nep-mac New Economics Papers
on Macroeconomics
Issue of 2021‒05‒17
131 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Slow recoveries, endogenous growth and macroprudential policy By Bonciani, Dario; Gauthier, David; Kanngiesser, Derrick
  2. Nonlinear Search and Matching Explained By ; Alexander W. Richter; Nathaniel A. Throckmorton
  3. Monetary and Macroprudential Policy Complementarities: evidence from European credit registers By Altavilla, Carlo; Laeven, Luc; Peydró, José Luis
  4. Bewley Banks By Jamilov, Rustam; Monacelli, Tommaso
  5. Banks and Negative Interest Rates By Heider, Florian; Saidi, Farzad; Schepens, Glenn
  6. Why the Flow of Funds Don’t Explain the Flow of Funds: Sectoral Balances, Balance Sheets, and the Accumulation Fallacy By Roth, Steve
  7. The Scars of Supply Shocks By Fornaro, Luca; Wolf, Martin
  8. A Congestion Theory of Unemployment Fluctuations By Yusuf Mercan; Benjamin Schoefer; Petr Sedláček
  9. Doves for the Rich, Hawks for the Poor? Distributional Consequences of Systematic Monetary Policy By Nils Gornemann; Keith Kuester; Makoto Nakajima
  10. State-dependent pricing turns money into a two-edged sword By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick
  11. Monetary Policy, Sectoral Comovement and the Credit Channel By Federico Di Pace; Christoph Gortz
  12. CBDC: Can central banks succeed in the marketplace for digital monies? By Bofinger, Peter; Haas, Thomas
  13. Central Bank Money: Liability, Asset, or Equity of the Nation? By Allen, Jason; Bateman, Will; Gleeson, Simon; Kumhof, Michael; Lastra, Rosa M; Omarova, Saule
  14. Welfare and Output with Income Effects and Demand Instability By David Baqaee; Ariel Burstein
  15. Do exchange rates absorb demand shocks at the ZLB? By Hoffmann, Mathias; Hürtgen, Patrick
  16. A re-examination of the exchange rate – interest rate differential relationship in Ghana By Ofori, Isaac Kwesi; Armah, Mark Kojo
  17. Portugal’s fiscal policy choices during the pandemic: a preliminary evaluation By Paul de Grauwe
  18. Data Revisions and the Effects of Monetary Policy Volatility By Kamalyan, Hayk
  19. Optimal bailouts in banking and sovereign crises By Sewon Hur; César Sosa-Padilla; Zeynep Yom
  20. The People versus the Markets: A Parsimonious Model of Inflation Expectations By Reis, Ricardo
  21. Are Bigger Banks Better? Firm-Level Evidence from Germany By Kilian Huber
  22. Germany's Labour Market in Coronavirus Distress - New Challenges to Safeguarding Employment By Herzog-Stein, Alexander; Nüß, Patrick; Peede, Lennert; Stein, Ulrike
  23. Job stability, earnings dynamics, and life-cycle savings By Kuhn, Moritz; Ploj, Gasper
  24. Temporary VAT Reduction during the Lockdown By Marius Clemens; Werner Röger
  25. Uncovering the mechanism(s): Financial constraints and wages By Arabzadeh, Hamzeh; Balleer, Almut; Gehrke, Britta
  26. A re-examination of the exchange rate – interest rate differential relationship in Ghana By Ofori, Isaac Kwesi; Armah, Mark Kojo
  27. Fiscal Stimulus in Liquidity Traps: Conventional or Unconventional Policies? By Lemoine, Matthieu; Lindé, Jesper
  28. How Does International Capital Flow? By Kumhof, Michael; Rungcharoenkitkul, Phurichai; Sokol, Andrej
  29. Macroeconomic Forecasting in Poland: Lessons From the COVID-19 Outbreak. By Rybacki, Jakub; Gniazdowski, Michał
  30. Sources of Bias in Inflation Rates and Implications for Inflation Dynamics By Braun, Rahel; Lein, Sarah
  31. Five Facts about the Distributional Income Effects of Monetary Policy By Niklas Amberg; Thomas Jansson; Mathias Klein; Anna Rogantini Picco
  32. News Shocks under Financial Frictions By Christoph Gortz; John Tsoukalas; Francesco Zanetti
  33. Aggregate-Demand Amplification of Supply Disruptions: The Entry-Exit Multiplier By Bilbiie, Florin Ovidiu; Melitz, Marc J
  34. Business Cycle Implications of Firm Market Power in Labor and Product Markets By Sami Alpanda; Sarah Zubairy
  35. Banks and negative interest rates By Heider, Florian; Saidi, Farzad; Schepens, Glenn
  36. Efecto Fisher y modelo de corrección de errores en Colombia, 1991-2020 By Luis Eduardo Castellanos Rodríguez; Juan David Diaz Ipuz; Cristian Camilo Dueñas Ruiz; Andrés Felipe León Donato
  37. Optimal Monetary and Macroprudential Policies By Josef Schroth
  38. Uncertainty shocks in currency unions By Born, Benjamin; Müller, Gernot; Pfeifer, Johannes
  39. The Covid-19 Crisis and Consumption: Survey Evidence from Six EU Countries By Christelis, Dimitris; Georgarakos, Dimitris; Jappelli, Tullio; Kenny, Geoff
  40. Expectation dispersion, uncertainty, and the reaction to news By Born, Benjamin; Dovern, Jonas; Enders, Zeno
  41. The Prince and Me A model of Fiscal Credibility By Nicolas End
  42. Environment, public debt and epidemics By Marion Davin; Mouez Fodha; Thomas Seegmuller
  43. The Local-Spillover Decomposition of an Aggregate Causal Effect By Timothy G. Conley; Bill Dupor; Mahdi Ebsim; Jingchao Li; Peter B. McCrory
  44. Price Setting and Volatility: Evidence from Oil Price Volatility Shocks By Matthew Klepacz
  45. Nowcasting Macroeconomic Aggregates in Argentina: Comparing the predictive ability of different models By Emilio Blanco; Laura D’Amato; Fiorella Dogliolo; Lorena Garegnani
  46. Reservation Raises: The Aggregate Labor Supply Curve at the Extensive Margin By Preston Mui; Benjamin Schoefer
  47. Effect of Exchange Rate Volatility on Tax Revenue Performance In Sub-Saharan Africa By Ofori, Isaac Kwesi; Obeng, Camara Kwasi; Mwinlaaru, Yeltulme Pter
  48. Uncertainty Premia, Sovereign Default Risk, and State-Contingent Debt By Francisco Roch; Francisco Roldán
  49. Common Component Structural VARs By Forni, Mario; Gambetti, Luca; Lippi, Marco; Sala, Luca
  50. Central Bank Digital Currency: When Price and Bank Stability Collide By Fernández-Villaverde, Jesús; Schilling, Linda Marlene; Uhlig, Harald
  51. Aggregate and Intergenerational Implications of School Closures: A Quantitative Assessment By Jang, Youngsoo; Yum, Minchul
  52. Keynesian Production Networks and the Covid-19 Crisis: A Simple Benchmark By Baqaee, David Rezza; Farhi, Emmanuel
  53. Macroeconomic Uncertainty and Vector Autoregressions By Forni, Mario; Gambetti, Luca; Sala, Luca
  54. Foreign Shocks as Granular Fluctuations By di Giovanni, Julian; Levchenko, Andrei A.; Mejean, Isabelle
  55. Reconstruction of the Spanish money supply, 1492-1810 By Chen, Yao; Palma, Nuno Pedro G.; Ward, Felix
  56. The Expected Return on Risky Assets: International Long-run Evidence By Kuvshinov, Dmitry; Zimmermann, Kaspar
  57. Quantifying Market Power and Business Dynamism in the Macroeconomy By Jan De Loecker; Jan Eeckhout; Simon Mongey
  58. Household Debt Overhang Did Hardly Cause a Larger Spending Fall during the Financial Crisis in Australia By Lars E.O. Svensson
  59. Payments on Digital Platforms: Resiliency, Interoperability and Welfare By Jonathan Chiu; Russell Wong
  60. Human Capital Investment and Development: The Role of On-the-job Training By Xiao Ma; Alejandro Nakab; Daniela Vidart
  61. All You Need Is Cash: Corporate Cash Holdings and Investment after the Global Financial Crisis By Andreas Joseph; Christiane Kneer; Neeltje van Horen
  62. The cost of holding foreign exchange reserves By Eduardo Levi Yeyati; Juan Francisco Gómez
  63. Parallel Digital Currencies and Sticky Prices By Uhlig, Harald; Xie, Taojun
  64. Common trends in producers’ expectations, the nonlinear linkage with Uruguayan GDP and its implications in economic growth forecasting By Bibiana Lanzilotta; Juan Gabriel Brida; Lucía Rosich
  65. Can central bank communication help to stabilise inflation expectations? By Jung, Alexander; Kühl, Patrick
  66. FDI Globalization and the New Phillips Curve: Role of Multinational Companies and Institutional Changes By Paul J.J. Welfens; Kaan Celebi
  67. The Deposits Channel of Monetary Policy: A Critical Review By Repullo, Rafael
  68. Four Decades of Canadian Earnings Inequality and Dynamics across Workers and Firms By Audra Bowlus; Émilien Gouin-Bonenfant; Huju Liu; Lance Lochner; Youngmin Park
  69. Zombies at large? Corporate debt overhang and the macroeconomy By Jordá, Óscar; Kornejew, Martin; Schularick, Moritz; Taylor, Alan M.
  70. The real effects of financial uncertainty shocks: A daily identification approach By Piergiorgio Alessandri; Andrea Gazzani; Alejandro Vicondoa
  71. Parental Time Investment and Intergenerational Mobility By Yum, Minchul
  72. Markups Across Space and Time By Anderson, Eric; Rebelo, Sérgio; Wong, Arlene
  73. Optimal Sustainable Intergenerational Insurance By Lancia, Francesco; Russo, Alessia; Worrall, Tim S
  74. Dinámica inflacionaria argentina pre-COVID 19: un mundo minado de outliers By Fernando Zarzosa Valdivia
  75. Quantifying market power and business dynamism in the macroeconomy By Jan de Loecker; Jan Eeckhout; Simon Mongey
  76. What drives the German TARGET balances? Evidence from a BVAR approach By Bettendorf, Timo; Jochem, Axel
  77. Accounting for the Decline in Homeownership among the Young By Yuxi Yao
  78. CIP Deviations, the Dollar, and Frictions in International Capital Markets By Wenxin Du; Jesse Schreger
  79. The Inexorable Recoveries of US Unemployment By Hall, Robert E.; Kudlyak, Marianna
  80. The Puzzling Change in the International Transmission of U.S. Macroeconomic Policy Shocks By Ilzetzki, Ethan
  81. Miopes y pesimistas: ¿Cómo forman sus expectativas de inflación los argentinos? Revisión empírica de un modelo teórico agregado de expectativas con sesgos de información. Estudio del caso argentino By Ignacio Galará
  82. What works for active labor market policies? By Eduardo Levi Yeyati; Martín Montané; Luca Sartorio
  83. Discrimination, Managers, and Firm Performance: Evidence from “Aryanizations” in Nazi Germany By Kilian Huber; Volker Lindenthal; Fabian Waldinger
  84. Who truly bears (bank) taxes? Evidence from only shifting statutory incidence By Jiménez, Gabriel; Martinez-Miera, David; Peydró, José Luis
  85. Inflation -- who cares? Monetary Policy in Times of Low Attention By Oliver Pf\"auti
  86. Human Capital, Female Employment, and Electricity: Evidence from the Early 20th Century United States By Daniela Vidart
  87. Informal Central Bank Communication By Vissing-Jørgensen, Annette
  88. Quality of government and regional trade: Evidence from European Union regions By Barbero Jiménez, Javier; Madras, Giovanni; Rodríguez-Crespo, Ernesto; Rodríguez-Pose, Andrés
  89. TARGET2-Securities (T2S) - The Pan-European Platform for the Settlement of Securities in Central Bank Money By Cristina Mastropasqua; Alessandro Intonti; Michael Jennings; Clara Mandolini; Massimo Maniero; Stefano Vespucci
  90. Consumer Credit with Over-Optimistic Borrowers By Exler, Florian; Livshits, Igor; MacGee, Jim; Tertilt, Michèle
  91. Stuck at Zero: Price Rigidity in a Runaway Inflation* By Avichai Snir; Haipeng Allan Chen; Daniel Levy
  92. Mobility under the COVID-19 Pandemic: Asymmetric Effects across Gender and Age By Caselli, Francesca; Grigoli, Francesco; Sandri, Damiano; Spilimbergo, Antonio
  93. The Role of the Prior in Estimating VAR Models with Sign Restrictions By Inoue, Atsushi; Kilian, Lutz
  94. Productivity and the Welfare of Nations By Basu, Susanto; Pascali, Luigi; Schiantarelli, Fabio; Servén, Luis
  95. Assessment of the fiscal stance appropiate for the euro area in 2021 By European Fiscal Board (EFB)
  96. Marginal tax changes with risky investment By Raffaele Rossi
  97. Risk-Taking Adaptation to Macroeconomic Experiences: Theory and Evidence from Developing Countries By Remy Levin; Daniela Vidart
  98. Forward Looking Loan Provisions: Credit Supply and Risk-Taking By Bernardo Morais; Gaizka Ormazabal; José-Luis Peydró; Mónica Roa; Miguel Sarmiento
  99. Why Does Capital Flow from Equal to Unequal Countries? By de Ferra, Sergio; Mitman, Kurt; Romei, Federica
  100. The Long-Term Impact of the COVID-19 Unemployment Shock on Life Expectancy and Mortality Rates By Bianchi, Francesco; Bianchi, Giada; Song, Dongo
  101. “Grease” or “Sand” the Wheels of Economic Development: A Meta-Analysis of Corruption By Ella Hugo; David A. Savage; Benno Torgler
  102. 2019 annual report of the European Fiscal Board By European Fiscal Board (EFB)
  103. The UK's Great Demand and Supply Recession By Jacob, Nicholas; Mion, Giordano
  104. Assessment of the fiscal stance appropiate for the euro area in 2020 By European Fiscal Board (EFB)
  105. State-dependent fiscal multipliers and financial dynamics: An impulse response analysis by local projections for South Africa By Serena Merrino
  106. A balance-sheet approach to fiscal sustainability By Eduardo Levi Yeyati; Federico Sturzenegger
  107. Banks, Political Capital, and Growth By Lambert, Thomas; Wagner, Wolf; Zhang, Eden Quxian
  108. Private Equity and Financial Stability: Evidence from Failed Bank Resolution in the Crisis By Emily Johnston-Ross; Song Ma; Manju Puri
  109. Is there consumer risk-pooling in the open economy? The evidence reconsidered By Minford, Patrick; Ou, Zhirong; Zhu, Zheyi
  110. The aggregate-demand doom loop: Precautionary motives and the welfare costs of sovereign risk By Francisco Roldán
  111. Integrated epi-econ assessment By Boppart, Timo; Harmenberg, Karl; Hassler, John; Krusell, Per; Olsson, Jonna
  112. Combining Bayesian VARs with survey density forecasts: does it pay off? By Bańbura, Marta; Brenna, Federica; Paredes, Joan; Ravazzolo, Francesco
  113. Technology Adoption and Leapfrogging: Racing for Mobile Payments By Pengfei Han; Zhu Wang
  114. Globalization and Global Crises: Rest of the World vs. Israel By Razin, Assaf
  115. Kapitalwert bei Null- und Negativzinsen By Dilger, Alexander
  116. Productivity, Place, and Plants By Benjamin Schoefer; Oren Ziv
  118. General Equilibrium Oligopoly and Ownership Structure By Azar, José; Vives, Xavier
  119. The Dynamics of Pareto Distributed Wealth in a Small Open Economy By Matthias Birkner; Niklas Scheuer; Klaus Wälde
  120. The Napoleonic Wars: A Watershed in Spanish History By Prados de la Escosura, Leandro; Santiago-Caballero, Carlos
  121. Vernacularization and Linguistic Democratization By Binzel, Christine; Link, Andreas; Ramachandran, Rajesh
  122. Assessment of EU fiscal rules with a focus on the six and two-pack legislation By European Fiscal Board (EFB)
  123. The mercantile dilemma: formalisations and historical conclusions By Saccal, Alessandro
  124. Fiscal Multipliers: A Heterogeneous-Agent Perspective By Broer, Tobias; Krusell, Per; Öberg, Erik
  125. Análisis del Comportamiento Fiscal de las Provincias Argentinas By María José Catalán; Emilse Vargas Ochuza
  126. Improving the well-being of Canadians By Peter Jarrett
  127. An Estimable Model of Production Interactions in Endogenous Networks By De Giorgi, Giacomo; Pellizzari, Michele; Rodríguez Barraquer, Tomás
  128. Behaviour in the Canadian large-value payment system: COVID-19 vs. the global financial crisis By Alexander Chaudhry; Anneke Kosse; Karen Sondergard
  129. The Story of the Real Exchange Rate By Itskhoki, Oleg
  130. United States economic outlook: 2020 in review and early 2021 developments By -
  131. Optimally Imprecise Memory and Biased Forecasts By Azeredo da Silveira, Rava; Sung, Yeji; Woodford, Michael

  1. By: Bonciani, Dario (Bank of England); Gauthier, David (Bank of England); Kanngiesser, Derrick (Bank of England)
    Abstract: Banking crises have severe short and long‑term consequences. We develop a general equilibrium model with financial frictions and endogenous growth in which macroprudential policy supports economic activity and productivity growth by strengthening bank’s resilience to adverse financial shocks. The improved intermediation capacity of a safer banking system leads to a higher steady state growth rate. The optimal bank capital ratio of 18% increases welfare by 6.7%, 14 times more than in the case without endogenous growth. When the economy enters a liquidity trap, the effects of financial disruptions and thus the benefits of macroprudential policy are even more significant.
    Keywords: Slow recoveries; endogenous growth; financial stability; macroprudential policy
    JEL: E32 E44 E52 G01 G18
    Date: 2021–04–23
  2. By: ; Alexander W. Richter; Nathaniel A. Throckmorton
    Abstract: Competing explanations for the sources of nonlinearity in search and matching models indicate that they are not fully understood. This paper derives an analytical solution to a textbook model that highlights the mechanisms that generate nonlinearity and quantifies their contributions. Procyclical variation in the matching elasticity creates nonlinearity in the job finding rate, which interacts with the law of motion for unemployment. These results show the matching function choice is not innocuous. Quantitatively, the Den Haan et al. (2000) matching function more than doubles the skewness of unemployment and welfare cost of business cycles, compared to the Cobb-Douglas specification.
