nep-mac New Economics Papers
on Macroeconomics
Issue of 2020‒10‒05
100 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. What do high-frequency expenditure network data reveal about spending and inflation during COVID‑19? By Kim Huynh; Helen Lao; Patrick Sabourin; Angelika Welte
  2. Communication and the Beliefs of Economic Agents By Bernardo Candia; Olivier Coibion; Yuriy Gorodnichenko
  3. A program for strengthening the Federal Reserve's ability to fight the next recession By David Reifschneider; David Wilcox
  4. What’s Up with the Phillips Curve? By William Chen; Marco Del Negro; Michele Lenza; Giorgio E. Primiceri; Andrea Tambalotti
  5. A different economic growth strategy for the U.S. By De Koning, Kees
  6. Does Unemployment Risk Affect Business Cycle Dynamics? By Sebastian Graves
  7. Los principales retos de la economía española tras el Covid-19. Comparecencia en la Comisión para la Reconstrucción Social y Económica de España tras el Covid-19. Congreso de los Diputados, el 23 de junio de 2020 By Pablo Hernández de Cos
  8. Monetary Policy Surprises and Exchange Rate Behavior By Refet S. Gürkaynak; A. Hakan Kara; Burçin Kısacıkoğlu; Sang Seok Lee
  9. Monetary Momentum By Andreas Neuhierl; Michael Weber
  10. Fiscal Expansion, Government Debt and Economic Growth: A Post-Keynesian Perspective By Parui, Pintu
  11. Employment Reallocation over the Business Cycle: Evidence from Danish Data By Bertheau, Antoine; Bunzel, Henning; Vejlin, Rune Majlund
  12. La economía española ante la crisis del Covid-19. Comparecencia ante la Comisión de Asuntos Económicos y Transformación Digital del Congreso de los Diputados, 18 de mayo de 2020 By Pablo Hernández de Cos
  13. Average Inflation Targeting and Household Expectations By Olivier Coibion; Yuriy Gorodnichenko; Edward S. Knotek II; Raphael Schoenle
  14. On the Importance of Household versus Firm Credit Frictions in the Great Recession By Patrick J. Kehoe; Pierlauro Lopez; Virgiliu Midrigan; Elena Pastorino
  15. The impact of short-term employment contracts on employment volatility and economic fluctuations By Matsue, Toyoki
  16. The 2020 Long-Term Budget Outlook By Congressional Budget Office
  17. After 25 Years as Faithful Members of the EU. Public Support for the Euro and Trust in the ECB in Austria, Finland and Sweden By Roth, Felix; Jonung, Lars
  18. Macroeconomic Responses of Emerging Market Economies to Oil Price Shocks: Analysis by Region and Resource Profile By Sophio Togonidze; Evzen Kocenda
  19. Generational Distribution of Fiscal Burdens: A Positive Analysis By Uchida, Yuki; Ono, Tetsuo
  20. Long Live the Vacancy By Haefke, Christian; Reiter, Michael
  21. Probing the mechanism: lending rate setting in a data-driven agent-based model By Papadopoulos, Georgios
  22. Commodity price volatility, fiscal balance and real interest rate By Monoj Kumar Majumder; Mala Raghavan; Joaquin Vespignani
  23. Average Inflation Targeting and Household Expectations By Olivier Coibion; Yuriy Gorodnichenko; Edward S. Knotek
  24. How Robust Are Makeup Strategies to Key Alternative Assumptions? By James Hebden; Edward Herbst; Jenny Tang; Giorgio Topa; Fabian Winkler
  25. Pricing under fairness concerns By Eyster, Erik; Madarász, Kristóf; Michaillat, Pascal
  26. Nonlinearities and expenditure multipliers in the Eurozone. By Andrea Boitani; Salvatore Perdichizzi; Chiara Punzo
  27. Uncertainty, Long-Run, and Monetary Policy Risks in a Two-Country Macro Model By Kimberly A. Berg; Nelson C. Mark
  28. Nontradable Goods and Fiscal Multipliers By Christian Glocker; Jesus Crespo Cuaresma
  29. Fedesarrollo: 50 años de influencia en política pública By Fedesarrollo
  30. Secured Credit Spreads By Efraim Benmelech; Nitish Kumar; Raghuram Rajan
  31. Eggs in One Basket: Security and Convenience of Digital Currencies By Charles M. Kahn; Francisco Rivadeneyra; Tsz-Nga Wong
  32. On Public Spending and Economic Unions By Fernando Broner; Alberto Martin; Jaume Ventura
  33. Interest rate pegs and the reversal puzzle: On the role of anticipation By Gerke, Rafael; Giesen, Sebastian; Kienzler, Daniel
  34. Government Spending Multipliers in (Un)certain Times By Jan Philipp Fritsche; Mathias Klein; Malte Rieth
  35. A Meta-Analysis of the Frisch Extensive Margin Elasticity By Roman Horvath; Ali Elminejad; Tomas Havranek
  36. Capital Income Taxation with Portfolio Choice By Ivo Bakota
  37. Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages? By Veronica Guerrieri; Guido Lorenzoni; Ludwig Straub; Iv‡n Werning
  38. Macroeconomic Dynamics and Reallocation in an Epidemic By Dirk Kruger; Harald Uhlig; Taojun Xie
  39. A Macro-Financial Perspective to Analyse Maturity Mismatch and Default By Xuan Wang
  40. Uncertainty and monetary policy during extreme events By Giovanni Pellegrino; Efrem Castelnuovo; Giovanni Caggiano
  41. The determinants of sovereign risk premiums in the UK and the European government bond market: The impact of Brexit By Samir Kadiric
  42. Financial Openness and Inflation: An Empirical Analysis By Alfred V. Guender; Hamish McHugh-Smith
  43. Financial conditions, business cycle fluctuations and growth at risk By Falconio, Andrea; Manganelli, Simone
  44. Optimal Foresight By Ryan Chahrour; Kyle Jurado
  45. Los ciclos internacionales y su impacto sobre la economía colombiana By José Antonio Ocampo
  46. Nowcasting the output gap By Tino Berger; James Morley; Benjamin Wong
  47. Firm Leverage and Wealth Inequality By Ivo Bakota
  48. The Economy’s Outlook, Challenges, and Way Forward By Eric S. Rosengren
  49. The Fed Takes on Corporate Credit Risk: An Analysis of the Efficacy of the SMCCF By Simon Gilchrist; Bin Wei; Vivian Z. Yue; Egon Zakrajšek
  50. Recruiting Intensity and Hiring Practices: Cross-Sectional and Time-Series Evidence By Lochner, Benjamin; Merkl, Christian; Stüber, Heiko; Gürtzgen, Nicole
  51. Income, Liquidity, and the Consumption Response to the 2020 Economic Stimulus Payments By Scott R. Baker; R.A. Farrokhnia
  52. Market Failures and Official Sector Interventions By Anna Kovner; Antoine Martin
  53. Monetary policy and stock market valuation By Laine, Olli-Matti
  54. Expanding the Toolkit: Facilities Established to Respond to the COVID-19 Pandemic By Anna Kovner; Antoine Martin
  55. Liquidity Transformation and Fragility in the US Banking Sector By Qi Chen; Itay Goldstein; Zeqiong Huang; Rahul Vashishtha
  56. Bullard Discusses Monetary Policy and Inflation Outlook with Bloomberg By James B. Bullard
  57. Internal and External Effects of Social Distancing in a Pandemic By Maryam Farboodi; Gregor Jarosch; Robert Shimer
  58. Real-Time Inequality and the Welfare State in Motion: Evidence from COVID-19 in Spain By Oriol Aspachs; Ruben Durante; Alberto Graziano; Josep Mestres; José García-Montalvo; Marta Reynal-Querol
  59. Trayectoria e influencia de los Modelos de Equilibrio General de Fedesarrollo By Eduardo Lora
  60. The Effects of Pandemic-Related Legislation on Output By Congressional Budget Office
  61. The Welfare Implications of Massive Money Injection: The Japanese Experience from 2013 to 2020 By Tsutomu Watanabe
  62. Durables and Lemons: Private Information and the Market for Cars By Richard Blundell; Ran Gu; Soren Leth-Petersen; Hamish Low; Costas Meghir
  63. Designing Oil Revenue Management Mechanisms : An Application to Chad By Campagne,Benoit Philippe Marcel; Kitzmuller,Markus; Tordo,Silvana
  64. Hartz and Minds: Happiness Effects of Reforming an Employment Agency By Max Deter
  65. Measuring the Cost of Living in Mexico and the US By David O. Argente; Chang-Tai Hsieh; Munseob Lee
  66. Coin migration between Germany and other euro area countries By Uhl, Matthias
  67. Quo Vadis, Britain? – Implications of the Brexit Process on the UK’s Real Economy By Kaan Celebi
  68. Boom Town Business Dynamics By Ryan Decker; Meagan McCollum; Gregory B. Upton, Jr.
  69. Gold as a Financial Instrument By Gomis-Porqueras, Pedro; Shi, Shuping; Tan, David
  70. Inflation Threshold Levels and Economic Growth in the Franc Zone Countries By Sanga,Dimitri; Gui-Diby,Steve Loris
  71. No-Arbitrage Priors, Drifting Volatilities, and the Term Structure of Interest Rates By Andrea Carriero; Todd E. Clark; Massimiliano Marcellino
  72. Banking euro area stress test model By Budnik, Katarzyna; Balatti, Mirco; Dimitrov, Ivan; Groß, Johannes; Kleemann, Michael; Reichenbachas, Tomas; Sanna, Francesco; Sarychev, Andrei; Siņenko, Nadežda; Volk, Matjaz
  73. One Rule Fits All ? Heterogeneous Fiscal Rules for Commodity Exporters When Price Shocks Can Be Persistent: Theory and Evidence By Galego Mendes,Arthur; Pennings,Steven Michael
  74. Fedesarrollo y la política monetaria By Roberto Steiner
  75. Quality of Goods and Price Setting for CPUs By Yuriy Gorodnichenko; Oleksandr Talavera; Nam Vu
  76. Economic Agents as Imperfect Problem Solvers By Cosmin L. Ilut; Rosen Valchev
  77. Bullard Talks about Average Inflation Targeting and Economic Growth with CNBC By James B. Bullard
  78. Brunner Versus Friedman: Diverging Aspirations For The Monetarist Project By Pierrick Clerc; Michel De Vroey
  79. Intermediary Asset Pricing during the National Banking Era By Colin Weiss
  80. Avoiding Root-Finding in the Krusell-Smith Algorithm Simulation By Ivo Bakota
  81. Macroeconomic Aspects of the Coronavirus Epidemic: Eurozone, EU, US and Chinese Perspectives By Paul J.J. Welfens
  82. Pandemics Through the Lens of Occupations By Anand Chopra; Michael B. Devereux; Amartya Lahiri
  83. The Pricing of Bank Bonds, Sovereign Credit Risk and ECB's Asset Purchase Programmes By Ricardo Branco; João Pinto; Ricardo Ribeiro
  84. Income Tax Evasion: Tax Elasticity, Welfare, and Revenue By Max Gillman
  85. Should the History of Macroeconomics Steer Cear of the Fray or be Partisan? A Critical Essay on Banks and Finance in Modern Macroeconomics by B. Ingrao and C. Sardoni By Michel De Vroey
  86. Endogenous Emission Caps Always Produce a Green Paradox By Gerlagh, Reyer; Hejimans, Roweno J. R. K.; Rosendahl, Knut Einar
  87. Underlying Inflation: Its Measurement and Significance By Jeremy B. Rudd
  88. How Did State Reopenings Affect Small Businesses? By Rajashri Chakrabarti; Sebastian Heise; Davide Melcangi; Maxim L. Pinkovskiy; Giorgio Topa
  89. Bank Lending Rates and Spreads in EMDEs : Evolution, Drivers, and Policies By Feyen,Erik H.B.; Zuccardi Huertas,Igor Esteban
  90. The Corona Virus, the Stock MarketÕs Response, and Growth Expectations By Niels J. Gormsen; Ralph S.J. Koijen
  91. BREXIT-Wirtschaftsperspektiven fŸr Deutschland und NRW: Mittel- und langfristige Effekte & Politikoptionen By Paul J.J. Welfens
  92. Did State Reopenings Increase Consumer Spending? By Rajashri Chakrabarti; Sebastian Heise; Davide Melcangi; Maxim L. Pinkovskiy; Giorgio Topa
  93. Fedesarrollo y la economía del narcotráfico By Carlos Caballero
  94. La influencia de Fedesarrollo: perspectivas y retos By Luis Fernando Mejía
  95. Capital Flows and the Stabilizing Role of Macroprudential Policies in CESEE By Markus Eller; Niko Hauzenberger; Florian Huber; Helene Schuberth; Lukas Vashold
  96. A behavioral economic approach to multiple job holdings with leisure By Hlouskova, Jaroslava; Tsigaris, Panagiotis
  97. Celebrando 50 años de Fedesarrollo By Ximena Cadena
  98. The Effectiveness of FX Interventions: A Meta-Analysis By Lucía Arango-Lozano; Lukas Menkhoff; Daniela Rodríguez-Novoa; Mauricio Villamizar-Villegas
  99. Does the Phillips curve help to forecast euro area inflation? By Bańbura, Marta; Bobeica, Elena
  100. Economic Impact Analysis of Covid-19 Implication on India’s GDP, Employment and Inequality By Biswajit Nag; Willem van der Geest

  1. By: Kim Huynh; Helen Lao; Patrick Sabourin; Angelika Welte
    Abstract: The official consumer price index (CPI) inflation measure, based on a fixed basket set before the COVID 19 pandemic, may not fully reflect what consumers are currently experiencing. We partnered with Statistics Canada to construct a more representative index for the pandemic with weights based on real-time transaction and survey data.
    Keywords: Inflation and prices; Payment clearing and settlement systems
    JEL: D1 D12 E3 E31 E4 E42 E5 E52
    Date: 2020–09
  2. By: Bernardo Candia; Olivier Coibion; Yuriy Gorodnichenko
    Abstract: New surveys provide a wealth of information on how economic agents form their expectations and how those expectations shape their decisions. We review recent evidence on how changes in macroeconomic expectations, particularly inflation expectations, affect households’ and firms’ actions. We show that the provision of information about inflation to households and firms can sometimes backfire in terms of their subsequent decisions. Whether or not this is the case hinges on how individuals interpret the news about inflation: supply-side interpretations (“inflation is bad for the economy”) lead to negative income effects, which can depress economic activity. We show that households in advanced economies, unlike professional forecasters, typically have such a supply-side interpretation, as do many firms. New communication strategies could avoid public misinterpretation of policy decisions.
