September 2016, the Bank of Japan (BoJ) changed its policy framework to target the yield on ten-year government bonds at “around zero percent,” close to the prevailing rate at the time. The new framework was announced as a modification of the Bank's earlier policy of rapid monetary base expansion via large-scale asset purchases—a policy that market participants increasingly regarded as unsustainable. While the BoJ announced that the rapid pace of government bond purchases would not change, it turned out that the yield target approach allowed for a dramatic scaling back in purchases. In Japan’s case, the commitment to purchase whatever was needed to keep the ten-year rate near zero has meant that very little in the way of asset purchases have been required.
    Keywords: asset purchases; monetary policy; monetary base; Bank of Japan; yield curve control
    JEL: E52 F0
    Date: 2020–06–22
  116. By: Andreini, Paolo; Charlotte Senftleben-König, Charlotte; Hasenzagl, Thomas; Reichlin, Lucrezia; Strohsal, Till
    Abstract: This paper develops a nowcasting model for the German economy. The model outperforms a number of alternatives and produces forecasts not only for GDP but also for other key variables. We show that the inclusion of foreign variables improves the model's performance, while financial variables do not. Additionally, a comprehensive model averaging exercise reveals that factor extraction in a single model delivers slightly better results than averaging across models. Finally, we estimate a "news" index for the German economy constructed as a weighted average of the nowcast errors related to each variable included in the model.
    Date: 2020–01
  117. By: Dräger, Lena, Kolaiti, Theoplasti, Sibbertsen, Philipp
    Abstract: This paper measures the convergence or divergence of EMU inflation rates and industrial production by testing for the existence of fractional cointegration relations. The notion of fractional cointegration allows for long-term equilibria with a higher degree of persistence than allowed for in the standard cointegration framework. We investigate both inflation and industrial production of EMU countries beginning with the introduction of the common currency and including the financial crisis and post-crisis period. Core as well as periphery countries are included in the study. By modelling possible breaks in the persistence structure we find evidence of fractional cointegration as well as a lower persistence before the crisis and a higher persistence by less evidence for fractional cointegration during the crisis. A second break which indicates the end of the crisis can be found as well. In addition, higher inflation persistence can be found for periphery than for core countries.
    Keywords: EMU inflation rates, industrial production, fractional cointegration, persistence breaks
    JEL: F15 F45 C32
    Date: 2020–07
  118. By: Bednarek, Peter; Ma, Chang; Rebucci, Alessandro; Te Kaat, Daniel Marcel
    Abstract: Capital flows and real estate are pro-cyclical, and real estate has a substantial weight in economies' income and wealth. In this paper, we study the role of real estate markets in the transmission of bank flow shocks to output growth across German cities. The empirical analysis relies on a new and unique matched data set at the city level and the bank-firm level. To measure bank flow shocks, we show that changes in sovereign spreads of Southern European countries (the so-called GIPS spread) can predict German cross-border bank flows. To achieve identification by geographic variation, in addition to a traditional supply-side variable, we use a novel instrument that exploits a policy assigning refugee immigrants to municipalities on an exogenous basis. We find that output growth responds more to bank flow shocks in cities that are more exposed to tightness in local real estate markets. We estimate that, during the 2009-2014 period, for every 100-basis point increase in the GIPS spread, the most exposed cities grow 15-25 basis points more than the least exposed ones. Moreover, the differential response of commercial property prices can explain most of this growth differential. When we unpack the transmission mechanism by using matched bank-firm-level data on credit, employment, capital expenditure and TFP, we find that firm real estate collateral as measured by tangible fixed assets plays a critical role. In particular, bank flow shocks increase the credit supply to firms and sectors with more real estate collateral. Higher credit supply then leads firms to hire and invest more, without evidence of capital misallocation.
    Keywords: business cycles; Capital Flows; cities; real estate
    JEL: E3 F3 R3
    Date: 2019–12
  119. By: Elie Gerschel (IPP - Institut des politiques publiques, CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique); Alejandra Martinez (IPP - Institut des politiques publiques); Isabelle Mejean (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, IPP - Institut des politiques publiques)
    Abstract: Before spreading globally, the Covid-19 epidemic was concentrated in the Hubei province. To contain the spread of the virus, the Chinese government has imposed quarantine measures and travel restrictions, entailing the slowdown of economic activity. We study the propagation of this geographically concentrated productivity slowdown to the global economy, through global value chains. Reliance on Chinese inputs has dramatically increased since the early 2000s. As a consequence, most countries are exposed to the Chinese productivity slowdown, both directly through their imports of Chinese inputs and indirectly, through other inputs themselves produced with some Chinese value added. This note aims at quantifying the total exposure of France compared to other countries. First, we compute the share of Chinese value added in French production. Then, we use data at the country and sector levels to quantify the impact of travel restrictions on French GDP.