    Keywords: Matching Function; Matching Elasticity; Complimentarity; Unemployment
    JEL: E24 E32 E37 J63 J64
    Date: 2021–05–11
  3. By: Altavilla, Carlo; Laeven, Luc; Peydró, José Luis
    Abstract: We document that there are strong complementarities between monetary policy and macroprudential policy in shaping the evolution of bank credit. We use a unique loan-level dataset comprising multiple credit registers from several European countries and different types of loans, including corporate loans, mortgages and consumer credit. We merge this rich information with borrower and bank-level characteristics and with indicators summarising macroprudential and monetary policy actions. We find that monetary policy easing increases both bank lending and lending to riskier borrowers, especially when there is a more accommodative macroprudential environment. These effects are stronger for less capitalised banks. Results apply to both household and firm lending, but they are stronger for consumer and corporate loans than for mortgages. Finally, for firms, the overall increase in bank lending induced by an accommodative policy mix is stronger for more (ex-ante) productive firms than firms with high ex ante credit risk, except for banks with low capital.
    Keywords: E51; E52; E58; G21; G28
    JEL: E51 E52 E58 G21 G28
    Date: 2020–12
  4. By: Jamilov, Rustam; Monacelli, Tommaso
    Abstract: We develop a non-linear, quantitative macroeconomic model with heterogeneous monopolistic financial intermediaries, incomplete markets, default risk, endogenous bank entry, and aggregate uncertainty. The model generates a bank net worth distribution fluctuation problem analogous to the canonical Bewley-Huggett-Aiyagari-Imrohoglu environment. Our framework nests Gertler-Kyiotaki (2010) and the standard Real Business Cycle model as special cases. We present four general results. First, relative to the GK benchmark, banks' balance sheet-driven recessions can be significantly amplified, depending on the interaction of endogenous credit margins, the cyclicality of a precautionary lending motive and the (counter-) cyclicality of intermediaries' idiosyncratic risk. Second, equilibrium responses to aggregate exogenous shocks depend explicitly on the conditional distributions of bank net worth and leverage, which are endogenous time-varying objects. Aggregate shocks to banks' balance sheets that hit a concentrated and fragile banking distribution cause significantly larger recessions. A persistent consolidation in the U.S. banking sector that matches the one observed over 1980-2020 generates a large economic contraction and an increase in financial instability. Third, we document, and match, novel stylized facts on both the cross-section of credit margins and the cyclical properties of the first three moments of the cross-sectional distributions of financial intermediary assets, net worth, leverage, loan margins, and default risk. We find that shocks to capital quality and to leverage constraint tightness (``financial shocks'') can match fluctuations in the U.S. financial sector very well. Finally, we use the model to identify and characterize episodes of systemic banking crises. Such events are associated with large economic recessions, spikes in bank leverage, and large drops in the number of intermediaries.
    Keywords: Aggregate fluctuations; financial intermediaries; Heterogeneity; incomplete markets; monopolistic competition
    JEL: E32 E44
    Date: 2020–11
  5. By: Heider, Florian; Saidi, Farzad; Schepens, Glenn
    Abstract: In this paper, we survey the nascent literature on the transmission of negative policy rates. We discuss the theory of how the transmission depends on bank balance sheets, and how this changes once policy rates become negative. We review the growing evidence that negative policy rates are special because the pass-through to banks' retail deposit rates is hindered by a zero lower bound. We summarize existing work on the impact of negative rates on banks' lending and securities portfolios, and the consequences for the real economy. Finally, we discuss the role of different "initial" conditions when the policy rate becomes negative, and potential interactions between negative policy rates and other unconventional monetary policies.
    Keywords: bank lending; bank risk taking; deposits; euro-area heterogeneity; Negative Interest Rates; zero lower bound
    JEL: E44 E52 E58 G20 G21
    Date: 2020–12
  6. By: Roth, Steve
    Abstract: This paper highlights and unpacks a little-known reality about the Financial Accounts of the United States: the Flows matrix on page 1 of the Federal Reserve’s quarterly Z.1 report does not explain period-to-period changes in the Levels matrix on page 3. The same is true of the sectoral Flow and Levels tables underlying those matrixes. Nor do those tables provide balance-sheet-complete accounting of household or national wealth accumulation. Measures of net saving/investment/capital formation and accumulation, and national wealth accumulation, diverge by tens of trillions of dollars. The discrepancy is explained and resolved by assembling a balance-sheet-complete empirical derivation of comprehensive U.S. “Haig-Simons” income, based on the Integrated Macroeconomic Accounts. The comprehensive measure is 23% higher than national accounts’ “primary” income. Relationships to the Piketty/Saez/Zucman Distributional National Accounts (DINAs) are discussed, along with implications for economic theory and empirical modeling, both mainstream and heterodox/Post-Keynesian.
    Keywords: wealth; flow of funds; capital; accumulation; integrated macroeconomic accounts; IMAs; income; gains; holding gains; capital gains; haig-simons
    JEL: B4 B5 E21 E22 E25
    Date: 2021–05
  7. By: Fornaro, Luca; Wolf, Martin
    Abstract: We study the effects of supply disruptions - for instance caused by the emergence of a pandemic - in an economy with Keynesian unemployment and endogenous productivity growth. By negatively affecting investment, even purely transitory negative supply shocks generate permanent output losses. The associated negative wealth effect depresses consumers' demand, which may even fall below the exogenous fall in supply. In this case, the optimal monetary policy response flips relative to conventional wisdom, as monetary expansions are needed to fight negative output gaps. If monetary policy is not expansionary enough a supply-demand doom loop emerges, causing a recession characterized by unemployment and weak productivity growth. Innovation policies, by fostering firms' investment, can restore full employment and healthy growth.
    Keywords: COVID-19; Endogenous Growth; Fiscal policy; hysteresis; investment; Keynesian growth; monetary policy; Supply Shocks; zero lower bound
    JEL: E22 E31 E32 E52 E62 O42
    Date: 2020–11
  8. By: Yusuf Mercan; Benjamin Schoefer; Petr Sedláček
    Abstract: In recessions, unemployment increases despite the—perhaps counterintuitive—fact that the number of unemployed workers finding jobs expands. We propose a theory of unemployment fluctuations resting on this countercyclicality of gross flows from unemployment into employment. In recessions, the abundance of new hires “congests” the jobs the unemployed fill—diminishing their marginal product and discouraging further job creation. Countercyclical congestion explains 30-40% of US unemployment fluctuations. Additionally, it explains the excess procyclicality of new hires' wages, the cyclical labor wedge, the large earnings losses from job displacement and from graduating during recessions, and the insensitivity of unemployment to policies such as unemployment insurance.
    JEL: D24 E24 E32 J21 J23 J64
    Date: 2021–05
  9. By: Nils Gornemann (Board of Governors of the Federal Reserve System, International Finance Division, Washington, D.C. 20551); Keith Kuester (University of Bonn, Adenauerallee 24-42, 53113 Bonn, Germany); Makoto Nakajima (Federal Reserve Bank of Philadelphia, Ten Independence Mall, Philadelphia, PA 19106-1574)
    Abstract: We build a New Keynesian business-cycle model with rich household heterogeneity. In the model, systematic monetary stabilization policy affects the distribution of income, income risks, and the demand for funds and supply of assets: the demand, because matching frictions render idiosyncratic labor-market risk endogenous; the supply, because markups, adjustment costs, and the tax system mean that the average profitability of firms is endogenous. Disagreement about systematic monetary stabilization policy is pronounced. The wealth rich or retired tend to favor inflation targeting. The wealth-poor working class, instead, favors unemployment-centric policy. One- and two-agent alternatives can show unanimous disapproval of inflation-centric policy, instead. We highlight how the political support for inflation-centric policy depends on wage setting, the tax system, and the portfolio that households have.
    Keywords: Monetary Policy, Unemployment, Search and Matching, Heterogeneous Agents, General Equilibrium, Dual Mandate
    JEL: E12 E21 E24 E32 E52 J64
    Date: 2021–05
  10. By: Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick
    Abstract: Strong evidence exists that price/wage durations are dependent on the state of the economy, especially inflation. We embed this dependence in a macro model of the US that otherwise does well in matching the economy's behaviour in the last three decades; it now also matches it over the whole post-war period. This finding implies a major new role for monetary policy: besides controlling inflation it now determines the economy's price stickiness. We find that, when backed by fiscal policy in preventing a ZLB, by targeting nominal GDP monetary policy can achieve high price stability and avoid large cyclical output fluctuations.
    Keywords: Crises; New keynesian; Nominal GDP; price stability; Rational Expectations; State-Dependence
    JEL: E2 E3
    Date: 2021–01
  11. By: Federico Di Pace (Bank of England); Christoph Gortz (University of Birmingham)
    Abstract: Using a structural vector autoregression, we document that a contractionary monetary policy shock triggers a decline in durable and non-durable outputs as well as a contraction in bank equity and a rise in the excess bond premium. The latter points to an important transmission channel of monetary policy via financial markets. It has long been recognized that a standard two-sector New Keynesian model, where durable goods prices are flexible and prices of non-durables and services sticky, does not generate the empirically observed sectoral co-movement across expenditure categories in response to a monetary policy shock. We show that introducing frictions in financial markets in a two-sector New Keynesian model can resolve its disconnect with the empirical evidence - a monetary tightening generates not only co-movement, but also a rise in credit spreads and a deterioration in bank equity.
    Keywords: financial intermediation, sectoral comovement, monetary policy, financial frictions, credit spreads.
    JEL: E22 E32 E44 E52
    Date: 2021–04
  12. By: Bofinger, Peter; Haas, Thomas
    Abstract: The discussion about central bank digital currencies (CBDC) has gained an impressive momentum. So far, however, the main focus has been on the macroeconomic implications of CBDCs and the narrow perspective of developing a digital substitute for cash. This paper adds a microeconomic dimension of CBDC to the discussion. We provide an overview of the existing payment ecosystem and derive a systemic taxonomy of CBDCs that distinguishes between new payment objects and new payment systems. Using our systemic taxonomy, we are able to categorize different CBDC proposals. In order to discuss and evaluate the different CBDC design options, we develop two criteria: allocative efficiency, i.e. whether a market failure can be diagnosed that justifies a government intervention, and attractiveness for users, i.e. whether CBDC proposals constitute attractive alternatives for users compared to existing payment objects and payment systems. Our analysis shows that there is no justification for digital cash substitutes from the point of view of allocative efficiency and the user perspective. Instead, our analysis opens the perspective for a retail payment system organized or orchestrated by the central bank without a new, independent payment object.
    Keywords: Central bank digital currency; central banks; international payments; Payment systems
    JEL: E42 E44 E52 E58 G21 G28
    Date: 2020–11
  13. By: Allen, Jason; Bateman, Will; Gleeson, Simon; Kumhof, Michael; Lastra, Rosa M; Omarova, Saule
    Abstract: Based on legal arguments, we advocate a conceptual and normative shift in our understanding of the economic character of central bank money (CBM). The widespread treatment of CBM as a central bank liability goes back to the gold standard, and uses analogies with commercial bank balance sheets. However, CBM is sui generis and legally not comparable to commercial bank money. Furthermore, in modern economies, CBM holders cannot demand repayment of CBM in anything other than CBM. CBM is not an asset of central banks either, and it is not central bank shareholder equity because it does not confer the same ownership rights as regular shareholder equity. Based on comparisons across a number of legal characteristics of financial instruments, we suggest that an appropriate characterization of CBM is as 'social equity' that confers rights of participation in the economy's payment system and thereby its economy. This interpretation is important for macroeconomic policy in light of quantitative easing and potential future issuance of central bank digital currency (CBDC). It suggests that in robust economies with credible monetary institutions, and where demand for CBM is sufficiently and sustainably high, large-scale issuance such as under CBDC is not inflationary, and it does not weaken public sector finances.
    Keywords: Assets; central bank balance sheet; Central bank digital currency; Central bank money; central bank reserves; currency; equity; Government Debt; liabilities; Quantitative easing
    JEL: E41 E42 E44 E51 E52 E58 G21 H61 H63 K0 K11 K12
    Date: 2020–12
  14. By: David Baqaee; Ariel Burstein
    Abstract: We provide a general non-parametric characterization of how welfare responds to changes in budget and production possibility sets when preferences are non-homothetic or subject to shocks, in both partial and general equilibrium. We generalize Hulten’s theorem, which is the basis for constructing aggregate quantities, to this context. We identify a new bias in measures of real consumption that depends on the covariance of price changes and expenditure changes due to income effects or preference shocks. We apply our results to long-run and short-run phenomena. In the long-run, we show that structural transformation, if caused by income effects, is roughly twice as important for welfare than what is implied by standard measures of Baumol’s cost disease. In the short-run, we show that when firms’ demand shocks are correlated with their supply shocks, industry-level price and output indices are biased, and this bias does not disappear in the aggregate. Finally, we show that correlated supply and demand shifters make real GDP and aggregate TFP unreliable metrics for measuring production and productivity, and we illustrate this using the Covid-19 crisis.
    JEL: E0 E01 E1 E21 E23 E3
    Date: 2021–05
  15. By: Hoffmann, Mathias; Hürtgen, Patrick
    Abstract: According to the two-country full information New Keynesian model with flexible exchange rates, the real exchange rate appreciates in response to an asymmetric negative demand shock at the zero lower bound (ZLB) and exacerbates the adverse macroeconomic effects. This finding requires inflation expectations to adjust counterfactually large. When modeling inflation expectations consistent with survey expectations using imperfect information, we find that exchange rates can absorb demand shocks at the ZLB. In sharp contrast to the full information model: (i) A negative demand shock concentrated in the home country causes a real exchange rate depreciation that partially absorbs the demand shock. (ii) A VAR with an identified demand shock via sign restrictions is consistent with a real exchange rate depreciation at the ZLB. (iii) When the ZLB is binding in the home country, it is optimal for the foreign policymaker to reduce rather than increase foreign interest rates. (iv) Forward guidance that reveals the true state of the economy exacerbates the negative output gap in the two countries.
    Keywords: monetary policy,inflation expectations,imperfect information,real exchange rates
    JEL: F33 E31 E32
    Date: 2021
  16. By: Ofori, Isaac Kwesi; Armah, Mark Kojo
    Abstract: This paper revisits the exchange rate and interest rate differential relationship since Ghana adopted the inflation targeting regime. Using macro-data spanning 2002 to 2019 for Ghana and the United States, we show the nonexistence of the relationship in both the short-run and long-run. Further, we show a positive but slow responsiveness of exchange rate to interest rate differential shocks from the short-run to medium term. The long-run result however shows a case of a strong and significant response of exchange rate to interest rate differential shocks. We recommend that the Bank of Ghana address perennial macroeconomic instability, especially on inflation which we conjecture to fuel investment uncertainty and investment insensitivity to interest rate.
    Keywords: Inflation Targeting, Exchange Rate, Impulse Response Function, Interest Rate Differential, VAR, Ghana
    JEL: A1 E4 E43 E5 F3 F31 G21
    Date: 2021–05–11
  17. By: Paul de Grauwe
    Abstract: In this paper I document the fact that, compared to the other EU-countries, the Portuguese government made relatively cautious budgetary policy choices during the pandemic. Most EU-countries decided to take more expansionary budgetary stances than Portugal. I also find empirical evidence suggesting that countries that used more fiscal stimulus managed to reduce the negative effects of the pandemic on GDP. This raises the question of whether the Portuguese government made the right fiscal policy choice during the pandemic. I argue that other factors than the budgetary policy stance matter in explaining growth performances. In addition, it is probably too early to tell whether the Portuguese government made the right fiscal policy choices.
    Keywords: pandemic, fiscal policies, fiscal stance, policy choice
    JEL: E60 E62 E65
    Date: 2021–05
  18. By: Kamalyan, Hayk
    Abstract: This paper evaluates the effects of monetary policy volatility by fully accounting for real-time nature of policy setting. The empirical analysis shows that the impact of real-data volatility on output is about two times lower compared to that of final data volatility. Qualitatively, the effects of the two measures of volatility are similar. These findings suggest that the business cycle implications of policy-related volatility may possibly be overstated.
    Keywords: Final Data, Real-Time Data, Monetary Policy Volatility
    JEL: E32 E52 E58
    Date: 2021–01–04
  19. By: Sewon Hur (Federal Reserve Bank of Dallas); César Sosa-Padilla (University of Notre Dame/NBER); Zeynep Yom (Villanova University)
    Abstract: We study optimal bailout policies in the presence of banking and sovereign crises. First, we use European data to document that asset guarantees are the most prevalent way in which sovereigns intervene during banking crises. Then, we build a model of sovereign borrowing with limited commitment, where domestic banks hold government debt and also provide credit to the private sector. Shocks to bank capital can trigger banking crises, with government sometimes finding it optimal to extend guarantees over bank assets. This leads to a trade-off: Larger bailouts relax domestic financial frictions and increase output, but also imply increasing government fiscal needs and possible heightened default risk (i.e., they create a ‘diabolic loop’). We find that the optimal bailouts exhibit clear properties. Other things equal, the fraction of banking losses that the bailouts would cover is: (i) decreasing in the level of government debt; (ii) increasing in aggregate productivity; and (iii) increasing in the severity of the bank- ing crisis. Even though bailouts mitigate the adverse effects of banking crises, we find that the economy is ex ante better off without bailouts: the ‘diabolic loop’ they create is too costly.
    Keywords: Bailouts Sovereign Defaults Banking Crises Conditional Transfers Sovereign-bank diabolic loop
    JEL: E32 E62 F34 F41 G01 G15 H63
    Date: 2021–04
  20. By: Reis, Ricardo
    Abstract: Expected long-run inflation is sometimes inferred using market prices, other times using surveys. The discrepancy between the two measures has large business-cycle fluctuations, is systematically correlated with monetary policies, and is mostly driven by disagreement, both between households and traders, and between different traders. A parsimonious model that captures both the dispersed expectations in surveys, and the trading of inflation risk in financial markets, can fit the data, and it provides estimates of the underlying expected inflation anchor. Applied to US data, the estimates suggest that inflation became gradually, but steadily, unanchored from 2014 onwards. The model detects this from the fall in cross-person expectations skewness, first across traders, then across people. In general equilibrium, when inflation and the discrepancy are jointly determined, monetary policy faces a trade-off in how strongly to respond to the discrepancy.
