nep-mac New Economics Papers
on Macroeconomics
Issue of 2020‒10‒26
104 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. How Macroeconomists Lost Control of Stabilization Policy: Towards Dark Ages By Jean-Bernard, Chatelain; Kirsten, Ralf
  2. Macro Uncertainty and Unemployment Risk By Oh, Joonseok; Rogantini Picco, Anna
  3. Fiscal Implications of Interest Rate Normalization in the United States By Huixin Bi; Wenyi Shen; Shu-Chun S. Yang
  4. On the Magnitude of the Expenditure Multiplier By Jesús Rodríguez-López; Mario Solís-García
  5. Unconventional Monetary Policy, Leverage & Default Dynamics By Edoardo Palombo
  6. Quantitative Easing and Direct Lending in Response to the COVID-19 Crisis By Filippo Occhino
  7. Conventional macroeconomic policies and the pandemic-driven recession By Celso José Costa Jr; Alejandro Garcia-Cintado; Karlo Marques
  8. Alternative Models of Interest Rate Pass-Through in Normal and Negative Territory By Mauricio Ulate
  9. Perceived Uncertainty Shocks, Excess Optimism-Pessimism, and Learning in the Business Cycle By Pratiti Chatterjee; Fabio Milani
  10. Forward Guidance Matters: Disentangling Monetary Policy Shocks By Leonardo N. Ferreira
  11. Macroprudential Policy, Monetary Policy and the Bank Interest Rate Margin By E Philip Davis; Dilruba Karim; Dennison Noel
  12. Pandemic Recession Dynamics: The Role of Monetary Policy in Shifting a U-Shaped Recession to a V-Shaped Rebound By Michael T. Kiley
  13. Macroprudential Policy in the Euro Area By Alvaro Fernandez-Gallardo; Ivan Paya
  14. Can GDP Growth Linked Instrument Be Used For Islamic Monetary Policy? By Uddin, Md Akther; Ali, Md Hakim; Radwan, Maha
  15. Corporate Debt, Rentiers' Portfolio Dynamics, Instability and Growth: A neo-Kaleckian Perspective By Parui, Pintu
  16. The Effects of Trend Inflation on Aggregate Dynamics and Monetary Stabilization By Andrey Alexandrov
  17. " The General Theory as "Depression Economics"? Financial Instability and Crises in Keynes's Monetary Thought" By Joerg Bibow
  18. Charge-offs, Defaults and the Financial Accelerator By Christopher M. Gunn; Alok Johri; Marc-Andre Letendre
  19. Alternative Measures of Price Inflation and the Perception of Real Income in Germany By Karl-Friedrich Israel; Gunther Schnabl
  20. Labor shortages and wage growth By Frohm, Erik
  21. Empirical Evidence of the Lending Channel of Monetary Policy under Negative Interest Rates By Whelsy BOUNGOU
  22. Islamic Monetary Economics: Insights from the Literature By Uddin, Md Akther
  23. Estimates of r* Consistent with a Supply-Side Structure and a Monetary Policy Rule for the U.S. Economy By Manuel Gonzalez-Astudillo; Jean-Philippe Laforte
  24. Budget deficits, public debt and the Ricardian Equivalence By Claudio Sardoni
  25. Is There a Stable Relationship between Unemployment and Future Inflation? By Terry J. Fitzgerald; Callum Jones; Mariano Kulish; Juan Pablo Nicolini
  26. POn Fisher Aggregation of Multi-factor Productivity Indexes By Rolf Färe; Valentin Zelenyuk
  27. Household Indebtedness and the Macroeconomic Effects of Tax Changes By Sangyup Choi; Junhyeok Shin
  28. Projecting post-crisis house and equity prices since the 1870s:not all crises are alike By Rafiq, Shuddhasattwa
  29. Exchange Rates and the Information Channel of Monetary Policy By Oliver Holtemöller; Alexander Kriwoluzky; Boreum Kwak
  30. Finance as Perpetual Orgy. How the ‘new alchemists’ twisted Kindleberger’s cycle of “manias, panics and crashes” to “manias, panics and renewed-manias”. By Palma, J. G.
  31. Household Financial Distress and the Burden of ‘Aggregate’ Shocks By Kartik B. Athreya; Ryan Mather; Jose Mustre-del-Rio; Juan M. Sanchez
  32. A Relative Answer to the Growth-Saving Puzzle By Gruber, Noam
  33. De la crise sanitaire à la crise économique ou la double exigence By Jean-Luc Gaffard
  34. The Micro Anatomy of Macro Consumption Adjustments By Rafael Guntin; Pablo Ottonello; Diego Perez
  35. Future Fiscal Adjustments and Debt Sustainability By Razzak, Weshah
  36. The policy-driven boom and bust in the housing market: Evidence from Mongolia By Doojav, Gan-Ochir; Damdinjav, Davaasukh
  37. Capital in Spain, 1850-2019 By Leandro Prados de la Escosura
  38. The FOMC’s New Individual Economic Projections and Macroeconomic Theories By Natsuki Arai
  39. South Korean Economy and the Free Trade Agreement with China By Bayari, Celal
  40. Surveying the survey: What can we learn about the effects of monetary policy on inflation expectations? By Michael Pedersen
  41. Risk Exposure and Acquisition of Macroeconomic Information By Christopher Roth; Sonja Settele; Johannes Wohlfart
  42. Banking Concentration and Financial Crises By Ray Barrell; Dilruba Karim
  43. Central Bank Communication with a Financial Stability Objective By David M. Arseneau
  44. Health Vulnerability versus Economic Resilience to the Covid-19 pandemic: Global Evidence By Simplice A. Asongu; Samba Diop; Joseph Nnanna
  45. The economic impact of pandemics: real and financial transmission channels By Hiona Balfoussia; Heather D. Gibson; Dimitris Malliaropulos; Dimitris Papageorgiou
  46. Anatomy of Corporate Credit Spreads: The Great Recession vs. COVID-19 By Mahdi Ebsim; Miguel Faria-e-Castro; Julian Kozlowski
  47. Productive government expenditure and economic growth in a heterogeneous-agents model By Ryo Arawatari; Takeo Hori; Kazuo Mino
  48. Cross-Border Regulatory Spillovers and Macroprudential Policy Coordination By Pierre-Richard Agénor; Timothy P. Jackson; Luiz Pereira da Silva
  49. "The Trade-off between Inflation and Unemployment in an MMT World: An Open Economy Perspective" By Emilio Carnevali; Matteo Deleidi
  50. The Longer-Run Framework: A Look Ahead By John C. Williams
  51. Using Survey Information for Improving the Density Nowcasting of US GDP with a Focus on Predictive Performance during Covid-19 Pandemic By Cem Cakmakli; Hamza Demircan
  52. Bank Liquidity Provision Across the Firm Size Distribution By Gabriel Chodorow-Reich; Olivier Darmouni; Stephan Luck; Matthew C. Plosser
  53. Corridor stability of the Kaleckian growth model: a Markov-switching approach By Brian Hartley
  54. Modeling optimal quarantines under infectious disease related mortality By Aditya Goenka; Lin Liu; Manh-Hung Nguyen
  55. Optimal Foreign Reserves and Central Bank Policy Under Financial Stress By Luis Felipe Céspedes; Roberto Chang
  56. Fireside Chats: Communication and Consumers’ Expectations in the Great Depression By Mathieu Pedemonte
  57. Dominant Currencies: How Firms Choose Currency Invoicing and Why it Matters By Mary Amiti; Oleg Itskhoki; Jozef Konings
  58. Global health care infrastructure and Africa in times of Covid-19: insights for sustainable development and future pandemics By Samba Diop; Simplice A. Asongu
  59. A note on the impact of news on US household inflation expectations By Ben Zhe Wang; Jeffrey Sheen; Stefan Tr\"uck; Shih-Kang Chao; Wolfgang Karl H\"ardle
  60. Imperfect Substitutability in Real Estate Markets and the Effect of Housing Demand on the Macroeconomy By J. Scott Davis; Kevin X. D. Huang; Ayse Sapci
  61. A Counterfactual Economic Analysis of COVID-19 Using a Threshold Augmented Multi-Country Model By Alexander Chudik; Kamiar Mohaddes; M. Hashem Pesaran; Mehdi Raissi; Alessandro Rebucci
  62. Can Households Predict where the Macroeconomy is Headed? By Kladivko, Kamil; Österholm, Pär
  63. Payment Innovations, the Shadow Economy and Cash Demand of Households in Euro Area Countries By Hans-Eggert Reimers; Friedrich Schneider; Franz Seitz
  64. Income in the Off-Season: Household Adaptation to Yearly Work Interruptions By John M. Coglianese; Brendan M. Price
  65. Information and Expectations in Policy-Making: Friedman's Changing Approaches to Macroeconomic Dynamics By Sylvie Rivot
  66. Implementing Monetary Policy in an "Ample-Reserves" Regime: When in Crisis (Note 3 of 3) By Jane E. Ihrig; Zeynep Senyuz; Gretchen C. Weinbach
  67. Fixed and Flexible Exchange-rates in Two Matching Models: Non-equivalence Results By Zhu, Tao; Wallace, Neil
  68. A Counterfactual Economic Analysis of Covid-19 Using a Threshold Augmented Multi-Country Model By Alexander Chudik; Kamiar Mohaddes; M. Hashem Pesaran; Mehdi Raissi; Alessandro Rebucci
  69. Simulation-based optimisation of the timing of loan recovery across different portfolios By Arno Botha; Conrad Beyers; Pieter de Villiers
  70. Has the Stock Market Become Less Representative of the Economy? By Frederik P. Schlingemann; René M. Stulz
  71. Between Lives and Economy: Optimal COVID-19 Containment Policy in Open Economies By Hsu, Wen-Tai; Lin, Hsuan-Chih (Luke); Yang, Han
  72. A researcher’s guide to the Swedish compulsory school reform By Nix, Emily
  73. Financial Constraints and Propagation of Shocks in Production Networks By Banu Demir Pakel; Beata Smarzynska Javorcik; Tomasz K. Michalski; Evren Ors
  74. Fiscal Multipliers for Saudi Arabia Revisited By H.E. Dr. Majid Al Moneef; Fakhri Hasanov
  75. The Rise of Income and Wealth Inequality in America: Evidence from Distributional Macroeconomic Accounts By Emmanuel Saez; Gabriel Zucman
  76. Uncertainty, Intangible Capital, and Productivity Dynamics By Edoardo Palombo
  77. Temptation and Commitment: Understanding Hand-to-Mouth Behavior By Orazio Attanasio; Agnes Kovacs; Patrick Moran
  78. Three essays in financial frictions By He, Sicheng
  79. Covid-19 Economic Vulnerability and Resilience Indexes: Global Evidence By Samba Diop; Simplice A. Asongu; Joseph Nnanna
  80. External imbalances from a GVAR perspective By Mariam Camarero Author-X-Name-Mariam; Josep Lluís Carrión-i-Silvestre; Cecilio Tamarit
  81. Monetary spillovers and real exchange rate misalignments in emerging markets By Krittika Banerjee; Ashima Goyal
  82. A Class of Time-Varying Vector Moving Average (infinity) Models By Yayi Yan; Jiti Gao; Bin peng
  83. Trends in US Income and Wealth Inequality: Revising After the Revisionists By Emmanuel Saez; Gabriel Zucman
  84. Offshore Tax Evasion and Wealth Inequality: Evidence from a Tax Amnesty in the Netherlands By Arjan Lejour; Simon Rabaté; Maarten van 't Riet
  85. A Pound Centric look at the Pound vs. Krona Exchange Rate Movement from 1844 to 1965 By Andrew Clark
  86. Pension Reforms, Population Aging, and Retirement Decision of the Elderly in a Neoclassical Growth Model By Hirono, Makoto; Mino, Kazuo
  87. How Expected Inflation Distorts the Current Account and the Valuation Effect By Philip Sauré; Philipp Herkenhoff
  88. Sharing Risk to Avoid Tragedy: Informal Insurance and Irrigation in Village Economies By Karol Mazur
  89. Do Party Ties Increase Transfer Receipts in Cooperative Federalism? - Evidence from Germany By Yannick Bury; Lars P. Feld; Ekkehard A. Köhler
  90. Interview With St. Louis Fed President James Bullard, Wall Street Journal By James B. Bullard
  91. The Economy’s Outlook, Challenges, and Way Forward By Eric S. Rosengren
  92. COVID-19 and the U.S. Economy: Progress on Health and Incomes By James B. Bullard
  93. Economic Fragility: Implications for Recovery from the Pandemic By Eric S. Rosengren
  94. Central bank information effects and transatlantic spillovers By Jarociński, Marek
  95. Capital Regulations and the Management of Credit Commitments during Crisis Times By Pelzl, Paul; Valderrama, Maria Teresa
  96. A Generalised Stochastic Volatility in Mean VAR. An Updated Algorithm By Haroon Mumtaz
  97. T’was slouching towards an illusion and now it’s scurrying toward a delusion: A COVID19-shocked doughnut model economy By Amavilah, Voxi Heinrich
  98. Bullard Interviewed on Fox Business By James B. Bullard
  99. Unwilling to Train? Firm Responses to the Colombian Apprenticeship Regulation By Santiago Caicedo; Miguel Espinosa; Arthur Seibold
  100. The use of the I3E model in macroeconomic analysis for the Irish economy By de Bruin, Kelly; Monaghan, Eoin; Yakut, Aykut Mert
  101. The Determinants of Economic Competitiveness By Kluge, Jan; Lappoehn, Sarah; Plank, Kerstin
  102. The Effects of COVID-19 on U.S. Small Businesses: Evidence from Owners, Managers, and Employees By Georgij Alekseev; Safaa Amer; Manasa Gopal; Theresa Kuchler; JW Schneider; Johannes Stroebel; Nils Wernerfelt
  103. Consumer Payment Choice for Bill Payments By Claire Greene; Joanna Stavins
  104. Allocating Losses: Bail-ins, Bailouts and Bank Regulation By Todd Keister; Yuliyan Mitkov

  1. By: Jean-Bernard, Chatelain; Kirsten, Ralf
    Abstract: This paper is a study of the history of the transplant of mathematical tools using negative feedback for macroeconomic stabilization policy from 1948 to 1975 and the subsequent break of the use of control for stabilization policy which occurred from 1975 to 1993. New-classical macroeconomists selected a subset of the tools of control that favored their support of rules against discretionary stabilization policy. The Lucas critique and Kydland and Prescott's time-inconsistency were over-statements that led to the "dark ages" of the prevalence of the stabilization-policy-ineffectiveness idea. These over-statements were later revised following the success of the Taylor rule.