    Date: 2020–03
  120. By: Pritha Mitra; Eric M. Pondi Endengle; Malika Pant; Luiz F. Almeida
    Abstract: Global attention to ending child marriage and its socio-economic consequences is gaining momentum. Ending child marriage is not only critical from a development perspective but it also has important economic implications. This paper is the first to quantify the relationship between child marriage and economic growth. Applying a simultaneous equations model, the analysis shows that eliminating child marriage would significantly improve economic growth—if child marriage were ended today, long-term annual per capita real GDP growth in emerging and developing countries would increase by 1.05 percentage points. The results also provide insights on policy prioritization in developing comprehensive strategies to end child marriage. For example, the strong interdependent relationship between education and child marriage suggests that education policies and the budgets that support them should place greater emphasis on reducing child marriage.
    Keywords: Economic growth;Economic conditions;Labor force participation;Human capital;Development;Developing Country,Economic Development,Growth,Macroeconomy,Macroeconomic Policy,Simultaneous Equation Models,Welfare,Well Being,WP,child marriage,per_capita growth,explanatory variable,simultaneous equation model,equation model
    Date: 2020–02–07
  121. By: Jacek Rothert (United States Naval Academy)
    Abstract: This paper documents cyclical behavior of real exchange rates (RERs) in emerging and developed economies: RERs are pro-cyclical in emerging markets and mildly counter-cyclical in developed economies. RER pro-cyclicality coincides with excess volatility of consumption and counter-cyclicality of the trade balance. The paper then re-evaluates the role of trend shocks and interest rate shocks in emerging economies, by incorporating these features into a standard international business cycle model where domestic and foreign goods are imperfect substitutes. In the model, estimated to match the behavior of the RERs, trend shocks play no role in TFP or GDP fluctuations in Mexico. Conversely, exogenous country risk shocks, without any frictions that would create supply-side effects, account for 78% of GDP fluctuations. The key is that domestic and foreign goods are imperfect substitutes, which dampens the impact of trend shocks and accentuates the impact of interest rate shocks on output and consumption.
    Date: 2019–10
  122. By: Serhan Cevik; Vibha Nanda
    Abstract: Fiscal sustainability remains a paramount challenge for small economies with high debt and greater vulnerability to climate change. This paper applies the model-based sustainability test for fiscal policy in a panel of 16 Caribbean countries during the period 1980–2018. The results indicate that the coefficient on lagged government debt is positive and statistically significant, implying that fiscal policy in the Caribbean takes corrective actions to counteract an increase in the debt-to-GDP ratio. Nonlinear estimations, however, show that the quadratic debt parameter is negative, which indicates that fiscal policy response is not adequate to ensure sustainability at higher levels of debt. We also find that the fiscal stance tends to be countercyclical on average during the sample period. These empirical results confirm that maintaining prudent fiscal policies and implementing growth-enhancing structural reforms are necessary to build fiscal buffers and ensure debt sustainability with high probability even when negative shocks occur over the long term.
    Keywords: Financial statistics;Fiscal policy;Economic growth;Deficit financing;Financial crises;Debt sustainability,fiscal reaction function,fiscal solvency,WP,debt-to-GDP ratio,debt-to-GDP,output gap,primary balance,policy stance
    Date: 2020–01–31
  123. By: Cole, Harold; Krueger, Dirk; Mailath, George J; Park, Yena
    Abstract: We analyze efficient risk-sharing arrangements when coalitions may deviate. Coalitions form to insure against idiosyncratic income risk. Self-enforcing contracts for both the original coalition and any deviating coalition rely on a belief in future cooperation, and we treat the contracting conditions of original and deviating coalitions symmetrically. We show that better belief coordination (higher social capital) tightens incentive constraints since it facilitates both the formation of the original as well as a deviating coalition. As a consequence, the payoff of successfully formed coalitions might be declining in the degree of belief coordination and equilibrium allocations might feature resource burning or utility burning.
    Keywords: Coalitions; Limited Commitment; Risk Sharing
    JEL: E20
    Date: 2020–01
  124. By: Porcellacchia, Davide
    Abstract: To study the effect on financial stability of persistent changes in the interest rate, this paper develops a recursive model of liquidity creation based on Diamond and Dybvig (1983). The model features two stable balanced growth paths: a good one with a healthy banking system and a bad one with a failed banking system. The paper’s main result is that a critical interest-rate level exists, below which a financial crisis takes place and the economy transitions from the good to the bad BGP. At this tipping point for the economy, banks’ franchise value of deposits goes down, since their net interest margins are compressed. This leads to a fall in bank equity, which gives depositors an incentive to run. The tipping point is not necessarily negative or zero. It is an increasing function of the persistence of the change in the interest rate. Since a persistent fall in the interest rate compresses the net interest margin further in the future, it damages the franchise value of deposits more for any given interest-rate cut. JEL Classification: E43, E50, G21
    Keywords: franchise value of deposits, liquidity, lower bound
    Date: 2020–07
  125. By: Joydeep Bhattacharya; Monisankar Bishnu; Min Wang
    Abstract: This paper studies the welfare of time-inconsistent, partially sophisticated agents living under two different regimes, one with complete, unfettered credit markets (CM) and the other with endogenous borrowing constraints (EBC) where the borrowing limits are set to make agents indifferent between defaulting and paying back their unsecured loans. The CM regime cannot deliver the first best because partially sophisticated agents would undo plans laid out by previous selves and borrow too much. Somewhat counterintuitively, in some cases, the EBC regime may deliver higher welfare than the CM regime. These results speak to the academic debate surrounding the creation and functioning of the CFPB (Consumer Financial Protection Bureau) in the U.S. and its implementation of the ability-to-repay rule on lenders after the 2007-8 crisis. Such institutions generate commitment publicly and may help time inconsistent agents economize on the costs of private commitment provision.