    JEL: D84 E31 E52
    Date: 2021–01
  21. By: Kilian Huber
    Abstract: The effects of large banks on the real economy are theoretically ambiguous and politically controversial. I identify quasi-exogenous increases in bank size in postwar Germany. I show that firms did not grow faster after their relationship banks became bigger. In fact, opaque borrowers grew more slowly. The enlarged banks did not increase profits or efficiency, but worked with riskier borrowers. Bank managers benefited through higher salaries and media attention. The paper presents newly digitized microdata on German firms and their banks. Overall, the findings reveal that bigger banks do not always raise real growth and can actually harm some borrowers.
    JEL: E24 E44 G21 G28 L11 L25 N14 N24 N84
    Date: 2021–05
  22. By: Herzog-Stein, Alexander; Nüß, Patrick; Peede, Lennert; Stein, Ulrike
    Abstract: We analyse measures of internal flexibility taken to safeguard employment during the Coronavirus Crisis in comparison to the Great Recession. Cyclical working-time reductions are again a major factor in safeguarding employment. Whereas during the Great Recession all working-time instruments contributed to the reduction in working time, short-time work (STW) now accounts for almost all of the working-time reduction. STW was more rapidly extended, more generous, and for the first time a stronger focus was put on securing household income on a broad basis. Still, the current crisis is more severe and affects additional sectors of the economy where low-wage earners are affected more frequently by STW and suffered on average relatively greater earnings losses. A hypothetical average short-time worker had a relative income loss in April 2020 that was more than twice as large as that in May 2009. Furthermore, marginal employment is affected strongly but not protected by STW.
    Keywords: Internal Flexibility Short-Time Work,Business Cycles,Great Recession,Coronavirus Crisis
    JEL: E24 E32 J08 J20
    Date: 2021
  23. By: Kuhn, Moritz; Ploj, Gasper
    Abstract: Labor markets are characterized by large heterogeneity in job stability. Some workers hold lifetime jobs, whereas others cycle repeatedly in and out of employment. This paper explores the economic consequences of such heterogeneity. Using Survey of Consumer Finances (SCF) data, we document a systematic positive relationship between job stability and wealth accumulation. Per dollar of income, workers with more stable careers hold more wealth. We also develop a life-cycle consumption-saving model with heterogeneity in job stability that is jointly consistent with empirical labor market mobility, earnings, consumption, and wealth dynamics. Using the structural model, we explore the consequences of heterogeneity in job stability at the individual and macroeconomic level. At the individual level, we find that a bad start to the labor market leaves long-lasting scars. The income and consumption level for a worker who starts working life from an unstable job is, even 25 years later, 5 percent lower than that of a worker who starts with a stable job. For the macroeconomy, we find welfare gains of 1.6 percent of lifetime consumption for labor market entrants from a secular decline in U.S. labor market dynamism.
    Keywords: consumption-saving behavior; Employment risk; Job stability
    JEL: E21 E24 J64
    Date: 2020–11
  24. By: Marius Clemens; Werner Röger
    Abstract: This paper evaluates the temporary VAT reduction introduced by the German government over the third and fourth quarter of 2020 as most controversial part of the COVID-19 stimulus package. Critics argue that VAT reductions are ineffective because of limited pass-through of temporary measures to consumer prices and in presence of lockdown measures. Advocates emphasize positive effects on durables and stress that a VAT reduction can at least partly substitute for a limited monetary policy response under the ZLB. We build a DSGE model which is capable to address these channels. Our model distinguishes between sectors directly and indirectly affected by the lockdown. This allows us to trace economic spillovers of lockdown measures to the rest of the economy and the differentiated impact of VAT measures on both sectors. We disaggregate consumption into durables and non-durables for both financially constrained and unconstrained households and we allow for imperfect pass-through of VAT measures into consumer prices. In general, if we include the durable investment channel we find robust sizeable effects of VAT changes on consumption even under a limited VAT pass-through. For the specific situation in Germany, we analyze the impact of the VAT reduction in conjunction with the lockdowns in 2020 Q2 to Q4. We use non-linear solution techniques to solve the model in the presence of a ZLB, forced savings and a lockdown constraint. We find a VAT short-term multiplier of one, which reduces over the medium term. Thus, the temporary VAT reduction is an effective instrument in the short-term but not efficient with regard to medium-term budget sustainability. Furthermore, we can show that the VAT reduction is able to mimic the macroeconomic effects of a central bank reaction according to a Taylor rule in case of a lockdown shock. However, compared to the monetary policy reaction the VAT reduction has only small direct effects on private investments.
    Keywords: Fiscal policy, DSGE modelling, COVID-19 lockdown, tax multiplier
    JEL: E62 E65 H21
    Date: 2021
  25. By: Arabzadeh, Hamzeh; Balleer, Almut; Gehrke, Britta
    Abstract: How do wages respond to financial recessions? Based on a dynamic macroeconomic model with frictions in the labor and the financial market, we address two prominent mechanism through which firms' financial constraints amplify unemployment and explore their effect on wages. First, the financial labor wedge reduces wages. Second, financial constraints may interact with aggregate labor market conditions in various ways putting upward or downward pressure on wages. We test partial-equilibrium implications of these theoretical mechanisms based on a large data set for Germany for 2006 to 2014 that combines administrative data on workers and wages with detailed information on the balance sheets of firms. Both mechanisms play a role empirically. Using our estimates as central calibration targets in our model, we document that financial recessions are associated with a substantial decline in both unemployment and wages. Financial constraints therefore weaken the direct link between wage rigidity and unemployment volatility.
    Keywords: business cycles; Financial Frictions; Search and Matching; unemployment; wages
    JEL: E32 E44 J63 J64
    Date: 2020–12
  26. By: Ofori, Isaac Kwesi; Armah, Mark Kojo
    Abstract: This paper revisits the exchange rate and interest rate differential relationship since Ghana adopted the inflation targeting regime. Using macro-data spanning 2002 to 2019 for Ghana and the United States, we show the nonexistence of the relationship in both the short-run and long-run. Further, we show a positive but slow responsiveness of exchange rate to interest rate differential shocks from the short-run to medium term. The long-run result however shows a case of a strong and significant response of exchange rate to interest rate differential shocks. We recommend that the Bank of Ghana address perennial macroeconomic instability, especially on inflation which we conjecture to fuel investment uncertainty and investment insensitivity to the interest rate.
    Keywords: Inflation Targeting,Exchange Rate,Impulse Response Function,Interest Rate Differential,VAR,Ghana
    JEL: A1 E4 E43 E3 F5
    Date: 2021
  27. By: Lemoine, Matthieu; Lindé, Jesper
    Abstract: Recent influential work argue that a gradual increase in sales tax stimulates economic activity in a liquidity trap by boosting inflation expectations. Higher public infrastructure investment should also be more expansive in a liquidity trap than in normal times by raising the potential interest rate and increasing aggregate demand. We analyze the relative merits of these policies in New Keynesian models with and without endogenous private capital formation and heterogeneity when monetary policy does not respond by raising policy rates. Our key finding is that the effectiveness of sales tax hikes differs notably across various model specifications, whereas the benefits of higher public infrastructure investment are more robust in alternative model environments. We therefore conclude that fiscal policy should consider public investment opportunities and not merely rely on tax policies to stimulate growth during the COVID-19 crisis.
    Keywords: DSGE model; liquidity trap; monetary policy; Public investments; Sales tax; zero lower bound
    JEL: E52 E58
    Date: 2020–12
  28. By: Kumhof, Michael; Rungcharoenkitkul, Phurichai; Sokol, Andrej
    Abstract: Understanding gross capital flows is increasingly viewed as crucial for both macroeconomic and financial stability policies, but theory is lagging behind many key policy debates. We fill this gap by developing a 2-country DSGE model that tracks domestic and cross-border gross positions between banks and households, with explicit settlement of all transactions through banks. We formalize the conceptual distinction between cross-border saving and financing, which often move in opposite directions in response to shocks. This matters for at least four policy debates. First, current accounts are poor indicators of financial vulnerability, because in a crisis creditors stop financing debt rather than current accounts, and because following a crisis current accounts are not the primary channel through which balance sheets adjust. Second, we re-interpret the global saving glut hypothesis by submitting that US households do not finance current account deficits with foreigners' physical saving, but with digital purchasing power, created by banks that are more likely to be domestic than foreign. Third, Triffin's current account dilemma is not in fact a dilemma, because the creation of additional US dollars requires dollar credit creation by domestic or foreign banks rather than US current account deficits. Finally, we show that the observed high correlation of gross capital inflows and outflows is overwhelmingly an automatic consequence of double entry bookkeeping, rather than the result of two separate and synchronized sets of economic decisions.
    Keywords: bank lending; current account; global saving glut; Gross capital flows; International Capital Flows; money creation; Sudden stops; Triffin's dilemma
    JEL: E44 E51 F41 F44
    Date: 2020–12
  29. By: Rybacki, Jakub; Gniazdowski, Michał
    Abstract: The aim of this paper is to analyze the forecast errors of Polish professional forecasters under the COVID-19 crisis in 2020—based on the Parkiet competition. This analysis shows that after the initial disruption related to imposed lockdown in March and April, commercial economists were capable of lowering their forecasts errors of the industrial production and retail sales. On the other hand, the far worse performance has been seen in the case of the market variable; either the size of errors or the disagreement were elevated throughout the entirety of 2020. Furthermore, long-term forecasts that were produced during the first year of the pandemic have been characterized with visible inconsistencies (i.e., projections of economic growth were similar when forecasters either assumed a strong increase in unemployment or when they did not).
    Keywords: GDP forecasting, Labor Market forecasts, COVID-19
    JEL: E27 E32 E37
    Date: 2021–05–11
  30. By: Braun, Rahel; Lein, Sarah
    Abstract: Official statistics measuring the cost of living are known to suffer from several biases. This paper shows that the size of the biases can vary with economic conditions. Using homescan data, it is first confirmed that official price indexes can be tracked using such granular datasets. While the often-acknowledged substitution bias is shown to be relatively small, neglected preference adjustment and product entry/exit results in a 2.6 percentage point bias in the annual inflation rate on average. Furthermore, the bias is particularly large in the aftermath of a shock to relative prices, increasing to 3.7 percentage points.
    Keywords: bias in inflation indexes; Homescan data; Inflation measurement
    JEL: C23 C3 E31 E4 E5
    Date: 2021–01
  31. By: Niklas Amberg; Thomas Jansson; Mathias Klein; Anna Rogantini Picco
    Abstract: We use Swedish administrative individual-level data to document five facts about the distributional income effects of monetary policy. (i) The effects of monetary policy shocks are U-shaped with respect to the income distribution—i.e., expansionary shocks increase the incomes of high- and low-income individuals relative to middle-income individuals. (ii) The large effects in the bottom are accounted for by the labor-income response and (iii) those in the top by the capital-income response. (iv) The heterogeneity in the labor-income response is due to the earnings heterogeneity channel, whereas (v) that in the capital-income response is due to the income composition channel.
    Keywords: monetary policy, income inequality, heterogeneous agents, administrative data
    JEL: C55 E32 E52
    Date: 2021
  32. By: Christoph Gortz (University of Birmingham); John Tsoukalas (University of Glasgow); Francesco Zanetti (University of Oxford)
    Abstract: We examine the dynamic effects and empirical role of TFP news shocks in the context of frictions in financial markets. We document two new facts using VAR methods. First, a (positive) shock to future TFP generates a significant decline in various credit spread indicators considered in the macro-finance literature. The decline in the credit spread indicators is associated with a robust improvement in credit supply indicators, along with a broad based expansion in economic activity. Second, VAR methods also establish a tight link between TFP news shocks and shocks that explain the majority of un-forecastable movements in credit spread indicators. These two facts provide robust evidence on the importance of movements in credit spreads for the propagation of news shocks. A DSGE model enriched with a financial sector generates very similar quantitative dynamics and shows that strong linkages between leveraged equity and excess premiums, which vary inversely with balance sheet conditions, are critical for the amplification of TFP news shocks. The consistent assessment from both methodologies provides support for the traditional 'news view' of aggregate fluctuations.
    Keywords: TFP News shocks, Business cycles, DSGE, VAR, Bayesian estimation
    JEL: E2 E3
    Date: 2021–05
  33. By: Bilbiie, Florin Ovidiu; Melitz, Marc J
    Abstract: The response of entry and exit to adverse supply shocks, such as COVID-19, is amplified by nominal rigidities. This leads to further amplification in the response of aggregate demand. Firms' inability to adjust their prices induces further changes in profitability that engender additional entry-exit dynamics. These changes in net entry, in turn, amplify the initial response to the shock by generating additional curvature in the relationship between the shock and aggregate demand. Even in our baseline model with efficient equilibrium entry, this entry-exit multiplier triggers a substantial magnification of the welfare losses due to a negative shock through these second-order effects. Nominal rigidities may also induce a first-order effect when entry is no longer efficient. Our model highlights how the addition of endogenous entry to a benchmark New Keynesian model radically changes the consequences of nominal rigidities. We focus on the amplification of aggregate demand to supply shocks, but also highlight other key divergences that can potentially resolve some empirical discrepancies associated with the workhorse New-Keynesian model.
    Keywords: Aggregate Demand and Supply; COVID-19; Entry-Exit; Recessions; sticky prices; Variety
    JEL: E3 E4 E5 E6
    Date: 2020–12
  34. By: Sami Alpanda (University of Central Florida, Department of Economics); Sarah Zubairy (Texas A&M University, Department of Economics)
    Abstract: In this paper, we analyze the business cycle implications of firms having oligopsony power in labor markets, as well as oligopoly power in product markets, within the context of a New Keynesian dynamic stochastic general equilibrium model with firm entry and exit. Relative to the standard setup with monopolistic competition in both goods and labor markets, the strategic interaction between intermediate goods firms in the current setup results in larger price markups as well as wage markdowns, while the slopes of the aggregate price and wage Phillips curves become flatter. These effects are strengthened in a strongly non-linear fashion as the number of firms in each sector decline. Oligopsonistic labor markets also render wage shocks expansionary, unlike in the standard setup. Results indicate that a secular increase in industry concentration would not only reduce the labor share of income, but also weaken the pass-through from firms' marginal costs to prices and from productivity increases to real wages.
    Keywords: Market power, oligopoly, oligopsony, New Keynesian DSGE model, entry-exit.
    JEL: E25 E32 L13
    Date: 2021–04–29
  35. By: Heider, Florian; Saidi, Farzad; Schepens, Glenn
    Abstract: In this paper, we survey the nascent literature on the transmission of negative policy rates. We discuss the theory of how the transmission depends on bank balance sheets, and how this changes once policy rates become negative. We review the growing evidence that negative policy rates are special because the pass-through to banks’ retail deposit rates is hindered by a zero lower bound. We summarize existing work on the impact of negative rates on banks’ lending and securities portfolios, and the consequences for the real economy. Finally, we discuss the role of different “initial” conditions when the policy rate becomes negative, and potential interactions between negative policy rates and other unconventional monetary policies. JEL Classification: E44, E52, E58, G20, G21
    Keywords: bank lending, bank risk taking, deposits, euro-area heterogeneity, negative interest rates, zero lower bound
    Date: 2021–05
  36. By: Luis Eduardo Castellanos Rodríguez; Juan David Diaz Ipuz; Cristian Camilo Dueñas Ruiz; Andrés Felipe León Donato
    Abstract: El presente ensayo analiza el efecto Fisher en Colombia durante el período 1991-2020. Se hace uso de la tasa de interés de los depósitos a término fijo y la tasa de inflación en frecuencia mensual. Los resultados evidencian no estacionariedad en las variables y una relación de cointegración entre estas. Sin embargo, la transmisión de la inflación a la tasa de interés no es completa en el largo plazo, lo cual evidencia un efecto Fisher parcial. Finalmente, se realiza un modelo de corrección de errores para identificar la velocidad de ajuste entre el corto y el largo plazo. *** This essay analyzes the Fisher effect in Colombia during the period 1991-2020. We use the interest rate of fixed-term deposits and the inflation rate on a monthly basis. The variables are non-stationary and there is a cointegration relationship between them. However, the transmission of inflation to the interest rate is not complete in the long term, therefore there is only a partial Fisher effect. Finally, an error correction model is carried out to identify the speed of adjustment between the short and long term.
    Keywords: efecto Fisher, neutralidad del dinero, estacionariedad, cointegración, modelo de corrección de errores
    JEL: C01 C10 C32 E31 E43
    Date: 2021–05–10
  37. By: Josef Schroth
    Abstract: This paper studies monetary policy in an economy where banks make risky loans to firms and provide liquidity services in the form of deposits to households. For given bank equity, market discipline implies that banks can take more deposits when assets are safer or more profitable. Banks respond to loan losses by making their balance sheets safer—i.e., they reduce risky lending sharply and accumulate more safe bonds. In contrast, a social planner would respond by making banks temporarily more profitable such that a riskier balance sheet can be maintained. A planner would temporarily reduce the expansiveness of monetary policy to avoid bonds becoming too liquid in support of the liquidity premium banks earn via deposits. Specifically, when bank equity is low, then optimal monetary policy stabilizes output by supporting bank lending rather than employment.
    Keywords: Credit and credit aggregates; Financial stability; Financial system regulation and policies; Inflation targets; Monetary policy
    JEL: E60 G28
    Date: 2021–05
  38. By: Born, Benjamin; Müller, Gernot; Pfeifer, Johannes
    Abstract: Uncertainty shocks cause economic activity to contract and more so, if monetary policy is constrained by an effective lower bound on interest rates. In this paper, we investigate whether countries within currency unions are also particularly prone to suffer from the adverse effects of heightened uncertainty because they lack monetary independence. First, we estimate a Bayesian VAR on quarterly time series for Spain. We find that country-specific uncertainty shocks impact economic activity adversely. Second, we calibrate a DSGE model of a small open economy and show that it is able to account for the evidence. Finally, we show that currency-union membership strongly reduces the effects of uncertainty shocks because it anchors long-run expectations of the price level and thus alleviates precautionary price setting in the face of increased uncertainty.