    Keywords: Control, Stabilization Policy Ineffectiveness, Negative feedback, Dynamic Games
    JEL: B22 B41 C36 C61 C62 C73 E32 E52 E61 E62
    Date: 2020–09–25
  2. By: Oh, Joonseok (Freie Universitat Berlin); Rogantini Picco, Anna (Research Department, Central Bank of Sweden)
    Abstract: This paper shows how uninsurable unemployment risk is crucial to qualitatively and quantitatively match macro responses to uncertainty shocks. Empirically, uncertainty shocks i) generate deflationary pressure; ii) have considerably negative consequences on economic activity; iii) produce a drop in aggregate consumption, which is mainly driven by the response of the households in the bottom 60% of the income distribution. Standard representative-agent New Keynesian models have difficulty to deliver these effects. A heterogeneous-agent framework with search and matching frictions and Calvo pricing allows us to jointly attain these results. Uncertainty shocks induce households' precautionary saving and firms' precautionary pricing behaviors, triggering a fall in aggregate demand and supply. These precautionary behaviors increase the unemployment risk of the imperfectly insured households, who strengthen precautionary saving. When the feedback loop between unemployment risk and precautionary saving is strong enough, a rise in uncertainty leads to i) a drop in inflation; ii) amplified negative responses of macro variables; iii) heterogeneous consumption responses of households, which are consistent with the empirical evidence.
    Keywords: Uncertainty shock; Inflation; Unemployment risk; Precautionary savings
    JEL: E12 E31 E32 J64
    Date: 2020–10–01
  3. By: Huixin Bi; Wenyi Shen; Shu-Chun S. Yang
    Abstract: This paper studies the fiscal implications of interest rate normalization from the zero lower bound (ZLB) in the United States. At the ZLB, the decline in tax revenues and the real bond price drives up government debt. During normalization, interest payments continue to rise higher than they would have had rates not reached the ZLB, potentially increasing government debt even as output and tax revenues recover. We find that against the yardstick of ability to pay, interest rate normalization is unlikely to pose an immediate threat to debt sustainability at the current net federal debt level of 90 to 100 percent of GDP. If the net federal debt reaches 150 percent of GDP, however, sovereign default risk can rise more quickly. We also find that a more active monetary policy better anchors inflation expectations and generates a faster recovery than a less active one, helping slow debt accumulation during normalization.
    Keywords: Interest rate normalization; Monetary and fiscal policy interaction; Debt sustainability; Non-linear DSGE model; New Keynesian model
    JEL: E43 E52 E62 E63 H30
    Date: 2020–10–02
  4. By: Jesús Rodríguez-López (U. Pablo de Olavide); Mario Solís-García (Macalester College)
    Abstract: We investigate the causes underlying the decline in the government expenditure multiplier after the Korean War. While this phenomenon has been documented before, we look at the decrease in relative multiplier values through the lens of a structural DSGE model, which we estimate using Bayesian methods and annual-frequency data from 1939 to 2017. The model replicates the observed fall in the expenditure multiplier; moreover, using a counterfactual exercise we show that the decline is accounted, for the most part, by changes in two of the model’s structural parameters, namely, a decline in consumption habit persistence and a higher autocorrelation of the public expenditure processes. Taken together, these changes imply a stronger negative wealth effect (over consumption), a lower discretion of U.S. fiscal policy and, consequently, a multiplier of smaller magnitude.
    Keywords: business cycles, military expenditure, government multipliers.
    JEL: E32 E62 H56
    Date: 2020–10
  5. By: Edoardo Palombo (Queen Mary University of London)
    Abstract: The objective of this paper is to investigate the effectiveness of credit easing policy in mitigating the economic fallout from a financial recession using a model that can account for the observed default and leverage dynamics during the financial crisis of 2007. A general equilibrium model is developed with a financial sector and endogenous asset defaults able to account for the observed default and leverage dynamics. Following an adverse aggregate shock, banks deleverage through two channels: (i) higher non-performing loans provisions, and (ii) lower the marginal return of assets. Credit policy is modelled as an expansion of the central bank’s balance sheet countering the disruption in private financial intermediation. Unconventional monetary policy, namely credit easing policy, is shown to be ineffective in mitigating the effects of a financial crisis due to its crowding out effect on the private asset market. Other non-monetary policy tools such as credit subsidies and their efficacy considered.
    Keywords: unconventional monetary policy, credit easing, credit subsidies, financial frictions, default, leverage, financial sector.
    JEL: E20 E32 E44 E52 E58
    Date: 2020–06–25
  6. By: Filippo Occhino
    Abstract: When the COVID-19 crisis hit the economy in 2020, the Federal Reserve responded with numerous programs designed to prevent a collapse in bank credit and firms’ available funds. I develop a dynamic general equilibrium model to study how these programs work and to evaluate their effectiveness. In the model, quantitative easing works through three channels: the expansion of bank reserves lowers a liquidity premium, the purchase of assets lowers a volatility risk premium, and the economic stimulus lowers a credit risk premium. Since bank reserves are currently larger than in the past, the liquidity premium channel is weaker, and quantitative easing is less effective. Direct lending to firms at a market rate is also less effective. Direct lending to firms at a subsidized rate can be more stimulative than quantitative easing, provided that it lowers firms’ marginal borrowing rate and user cost of capital.
    Keywords: Quantitative easing; credit easing; liquidity premium; risk premium; COVID-19
    JEL: E32 E43 E51 E52 E58
    Date: 2020–10–05
  7. By: Celso José Costa Jr (Department of Economics, State University of Ponta Grossa); Alejandro Garcia-Cintado (Department of Economics, Pablo de Olavide University); Karlo Marques (Department of Economics, State University of Ponta Grossa)
    Abstract: We build a three-country DSGE model to address the economic fallout from the COVID-19 shock with and without the economic authorities’ reaction. In the latter case, three different scenarios are drawn: optimistic, baseline, and pessimistic scenarios. We find that the pandemic brings about a prolonged economic depression in the pessimistic scenario, as GDP and hours worked fall by 20% (from trend) and they never recover their pre-crisis levels over the span of time studied. Interestingly, the supply-side effects dominate the demand-side ones, which leads to inflationary pressures on a temporary basis. In the base scenario, output and hours worked decline by 10% and deflation kicks in, but the economy goes back to the initial steady-state faster than in the preceding setting, roughly after two years. As for the optimistic one, the effects of the shock on output and hours worked are relatively mild and short-lived. We then move on to analyze the effectiveness of a collection of fiscal and monetary policy tolos in curbing the recessionary consequences of the pandemic. The most powerful instruments are government purchases and expansionary monetary policy, although these two measures come with some trade-offs. A labor-income tax cut can also play an important role in helping the economy return to its steady-state levels. The remaining tax policies seem to have small effects on the economy.
    Keywords: Pandemic, Taxation, Public spending, Monetary policy, DSGE model.
    JEL: E59 E60 E62 H00 I10
    Date: 2020–04
  8. By: Mauricio Ulate
    Abstract: In the aftermath of the Great Recession, many countries used low or negative policy rates to stimulate the economy. These policies gave rise to a rapidly growing literature that seeks to understand and quantify their impact. A fundamental step when studying the effectiveness of low and negative policy rates is to understand their transmission to loan and deposit rates. This paper proposes two models of pass-through from policy rates to loan and deposit rates that can match important stylized facts while remaining parsimonious. These models can be used to study the transition between positive and negative policy rates and to quantify the impact of negative rates on banks.
    Keywords: Negative Interest Rates; ZLB; Monetary Policy; Bank Profitability
    JEL: E32 E44 E52 E58 G21
    Date: 2020–09–09
  9. By: Pratiti Chatterjee; Fabio Milani
    Abstract: What are the effects of beliefs, sentiment, and uncertainty, over the business cycle? To answer this question, we develop a behavioral New Keynesian macroeconomic model, in which we relax the assumption of rational expectations. Agents are, instead, boundedly rational: they have a finite-planning horizon, and they learn about the economy over time. Moreover, we allow agents to have a potentially asymmetric loss function in forecasting, which creates a direct channel for expected variances to affect the economy. In forming expectations, agents may be subject to shifts in optimism and pessimism (sentiment) and their beliefs may be influenced by their perceptions about future uncertainty. We estimate the behavioral model using Bayesian methods and exploit a large number of subjective expectation series (both point and density forecasts) at different horizons from the Survey of Professional Forecasters. We find that sentiment shocks are the key source of business cycle fluctuations. Shifts in perceived uncertainty can also affect real activity and inflation through a confidence channel, as they play an important role in belief formation. Overall, the results shed light on the importance of behavioral forces over the business cycles, and on the contribution and interaction of first-moment - sentiment - shocks versus second-moment - perceived uncertainty - shocks.
    Keywords: uncertainty shocks, sentiment, animal spirits, learning, behavioural New Keynesian model, sources of business cycle fluctuations, observed survey expectations, optimism and pessimism in business cycles, probability density forecasts
    JEL: C32 E32 E50 E52
    Date: 2020
  10. By: Leonardo N. Ferreira (Queen Mary University of London)
    Abstract: Central banks have usually employed short-term rates as the main instrument of monetary policy. In the last decades, however, forward guidance has also become a central tool for monetary policy. In an innovative way this paper combines two sources of extraneous information-high frequency surprises and narrative evidence-with sign restrictions in a structural vector autoregressive (VAR) model to fully disentangle the e ects of forward guidance shocks from the e ects of conventional monetary policy shocks. Results show that conventional monetary policy has the expected e ects even in a recent US sample, in contrast with the evidence reported by Barakchian and Crowe (2013) and Ramey (2016), and that forward guidance is an e ective policy tool. In fact, it is at least as strong as conventional monetary policy.
    Keywords: Forward Guidance, Monetary Policy, Narrative Sign Restrictions, High-frequency identification
    JEL: E30 E32 E43 E52 E58 C11 C50
    Date: 2020–09–15
  11. By: E Philip Davis; Dilruba Karim; Dennison Noel
    Abstract: Against the background of the policy interest in the interaction of monetary policy and macroprudential policy, we present empirical estimates of effects of macroprudential policies alongside monetary policy on banks' interest rate margins (net interest income/average assets). This is an important determinant of banks' profitability and accordingly their ability to accumulate capital, as well as a key aspect of the transmission mechanism of monetary policy. To our knowledge, such an analysis has not been undertaken in the research literature to date. The empirical results for a sample of over 1,300 banks from 15 advanced countries over 2000-13 suggest that the level and difference of interest rates and the yield curve affect the margin, in line with existing work. Meanwhile a number of macroprudential policy measures have an effect on the margin, firstly when they are introduced, secondly in levels and thirdly when leveraged in combination with the level of the interest rate. Some differences are found in the response of small and large banks to macroprudential policy but less so for monetary policy. We contend that these results are of considerable relevance to policymakers and regulators, notably in gauging the overall stance of macroeconomic policy.
    Keywords: macroprudential policy, monetary policy, short term interest rate, yield curve, bank interest margin
    JEL: E44 E58 G17 G28
    Date: 2020–10
  12. By: Michael T. Kiley
    Abstract: COVID-19 has depressed economic activity around the world. The initial contraction may be amplified by the limited space for conventional monetary policy actions to support recovery implied by the low level of nominal interest rates recently. Model simulations assuming an initial contraction in output of 10 percent suggest several policy lessons. Adverse effects of constrained monetary policy space are large, changing a V-shaped rebound into a deep U-shaped recession absent large-scale Quantitative Easing (QE). Additionally, the medium-term scarring on economic potential can be large, and mitigation of such effects involves persistently accommodative monetary policy to support investment and long-run productive capacity. The simulations also illustrate the importance of coordinating QE and interest rate policy. Finally, the simulations, conducted within a model developed prior to the pandemic, illustrate limitations in economists’ understanding of QE and the channels through which shocks like a pandemic affect medium-term economic performance.
    Keywords: Quantitative easing; Effective lower bound; Unconventional monetary policy;
    JEL: E52 E58 E44 E37
    Date: 2020–10–07
  13. By: Alvaro Fernandez-Gallardo; Ivan Paya
    Abstract: It is now widely accepted that monetary authorities should have a mandate to safeguard financial stability and that macroprudential policies should be an integral part of such a mandate. However, our understanding of the effectiveness of macroprudential policies and their impact on monetary policy target variables and, more broadly, on macroeconomic outcomes, is still limited. This paper addresses that gap and examines the development and impact of macroprudential policies in the euro area. The contribution of the paper is twofold. First, we construct a novel index that captures the stance of the macroprudential policy and we highlight its main stylised facts since the inception of the euro in 1999. Second, we employ a combination of a narrative approach and a structural VAR method to identify both unanticipated and anticipated exogenous variations in macroprudential policies. Our results show that unanticipated or surprise shocks and anticipated or news macroprudential policy shocks exhibit differentiated effects on macroeconomic variables and that they both contribute over the medium term to safeguard financial stability. We also nd significant linkages between monetary and macroprudential policies over a sample period that includes events such as the great financial crisis and the sovereign debt crisis.
    Keywords: macroprudential policy, financial stability, euro area, monetary policy
    JEL: E58 E61
    Date: 2020
  14. By: Uddin, Md Akther; Ali, Md Hakim; Radwan, Maha
    Abstract: In this paper, we investigate Islamic monetary policy and proposes an alternative monetary policy instrument, namely gross domestic products (GDP) growth link instrument. The modeling techniques applied are ordinary least square (OLS) and the method is applied to a dataset of 99 countries for the year 2012 and time series data for Malaysia over the period of 1983-2013. Moreover, six months (January – June 2014) daily data on Islamic and conventional interbank rates are used for the correlational study. The results tend to show that GDP growth rate adjusted for interest income and inflation can be set as a benchmark for money market instruments and reference rate for financial and capital market to set the cost of capital or rate of return. Also, we found that real interest rate is mostly not representative across 99 countries as most of the time policy rates are either determined in the money market which is usually disintegrated with the real sector of an economy, or it is fixed by the Central Bank. Islamic and conventional money market rates are found significantly correlated in the presence of dual banking system. Moreover, inflation and employment rate in the Organisation of Islamic Cooperation (OIC) countries are found higher than non-OIC countries. Therefore, the interest rate should be replaced with more representative policy rate like the GDP growth rate linked instrument which could provide a benchmark rate for pricing products in Islamic commercial banking, and an avenue for investment in the Islamic financial market.