    JEL: E2 E3 E4 E5
    Date: 2020–09
  3. By: David Reifschneider (former Federal Reserve); David Wilcox (Peterson Institute for International Economics)
    Abstract: If the Federal Reserve does not decisively change the way it conducts monetary policy, it will probably not be capable of fighting recessions in the future as effectively as it fought them in the past. This reality helped motivate the Fed to undertake the policy framework review in which it is currently engaged. Researchers have suggested many steps the Fed could take to improve its recession-fighting ability; however, no consensus has emerged as to which of these steps would be both practical and maximally effective. This paper aims to fill that gap. It recommends that the Fed commit as soon as possible to a new approach for fighting recessions, involving two key elements. First, the Fed should commit that whenever it runs out of room to cut the federal funds rate further, it will leave the rate at its minimum level until the labor market recovers and inflation returns to 2 percent. Second, the Fed should commit that under the same circumstances, it will begin to purchase longer-term assets in volume and will continue such purchases until the labor market recovers. If the forces driving the next recession are not unusually severe, this framework might allow the Fed to be as effective at fighting that recession as it was in the past. If the next recession is more severe, however, the Fed will probably run out of ammunition even if it takes the two steps recommended here. Therefore, both monetary and fiscal policymakers should consider yet other steps they could take to enhance their ability to fight future recessions.
    Keywords: Monetary policy, Federal Reserve, framework review, effective lower bound
    JEL: E43 E44 E52 E58
    Date: 2020–03
  4. By: William Chen; Marco Del Negro; Michele Lenza; Giorgio E. Primiceri; Andrea Tambalotti
    Abstract: U.S. inflation used to rise during economic booms, as businesses charged higher prices to cope with increases in wages and other costs. When the economy cooled and joblessness rose, inflation declined. This pattern changed around 1990. Since then, U.S. inflation has been remarkably stable, even though economic activity and unemployment have continued to fluctuate. For example, during the Great Recession unemployment reached 10 percent, but inflation barely dipped below 1 percent. More recently, even with unemployment as low as 3.5 percent, inflation remained stuck under 2 percent. What explains the emergence of this disconnect between inflation and unemployment? This is the question we address in “What’s Up with the Phillips Curve?,” published recently in Brookings Papers on Economic Activity.
    Keywords: inflation; unemployment; monetary policy trade-off; VARs; DSGE models
    JEL: E2 E52
    Date: 2020–09–18
  5. By: De Koning, Kees
    Abstract: The corona virus pandemic has dramatically changed the economic outlook for the United States and many other countries. In June this year, the Federal Reserve published its unemployment predictions. From a July 2020 level of 10.2%, it expects the year-end ratio to drop to 9.3%; by the end of 2022 to reach 5.5% and ultimately to return to the pre-corona crisis level of 4.1% at a later date. The adjustment period during the previous financial crisis took from December 2006, when the U.S unemployment level reached a low of 4.4%, to April 2017 when it, for the first time since December 2006, reached a level of 4.4% again: more than 10 years of adjustments. In October 2009, it reached 10.0% as the highest level during the previous financial crisis. Households also lost $6 trillion in home equity between Q2 2006 and Q1 2012. If the past can be any guidance for the future, the current unemployment projections may seem somewhat optimistic. Higher unemployment levels go hand in hand with reduced incomes; dropping house prices as foreclosures and evictions become the standard practice to affect households. Governments -the U.S. government included- have a tendency to (have to) spend more in recession periods when tax incomes drop and borrowings rise. The last year a surplus was recorded on the U.S. Federal government account was in 2000. Since then the cumulative deficit has grown into a debt to GDP level of 107% of GDP. The expected deficit for this fiscal year 2020 is $3.7 trillion. Any debt in excess of over 85% of GDP lowers future growth patterns. U.S. Government debt levels are based on the premise of borrowing first and repaying later. No savings are set-aside in good years to spend in recession years. Therefore interest and principal repayments need to take place in later years, reducing the government’s disposable income for other purposes. Households mostly save first and spend at a later date. In 2019, U.S. households pension savings reached $32.3 trillion and home equity net worth in privately owned homes was $ 19.565 trillion. The U.S. nominal GDP in the same year was $21.43 trillion. The key to turn an economy around in the fastest possible manner is to use household’s existing savings first, before resorting to borrowings: A Temporary (home) Equity Spend and Save Again system (Tessa) will be set out in this paper.
    Keywords: U.S. economic growth, unemployment, financial crisis. household losses in home equity, savings and spending levels government and households, U.s. government debt to GDP level. the use of home equity to create economic growth.
    JEL: D1 D12 D14 E2 E21 E24 E4 E42 E44 E5 E58 G12
    Date: 2020–09–04
  6. By: Sebastian Graves
    Abstract: In this paper, I show that the decline in household consumption during unemployment spells depends on both liquid and illiquid asset positions. I also provide evidence that unemployment spells predict the withdrawal of illiquid assets, particularly when households have few liquid assets. Motivated by these findings, I embed endogenous unemployment risk in a two-asset heterogeneous-agent New Keynesian model. The model is consistent with the above evidence and provides a new propagation mechanism for aggregate shocks due to a flight-to-liquidity that occurs when unemployment risk rises. This mechanism implies that unemployment insurance plays an important role as an automatic stabilizer, particularly when monetary policy is constrained.
    Keywords: Heterogeneous-agent model; liquid and illiquid assets; Unemployment insurance; Unemployment risk
    JEL: E10 E24 E32 E62 J64
    Date: 2020–09–18
  7. By: Pablo Hernández de Cos (Banco de España)
    Abstract: Una vez superada la etapa más aguda de la crisis del Covid-19, que ha supuesto una respuesta inmediata y contundente de la política económica, el gobernador plantea las medidas económicas prioritarias en la fase siguiente a la hibernación y la puesta en marcha, de manera urgente, de una estrategia ambiciosa, integral, permanente y evaluable de reformas estructurales y de consolidación fiscal. En esta segunda fase de reactivación paulatina, la respuesta de la política económica, para sentar las bases de un crecimiento sostenible y equilibrado, tiene que combinar dos objetivos: apoyar la recuperación y facilitar el ajuste estructural. Y, en ese escenario, la sostenibilidad de las finanzas públicas debe estar garantizada. Para potenciar la credibilidad y efectividad de esta respuesta inicial y de toda la estrategia de reformas: i) la expansión fiscal en el corto plazo debe presentarse acompañada de un plan de saneamiento de las cuentas públicas en el medio plazo, que procederá cuando la economía recupere una senda de crecimiento sólido; ii) las reformas estructurales deben acelerarse, para generar efectos positivos a muy corto plazo sobre las decisiones de gasto, inversión y contratación; iii) el consenso político debe garantizar la permanencia de la estrategia durante varias legislaturas. En el corto plazo, las políticas de apoyo a la recuperación deberán acomodarse a la evolución de la situación sanitaria y la coyuntura económica. Ello supondrá mantener medidas monetarias y financieras orientadas a preservar el acceso adecuado a la financiación, extender y recalibrar el sostenimiento de rentas y expedientes de regulación temporal de empleo, nuevas medidas, como políticas activas de empleo y de formación de los desempleados y mejores procedimientos de reestructuración e insolvencia empresarial, y un impulso fiscal a la reestructuración del tejido productivo a través de la inversión en capital tecnológico, educación y formación. En el medio plazo, los principales desafíos de la economía española inspiran la agenda de reformas estructurales que debe aumentar nuestro crecimiento potencial en el escenario de los próximos años. En el texto se detallan las medidas contenidas en esta agenda en respuesta a cada uno de los retos identificados: i) mejorar la dinámica de la productividad (fomento de la dinámica y el crecimiento empresarial, aumento del grado de competencia sectorial; mejora del capital humano e incremento del capital tecnológico); ii) reducir el desempleo y la precariedad del empleo (con menor temporalidad y políticas activas de empleo); iii) afrontar el reto del envejecimiento poblacional (reformas del sistema de pensiones); iv) reforzar las políticas de inclusión (ingreso mínimo vital y acceso a la vivienda); v) favorecer la transición hacia una economía más sostenible (desde la política fiscal y el sistema financiero); vi) mantener un sector financiero saneado; vii) afrontar los nuevos retos (globalización y digitalización); viii) impulsar la reforma de la gobernanza europea (un fondo de recuperación europeo adecuado, avances en la unión fiscal, reforma del Pacto de Estabilidad y Crecimiento, culminación de la Unión Bancaria y una verdadera Unión de Mercados de Capitales); ix) garantizar la sostenibilidad de las cuentas públicas (un ambicioso programa de consolidación fiscal plurianual).
    Keywords: escenario pos-Covid-19, políticas económicas, prioridades estratégicas, recuperación económica, ajuste estructural, consolidación fiscal, agenda de reformas, crecimiento potencial, políticas de empleo, capital humano y tecnológico, políticas de inclusión, economía sostenible, gobernanza europea, globalización, digitalización
    JEL: E60 E61 E65 E66 E44 E62 E64 E58 J1 J3 J38 I0 I2 F55 I14 I15 Q5
    Date: 2020–09
  8. By: Refet S. Gürkaynak; A. Hakan Kara; Burçin Kısacıkoğlu; Sang Seok Lee
    Abstract: Central banks unexpectedly tightening policy rates often observe the exchange value of their currency depreciate, rather than appreciate as predicted by standard models. We document this for Fed and ECB policy days using event-studies and ask whether an information effect, where the public attributes the policy surprise to an unobserved state of the economy that the central bank is signaling by its policy may explain the abnormality. It turns out that many informational assumptions make a standard two-country New Keynesian model match this behavior. To identify the particular mechanism, we condition on multiple asset prices in the event-study and model implications for these. We find that there is heterogeneity in this dimension in the event-study and no model with a single regime can match the evidence. Further, even after conditioning on possible information effects driving longer term interest rates, there appear to be other drivers of exchange rates. Our results show that existing models have a long way to go in reconciling event-study analysis with model-based mechanisms of asset pricing.
    JEL: E43 E44 E52 E58 G14
    Date: 2020–09
  9. By: Andreas Neuhierl (University of Notre Dame); Michael Weber (University of Chicago - Booth School of Business)
    Abstract: We document a large return drift around monetary policy announcements by the Federal Open Market Committee (FOMC). Stock returns start drifting up 25 days before expansionary monetary policy surprises, whereas they decrease before contractionary surprises. The cumulative return difference across expansionary and contractionary policy decisions amounts to 2.5% until the day of the policy decision and continues to increase to more than 4.5% 15 days after the meeting. The drift is more pronounced during periods of high uncertainty, it is a market-wide phenomenon, and it is present in all industries and many international equity markets. Standard returns factors and time-series momentum do not span the return drift around FOMC policy decisions. A simple trading strategy exploiting the drift around FOMC meetings increases Sharpe ratios relative to a buy-and-hold investment by a factor of 4. The cumulative returns before FOMC meetings significantly predict the subsequent policy surprise.
    Keywords: Return Drift, Monetary Policy, FOMC, Macro News
    JEL: E31 E43 E44 E52 E58 G12
    Date: 2020
  10. By: Parui, Pintu
    Abstract: Constructing a post-Keynesian growth model, we try to explore how the interaction between capital accumulation and government debt opens up the possibility of multiple equilibria and instability in the economy. We investigate the impact of various parameters such as different tax rates, savings propensities, interest rate etc. on the short run aggregate demand and long run equilibrium growth rate and fiscal debt-capital ratio. We explore the relationship between a progressive tax system and wage-led demand regime. We show that when there is fiscal deficit and government incurs debt, a sufficiently high government expenditure to GDP ratio is essential for achieving stability in the system. Moreover, in a certain case, a low speed of adjustment of the rate of capital accumulation is required, as otherwise, the economy may lose its stability and produces the limit cycles. In case of a moderate level of a fiscal expenditure to GDP ratio, when Keynesian stability condition is satisfied, a lower rate of interest and a higher autonomous investment demand are desirable as they enhance the stable region of the economy.
    Keywords: Government deficits and debt, Post-Keynesian, Instability, Limit cycle, Growth model
    JEL: C62 E12 E32 E62 O41
    Date: 2020–09–03
  11. By: Bertheau, Antoine (University of Copenhagen); Bunzel, Henning (Aarhus University); Vejlin, Rune Majlund (Aarhus University)
    Abstract: We present new evidence on how employment growth varies across firm types (size, productivity, and wage) and over the business cycle using Danish data covering almost 30 years. We decompose net employment growth into two recruitment margins: net hirings from/to employment (poaching) and net hirings from nonemployment. High-productivity firms are the most growing firms due to poaching. High wage firms poach almost as many workers, but shed an almost equal amount to non-employment. Large firms do not poach workers from smaller firms. In terms of employment cyclicality, we find that low-productive and low-wage firms shed proportionally more jobs in recessions. We relate our findings to recent models of employment fluctuations that jointly analyze worker and firm dynamics.
    Keywords: worker flows, firm heterogeneity, matched employer-employee data, business cycle, equilibrium search models
    JEL: E24 E32 J63
    Date: 2020–09
  12. By: Pablo Hernández de Cos (Banco de España)
    Abstract: La pandemia de coronavirus ha colocado nuestra economía en una situación inédita, por la enorme magnitud de esta perturbación adversa, su previsible temporalidad, aunque con potenciales daños estructurales, y su absoluta globalidad. Algunas características de la economía española —la especialización sectorial del tejido productivo, el reducido tamaño medio de las empresas y la elevada temporalidad en el empleo— la hacen más vulnerable que las de otros países a esta perturbación. Esta situación demanda, en una primera fase, políticas económicas inmediatas contundentes, acotadas en el tiempo —hasta que el empleo y la actividad económica recuperen el pulso tras el proceso de hibernación inducida— y coordinadas internacionalmente. El objetivo es paliar la pérdida de rentas de los hogares y las empresas afectados por la crisis, y evitar que una perturbación de carácter temporal genere efectos persistentes en el tiempo; para ello, la política fiscal es la herramienta más adecuada. La política monetaria debe operar también de manera enérgica para garantizar a los agentes económicos unas condiciones de financiación y liquidez adecuadas. Las políticas micro- y macroprudencial deben promover que las entidades financieras sigan haciendo llegar el crédito a las familias y a las empresas, y, a la vez, preservar la estabilidad financiera del sistema. Además, la crisis, por ser global, exige una respuesta coordinada a escala internacional y, en el plano europeo, una respuesta conjunta, soportada por un mecanismo de mutualización de recursos financieros y de riesgos, y una unión bancaria completa. Una vez superada la fase más aguda de esta crisis, las políticas económicas deberán abordar, fundamentalmente, los siguientes retos: reducir el déficit estructural y la deuda pública, y favorecer el crecimiento a largo plazo. La estrategia deberá descansar en un programa de consolidación presupuestaria de medio plazo —que, a través de una revisión del gasto y de la estructura y capacidad impositivas, permita sanear nuestras finanzas públicas—, así como en un programa de reformas estructurales que eleven la capacidad de crecimiento económico, con especial atención a la mejora del capital humano y al gasto eficiente en I+D.