    Keywords: Euro Area; Euro crisis; Exchange Rate Regime; monetary policy; Uncertainty shocks
    JEL: E44 F41
    Date: 2020–12
  39. By: Christelis, Dimitris; Georgarakos, Dimitris; Jappelli, Tullio; Kenny, Geoff
    Abstract: Using new panel data from a representative survey of households in the six largest euro area economies, the paper estimates the impact of the Covid-19 crisis on consumption. The panel provides, each month, household-specific indicators of the concern about finances due to Covid-19 from the first peak of the pandemic until October 2020. The results show that this concern causes a significant reduction in non-durable consumption. The paper also explores the potential impact on consumption of government interventions and of another wave of Covid-19, using household-level consumption adjustments to scenarios that involve positive and negative income shocks. Fears of the financial consequences of the pandemic induce a significant reduction in the marginal propensity to consume, an effect consistent with models of precautionary saving and liquidity constraints. The results are robust to endogeneity concerns through use of panel fixed effects and partial identification methods, which account also for time-varying unobservable variables, and provide informative identification regions of the average treatment effect of the concern for Covid-19 under weak assumptions.
    Keywords: Consumption; Financial concerns; fiscal policies; Income Shocks; marginal propensity to consume
    JEL: D12 D81 E21 G51 H31
    Date: 2020–12
  40. By: Born, Benjamin; Dovern, Jonas; Enders, Zeno
    Abstract: Releases of key macroeconomic indicators are closely watched by financial markets. We investigate the role of expectation dispersion and economic uncertainty for the stock-market reaction to indicator releases. We find that the strength of the financial market response to news decreases with the preceding dispersion in expectations about the indicator value. Uncertainty, in contrast, increases the response. We rationalize our findings in a model of imperfect information. In the model, dispersion results from a perceived weak link between macroeconomic indicators and fundamentals that reduces the informational content of indicators, while higher fundamental uncertainty makes this informational content more valuable.
    Keywords: event study; Expectation dispersion; forecaster disagreement; Macroeconomic news; Stock market; uncertainty
    JEL: E44 G12 G14
    Date: 2020–12
  41. By: Nicolas End (Aix-Marseille Univ, CNRS, AMSE, Marseille, France.)
    Abstract: Government fiscal actions influence forward-looking private agents' current and future decisions, which, in turn, impact fiscal performance. This paper highlights this expectation channel with a Barro-type endogenous growth model where an impatient government finances growth-enhancing spending through income taxes and public debt. Fiscal and macroeconomic outcomes emerge from the interplay of households and policymakers' preferences for public expenditure and private consumption. I find that the government's maximizing its own utility and facing an endogenous interest spread are sufficient ingredients to yield multiple equilibria, independently of the government's policy intentions. The economy almost always heads to the high public spending equilibrium, emphasizing the importance of fiscal institutions to tame government impatience and bolster fiscal credibility.
    Keywords: fiscal policy, credibility, expectations
    JEL: E60 H30 H11
    Date: 2021–05
  42. By: Marion Davin (CEE-M, Univ Montpellier, CNRS, INRAE, SupAgro, Montpellier, France.); Mouez Fodha (University Paris 1 Panthéon-Sorbonne and Paris School of Economics, Paris, France.); Thomas Seegmuller (Aix Marseille Univ, CNRS, AMSE, Marseille, France.)
    Abstract: We study whether fiscal policies, especially public debt, can help to curb the macroeconomic and health consequences of epidemics. Our approach is based on three main features: we introduce the dynamics of epidemics in an overlapping generations model to take into account that old people are more vulnerable; people are more easily infected when pollution is high; public spending and public debt can be used to tackle the effects of epidemics. We show that fiscal policies can promote the convergence to a stable steady state with no epidemics. When public policies are not able to permanently eradicate the epidemic, public debt and income transfers could reduce the number of infected people and increase capital and GDP per capita. As a prerequisite, pollution intensity should not be too high. Finally, we define a household subsidy policy which eliminates income and welfare inequalities between healthy and infected individuals.
    Keywords: epidemics, pollution, overlapping generations, public debt
    JEL: E6 I18 Q59
    Date: 2021–05
  43. By: Timothy G. Conley; Bill Dupor; Mahdi Ebsim; Jingchao Li; Peter B. McCrory
    Abstract: This paper presents a method to decompose the causal effect of government defense spending into: (i) a local (or direct) effect, and (ii) a spillover (or indirect) effect. Each effect is measured as a multiplier: the unit change in output of a one unit change in government spending. We apply this method to study the effect of U.S. defense spending on output using regional panel data. We estimate a positive local multiplier and a negative spillover multiplier. By construction, the sum of the local and spillover multipliers provides an estimate of the aggregate multiplier. The aggregate multiplier is close to zero and precisely estimated. We show that enlisting disaggregate data improves the precision of aggregate effect estimates, relative to using aggregate time series alone. Our paper provides a template for researchers to conduct inference about local, spillover and aggregate causal effects in a unified framework.
    Keywords: local and spillover effects; aggregate fiscal multipliers
    JEL: C3 E6
    Date: 2021–05–12
  44. By: Matthew Klepacz
    Abstract: How do changes in aggregate volatility alter the impulse response of output to monetary policy? To analyze this question, I study whether individual prices in Producer Price Index micro data are more likely to change and to move in the same direction when aggregate volatility is high, which would increase aggregate price exibility and reduce the effectiveness of monetary policy. Taking advantage of plausibly exogenous oil price volatility shocks and heterogeneity in oil usage across industries, I find that price changes are more dispersed and less frequent, implying that prices are less likely to move in the same direction when aggregate volatility is high. This contrasts with findings in the literature about idiosyncratic volatility. I use a state-dependent pricing model to interpret my findings. Random menu costs are necessary for the model to match the positive empirical relationship between oil price volatility and price change dispersion. This is the case because random menu costs reduce the extent to which firms with prices far from their optimum all act in a coordinated fashion when volatility increases. The model implies that increases in aggregate volatility do not substantially reduce the ability of monetary policy to stimulate output.
    Keywords: Volatility; Ss model; Menu cost; Monetary policy; Oil
    JEL: E30 E31 E50
    Date: 2021–04–30
  45. By: Emilio Blanco; Laura D’Amato; Fiorella Dogliolo; Lorena Garegnani
    Abstract: Monetary policy making requires a correct and timely assessment of current macroeconomic conditions. While the main source of macroeconomic data is quarterly National Accounts, of- ten published with a significant lag, higher frequency business cycle indicators are increasingly available. Taking this into account, central banks have adopted nowcasting as a useful tool for having an immediate and more accurate perception of economic conditions. In this paper, we extend the use of nowcasting tools to produce early indicators of the evolution of two components of aggregate domestic demand: consumption and investment. The exercise uses a broad and restricted set of indicators to construct di↵erent dynamic factor models, as well as a pooling of models in the case of investment. Finally, we compare di↵erent approaches in a pseudo-real time out-of-sample exercise and evaluate their predictive performance.
    Keywords: Nowcasting, dynamic factor models, forecast pooling
    JEL: C22 C53 E37
    Date: 2020–11
  46. By: Preston Mui; Benjamin Schoefer
    Abstract: We measure extensive-margin labor supply (employment) preferences in two representative surveys of the U.S. and German populations. We elicit reservation raises: the percent wage change that renders a given individual indifferent between employment and nonemployment. It is equal to her reservation wage divided by her actual, or potential, wage. The reservation raise distribution is the nonparametric aggregate labor supply curve. Locally, the curve exhibits large short-run elasticities above 3, consistent with business cycle evidence. For larger upward shifts, arc elasticities shrink towards 0.5, consistent with quasi-experimental evidence from tax holidays. Existing models fail to match this nonconstant, asymmetric curve.
    JEL: E24 E32 J22 J64
    Date: 2021–05
  47. By: Ofori, Isaac Kwesi; Obeng, Camara Kwasi; Mwinlaaru, Yeltulme Pter
    Abstract: Efforts to spur growth in sub-Sahara Africa have been intensified amid structural and institutional constraints. Tax revenue, the chief source of funding for developmental purposes in SSA remains low and unstable. In fact, the SSA sub-region finds it difficult generating tax revenue up to 20 per cent of GDP. One factor that has not caught the attention of policymakers in terms of its impact on tax revenue performance is exchange rate volatility. Using macrodata spanning 1984 to 2017 for 21 countries, we provide empirical evidence from a panel autoregressive distributed lag technique to show that exchange rate volatility is directly harmful to tax revenue performance, and indirectly through trade openness.
    Keywords: Cointegration,Exchange Rate Volatility,GARCH,Sub-Sahara Africa,Tax Revenue
    JEL: A1 E5 E6 F1 F3 F4
    Date: 2021
  48. By: Francisco Roch (International Monetary Fund); Francisco Roldán (International Monetary Fund)
    Abstract: We analyze how concerns for model misspecification on the part of international lenders affect the desirability of issuing state-contingent debt instruments in a stan- dard sovereign default model à la Eaton and Gersovitz (1981). We show that for the commonly used threshold state-contingent bond structure (e.g., the GDP-linked bond issued by Argentina in 2005), the model with robustness generates ambiguity premia in bond spreads that can explain most of what the literature has labeled as novelty premium. While the government would be better off with this bond when facing rational expectations lenders, this additional source of premia leads to welfare losses when facing robust lenders. Finally, we characterize the optimal design of the state-contingent bond and show how it varies with the level of robustness. Our find- ings rationalize the little use of these instruments in practice and shed light on their optimal design.
    Keywords: Sovereign debt default state-contingent debt instruments robust control ambiguity premia
    JEL: E43 E44 F34 G12 H63 O16
    Date: 2021–03
  49. By: Forni, Mario; Gambetti, Luca; Lippi, Marco; Sala, Luca
    Abstract: Small scale VAR models are subject to two major issues: first, the information set might be too narrow; second, many macroeconomic variables are measured with error. The two features produce distorted estimates of the impulse response functions. We propose a new procedure, called Common Components Structural VARs (CC-SVAR), which solves both problems. It consists in (a) treating the variables, prior to estimation, in order to extract their common components; this eliminates measurement errors; (b) estimating a VAR with m > q common components, that is a singular VAR, where q is the number of shocks driving the economy; this solves the fundamentalness problem. SVARs and CC-SVARs are compared in the empirical analysis of monetary policy and technology shocks. The results obtained by SVARs are not robust, in that they strongly depend on the choice and the treatment of the variables considered. On the contrary, using CCSVARs (i) contractionary monetary shocks produce a decrease of prices independently of the variables included in the model, (ii) irrespective of whether hours worked enter the model in log-levels or growth rates, technology improvements produce an increase in hours worked.
    Keywords: Nonfundamentalness; structural factor models; structural VAR models
    JEL: C32 E32
    Date: 2020–12
  50. By: Fernández-Villaverde, Jesús; Schilling, Linda Marlene; Uhlig, Harald
    Abstract: A central bank digital currency, or CBDC, may provide an attractive alternative to traditional demand deposits held in private banks. When offering CBDC accounts, the central bank needs to confront classic issues of banking: conducting maturity transformation while providing liquidity to private customers who suffer "spending'' shocks. We analyze these issues in a nominal version of a Diamond and Dybvig (1983) model, with an additional and exogenous price stability objective for the central bank. While the central bank can always deliver on its nominal obligations, runs can nonetheless occur, manifesting themselves either as excessive real asset liquidation or as a failure to maintain price stability. We demonstrate an impossibility result that we call the CBDC trilemma: of the three goals of efficiency, financial stability (i.e., absence of runs), and price stability, the central bank can achieve at most two.
    Keywords: bank runs; CBDC trilemma; Central bank digital currency; Financial Intermediation; Inflation targeting; monetary policy
    JEL: E58 G21
    Date: 2020–12
  51. By: Jang, Youngsoo; Yum, Minchul
    Abstract: This paper quantitatively investigates the macroeconomic and distributional consequences of school closures through intergenerational channels in the medium- and long-term. The model economy is a dynastic overlapping generations general equilibrium model in which schools, in the form of public education investments, complement parental investments in producing children's human capital. We find that unexpected school closure shocks have moderate long-lasting adverse effects on macroeconomic aggregates and reduce intergenerational mobility, especially among older children. Lower substitutability between public and parental investments induces larger damages in the aggregate economy and overall incomes of the affected children, while mitigating negative impacts on intergenerational mobility.
    Keywords: Intergenerational mobility, lifetime income, parental investments, aggregate loss, substitutability
    JEL: E24 I24 J22
    Date: 2020–11
  52. By: Baqaee, David Rezza; Farhi, Emmanuel
    Abstract: How do supply and demand shocks, like the ones caused by Covid-19, interact with complex production networks? In this note, we consider a stripped-down version of the model presented in Baqaee and Farhi (2020). Despite its simplicity, the model we present allows for an arbitrary input-output network, complementarities in both consumption and production, incomplete markets, downward nominal wage rigidity, and a zero-lower bound on interest rates. Nevertheless, despite allowing for these realistic ingredients, this model has a very stark property: namely, factor income shares at the initial equilibrium are global sufficient statistics for the input-output network. This irrelevance result clarifies what assumptions must be broken if the production network is to play a role in shock propagation.
    Keywords: complementarities; COVID-19; Downward wage rigidity; irrelevance; production networks; Supply Chains
    JEL: E0 E1 E4
    Date: 2021–01
  53. By: Forni, Mario; Gambetti, Luca; Sala, Luca
    Abstract: We estimate measures of macroeconomic uncertainty and compute the effects of uncertainty shocks by means of a new simple procedure based on standard VARs. Uncertainty and its effects are estimated using a single model so to ensure internal consistency. Under suitable assumptions, our procedure is equivalent to using the square of the VAR forecast error as an external instrument in a proxy SVAR. Our procedure allows to add orthogonality constraints to the standard proxy SVAR identification scheme. We apply our method to a US data set; we find that uncertainty is mainly exogenous and is responsible of a large fraction of business-cycle fluctuations.
    Keywords: OLS estimation; stochastic volatility; Uncertainty shocks; VAR models
    JEL: C32 E32
    Date: 2021–01
  54. By: di Giovanni, Julian; Levchenko, Andrei A.; Mejean, Isabelle
    Abstract: This paper uses a dataset covering the universe of French firm-level sales, imports, and exports over the period 1993-2007 and a quantitative multi-country model to study the international transmission of business cycle shocks at both the micro and the macro levels. The largest firms are both important enough to generate aggregate fluctuations (Gabaix, 2011), and most likely to be internationally connected. This implies that foreign shocks are transmitted to the domestic economy primarily through the largest firms. We first document a novel stylized fact: larger French firms are significantly more sensitive to foreign GDP growth. We then implement a quantitative framework calibrated to the full extent of observed heterogeneity in firm size, exporting, and importing. We simulate the propagation of foreign shocks to the French economy and report one micro and one macro finding. At the micro level heterogeneity across firms predominates: 40 to 85% of the impact of foreign fluctuations on French GDP is accounted for by the "foreign granular residual" -- the term capturing the fact that larger firms are more affected by the foreign shocks. At the macro level, firm heterogeneity dampens the impact of foreign shocks, with the GDP responses 10 to 20% larger in a representative firm model compared to the baseline model.
    Keywords: Aggregate fluctuations; granularity; input linkages; international trade; shock transmission
    JEL: E32 F15 F23 F44 F62 L14
    Date: 2020–11
  55. By: Chen, Yao; Palma, Nuno Pedro G.; Ward, Felix
    Abstract: How did the Spanish money supply evolve in the aftermath of the discovery of large amounts of precious metals in Spanish America? We synthesize the available data on the mining of monetary metals and their international flow to estimate the money supply for Spain from 1492 to 1810. Our estimate suggests that the Spanish money supply increased more than ten-fold. This monetary expansion can account for most of the price level rise in early modern Spain. In its absence, Spain would have required substantial deflation to accommodate its early modern output gains.
    Keywords: Early Modern Period; equation of exchange; Quantity Theory of Money
    JEL: E31 E51 N13
    Date: 2020–12
  56. By: Kuvshinov, Dmitry; Zimmermann, Kaspar
    Abstract: This paper estimates the expected return on equity and housing for 17 advanced economies between years 1870 and 2015. We show that the expected risky return has been in steady decline, but its trend is markedly different to that in the safe rate. As a consequence, the ex ante risk premium exhibits large secular movements, and risk premia and safe rates are strongly negatively correlated. Our findings suggest that time-varying risk appetite is a key driver of expected risky and safe returns - not only in the short, but also in the long run.
    Keywords: expected returns; long-run trends; real interest rates; return predictability; risk premia
    JEL: E43 E44 G12 G15 N20
    Date: 2020–12
  57. By: Jan De Loecker; Jan Eeckhout; Simon Mongey
    Abstract: We propose a general equilibrium economy with oligopolistic output markets in which two channels can cause a change in market power: (i) technology, via changes to productivity shocks and the cost of entry, (ii) market structure, via changes to the number of potential competitors. First, we disentangle these narratives by matching time-series on markups, labor reallocation and costs between 1980 and 2016, finding that both channels are necessary to account for the data. Second, we show that changes in technology and market structure over this period yielded positive welfare effects from reallocation and selection, but off-setting negative effects from deadweight loss and overhead. Overall, welfare is 9 percent lower in 2016 than in 1980. Third, the changes we identify replicate cross-sectional patterns in declining business dynamism, declining equilibrium wages and labor force participation, and sales reallocation toward larger, more productive firms.
    JEL: E0 L1
    Date: 2021–05
  58. By: Lars E.O. Svensson
    Abstract: The “debt-overhang hypothesis” – that households cut back more on their spending in a crisis when they have higher levels of outstanding mortgage debt (Dynan, 2012) – seems to be taken for granted by macroprudential authorities in several countries in their policy decisions, as well as by the international organizations that evaluate and comment on countries’ macroprudential policy. New results for Australian microdata are presented that reject the debt-overhang hypothesis. The results instead support the “spending-normalization hypothesis” of Andersen, Duus, and Jensen (2016), what can also be called the “debt-financed overspending” hypothesis – that the correlation between high pre-crisis household indebtedness and subsequent spending falls during the crisis reflects high debt-financed spending pre-crisis and a return to normal spending during the crisis. As discussed in Svensson (2019, 2020), this is consistent with the above correlation reflecting debt-financed overspending through what Muellbauer (2012) calls the “housing-collateral household demand” channel and Mian and Sufi (2018) the “debt-driven household demand” channel.