    Keywords: endogenous borrowing constraints, overborrowing, financial protection
    JEL: E21 G28
    Date: 2020–06
  126. By: Alvarez-Espinoza, Andrés Camilo; Calderón Díaz, Silvia Liliana; Romero Otálora, Germán; Ordoñez, Alejandro
    Abstract: Este artículo presenta los efectos potenciales del cambio climático sobre la economía del país. A partir de datos sobre los efectos del clima futuro en la productividad de componentes de los sectores agrícola, forestal, pesquero, ganadero y de transporte se estima el impacto agregado del cambio climático en la economía del país, utilizando el Modelo de Equilibrio General Computable de Cambio Climático para Colombia (MEG4C). Los resultados muestran que el impacto sería negativo con pérdidas promedio anuales en el PIB del 0,49% en el periodo 2011 al 2100.
    Keywords: Impacto económico; Cambio climático; Equilibrio general
    JEL: Q54 E17
    Date: 2020–06
  127. By: Julian T Chow
    Abstract: Guyana’s residential real estate prices have been rising, particularly in the capital city Georgetown, following the discovery of oil in 2015. In line with the growing demand for housing, commercial banks’ housing loans have increased, prompting higher household debt. This paper presents two analyses which suggest that housing prices in Georgetown and banks’ lending to the housing sector appear to be in their early stages of growth. However, given the data limitations and caveats that underpin the analyses, the findings could also indicate early signals of possible risks. Further data collection would support surveillance and deeper studies. At the same time, enhancing prudential measures would help safeguard financial and macroeconomic stability. These include strengthening the monitoring of the housing market, bank lending practices and household debt, as well as fortifying the macroprudential framework, including with more effective toolkits for early intervention.
    Keywords: Real estate prices;Price indexes;Real sector;Supply and demand;Housing prices;Guyana,macroprudential policies,housing market,macroeco-financial stability.,WP,house price,percent change,house market,estate price,household debt
    Date: 2020–01–31
  128. By: Bems, Rudolfs; Kikkawa, Ayumu Ken
    Abstract: Global Value Chains have proliferated economic policy debates. Yet a key concept---trade in value added---is likely mismeasured because of sectoral aggregation bias stemming from reliance on input-output tables. This paper uses comprehensive firm-level data on both domestic and international transactions to study this bias. We find that sectoral aggregation leads to overstated trade in value added and, correspondingly, understated import content of gross exports. The economic magnitude of the estimated bias varies from moderate to large---at 2-5 p.p. of gross exports for Belgium and 17 p.p. for China. We study how the interplay between within-sector heterogeneities in firm import and export intensities and firm size determine the magnitude of the sectoral aggregation bias.
    Keywords: Aggregation bias; global value chains; Input-Output Tables
    JEL: E01 F14 L14
    Date: 2020–01
  129. By: Jiro Honda; Hiroaki Miyamoto
    Abstract: Would population aging affect the effectiveness of fiscal stimulus? Despite the renewed focus on population aging, there are few empirical studies on the output effects of fiscal policy in aging economies. Our study fills this gap by analyzing this issue in OECD countries. We find that, as population ages, the output effects of fiscal spending shocks are weakened. We also find that, while high-debt countries generally face weaker fiscal multipliers, high-debt aging economies face even weaker multipliers. These results point to important policy implications: population aging would call for a larger fiscal stimulus to support aggregate demand during recession and thus require larger fiscal space to allow a wider swing of the fiscal position without creating concerns for fiscal sustainability. Our analysis also suggests that policy measures to promote labor supply could help increase the output effect of fiscal stimulus in aging economies.
    Date: 2020–06–12
  130. By: Matthieu Renault (Université de Côte d'Azur; CNRS, GREDEG)
    Abstract: As a complement to Hoover (2012), this paper addresses the compatibility between the “General Equilibrium†(in particular, the disequilibrium theory†) and the “Aggregation†(i.e. large-scale models) microfoundational programs in the search for microfoundations in macroeconomics. For this purpose, Edmond Malinvaud is an interesting case, for he committed to both microfoundational programs and used to regard them as compatible. This paper brings such compatibility to the forefront through the analysis of Malinvaud's conception of macroeconomics, his alternative view on the search for microfoundations, and his research agenda in disequilibrium theory throughout the 1970s and the 1980s.
    Keywords: Microfoundations of Macroeconomics; Edmond Malinvaud; Macroeconometric Modeling; Disequilibrium Theory; New Classical Economics
    Date: 2020–06

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