    Keywords: Covid-19, perturbación, respuesta a la crisis, políticas macroeconómicas, reformas estructurales, proyecto europeo, crecimiento potencial
    JEL: E6 E60 E61 E65 E66 F01 F55
    Date: 2020–08
  13. By: Olivier Coibion; Yuriy Gorodnichenko; Edward S. Knotek II; Raphael Schoenle
    Abstract: Using a daily survey of U.S. households, we study how the Federal Reserve’s announcement of its new strategy of average inflation targeting affected households’ expectations. Starting with the day of the announcement, there is a very small uptick in the minority of households reporting that they had heard news about monetary policy relative to prior to the announcement, but this effect fades within a few days. Those hearing news about the announcement do not seem to have understood the announcement: they are no more likely to correctly identify the Fed’s new strategy than others, nor are their expectations different. When we provide randomly selected households with pertinent information about average inflation targeting, their expectations still do not change in a different way than when households are provided with information about traditional inflation targeting.
    JEL: E3 E4 E5
    Date: 2020–09
  14. By: Patrick J. Kehoe; Pierlauro Lopez; Virgiliu Midrigan; Elena Pastorino
    Abstract: Although a credit tightening is commonly recognized as a key determinant of the Great Recession, to date, it is unclear whether a worsening of credit conditions faced by households or by firms was most responsible for the downturn. Some studies have suggested that the household-side credit channel is quantitatively the most important one. Many others contend that the firm-side channel played a crucial role. We propose a model in which both channels are present and explicitly formalized. Our analysis indicates that the household-side credit channel is quantitatively more relevant than the firm-side credit channel. We then evaluate the relative benefits of a fixed-sized transfer to households and to firms that improves each group’s access to credit. We find that the effects of such a transfer on employment are substantially larger when the transfer targets households rather than firms. Hence, we provide theoretical and quantitative support to the view that the employment decline during the Great Recession would have been less severe if instead of focusing on easing firms’ access to credit, the government had expended an equal amount of resources to alleviate households’ credit constraints.
    Keywords: credit constraints; collateral constraints; Great Recession; financial recession; government transfers
    JEL: E3 E32 E62 J2 J6
    Date: 2020–09–25
  15. By: Matsue, Toyoki
    Abstract: This study investigates the effects of short-term employment contracts on employment fluctuations and economic fluctuations using a dynamic model with long-term and short-term employment contracts. Numerical experiments show that an increase in the short-term employment ratio amplifies the fluctuations in total employment—when an expected temporary productivity shock occurs—because of the variations in short-term employment being larger than those in long-term employment. Moreover, the large fluctuations in employment lead to the high variations in production and consumption. Promoting the utilization of short-term employment contracts would elicit the amplification of not only the employment fluctuations but also the economic fluctuations.
    Keywords: employment fluctuations; short-term employment; labor contract; employment duration; labor market institutions
    JEL: E24 E27 E32 J20 J41
    Date: 2020–09–03
  16. By: Congressional Budget Office
    Abstract: By the end of 2020, federal debt held by the public is projected to equal 98 percent of gross domestic product (GDP)—its highest level since shortly after World War II. If current laws governing taxes and spending generally remained unchanged, debt would first exceed 100 percent of GDP in 2021 and would reach 107 percent of GDP, its highest level in the nation’s history, by 2023, CBO projects. Debt would continue to increase in most years thereafter, reaching 195 percent of GDP by 2050.
    JEL: E20 E60 E61 E62 E66 H50 H51 H53 H55 H60 H61 H62 H63 H68
    Date: 2020–09–21
  17. By: Roth, Felix (Department of Economics, University of Hamburg); Jonung, Lars (Department of Economics, Lund University)
    Abstract: Austria, Finland and Sweden became members of the EU in 1995. This paper examines how support for the euro and trust in the European Central Bank (ECB) have evolved in these three countries since their introduction at the turn of the century. Support for the euro in the two euro-area members Austria and Finland has remained high and relatively stable since the physical introduction of the new currency nearly 20 years ago, while the euro crisis significantly reduced support for the euro in Sweden. Since the start of the crisis, trust in the ECB was strongly influenced by the pronounced increase in unemployment in the euro area, demonstrating that the ECB was held accountable for macroeconomic developments. Our results indicate that citizens in the EU, both within and outside the euro area, judge the euro and the ECB based on the economic performance of the euro area. Thus, the best way to foster support for the euro and trust in the ECB is to pursue policies aimed at achieving low unemployment and high growth.
    Keywords: euro; trust; ECB; EU; monetary union; Austria; Finland; Sweden
    JEL: E42 E52 E58 F33 F45
    Date: 2020–09–08
  18. By: Sophio Togonidze (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic); Evzen Kocenda (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic; Ustav teorie informace a automatizace Akademie ved Ceske Republiky)
    Abstract: This study employs a vector autoregressive (VAR) model to analyse how oil price shocks affect macroeconomic fundamentals in emerging economies. Findings from existing literature remain inconclusive how macroeconomic variables fare towards shocks, especially in emerging economies. The objective of our study is to uncover if analysis by region (Latin America and the Caribbean, East Asia and the Pacific, Europe, and Central Asia) and resource intensity of economies (oil exporters, oil importers, minerals exporters, and less resource intensive). Our unique approach forms part of our contribution to the literature. We find that Latin America and the Caribbean are least affected by oil price shocks, while in East Asia and the Pacific the response of inflation and interest rate to oil price shocks is positive, and output growth is negative. Our analysis by resource endowment fails to show oil price shocks’ ability to explain huge variations in macroeconomic variables in oil importing economies. Further sensitivity analysis using US interest rates as an alternative source of external shocks to emerging economies establishes a significant response of interest rate responses to US interest rate in Europe and Central Asia, and in inflation in Latin America and the Caribbean. We also find that regardless of resource endowment, the response of output growth and capital to a positive US interest rate shock is negative and significant in EMs. Our results are persuasive that resource intensity and regional factors impact the responsiveness of emerging economies to oil price shocks, thus laying a basis for policy debate.
    Keywords: Emerging market economies, Oil price shocks, Output growth, Panel VAR
    JEL: F44 E37 C11 E32
    Date: 2020–09
  19. By: Uchida, Yuki; Ono, Tetsuo
    Abstract: This study presents a political economy model with overlapping generations to analyze the effects of population aging on fiscal policy formation and the resulting distribution of fiscal burden across generations. The analysis shows that increased political power of the old, arising from population aging, leads to (i) an increase in the ratio of labor income tax revenue to GDP and the ratio of debt to GDP, and (ii) an increase in the ratio of capital income tax revenue to GDP in countries with high degrees of preferences for public goods, but an initial decrease followed by an increase in this ratio in countries with low degrees of preferences for public goods.
    Keywords: Generational burden; Overlapping generations; Political economy; Population aging; Public debt
    JEL: D70 E24 E62 H60
    Date: 2020–09–09
  20. By: Haefke, Christian (New York University, Abu Dhabi); Reiter, Michael (IHS - Institute for Advanced Studies, Vienna)
    Abstract: We reassess the role of vacancies in a Diamond-Mortensen-Pissarides style search and matching model. In the absence of free entry long lived vacancies and endogenous separations give rise to a vacancy depletion channel which we identify via joint unemployment and vacancy dynamics. We show conditions for constrained efficiency and discuss important implications of vacancy longevity for modeling and calibration, in particular regarding match cyclicality and wages. When calibrated to the postwar US economy, the model explains not only standard deviations and autocorrelations of labor market variables, but also their dynamic correlations with only one shock.
    Keywords: Beveridge curve, business cycles, job destruction, random matching, separations, unemployment volatility, wage determination
    JEL: E24 E32 J63 J64
    Date: 2020–09
  21. By: Papadopoulos, Georgios
    Abstract: The mechanism underlying banks' interest rate setting behaviour is an important element in the study of economic systems with important policy implications associated with the potential of monetary and -recently- macroprudential policies to affect the real economy. In the agent-based modelling literature, lending rate setting has so far been modelled in an ad-hoc manner, based almost exclusively on theoretical grounds with the specifics usually chosen in an arbitrary fashion. This study tries to empirically identify the mechanism that approximates the observed patterns of consumer credit interest rates within a data-driven, agent-based model (ABM). The analysis suggests that there is heterogeneity across countries, both in terms of the rule itself as well as its specific parameters and that often a simple, borrower-risk only mechanism adequately approximates the historical series. More broadly, the validation exercise shows that the model is able to replicate the dynamics of several variables of interest, thus providing a way to bring ABMs "close to the data".
    Keywords: Agent-based modelling, Lending rate mechanism, Consumer credit, Model validation, Rule discovery
    JEL: C63 E21 E27 E43
    Date: 2020–09–04
  22. By: Monoj Kumar Majumder; Mala Raghavan; Joaquin Vespignani
    Abstract: The objective of this study is to explore the impact of commodity price volatility on the governments’ fiscal balance. Using a dynamic panel data model for 108 countries from 1993 to 2018, this study finds that governments’ fiscal balance deteriorates with commodity price volatility. A one standard deviation increase in commodity price volatility leads to a reduction of approximately 0.04 units in the fiscal balance as a percentage of gross domestic product. In addition, we examine the role of real interest rates in influencing the relationship between commodity price volatility and fiscal balance. The empirical results suggest that the negative impact of commodity price volatility on fiscal balance can be mitigated with lower real interest rate.
    Keywords: Commodity prices, commodity price volatility, fiscal balance, real interest rate
    JEL: E58 E62 G01
    Date: 2020–09
  23. By: Olivier Coibion; Yuriy Gorodnichenko; Edward S. Knotek
    Abstract: Using a daily survey of U.S. households, we study how the Federal Reserve’s announcement of its new strategy of average inflation targeting affected households’ expectations. Starting with the day of the announcement, there is a very small uptick in the minority of households reporting that they had heard news about monetary policy relative to prior to the announcement, but this effect fades within a few days. Those hearing news about the announcement do not seem to have understood the announcement: they are no more likely to correctly identify the Fed’s new strategy than others, nor are their expectations different. When we provide randomly selected households with pertinent information about average inflation targeting, their expectations still do not change in a different way than when households are provided with information about traditional inflation targeting.
    Keywords: Inflation targeting; inflation expectations; surveys; communication; randomized controlled trial
    JEL: E3 E4 E5
    Date: 2020–09–18
  24. By: James Hebden; Edward Herbst; Jenny Tang; Giorgio Topa; Fabian Winkler
    Abstract: We analyze the robustness of makeup strategies—policies that aim to offset, at least in part, past misses of inflation from its objective—to alternative modeling assumptions, with an emphasis on the role of inflation expectations. We survey empirical evidence on the behavior of shorter-run and long-run inflation expectations. Using simulations from the FRB/US macroeconomic model, we find that makeup strategies can moderately offset the real effects of adverse economic shocks, even when much of the public is uninformed about the monetary strategy. We also discuss the robustness of makeup strategies to alternative assumptions about the slope of the Phillips curve and the (mis)perception of economic slack.
    Keywords: Monetary policy; Effective lower bound; Expectations
    JEL: E47 E52
    Date: 2020–08–27
  25. By: Eyster, Erik; Madarász, Kristóf; Michaillat, Pascal
    Abstract: This paper proposes a theory of pricing premised upon the assumptions that customers dislike unfair prices—those marked up steeply over cost—and that firms take these concerns into account when setting prices. Since they do not observe firms’ costs, customers must extract costs from prices. The theory assumes that customers infer less than rationally: when a price rises due to a cost increase, customers partially misattribute the higher price to a higher markup—which they find unfair. Firms anticipate this response and trim their price increases, which drives the passthrough of costs into prices below one: prices are somewhat rigid. Embedded in a New Keynesian model as a replacement for the usual pricing frictions, our theory produces monetary nonneutrality: when monetary policy loosens and inflation rises, customers misperceive markups as higher and feel unfairly treated; firms mitigate this perceived unfairness by reducing their markups; in general equilibrium, employment rises. The theory also features a hybrid short-run Phillips curve, realistic impulse responses of output and employment to monetary and technology shocks, and an upward-sloping long-run Phillips curve.
    Keywords: forthcoming
    JEL: L11 E31 D91
    Date: 2020–09–07
  26. By: Andrea Boitani (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Salvatore Perdichizzi; Chiara Punzo
    Abstract: We analyze the non-linear effects of government spending for the Euro area in recession, by using local projection method and by testing whether the impact of the shock depends crucially on the levels of public debt or the depth of the recession. We provide three insights. First, expenditure mul-tipliers are not strongly state-dependent but they are always above unity. Second, state dependency emerges as soon as deep recession is distinguished from ordinary downturns. Third, fiscal space matters: expenditure multi-pliers are larger in low fiscal space, high debt, South-EZ countries than in low-debt, North-EZ countries.
    Keywords: Expenditure multipliers, State-dependent fiscal policy, Fiscal consolidation.
    JEL: E32 E62
    Date: 2020–06
  27. By: Kimberly A. Berg; Nelson C. Mark
    Abstract: We study international currency risk in a two-country dynamic stochastic general equilibrium model under incomplete markets. The underlying sources of risk are direct shocks to productivity growth, shocks to a long-run risk component of productivity growth, shocks to a stochastic volatility component of productivity growth, and shocks to monetary policy. The long-run risk and stochastic volatility shocks have the interpretation of aggregate demand shocks. Cross-country heterogeneity in the model arises from three sources: differences in the long-run risk and stochastic volatility process parameters that we estimate using United States and Japanese total factor productivity data, differences in monetary policy parameters, and differences in export pricing. The driving force behind currency risk is heterogeneity in precautionary saving. Differences in monetary policy can generate moderate currency risk, but structural differences in productivity growth are more important. Export pricing conventions are not important sources of currency risk. Stochastic volatility shocks are key to generating volatility in the currency risk premium, but they do not help at all in explaining the forward premium bias/anomaly.