    JEL: E21 G01 G18 G21 R21
    Date: 2021–05
  59. By: Jonathan Chiu; Russell Wong
    Abstract: Digital platforms, such as Alibaba and Amazon, operate an online marketplace to facilitate transactions. This paper studies a platform’s business model choice between accepting cash and issuing tokens, as well as the implications for welfare, resiliency, and interoperability. A cash platform free rides on the existing payment infrastructure and profits from collecting transaction fees. A token platform earns seigniorage, albeit bearing the costs of setting up the system and holding reserves to mitigate the cyber risk. Tokens earn consumers a return, insulating transactions from the liquidity costs of using cash, but also expose them to the remaining cyber risk. The platform issues tokens if the interest rate is high, the platform scope is large, and the cyber risk is small. Unbacked floating tokens with zero transaction fees or interest-bearing stablecoins can implement the equilibrium business model, which is not necessarily socially optimal because the platform does not internalize its impacts on off-platform activities. The model explains why Amazon does not issue tokens, but Alipay issues tokens circulatable outside its Alibaba platforms. Regulations such as a minimum reserve requirement can reduce welfare
    Keywords: Digital tokens; Payments; Platforms; Money; Regulation
    JEL: E1 E25 G28
    Date: 2021–02–17
  60. By: Xiao Ma (University of California-San Diego (UCSD)); Alejandro Nakab (University of California-San Diego (UCSD)); Daniela Vidart (University of Connecticut)
    Abstract: This paper offers an explanation for why workers in richer countries have faster rates of wage growth over their lifetimes than workers in poorer countries by providing theory and evidence on the differences in firm-provided training across countries. We document that the share of workers who receive firm-provided training increases with development, and that this is a key determinant of worker human capital investments. We then build a general equilibrium search model with firm-training investments and frictional labor markets. Our model suggests firm-training accounts for a large share of the cross-country wage growth differences. We find that self-employment is the key factor explaining the lack of training in the poorest economies, whereas labor market frictions are key to explaining training differences as countries develop. Finally, our model predicts considerable inefficiencies in human capital investments and sizeable aggregate gains from training subsidies to firms, which may be particularly desirable in poor countries where economic environments disincentivize training.
    Keywords: On-the-job Training, Human Capital Accumulation, Lifecycle wage growth, Economic Growth, Worker Turnover
    JEL: E24 J24 O11 O15 J63 J64 M53
    Date: 2021–05
  61. By: Andreas Joseph; Christiane Kneer; Neeltje van Horen
    Abstract: Cash holdings at the onset of a financial crisis are a key determinant of investment by SMEs not only during the crisis but also during the recovery period. Cash-rich SMEs could maintain their capital stock during the global financial crisis, while cash-poor rivals reduced theirs. This gave cash-rich SMEs a competitive advantage during the recovery, resulting in a persistent and growing investment gap. The amplification effect was present for SMEs with both volatile and stable cash holdings and was particularly pronounced for younger and smaller firms. Competition dynamics and borrowing constraints seem to drive this amplification effect.
    Keywords: SMEs, investment, cash holdings, financial crisis, misallocation
    JEL: D22 E32 E44 G32
    Date: 2021
  62. By: Eduardo Levi Yeyati (Universidad Torcuato Di Tella/The Brookings Institution); Juan Francisco Gómez (Universidad de Buenos Aires)
    Abstract: Recent studies that have emphasized the costs of accumulating reserves for self-insurance purposes have overlooked two potentially important side-effects. First, the impact of the resulting lower spreads on the service costs of the stock of sovereign debt, which could substantially reduce the marginal cost of holding reserves. Second, when reserve accumulation reflects countercyclical LAW central bank interventions, the actual cost of reserves should be measured as the sum of valuation effects due to exchange rate changes and the local-to-foreign currency exchange rate differential (the inverse of a carry trade profit and loss total return flow), which yields a cost that is typically smaller than the one arising from traditional estimates based on the sovereign credit risk spreads. We document those effect s empirically to illustrate that the cost of holding reserves may have been considerably smaller than usually assumed in both the academic literature and the policy debate.
    Keywords: International reserves exchange rate policy capital flows financial crisis
    JEL: E42 E52 F33 F41
    Date: 2021–03
  63. By: Uhlig, Harald; Xie, Taojun
    Abstract: The recent rise of digital currencies opens the door to their use in parallel alongside official currencies (``dollar'') for pricing and transactions. We construct a simple New Keynesian framework with parallel currencies as pricing units and sticky prices. Relative prices become a state variable. Exchange rate shocks can arise even without other sources of uncertainty. A one-time exchange rate appreciation for a parallel currency leads to persistent redistribution towards the dollar sector and dollar inflation. The share of the non-dollar sector increases when prices in the dollar sector become less sticky and when firms can choose the pricing currency.
    Keywords: currency choice; digital currency; monetary policy; New Keynesian Model; sticky prices
    JEL: E30 E52
    Date: 2020–12
  64. By: Bibiana Lanzilotta (Universidad de la República); Juan Gabriel Brida (Universidad de la República); Lucía Rosich (Universidad de la República)
    Abstract: Este trabajo estudia las tendencias comunes entre las expectativas de los productores industriales y su interdependencia con el crecimiento económico del Uruguay en las últimas dos décadas (1998 – 2017). Se utilizaron las series de expectativas recabadas por la Cámara de Industrias del Uruguay clasificadas en cuatro grupos industriales: exportadoras, bajo comercio, sustitutivas de importación y comercio intra rama. En base a la estimación de Modelos Estructurales Multivariantes, se encontró un nivel común entre los indicadores de expectativas de los cuatro grupos industriales. El grupo que lidera las expectativas de todas las empresas pertenecientes a la industria manufacturera es el más expuesto a la competencia internacional. En consecuencia, el componente tendencial de las empresas exportadoras impulsa al de los otros grupos.
    Keywords: expectativas de los agentes factores comunes Modelos Estructurales Multivariantes, proyección del PIB cointegración no lineal
    JEL: C32 D84 E32
    Date: 2021–04
  65. By: Jung, Alexander; Kühl, Patrick
    Abstract: This paper examines whether central bank communication stabilises euro area inflation expectations through the information and news channel. A novelty of the study is its use of data from Google Analytics on ECB website traffic as proxy for visitors’ attention to its communication. We conduct several econometric tests with daily data to measure the impact of ECB communication on the information demand of the public and ultimately on inflation expectations. Overall, this study shows that website attention, as captured by search volumes of visitors, influences euro area inflation expectations. We find that increased website attention contributes to narrowing the gap between market-based forecasts and (the mean of) longer-term professional inflation expectations. Our findings add to the theoretical evidence on the existence of an information and news channel. JEL Classification: C20, D80, E52, E58, G14
    Keywords: forward guidance, high-frequency identification, information and news channel, information demand, website attention
    Date: 2021–05
  66. By: Paul J.J. Welfens (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW)); Kaan Celebi (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))
    Abstract: There has been some recent debate about changes in the Phillips curve in the context of economic globalization and a flattening of the curve, respectively. Little evidence has been found in support of such links so far. However, our analysis shows that both inward FDI stock variables and outward FDI stock variables significantly affect the Phillips curve and the inflation-unemployment trade-off in the medium term. In the Euro Area, the inward FDI stock variable raises the slope of the Phillips curve, while the outward FDI stock variable brings a flattening of the Phillips curve; the latter effect is not observed in the case of the UK and in the case of the US there are no clear FDI effects. Furthermore, we consider - also for the first time in the literature - the impact of product innovations and process innovations. For the UK and the Euro Area, we find significant parameters for the variables mentioned. The analysis clearly suggests that foreign direct investment is crucial for understanding key macroeconomic variables; thus the findings could reinforce new DSGE research perspectives by ROEGER/WELFENS (2021) who have developed a new macro model with FDI. The OECD should urgently consider providing more data on FDI - for example, sector FDI stock data - and on product innovations and process innovations.
    Keywords: Globalization, Phillips curve, Foreign Direct Investment, Institutional Changes, New Phillips curve
    JEL: F62 F68 E31 F21 F23 O43
    Date: 2021–04
  67. By: Repullo, Rafael
    Abstract: Drechsler, Savov, and Schnabl (2017) claim that increases in the monetary policy rate lead to reductions in bank deposits, which account for the negative effect on bank lending. This paper reviews their theoretical analysis, showing that the relationship between the policy rate and the equilibrium amount of deposits is in fact U-shaped. Then, it constructs an alternative model, based on a simple microfoundation for the households' demand for deposits, where an increase in the policy rate always increases the equilibrium amount of deposits. These results question the theoretical underpinnings of the "deposits channel" of monetary policy transmission.
    Keywords: banks' market power; deposits channel; monetary policy transmission
    JEL: E52 G21 L13
    Date: 2020–12
  68. By: Audra Bowlus; Émilien Gouin-Bonenfant; Huju Liu; Lance Lochner; Youngmin Park
    Abstract: This paper studies the evolution of individual earnings inequality and dynamics in Canada from 1983 to 2016 using tax files and administrative records. Linking these individuals to their employers (and rich administrative records on firms) beginning in 2001, it also documents the relationship between the earnings dynamics of workers and the size and growth of their employers. It highlights three main patterns over this period: First, with a few exceptions (sharp increase in top 1% and declining gender gap), Canada has experienced relatively modest changes in overall earnings inequality, volatility, and mobility between 1983 and 2016. Second, there is considerable variability in earnings inequality and volatility over the business cycle. Third, the earnings dynamics of individuals are strongly related to the size and employment growth of their employers.
    JEL: E24 J24 J31 J62 L25
    Date: 2021–05
  69. By: Jordá, Óscar; Kornejew, Martin; Schularick, Moritz; Taylor, Alan M.
    Abstract: With business leverage at record levels, the effects of corporate debt overhang on growth and investment have become a prominent concern. In this paper, we study the effects of corporate debt overhang based on long-run cross-country data covering the near universe of modern business cycles. We show that business credit booms typically do not leave a lasting imprint on the macroeconomy. Quantile local projections indicate that business credit booms do not affect the economy's tail risks either. Yet in line with theory, we find that the economic costs of corporate debt booms rise when inefficient debt restructuring and liquidation impede the resolution of corporate financial distress and make it more likely that corporate zombies creep along.
    Keywords: business cycles; Corporate Debt; local projections
    JEL: E44 G32 G33 N20
    Date: 2020–12
  70. By: Piergiorgio Alessandri (Bank of Italy); Andrea Gazzani (Bank of Italy); Alejandro Vicondoa (Universidad Católica de Chile)
    Abstract: Isolating financial uncertainty shocks is difficult because financial markets rapidly price changes in several economic fundamentals. To bypass this difficulty, we identify uncertainty shocks using daily data and use their monthly averages as an instrument in a VAR. We show that this novel approach is theoretically appealing and has dramatic implications for leading empirical studies on financial uncertainty. Daily interactions between equity returns, bond spreads and expected volatility cause previous identification schemes to fail at the monthly frequency. Once these interactions are explicitly modeled, the impact of uncertainty shocks on output and inflation is significant and similar across specifications.
    Keywords: uncertainty shocks financial shocks structural vector autoregression high-frequency identification external instruments
    JEL: C32 C36 E32
    Date: 2021–04
  71. By: Yum, Minchul
    Abstract: This paper constructs a quantitative model of intergenerational mobility in which lifetime income mobility is shaped by various channels including parental time investments in children. The calibrated model delivers positive educational gradients in parental time investment, as observed in the data, and also successfully accounts for untargeted distributional aspects of income mobility, captured in the income quintile transition matrix. The model implies that removing the positive educational gradients in parental time investment during the whole childhood would reduce intergenerational income persistence nearly by 40 percent. Policy experiments suggest that subsidies to childhood investments that can diminish positive educational gradients in parental time investments would increase intergenerational mobility, and that there are better ways of subsidizing investments to achieve greater mobility in terms of aggregate output and welfare.
    Keywords: Intergenerational elasticity; quintile transition matrix; parental investments; college education
    JEL: E24 I24 J22
    Date: 2020–11
  72. By: Anderson, Eric; Rebelo, Sérgio; Wong, Arlene
    Abstract: In this paper, we provide direct evidence on the behavior of markups in the retail sector across space and time. Markups are measured using gross margins. We consider three levels of aggregation: the retail sector as a whole, the firm level, and the product level. We find that: (1) markups are relatively stable over time and mildly procyclical; (2) there is large regional dispersion in markups; (3) there is positive cross-sectional correlation between local income and local markups; and (4) differences in markups across regions are explained by differences in assortment within each goods category, not by deviations from uniform pricing. We propose an endogenous assortment model consistent with these facts.
    Keywords: business cycles; Gross margins; Marginal costs; prices
    JEL: E30
    Date: 2020–12
  73. By: Lancia, Francesco; Russo, Alessia; Worrall, Tim S
    Abstract: Optimal intergenerational insurance is examined in a stochastic overlapping generations endowment economy with limited enforcement of risk-sharing transfers. Transfers are chosen by a benevolent planner who maximizes the expected discounted utility of all generations while respecting the participation constraint of each generation. We show that the optimal sustainable intergenerational insurance is history dependent. The risk from a shock is unevenly spread into the future, generating heteroscedasticity and autocorrelation of consumption even in the long run. The optimum can be interpreted as a social security scheme characterized by a minimum welfare entitlement for the old and state-contingent entitlement thresholds.
    Keywords: Intergenerational insurance; Limited Commitment; Risk Sharing; stochastic overlapping generations
    JEL: D64 E21 H55
    Date: 2020–12
  74. By: Fernando Zarzosa Valdivia
    Abstract: Este paper extiende, para el período 2005M10-2020M03, el análisis de Zarzosa Valdivia (2020) al introducir outliers estocásticos en la dinámica de la inflación general y sus componentes (alimentos y bebidas, vestimenta o indumentaria, vivienda, equipamiento del hogar, salud, transporte y comunicación, recreación, educación y bienes y servicios varios). Encontramos evidencia de a) que en el 10\% de los últimos 15 años (34 meses) Argentina ha sufrido algún tipo de shock de precios, b) inercia inflacionaria cercana al 50% para la inflación general y los alimentos, c) la inflación aumentará en un 23% de una devaluación en el primer trimestre.
    Keywords: Inflación, inflación sectorial, ARMAX, Outliers, Inercia
    JEL: E31 E37 C5
    Date: 2020–11
  75. By: Jan de Loecker; Jan Eeckhout; Simon Mongey
    Abstract: We propose a general equilibrium model with oligopolistic output markets where two channels can cause a change in market power: (i) technology, via changes to productivity shocks and the cost of entry, (ii) market structure, via changes to the number of potential competitors. First, we disentangle these narratives by matching data on markups, labor reallocation and costs, finding that both channels are necessary to account for the data. Second, we show that changes in technology and market structure yield positive welfare effects through reallocation and selection, but off-setting negative effects from dead-weight loss and overhead. Overall, welfare is 9 percent lower in 2016 than in 1980. Third, the changes we identify explain and decompose cross-sectional patterns in declining business dynamism, declining equilibrium wages and labor force participation via reallocation toward larger, more productive firms.
    Keywords: business dynamism, market power in the aggregate economy, technological change, market structure, reallocation, Endogenous markups, wage stagnation, labor share, passthrough
    JEL: C6 D4 D5 L1
    Date: 2021–04
  76. By: Bettendorf, Timo; Jochem, Axel
    Abstract: Applying a BVAR model, the present paper first identifies the possible drivers of Germany's TARGET claims. In this context, in terms of potential causes, a distinction is made between a rise in the global risk assessment, tensions within the euro area, and European monetary policy. It becomes evident that the TARGET flows between 2015 and 2017 can be ascribed in large part to monetary policy and to a minor extent to the risk assessment within the euro area. At the peak of the European debt crisis between 2010 and mid-2012, the TARGET flows were affected by uncertainty in the euro area as a dominant factor, although global factors also played a key role according to the model. The BVAR model we use opens up the possibility of studying the causes of current fluctuations in Germany's TARGET claims.
    Keywords: target balances,risk,monetary policy,bayesian vector autoregression,sign restrictions
    JEL: C32 E52 F32
    Date: 2021
  77. By: Yuxi Yao (University of Western Ontario)
    Abstract: This paper documents that the drop in young homeownership is more persistent among non-college graduates compared to college graduates: while some college graduates postpone home purchasing, non-college graduates are more likely to remain longterm renters. I develop a model showing that the combination of a higher share of college graduates and a widening education-driven income gap accounts for the delayed home purchasing of college graduates and the lack of purchasing among non-college graduates. Exploiting cross-city variation, I find that the mechanism can quantitatively account for the diverging ownership decisions between the two education groups from 1980 to 2019.
    Keywords: Housing Tenure Choice, College Share, Household Income, Housing Prices, General Equilibrium Effects
    JEL: E21 E60 R21
    Date: 2021–04–29
  78. By: Wenxin Du; Jesse Schreger
    Abstract: The covered interest rate parity (CIP) condition is a fundamental arbitrage relationship in international finance. In this chapter, we review its breakdown during the Global Financial Crisis and its continued failure in the subsequent decade. We review how to measure CIP deviations, discuss the drivers of CIP deviations, and the implications of CIP deviations for global financial markets.
    JEL: E0 F0 G0
    Date: 2021–05
  79. By: Hall, Robert E.; Kudlyak, Marianna
    Abstract: Unemployment recoveries in the US have been inexorable. It is a remarkable fact that, prior to 2020, after unemployment reached its peak in a recession, and a recovery began, the annual reduction in the unemployment rate was stable at around 0.1 log points per year. The economy seems to have an irresistible force toward restoring full employment. Unless another crisis intervenes, unemployment continues to glide down to its minimum level of approximately 3.5 percentage points. The observed behavior of unemployment casts doubt on the common assumption that there is a constant natural rate of unemployment around which unemployment oscillates. Instead, the natural rate of unemployment during recoveries tracks actual unemployment on its downward path.