    Keywords: Real Economy, Islamic Monetary Policy, Real Interest Rate, GDP Growth Rate, Inflation, Real Exchange Rate, Gross Savings
    JEL: E42 E52 E58
    Date: 2019–08–29
  15. By: Parui, Pintu
    Abstract: Considering a stock-flow consistent neo-Kaleckian macro-model, along with firms' debt dynamics, in the long-run, we incorporate portfolio dynamics of rentiers and investigate the possibility of multiple equilibria and dynamic stability of the economy. Both the debt-led and the debt-burdened demand and growth regimes are possible. We find share buybacks, under certain conditions, not only may lead to the deterioration of the equilibrium rate of capital accumulation in the long-run but may potentially destabilize the entire economy. A strictly regulated financial market is desirable, as otherwise, the economy may lose its stability and produces the limit cycles.
    Keywords: Capital Accumulation, Kaleckian Model, Stock-flow Consistency, Instability, Limit Cycle
    JEL: C62 E12 E32 E44 O41
    Date: 2020–09–11
  16. By: Andrey Alexandrov
    Abstract: I derive a set of new analytic results for the effects of trend inflation on aggregate price and output dynamics in menu cost models. I find that positive trend inflation: (1) induces asymmetry in price and output responses to monetary shocks, (2) leads to price overshooting after large shocks, and (3) destroys the monetary neutrality result for large shocks. Under positive trend inflation, large expansionary monetary interventions lead to output contractions, and smaller expansionary interventions have substantially reduced potency. Using U.S. sectoral data, I provide supporting evidence for these model predictions. Calibrating a general equilibrium model to the U.S. economy, I find sizable effects of trend inflation on monetary stabilization policy. Raising the inflation target from 2% to 4% increases the economy's sensitivity to an adverse markup shock and worsens the stabilization trade-off.
    Keywords: trends, asymmetry, trend inflation, aggregate dynamics
    JEL: E32 E52
    Date: 2020–10
  17. By: Joerg Bibow
    Abstract: This paper revisits Keynes's writings from Indian Currency and Finance (1913) to The General Theory (1936) with a focus on financial instability. The analysis reveals Keynes's astute concerns about the stability/fragility of the banking system, especially under deflationary conditions. Keynes's writings during the Great Depression uncover insights into how the Great Depression may have informed his General Theory . Exploring the connection between the experience of the Great Depression and the theoretical framework Keynes presents in The General Theory , the assumption of a constant money stock featuring in that work is central. The analysis underscores the case that The General Theory is not a special case of the (neo-)classical theory that is relevant only to "depression economics"--refuting the interpretation offered by J. R. Hicks (1937) in his seminal paper "Mr. Keynes and the Classics: A Suggested Interpretation." As a scholar of the Great Depression and Federal Reserve chairman at the time of the modern crisis, Ben Bernanke provides an important intellectual bridge between the historical crisis of the 1930s and the modern crisis of 2007-9. The paper concludes that, while policy practice has changed, the "classical" theory Keynes attacked in 1936 remains hegemonic today. The common (mis-)interpretation of The General Theory as depression economics continues to describe the mainstream's failure to engage in relevant monetary economics.
    Keywords: John Maynard Keynes; Great Depression; Financial Crises; Central Banks; Interest Rates; Monetary Theory
    JEL: B2 B3 E44 E58 E65 G01
    Date: 2020–10
  18. By: Christopher M. Gunn; Alok Johri; Marc-Andre Letendre
    Abstract: We uncover new facts: U.S. banks countercyclically vary the ratio of charge-offs to defaulted loans (COD). The variance of this ratio is roughly 15 times larger than that of GDP. Canonical financial accelerator models cannot explain this variance. We develop an expression for the wedge between charge-offs and defaults in the model and show that introducing stochastic default costs as in Gunn and Johri (2013a) and stochastic risk as in Christiano et al. (2014) into the canonical theoretical model can potentially resolve the discrepancy since both shocks have the ability to move this wedge. Estimating the augmented model using Bayesian techniques reveals that default cost shocks account for most of the variance of COD, while risk shocks account for most of the credit spread. Both shocks also matter for standard U.S. business cycle variables, with the anticipated components of each being most important.
    Keywords: Charge-offs and defaults; default cost shocks; news shocks; risk shocks; financial accelerator models; business cycles
    JEL: E3 E44
    Date: 2020–10
  19. By: Karl-Friedrich Israel; Gunther Schnabl
    Abstract: Since the 1980s inflationary pressures seem to materialize overproportionately outside of the sectors of consumer goods and services. We combine the Harmonized Index of Consumer Prices with indices for asset prices, such as stocks and real estate, as well as the costs of public goods to develop alternative inflation measures in Germany since the introduction of the euro. Real economic growth as well as median wage developments are reexamined in light of the alternative inflation estimates. Both turn out to be negative over the past decade in the most pessimistic scenarios.
    Keywords: inflation, harmonized index of consumer prices, hidden inflation, assets prices, costs of public goods, inflation targeting, monetary policy, real wages, real economic growth, Germany
    JEL: E31 E52 E58 O11
    Date: 2020
  20. By: Frohm, Erik (Monetary Policy Department, Central Bank of Sweden)
    Abstract: This paper presents a novel measure of labor market conditions based on micro data from a large business survey in Sweden. The indicator, relative labor shortages (RLS), is the ratio of respondents’ quantitative assessment of labor shortages and current employment. Contrary to other surveybased measures of labor market conditions and the vacancy-unemployment ratio, RLS remained relatively subdued during the 2013-2018 recovery from the Great Recession. As the indicator is highly correlated with annual wage growth at the establishment-level, its slow recovery can help explain why wage growth in Sweden has been sluggish since the Great Recession.
    Keywords: Wage inflation; labor shortages; survey data
    JEL: C80 E31 E60 J23 J31
    Date: 2020–09–01
  21. By: Whelsy BOUNGOU
    Abstract: Does the lending channel of monetary policy operate under a negative interest rate policy (NIRP)? The purpose of this study is to shed light on the existence of a lending channel of monetary policy under NIRP. To do so, we aim to provide an in-depth analysis of the relationship between NIRP and bank-lending behavior. To achieve this, we employ a large panel dataset of 4072 banks operating in 54 countries over the period 2009-2018 and a Difference-in-Differences methodology. We find that banks located in countries affected by negative interest rates have adjusted their bank-lending behavior by increasing lending activities. Our findings suggest that in response to negative interest rates, banks have reduced their lending cost, and increased lending supply, especially for loans longer than 3 months. Finally, we also find that the transmission of monetary policy under negative interest rates to the real economy depends on banks' specific characteristics such as reliance on retail deposits and size.
    Keywords: Negative interest rates; Lending cost; Lending supply; Lending maturity; Difference-in-Differences estimation
    JEL: E43 E51 E52 F34 G21
    Date: 2020
  22. By: Uddin, Md Akther
    Abstract: This chapter reviews critical early literature of Islamic monetary economics. The prohibition of Riba has imposed challenges on Islamic economists to come up with the viable alternatives to achieve Islamic monetary policy goals. Our extensive review of theoretical and empirical literature indicates that equity based profit- and loss-sharing instruments have been proposed for conducting open market operations in an interest-free economy. Theoretically, the central bank can achieve desired goals by controlling money supply and profit-sharing ratios. The findings from empirical literature suggest that money demand tend to be more stable in an interest-free economy. Whether monetary transmission works through Islamic banking channel is controversial, but the literature is growing. These findings are not surprising as majority Muslim countries lack sustainable and equitable economic growth. Moreover, these countries suffer from higher inflation and unemployment with little or no monetary freedom due to fixed exchange rate regime, shallow financial markets and strict capital control.
    Keywords: Islamic monetary policy, interest-free economy, monetary policy instruments
    JEL: E42 E52 E58
    Date: 2019
  23. By: Manuel Gonzalez-Astudillo; Jean-Philippe Laforte
    Abstract: We estimate the natural rate of interest (r*) using a semi-structural model of the U.S. economy that jointly characterizes the trend and cyclical factors of key macroeconomic variables such as output, the unemployment rate, inflation, and short- and long-term interest rates. We specify a monetary policy rule and an equation that characterizes the 10-year Treasury yield to exploit the information provided by both interest rates to infer r*. However, the use of a monetary policy rule with a sample that spans the Great Recession and its aftermath poses a challenge because of the effective lower bound. We devise a Bayesian estimation technique that incorporates a Tobit-like specification to deal with the censoring problem. We compare and validate our model specifications using pseudo out-of-sample forecasting exercises and Bayes factors. Our results show that the smoothed value of r* declined sharply around the Great Recession, eventually falling below zero, and has remained negative since then. Our results also indicate that obviating the censoring would imply higher estimates of r* than otherwise.
    Keywords: Natural rate of interest; Natural unemployment rate; Output gap; Shadow interest rate;
    JEL: C32 C34 E32
    Date: 2020–10–08
  24. By: Claudio Sardoni (Department of Social Sciences and Economics, Sapienza University of Rome)
    Abstract: The paper criticizes the so-called Ricardian equivalence (RE) and its implications for the analysis of the problem of the public debt. It is argued that the validity of the RE hinges on an unsatisfactory view of the economic role of the state as a mere `parasite' and on an unwarranted extension of the micro-economic analysis of debts to the macro-economic level. When dealing with the problem of the ratio of the public debt to GDP, the acceptance of the RE translates into the assumption that the economy's rate of growth is independent of public spending, taxes and debt. On the grounds of the critique of the RE, the paper presents a differ- ent approach, based on the idea that an adequate composition of public spending can ensure a stable public debt ratio even though the government runs a primary deficit. According to such approach, public outlays should be mostly devoted to productive expenditures, i.e. those which a ect the equilibrium rate of growth thanks to their positive impact on overall productivity.
    JEL: E21 E62 E60 H30 H54 H60
    Date: 2020–09
  25. By: Terry J. Fitzgerald; Callum Jones; Mariano Kulish; Juan Pablo Nicolini
    Abstract: The empirical literature on the stability of the Phillips curve has largely ignored the bias that endogenous monetary policy imparts on estimated Phillips curve coefficients. We argue that this omission has important implications. When policy is endogenous, estimation based on aggregate data can be uninformative as to the existence of a stable relationship between unemployment and future inflation. But we also argue that regional data can be used to identify the structural relationship between unemployment and inflation. Using city-level and state-level data from 1977 to 2017, we show that both the reduced form and the structural parameters of the Phillips curve are, to a substantial degree, quite stable over time.
    Keywords: Endogenous monetary policy; Stability of the Phillips curve
    JEL: E52 E58
    Date: 2020–10–07
  26. By: Rolf Färe (Department of Economics, Oregon State University and Department of Agricultural and Resource Economics, University of Maryland, USA); Valentin Zelenyuk (School of Economics and Centre for Efficiency and Productivity Analysis (CEPA) at The University of Queensland, Australia)
    Abstract: The goal of this paper is to investigate the question of importance of Fisher aggregation of the Paasche and Laspeyres versions of Malmquist quantity and productivity indexes from both theoretical and empirical perspectives. We discuss existing justification and provide an alternative theoretical justification based on results from functional equations literature. We also use real data (from Kumar and Russell (2002, American Economic Review)) to illustrate how dramatic the differences in conclusions can be in practice depending on whether one employs Laspeyres or Paasche productivity indexes.
    Keywords: Fisher, Laspeyres, Paasche, Malmquist, Productivity Indexes
    JEL: D24 E22 E23 E24 O47
    Date: 2020–06
  27. By: Sangyup Choi (Yonsei Univ); Junhyeok Shin (Yonsei Univ)
    Abstract: This study is an attempt to investigate whether household indebtedness influences the macroeconomic effects of the U.S. tax policy. We apply a state-dependent local projection method to the exogenous tax shock series by Romer and Romer (2010) and find that a tax cut strongly stimulates the output when households are highly indebted. The expansionary effect of a tax cut in the period of high household debt is particularly significant for (i) consumption than investment; (ii) a personal income tax than a corporate income tax; (iii) during bad times than good times. These findings support household indebtedness as a measure of liquidity constraint for wealthy hand-to-mouth households at the macro-level. In response to a tax cut, households increase (decrease) labor supply when they are highly indebted (not indebted). This lack of a neoclassical wealth effect further contributes to an increase in the output. The state-dependent effects of tax policy, which influence the disposable income of the household directly, are more notable than those of the government spending policy, lending further support to the role of the household liquidity constraint channel of tax policy.
    Keywords: Tax policy; Household debt; Liquidity constraints; Nonlinearity; Local projections
    JEL: E32 E62 H30
    Date: 2020–10
  28. By: Rafiq, Shuddhasattwa
    Abstract: This paper projects house and equity prices following different types of macroeconomic shocks since the 1870s in 17 western economies. In doing so, we classify macroeconomic downturns into three distinct groups: normal recessions, financial recessions, and disasters. By combining three newly available historical data sets spanning 143 years and by employing local projection technique, this study finds that financial recessions have the most detrimental effect and cause substantial decreases in house prices, stock prices and construction costs. Post-crisis stock price declines are observed through the whole sample period, but both house prices and construction costs were the most vulnerable to crises after WWII. The study also finds that stock prices drop substantially immediately after financial crises and rebound within four to six years, while shocks to house prices are more persistent. This asymmetry of persistence and magnitude of shocks among housing and equity prices might have had a substantial impact on post-recession wealth re-distribution since WWII as lower and middle class families are more likely to have their wealth invested in a home rather than in other financial investments like stocks.
    Keywords: Financial crisis, Normal recessions, House prices, Stock prices, Local projection.
    JEL: E5 E52 E58 G12 R31
    Date: 2020–07
  29. By: Oliver Holtemöller; Alexander Kriwoluzky; Boreum Kwak
    Abstract: We disentangle the effects of monetary policy announcements on real economic variables into an interest rate shock component and a central bank information shock component. We identify both components using changes in interest rate futures and in exchange rates around monetary policy announcements. While the volatility of interest rate surprises declines around the Great Recession, the volatility of exchange rate changes increases. Making use of this heteroskedasticity, we estimate that a contractionary interest rate shock appreciates the dollar, increases the excess bond premium, and leads to a decline in prices and output, while a positive information shock appreciates the dollar, decreases prices and the excess bond premium, and increases output.