    JEL: E21 E43 F31 G12
    Date: 2020–09
  28. By: Christian Glocker; Jesus Crespo Cuaresma
    Abstract: We assess the role that nontradable goods play as a determinant of fiscal spending multipliers, making use of a two-sector model. While fiscal multipliers increase with the share of nontradable goods, an inverted U-shaped relationship exists between multiplier size and the import share. Employing an interacted panel VAR model for EU countries, we estimate the effect of the share of nontradable goods on fiscal spending multipliers. Our empirical results provide strong evidence for the predictions of the theoretical model. They imply that the drag of fiscal consolidations is on average smaller in countries with a low share of nontradable goods.
    Keywords: fiscal spending multiplier, nontradable goods, openness, DSGE model, interacted panel VAR model
    JEL: E62 F41 C23
    Date: 2020
  29. By: Fedesarrollo
    Abstract: Como parte de la celebración de los 50 años de Fedesarrollo, se construyó este libro con el propósito de hacer una revisión histórica de la influencia de Fedesarrollo en diversas áreas de las políticas públicas en Colombia contada por quienes han sido sus directores a lo largo de los años. En cada uno de los capítulos del libro se recoge de primera mano su visión.
    Keywords: Tecnocracia, Sector Agropecuario, Gastos Sociales, Economía del Narcotráfico, Ciclos Económicos, Modelos de Equilibrio General de Fedesarrollo, Política Económica, Régimen Cambiario, Política Monetaria, Mercado Laboral, Crecimiento Económico, Desarrollo Económico y Social, Historia Económica, Colombia
    JEL: L31 L38 O10 E60 I23 O14 Q18 H50 E26 F13 D58 E60 F31 E52 J40 O47 N16
    Date: 2020–08–26
  30. By: Efraim Benmelech (Northwestern University - Kellogg School of Management and NBER); Nitish Kumar (University of Florida - Warrington College of Business); Raghuram Rajan (University of Chicago - Booth School of Business)
    Abstract: Lenders are unwilling to accept lower credit spreads for secured debt relative to unsecured debt when a firm is healthy. However, they accept significantly lower credit spreads for secured debt when a firmÕs credit quality deteriorates, the economy slows, or average credit spreads widen. This contingent valuation of collateral or security, coupled with the borrower perceiving a loss of operational and financial flexibility when issuing secured debt, may explain why firms issue secured debt on a contingent basis; they issue more when their credit quality deteriorates, the economy slows, and average credit spreads widen.
    JEL: E44 E51 G21 G23 G33
    Date: 2020
  31. By: Charles M. Kahn; Francisco Rivadeneyra; Tsz-Nga Wong
    Abstract: Digital currencies store balances in anonymous electronic addresses. We analyze the trade-offs between safety and convenience of aggregating balances in addresses, electronic wallets and banks. In our model agents balance the risk of theft of a large account with the cost to safeguarding a large number of passwords of many small accounts. Account custodians (banks, wallets and other payment service providers) have different objectives and tradeoffs on these dimensions; we analyze the welfare effects of differing industry structures and interdependencies, and in particular the consequences of "password aggregation" programs which in effect consolidate risks across accounts.
    Keywords: digital currencies; wallets; hacking; theft; welfare
    JEL: E42 E51 E58
    Date: 2020–09–04
  32. By: Fernando Broner; Alberto Martin; Jaume Ventura
    Abstract: We analyze the conduct of fiscal policy in a financially integrated union in the presence of financial frictions. Frictions create a wedge between the return to investment and the union interest rate. This leads to an over-spending externality. While the social cost of spending is the return to investment, governments care mostly about the (depressed) interest rate they face. In other words, the crowding out effects of public spending are partly “exported” to the rest of the union. We argue that it may be hard for the union to deal with this externality through the design of fiscal rules, which are bound to be shaped by the preferences of the median country and not by efficiency considerations. We also analyze how this overspending externality - and the union’s ability to deal with it effectively - changes when the union is financially integrated with the rest of the world. Finally, we extend our model by introducing a zero lower bound on interest rates and show that, if financial frictions are severe enough, the union is pushed into a liquidity trap and the direction of the spending externality is reversed. At such times, fiscal rules that are appropriate during normal times might backfire.
    JEL: E62 F32 F34 F36 F41 F45
    Date: 2020–09
  33. By: Gerke, Rafael; Giesen, Sebastian; Kienzler, Daniel
    Abstract: We revisit the reversal puzzle: A counterintuitive contraction of inflation in response to an interest rate peg. We show that it is intimately related to the degree of agents' anticipation. If agents perfectly anticipate the peg, reversals occur depending on the duration of the peg. If they do not anticipate the peg, reversals are absent. In the case of imperfect anticipation, implemented by a Markov-switching framework, we measure the degree of anticipation by the frequency of the peg regime. Even if the frequency of the peg takes on a value twice as large as empirically observed, the reversal puzzle is absent.
    Keywords: Interest rate peg,Reversal puzzle,Regime-switching model
    JEL: E32 E52
    Date: 2020
  34. By: Jan Philipp Fritsche; Mathias Klein; Malte Rieth
    Abstract: We estimate the dynamic effects of government spending shocks, using time-varying volatility in US data modeled through a Markov switching process. We find that the average government spending multiplier is significantly and persistently above one, driven by a crowding-in of private consumption and non-residential investment. We rationalize the results empirically through a contemporaneously countercyclical response of government spending and an efficient weighting of observations inversely to their error variance. We then show that the multiplier is significantly smaller when volatility is high, consistent with theories predicting reduced effectiveness of fiscal interventions in uncertain times.
    Keywords: Fiscal policy, government spending multiplier, uncertainty, structural vector autoregressions, heteroskedasticity
    JEL: C32 E62 H50
    Date: 2020
  35. By: Roman Horvath (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic); Ali Elminejad (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic); Tomas Havranek (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic)
    Abstract: A key parameter in structural models is the Frisch elasticity of labor supply at the extensive margin, but empirical estimates vary greatly. We provide a quantitative synthesis of the literature. To this end, we collect 723 estimates from 36 studies along with 22 explanatory variables reflecting studies’ characteristics and address model uncertainty by Bayesian and frequentist model averaging. Using linear and non-linear techniques, we find that publication bias exaggerates the mean of reported elasticities in the literature from 0.25 to 0.49. Our findings also suggest that two principal characteristics affect the magnitude of estimated elasticities systematically. First, identification bias: studies that follow a quasi-experimental approach tend to report smaller estimates. Second, aggregation bias: studies using macro data tend to report larger estimates. Furthermore, estimates associated with prime age or male workers tend to be systematically smaller, while studies relying on specific-industry data, near retirement workers, and probit regression tend to be larger.
    Keywords: Frisch elasticity, extensive margin, meta-analysis, publication bias, Bayesian model averaging
    JEL: E24 J20 J21 C83
    Date: 2020–09
  36. By: Ivo Bakota
    Abstract: This paper analyzes redistributional and macroeconomic effects of differential taxation of financial assets with a different risk levels. The redistributive effect stems from the fact that various households hold portfolios with a starkly different risk levels. In particular, poor households primarily save in safe assets, while rich households often invest a substantially higher share of their wealth in (risky) equity. At the same time, equity and safe assets are often taxed at different rates in many tax codes. This is primarily because investments in equity (which are relatively riskier) are taxed both as corporate and personal income, unlike debt, which is tax deductible for corporations. This paper firstly builds a simple theoretical two-period model which shows that the optimal tax wedge between risky and safe assets is increasing in the underlying wealth inequality. Furthermore, I build a quantitative model with a continuum of heterogeneous agents, parsimonious life-cycle, borrowing constraint, aggregate shocks and uninsurable idiosyncratic shocks, in which the government raises revenue by using linear taxes on risky and safe assets. Simulations of quantitative models shows that elimination of differential asset taxation leads to a welfare loss equivalent to a 0.3% permanent reduction in consumption. I find that the optimal tax wedge between taxes on equity and debt is higher than the one in the U.S. tax code.
    Keywords: portfolio choice; optimal taxation; redistribution;
    JEL: E62 G11 G32 H21 H23
    Date: 2020–09
  37. By: Veronica Guerrieri (University of Chicago - Booth School of Business); Guido Lorenzoni (Northwestern University and NBER); Ludwig Straub (Harvard University); Iv‡n Werning (Massachusetts Institute of Technology (MIT) and NBER)
    Abstract: We present a theory of Keynesian supply shocks: supply shocks that trigger changes in aggregate demand larger than the shocks themselves. We argue that the economic shocks associated to the COVID-19 epidemicÑshutdowns, layoffs, and firm exitsÑmay have this feature. In one-sector economies supply shocks are never Keynesian. We show that this is a general result that extend to economies with incomplete markets and liquidity constrained consumers. In economies with multiple sectors Keynesian supply shocks are possible, under some conditions. A 50% shock that hits all sectors is not the same as a 100% shock that hits half the economy. Incomplete markets make the conditions for Keynesian supply shocks more likely to be met. Firm exit and job destruction can amplify the initial effect, aggravating the recession. We discuss the effects of various policies. Standard fiscal stimulus can be less effective than usual because the fact that some sectors are shut down mutes the Keynesian multiplier feedback. Monetary policy, as long as it is unimpeded by the zero lower bound, can have magnified effects, by preventing firm exits. Turning to optimal policy, closing down contact-intensive sectors and providing full insurance payments to affected workers can achieve the first-best allocation, despite the lower per-dollar potency of fiscal policy.
    Date: 2020
  38. By: Dirk Kruger (University of Pennsylvania, CEPR and NBER); Harald Uhlig (University of Chicago, CEPR and NBER); Taojun Xie (National University of Singapore)
    Abstract: In this paper we argue that endogenous shifts in private consumption behavior across sectors of the economy can act as a potent mitigation mechanism during an epidemic or when the economy is re-opened after a temporary lockdown. Extending the theoretical framework proposed by Eichenbaum-Rebelo-Trabandt (2020), we distinguish goods by their degree to which they can be consumed at home rather than in a social (and thus possibly contagious) context. We demonstrate that, within the model the ÒSwedish solutionÓ of letting the epidemic play out without government intervention and allowing agents to shift their sectoral behavior on their own can lead to a substantial mitigation of the economic and human costs of the COVID-19 crisis, avoiding more than 80 of the decline in output and of number of deaths within one year, compared to a model in which sectors are assumed to be homogeneous. For different parameter configurations that capture the additional social distancing and hygiene activities individuals might engage in voluntarily, we show that infections may decline entirely on their own, simply due to the individually rational re-allocation of economic activity: the curve not only just flattens, it gets reversed.
    Keywords: Epidemic, Coronavirus, Macroeconomics, Sectoral Substitution
    JEL: E52 E30
    Date: 2020
  39. By: Xuan Wang (Vrije Universiteit Amsterdam)
    Abstract: The Basel Committee proposed the Net Stable Funding Ratio (NSFR) to curb excessive maturity mismatch of the banking sector. However, it remains to be ascertained as to what are the financial and real effects of the NSFR on banks' credit quality, investment, and the pass-through of monetary policy. This paper develops a nominal dynamic general equilibrium featuring banks' maturity mismatch and the moral hazard due to costly monitoring. First, I show that a tightening of the NSFR to move loan maturity towards the long-run capital investment cycle would only increase real investment if it sufficiently improves banks' credit quality. Then in the numerical example calibrated with the US data, I show that such tightening of the NSFR can indeed increase real investment and also reduce the aggregate fluctuation of the economy. In the steady states, a 10% tightening in the NSFR can decrease net charge-offs of non-performing loans by about 0.06 pp annually, despite squeezing banks' interest margin. Moreover, the moral hazard stemming from banks' unobserved monitoring effort impairs the pass-through of monetary policy. However, a 10% tightening in the NSFR improves the pass-through of a 20-bp policy rate reduction by around 17% annually. Finally, the model simulates the stochastic dynamic equilibrium path to study the propagation of shocks, demonstrating that the NSFR complements monetary policy in reducing financial frictions.
    Keywords: Maturity mismatch, Net Stable Funding Ratio, default, banking, monetary policy, macro-prudential policy
    JEL: E44 E51 G18 G21
    Date: 2020–09–22
  40. By: Giovanni Pellegrino; Efrem Castelnuovo; Giovanni Caggiano
    Abstract: How damaging are uncertainty shocks during extreme events such as the great recession and the Covid-19 outbreak? Can monetary policy limit output losses in such situations? We use a nonlinear VAR framework to document the large response of real activity to a financial uncertainty shock during the great recession. We replicate this evidence with an estimated DSGE framework featuring a concept of uncertainty comparable to that in our VAR. We employ the DSGE model to quantify the impact on real activity of an uncertainty shock under different Taylor rules estimated with normal times vs. great recession data (the latter associated with a stronger response to output). We find that the uncertainty shock-induced output loss experienced during the 2007-09 recession could have been twice as large if policymakers had not responded aggressively to the abrupt drop in output in 2008Q3. Finally, we use our estimated DSGE framework to simulate different paths of uncertainty associated to different hypothesis on the evolution of the coronavirus pandemic. We find that: i) Covid-19-induced uncertainty could lead to an output loss twice as large as that of the great recession; ii) aggressive monetary policy moves could reduce such loss by about 50%.
    Keywords: Uncertainty shock, nonlinear IVAR, nonlinear DSGE framework, minimum-distance estimation, great recession, Covid-19
    JEL: C22 E32 E52
    Date: 2020–09
  41. By: Samir Kadiric (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))
    Abstract: This paper analyzes recent developments in the British and European government bond markets with reference to the United Kingdom´s decision to leave the European Union. The two main goals of the study are, firstly, to examine whether the Brexit referendum result has affected the risk premium and, secondly, whether there are any changes in risk pricing following the referendum. The paper finds a significant impact of the Brexit referendum on the risk premium in selected economies. Furthermore, the results suggest that there is a considerable change in risk pricing after the announcement of the referendum result. Credit default risk and the risk aversion play a much important role in the post-referendum period than they did prior to the vote, particularly in the United Kingdom.
    Keywords: asset pricing, government bond yield spreads, risk premium, UK, Europe, Brexit
    JEL: E43 E44 F36 G12 G15
    Date: 2020–03
  42. By: Alfred V. Guender (University of Canterbury); Hamish McHugh-Smith
    Abstract: Our empirical analysis reveals a strong systematic inverse link between financial openness and CPI inflation in over 100 countries, adding weight to the argument that inflation in financially open economies is lower. Trade openness in contrast bears no systematic relationship to inflation.