    Keywords: Business cycle; NAIRU; Natural unemployment rate; Recession; recovery; unemployment
    JEL: E32 J63 J64
    Date: 2021–01
  80. By: Ilzetzki, Ethan
    Abstract: We demonstrate a dramatic change over time in the international transmission of US monetary policy shocks. International spillovers from US interest rate policy have had a different nature since the 1990s than they did in post-Bretton Woods period. Our analysis is based on the a panel of 21 high income and emerging market economies. Prior to the 1990s, the US dollar appreciated, and ex-US industrial production declined, in response to increases in the US Federal Funds Rate, as predicted by textbook open economy models. The past decades have seen a shift, whereby increases in US interest rates depreciate the US dollar but stimulate the rest of the world economy. Results are robust to several identification methods. We sketch a simple theory of exchange rate determination in face of interest-elastic risk aversion that rationalizes these findings.
    Keywords: Exchange Rates; International Financial Intermediation; International spillovers; monetary
    Date: 2021–01
  81. By: Ignacio Galará (Instituto Nacional de Estadísticas de Chile)
    Abstract: Se propone un modelo teorico del mecanismo de formación de expectativas de inflacion en los consumidores, con el objetivo de identificar sus factores determinantes, la manera en que se asocian y su dinamica intertemporal ante la incertidumbre. El modelo es estimado mediante el Filtro de Kalman con la informacion de Argentina entre 2006 y 2020 para evaluar su consistencia, permitiendo identificar aspectos como la importancia que las personas asignan a sus propias creencias y el nivel de atencion a la información externa en cada período. El entendimiento de esta dinamica resulta clave en el escenario argentino de la ultima década, donde la inflación fue un punto focal en determinar el humor del consumidor y las políticas publicas, en un contexto de incertidumbre sobre el desempeno macroeconómico y de cuestionamiento sobre la veracidad de los datos de inflación.
    Keywords: Modelo de comportamiento Expectativas de Inflacion Sesgos de informacion Estimación Econométrica
    JEL: C51 D01 D81 D84 E21 E31
    Date: 2021–03
  82. By: Eduardo Levi Yeyati (Universidad Torcuato Di Tella/The Brookings Institution); Martín Montané (Universidad Torcuato Di Tella); Luca Sartorio (Universidad Torcuato Di Tella)
    Abstract: The past 5 years have witnessed a flurry of RCT evaluations that shed new light on the impact and cost effectiveness of Active Labor Market Policies (ALMPs) aiming to improve workers ´ access to new jobs and better wages. We report the first systematic review of 102 RCT interventions comprising a total of 652 estimated impacts. We find that (i) a third of these estimates are positive and statistically significant (PPS) at conventional levels; (ii) programs are more likely to yield positive results when GDP growth is higher and unemployment lower; (iii) programs aimed at building human capital, such as vocational training, independent worker assistance and wage subsidies, show significant positive impact, and (iv) program length, monetary incentives, individualized follow up and activity targeting are all key features in determining the effectiveness of the interventions.
    Keywords: vocational training labor policies wage subsidies randomized controlled trials
    JEL: J21 J48 E24
    Date: 2021–03
  83. By: Kilian Huber; Volker Lindenthal; Fabian Waldinger
    Abstract: Large-scale increases in discrimination can lead to dismissals of highly qualified managers. We investigate how expulsions of senior Jewish managers, due to rising discrimination in Nazi Germany, affected large corporations. Firms that lost Jewish managers experienced persistent reductions in stock prices, dividends, and returns on assets. Aggregate market value fell by roughly 1.8 percent of German GNP because of the expulsions. Managers who served as key connectors to other firms and managers who were highly educated were particularly important for firm performance. The findings imply that individual managers drive firm performance. Discrimination against qualified business leaders causes first-order economic losses.
    JEL: D22 E60 G30 J7 J71 M12 N24 N34 N8
    Date: 2021–05
  84. By: Jiménez, Gabriel; Martinez-Miera, David; Peydró, José Luis
    Abstract: We show strong overall and heterogeneous economic incidence effects, as well as distortionary effects, of only shifting statutory incidence (i.e., the agent on which taxes are levied), without any tax rate change. For identification, we exploit a tax change and administrative data from the credit market: (i) a policy change in 2018 in Spain shifting an existing mortgage tax from being levied on borrowers to being levied on banks; (ii) some areas, for historical reasons, were exempt from paying this tax (or have different tax rates); and (iii) an exhaustive matched credit register. We find the following robust results: First, after the policy change, the average mortgage rate increases consistently with a strong â?? but not complete â?? tax pass-through. Second, there is a large heterogeneity in such pass-through: larger for borrowers with lower income, a smaller number of lending relationships, not working for the lender, or facing less banks in their zip-code, thereby suggesting a bargaining power mechanism at work. Third, despite no variation in the tax rate, and consistent with the non-full tax pass-through, the tax shift increases banks' risk-taking. More affected banks reduce costly mortgage insurance in case of loan default (especially so if banks have weaker ex-ante balance sheets) and expand into non-affected but (much) ex-ante riskier consumer lending, experiencing even higher ex-post defaults within consumer loans.
    Keywords: banks; Incidence; inequality; Mortgages; risk-taking; taxes
    JEL: E51 G21 G28 G51 H22
    Date: 2020–12
  85. By: Oliver Pf\"auti
    Abstract: Based on a model of optimal information acquisition, I propose an approach to measure attention to inflation in the data. Applying this approach to US consumers and professional forecasters provides substantial evidence that attention to inflation in the US decreased significantly over the last five decades. Consistent with the theoretical model, attention is higher in times of volatile inflation. To examine the consequences of limited attention for monetary policy, I augment the standard New Keynesian model with a lower-bound constraint on the nominal interest rate and inflation expectations that are characterized by limited attention. Accounting for the lower bound fundamentally alters the normative implications of low attention. While lower attention raises welfare absent the lower-bound constraint, it decreases welfare when accounting for the lower bound. In the presence of the lower bound, limited attention can lead to inflation-attention traps: prolonged periods of a binding lower bound and low inflation due to slowly-adjusting inflation expectations. To prevent these traps, it is optimal to increase the inflation target as attention declines.
    Date: 2021–05
  86. By: Daniela Vidart (University of Connecticut)
    Abstract: This paper revisits the link between electrification and the rise in female labor force participation (LFP), and presents theoretical and empirical evidence showing that elec-trification triggered a rise in female LFP by increasing market opportunities for skilled women. I formalize my theory in an overlapping generations model, and find that my mechanism explains one third of the rise in female LFP during the rollout of electricity in the US (1880-1960), and matches the slow decline in female home-production hours during this period. I then present micro-evidence supporting my theory using newly digitized data on the early electrification of the US.
    Keywords: Female Labor Force Participation, Human Capital Accumulation, Electrification, Skill-biased Technical Change, Home to Market Transition, Brain vs. Brawn
    JEL: O33 J24 E24 O11 J22
    Date: 2021–05
  87. By: Vissing-Jørgensen, Annette
    Abstract: Starting from a set of facts on the timing of stock returns relative to Federal Reserve decision-making, I argue that informal communication â?? including unattributed communication -- plays a central role in monetary policy communication. This contrasts with the standard communications framework in which communication should be public and on-the-record because it serves to ensure accountability and policy effectiveness. I lay out possible benefits of using unattributed communication as an institution, but these should be weighed against substantial costs: It runs counter to accountability to use unattributed communication, causes frustration among those trying to understand central bank intensions, and enables use of such communication by individual policymakers. Unattributed communication driven by policymaker disagreements is unambiguously welfare reducing, because it reduces policy flexibility and harms the central bank's credibility and decision-making process. I suggest that central banks resist unattributed communication via expensive newsletters and increase consensus-building efforts to reduce disagreement-driven unattributed communication.
    Keywords: communication; monetary policy; Stock market
    JEL: E5 G12
    Date: 2020–12
  88. By: Barbero Jiménez, Javier; Madras, Giovanni; Rodríguez-Crespo, Ernesto; Rodríguez-Pose, Andrés
    Abstract: This paper examines â?? using a novel database of regional trade flows between 267 European regions for 2013 â?? how government quality affects trade between European Union (EU) regions. The results of a structural gravity cross-sectional analysis of trade show that trade across EU regions is highly influenced by differences in regional government quality. This influence varies by sector of economic activity and by the level of economic development of the region. The results indicate that, if the less developed regions of the EU want to engage in greater interregional trade, improving their institutional quality is a must.
    Keywords: gravity model of trade; institutions; quality of government; regional policy; structural estimation; Trade
    JEL: E02 F15 R10
    Date: 2021–01
  89. By: Cristina Mastropasqua (Bank of Italy); Alessandro Intonti (Bank of Italy); Michael Jennings (Bank of Italy); Clara Mandolini (Bank of Italy); Massimo Maniero (Bank of Italy); Stefano Vespucci (Bank of Italy)
    Abstract: The launch of TARGET2-Securities (T2S) in June 2015 marked a fundamental step towards the integration of Europe’s post-trading market. The Eurosystem’s decision in 2008 to build a pan-European platform for the settlement of securities in central bank money stemmed from the objectives and tasks embedded in the ESCB/ECB Statute, to define and implement the monetary policy of the Union and promote the smooth operation of payment systems. T2S also represents a key building block of capital market integration in the EU. The platform was realized by Banque de France, Banca d’Italia, Deutsche Bundesbank, Banco de España (4CB). Its project and operational costs were borne by all Eurosystem central banks; these costs will be entirely recovered through the service charges applied to T2S users. Today T2S is well-established in the landscape of European and global payment infrastructures. In 2020, it hosted the operations of twenty-one CSDs from twenty European markets; it settled over seven hundred thousand transactions per day in central bank money on a stable basis, with peaks of over one million. Its functioning is constantly monitored and subject to regular reporting by the Eurosystem to the market. In addition, it is subject to Eurosystem supervision according to the international principles defined for technological infrastructures of systemic importance. The evolution of T2S is a continuous development process; the next objectives concern the integration with other TARGET Services and the reiforcement of IT security and resilience measures, for which work is in progress. The challenges posed by emerging distributed technologies applied to securities settlement do not appear to constitute an alternative to the extremely advanced features of T2S. The European Commission’s issuance programme, which can be reasonably assumed will have propulsive effects for the European capital market, represents on the other hand an opportunity to enhance T2S network effects, increasing the number and size of settled instruments and the business opportunities for the markets connected to it. This work is divided into six chapters. Chapter 1 describes how T2S works. Chapter 2 explains the legal framework and the external governance structure. Chapter 3 focuses on the operations carried out in T2S by the European financial community. Chapter 4 illustrates the tasks carried out by Banca d’Italia. Chapter 5 describes the experiences of three leading Italian operators in T2S since its inception. Chapter 6 provides an account of planning and policy aspects, of the challenges posed by new technologies and of the opportunities to increase the central role of T2S in the European landscape. Creation date: 2021-05
    Keywords: payment systems, market infrastructures,financial markets,economic integration
    JEL: E42 E44 F36
  90. By: Exler, Florian; Livshits, Igor; MacGee, Jim; Tertilt, Michèle
    Abstract: There is active debate over whether borrowers' cognitive biases create a need for regulation to limit the misuse of credit. To tackle this question, we incorporate over-optimistic borrowers into an incomplete markets model with consumer bankruptcy. Lenders price loans, forming beliefs - type scores - about borrowers' types. Since over-optimistic borrowers face worse income risk but incorrectly believe they are rational, both types behave identically. This gives rise to a tractable theory of type scoring as lenders cannot screen borrower types. Since rationals default less often, the partial pooling of borrowers generates cross-subsidization whereby over-optimists face lower than actuarially fair interest rates. Over-optimists make financial mistakes: they borrow too much and default too late. We calibrate the model to the US and quantitatively evaluate several policies to address these frictions: reducing the cost of default, increasing borrowing costs, imposing debt limits, and providing financial literacy education. While some policies lower debt and filings, they do not reduce overborrowing. Financial literacy education can eliminate financial mistakes, but it also reduces behavioral borrowers' welfare by ending cross-subsidization. Score-dependent borrowing limits can reduce financial mistakes but lower welfare.
    Keywords: bankruptcy; Consumer credit; Cross-subsidization; financial literacy; Financial Mistakes; financial regulation; Over-Optimism; Type Score
    JEL: E21 E49 G18 K35
    Date: 2020–12
  91. By: Avichai Snir (Netanya Academic College); Haipeng Allan Chen (University of Kentucky); Daniel Levy (RCEA - Rimini Center for Economic Analysis, Emory University [Atlanta, GA], Bar-Ilan University [Israël], RCEA - Research Centre for Economic Analysis)
    Abstract: We use micro level retail price data from convenience stores to study the link between 0-ending price points and price rigidity during a period of a runaway inflation, when the annual inflation rate was in the range of 60%-430%. Surprisingly, we find that 0-ending prices are less likely to adjust, and when they do adjust, the average adjustments are larger. These findings suggest that price adjustment barriers associated with round prices are strong enough to cause a systematic delay in price adjustments even in a period of a runaway inflation, when 85 percent of the prices change every month.
    Keywords: Sticky Prices,Rigid Prices,0-Ending Price Points,9-Ending Price points,Runaway Inflation,Cost of Price Adjustment,Menu Cost,Hyperinflation
    Date: 2021
  92. By: Caselli, Francesca; Grigoli, Francesco; Sandri, Damiano; Spilimbergo, Antonio
    Abstract: Overall mobility declined during the COVID-19 pandemic because of government lockdowns and voluntary social distancing. Yet, aggregate data mask important heterogeneous effects across segments of the population. Using unique mobility indicators based on anonymized and aggregate data provided by Vodafone for Italy, Portugal, and Spain, we find that lockdowns had a larger impact on the mobility of women and younger cohorts. Younger people also experienced a sharper drop in mobility in response to rising COVID-19 infections. Our findings, which are consistent across estimation methods and robust to a variety of tests, warn about a possible widening of gender and inter-generational inequality.
    Keywords: age; COVID-19; Gender; lockdown; mobility
    JEL: E1 H0 I1
    Date: 2020–12
  93. By: Inoue, Atsushi; Kilian, Lutz
    Abstract: Several recent studies have expressed concern that the Haar prior typically imposed in estimating sign-identified VAR models may be unintentionally informative about the implied prior for the structural impulse responses. This question is indeed important, but we show that the tools that have been used in the literature to illustrate this potential problem are invalid. Specifically, we show that it does not make sense from a Bayesian point of view to characterize the impulse response prior based on the distribution of the impulse responses conditional on the maximum likelihood estimator of the reduced-form parameters, since the the prior does not, in general, depend on the data. We illustrate that this approach tends to produce highly misleading estimates of the impulse response priors. We formally derive the correct impulse response prior distribution and show that there is no evidence that typical sign-identified VAR models estimated using conventional priors tend to imply unintentionally informative priors for the impulse response vector or that the corresponding posterior is dominated by the prior. Our evidence suggests that concerns about the Haar prior for the rotation matrix have been greatly overstated and that alternative estimation methods are not required in typical applications. Finally, we demonstrate that the alternative Bayesian approach to estimating sign-identified VAR models proposed by Baumeister and Hamilton (2015) suffers from exactly the same conceptual shortcoming as the conventional approach. We illustrate that this alternative approach may imply highly economically implausible impulse response priors.
    Keywords: absolute loss; impulse response; Joint inference; Loss function; posterior; Prior
    JEL: C22 C32 C52 E31 Q43
    Date: 2020–12
  94. By: Basu, Susanto; Pascali, Luigi; Schiantarelli, Fabio; Servén, Luis
    Abstract: We show that the welfare of a countryiÌ s infinitely-lived representative consumer is summarized, to a first order, by total factor productivity (TFP), appropriately defined, and by the capital stock per capita. The result holds for both closed and open economies, regardless of the type of production technology and the degree of product market competition. Welfare-relevant TFP needs to be constructed with prices and quantities as perceived by consumers, not firms. Thus, factor shares need to be calculated using after-tax wages and rental rates. We use these results to calculate welfare gaps and growth rates in a sample of advanced countries with high-quality data on output, hours worked, and capital. We also present evidence for a broader sample that includes both advanced and developing countries.
    Keywords: productivity; Solow residual; TFP; welfare
    JEL: D24 D90 E20 O47
    Date: 2020–12
  95. By: European Fiscal Board (EFB)
    Abstract: Tn 1 July 2020, the European Fiscal Board has published its assessment of the general orientation of fiscal policy in the euro area. The economic consequences of the Covid-19 pandemic make the years 2020 and 2021 extraordinary and the assessment of the euro-area fiscal stance particularly relevant. All main forecasters anticipate a deep recession of around or more than 8% of GDP this year, followed by a partial recovery in 2021; downside risks are substantial. The fiscal measures adopted by individual Member States, flanked by the decisions of the European Central Bank and the proposals of the European Commission, in particular the Recovery Instrument are fully warranted. In light of the partial and fragile recovery expected for 2021, the Board cautions against a premature withdrawal of fiscal support measures at the Member State level and looks forward to a swift and effective implementation of recent EU proposals. It advocates a strong focus on growth-enhancing government expenditure including investment, to provide stabilisation in the short-term while bolstering prospects of stronger future growth. In 2020, containment measures taken in response to the Covid-19 pandemic have triggered an unprecedented recession in the euro area. The crisis simultaneously crippled supply and demand. The activation of the general escape clause of the Stability and Growth Pact was justified in light of the severe economic downturn and has enabled governments to make full use of their fiscal arsenal subject to the sustainability constraint. However, a review date and the conditions for an exit from the clause have not been indicated and should be discussed and agreed as soon as possible. Governments have reacted with discretionary fiscal measures estimated at 3¼ % of GDP on top of automatic stabilisers amounting to close to 5% of GDP. Recent announcements by Germany and France could increase the total amount of national discretionary measures to 4% of GDP. Several initiatives were also taken at the EU level. In its latest forecast, the Commission expects real GDP in the euro area to drop by close to 8% in 2020 followed by a sizable yet partial recovery in 2021, leaving the level of economic activity still 2% below its 2019 level. The expected recovery hinges on the assumption that demand rebounds strongly and no further general confinement measures are taken. The severity of the economic impact of the crisis varies greatly among Member States and regions, threatening to exacerbate existing differences in economic performance. The Board recognises that any prediction for economic growth in 2021 is subject to a high degree of uncertainty and that the balance of risks is tilted to the downside. As next year’s bounce-back of the euro area economy is expected to be limited, a withdrawal of fiscal support would be premature. The crisis has seen Member States with high levels of government debt prior to the outbreak of the Covid-19 pandemic hit especially hard in terms of the immediate health crisis as well as exposure to vulnerable sectors. As a result, negative growth combined with the fiscal response in 2020 will lead to a further major increase in government debt as share of GDP. For fiscally constrained Member States, a swift and effective implementation of the recent proposals for fiscal support at the EU level would be particularly welcome. The European instrument for temporary Support to mitigate Unemployment Risks in an Emergency (SURE) and particularly the Recovery Instrument have features of a genuine fiscal capacity, but they are designed as temporary instruments. The current economic shock has revealed once more the pitfalls of a monetary union without a meaningful and genuine central fiscal capacity. Against this backdrop, the Board sees the opportunity to kill two birds with one stone. Increasing government expenditure that stimulates demand while at the same time raising the long-term growth potential of the economy should be given particular prominence. Hence, the report published today includes a dedicated section outlining different approaches to support government investment and growth-friendly government expenditure more generally. Ideally, a central fiscal capacity or a dedicated investment fund would be complemented by a reformed Stability and Growth Pact that simplifies the fiscal framework while allowing governments to effectively protect growth-enhancing government expenditure.