    Keywords: Monetary policy, central bank information shock, identification through heteroskedasticity, high-frequency identification, proxy SVAR
    JEL: C36 E52 E58
    Date: 2020
  30. By: Palma, J. G.
    Abstract: The analysis will focus on how the traditional Kindlebergian financial-crisis cycle of “manias, panics and crashes” has been twisted so that now policymakers make sure that any panic is immediately followed by a renewed mania. Due to a “secular-stagnationists”-style thinking, central bankers, treasury officials and politicians - the ‘new alchemists’ - now believe that only a perpetual-mania can deliver some resemblance of growth. So, they persist in pumping liquidity and relaxing monetary conditions, no matter how much this violates every possible principle of markets economics, and regardless of the fact that the current policies to reactivate mature economies (rocketing the net-worth of a few individuals) have already been tried and failed post-2008. One by-product of this new perpetual-mania is that emerging markets have become what I have labelled “the financial markets of last resort”, and commodities “the financial asset of last resort”. That is, most emerging markets now don’t have to put up anymore with international finance being a “sellers” market (where they had to knock and beg); now, it is the international speculator who has been pushed into a yield-chasing frenzy in emerging markets. This new “buyers” market has proved to be a mixed blessing for emerging markets, as many of them have joined the ‘everything rally’ - in which you have nothing to lose but your real economy.
    Keywords: manias, panics, financialisation, QE, excess liquidity, ‘disconnect’ between the financial and the real worlds, emerging markets, Latin America, Asia, Keynes, Kindleberger, Minsky, Buchanan
    JEL: E22 D70 D81 E24 E51 F02 F21 F32 F40 F44 F63 G15 G20 G28 G30 G38 L51 N20 O16
    Date: 2020–10–08
  31. By: Kartik B. Athreya; Ryan Mather; Jose Mustre-del-Rio; Juan M. Sanchez
    Abstract: In this paper we show that household-level financial distress (FD) varies greatly and can increase vulnerability to economic shocks. To do this, we establish three facts: (i) regions in the United States vary significantly in their “FD-intensity,” measured either by how much additional credit households can access or how delinquent they are on debts, (ii) shocks that are typically viewed as “aggregate” in nature hit geographic areas quite differently, and (iii) FD is an economic “pre-existing condition”: the share of an aggregate shock borne by a region is positively correlated with the level of FD present at the time of the shock. Using an empirically disciplined and institutionally rich model of consumer debt and default, we show that in the shocks dealt by the Great Recession and the initial months of the COVID-19 pandemic, FD had quantitative significance for consumption. Our model suggests that the uneven distribution of FD creates widely varying consumption responses to shocks. This is true even when subjecting regions with differing levels of FD to the same shocks.
    Keywords: Consumption; Credit card debt; Bankruptcy; Recession; Foreclosure; Mortgages; Delinquency; Financial distress; Geography
    JEL: D31 D58 E21 E44 G11 G12 G21
    Date: 2020–10–05
  32. By: Gruber, Noam
    Abstract: Prolonged rapid growth, i.e. a "catching-up" process, is known to be accompanied by high rates of household saving. This phenomenon is central in explaining the direction of international capital flows and trade imbalances in the past several decades, yet it is very much in contradiction to prevailing macroeconomic theory. This paper finds that a standard life-cycle model, even when integrated with uncertainty about future growth and credit constraints, is completely unable to replicate the relations between growth and saving as seen in the data. However, adding utility from relative consumption to the model allows for the full replication of these relations.
    Keywords: Life Cycle, Saving Growth, Open Economy Growth, Household Saving, Life Cycle Models and Saving, Relative Income Hypothesis
    JEL: D91 E21 F43 O11
    Date: 2020–10–06
  33. By: Jean-Luc Gaffard (OFCE Sciences-Po; Université Côte d'Azur; GREDEG CNRS; Institut Universitaire de France)
    Abstract: La crise sanitaire et son impact immédiat sur l’économie sont tout à fait inédits. Il n’empêche que ces événements sont révélateurs de distorsions existantes qu’ils amplifient. Les mesures requises de politique économique doivent satisfaire une double exigence, celle de stabilisation immédiate et celle de transformation structurelle. Il convient, certes, de massivement soutenir financièrement entreprises et ménages. Mais ce serait un leurre et une faute que de croire pallier ainsi les difficultés structurelles quitte à augmenter sans limite dépenses et dettes publiques, ou de persister, sans l’avouer ouvertement, dans la mise en œuvre des politiques dites de compétitivité et de flexibilité. La crise sanitaire devrait agir comme détonateur des réformes institutionnelles à même de permettre aux différents acteurs de sécuriser leurs choix à long terme et de construire l’avenir en commun.
    Keywords: Court et long terme, institutions, politique économique, rupture structurelle
    JEL: E02 E20 E30 E60
    Date: 2020–10
  34. By: Rafael Guntin; Pablo Ottonello; Diego Perez
    Abstract: We study crises characterized by large adjustments of aggregate consumption through their microlevel patterns. We show that leading theories designed to explain aggregate consumption dynamics differ markedly in their cross-sectional predictions. While theories based on financial frictions predict that rich households with liquid assets should be able to smooth consumption during bad times, neoclassical theories predict that these agents would optimally adjust their consumption if crises severely affect their permanent income. Using microlevel data on several episodes of large aggregate-consumption adjustment, we document that rich households significantly adjust consumption relative to their income, consistent with the permanent-income hypothesis of consumption during crises. We discuss our findings' implications for the effectiveness of stabilization policies that target consumption during crises.
    JEL: E21 E60 F41 F44
    Date: 2020–10
  35. By: Razzak, Weshah
    Abstract: We estimate a VAR, which summarizes the dynamics of five variables, the real price of oil, the long-run real interest rate, real GDP, the primary fiscal balance-GDP, and debt-GDP. We make dynamic stochastic projections and use the data to compute the annual primary fiscal balance required to achieve a particular debt-GDP target over the period from the end of the sample in 2018 to 2024. For Oman to achieve a debt-GDP target between 60 to 20 percent in 2024, it has to increase its annual primary fiscal balance by about OR 4 Billion (USD 10.4 Billion) either by increasing revenues, decrease expenditures, or both. This figure increases substantially if Oman wants to achieve the target earlier than 2024.
    Keywords: External debt, fiscal balance, fiscal adjustment
    JEL: E6 E62 H6
    Date: 2020–10–08
  36. By: Doojav, Gan-Ochir; Damdinjav, Davaasukh
    Abstract: This paper examines the effects of a mortgage interest rate subsidy on boom and bust in the housing market by exploiting the Housing Mortgage (HM) program implemented in Mongolia. Main results are (i) the recent housing boom occurred from 2012Q2 to 2014Q1, while the housing bust lasted four years, (ii) both house-specific factors and macroeconomic variables have a significant influence on the housing price dynamics, (iii) mortgage interest rate semi-elasticity and real household income elasticity for Mongolia are estimated as -3.0 and 1.4, respectively, and (iv) dynamic analysis of the estimated VECMs suggests that the policy intervention in the mortgage market (i.e., introducing an interest rate subsidy on mortgage loans for buying residential properties with below 80 square meters) has driven the recent housing boom in Mongolia.
    Keywords: House prices, Booms and busts, Mortgage interest-rate subsidy,Mongolia
    JEL: C53 D14 E32 E51 G21 R21 R31
    Date: 2019
  37. By: Leandro Prados de la Escosura (Universidad Carlos III and CEPR)
    Abstract: The rising trend in the capital-output ratio and the productivity slowdown have put capital back in the economist’s agenda. This paper contributes to the debate by providing new estimates of net capital stock and services for Spain over the last 170 years. The net capital (wealth) stock-GDP ratio rose over time and doubled in the last half-a-century. Capital services grew fast over the long-run accelerating in the 1920s and from the mid-1950s to 2007. Until 1975 its acceleration was helped by an increase in the ‘quality’ of capital. Capital deepening proceeded steadily, accelerating during 1955-1985, and slowing down thereafter for expanding sectors attracted less investment-specific technological progress. Although capital consumption rose over time, the rate of depreciation fell from 1970 to 2007 as new capital goods’ relative prices declined due to embodied technological change.
    Keywords: Capital Stock and Services, Capital Deepening, Capital- output ratio, Spain
    JEL: D24 E01 E22 N33 N34
    Date: 2020–10
  38. By: Natsuki Arai (National Chengchi University)
    Abstract: This paper examines whether the individual economic projections made by the Federal Open Market Committee’s (FOMC) policymakers are consistent with macroeconomic theories: Okun’s law, the Phillips curve, and the Taylor rule. By analyzing the FOMC’s individual economic projections between 2007 and 2014, I find that they are consistent with Okun’s law, revealing a significantly negative relationship between unemployment and output growth projections. On the other hand, the relationship between inflation and unemployment projections associated with the Phillips curve is much weaker and more dispersed. The results on the FOMC’s reaction function, the Taylor rule, are mixed: The response of the projections of the federal funds rate against the inflation gap projections—the deviation of inflation projections from the target—is significantly positive, whereas the response against the corresponding output gap projections varies depending on the specification.
    Keywords: FOMC, Individual Economic Projections, Okun’s law, Phillips Curve,Taylor rule
    JEL: C32 C53 E58
    Date: 2020–10
  39. By: Bayari, Celal
    Abstract: South Korea has had a continuous engagement with significant trade, investment and security matters simultaneously in its relations with other nations. South Korea’s bilateralism with China is a part of a larger milieu which China has been constructing, that includes the Belt and Road Initiative (BRI) and the Asian Infrastructure Investment Bank (AIIB). South Korea has become a member of the AIIB in December 2015 and it has not joined the BRI. The discussion here also concerns South Korea-China FTA agreement’s aftermath. China is a nation with a very broad range of regional, intraregional and global ambitions and strategies. Undoubtedly, the East Asian security framework has an overbearing impact on the trade and investment environment. Moreover, the relations between Seoul and Pyongyang are relevant to the economic and political developments in East Asia. There are earlier discussions of the structure of the US-South Korea and China-North Korea alliances and there is also prior coverage of the effects of China on North Korean economy and the consequences for South Korea, neither of which will not be recapped here due to lack of space. South Korea, together with the US, Japan, North Korea, China and Russia, has been engaged in a long process of negotiations in several ‘six party talks’ since 2003, to bring a lasting peace to the Korean Peninsula, which have not, as yet, led to a final outcome, as has been the case with the series of the US and North Korean disarmament talks that originated in 1994. While these issues are relevant to the larger context of the topic, in this discussion, the focus is on the South Korean economic model and business systems and its interaction with the Chinese economy and the 2015 FTA and the Chinese business systems.
    Keywords: South Korean economy, Chaebols, China, FTA, Belt and Road Initiative, global value chains
    JEL: A2 B5 B52 E23 E30 E44 E6 F1 F10 F11 F12 F13 F14 F15 F16 F23 F43 F44 F5 G15 G18 G2 G21 G24 H1 H13 H5 H54 H77 J2 J21 J24 J31 J42 K2 K21 K23 L1 L11 L12 L13 L14 L16 M1 M13 O11 O14 O15 O19 P1 P12 P13 P16 P2 P23 P31 P32 P33 P36 P37
    Date: 2020–05–14
  40. By: Michael Pedersen
    Abstract: The replies to a questionnaire that was sent to the participants in the Chilean Financial Traders Survey (FTS) reveal heterogeneity in how they make their forecasts. There are also differences in how the traders understand questions regarding the future monetary policy rate (MPR); some of them answer what they think the central bank will do, while others what they think it should do. The FTS is distinctive from similar surveys in the sense that it is conducted immediately before and after the monetary policy meetings. This study employs a novel dataset that consists of FTS micro observations to assess the extent to which heterogeneity in the replies to the questionnaire affects how agents take into account MPR surprises when updating their inflation expectations. While the should-do traders incorporate MPR surprises in their one-year-ahead inflation expectations, it is not evident that will-do respondents do so. This could imply that the “model” traders have in mind includes an endogenous MPR path, which is not necessarily in accordance with what they think the central bank is going to do in the short run. The baseline estimates suggest that agents that merely base their forecasts on models do not seem to factor in MPR surprises in their inflation expectations updates, but small sample corrected standard errors indicate that the should-do traders might. On the other hand, for those that use information only from financial markets, only the will-do traders adjust inflation expectations in response to MPR surprises, which could be because asset prices incorporate what the market thinks the central bank is going to do. Two-years-ahead inflation expectations are not affected by MPR surprises. The results help to understand heterogeneity in forecasters’ inflation updates and stress the importance of understanding on what basis survey respondents answer the questions.
    Date: 2020–09
  41. By: Christopher Roth (University of Warwick); Sonja Settele (CEBI, Department of Economics, University of Copenhagen); Johannes Wohlfart (CEBI, Department of Economics, University of Copenhagen)
    Abstract: We conduct an experiment with a representative sample from the US to study households' demand for macroeconomic information. Respondents who learn of a higher personal exposure to unemployment risk during recessions increase their demand for an expert forecast about the likelihood of a recession. Our findings are consistent with the basic premise of theories of rational inattention that demand for information depends on its expected benefit. Moreover, the fact that perceived risk exposure responds to information highlights frictions in households' knowledge about the personal relevance of particular pieces of information. Our findings inform the modeling of information frictions in macroeconomics.
    Keywords: Risk Exposure, Macroeconomic Conditions, Information Acquisition, Experiment
    JEL: D12 D14 D83 D84 E32 G11
    Date: 2020–09–21
  42. By: Ray Barrell; Dilruba Karim
    Abstract: Policy makers need to know if the structure of competition and the degree of banking market concentration change the incidence of financial crises. Previous studies have not always come to clear conclusions. We use a new dataset of 19 countries where we include capital adequacy and house price growth as factors affecting crisis incidence, and we find a positive role for bank concentration in reducing incidence. In addition, we look at New Industrial Economics indicators of market structure and find that increased market power also reduces crisis incidence. We conclude that attempts to increase competition in banking, although welcome for welfare reasons, should be accompanied by increases in capital standards.