    Keywords: Financial Openness, Trade Openness, Inflation, Capital Controls
    JEL: E3 E5 F3
    Date: 2020–09–01
  43. By: Falconio, Andrea; Manganelli, Simone
    Abstract: We study the macroeconomic consequences of financial shocks and increase in economic risk using a quantile vector autoregression. Financial shocks have a negative, but asymmetric impact on the real economy: they substantially increase growth at risk, but have limited impact on upside potential. The impact of financial shocks is explained away after controlling for economic risk (measured by the interquantile range). The effects are economically relevant. Bad economic environment, characterized by negative real and financial shocks, has a highly skewed impact on business cycle fluctuations, leading to a peak reduction of monthly industrial production by more than 2%. In comparison, positive real and financial shocks in a good economic environment have limited effect on upside potential of the economy. JEL Classification: C32, C53, E32, E44
    Keywords: financial conditions, quantile regression, risk, uncertainty
    Date: 2020–09
  44. By: Ryan Chahrour (Boston College); Kyle Jurado (Duke University)
    Abstract: Agents have foresight when they receive information about a random process above and beyond the information contained in its current and past history. In this paper, we propose an information-theoretic measure of the quantity of foresight in an information structure, and show how to separate informational assumptions about foresight from physical assumptions about the dynamics of the processes itself. We then develop a theory of endogenous foresight in which the type of foresight is chosen optimally by economic agents. In a prototypical dynamic model of consumption and saving, we derive a closed-form solution to the optimal foresight problem.
    Keywords: expectations; rational inattention; incomplete information; noise shocks
    JEL: D83 D84 E21
    Date: 2020–09–10
  45. By: José Antonio Ocampo
    Abstract: Capítulo 5 del libro: "Fedesarrollo: 50 años de influencia en política pública". Bogotá: Fedesarrollo - En este capítulo, José Antonio Ocampo menciona las contribuciones y recomendaciones que ha realizado Fedesarrollo al manejo de ciclos externos y flujos de capital. En este sentido, muestra la evolución, desde la década de los setenta, de los términos de intercambio y flujos de capital.
    Keywords: Términos de Intercambio, Flujos de Capital, Ciclos Económicos, Política Cambiaria, Economía Colombiana, Centros de Pensamiento, Fedesarrollo, Colombia
    JEL: F13 E32 E22 O54 L38 L31 I23
    Date: 2020–08–26
  46. By: Tino Berger; James Morley; Benjamin Wong
    Abstract: We propose a way to directly nowcast the output gap using the Beveridge-Nelson decomposition based on a mixed-frequency Bayesian VAR. The mixed-frequency approach produces similar but more timely estimates of the U.S. output gap compared to those based on a quarterly model, the CBO measure of potential, or the HP filter. We find that within-quarter nowcasts for the output gap are more reliable than for output growth, with monthly indicators for a credit risk spread, consumer sentiment, and the unemployment rate providing particularly useful new information about the final estimate of the output gap. An out-of-sample analysis of the COVID-19 crisis anticipates the exceptionally large negative output gap of -8.3% in 2020Q2 before the release of real GDP data for the quarter, with both conditional and scenario nowcasts tracking a dramatic decline in the output gap given the April data.
    Keywords: Nowcasting, output gap, COVID-19
    JEL: C32 C55 E32
    Date: 2020–08
  47. By: Ivo Bakota
    Abstract: This paper studies the effects of a change in firm leverage on wealth inequality and macroeconomic aggregates. The question is studied in a general equilibrium model with a continuum of heterogeneous agents, life-cycle, incomplete markets, and idiosyncratic and aggregate risk. The analysis focuses on the particular change in firm leverage that occurred in the U.S. during the 1980s, when firm leverage increased significantly, and subsequently has been dropping since the early 1990s. In the benchmark model, an increase in firm leverage of the size that occurred during the 1980s increases capital accumulation by 5.38%, decreases wealth inequality by 1.07 Gini points and decreases government revenues by 0.11% of output. An increase in firm leverage increases average after-tax returns on savings, as firm debt has beneficial tax treatment. This increases the saving rates of all households, and disproportionately increases the saving rates of relatively poorer households. Consequently, the model implies that the increase in firm leverage did not contribute to rising inequality in the U.S. in the 1980s, but rather the opposite; that the reduction in leverage from the early 1990s to 2008 has contributed to rising wealth inequality. Furthermore, I show that if the model abstracts from beneficial tax treatment of corporate debt, the change in leverage has only minor effects on macro aggregates and inequality, despite having significant implications for asset prices. This is consistent with the previous result in the literature showing that the Modigliani-Miller theorem approximately holds in the heterogeneous agents model with imperfect markets.
    Keywords: portfolio choice; heterogeneous agents; life-cycle; leverage;
    JEL: E44 G10 G11 G32
    Date: 2020–09
  48. By: Eric S. Rosengren
    Abstract: Recent economic data have been encouraging, but President Rosengren believes the most difficult part of the recovery is still ahead of us. A full recovery probably requires the availability of vaccines and more effective treatments for the virus because until then, many businesses and households are unlikely to return to more normal spending habits. While he anticipates a slowly improving economy, economic activity still faces serious headwinds. Potential financial impediments and challenges in the labor market make the recovery process more gradual than any of us would prefer. Improvement in the economy will depend importantly on the progress we make in mitigating and treating the virus. Until a vaccine is widely available, it is appropriate to have highly accommodative monetary and fiscal policy. Monetary policy is pursuing new and imaginative ways to deal with the effects of this pandemic. However, President Rosengren's view is that additional fiscal policy is probably the more effective tool at this time, since it can directly allocate money to firms and businesses most impacted by COVID-19 without requiring them to take on additional debt that must be repaid.
    Keywords: COVID-19; pandemic; employment; fiscal policy; monetary policy; Main Street Lending Program; recovery
    Date: 2020–09–23
  49. By: Simon Gilchrist; Bin Wei; Vivian Z. Yue; Egon Zakrajšek
    Abstract: We evaluate the efficacy of the Secondary Market Corporate Credit Facility (SMCCF), a program designed to stabilize the corporate bond market in the wake of the Covid-19 shock. The Fed announced the SMCCF on March 23 and expanded the program on April 9. Regression discontinuity estimates imply that these announcements reduced credit spreads on bonds eligible for purchase 70 basis points. We refine this analysis by constructing a sample of bonds—issued by the same set of companies—which differ in their SMCCF eligibility. A diff-in-diff analysis shows that both announcements had large effects on credit spreads, narrowing spreads 20 basis points on eligible bonds relative to their ineligible counterparts within the same set of issuers across the two announcement periods. The March 23 announcement also reduced bid-ask spreads ten basis points within ten days of the announcement. By lowering credit spreads and improving liquidity, the April 9 announcement had an especially pronounced effect on “fallen angels.” The actual purchases lowered credit spreads by an additional five basis points and bid-ask spreads by two basis points. These results confirm that the SMCCF made it easier for companies to borrow in the corporate bond market.
    JEL: E44 E58 G2
    Date: 2020–09
  50. By: Lochner, Benjamin (Institute for Employment Research (IAB), Nuremberg); Merkl, Christian (University of Erlangen-Nuremberg); Stüber, Heiko (University of Erlangen-Nuremberg); Gürtzgen, Nicole (Institute for Employment Research (IAB), Nuremberg)
    Abstract: Using the German IAB Job Vacancy Survey, we look into the black box of recruiting intensity and hiring practices from the employers' perspective. Our paper evaluates three important channels for hiring —namely vacancy posting, the selectivity of hiring (labor selection), and the number of search channels— through the lens of an undirected search model. Vacancy posting and labor selection show a U-shape over the employment growth distribution. The number of search channels is also upward sloping for growing establishments, but relatively flat for shrinking establishments. We argue that growing establishments react to positive establishment-specific productivity shocks by using all three channels more actively. Furthermore, we connect the fact that shrinking establishments post more vacancies and are less selective than those with a constant workforce to churn triggered by employment-to-employment transitions. In line with our theoretical framework, all three hiring margins are procyclical over the business cycle.
    Keywords: administrative data, survey data, labor selection, vacancies, recruiting intensity
    JEL: E24 J63
    Date: 2020–09
  51. By: Scott R. Baker (Northwestern University - Kellogg School of Management and NBER); R.A. Farrokhnia (Columbia University - Columbia Business School)
    Abstract: The 2020 CARES Act directed cash payments to households. We analyze householdsÕ spending responses using high-frequency transaction data from a FinTech, exploring heterogeneity by income levels, recent income declines, and liquidity. Households respond rapidly to receipt of stimulus payments, with spending increasing by $0.30 per dollar of stimulus during the first month. Households with lower incomes, greater income drops, and lower levels of liquidity display stronger responses highlighting the importance of targeting. Liquidity plays the most important role, with no observed spending response for households with high levels of bank account balances. Relative to the effects of previous economic stimulus programs in 2001 and 2008, we see larger and faster effects overall, smaller increases in durables spending, and larger increases in spending on food, likely reflecting the impact of shelter-in-place orders and supply disruptions. Additionally, we see increases in payments like rents, mortgages, and credit cards reflecting a short-term debt overhang. We formally show that these differences can make direct payments less effective in stimulating aggregate consumption.
    Keywords: Household Finance, Consumption, COVID-19, Stimulus, MPC, Transaction Data
    JEL: D14 E21
    Date: 2020
  52. By: Anna Kovner; Antoine Martin
    Abstract: In the United States and other free market economies, the official sector typically has minimal involvement in market activities absent a clear rationale to justify intervention, such as a market failure. In this post, we consider arguments for official sector intervention, focusing on the market failure arising from externalities related to business closures. These externalities are likely to be particularly high for closures arising from pandemic-related economic disruptions. We discuss how the official sector, including institutions such as Congress and the Treasury, can increase social welfare by acting to minimize the fixed costs of business start-up and failure, including the costs associated with unemployment, beyond the level set by private markets alone.
    Keywords: official sector interventions; COVID-19; pandemic
    JEL: I18 E32
    Date: 2020–09–23
  53. By: Laine, Olli-Matti
    Abstract: This paper estimates the effect of the European Central Banks’s monetary policy on the term structure of expected stock market risk premia. Expected stock market premia are solved using analysts’ dividend forecasts, the Eurostoxx 50 stock index and Eurostoxx 50 dividend futures. Although risk-free rates have decreased after the global financial crisis, the results indicate that the expected average stock market return has remained quite stable at around 9 percent. This implies that the expected average stock market risk premium has increased since the financial crisis. The effect of monetary policy on expected premia is analysed using VAR models and local projection methods. According to the results, monetary policy easing raises the average expected premium. The effect is explained by a rise in long-horizon expected premia.
    JEL: E52 G12
    Date: 2020–09–18
  54. By: Anna Kovner; Antoine Martin
    Abstract: The Federal Reserve’s response to the coronavirus pandemic has been unprecedented in its size and scope. In a matter of months, the Fed has, among other things, cut the federal funds rate to the zero lower bound, purchased a large amount of Treasury securities and agency mortgage‑backed securities (MBS) and, together with the U.S. Treasury, introduced several lending facilities. Some of these facilities are very similar to ones introduced during the 2007-09 financial crisis while others are completely new. In this post, we argue that the new facilities, while unprecedented, are a natural extension of the Fed’s toolkit, as they operate through similar economic mechanisms to prevent self-reinforcing bad outcomes. We also explain why these new facilities are particularly useful as part of the response to the pandemic, which is an economic shock very different from a financial crisis.
    Keywords: Federal Reserve; pandemic; COVID-19; facilities
    JEL: E5
    Date: 2020–09–22
  55. By: Qi Chen; Itay Goldstein; Zeqiong Huang; Rahul Vashishtha
    Abstract: This paper provides, for the first time, large-scale evidence that liquidity transformation by banks creates fragility, as their uninsured depositors face an incentive to withdraw their money before others (a so-called panic run). Such fragility manifests itself in stronger sensitivity of deposit flows to bank performance. A deterioration in the aggregate conditions in the banking system makes the fragility within each bank stronger. We run multiple tests to show that depositors’ motives are not driven purely by fundamentals, but rather that the element of panic, leading them to think about what other depositors will do, is important in the data. We analyze the tradeoff banks face when setting their level of liquidity transformation, and show how they use deposit insurance to mitigate some of its negative effects.
    JEL: E02 G01 G21
    Date: 2020–09
  56. By: James B. Bullard
    Abstract: St. Louis Fed President James Bullard discussed the Federal Open Market Committee’s flexible average inflation targeting approach and why he thinks inflation may move higher in the near term. He spoke during an appearance on “Bloomberg Daybreak: Australia.”
    Keywords: Monetary policy; Inflation targeting
    Date: 2020–09–21
  57. By: Maryam Farboodi (Massachusetts Institute of Technology); Gregor Jarosch (Princeton University); Robert Shimer (University of Chicago)
    Abstract: We use a conventional dynamic economic model to integrate individual optimization, equilibrium interactions, and policy analysis into the canonical epidemiological model. Our tractable framework allows us to represent both equilibrium and optimal allocations as a set of differential equations that can jointly be solved with the epidemiological model in a unified fashion. Quantitatively, the laissez-faire equilibrium accounts for the decline in social activity we measure in US micro-data from Safe Graph. Relative to that, we highlight three key features of the optimal policy: it imposes immediate, discontinuous social distancing; it keeps social distancing in place for a longtime or until treatment is found; and it is never extremely restrictive, keeping the effective reproduction number mildly above the share of the population susceptible to the disease.
    Date: 2020
  58. By: Oriol Aspachs; Ruben Durante; Alberto Graziano; Josep Mestres; José García-Montalvo; Marta Reynal-Querol
    Abstract: Most official economic statistics have a relatively low frequency. The measures of inequality, in particular, are not only produced with low frequency but also with significant lags. This poses an important challenge for policymakers in their objective to mitigate the effects of a rapidly moving epidemic as the COVID-19. We propose a methodology for tracking the evolution of income inequality in the aftermath of the COVID-19 pandemic using high-frequency, high-quality microdata from bank-records. Using this approach we study the evolution of inequality since the beginning of the COVID-19 pandemic, and its effect on different groups of the population. First, we show that the payroll data managed by banks are an extremely useful source of information to detect, timely and accurately, changes in the distribution of wages. Our data replicate very closely the distribution of wages from the official wage surveys. Second, we show that, in absence of public benefits schemes, inequality would have increased dramatically. The impact of the crisis on inequality is explained mostly by its effect on low-wage workers. Pre-benefits wage inequality has increased significantly among foreign-born individuals, and regions that have a heavy economic dependence on touristic activities. Finally, we show that the public benefits activated soon after the beginning of the pandemic have substantially mitigated the impact of the COVID-19 crisis on inequality.