    Date: 2020–07–01
  96. By: Raffaele Rossi (University of Manchester)
    Abstract: Using an estimated life-cycle model, we quantify the role of heterogeneity in wealth returns for the response of income to marginal tax changes. In our economy, agents who are sufficiently productive can obtain higher returns by choosing to be entrepreneurs. Return heterogeneity amplifies the responsiveness of total income to marginal tax changes along the entire income distribution with the top 1 percent displaying the highest elasticities. Return heterogeneity increases the incentives to invest for the richest, high-return entrepreneurs, thus amplifying their income responses to marginal tax changes. This reallocation of capital increases aggregate productivity, generating a larger boost in equilibrium wages. This in turn strengthens the income response of the bottom 90 percent, but nevertheless, their response is smaller than at the top.
    Keywords: risky investment, elasticity of taxable income, life-cycle, entrepreneurs, structural estimation
    JEL: E62 H21 H24
    Date: 2021–04
  97. By: Remy Levin (University of Connecticut); Daniela Vidart (University of Connecticut)
    Abstract: How do lifetime experiences of macroeconomic risk shape attitudes towards risk? We study this question theoretically and empirically for individuals in developing countries. We build a Bayesian model of choice in which agents’ risk attitude adapts to their evolving beliefs about background risk. Our model predicts that risk aversion will increase monotonically in the variance of the background risk, and will decrease convexly in the mean. We test the model by linking longitudinal surveys from Indonesia and Mexico, containing elicited measures of risk aversion for the same subjects years apart, with state-level real GDP growth time series capturing their lifetime macroeconomic experiences. In both countries measured risk aversion significantly increases in experienced growth volatility and significantly decreases in experienced mean growth. The effect of volatility is 0.9-4.3 times the effect of the mean, indicating that experiences of volatility are first-order drivers of risk attitudes.
    Keywords: Risk attitudes, experience effects, macroeconomic volatility, development
    JEL: D14 D81 D83 E32 G11 O11 O12
    Date: 2021–05
  98. By: Bernardo Morais; Gaizka Ormazabal; José-Luis Peydró; Mónica Roa; Miguel Sarmiento
    Abstract: We show corporate-level real, financial, and (bank) risk-taking effects associated with calculating loan provisions based on expected—rather than incurred—credit losses. For identification, we exploit unique features of a Colombian reform and supervisory, matched loan-level data. The regulatory change induces a dramatic increase in provisions. Banks tighten all new lending conditions, adversely affecting borrowing-firms, with stronger effects for risky-firms. Moreover, to minimize provisioning, more affected (less-capitalized) banks cut credit supply to risky-firms—SMEs with shorter credit history, less tangible assets or more defaulted loans—but engage in “search-for-yield” within regulatory constraints and increase portfolio concentration, thereby decreasing risk diversification. **** RESUMEN: Este documento analiza los efectos reales, financieros y de toma de riesgos bancarios asociados al cambio en el cálculo de las provisiones de los préstamos con base en pérdidas esperadas a las calculadas con base en pérdidas incurridas. En nuestra identificación explotamos características únicas de una reforma regulatoria en Colombia usando datos a nivel de préstamos banco-firma. Encontramos que el cambio regulatorio condujo a un importante incremento en las provisiones bancarias. Asimismo, los bancos endurecieron los estándares de crédito, afectando negativamente a las firmas deudoras con efectos más fuertes sobre las firmas riesgosas. Para reducir el nivel de provisiones, los bancos más afectados (menos capitalizados) redujeron la oferta de crédito a las firmas riesgosas (firmas pequeñas con menor historia crediticia, menores activos tangibles o mayores préstamos en mora) y a su vez, incrementaron la búsqueda de retorno dentro del sector menos afectado por la regulación, aumentaron así la concentración del portafolio de créditos y por ende reduciendo la diversificación del riesgo.
    Keywords: Loan provisions, IFRS9, ECL, corporate credit, real effects, bank risk-taking, Provisiones de préstamos, crédito corporativo, efectos reales, toma de riesgos bancarios
    JEL: E31 G21 G18 G28
    Date: 2021–05
  99. By: de Ferra, Sergio; Mitman, Kurt; Romei, Federica
    Abstract: Capital flows from equal to unequal countries. We document this empirical regularity in a large sample of advanced economies. The capital flows are largely driven by private savings. We propose a theory that can rationalize these findings: more unequal countries endogenously develop deeper financial markets. Households in unequal counties, in turn, borrow more, driving the observed direction of capital flows.
    Keywords: Capital Flows; current account; inequality
    JEL: E21 F32 F41
    Date: 2021–01
  100. By: Bianchi, Francesco; Bianchi, Giada; Song, Dongo
    Abstract: We adopt a time series approach to investigate the historical relation between unemployment, life expectancy, and mortality rates. We fit a Vector-autoregression (VAR) for the overall US population and for groups identified based on gender and race. We find that shocks to unemployment are followed by statistically significant increases in mortality rates and declines in life expectancy. We use our results to assess the long-run effects of the COVID-19 economic recession on mortality and life expectancy. We estimate the size of the COVID-19-related unemployment to be between 2 and 5 times larger than the typical unemployment shock, depending on race/gender, resulting in a 3.0% increase in mortality rate and a 0.5% drop in life expectancy over the next 15 years for the overall American population. We also predict that the shock will disproportionately affect African-Americans and women, over a short horizon, while white men might suffer large consequences over longer horizons. These figures translate in a staggering 0.89 million additional deaths over the next 15 years.
    Keywords: COVID-19; Life Expectancy; Mortality; Unemployment rate
    JEL: C32 E32 I14 J11
    Date: 2020–12
  101. By: Ella Hugo; David A. Savage; Benno Torgler
    Abstract: Corruption literature within economics has long returned ambiguous results with no concise cause or impact of corruption identified. This meta-analysis aims to find synergy within the corruption literature by assessing macroeconomic empirical studies that evaluate whether corruption ‘greases or sands’ the wheels of economic development. The meta-analysis provides an analysis of popular variables used within the corruption literature and assesses their significance when measuring corruption.
    Keywords: Meta-Analysis; Corruption; Macroeconomics; Publication Bias
    JEL: E00 D73 O1 C19
    Date: 2021–05
  102. By: European Fiscal Board (EFB)
    Abstract: The report provides a comprehensive and independent assessment of how the SGP was applied in the last complete surveillance cycle, 2018. Economic growth in 2018 turned out relatively strong, albeit slowing down in the second semester. Although it was in line with the expectations of spring 2017, many perceived the growth outturn as disappointing by comparison with the strong momentum of 2017 and after an intermediate period of more optimistic forecasts. Growth was unexpectedly job-rich and tax revenues turned out higher than planned. As a result, on aggregate fiscal positions improved more rapidly than expected, with the aggregate deficit reaching a historical low in both the EU and the euro area. On aggregate, the structural primary balance improved marginally. However, a large share of the unexpectedly high tax revenues was located in countries that already had fiscal space; and most of the countries that needed to reduce their high debt levels spent their higher revenues, if not more, instead of building fiscal buffers. Therefore, their fiscal position deteriorated or did not improve by as much as required. For the euro area as a whole, the relatively vigorous pace of expenditure growth net of revenue measures actually signals that fiscal policy was overly expansionary. During the 2018 fiscal surveillance cycle, the Commission applied a ‘margin of discretion’ on top of existing flexibility, reducing fiscal requirements for two Member States. When assessing compliance with requirements, it also used various elements of discretion to justify not drawing conclusions or taking corrective measures against several Member States for which there were serious signs of significant deviation. In this context, useful interventions by some national independent fiscal institutions (IFIs) helped strengthening transparency and accountability in individual Member States. More generally, IFIs could play a more effective role if they all were to meet an EU-wide set of minimum standards ensuring that they have sufficient means, independence and impact. The 2018 experience provides a good illustration of more general weaknesses in the EU fiscal framework and its implementation, as the EFB highlighted in its recent Assessment report. To overcome issues of complexity, opacity, poor compliance and political interference, the Board proposes radically simplifying the rules and clarifying governance. The reformed Pact would target a sustainable debt level, to be achieved by controlling net expenditure growth in a way that allows stabilising the economic cycle. An escape clause would allow room for inevitable discretion, but based on independent judgement. Additional possible reforms include a targeted Golden Rule to protect growth-enhancing public expenditure, making compliance with rules a precondition for access to a central fiscal capacity, reconsidering reverse qualified majority voting, and appointing a full-time President of the Eurogroup who is not a national finance minister.
    Date: 2019–10–29
  103. By: Jacob, Nicholas; Mion, Giordano
    Abstract: We revisit UK's poor productivity performance since the Great Recession by means of both a suitable theoretical framework and firm-level prices and quantities data for detailed products allowing us to both measure demand, and its changes over time, and distinguish between quantity total factor productivity (TFP-Q), i.e., the capacity to turn inputs into more physical output (number of shirts, liters of beer), and what we call revenue total factor productivity (TFP-R), i.e., productivity calculated using revenue (or value-added) as a measure of output and so the capacity to turn inputs into more revenue. This in turn allows us to measure how changes in TFP-Q, demand and markups ultimately affected revenue TFP, as well as labour productivity, over the Great Recession. Our findings suggest that the poor UK firms' productivity performance post-recession is due to both a weakening of demand and a decreasing TFP-Q pushing down sales, markups, revenue TFP and labour productivity.
    Keywords: demand; great recession; prices; Revenue TFP; Total factor productivity (TFP); United Kingdom
    JEL: D24 E01 L11 O47 O52
    Date: 2020–12
  104. By: European Fiscal Board (EFB)
    Abstract: On 25 June 2019, the European Fiscal Board published its assessment of the general orientation of fiscal policy in the euro area for 2020. The main forecasters currently consider that the euro area economy is going through a temporary period of weaker growth before picking up again, but they also flag downside risks. The Board concludes that, in an economy operating around potential and in view of economic and geopolitical uncertainty, a neutral fiscal stance is appropriate for the euro area as a whole in 2020. This can be achieved with differentiated fiscal stances at the country level. Member States that have not yet achieved sound fiscal positions need to build fiscal buffers, in line with the rules of the Stability and Growth Pact. Especially countries with a high public debt need to put it on a firm downward path. Conversely, large Member States whose budget surpluses exceed the requirements of the Pact should use part of their available fiscal space to invest more and support economic growth. After several quarters of strong growth, economic activity in the euro area has disappointed since mid-2018. Most forecasters currently expect it to grow only at a slow pace in 2019, because of external and domestic factors. On the external side, escalating trade tensions and tighter financial conditions have affected world trade and manufacturing, dampening foreign demand. On the domestic side, some adverse temporary factors are at play in the largest euro area Member States, including a slump in the automotive sector, social protests and political uncertainty. In 2020, both domestic and external demand are expected to strengthen again, although with some risks. The unemployment rate is forecast to fall to its lowest level since the euro’s introduction, supporting wage growth and consumption. Global economic activity is expected to rebound and net exports should weigh less on growth. Thanks to these factors, and with continued support from monetary policy, economic growth is expected to regain some momentum in 2020. There are, however, downside risks to this scenario. Trade tensions could flare up, growth in emerging economies may be weaker than expected, the withdrawal of the United Kingdom from the EU is surrounded by uncertainty, and financing conditions may tighten up in high-debt countries. The policy measures announced so far in euro area Member States sum up to some aggregate fiscal expansion in 2020, which goes beyond what is allowed by the Stability and Growth Pact and risks being pro-cyclical. The Board is of the view that, in an economy operating around potential, a neutral fiscal stance is more appropriate. Moreover, a significant part of the expected fiscal expansion originates in countries where high government debt-to-GDP ratios rather call for steady consolidation. The Board advises countries to build fiscal buffers until they reach their medium-term budgetary objective (MTO) – a position that ensures sustainable debt levels while offering room for manoeuvre during downturns. On the other hand, large euro area economies with budget surpluses exceeding their MTO can make a timely use of their fiscal space to strengthen current and future growth, especially by spending more on public investment. The Board is aware of risks to the economic forecasts and its guidance applies to the central scenario of a moderate pickup in economic growth. Automatic stabilisers can take care of normal growth surprises, and the rules of the Stability and Growth Pact include provisions for additional margins when needed. However, in the absence of a central fiscal capacity, the current framework is not equipped to significantly mitigate the impact of very adverse common shocks.
    Date: 2019–06–25
  105. By: Serena Merrino
    Abstract: The aim of this paper is to assess South Africa's fiscal multiplier across different states of the economy, with a focus on the financial accelerator mechanism of fiscal policy shocks, by estimating impulse response functions from both linear and non-linear local projections. The model finds evidence of strong business cycle effects such that, while the average multiplier is below 0.5, it reaches 1.2 during recessions and that, while credit volume diminishes during periods of positive output gap, it expands otherwise.
    Keywords: Fiscal multipliers, impulse response, State-dependent, Credit, South Africa, Financial dynamics, Multiplier effects
    Date: 2021
  106. By: Eduardo Levi Yeyati (Universidad Torcuato Di Tella/The Brookings Institution); Federico Sturzenegger (Universidad de San Andrés/Harvard Kennedy School)
    Abstract: This paper proposes a new methodology to assess fiscal sustainability. Our approach relies on computing both government ´s assets and liabilities as opposed to focuting only on explicity liabilities. Assets are primarily the present discounted value of taxes, while liablities are primarily the present discounted value of expenditures in addition to explicit liabilities. By looking at the government ´s balance sheet we can compute the net worth of government, as well as evaluate it’s response to growth, commodity prices or real exchange rate shocks. We show that the implications for fiscal sustainability may be different from those obtained by focusing only on explicit liabilities as in the traditional approaches.
    Date: 2021–04
  107. By: Lambert, Thomas; Wagner, Wolf; Zhang, Eden Quxian
    Abstract: We show that politically connected banks influence economic activity. We exploit shocks to individual banks' political capital following close US congressional elections. We find that regional output growth increases when banks active in the region experience an average positive shock to their political capital. The effect is economically large, but temporary, and is due to lower restructuring in the economy rather than increased productivity. We show that eased lending conditions (especially for riskier firms) can account for the growth effect. Our analysis is a first attempt to directly link the politics and finance literature with the finance and growth literature.
    Keywords: Campaign Contributions; close elections; corporate lending; creative destruction; economic growth; Political Connections; productivity
    JEL: D72 E65 G18 G21
    Date: 2020–12
  108. By: Emily Johnston-Ross; Song Ma; Manju Puri
    Abstract: This paper investigates the role of private equity (PE) in failed bank resolutions after the 2008 financial crisis, using proprietary FDIC failed bank acquisition data. PE investors made substantial investments in underperforming and riskier failed banks, particularly in geographies where local banks were also distressed, filling the gap created by a weak, undercapitalized banking sector. Using a quasi-random empirical design based on detailed bidding information, we show PE-acquired banks performed better ex post, with positive real effects for the local economy. Overall, PE investors had a positive role in stabilizing the financial system through their involvement in failed bank resolution.
    JEL: E65 G18 G21
    Date: 2021–05
  109. By: Minford, Patrick; Ou, Zhirong; Zhu, Zheyi
    Abstract: We revisit the evidence on consumer risk-pooling and uncovered interest parity. Widely used single equation tests are strongly biased against both. Using the full-model, Indirect Inference test, which is unbiased and has Goldilocks power by Monte Carlo experiments, we find that both the risk-pooling hypothesis and its weaker UIP version are generally accepted as part of a full world DSGE model. The fact that the risk-pooling hypothesis, with its implication of strong cross-border consumer linkage, has passed this test with generally the highest p-value, suggests that it deserves serious attention from policy-makers looking for a relevant model to discuss international monetary and other business cycle issues.
    Keywords: consumer risk-pooling; full-model test; indirect inference; Open economy; UIP
    JEL: C12 E12 F41
    Date: 2021–01
  110. By: Francisco Roldán (International Monetary Fund)
    Abstract: I examine the role of households' precautionary savings motive in amplifying and propagating changes in sovereign spreads. I study this mechanism in a model where the government of a small open economy borrows from foreigners but the debt is then partially held by heterogeneous domestic savers. In a calibration to Spain in the 2000s, default risk accounts for about half of the output contraction. More generally, sovereign risk exacerbates volatility in consumption over time and across agents, creating large and unequal welfare costs even if default does not materialize.
    Keywords: Sovereign risk default aggregate demand precautionary motives heterogeneous agents
    JEL: E21 F34 H63
    Date: 2021–04
  111. By: Boppart, Timo; Harmenberg, Karl; Hassler, John; Krusell, Per; Olsson, Jonna
    Abstract: We formulate an economic time use model and add to it an epidemiological SIR block. In the event of an epidemic, households shift their leisure time from activities with a high degree of social interaction to activities with less, and also choose to work more from home. Our model highlights the different actions taken by young individuals, who are less severely affected by the disease, and by old individuals, who are more vulnerable. We calibrate our model to time use data from ATUS, employment data, epidemiological data, and estimates of the value of a statistical life. There are qualitative as well as quantitative differences between the competitive equilibrium and social planner allocation and, moreover, these depend critically on when a cure arrives. Due to the role played by social activities in people's welfare, simple indicators such as deaths and GDP are insufficient for judging outcomes in our economy.