    Keywords: Financial Stability, Bank Competition, Banking Crises, Macroprudential Policy
    JEL: E44 G01 G18
    Date: 2020–10
  43. By: David M. Arseneau
    Abstract: An endogenous financial crisis is introduced into the canonical model used to study central bank transparency. The central bank is endowed with private information about the real economy and credit conditions which jointly determine financial vulnerabilities. An optimal choice is made regarding whether to communicate this information to the public. A key finding is that the optimal communication strategy depends on the state of the credit cycle and the \ composition of shocks driving the cycle. From a policy perspective, this raises the possibility that central bank communication in the presence of a financial stability objective faces a time inconsistency problem.
    Keywords: Financial stability report; Information disclosure; Survey of economic projections; Time inconsistency problem; Transparency
    JEL: G18 E58 E61
    Date: 2020–10–13
  44. By: Simplice A. Asongu (Yaounde, Cameroon); Samba Diop (Alioune Diop University, Bambey, Senegal); Joseph Nnanna (The Development Bank of Nigeria, Abuja, Nigeria)
    Abstract: The purpose of this study is to understand how countries have leveraged on their economic resilience to fight the Covid-19 pandemic. The focus is on a global sample of 150 countries divided into four main regions, namely: Africa, Asia-Pacific and the Middle East, America and Europe. The study develops a health vulnerability index (HVI) and leverages on an existing economic resilience index (ERI) to provide four main scenarios from which to understand the problem statement, namely: ‘low HVI-low ERI’, ‘high HVI-low ERI’, ‘high HVI-high ERI’ and ‘low HVI-high ERI’ quadrants. It is assumed that countries that have robustly fought the pandemic are those in the ‘low HVI-high ERI’ quadrant and to a less extent, countries in the ‘low HVI-low ERI’ quadrant. Most European countries, one African country (i.e. Rwanda), four Asian countries (Japan, China, South Korea and Thailand) and six American countries (USA, Canada, Uruguay, Panama, Argentina and Costa Rica) are apparent in the ideal quadrant.
    Keywords: Novel coronavirus, health vulnerability, economic resilience
    JEL: E10 E12 E20 E23 I10 I18
    Date: 2020–09
  45. By: Hiona Balfoussia (Bank of Greece); Heather D. Gibson (Bank of Greece); Dimitris Malliaropulos (Bank of Greece and University of Piraeus); Dimitris Papageorgiou
    Abstract: We explore the economic impact of the pandemic and the importance of real and financial sector linkages in this context. We explicitly model the financial sector and trace its role in propagating the pandemic shocks. We find that the pandemic-induced adverse labour supply shock can have sizable effects on the real economy, which are further propagated through the banking sector. Moreover, the contemporaneous pandemic-induced financial shock has financial, but also real effects, including high and protracted firm bankruptcies as well as a more fragile banking sector, thus hindering the financing of the real economy. The duration of the pandemic matters for its impact on the macroeconomy, as both business investment and bank balance sheets take disproportionately longer to recover. Our findings underline the need for well-targeted policy measures to support the real economy and, secondarily, the financial sector during the pandemic and provide justification for several of the policy initiatives recently taken by governments, central banks and regulatory institutions around the world.
    Keywords: COVID-19; pandemic; lockdown; social distancing; uncertainty; propagation
    JEL: E2 E3 E5 G1
    Date: 2020–09
  46. By: Mahdi Ebsim; Miguel Faria-e-Castro; Julian Kozlowski
    Abstract: We compare the evolution of corporate credit spreads during the Great Recession and the COVID-19 pandemic. The two crises featured increases of similar magnitudes in the median and cross-sectional dispersion of credit spreads, but the pandemic was short-lived and different sectors were affected. The micro-data reveal larger differences between the two episodes: the Great Recession featured an increase in the across-firm dispersion, and leverage was an important predictor of credit spreads. Differently, the COVID-19 crisis displayed a larger increase in within-firm dispersion, and funding liquidity was a more important predictor of movements in spreads. These findings suggest that, at the corporate level, the Great Recession was primarily a solvency crisis, while COVID-19 was a liquidity crisis.
    Keywords: Credit Spreads; Great Recession; COVID-19
    JEL: E44 G12 G32
    Date: 2020–10–09
  47. By: Ryo Arawatari (Graduate School of Economics, Doshisha University); Takeo Hori (Department of Industrial Engineering and Economics, School of Engineering Tokyo Institute of Technology); Kazuo Mino (Institute of Economic Research, Kyoto University)
    Abstract: This paper examines the relationship between productive government expenditure and economic growth. An R&D-based model of endogenous growth is used in which agents have heterogeneous entrepreneurial abilities. We show that if the entrepreneurial ability follows a long- and fat-tailed distribution, then the relationship between government ex-penditure/ GDP and economic growth rate is depicted by an inverted U-shaped curve with a flat top. The flat top indicates that government size change has a limited impact on growth. We calibrate the model to U.S. data and empirically confirm the above theoretical prediction.
    Keywords: endogenous growth, government expenditure, heterogeneous agents, nonlinear relationship
    JEL: E62 O40
    Date: 2020–10
  48. By: Pierre-Richard Agénor; Timothy P. Jackson; Luiz Pereira da Silva
    Abstract: A two-region, core-periphery model with financial frictions, imperfect financial integration, and cross-border banking is used to assess the gains from international macroprudential policy coordination. A core global bank lends to its affiliates in the periphery and banks are subject to a risk-sensitive capital regulatory regime. An expansionary monetary policy in the core is used to illustrate how lending costs, countercyclical capital buffers (which respond to real credit growth), and regulatory arbitrage affect cross-border bank capital flows, under both economies and diseconomies of scope in domestic and foreign lending by the global bank. Welfare gains are calculated for three policy regimes: independent policies (Nash), coordination, and reciprocity–where capital ratios set in the core region are also imposed in the periphery. Coordination generates significant gains at the level of the world economy, and these gains increase with the degree of international financial integration. However, their distribution tends to be highly asymmetric. Under certain circumstances, reciprocity may generate higher gains than independent policies for the world economy, despite the reciprocating jurisdiction (the periphery) being invariably worse off.
    JEL: E58 F42 F62
    Date: 2020–09
  49. By: Emilio Carnevali; Matteo Deleidi
    Abstract: This paper is focused on Modern Monetary Theory's (MMT) treatment of inflation from an open economy perspective. It analyzes how the inflation process is explained within the MMT framework and provides empirical evidence in support of this vision. However, it also makes use of a stock-flow consistent (open economy) model to underline some limits of the theory when it is applied in the context of a non-US (relatively) open economy with a flexible exchange rate regime. The model challenges the contention made by MMTers that measures such as the job guarantee program can achieve full employment without facing an inflation-unemployment trade-off.
    Keywords: Central Banking; Post-Keynesian; Open Economy Model; Modern Money Theory
    JEL: E51 E12 F41
    Date: 2020–10
  50. By: John C. Williams
    Abstract: Remarks at the Hoover Institution Monetary Policy Virtual Series: The Road Ahead for Central Banks (delivered via videoconference).
    Keywords: inflation; monetary policy; unemployment; employment; dual mandate; framework; interest rates; COVID-19; pandemic; expectations; r-star; Federal Reserve
    Date: 2020–10–07
  51. By: Cem Cakmakli (Koc University, Istanbul, Turkey); Hamza Demircan (Central Bank of the Republic of Turkey, Istanbul, Turkey)
    Abstract: We provide a methodology that efficiently combines the statistical models of nowcasting with the survey information for improving the (density) nowcasting of US real GDP. Specifically, we use the conventional dynamic factor model together with a stochastic volatility component as the baseline statistical model. We augment the model with information from the survey expectations by aligning the first and second moments of the predictive distribution implied by this baseline model with those extracted from the survey information at various horizons. Results indicate that survey information bears valuable information over the baseline model for nowcasting GDP. While the mean survey predictions deliver valuable information during extreme events such as the Covid-19 pandemic, the variation in the survey participants’ predictions, often used as a measure of ‘ambiguity’, conveys crucial information beyond the mean of those predictions for capturing the tail behavior of the GDP distribution.
    Keywords: Dynamic factor model; Stochastic volatility; Survey of Professional Forecasters; Disagreement; Predictive density evaluation; Bayesian inference.
    JEL: C32 C38 C53 E32 E37
    Date: 2020–10
  52. By: Gabriel Chodorow-Reich; Olivier Darmouni; Stephan Luck; Matthew C. Plosser
    Abstract: Using loan-level data covering two-thirds of all corporate loans from U.S. banks, we document that SMEs (i) obtain much shorter maturity credit lines than large firms; (ii) have less active maturity management and therefore frequently have expiring credit; (iii) post more collateral on both credit lines and term loans; (iv) have higher utilization rates in normal times; and (v) pay higher spreads, even conditional on other firm characteristics. We present a theory of loan terms that rationalizes these facts as the equilibrium outcome of a trade-off between commitment and discretion. We test the model's prediction that small firms may be unable to access liquidity when large shocks arrive using data on drawdowns in the COVID recession. Consistent with the theory, the increase in bank credit in 2020Q1 and 2020Q2 came almost entirely from drawdowns by large firms on pre-committed lines of credit. Differences in demand for liquidity cannot fully explain the differences in drawdown rates by firm size, as we show that large firms also exhibited much higher sensitivity of drawdowns to industry-level measures of exposure to the COVID recession. Finally, we match the bank data to a list of participants in the Paycheck Protection Program (PPP) and show that SME recipients of PPP loans reduced their non-PPP bank borrowing in 2020Q2 by between 53 and 125 percent of the amount of their PPP funds, suggesting that government-sponsored liquidity can overcome private credit constraints.
    JEL: E51 G21 G32
    Date: 2020–10
  53. By: Brian Hartley (Department of Economics, New School for Social Research)
    Abstract: To assess the conditional stability properties of the Kaleckian growth framework in the mediumrun, we investigate behavioral corridors where investment will be unresponsive to departures of actual from desired utilization rates - thus providing for the episodic incidence of Harrodian instability. We empirically assess this relationship using two-state Markov-Switching Structural Vector Auto-Regression t on non-residential xed investment and the rate of capacity utilization for the United States. To directly assess the relevance of a behavioral corridor for the cyclical dynamics of the endogenous variables, the probabilities governing the transition between hidden states are modelled as a time-varying function of gap between realized utilization rates and their long-run average. Results suggest the response of investment to structural utilization shocks is highly regime-dependent and predominantly occurs during business cycle downturns.
    Keywords: Kaleckian Growth Model, Growth and Distribution, Harrodian Instability, Hidden Markov Models, Structural Vector Auto-Regression, Bayesian Econometrics
    JEL: B50 C11 E11
    Date: 2020–10
  54. By: Aditya Goenka; Lin Liu; Manh-Hung Nguyen
    Abstract: This paper studies optimal quarantines (can also be interpreted as lockdowns or selfisolation) when there is an infectious disease with SIS dynamics and infections can cause disease related mortality in a dynamic general equilibrium neoclassical growth framework. We characterize the optimal decision and the steady states and how these change with changes in effectiveness of quarantine, productivity of working from home, contact rate of disease and rate of mortality from the disease. A standard utilitarian welfare function gives the counter-intuitive result that increasing mortality reduces quarantines but increases mortality and welfare while economic outcomes and infections are largely unaffected. With an extended welfare function incorporating welfare loss due to disease related mortality (or infections generally) however, quarantines increase, and the decreasing infections reduce mortality and increase economic outcomes. Thus, there is no optimal trade-off between health and economic outcomes. We also study sufficiency conditions and provide the first results in economic models with SIS dynamics with disease related mortality - a class of models which are non-convex and have endogenous discounting so that no existing results are applicable
    Keywords: Infectious diseases, Covid-19, SIS model, mortality, sufficiency conditions, economic growth, lockdown, quarantine, self-isolation
    JEL: E13 E22 D50 D63 I10 I15 I18 O41 C61
    Date: 2020–09
  55. By: Luis Felipe Céspedes; Roberto Chang
    Abstract: We study the interaction between optimal foreign reserves accumulation and central bank international liquidity provision in a small open economy under financial stress. Firms and households finance investment and consumption by borrowing from domestic financial intermediaries (banks), which in turn borrow from abroad. Binding financial constraints can cause the domestic rate of interest to rise above the world rate and the real exchange rate to depreciate, leading to inefficiently low investment and consumption. A role then emerges for a central bank that accumulates reserves in order to provide liquidity if financial frictions bind. The optimal level of international reserves in this context depends, among other variables, on the term premium, the depth of financial markets, ex ante financial uncertainty and the precise way the central bank intervenes. The model is consistent with both the increase in international reserves observed during the period 2004-2008 and with policy intervention after the Lehman bankruptcy.
    JEL: E5 F3 F4
    Date: 2020–10
  56. By: Mathieu Pedemonte
    Abstract: This paper shows how policy announcements can be used to manage expectations and have a role as a policy tool. Using regional variation in radio exposure, I evaluate the impact of President Franklin D. Roosevelt’s 1935 Fireside Chat, in which he showcased the introduction of important social policies, establishing a new cycle of the New Deal. I document that cities with higher exposure to the announcement exhibited a significant increase in spending on durable goods. I provide evidence that this result is not driven by wealth or other potentially confounding variables. The estimated effect is consistent with changes in expectations toward the policies announced. This paper shows the power of communication as a policy tool in affecting economic activity.
    JEL: E21 D84 N32
    Date: 2020–10–06
  57. By: Mary Amiti; Oleg Itskhoki; Jozef Konings
    Abstract: Using new data on currency invoicing for Belgian firms, we analyze how firms make their currency choice, for both exports and imports, and the implications of this choice for exchange rate pass-through into prices and quantities. We derive our estimating equations from a theoretical framework featuring variable markups, international input sourcing, and staggered price setting with endogenous currency choice. Our structural specification provides a new test of the allocative consequences of nominal rigidities, by estimating the treatment effect of foreign-currency price stickiness on the dynamic response of prices and quantities, controlling for the endogeneity of the firm's currency choice. We show that flexible-price determinants of exchange rate pass-through are also the key firm characteristics that determine currency choice. In particular, small non-importing firms tend to price their exports in euros (producer currency) and exhibit complete exchange-rate pass-through into destination prices at all horizons. In contrast, large import-intensive firms tend to denominate their exports in foreign currencies, especially in the US dollar, exhibiting a lower pass-through of the euro-destination exchange rate and a pronounced sensitivity to the dollar-destination exchange rate. The effects of foreign-currency price stickiness are still significant beyond the one-year horizon, but gradually dissipate in the long run.