    JEL: C81 D63 E24 J31
    Date: 2020–09
  59. By: Eduardo Lora
    Abstract: Capítulo 7 del libro: "Fedesarrollo: 50 años de influencia en política pública". Bogotá: Fedesarrollo - Eduardo Lora se enfoca en el instrumento metodológico de los modelos de equilibrio general como herramienta utilizada en Fedesarrollo para analizar, hacer proyecciones, etc, para influir en políticas públicas y decisiones políticas.
    Keywords: Modelos de Equilibrio General de Fedesarrollo, Modelos de Equilibrio General Computable, MEGC, Crecimiento Económico, Política Económica, Economía Colombiana, Política Pública, Centros de Pensamiento, Fedesarrollo, Colombia
    JEL: D58 C68 E27 O54 E60 L38 L31 I23
    Date: 2020–08–26
  60. By: Congressional Budget Office
    Abstract: Federal laws enacted in response to the 2020 coronavirus pandemic are projected to add $2.3 trillion to the deficit in fiscal year 2020 and $0.6 trillion in 2021. CBO estimates that the legislation will increase the level of real (inflation-adjusted) gross domestic product (GDP) by 4.7 percent in 2020 and 3.1 percent in 2021. From fiscal year 2020 through 2023, for every dollar that it adds to the deficit, the legislation is projected to increase GDP by 59 cents. In the longer term, the legislation will reduce the level of real GDP, CBO estimates.
    JEL: E62 E65 H30 H60
    Date: 2020–09–18
  61. By: Tsutomu Watanabe (Graduate School of Economics, University of Tokyo)
    Abstract: This paper derives a money demand function that explicitly takes the costs of storing money into account. This function is then used to examine the consequences of the large-scale money injection conducted by the Bank of Japan since April 2013. The main findings are as follows. First, the opportunity cost of holding money calculated using 1-year government bond yields has been negative since the fourth quarter of 2014, and most recently (2020:Q2) was -0.2%. Second, the marginal cost of storing money, which was 0.3% in the most recent quarter, exceeds the marginal utility of money, which was 0.1%. Third, the optimum quantity of money, measured by the ratio of M1 to nominal GDP, is 1.2. In contrast, the actual money-income ratio in the most recent quarter was 1.8. The welfare loss relative to the maximum welfare obtained under the optimum quantity of money in the most recent quarter was 0.2% of nominal GDP. The findings imply that the Bank of Japan needs to reduce M1 by more than 30%, for example through measures that impose a penalty on holding money.
    Date: 2020–09
  62. By: Richard Blundell (University College London); Ran Gu (University of Essex); Soren Leth-Petersen (University of Copenhagen); Hamish Low (University of Oxford); Costas Meghir (Cowles Foundation, Yale University, NBER, IZA, CEPR, and Institute for Fiscal Studies)
    Abstract: We specify an equilibrium model of car ownership with private information where individuals sell and purchase new and second-hand cars over their life-cycle. This private information introduces a transaction cost, distorts the market and reduces the value of a car as a savings instrument. We estimate the model using Danish linked registry data on car ownership, income and wealth. The transaction cost, which we term the lemons penalty, is estimated to be 18% of the price in the first year of ownership, declining with the length of ownership. It leads to large reductions in the turnover of cars and in the probability of downgrading in the event of an adverse income shock. The size of the lemons penalty declines when uncertainty in the economy increases, as in recessions: large income shocks induce individuals to sell their cars, even if of good quality, and this reduces the lemons problem.
    Keywords: Lemons penalty, Car market, Income uncertainty, Estimated life-cycle equilibrium model
    JEL: D82 E21
    Date: 2019–09
  63. By: Campagne,Benoit Philippe Marcel; Kitzmuller,Markus; Tordo,Silvana
    Abstract: Oil resources usually play a significant role in oil-rich countries, in gross domestic product and government revenues. High dependence of government revenues on oil can contribute to severe recession following an adverse commodity price shock, such as in 2014. This paper examines the extent to which a fiscal rule or stabilization fund could translate into a less pro-cyclical fiscal policy, with the government saving part of its oil revenues during periods of high prices and drawing down on the savings during difficult periods. Using the macro-structural model MFMod, the paper presents, evaluates, and discusses the strengths and weaknesses of different oil revenue management mechanisms applied to the specific case of Chad. The scenarios demonstrate that a well-designed management rule can successfully insulate the public budget from the oil price cycle, resulting in a significant reduction in the volatility of the economy.
    Keywords: Energy Policies&Economics,Public Finance Decentralization and Poverty Reduction,Public Sector Economics,Public Financial Management,Macroeconomic Management,Financial Sector Policy
    Date: 2020–09–17
  64. By: Max Deter
    Abstract: Since the labor market reforms around 2005, known as the Hartz reforms, Germany has experienced declining unemployment rates. However, little is known about the reforms’ effect on individual life satisfaction of unemployed workers. This study applies difference-in-difference estimations and finds a decrease in life satisfaction after the reforms that is more pronounced for male unemployed in west Germany. The effect is driven by income and income satisfaction, but not by the unemployment rate. Also unemployed persons who exogenously lost their jobs are affected by the reforms. In line with the structure of the reforms, the effect is stronger on long-term and involuntarily unemployed persons.
    Keywords: Unemployment, Hartz reforms, happiness, SOEP
    JEL: E24 I31 J64
    Date: 2020
  65. By: David O. Argente; Chang-Tai Hsieh; Munseob Lee
    Abstract: Cross-country price indexes are crucial to compare living standards between countries and to measure global inequality. An accurate measurement of these price indexes is a difficult task because of the lack of accurate data on the consumption patterns of different countries. We construct a unique data on prices and quantities for consumer packaged goods matched at the barcode-level across the United States and Mexico. We estimate that the Mexican real consumption relative to the United States is larger than previously estimated. We identify heterogeneity in shopping behavior, quality of products, and variety availability as important sources of bias in international price comparisons.
    JEL: E0 F0 O0
    Date: 2020–09
  66. By: Uhl, Matthias
    Abstract: Euro coins have a common European side and an individual national side. Thanks to coin migration, coins bearing a panoply of national sides are in circulation throughout the euro area. In this paper, we model the mixing of coins circulating in the euro area countries and in particular the extent of coin migration in the euro area. A model calibration suggests that, for the coin denominations €2, €1, 50 cent and 20 cent roughly the same quantity of euro coins migrate from Germany to the rest of the euro area as vice versa. Accordingly, the relatively large quantities of coins issued by the Federal Republic of Germany are not materially explained by exports of coins to other euro area countries.
    Keywords: Euro coins,coin circulation,coin mixing
    JEL: E41
    Date: 2020
  67. By: Kaan Celebi (Frankfurt University of Applied Sciences, Faculty 3: Business and Law, Non-Resident Senior Fellow at the European Institute for International Economic Relations (EIIW) at the University of Wuppertal)
    Abstract: Using the Panel Data Approach (PDA) of Hsiao et al. (2012) in combination with the LASSO method, this article aims to measure the effect of the Brexit process on the United Kingdom’s real economy up to 2019Q2. The results are twofold: Firstly, compared to the existing literature, the PDA improves the measurement of the impact of Brexit on the real economy regarding computation intensity, the feasibility of statistical inference and a wider application area. Secondly, the estimated counterfactuals for the UK show that the Brexit process has played a crucial role in the UK’s economy, leading to lower GDP (growth rates), lower private consumption, lower gross fixed capital formation (GFCF) and higher exports. On average, GDP growth has declined between 1.3 and 1.4 percentage points, whereby the cumulative loss ranges between 48 and 54 billion British pounds. Moreover, private consumption in the UK has declined 4.7 billion British pounds quarterly on average. The predicted counterfactuals show that the impact of the Brexit process on GFCF has begun in 2018Q1, whereby the average treatment effect amounts to -2.9 billion British pounds. The UK’s exports increased since the referendum, most likely due to the depreciation of the British pound post-Brexit. The average quarterly effect of the Brexit process on exports is estimated here at 4.8 billion British pounds.
    Keywords: Brexit, economic policy uncertainty, counterfactual, Panel Data Approach, LASSO
    JEL: C23 C54 E65 F42 O47
    Date: 2020–01
  68. By: Ryan Decker; Meagan McCollum; Gregory B. Upton, Jr.
    Abstract: The shale oil and gas boom in the U.S. provides a unique opportunity to study economic growth in a "boom town" environment, to derive insights about economic expansions more generally, and to obtain clean identification of the causal effects of economic growth on specific margins of business adjustment. The creation of new business establishments--separate from the expansion of existing establishments--accounts for a disproportionate share of the multi-industry employment growth sparked by the shale boom, an intuitive but not inevitable empirical result that is broadly consistent with canonical models of firm dynamics. New firms, in particular, contribute nearly half of the cumulative economic growth resulting from the shale boom.
    Keywords: Business dynamics; Entrepreneurship; Natural resource booms; Economic growth
    JEL: E24 L26 M13 Q33 Q35 R23
    Date: 2020–09–18
  69. By: Gomis-Porqueras, Pedro; Shi, Shuping; Tan, David
    Abstract: In this paper, we explore the effectiveness of gold as a hedging and safe haven instrument for a variety of market risks. Rather than confining the analysis to specific countries, we treat gold as a global asset and apply the novel Phillips, Shi and Yu (2015a,b) methodology to identify extreme price movements. This method accounts for both the level and speed of changes in price dynamics that better characterises periods of abnormally high risks. We find that gold is a strong safe haven for stock, European sovereign, and oil inflation market risks. We also show that gold is a strong hedge to inflationary and currency risks. We demonstrate that gold had exhibited safe haven properties during the 2020 Covid-19 crisis, and highlight the importance of considering explosive behaviour in identifying periods of risk.
    Keywords: Gold; Hedge; Safe Haven; Sovereign Debt; Equity Markets.
    JEL: E4 E44 G0
    Date: 2020–09–07
  70. By: Sanga,Dimitri; Gui-Diby,Steve Loris
    Abstract: This paper examines the growth-inflation nexus in Franc zone currency unions. It aims at estimating the inflation threshold above which additional inflationary pressures adversely affect economic expansion. It uses cointegration methods that are applied to data from 14 African countries from the Franc zone over 1970-2018. Based on country-level data, the results indicate that it is possible to increase the threshold levels used by regional central banks to 5.4-5.6 percent in the Central African Monetary Union and 4.3-4.5 percent in the West African Monetary Union. Homogeneous cointegration panel data analyses confirm the need to increase the threshold in Central African Monetary Union countries but do not in the West African Monetary Union countries.
    Keywords: Inflation,Economic Growth,Industrial Economics,Economic Theory&Research,International Trade and Trade Rules,Macroeconomic Management
    Date: 2020–09–21
  71. By: Andrea Carriero; Todd E. Clark; Massimiliano Marcellino
    Abstract: We derive a Bayesian prior from a no-arbitrage affine term structure model and use it to estimate the coefficients of a vector autoregression of a panel of government bond yields, specifying a common time-varying volatility for the disturbances. Results based on US data show that this method improves the precision of both point and density forecasts of the term structure of government bond yields, compared to a fully fledged term structure model with time-varying volatility and to a no-change random walk forecast. Further analysis reveals that the approach might work better than an exact term structure model because it relaxes the requirements that yields obey a strict factor structure and that the factors follow a Markov process. Instead, the cross-equation no-arbitrage restrictions on the factor loadings play a marginal role in producing forecasting gains.
    Keywords: Term structure; volatility; density forecasting; no arbitrage
    JEL: C32 C53 E43 E47 G12
    Date: 2020–09–22
  72. By: Budnik, Katarzyna; Balatti, Mirco; Dimitrov, Ivan; Groß, Johannes; Kleemann, Michael; Reichenbachas, Tomas; Sanna, Francesco; Sarychev, Andrei; Siņenko, Nadežda; Volk, Matjaz
    Abstract: The Banking Euro Area Stress Test (BEAST) is a large scale semi-structural model developed to assess the resilience of the euro area banking system from a macroprudential perspective. The model combines the dynamics of a high number of euro area banks with that of the euro area economies. It reflects banks’ heterogeneity by replicating the structure of their balance sheets and profit and loss accounts. In the model, banks adjust their assets, interest rates, and profit distribution in line with the economic conditions they face. Bank responses feed back to the macroeconomic environment affecting credit supply conditions. When applied to a stress test of the euro area banking system, the model reveals higher system-wide capital depletion than the analogous constant balance sheet exercise. JEL Classification: E37, E58, G21, G28
    Keywords: banking sector deleveraging, macroprudential policy, macro stress test, real economy-financial sector feedback loop
    Date: 2020–09
  73. By: Galego Mendes,Arthur; Pennings,Steven Michael
    Abstract: Commodity-exporting developing economies are often characterized as having needlessly procyclical fiscal policy: spending when commodity prices are high and cutting back when prices fall. The standard policy advice is instead to save during price windfalls and maintain spending during price busts. This paper questions this characterization and policy advice. Using a New Keynesian model, it finds that optimal fiscal policy is heterogeneous depending on the commodity exported and exchange rate regime. Optimal fiscal policy is often procyclical in countries with floating exchange rates because many commodity price shocks are highly persistent, and so they should be spent according to the permanent income hypothesis. In contrast, in countries with fixed exchange rates, optimal fiscal policy becomes countercyclical to smooth the business cycle. Empirically, the paper introduces a new measure of fiscal cyclicality, the marginal propensity to spend (MPS) an extra dollar of commodity revenues, and shows that it is moderately procyclical overall but highly heterogeneous across countries depending on their characteristics. Consistent with theory, the MPS is more procyclical in countries with floating exchange rates than those with fixed exchange rates. Moreover, in countries with floating exchange rates, the MPS is higher in countries facing more persistent commodity price shocks.
    Date: 2020–09–15
  74. By: Roberto Steiner
    Abstract: Capítulo 10 del libro: Fedesarrollo: 50 años de influencia en política pública. Bogotá: Fedesarrollo - En este capítulo, Roberto Steiner hace un recorrido cronológico de seis episodios retadores en la historia de la política monetaria colombiana; además, expone los debates que se dieron y la influencia que tuvo Fedesarrollo entorno a estos momentos.
    Keywords: Política Monetaria, Bonanza Cafetera, Crisis Financiara, Historia Económica, Política Pública, Centros de Pensamiento, Fedesarrollo, Colombia
    JEL: E52 E63 G01 O23 N16 L38 L31 I23
    Date: 2020–08–26
  75. By: Yuriy Gorodnichenko (University of California, Berkeley); Oleksandr Talavera (University of Birmingham); Nam Vu (University of Birmingham)
    Abstract: This paper investigates the link between product quality and price-setting for central processing units (CPUs). Using thousands of price quotes from a large price-comparison website, we find that market fundamentals, such as the number of sellers, median price, share of convenient prices and level of seller stability, are important factors for explaining price stickiness and price dispersion. We demonstrate that calculations of price inflation require conditioning not only on CPU quality but also market fundamentals to ensure that CPU attributes are priced correctly. Failing to do so can result in understatement of CPU price deflation in the sample period.