    JEL: E10 I10
    Date: 2020–12
  112. By: Bańbura, Marta; Brenna, Federica; Paredes, Joan; Ravazzolo, Francesco
    Abstract: This paper studies how to combine real-time forecasts from a broad range of Bayesian vector autoregression (BVAR) specifications and survey forecasts by optimally exploiting their properties. To do that, it compares the forecasting performance of optimal pooling and tilting techniques, including survey forecasts for predicting euro area inflation and GDP growth at medium-term forecast horizons using both univariate and multivariate forecasting metrics. Results show that the Survey of Professional Forecasters (SPF) provides good point forecast performance, but also that SPF forecasts perform poorly in terms of densities for all variables and horizons. Accordingly, when the model combination or the individual models are tilted to SPF's first moments, point accuracy and calibration improve, whereas they worsen when SPF's second moments are included. We conclude that judgement incorporated in survey forecasts can considerably increase model forecasts accuracy, however, the way and the extent to which it is incorporated matters. JEL Classification: C11, C32, C53, E27, E37
    Keywords: Entropic tilting, Judgement, Optimal Pooling, Real Time, Survey of Professional Forecasters
    Date: 2021–05
  113. By: Pengfei Han; Zhu Wang
    Abstract: Paying with a mobile phone is a cutting-edge innovation transforming the global payments industry. However, some advanced economies like the U.S. are lagging behind in mobile payment adoption. We construct a dynamic model with sequential payment innovations to explain this puzzle, which uncovers how advanced economies' past success in adopting card-payment technology holds them back in the mobile-payment race. Our calibrated model matches the cross-country adoption patterns of card and mobile payments and also explains why advanced and developing countries favor different mobile payment solutions. Based on the model, we conduct several quantitative exercises for welfare and policy analyses.
    Keywords: Technology adoption; Sunk cost; Payment system
    JEL: E4 G2 O3
    Date: 2021–03–01
  114. By: Razin, Assaf
    Abstract: Post WWII globalization forces are facing headwinds in the form of global crises-the "The Great Recession" and the "The Pandemic Recession". Israel's trade and financial globalization, however, is steadily rising. The pandemic-induced slump in economic activity is deep, as consumer spending, investment spending, and export demand tumble. Central banks, tied down by the zero interest rate, resort to semi-fiscal expansionary policies. Indeed, the stabilization burden falls on fiscal policy. The paper provides an overview of the new globalization trends in the world and in Israel, with emphasis on the role of global crises, the Global Financial Crisis, and the Pandemic Crisis in changing globalization long-term trends. When the coronavirus hit, supply chains and production have been disrupted. However, the impact of the pandemic shock is not on the supply side only. On the demand side, the desire to invest has plunged, while people across the rich world are now saving much of their income. Would this short-term changes can reinforce the re-trending of the globalization, which is observed since the Global Financial Crisis? The paper focuses on globalization forces and provides an overview of advanced economies and Israel.
    Date: 2021–01
  115. By: Dilger, Alexander
    Abstract: Der Kapitalwert lässt sich auch bei Null- und Negativzinsen zumindest über endliche Zeiträume einfach berechnen sowie betriebswirtschaftlich für Investitionsentscheidungen sinnvoll ver­wen­den. Volkswirtschaftlich ist relevant, warum es Zinsen von und unter null überhaupt gibt und ob höherer Konsum dann nicht besser wäre als ressourcenverbrauchende Investitionen.
    JEL: D25 D61 E43 G11 G31 H43 J11
    Date: 2021
  116. By: Benjamin Schoefer; Oren Ziv
    Abstract: Why do cities differ so much in productivity? Using a split-sample IV strategy, we document that up to three quarters of the large measured dispersion in productivity across US cities is spurious and reflects the "luck of the draw" of idiosyncratically heterogeneous plants. Due to this granularity bias, economies with randomly reallocated plants exhibit nearly as high a variance as the empirical economy. For new plants, four fifths of the raw dispersion reflects granularity bias, and their productivity is only imperfectly correlated with that of older plants, which dominate measured productivity levels. These US-based patterns broadly extend to European countries.
    JEL: D22 D24 E23 R0 R12
    Date: 2021–05
  117. By: Cazotto, Gabriel; Araujo, Lyanna
    Abstract: O artigo apresenta um estudo a mercê das exportações brasileiras durante a pandemia do COVID-19. A forma mais eficiente que o governo encontrou para conter a contaminação e o número de mortes é o lockdown, que foi estabelecido no país. Entretanto, ocasionou fortes impactos na oferta e demanda de bens e produtos. A partir da paralisação do serviço industrial, induziu uma diminuição das manufaturas, e consequentemente, o seu consumo e suas exportações. O setor agropecuário cresceu nesse período, exportando cada vez mais produtos, atendendo a demanda por alimentos de vários países, mas a demanda interna ficou prejudicada, produzindo uma alta na maioria dos bens alimentícios. Um dos setores mais importante é o de serviços, que representa cerca de mais 70% no Produto Interno Bruto – PIB na qual caiu significativamente durante os dois primeiros trimestres do ano, somente no terceiro trimestre o PIB se valorizou frente ao período anterior. As expectativas para 2021, são de melhores resultados, a esperança é para que a vacina chegue no primeiro semestre e assim, aumente o consumo e encaminhando uma repercussão positiva para a economia brasileira, que tanto foi prejudicada.
    Keywords: COVID-19. Economia. Exportações. Setor Industrial e Agropecuário.
    JEL: E0 E6 I1 Q1
    Date: 2020–12–20
  118. By: Azar, José; Vives, Xavier
    Abstract: We develop a tractable general equilibrium framework in which firms are large and have market power with respect to both products and labor, and in which a firm's decisions are affected by its ownership structure. We characterize the Cournot-Walras equilibrium of an economy where each firm maximizes a share-weighted average of shareholder utilities-rendering the equilibrium independent of price normalization. In a one-sector economy, if returns to scale are non-increasing then an increase in "effective" market concentration (which accounts for common ownership) leads to declines in employment, real wages, and the labor share. Yet when there are multiple sectors, due to an intersectoral pecuniary externality, an increase in common ownership could stimulate the economy when the elasticity of labor supply is high relative to the elasticity of substitution in product markets. We characterize for which ownership structures the monopolistically competitive limit or an oligopolistic one are attained as the number of sectors in the economy increases. When firms have heterogeneous constant returns to scale technologies we find that an increase in common ownership leads to markets that are more concentrated.
    Keywords: Antitrust Policy; Common ownership; corporate governance; Labor Share; macro economy; market power; oligopsony; portfolio diversification
    JEL: D43 D51 E11 L21 L41
    Date: 2020–11
  119. By: Matthias Birkner; Niklas Scheuer; Klaus Wälde
    Abstract: We study a small open economy displaying Pareto-distributed wealth resulting from random death. The government runs a distribution scheme on inheritance. We present the mathematical background that allows to study the dynamics of means. We end up with ordinary differential equations for the mean of age and of individual and government wealth. We also study distributional dynamics analytically. Starting from any distribution of age and wealth, the aggregate distribution converges, both on a transition path towards a steady state and on a transition path towards balanced growth, to an exponential distribution of age and a Pareto-distribution of wealth. The findings are illustrated for different distribution schemes.
    Keywords: analytical dynamics of mean and distribution, age and wealth, government budget, stochastic differential equation, Kolmogorov backward equation
    JEL: C61 D31 E21
    Date: 2021
  120. By: Prados de la Escosura, Leandro; Santiago-Caballero, Carlos
    Abstract: The Napoleonic Wars had dramatic consequences for Spain's economy. The Peninsular War had higher demographic impact than any other military conflict, including civil wars, in the modern era. Farmers suffered confiscation of their crops and destruction of their main capital asset, livestock. The shrinking demand, the disruption of international and domestic trade, and the shortage of inputs hampered industry and services. The loss of the American colonies, a by-product of the French invasion, seriously harmed absolutism. In the long run, however, the Napoleonic Wars triggered the dismantling of Ancien Régime institutions and interest groups. Freed from their constraints, the country started a long and painful transition towards the liberal society. The Napoleonic Wars may be deemed, then, as a watershed in Spanish history.
    Keywords: growth; Institutional Change; Napoleonic Wars; Peninsular War; Spain
    JEL: E02 F54 N13 N43
    Date: 2020–12
  121. By: Binzel, Christine; Link, Andreas; Ramachandran, Rajesh
    Abstract: The use of a language in written and formal contexts that is distinct from the varieties used in everyday communication - such as Latin in early modern Europe and Standard Arabic in the Arabic-speaking world - comes with benefits, but also with costs. Drawing on city-level data on all books and pamphlets published in Europe between 1451 and 1600, we document that the Protestant Reformation led to a sharp rise in vernacular printing, such that by the end of the 16th century, the majority of works were printed in spoken tongues rather than in Latin. This transformation allowed broader segments of society to access knowledge. It was also associated, as we show, with a significant diversification in the composition of authors and book content. Finally, we provide evidence that an increase in vernacular printing at the city level is strongly correlated with higher population growth - a proxy for economic development - and in the birth of notable innovators and creative individuals. In this way, we argue that the vernacularization of printing was an important driver of European dynamism in the early modern period.
    Keywords: economic development; Inclusive institutions; Language; Protestant Reformation
    JEL: E02 N13 Z12 Z13
    Date: 2020–11
  122. By: European Fiscal Board (EFB)
    Abstract: On 11 September 2019, the European Fiscal Board (EFB) published an assessment of the EU fiscal rules. The assessment was produced in response to a dedicated request by Commission President Jean-Claude Juncker as part of an ongoing comprehensive review of the EU fiscal framework with a focus on the six and two-pack legislation. It was carried out against three main criteria: (1) ensuring the long-term sustainability of public finances; (2) stabilising economic activity in a counter-cyclical fashion; and (3) improving the quality of public finances. The EFB proposes to overcome the complexity of the current EU fiscal framework by simplifying the EU fiscal rules and by improving the governance of the fiscal framework. The EFB advocates for a reformed Stability and Growth Pact which would be based on one single target (sustainable public debt), one single instrument (controlling net expenditure growth) and one general escape clause.
    Date: 2019–08–01
  123. By: Saccal, Alessandro
    Abstract: The following contributions are hereby worked: one mathematically formalises Mundell’s Impossible trio and Rodrik’s Globalisation paradox, supplying the latter with a taxonomy in terms of the current account; by means of Kaldor’s price endogeneity in output, one proves that external real money market disparity and trade generate external output mismatches and lead to autarky unless offset, using topology and dynamical systems; one characterises transfers and federalism and shows that all unitary states are federal polities and can merge into confederations; one demonstrates that the said external output mismatches can be only eluded via autarky or neutralisation, irrespective of federalism; one discerns artificial currency areas guaranteeing inter-regional external output equality and modern protectionism as two Nash equilibria, especially rationalising the nexus between the Gold standard, the Industrial revolution and the Great divergence therethrough.
    Keywords: autarky; federalism; inefficiency; trilemma.
    JEL: E12 F13 F22 F41 F43 F45 F52 F60 N10 O11 O40
    Date: 2019–07–27
  124. By: Broer, Tobias; Krusell, Per; Öberg, Erik
    Abstract: We use an analytically tractable heterogeneous-agent (HANK) version of the standard New Keynesian model to show how the size of fiscal multipliers depends on i) the distribution of factor incomes, and ii) the source of nominal rigidities. With sticky prices but flexible wages, the standard representative-agent (RANK) model predicts large multipliers because profits fall after a fiscal stimulus and the resulting negative income effect makes the representative worker work harder. Our HANK model, where workers do not own stock and thus do not receive profit income, predicts smaller fiscal multipliers. In fact, they are smaller with sticky prices than with flexible prices. When wages are the source of nominal rigidity, in contrast, fiscal multipliers are close to one, independently of income heterogeneity and price stickiness.
    Date: 2021–01
  125. By: María José Catalán; Emilse Vargas Ochuza
    Abstract: Esta investigación propone analizar en primera instancia cómo es el desempeño fiscal de cada una de las 23 provincias argentinas, junto con la Ciudad Autónoma de Buenos Aires, para el período 1988-2018. Los resultados denotan de que casi la totalidad de las mismas presentan una política fiscal procíclica, en línea con el comportamiento del país a nivel nacional. Por otra parte, se detalla un modelo teórico que expone cómo las transferencias discrecionales por parte del gobierno federal generan una relación estratégica entre las provincias, y cuyos resultados sirven de sustento para un análisis empírico de las transferencias y la posible creación de un fondo de reserva anticíclico a partir de ellas. Lo último será realizado a modo de complemento en una investigación futura.
    Keywords: Política fiscal, Prociclicidad, Provincias Argentinas, Transferencias
    JEL: H3 H5
    Date: 2020–11
  126. By: Peter Jarrett
    Abstract: For many years now, a growing number of economists, policy makers, and civil society groups have pointed to the limits of using only GDP as the primary measure of national economic progress. Accordingly, a progressively greater focus has been placed on the concept of well-being and its optimal measurement, as well as its appropriate use in budgeting and other aspects of policymaking. Canada has had a long history of measuring subjective well-being and a good pre-COVID 19 record on many of its determinants but has not yet decided on an official government-wide framework. This chapter delves into the topic and then looks at some of its crucial aspects, in particular: inequality and poverty including food insecurity; housing affordability and homelessness; physical and mental health and long-term care, with a special focus on Pharmacare; and environmental conditions. It includes a special section on the problems facing Indigenous peoples and those belonging to racialise.
    Keywords: child care, guaranteed income, health care, homelessness, housing, income inequality,, Indigenous People, long-term care, poverty, well-being
    JEL: D3 D6 E2 I1 I2 I3 O51
    Date: 2021–05–12
  127. By: De Giorgi, Giacomo; Pellizzari, Michele; Rodríguez Barraquer, Tomás
    Abstract: We propose a model where forward-looking agents first decide to form links with each other and, then, engage in a production activity jointly with their linked peers. Exogenous linking opportunities facilitate the creation of network connections and the return to productive effort varies with the personal attributes of the connected agents. We apply our model to a purposely built dataset of college students containing information on the endogeneous networks of study partners linked with administrative records on the students' characteristics and academic performance. Identification relies upon the random assignment of students to classrooms, which generates exogenous opportunities for socialisation. Using the estimated structural parameters, we investigate the implications of two counterfactual experiments, one where students are streamed into classes by ability and one with single-sex classes.
    Keywords: counterfactual; Education; estimation; networks; Production
    JEL: C15 C63 C73 D85 E23 I23
    Date: 2020–11
  128. By: Alexander Chaudhry; Anneke Kosse; Karen Sondergard
    Abstract: The Large Value Transfer System (LVTS) is Canada’s electronic funds transfer system for large-value and time-critical payments. It forms the backbone of the Canadian financial system. If the payments in the LVTS were to come to a halt, this would have a systemic impact on overall economic activity and affect the stability of the Canadian financial system. In this note we discuss the role that the LVTS has played during the onset of the Covid-19 pandemic and we evaluate the stress experienced in the system in 2020. In particular, we examine the number and value of rejected and delayed payments, the proportion of Tranche 2 transactions and intraday bilateral credit limit adjustments. We show that lessons learned from the 2008–09 global financial crisis in terms of the timing and effectiveness of specific Bank of Canada policy measures have helped avoid potential liquidity stresses in the LVTS in 2020.
    Keywords: Coronavirus disease (COVID-19); Financial institutions; Financial stability; Payment clearing and settlement systems
    JEL: E65
    Date: 2021–05
  129. By: Itskhoki, Oleg
    Abstract: The real exchange rate (RER) measures relative price levels across countries, capturing deviations from purchasing power parity (PPP). RER is a key variable in international macroeconomic models as it is central to equilibrium conditions in both goods and asset markets. It is also one of the most starkly-behaved variables empirically, tightly co-moving with the nominal exchange rate and virtually uncorrelated with most other macroeconomic variables, nominal or real. This survey lays out an equilibrium framework of RER determination, focusing separately on each building block and discussing corresponding empirical evidence. We emphasize home bias and incomplete pass-through into prices with expenditure switching and goods market clearing, imperfect international risk sharing, country budget constraint and monetary policy regime. We show that RER is inherently a general-equilibrium variable, which depends on the full model structure and policy regime, and therefore partial theories like PPP are insufficient to explain it. We also discuss issues of stationarity and predictability of exchange rates.
    Keywords: Backus-Smith puzzle; PPP puzzle; real exchange rate
    JEL: E30 F31 F41
    Date: 2020–12
  130. By: -
    Abstract: The United States economy contracted by 3.5% in 2020 —the worst performance since the Second World War— but is currently expected to grow by an estimated 6.5% in 2021, the fastest pace in three decades. While there is optimism for the growth outlook this year and beyond, uncertainty and risks prevail. The United States economic outlook: 2020 in review and early 2021 developments presents and analyses the developments in the United States economy in 2020 and early 2021, and examines how they could affect financial conditions in Latin America and the Caribbean. The report includes a gender focus on the impact of the pandemic on the labour market.
    Date: 2021–05–04
  131. By: Azeredo da Silveira, Rava; Sung, Yeji; Woodford, Michael
    Abstract: We propose a model of optimal decision making subject to a memory constraint. The constraint is a limit on the complexity of memory measured using Shannon's mutual information, as in models of rational inattention; but our theory differs from that of Sims (2003) in not assuming costless memory of past cognitive states. We show that the model implies that both forecasts and actions will exhibit idiosyncratic random variation; that average beliefs will also differ from rational-expectations beliefs, with a bias that fluctuates forever with a variance that does not fall to zero even in the long run; and that more recent news will be given disproportionate weight in forecasts. We solve the model under a variety of assumptions about the degree of persistence of the variable to be forecasted and the horizon over which it must be forecasted, and examine how the nature of forecast biases depends on these parameters. The model provides a simple explanation for a number of features of reported expectations in laboratory and field settings, notably the evidence of over-reaction in elicited forecasts documented by Afrouzi et al. (2020) and Bordalo et al. (2020a).
    Keywords: over-reaction; rational inattention; Survey expectations
    JEL: D84 E03 G41
    Date: 2020–11

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