    JEL: E31 F31 F41
    Date: 2020–10
  58. By: Samba Diop (Alioune Diop University, Bambey, Senegal); Simplice A. Asongu (Yaoundé, Cameroon)
    Abstract: This exploratory study aims to assess Africa’s lagging position in global heath in relation to some health care infrastructure before critically examining the situation of Africa in the light of pressing Covid-19 healthcare infrastructural needs in terms of number of hospital beds, intensive care units (ICU) beds and ventilators per 100 000 people. A comparative analysis is provided to showcase which regions are leading in the health facilities in the world in general and Africa in particular as well as countries that are lagging in the attendant healthcare facilities. Analytical insights are provided to illustrate that the Covid-19 pandemic has revealed how Africa cannot reach most Sustainable Development Goals (SDGs), especially SDG-3 on health and wellbeing. Moreover, corresponding inferences suggest that the continent is unprepared for future pandemics in terms of health facilities.
    Keywords: Novel coronavirus, Socio-economic effects; Africa
    JEL: E10 E12 E20 E23 I10 I18
    Date: 2020–06
  59. By: Ben Zhe Wang; Jeffrey Sheen; Stefan Tr\"uck; Shih-Kang Chao; Wolfgang Karl H\"ardle
    Abstract: Monthly disaggregated US data from 1978 to 2016 reveals that exposure to news on inflation and monetary policy helps to explain inflation expectations. This remains true when controlling for household personal characteristics, perceptions of government policy effectiveness, future interest rates and unemployment expectations, and sentiment. We find an asymmetric impact of news on inflation and monetary policy after 1983, with news on rising inflation and easier monetary policy having a stronger effect in comparison to news on lowering inflation and tightening monetary policy. Our results indicate the impact on inflation expectations of monetary policy news manifested through consumer sentiment during the lower bound period.
    Date: 2020–09
  60. By: J. Scott Davis; Kevin X. D. Huang; Ayse Sapci
    Abstract: Changes in housing demand can have a macroeconomic effect through the collateral channel, where the change in residential real estate prices is associated with a change in commercial real estate prices, affecting firm collateral and thus firm investment. We argue that this channel is weaker when residential and commercial real estate are poor substitutes. Using cross-state heterogeneity in the strength of zoning regulations as a proxy for heterogeneity in the substitutability of residential and commercial real estate, we first show with firm level data that the strength of local zoning regulations has a negative effect on the estimated increase in firm investment following an increase in local residential real estate prices. We then construct a DSGE model where land has both residential and commercial uses and estimate it using Bayesian techniques and U.S. macroeconomic data. We find the average elasticity of substitution between commercial and residential real estate in the U.S. to be around 0.35, but in states with strong zoning restrictions it can be as low as 0.16 and in states with weak zoning restrictions it can be as high as 0.66. Simulations of the model show how these differences in zoning restrictions can affect the transmission of a housing demand shock to the macroeconomy.
    Keywords: Commercial real estate; residential real estate; housing demand shock; zoning
    JEL: R10 R30 E30
    Date: 2020–09–28
  61. By: Alexander Chudik; Kamiar Mohaddes; M. Hashem Pesaran; Mehdi Raissi; Alessandro Rebucci
    Abstract: This paper develops a threshold-augmented dynamic multi-country model (TG-VAR) to quantify the macroeconomic effects of COVID-19. We show that there exist threshold effects in the relationship between output growth and excess global volatility at individual country levels in a significant majority of advanced economies and in the case of several emerging markets. We then estimate a more general multi-country model augmented with these threshold effects as well as long-term interest rates, oil prices, exchange rates and equity returns to perform counterfactual analyses. We distinguish common global factors from trade-related spillovers, and identify the COVID-19 shock using GDP growth forecast revisions of the IMF in 2020Q1. We account for sample uncertainty by bootstrapping the multi-country model estimated over four decades of quarterly observations. Our results show that the COVID-19 pandemic will lead to a significant fall in world output that is most likely long-lasting, with outcomes that are quite heterogenous across countries and regions. While the impact on China and other emerging Asian economies is estimated to be less severe, the United States, the United Kingdom and several other advanced economies may experience deeper and longer-lasting effects. Non-Asian emerging markets stand out for their vulnerability. We show that no country is immune to the economic fallout of the pandemic because of global interconnections as evidenced by the case of Sweden. We also find that long-term interest rates could fall significantly below their recent lows in core advanced economies, but this does not seem to be the case in emerging markets.
    Keywords: Threshold-augmented Global VAR (TGVAR); international business cycle; COVID-19; global volatility; threshold effects
    JEL: C32 E44 F44
    Date: 2020–10–02
  62. By: Kladivko, Kamil (Örebro University School of Business); Österholm, Pär (Örebro University School of Business)
    Abstract: In this paper, we evaluate households’ directional forecasts of inflation and the unemployment rate in Sweden. The analysis is conducted using monthly forecasts from the National Institute of Economic Research’s Economic Tendency Survey that range from January 1996 until August 2019. Results indicate that households have statistically significant ability to forecast where the unem-ployment is headed, but they fail in predicting the direction of future inflation.
    Keywords: Survey data; Directional forecasts; Inflation; Unemployment
    JEL: E37
    Date: 2020–10–09
  63. By: Hans-Eggert Reimers; Friedrich Schneider; Franz Seitz
    Abstract: We analyze for the first time cash holdings of private households in all euro area countries from 2002 to 2019 within a panel cointegration framework. Besides the traditional determinants of cash demand like transactions balances and opportunity costs, we concentrate on cashless payments media as substitutes to cash payments and the role of the shadow economy. Moreover, we take due account of country-specific repercussions of the financial and economic crisis of 2008/09, time series properties and distinguish between small and large countries. We find a significant and positive relationship among households' cash holdings, the volume of transactions and the size of the shadow economy irrespective of country size for all euro area countries over our sample period. Additionally, there is a substitution relationship between the accessibility and availability of cashless payments media and cash demand. And a decreasing number of ATMs reduces cash holdings. These results have important political and financial implications.
    Keywords: cash, cashless payments, shadow economy, cash demand function, panel cointegration
    JEL: C23 E41 E58
    Date: 2020
  64. By: John M. Coglianese; Brendan M. Price
    Abstract: Joblessness is highly seasonal. To analyze how households adapt to seasonal joblessness, we introduce a measure of seasonal work interruptions premised on the idea that a seasonal worker will tend to exit employment around the same time each year. We show that an excess share of prime-age US workers experience recurrent separations spaced exactly 12 months apart. These separations coincide with aggregate seasonal downturns and are concentrated in seasonally volatile industries. Examining workers most prone to seasonal work interruptions, we find that these workers incur large earnings losses during the off-season. Lost earnings are (i) driven mainly by repeated separations from the same employer; (ii) not recouped at other firms; (iii) partly offset by unemployment benefits; and (iv) amplified by concurrent drops in partners' earnings. On net, household income falls by about 80 cents for each $1 lost in own earnings.
    Keywords: Seasonality; Seasonal employment; Job loss; Household income; Household labor dynamics; Unemployment; Unemployment insurance
    JEL: D10 E32 J63
    Date: 2020–10–07
  65. By: Sylvie Rivot (BETA)
    Abstract: The paper shows how Friedman gradually came to incorporate the expectations formation process in his account of macroeconomic disequilibria. It is shown that Friedman's early Monetarism relies on slowly adjusting prices and wages, mainly because of long-term contracts. When he first addressed the expectations issue in his work macroeconomic dynamics Friedman actually considered static expectations. In the mid-1960s his anticipationist critique of the Phillips curve led Friedman to place at the centre of the analysis the idea that private agents progressively adjust their forecasts to a new informational environment. Nevertheless, adaptive expectations involve backward-looking behaviour regarding the price structure, without taking account of the probable effect of discretionary policy on the economy in the future; hence economic agents make systematic forecasting errors. Friedman eventually considered forward-looking behaviour in the 1970s but stopped short of fully embracing the rational expectations approach to economic policy. In Friedman's later Monetarism there is an echo of Friedman's early joint work with Savage regarding attitudes towards risk based on the subjective probability approach. But this is the residual outcome of a very lengthy process.
    Keywords: Friedman, adaptive expectations, rational expectations, static expectations, dynamics, monetary economy
    JEL: B22 B31
    Date: 2020–10
  66. By: Jane E. Ihrig; Zeynep Senyuz; Gretchen C. Weinbach
    Abstract: Note 1 and Note 2 in this three-part series described how the Federal Reserve (or Fed) implements monetary policy in normal times, with an ample quantity of reserves in the banking system. In this third and final Note in our series, we take a detour in light of current circumstances and describe how the Fed operates amid a crisis—when facing severely strained economic or financial circumstances, or both.
    Date: 2020–10–02
  67. By: Zhu, Tao; Wallace, Neil
    Abstract: There is a presumption that fixed and flexible (floating or market-determined) exchange-rate systems are equivalent if prices are flexible. We show that the presumption does not hold in two matching models of money. In both models, (i) currencies are the only assets and all trade is spot trade; (ii) the trades that directly determine welfare occur in pairwise meetings between buyers and sellers; and (iii) imperfect substitutability (including, as a special case, no substitutability) among currencies is a consequence of the trading protocol in those meetings. The two models are variants of the Lagos-Wright (2005) model and differ regarding the timing of the shock realizations relative to the centralized trade opportunities. One version has a speculative fringe. In it, the unique stationary (monetary) equilibrium under the fixed exchange-rate regime is one of a continuum of equilibria under a flexible exchange-rate regime. The other version has no speculative fringe. In it, there is a unique (monetary) stationary equilibrium under each exchange-rate regime and they differ.
    Keywords: Matching models of money; exchange-rate regimes
    JEL: E4 F3 F31
    Date: 2020–09–13
  68. By: Alexander Chudik; Kamiar Mohaddes; M. Hashem Pesaran; Mehdi Raissi; Alessandro Rebucci
    Abstract: This paper develops a threshold-augmented dynamic multi-country model (TG-VAR) to quantify the macroeconomic effects of Covid-19. We show that there exist threshold effects in the relationship between output growth and excess global volatility at individual country levels in a significant majority of advanced economies and in the case of several emerging markets. We then estimate a more general multi-country model augmented with these threshold effects as well as long term interest rates, oil prices, exchange rates and equity returns to perform counterfactual analyses. We distinguish common global factors from trade-related spillovers, and identify the Covid-19 shock using GDP growth forecast revisions of the IMF in 2020Q1. We account for sam-ple uncertainty by bootstrapping the multi-country model estimated over four decades of quarterly observations. Our results show that the Covid-19 pandemic will lead to a significant fall in world output that is most likely long-lasting, with outcomes that are quite heterogenous across countries and regions. While the impact on China and other emerging Asian economies are estimated to be less severe, the United States, the United Kingdom, and several other advanced economies may experience deeper and longer-lasting effects. Non-Asian emerging markets stand out for their vulnerability. We show that no country is immune to the economic fallout of the pandemic because of global interconnections as evidenced by the case of Sweden. We also find that long-term interest rates could fall significantly below their recent lows in core advanced economies, but this does not seem to be the case in emerging markets.
    Keywords: threshold-augmented global VAR (TGVAR), international business cycle, Covid-19, global volatility, threshold effects
    JEL: C32 E44 F44
    Date: 2020
  69. By: Arno Botha; Conrad Beyers; Pieter de Villiers
    Abstract: A novel procedure is presented for the objective comparison and evaluation of a bank's decision rules in optimising the timing of loan recovery. This procedure is based on finding a delinquency threshold at which the financial loss of a loan portfolio (or segment therein) is minimised. Our procedure is an expert system that incorporates the time value of money, costs, and the fundamental trade-off between accumulating arrears versus forsaking future interest revenue. Moreover, the procedure can be used with different delinquency measures (other than payments in arrears), thereby allowing an indirect comparison of these measures. We demonstrate the system across a range of credit risk scenarios and portfolio compositions. The computational results show that threshold optima can exist across all reasonable values of both the payment probability (default risk) and the loss rate (loan collateral). In addition, the procedure reacts positively to portfolios afflicted by either systematic defaults (such as during an economic downturn) or episodic delinquency (i.e., cycles of curing and re-defaulting). In optimising a portfolio's recovery decision, our procedure can better inform the quantitative aspects of a bank's collection policy than relying on arbitrary discretion alone.
    Date: 2020–09
  70. By: Frederik P. Schlingemann; René M. Stulz
    Abstract: The firms listed on the stock market in aggregate as well as the top market capitalization firm contribute less to total non-farm employment and GDP now than in the 1970s. A major reason for this development is the decline of manufacturing and the growth of the service economy as firms providing services are less likely to be listed on exchanges. We develop quantitative measures of representativeness showing how firms’ market capitalizations differ from their contribution to employment and GDP. Representativeness is worst when the market is most highly valued and worsens over time for employment, but not for value added.
    JEL: E44 G23 G32 K22 L16
    Date: 2020–10
  71. By: Hsu, Wen-Tai (School of Economics, Singapore Management University); Lin, Hsuan-Chih (Luke) (Institute of Economics, Academia Sinica); Yang, Han (Institute of Economics, Academia Sinica)
    Abstract: This paper studies optimal containment policy for combating a pandemic in an open-economy context. It does so via quantitative analyses using a model that incorporates a standard epidemiological compartmental model in a multi-country, multi-sector Ricardian model of international trade with full-fledged input-output linkages. We devise a novel approach in computing optimal national policies in the long run, and contrast these policies with a baseline in which countries maintain their current policies until vaccine availability. The welfare gains under optimal policies are asymmetric as the gains for the set of countries which should tighten up the containment measures are much larger than those which should relax. We also find that the welfare implications of optimal policies in open economies differ significantly from those in closed ones.
    Keywords: COVID-19; pandemic; welfare analysis; containment policy; optimal policy; open economy; trade; input-output linkages
    JEL: E27 F11 F40 I18
    Date: 2020–10–05
  72. By: Nix, Emily (University of Southern California.)
    Abstract: To produce output for a firm, coworkers often interact. This paper examines the possibility that as a byproduct of these interactions, there are learning spillovers: coworkers learn general skills from each other that increase future productivity. In the first part of t he paper I show t hat learning spillovers imply externalities in the return to human capital which firms may not internalize when there is asymmetric information. As a result, individuals may inefficiently invest in their own education. Next, I show that learning spillovers are empirically relevant. Using matched administrative data from Sweden and a combination of fixed effects and controls to address bias from worker sorting and firm heterogeneity, I find that increasing the average education of a given worker’s coworkers by 10 percentage points increases that worker’s wages in the following year by 0.3%, which is significant at the 1% level. The effect is persistent, decreases with age, and is higher for workers in occupations where they interact more regularly with their coworkers.