    Keywords: price setting, e-commerce, product quality, hedonic pricing, inflation
    JEL: E31 L11 L81 L86
    Date: 2020–09
  76. By: Cosmin L. Ilut; Rosen Valchev
    Abstract: We develop a tractable model of limited cognitive perception of the optimal policy function, with agents using costly reasoning effort to update beliefs about this optimal mapping of economic states into actions. A key result is that agents reason less (more) when observing usual (unusual) states, producing state- and history-dependent behavior. Our application is a standard incomplete markets model with ex-ante identical agents that hold no a-priori behavioral biases. The resulting ergodic distribution of actions and beliefs is characterized by “learning traps”, where locally stable dynamics of wealth generate “familiar” regions of the state space within which behavior appears to follow past-experience-based heuristics. We show qualitatively and quantitatively how these traps have empirically desirable properties: the marginal propensity to consume is higher, hand-to-mouth status is more frequent and persistent, and there is more wealth inequality than in the standard model.
    JEL: C11 D83 D91 E21
    Date: 2020–09
  77. By: James B. Bullard
    Abstract: St. Louis Fed President James Bullard discussed the Federal Open Market Committee’s updated monetary policy framework and various aspects of the U.S. economy.
    Keywords: Federal Open Market Committee
    Date: 2020–08–28
  78. By: Pierrick Clerc (Swiss National Bank); Michel De Vroey (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: The aim of this paper is to compare the visions held by two eminent monetarist economists, M. Friedman and K. Brunner, on the development prospects of monetarism within the macroeconomics discipline. Brunner, jointly with A. Meltzer, strived at constructing a model competing with the IS-LM model. By contrast, when invited to elaborate on the broader theoretical framework of monetarism, Friedman had no qualms to use the IS-LM model. In the first part of this paper, we summarize Friedman’s “Theoretical Framework” paper, Brunner and Meltzer’s reaction to it, and Friedman’s response. In the second part, we study the commonalities and differences between Friedman’s and Brunner’s approaches. In the third part, we summarize and assess the Brunner–Meltzer model. More general observations are offered in the conclusion.
    Keywords: M. Friedman, K. Brunner, monetarism, IS-LM model
    JEL: B22 B31 E40 E60
    Date: 2020–07–01
  79. By: Colin Weiss
    Abstract: Financial intermediary balance sheets matter for asset returns even when these intermediaries do not directly participate in the relevant asset markets. During the National Banking Era, liquidity conditions for the New York Clearinghouse (NYCH) banks forecast excess returns for stocks, bonds, and currencies. The NYCH banks had little to no direct participation in these markets; their main link to these markets was through securities financing. Liquidity conditions affect asset prices through the credit growth of the NYCH banks, which shapes marginal investors' discount rates. I use institutional features of this era to provide evidence in favor of this mechanism.
    Keywords: Liquidity management; Margin loans; Intermediary asset pricing; National banks
    JEL: G12 G21 E51 N21
    Date: 2020–09–18
  80. By: Ivo Bakota
    Abstract: This paper proposes a novel method to compute the simulation part of the Krusell-Smith (1997, 1998) algorithm when the agents can trade in more than one asset (for example, capital and bonds). The Krusell-Smith algorithm is used to solve general equilibrium models with both aggregate and uninsurable idiosyncratic risk and can be used to solve bounded rationality equilibria and to approximate rational expectations equilibria. When applied to solve a model with more than one financial asset, in the simulation, the standard algorithm has to impose equilibria for each additional asset (find the market-clearing price), for each period simulated. This procedure entails root-finding for each period, which is computationally very expensive. I show that it is possible to avoid this rootfinding by not imposing the equilibria each period, but instead by simulating the model without market clearing. The method updates the law of motion for asset prices by using Newton-like methods (Broyden’s method) on the simulated excess demand, instead of imposing equilibrium for each period and running regressions on the clearing prices. Since the method avoids the root-finding for each time period simulated, it leads to a significant reduction in computation time. In the example model, the proposed version of the algorithm leads to a 32% decrease in computational time, even when measured conservatively. This method could be especially useful in computing asset pricing models (for example, models with risky and safe assets) with both aggregate and uninsurable idiosyncratic risk since methods which use linearization in the neighborhood of the aggregate steady state are considered to be less accurate than global solution methods for these particular types of models.
    Keywords: portfolio choice; heterogeneous agents; Krusell-Smith;
    JEL: E44 G12 C63
    Date: 2020–09
  81. By: Paul J.J. Welfens (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))
    Abstract: The Corona Virus (COVID-19) epidemic represents a major challenge for the world economy. While a detailed longer-term diffusion path of the new virus cannot be anticipated for individual countries, with the possible exception of China, which was the starting point of the international epidemic, one should expect falling asset prices in Asia, the United States and the European Union plus the United Kingdom Ð except for the price of risk-free government bonds. In the course of 2020/21 the US, the EU and the UK, as well as other countries, will face both an increasing number of infected patients as well as a higher case fatality ratio. Health care expenditures in the US will increase more than in the Eurozone and the EU in the medium term, a development that undermines the international competitiveness of the United States. In the US, the spread of the COVID-19 could raise the ratio of health expenditures relative to GDP beyond the current 18% while the health care expenditure of Western EU countries will not rise much beyond the current 10% (12% in France, 11% in Germany in 2018). To the extent that morbidity and mortality in industrialized countries is a positive function of age, higher health expenditures for patients above 65 years of age should be anticipated; in the US with considerable higher government health expenditures. Hence, the US deficit-GDP ratio will remain high. A rising health care-GDP ratio in the US is equivalent to a rising US export tariff; already in the current situation Ð prior to 2020 Ð the transatlantic differential in health care-GDP ratios implies that Western European countries will face a relative cost advantage in the context of the Corona virus epidemic so that the trade balance surplus of the Eurozone could rise unless supply-side shocks in the EU exceed those of the US. The COVID-19 challenge for the US Trump Administration is a serious one, since the lack of experts in the Administration will become more apparent in such a systemic stress situation Ð and this might well affect the November 2020 US presidential election which, in turn, would itself have considerable impacts on the UK and the EU27 as well as EU-UK trade negotiations.
    Keywords: Coronavirus, Health System, Macroeconomics, EU, US, China
    JEL: I11 I18 F01 H51
    Date: 2020–03
  82. By: Anand Chopra; Michael B. Devereux; Amartya Lahiri
    Abstract: We outline a macro-pandemic model where individuals can select into working from home or in the market. Market work increases the risk of infection. Occupations differ in the ease of substitution between market and home work, and in the risk of infection. We examine the evo- lution of a pandemic in the model as well as its macroeconomic and distributional consequences. The model is calibrated to British Columbian data to examine the implications of shutting down different industries by linking industries to occupations. We find that endogenous choice to self- isolate is key: it reduces the peak infection rate by 2 percentage points but reduces the trough consumption level by 4 percentage points, even without policy mandated lockdowns. The model also produces widening consumption inequality, a fact that has characterized COVID-19.
    JEL: E0 I0
    Date: 2020–09
  83. By: Ricardo Branco (Mazars Portugal and Universidade Católica Portuguesa, Católica Porto Business School); João Pinto (Universidade Católica Portuguesa, Católica Porto Business School and CEGE); Ricardo Ribeiro (Universidade Católica Portuguesa, Católica Porto Business School and CEGE)
    Abstract: The 2008 Global financial crisis and the subsequent European sovereign debt crisis deteriorated banks funding conditions and lead to a substitution effect among bond instruments. We examine the pricing of straight, covered and securitization bonds issued by European banks in the 2000-2016 period, with a particular focus on the effect of sovereign credit risk and ECB's asset purchase programmes on spreads. We nd that (i) straight, covered and securitization bonds are priced in segmented markets, (ii) the impact of common pricing determinants on spreads differ significantly between non-crisis and crisis periods, (iii) sovereign credit risk is an important determinant of banks' cost of funding, especially in crisis periods, (iv) ECB's asset purchase programmes exhibited mixed effectiveness in improving banks funding conditions, (v) contractual bond characteristics other than credit ratings, macroeconomic factors and bank characteristics are important determinants of spreads, and (vi) there is evidence of heterogeneity across countries.
    Keywords: Straight Bonds; Covered Bonds; Securitization Bonds; Bond Pricing; Sovereign Risk; Asset Purchase Programmes
    JEL: E52 G01 G12 G21 G32
    Date: 2020–01
  84. By: Max Gillman (1 University Blvd; University of Missouri – St. Louis; St. Louis, MO 63121)
    Abstract: This paper provides a general equilibrium model of income tax evasion. As functions of the share of income reported, the paper contributes an analytic derivation of the tax elasticity of taxable income, the welfare cost of the tax, and government revenue as a percent of output. It shows how an increase in the tax rate causes the tax elasticity and welfare cost to increase in magnitude by more than with zero evasion. Keeping constant the ratio of income tax revenue to output, as shown to be consistent with certain US evidence, a rising productivity of the goods sector induces less evasion and thereby allows tax rate reduction. The paper derives conditions for a stable share of income tax revenue in output with dependence upon the tax elasticity of reporting income. Examples are provided with less and more productive economies in terms of the tax elasticity of reported income, the welfare cost of taxation and the tax revenue as a percent of output, with sensitivity analysis with respect to leisure preference and goods productivity. Discussion focuses on how the tax evasion analysis may help explain such fiscal tax policy as the postwar US income tax rate reductions with discussion of tax acts and government fiscal multipliers. Fiscal policy with tax evasion included shows how tax rate reduction induces less tax evasion, a lower welfare cost of taxation, and makes for a stable income tax share of output.
    Keywords: Optimal Evasion; Tax Law; Welfare; Tax Elasticity; Revenue; Productivity; Development.
    JEL: E13 H21 H26 H30 H68 K34 K42 O11
    Date: 2020–09
  85. By: Michel De Vroey (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: My review of Ingrao and Sardoni’s book paper focuses on its Part II, entitled “From the Neoclassical Synthesis to New Keynesian Economics.” My criticisms amount to three. First, I disagree with Ingrao and Sardoni’s account of the twists and turns that have occurred in modern macroeconomics. Often, where they see continuity, I see cleavage; where they see cleavage, I see continuity. Second, I put forward that the result of the 2008 recession is that DSGE economists were led to zero in on the hitherto neglected issue of the workings of the financial sector and its integration in their models. Hence, Ingrao and Sardoni’s conclusion of failure must be revised. Third, I want to bring out that the internal history of economics can be written in two ways: the approach can be partisan or steer clear of the fray. As I am in favor of the latter, I regret that Ingrao and Sardoni have adopted the former.
    Keywords: History of macroeconomics, banking finance
    JEL: B10 B22 B26
    Date: 2020–07–07
  86. By: Gerlagh, Reyer (Department of Economics, Tilburg University); Hejimans, Roweno J. R. K. (Department of Economics, Tilburg University); Rosendahl, Knut Einar (School of Economics and Business, Norwegian University of Life Sciences)
    Abstract: For any emission trading system (ETS) with quantity-based endogenous supply of allowances, there exists an allowances-demand reducing policy that increases aggregate supply and thus cumulative emissions. We establish this green paradox in a general model and apply the insights to the Market Stability Reserve (MSR) in the EU ETS, implemented in 2018. We show that demand-reducing policies announced in early periods but realized in the future, such as decisions to phase out coal power, can be inverted by the new rules: they may increase cumulative emissions. We provide quantitative evidence of our result for a model disciplined on the price rise in the EU ETS that followed the introduction of the MSR. Our results point to the need for better coordination between different policies in the "European Green Deal" proposed by the European Commission late 2019.
    Keywords: Emissions trading; Green paradox; EU ETS; environmental policy; dynamic modeling
    JEL: D59 E61 H23 Q50 Q54 Q58
    Date: 2020–05–08
  87. By: Jeremy B. Rudd
    Abstract: Underlying inflation is the rate of inflation that would be expected to eventually prevail in the absence of economic slack, supply shocks, idiosyncratic relative price changes, or other disturbances. Underlying inflation is a useful benchmark for monetary policy in that it provides an idea of the rate of price change that would be expected to obtain under "normal" circumstances in an economy where the level of resource utilization is putting neither upward nor downward pressure on inflation.
    Date: 2020–09–18
  88. By: Rajashri Chakrabarti; Sebastian Heise; Davide Melcangi; Maxim L. Pinkovskiy; Giorgio Topa
    Abstract: In our previous post, we looked at the effects that the reopening of state economies across the United States has had on consumer spending. We found a significant effect of reopening, especially regarding spending in restaurants and bars as well as in the healthcare sector. In this companion post, we focus specifically on small businesses, using two different sources of high-frequency data, and we employ a methodology similar to that of our previous post to study the effects of reopening on small business activity along various dimensions. Our results indicate that, much like for consumer spending, reopenings had positive and significant effects in the short term on small business revenues, the number of active merchants, and the number of employees working in small businesses. It is important to stress that we are not expressing any views in this post on the normative question of whether, when, or how states should loosen or tighten restrictions aimed at controlling the COVID-19 pandemic.
    Keywords: state reopenings; COVID-19; small businesses; revenues; employment
    JEL: E2
    Date: 2020–09–21
  89. By: Feyen,Erik H.B.; Zuccardi Huertas,Igor Esteban
    Abstract: This paper analyzes the main trends and patterns of nominal lending interest rates and lending-deposit interest rate spreads in emerging markets and developing economies. Using data from 140 emerging markets and developing economies, analysis shows that nominal lending rates and spreads declined between 2003 and 2017, with regional heterogeneity. In addition, it finds that less economically and financially developed countries tend to exhibit higher lending rates and spreads. These higher rates tend to be driven by higher spreads, not deposit interest rates. Also, illustrative regressions suggest that relevant correlates of nominal lending rates include inflation, public debt, and policy interest rate (macro-fiscal conditions); overhead costs, nonperforming loans, and non-interest income (banking characteristics); and credit bureau coverage and time to resolve insolvency (business environment). Finally, illustrative decompositions of the level and 10-year change between 2007 and 2017 of nominal lending rates find relative differences across regions. On the decline of nominal interest rates in that decade, rising public debt and nonperforming loans have pushed rates up, which was counterbalanced by a reduction in inflation, the policy interest rate, and overhead costs and a better business environment. Since the global financial crisis, a common global factor has increased in importance and has contributed to the downward trend in nominal lending rates.