    Keywords: Human Capital Accumulation; Diffusion of Knowledge; Learning
    JEL: E24
    Date: 2020–09–24
  73. By: Banu Demir Pakel; Beata Smarzynska Javorcik; Tomasz K. Michalski; Evren Ors
    Abstract: This study finds that even small unexpected supply shocks propagate downstream through production networks and are amplified by firms with short-term financial constraints. The unexpected 2011 increase in the tax on imports purchased with foreign-sourced trade credit is examined using data capturing almost all Turkish supplier-customer links. The identification strategy exploits the heterogeneous impact of the shock on importers. The results indicate that this relatively minor, non-localized shock had a non-trivial economic impact on exposed firms and propagated downstream through affected suppliers. Additional empirical tests, motivated by a simple theory, demonstrate that low-liquidity firms amplified its transmission.
    Keywords: production networks, shock transmission, financing constraints, liquidity
    JEL: F14 F61 G23 L14 E23
    Date: 2020
  74. By: H.E. Dr. Majid Al Moneef; Fakhri Hasanov (King Abdullah Petroleum Studies and Research Center)
    Abstract: Fiscal policy lies at the heart of key macroeconomic and budgetary decisions and is central to understanding the dynamics of oil rich economies. Fiscal multipliers, including spending multipliers, indicate how changes to fiscal policy can stimulate economic growth, to what magnitude, and how efficiently, making them valuable tools for macroeconomic planning and analysis.
    Keywords: Fiscal multipliers, Non-oil Private GDP, VAR analysis
    Date: 2020–10–05
  75. By: Emmanuel Saez; Gabriel Zucman
    Abstract: This paper studies inequality in America through the lens of distributional macroeconomic accounts—comprehensive distributions of the aggregate amount of income and wealth recorded in the official macroeconomic accounts of the United States. We use these distributional macroeconomic accounts to quantify the rise of income and wealth concentration since the late 1970s, the change in tax progressivity, and the direct redistributive effects of government intervention in the economy. Between 1978 and 2018, the share of pre-tax income earned by the top 1% rose from 10% to about 19% and the share of wealth owned by the top 0.1% rose from 7% to about 18%. In 2018, the tax system was regressive at the top end; the top 400 wealthiest Americans paid a lower average tax rate than the macroeconomic tax rate of 29%. We confront our methods and findings with those of other studies, pinpoint the areas where more research is needed, and describe how additional data collection could improve inequality measurement.
    JEL: D31 H20
    Date: 2020–10
  76. By: Edoardo Palombo (Queen Mary University of London)
    Abstract: Following an unparalleled rise in uncertainty over the Great Recession, the US economy has been experiencing anaemic productivity growth. This paper offers a quantitative study on the link between uncertainty and low productivity growth. Firstly, using micro level data I show that uncertainty accounts for half of the drop in intangible capital stock during the Great Recession. Secondly, to investigate the effect of uncertainty on productivity growth dynamics, I present a novel general equilibrium endogenous growth model with heterogeneous firms that undertake intangible capital investment subject to non-convex costs and time-varying uncertainty. I show that uncertainty can generate slow recoveries and a persistent slowdown in productivity growth when accounting for the empirical discrepancy between the realised and expected changes to the second-moment of fundamentals.
    Keywords: Uncertainty, R&D, Innovation, Productivity, Great Recession, Intangible Capital, Slow Recoveries
    JEL: O40 O41 O51
    Date: 2020–06–25
  77. By: Orazio Attanasio; Agnes Kovacs; Patrick Moran
    Abstract: This paper presents a model of consumption behavior that explains the presence of ‘wealthy hand-to-mouth’ consumers using a mechanism that differs from those analyzed previously. We show that a two-asset model with temptation preferences generates a demand for commitment and thus illiquidity, leading to hand-to-mouth behavior even when liquid assets deliver higher returns than illiquid assets. This model fits other features of the data, such as the fact that the Marginal Propensity to Consume declines only slowly with shock size. Moreover, temptation and commitment have important policy implications: we show that housing subsidies and mandatory mortgage amortization increase household savings.
    JEL: D11 D14 D91 E21 R21
    Date: 2020–10
  78. By: He, Sicheng
    Abstract: My dissertation studies how financial frictions affect economy, especially macroeconomy.Chapter 2 studies the potential for rational bubbles in the innovation sector to affect long term economic growth. We show that stock market prices of R&D firms could include a bubble component when credit constraints are present. Bubbles are self-sustained in equilibrium by a "liquidity" premium that originates when credit constraints are relaxed. Bubbles expand borrowing and production capacity of R&D firms, stimulate innovation and increase the growth rate. Bubbles are magnified by tighter credit constraints and scarce investment opportunities. Finally, we show that bubbles can create permanent reallocation effects benefiting the innovation sector over other sectors.Chapter 3 uses a generalized Kiyotaki and Moore model (1997) with collateral and cash-in-advance constraints to study the effects of financial and non-financial crisis and the effects of monetary policy both in the short and the long run. We then characterize optimal monetary policy in the Ramsey sense. We find that in the long run, the optimal monetary policy drives the social, but not the individual, shadow price of the collateral constraint to zero. This translates into a generalized version of the Friedman's rule, one that takes into account the degree of credit tightening. In the short run, optimal monetary policy is counter-cyclical, significantly offsetting the effects of financial shocks and reducing the welfare loss of the shocks.Chapter 4 studies the dynamics of blockchain innovation, adoption and competition in the global payment industry in the presence of a traditional technology. We build a theoretical model with network effects to study the possible evolution path of the payments industry, how a particular technology can gain and lose its market share and whether there exist some technology which can maintain its dominant power. We also study the role of bubbles, and show that they have positive and negative effect on the social welfare.
    Date: 2019–01–01
  79. By: Samba Diop (Alioune Diop University, Bambey, Senegal); Simplice A. Asongu (Yaoundé, Cameroon); Joseph Nnanna (The Development Bank of Nigeria, Abuja, Nigeria)
    Abstract: The study complements the extant literature by constructing Covid-19 economic vulnerability and resilience indexes using a global sample of 150 countries which are categorized into four principal regions, namely: Africa, Asia-Pacific and the Middle East, America and Europe. Seven variables are used for the vulnerability index and nine for the resilience index. Both regions and sampled countries are classified in terms of the two proposed and computed indexes. The classification of countries is also provided in terms of four scenarios pertaining to vulnerability and resilience characteristics, notably: low vulnerability-low resilience, high vulnerability-low resilience, high vulnerability-high resilience and low vulnerability-high resilience to respectively illustrate, sensitive, severe, asymptomatic and best cases. The findings are relevant to policy makers especially as it pertains to decision making in resources allocation in the fight against the global pandemic.
    Keywords: Novel coronavirus, Economic vulnerability, Economic resilience
    JEL: E10 E12 E20 E23 I10 I18
    Date: 2020–10
  80. By: Mariam Camarero Author-X-Name-Mariam (Department of Economics, University Jaume I and INTECO); Josep Lluís Carrión-i-Silvestre (Department of Econometrics, Statistics and Spanish Economy, University of Barcelona); Cecilio Tamarit (Department of Applied Economics II, University of Valencia and INTECO)
    Abstract: In this paper we study the drivers governing external disequilibria through a Global VAR (GVAR) analysis applied to a group of 24 countries during the period 1972-2017. The GVAR methodology is particularly well suited for our research question. First, it permits to measure the effects of both, domestic and foreign country-specific shocks. Second, it allows to analyze not only the long-run relationships, but also the dynamics through generalized impulse-response functions. Third, it enables to test many hypotheses from a macroeconomic perspective and the existence of spillovers. Our results show evidence of international financial integration in terms of the fulfillment of the real interest rate parity. Concerning the Twin Deficit hypothesis, we find no linkages between domestic current account and fiscal fiscal defficit. In addition, we show how German fiscal policy has relevant spillover effects on other European countries (such as France, Spain and the Netherlands) as well as on the US and India. Finally, the global shocks have long-lasting effects in most of the countries analyzed, especially through the real oil prices. These results provide some clues about how to implement a more symmetrical external adjustment, especially inside the euro area.
    Keywords: Current account, net foreign assets, twin deficit, panel data, Global VAR
    JEL: F32 F41 C23
    Date: 2020–09
  81. By: Krittika Banerjee (Indira Gandhi Institute of Development Research); Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: After the adoption of unconventional monetary policies (UMP) in advanced economies (AEs) there weremany studies of monetary spillovers to asset prices in emerging market economies (EMEs) but the extentof contribution of EMEs and AEs respectively in real exchange rate (RER) misalignments has not been addressed. Using fixed effects, pooled mean group and common correlated effects we address the gap ina cross-country panel set-up with country specific controls. Multi-way clustering is used to ensure robust statistical inferences. Robust evidence is found for significant monetary spillovers over 1998-2017 in the form of RER overvaluation of EMEs against AEs especially through the portfolio rebalancing channel. EME RER against US saw significantly more overvaluation in UMP years indicating greater role of US in monetary spillovers. However, in the long run monetary neutrality holds. EMEs did pursue mercantilist and precautionary policies that undervalued their RERs. Precautionary undervaluation is more evident with bilateral EME US RER. Export diversification reduces EME mercantilist motives against US. That AE monetary policy significantly appreciates EMERER should be kept in mind for future policy cooperation between EMEs and AEs.
    Keywords: Unconventional monetary policies, monetary spillovers, mercantilist, precautionary, pooled mean group, common correlated effects, cluster robust
    JEL: E4 E5 F3 F42
    Date: 2020–09
  82. By: Yayi Yan; Jiti Gao; Bin peng
    Abstract: Multivariate time series analyses are widely encountered in practical studies, e.g., modelling policy transmission mechanism and measuring connectedness between economic agents. To better capture the dynamics, this paper proposes a class of multivariate dynamic models with time-varying coefficients, which have a general time-varying vector moving average (VMA) representation, and nest, for instance, time-varying vector autoregression (VAR), time–varying vector autoregression moving–average (VARMA), and so forth as special cases. The paper then develops a unified estimation method for the unknown quantities before an asymptotic theory for the proposed estimators is established. In the empirical study, we investigate the transmission mechanism of monetary policy using U.S. data, and uncover a fall in the volatilities of exogenous shocks. In addition, we find that (i) monetary policy shocks have less influence on inflation before and during the so-called Great Moderation, (ii) inflation is more anchored recently, and (iii) the long-run level of inflation is below, but quite close to the Federal Reserve’s target of two percent after the beginning of the Great Moderation period.
    Keywords: multivariate time series model, nonparametric kernel estimation, trending stationarity
    Date: 2020
  83. By: Emmanuel Saez; Gabriel Zucman
    Abstract: Recent studies argue that US inequality has increased less than previously thought, in particular due to a more modest rise of wealth and capital income at the top (Smith et al., 2019; Smith, Zidar and Zwick, 2020; Auten and Splinter, 2019). We examine the claims made in these papers point by point, separating genuine improvements from arguments that do not appear to us well grounded empirically or conceptually. Taking stock of this body of work, and factoring in other improvements, we provide a comprehensive update of our estimates of US income and wealth inequality. Although some of the points raised by the revisionists are valuable, the core quantitative findings of this literature do not appear to be supported by the data. The low capital share of private business income estimated in Smith et al. (2019) is not consistent with the large capital stock of these businesses. In Smith, Zidar and Zwick (2020), the interest rate assigned to the wealthy is higher than in the datasets where both income and wealth can be observed, leading to downward biased top wealth shares; capitalizing equities using almost only dividends dramatically underestimates the wealth of billionaires relative to the Forbes 400. In Auten and Splinter (2019), business profits earned by the top 1% but not taxable (due in particular to generous depreciation rules) are classified as tax evasion; tax evasion is then allocated to the bottom 99% based on an erroneous reading of random audit data. Our revised series show a rise of inequality similar to Saez and Zucman (2016) and Piketty, Saez, and Zucman (2018) while allowing for a more granular depiction of the composition of wealth and income at the top.
    JEL: D31 E25 H26
    Date: 2020–10
  84. By: Arjan Lejour (CPB Netherlands Bureau for Economic Policy Analysis); Simon Rabaté (CPB Netherlands Bureau for Economic Policy Analysis); Maarten van 't Riet (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: As long as there have been taxes, people have tried to avoid and evade them. Interest in these phenomena has been fueled by the effects on public revenues, as well as on the distribution of wealth and income. One prominent example of tax evasion is the hiding of wealth and income in tax havens. According to estimates by Zucman (2013), 8% of global financial wealth, or $5.9 trillion, is held in tax havens. During the global financial crisis of the late 2000s, the G20 countries vowed to tackle offshore tax evasion and proclaimed the end of the “era of banking secrecy”. In recent years, leaks containing confidential information from financial institutions as well as academic research investigating leaks and tax amnesties have confirmed the popular narrative that tax evasion is concentrated among the wealthiest in society (Alstadsæter, Johannesen and Zucman, 2018, 2019). This does not only affect public revenues, but also the measurement of wealth and income inequality. We use unique microdata to study tax evasion in the Netherlands. We have received data on over 27,000 participants to the Dutch tax amnesty between the years 2002 and 2018. In addition, we have data on households who appeared in recent information requests to 4 different Swiss banks. We link these data to administrative data on income, wealth, and demographics covering the entire Dutch population.
    JEL: H26 H87 E21
    Date: 2020–10
  85. By: Andrew Clark (Department of Economics, University of Reading)
    Abstract: A longitudinal (1844-1965) study of the Pound Krona exchange rate is conducted utilizing London Times article news sentiment, gold price, GDP, and other relevant metrics to create a dynamic systems state-based model to predict the Pound Krona yearly exchange rate. The created model slightly outperforms a naive random walk forecasting model.
    Keywords: Econometrics, Machine Learning, Dynamic Systems, Complex Systems
    JEL: C32 C53 C63 E17 F31
    Date: 2020–10–09
  86. By: Hirono, Makoto; Mino, Kazuo
    Abstract: This study explores the linkage between the labor force participation of the elderly and the long-run performance of the economy in the context of a two-period-lived over- lapping generations model. We assume that the old agents are heterogeneous in their labor efficiency and they continue working if their income exceeds the pension that can be received in the case of full retirement. We first inspect the key factors that the retirement decision of the elderly. We then examine analytically as well as numeri-cally the long-run impact of labor participation of the elderly on capital accumulation.