    Keywords: Inflation,Business Environment,Financial Sector Policy,Bankruptcy and Resolution of Financial Distress,Macroeconomic Management
    Date: 2020–09–09
  90. By: Niels J. Gormsen (University of Chicago - Booth School of Business); Ralph S.J. Koijen (University of Chicago Booth School of Business)
    Abstract: We use data from the aggregate equity market and dividend futures to quantify how investorsÕ expectations about economic growth across horizons evolve in response to the corona virus outbreak and subsequent policy responses. Dividend futures, which are claims to dividends on the aggregate stock market in a particular year, can be used to directly compute a lower bound on growth expectations across maturities or to estimate expected growth using a simple forecasting model. We show how the actual forecast and the bound evolve over time. As of March 16, expected growth over the next quarter declined by 2.5% in the US and 3.5% in Europe (both annualized) compared to the beginning of the year. The lower bound on expected GDP growth has been revised down by as much as 10% in the US and 12% in the EU. There are signs of catch-up growth from year 4 to year 10. News about economic relief programs on March13 appear to have increased stock prices by lowering risk aversion and lift long-term growth expectations, but did little to improve expectations about short-term growth.The events on March 16 reflect a deterioration of fundamentals in the US and predicta deepening of the economic downturn. We also show how data on dividend futures can be used to understand why stock markets fell so sharply, well beyond changes ingrowth expectations
    Date: 2020
  91. By: Paul J.J. Welfens (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))
    Abstract: Mit dem absehbaren BREXIT ergeben sich fŸr Deutschland und insbesondere NRW eine Reihe von škonomischen Herausforderungen; zugleich fŸr NRW auch bestimmte Chancen. Der BREXIT, der auf einem nicht-ordnungsgemŠ§en Referendum in 2016 beruht, bedeutet fŸr Deutschland in AbhŠngigkeit von der Art des EU-UK-Freihandelsabkommens nach dem BREXIT eine mittel- und langfristige EinkommensdŠmpfung durch die Verminde-rung der deutschen Exporte nach Gro§britannien. Zudem gibt es einen ExportdŠmpfungseffekt speziell auch Richtung den Niederlanden und Belgien, die mit UK handelsmŠ§ig bislang relativ stark verflochten sind. Gleichzeitig sind erhšhte DirektinvestitionszuflŸsse aus UK zu erwarten. FŸr NRW bzw. Deutschland gibt es zugleich Chancen, rŸckwanderungswillige EU-Auswanderer aus UK fŸr den Arbeitsmarkt zu gewinnen und dabei speziell das FachkrŠftedefizit mittelfristig zu vermindern. Kurzfristig sind die regionalen NRW-Jobverluste durch den BREXIT Ÿberschaubar. Die NRW-Landesregierung wŠre gut beraten, sich speziell um RŸckkehrer aus UK verstŠrkt bzw. aktiv zu bemŸhen, wobei auch an konzertierte AktivitŠten von IHKs in Kooperation mit der Landesregierung zu denken ist.
    Keywords: BREXIT, Wachstum, BeschŠftigung, StabilitŠt, Wirtschaftspolitik
    JEL: F43 O11 E60 F63
    Date: 2019–06
  92. By: Rajashri Chakrabarti; Sebastian Heise; Davide Melcangi; Maxim L. Pinkovskiy; Giorgio Topa
    Abstract: The spread of COVID-19 in the United States has had a profound impact on economic activity. Beginning in March, most states imposed severe restrictions on households and businesses to slow the spread of the virus. This was followed by a gradual loosening of restrictions (“reopening”) starting in April. As the virus has re-emerged, a number of states have taken steps to reverse the reopening of their economies. For example, Texas and Florida closed bars again in June, and Arizona additionally paused operations of gyms and movie theatres. Taken together, these measures raise the question of how closures and reopenings affect consumer spending. In this post, we investigate how much consumer spending increased after the reopenings. It is important to stress that we are not expressing any views on the normative question of whether, when, or how states should loosen or tighten restrictions aimed at controlling the COVID-19 pandemic.
    Keywords: consumer spending; COVID-19; credit cards; reopening
    JEL: E2
    Date: 2020–09–18
  93. By: Carlos Caballero
    Abstract: Capítulo 4 del libro: "Fedesarrollo: 50 años de influencia en política pública". Bogotá: Fedesarrollo - En este capítulo, Carlos Caballero reúne los principales informes sobre economía de las drogas ilícitas publicados por Fedesarrollo (y algunos otros) en sus 50 años. En estos, se muestra el interés del centro de investigación en las economías ilegales al tratar de estimar su tamaño, y demostrar el daño que esta hace al desarrollo económico, la creación de empleo y al bienestar de la población.
    Keywords: Economía del Narcotráfico, Economía Ilegal, Desarrollo Económico y Social, Economía Colombiana, Política Pública, Centros de Pensamiento, Fedesarrollo, Colombia
    JEL: E26 O10 O54 L38 L31 I23
    Date: 2020–08–26
  94. By: Luis Fernando Mejía
    Abstract: Capítulo 12 del libro: Fedesarrollo: 50 años de influencia en política pública. Bogotá: Fedesarrollo - En este capítulo, Luis Fernando Mejía refleja la influencia que ha tenido Fedesarrollo durante sus 50 años en los debates, el diseño y formulación, implementación y evaluación de políticas públicas. También, postula nuevos retos de Fedesarrollo para el futuro.
    Keywords: Fedesarrollo, Centros de Pensamiento, Política Pública, Crecimiento Económico, Política Económica, Desarrollo Económico y Social, Economía Colombiana, Colombia
    JEL: L31 I23 L38 O10 E60 O47 O54
    Date: 2020–08–26
  95. By: Markus Eller; Niko Hauzenberger; Florian Huber; Helene Schuberth; Lukas Vashold
    Abstract: In line with the recent policy discussion on the use of macroprudential measures to respond to cross-border risks arising from capital flows, this paper tries to quantify to what extent macroprudential policies (MPPs) have been able to stabilize capital flows in Central, Eastern and Southeastern Europe (CESEE) -- a region that experienced a substantial boom-bust cycle in capital flows amid the global financial crisis and where policymakers had been quite active in adopting MPPs already before that crisis. To study the dynamic responses of capital flows to MPP shocks, we propose a novel regime-switching factor-augmented vector autoregressive (FAVAR) model. It allows to capture potential structural breaks in the policy regime and to control -- besides domestic macroeconomic quantities -- for the impact of global factors such as the global financial cycle. Feeding into this model a novel intensity-adjusted macroprudential policy index, we find that tighter MPPs may be effective in containing domestic private sector credit growth and the volumes of gross capital inflows in a majority of the countries analyzed. However, they do not seem to generally shield CESEE countries from capital flow volatility.
    Date: 2020–09
  96. By: Hlouskova, Jaroslava (Institute for Advanced Studies (IHS), Vienna, International Institute for Applied Systems Analysis (IIASA), Laxenburg, Austria, and Faculty of National Economy, University of Economics in Bratislava, Slovakia); Tsigaris, Panagiotis (Department of Economics, Thompson Rivers University, Kamloops,BC, Canada)
    Abstract: Financial constraints or economic needs, career development, psychological satisfaction as well as demographic and situational factors cause workers to seek more than one job while enjoying leisure time. In this paper we examine how a worker with prospect theory type of preferences allocates her time between leisure, a safe job and a risky job. Optimal time allocation for a sufficient loss averse worker depends on the reference level which in turn determines whether the worker is willing to experience relative losses or not. When the reference level is relatively low then the sufficiently loss averse worker will allocate some of her time to leisure and will hold both jobs in order to diversify risk and reduce income loss arising from the risky job. However, if the probability of a good state of nature is very high and the reference level is very low, the worker spends time only on leisure and the risky job while avoids the safe job. Loss aversion does not affect the optimal time allocation to the three activities as the time allocation results in avoiding relative losses for any state of nature. When the reference level is relative high, but not too high, the worker will allocate her time between both safe and risky jobs as well as to the leisure. Worker with very high reference level will avoid the safe job and will divide her time between the risky job and the leisure. In both cases the worker is willing to accept relative losses in the bad state of nature provided it is compensated with relative gains in the good state of nature. Here the allocation of time to the three activities depends on the degree of loss aversion. When the reference level is relatively low, but not too low, an increase in the reference level will reduce leisure time, reduce time in the risky job and increase time in the safe job. At very low reference levels, an increase in the reference level will result in the worker re-allocating her time from leisure to the risky job assuming the probability of a good state of nature is higher than a threshold. When the reference level is high the opposite effects are observed. We also examine other comparative statics including the effect of changes in the wage rate.
    Keywords: multiple job holdings, prospect theory, loss aversion
    JEL: D81 G11 E24
    Date: 2020–09
  97. By: Ximena Cadena
    Abstract: Presentación del libro: "Fedesarrollo: 50 años de influencia en política pública" - En esta presentación del libro se resalta la influencia que ha tenido Fedesarrollo en el desarrollo de políticas de diversa índole al proveer información de calidad que ayuda a la toma de decisiones políticas. Además, se hace una reflexión hacia el futuro sobre los retos que enfrentan instituciones como Fedesarrollo: las amenazas a la democracia, la velocidad de las redes y desconfianza hacia la ciencia, y el camino que queda en materia de pobreza y desigualdad en Colombia. También, se describe el recorrido de planeación y escritura que se llevó a cabo con cada exdirector para recoger su esencia y la de Fedesarrollo en este libro.
    Keywords: Fedesarrollo, Centros de Pensamiento, Política Pública, Economía Colombiana, Política Económica, Desarrollo Económico y Social, Historia Económica, Colombia
    JEL: L31 I23 L38 O54 O10 E60 N16
    Date: 2020–08–26
  98. By: Lucía Arango-Lozano (Banco de la República de Colombia); Lukas Menkhoff; Daniela Rodríguez-Novoa (Banco de la República de Colombia); Mauricio Villamizar-Villegas (Banco de la República de Colombia)
    Abstract: There is ample empirical literature centering on the effectiveness of foreign exchange intervention (FXI). Given the mix of objectives and country-heterogeneity, the general lack of consensus thus far is no surprise. We shed light on this debate by conducting the first comprehensive meta-analysis in the FXI literature, with 279 reported effects that stem from 74 distinct empirical studies. We cover estimations conducted in 19 countries across five decades. Overall, our meta-survey reports an average depreciation of domestic currency of 1% and a reduction of exchange rate volatility of 0.6%, in response to a $1 billion US dollar purchase. Results are qualitatively confirmed but smaller in size under fixed and random-effect estimations. When narrowing in on different economic factors, we find that effects are magnified for cases consistent with the monetary trilemma (greater if financial openness and monetary independence are low). Effects are also larger in emerging than advanced economies, when banking crises remain mild, and when interventions are large in size and are announced. **** RESUMEN: Existe una amplia literatura empírica sobre la efectividad de la intervención cambiaria (FXI). Sin embargo, dados los diferentes objetivos y la heterogeneidad de los países con respecto a las condiciones del mercado, es de esperarse que a la fecha no haya un consenso. Este trabajo es el más grande jamás realizado en la literatura de FXI, con un total de 279 efectos reportados, provenientes de 74 estudios empíricos. Cubre estimaciones realizadas en 19 países y durante 5 décadas. En general, nuestro meta-análisis encuentra una depreciación promedio de la moneda local del 1,0% y una reducción de la volatilidad de la tasa de cambio del 0,6%, en respuesta a una compra neta de mil millones de dólares. Sin embargo, los resultados son más pequeños bajo efectos fijos y aleatorios. Al considerar diferentes factores económicos, encontramos que los efectos se magnifican para los casos consistentes con el trilema de la política monetaria (mayor efecto si la apertura financiera y la independencia monetaria son bajas). Los efectos también son mayores en países emergentes, cuando las crisis cambiarias y bancarias son menores, cuando aumenta el tamaño de la intervención y cuando las intervenciones son anunciadas.
    Keywords: foreign exchange intervention, exchange rate, meta-analysis, Intervención cambiaria, tasa de cambio, meta-análisis
    JEL: C83 E58 F31
    Date: 2020–09
  99. By: Bańbura, Marta; Bobeica, Elena
    Abstract: We find that it does, but choosing the right specification is not trivial. We unveil notable model instability, with breaks in the performance of most simple Phillips curves. Euro area inflation was particularly hard to forecast in the run-up to the EMU and after the sovereign debt crisis, when the trend and for the latter period, also the amount of slack, were harder to pin down. Yet, some specifications outperform a univariate benchmark most of the time and are thus a useful element in a forecaster's toolkit. We base these conclusions on an extensive forecast evaluation over 1994 - 2018, an extraordinarily long period by euro area standards. We complement the analysis using real-time data over 2005-2018. As lessons for practitioners, we find that: (i) the key type of time variation to consider is an inflation trend; (ii) a simple filter-based output gap works well overall as a measure of economic slack, but after the Great Recession it is outperformed by endogenously estimated slack or by estimates from international economic institutions; (iii) external variables do not bring forecast gains; (iv) newer generation Phillips curve models with several time-varying features are a promising avenue for forecasting, especially when density forecasts are of interest, and finally, (v) averaging over a wide range of modelling choices offers some hedge against breaks in forecast performance. JEL Classification: C53, E31, E37
    Keywords: C53, E31, E37
    Date: 2020–09
  100. By: Biswajit Nag (Indian Institute of Foreign Trade , New Delhi); Willem van der Geest (Department of Economic and Social Affairs (DESA), United Nations, New York)
    Abstract: India with large-scale informal workers face a major crisis due to Covid-19 pandemic. The current paper attemptsto understand the possible growth trajectory in few major sectors and its effect on employment, possible bearing on health management and fiscal scenario. It starts with a comparative analysis of South Asian economies in terms of incidence of the disease, stringency and its impact. This is juxtaposed with the predicted impact on GDP, consumption and investment as calculated by multilateral agencies. Using the base level data provided by Asian Development Bank and the World Bank, the current paper analyses the possible decline of India’s GDP developing ‘upper’ and ‘lower’ case scenarios through various sector level assumptions. Further, employment impact is assessed using asymmetric nature of employment elasticity of output. For the year 2020-21, the model did quarterly prediction. Next, the article describes the channels in which job loss and health crisis can lead to income inequality and whether current state of health management and fiscal constraint address in short and medium term in light of the announced stimulus package. The results indicate a large-scale job losses in 2020 (16 to 34 million)and a slight recovery in 2021. This will have a severe socio-economic impact and may push the economy backward for several years.
    Keywords: GDP Forecasting, Unemployment, Public policy
    JEL: E17 J60 J68
    Date: 2020–08

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