    Keywords: retirement decision, labor force participation, population aging, pension system, capital accumulation
    JEL: E62
    Date: 2020–07–10
  87. By: Philip Sauré (Johannes Gutenberg University); Philipp Herkenhoff (Johannes Gutenberg University)
    Abstract: We show that the current account balance (CA) is systematically distorted by an inflation effect, which arises because income on foreignissued debt is recorded through nominal interest accruing in the currency of denomination. Since nominal interests include compensations for expected inflation, increases in the latter must impact the CA. Guided by the relevant international accounting rules, we impute the inflation effect for 50 economies between 1991 and 2017. When correcting for the inflation effect, the absolute value of yearly CAs drops by 0.13% of GDP on average. Over the full period, however, the impact is a sizable reduction of 22.85% of initial GDP for the average country (26.4% for the U.S.). As the flip-side of the CA distortions, the inflation effect contributes systematically to the well-known valuation effect of net foreign assets, of which about a twelfth is accounted for between 1991 and 2017 for the average country and well over half for the U.S.
    JEL: F30 F32
    Date: 2020–10–09
  88. By: Karol Mazur
    Abstract: I present a model of interaction between risk sharing and co-operation over irrigational investments in presence of limited commitment constraints and apply it to the case of farmers in rural India. I demonstrate that if access to irrigation can be regulated by villagers, the two institutions reinforce each other. However, if benefits of such investments are non-excludable (as is the case with provision by central authorities), they may harm local co-operation. Using the ICRISAT panel, I provide empirical support for the mechanism. Quantitative evaluation demonstrates significant reinforcement between the two institutions and economic losses due to sub-optimal irrigation management.
    Keywords: Risk Sharing; Limited Commitment; Village Economies; Endogenous Aggregate Risk; Irrigation; Public Goods; Endogenous Informal Institutions
    JEL: E20 O12 O11 O13 Q15
    Date: 2020
  89. By: Yannick Bury; Lars P. Feld; Ekkehard A. Köhler
    Abstract: Cooperative fiscal federalism needs a multi-level consent to decide on the allocation of intergovernmental transfers. We study how parliamentary representation of municipalities on the federal level influences the allocation of federal transfers to municipal governments under this type of federalism. Using a regression discontinuity design in close electoral races, we find that a directly elected member of the federal parliament, who belongs to the party that leads the federal government, induces higher infrastructure transfers from the federal government to a local jurisdiction. However, our results show that this effect only unfolds, if the parliamentarian’s party is simultaneously leading the state government. Moreover, we identify party competition on the local level as motive behind the strategic use of federal funds. Thus, while supporting the swing voter hypothesis, our results suggest that federalism inherently entails restrictions for misusing intergovernmental transfers for political reasons.
    Keywords: fiscal federalism, partisan alignment, vertical transfers
    JEL: H71 H72 H77 E62
    Date: 2020
  90. By: James B. Bullard
    Abstract: Federal Reserve Bank of St. Louis President James Bullard in an interview with Michael S. Derby of The Wall Street Journal laid out his optimism for the U.S. economy’s outlook and why he doesn’t see the same need for additional fiscal support from the government for the economy as his central bank colleagues. Mr. Bullard in the interview Monday also discussed how he thinks the Federal Reserve will handle policy over the near term, while flagging the economy’s ability to adapt during the coronavirus pandemic. The following transcript has been lightly edited for content and clarity.
    Keywords: economic outlook; central banking; coronavirus; COVID-19
    Date: 2020–10–06
  91. By: Eric S. Rosengren
    Abstract: President Rosengren’s comments were delivered at the Massachusetts Bankers Association’s New England Conference, and were based on a speech he delivered on September 23, 2020 to the Boston Economic Club.
    Keywords: COVID-19; pandemic; employment; fiscal policy; monetary policy; Main Street Lending Program; recovery
    Date: 2020–09–30
  92. By: James B. Bullard
    Abstract: During a virtual presentation for the Global Interdependence Center, St. Louis Fed President James Bullard said there has been substantial progress in managing the global health crisis. In addition, he noted that U.S. macroeconomic news has surprised dramatically to the upside and that economic activity will likely show outsized growth in the third quarter.
    Keywords: COVID-19
    Date: 2020–09–24
  93. By: Eric S. Rosengren
    Abstract: Clearly a deadly pandemic was bound to badly impact the economy. However, I am sorry to say that the slow build-up of risk in the low-interest-rate environment that preceded the current recession likely will make the economic recovery from the pandemic more difficult.
    Keywords: financial stability; risks; commercial real estate; economic recovery; COVID-19; public health; pandemic
    Date: 2020–10–08
  94. By: Jarociński, Marek
    Abstract: The news about the economy contained in a central bank announcement can affect public expectations. This paper shows, using both event studies and vector autoregressions, that such central bank information effects are an important channel of the transatlantic spillover of monetary policy. They account for a part of the co-movement of German and US government bond yields around Fed policy announcements, for most of this co-movement around ECB policy announcements, and significantly affect a range of financial and macroeconomic quantities on both sides of the Atlantic. These findings shed new light on the nature of central bank information. JEL Classification: E52, F31, F42
    Keywords: high-frequency identification, international policy transmission, monetary policy shocks, structural VAR
    Date: 2020–10
  95. By: Pelzl, Paul (Dept. of Business and Management Science, Norwegian School of Economics); Valderrama, Maria Teresa (Oesterreichische Nationalbank)
    Abstract: Drawdowns on credit commitments by firms reduce a bank’s capital buffer. Exploiting Austrian credit register data and the 2008-09 financial crisis as exogenous shock to bank health, we provide novel evidence that capital-constrained banks manage this concern by substantially cutting partly or fully unused credit commitments. Controlling for a bank’s capital position, we further find that also larger liquidity problems induce banks to cut such commitments. These results show that banks manage both capital and liquidity risk posed by undrawn credit commitments in periods of financial distress, but thereby reduce liquidity insurance to firms exactly when they need it most.
    Keywords: Capital Regulations; Credit Commitments; Financial Crisis
    JEL: E51 G01 G21 G28 G32
    Date: 2020–10–15
  96. By: Haroon Mumtaz (Queen Mary University of London)
    Abstract: In this note we present an updated algorithm to estimate the VAR with stochastic volatility proposed in Mumtaz (2018). The model is re-written so that some of the Metropolis Hastings steps are avoided.
    Keywords: VAR, Stochastic volatility in mean, error covariance
    JEL: C3 C11 E3
    Date: 2020–07–05
  97. By: Amavilah, Voxi Heinrich
    Abstract: An easy way of observing and predicting changes in the structure and behavior of any freemarket economy is to track changes in its circular flow model of economic activity. Using book titles as a literature review in combinations with a few classics, I describe how the circular flows of free -market economies evolved from little, gentle, and now nearly powerless government role, culminating in superduper capitalism. First the evolution generated great wealth and income, and of late also increasinginequality. Processes like globalization that allowed for econ omic convergence also spurred enormous tensions. The resulting stresses and strains are responsible for unpopular populism and nationalism. The doughnut economic model provides a reasonable framework for explaining what we observe. It shows a decline in the social foundations of human rights, made worse by breaches in the “planetary boundaries” both of which squeeze the livable space ever more tightly like a boa-constrictor suffocating its prey. In this paper I do not go as far as measuring my observations, but the directions for policy and future research have clearly been established. Regarding the latter, one may want to examine how COVID19 has shocked into scurrying towards a delusion of a system that was already slouching towards an illusion. It turns out that the illusion is not a new prediction. In his critique of Marx and rationalization of Kondratieff’s waves (K-waves) Schumpeter predicted that capitalism as an innovation is not immune to the “gale of creative destruction.”
    Keywords: Circular flow model, doughnut economic model, social foundations of human rights, inclusive and sustainable development, planetary limits, unpopular populism, super-duper capitalism
    JEL: E19 O33 O47 Y90 Z0
    Date: 2020–10–01
  98. By: James B. Bullard
    Abstract: St. Louis Fed President James Bullard shared his views on the U.S. economy, fiscal stimulus and other topics during an interview on “Barron’s Roundtable” on Fox Business.
    Keywords: stimulus
    Date: 2020–10–09
  99. By: Santiago Caicedo; Miguel Espinosa; Arthur Seibold
    Abstract: We study firm responses to a large-scale change in apprenticeship regulation in Colombia. The reform requires firms to train, setting apprentice quotas that vary discontinuously in firm size. We document strong heterogeneity in responses across sectors, where firms in sectors with high skill requirements tend to avoid training apprentices, while firms in low-skill sectors seek apprentices. Guided by these reduced-form findings, we structurally estimate firms’ training costs. Especially in high-skill sectors, many firms face large training costs, limiting their willingness to train apprentices. Yet, we find substantial overall benefits of expanding apprenticeship training, in particular when the supply of trained workers increases in general equilibrium. Finally, we show that counterfactual policies that take into account heterogeneity across sectors can deliver similar benefits from training while inducing less distortions in the firm-size distribution and in the allocation of resources across sectors.
    JEL: E24 J21 J24 M50
    Date: 2020
  100. By: de Bruin, Kelly; Monaghan, Eoin; Yakut, Aykut Mert
    Date: 2020
  101. By: Kluge, Jan (Institute for Advanced Studies, Vienna, Austria); Lappoehn, Sarah (Institute for Advanced Studies, Vienna, Austria); Plank, Kerstin (Institute for Advanced Studies, Vienna, Austria)
    Abstract: This paper aims at identifying relevant indicators for TFP growth in EU countries during the recovery phase following the 2008/09 economic crisis. We proceed in three steps: First, we estimate TFP growth by means of Stochastic Frontier Analysis (SFA). Second, we perform a TFP growth decomposition in order to get measures for changes in technical progress (CTP), technical efficiency (CTE), scale efficiency (CSC) and allocative efficiency (CAE). And third, we use BART – a non-parametric Bayesian technique from the realm of statistical learning – in order to identify relevant predictors of TFP and its components from the Global Competitiveness Reports. We find that only a few indicators prove to be stable predictors. In particular, indicators that characterize technological readiness, such as broadband internet access, are outstandingly important in order to push technical progress while issues that describe innovation seem only to speed up CTP in higher-income economies. The results presented in this paper can be guidelines to policymakers as they identify areas in which further action could be taken in order to increase economic growth. Concerning the bigger picture, it becomes obvious that advanced machine learning techniques might not be able to replace sound economic theory but they help separating the wheat from the chaff when it comes to selecting the most relevant indicators of economic competitiveness.
    Keywords: Competitiveness, TFP growth, Stochastic Frontier Analysis, BART
    JEL: C23 E24 O47
    Date: 2020–10
  102. By: Georgij Alekseev; Safaa Amer; Manasa Gopal; Theresa Kuchler; JW Schneider; Johannes Stroebel; Nils Wernerfelt
    Abstract: We analyze a large-scale survey of owners, managers, and employees of small businesses in the United States to understand the effects of the early stages of the COVID-19 pandemic on those businesses. The survey was fielded in late April 2020 among Facebook business page administrators, frequent sellers on Facebook’s e-commerce platform Marketplace, and the general Facebook user population. We observe more than 66,000 responses covering most sectors of the economy, including many businesses that had stopped operating due to the pandemic. The survey asks 136 questions covering topics such as changes in business operations and employment, changes in financing patterns, and the interaction of household and business responsibilities. We characterize the adjustments implemented to survive the pandemic and explore the key challenges to continue operating or to re-open. We show how these patterns differ across industry, firm size, owner gender, and other firm characteristics.
    Keywords: small businesses, COVID-19, working from home, small business finance
    JEL: E30 L26 M13
    Date: 2020
  103. By: Claire Greene; Joanna Stavins
    Abstract: Why do US consumers pay their bills the way they do? Using data from a recent diary of consumer payment behavior, we find that the type of bill consumers are paying and how they are paying (online or automatically) are important factors in determining the payment method, in addition to the dollar value of the bill and the demographic and income profile of the individual who is paying. In contrast, dollar value and demographic attributes are found to be the most important factors determining the payment instrument chosen for purchases. Consumer choices for bill payments are somewhat constrained by requirements imposed by merchants, while the choice of payment instrument for purchases is not constrained by such requirements. The convenience and speed provided by automatic and online payments are not benefitting all US consumers equally. Unbanked consumers lack access to most payment methods and, hence, use cash or prepaid cards to pay their bills. Low-income consumers pay their bills differently from the rest of the sample: They are more likely to pay in person, use significantly more cash, and are less likely to set up automated or online bill payments, regardless of whether they have a bank account. Although consumers specify in the diary which methods they prefer to use to pay their bills, in practice they are not likely to act consistently with their stated preferences. We find that consumers who pay their bills online are less likely to deviate from their preferred payment method, while those who pay their bills automatically are more likely to deviate, after we control for income, demographic attributes, the dollar amount of the bill, and the merchant type. We find no evidence of the salience effect of automatic bill payments that Sexton (2015) finds for energy consumption. Rather, we find that consumers who pay their bills automatically have higher incomes and spend more on bills than lower-income consumers do, but that automatic bill payments are lower in value on average, which is the opposite of the finding by Sexton (2015).
    Keywords: bill payments; payment choice; payment preferences; consumer payments
    JEL: D12 D14 E42
    Date: 2020–06–01
  104. By: Todd Keister; Yuliyan Mitkov
    Abstract: We study the interaction between a government’s bailout policy and banks’ willingness to impose losses on (or “bail in”) their investors. The government has limited commitment and may choose to bail out banks facing large losses. The anticipation of this bailout undermines a bank’s private incentive to impose a bail-in. In the resulting equilibrium, bail-ins are too small and bailouts are too large. Some banks may also face a run by informed investors, creating further distortions and leading to larger bailouts. We show how a regulator with limited information can raise welfare and improve financial stability by imposing a system-wide, mandatory bail-in at the onset of a crisis. In some situations, allowing banks to choose between meeting a minimum bail-in and opting out can raise welfare further.
    Keywords: Bank bailouts, moral hazard, financial stability, banking regulation
    JEL: E61 G18 G28
    Date: 2020–09

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