nep-mac New Economics Papers
on Macroeconomics
Issue of 2021‒05‒31
126 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. How “Monetization” Really Works—Examples from Nations’ Policy Responses to COVID-19 By Felipe, Jesus; Fullwiler, Scott; Estrada, Gemma; Jaber, Maria Hanna; Magadia, Mary Ann; Patagan, Remrick
  2. Forecasting Base Metal Prices with an International Stock Index By Pincheira, Pablo; Hardy, Nicolas; Bentancor, Andrea; Henriquez, Cristóbal; Tapia, Ignacio
  3. Understanding Uncertainty Shocks in Uruguay through VAR modeling By Bibiana Lanzilotta; Gabriel Merlo; Gabriela Mordecki; Viviana Umpierrez
  4. Forecasting with Shadow-Rate VARs By Andrea Carriero; Todd E. Clark; Massimiliano Marcellino; Elmar Mertens
  5. Fiscal Policy Interventions at the Zero Lower Bound By Sabri Boubakera; Duc Khuong Nguyen; Nikos Paltalidis
  6. Is It Time to Reassess the Focal Role of Core PCE Inflation? By Randal Verbrugge
  7. Expectations, Stagnation and Fiscal Policy: a Nonlinear Analysis By Evans, George W.; Honkapohja, Seppo; Mitra, Kaushik
  8. Monetary Policy and Asset Price Overshooting: A Rationale for the Wall/Main Street Disconnect By Caballero, Ricardo; Simsek, Alp
  9. Modeling and Forecasting Macroeconomic Downside Risk By De Polis, Andrea; Delle Monache, Davide; Petrella, Ivan
  10. Monetary Policy when the Phillips Curve is Locally Quite Flat By Beaudry, Paul; Hou, Chenyu; Portier, Franck
  11. A dilemma between liquidity regulation and monetary policy: some history and theory By Monnet, Eric; Vari, Miklos
  12. Inequality, household debt, ageing and bubbles: A model of demand-side Secular Stagnation By Di Bucchianico, Stefano
  13. Negative Monetary Policy Rates and Systemic Banks' Risk-Taking: Evidence from the Euro Area Securities Register By Bubeck, Johannes; Maddaloni, Angela; Peydró, José Luis
  14. The International Aspects of Macroprudential Policy By Forbes, Kristin
  15. Belief Distortions and Macroeconomic Fluctuations By Bianchi, Francesco; Ludvigson, Sydney C.; Ma, Sai
  16. Fiscal and Monetary Stabilization Policy at the Zero Lower Bound: Consequences of Limited Foresight By Woodford, Michael; Xie, Yinxi
  17. Public Debt and state-dependent Effects of Fiscal Policy in the Euro Area By Snezana Eminidou; Martin Geiger; Marios Zachariadis
  18. Earnings Inequality and the Minimum Wage: Evidence from Brazil By Niklas Engbom; Christian Moser
  19. Stabilization vs. Redistribution: the Optimal Monetary-Fiscal Mix By Bilbiie, Florin Ovidiu; Monacelli, Tommaso
  20. A Quantitative Model for the Integrated Policy Framework By Adrian, Tobias; Erceg, Christopher J.; Lindé, Jesper; Zabczyk, Pawel; Zhou, Jianping
  21. Financial Frictions: Macro vs Micro Volatility By Lee, Seungcheol; Luetticke, Ralph; Ravn, Morten O
  22. The Inflation Expectations of U.S. Firms: Evidence from a new survey By Bernardo Candia; Olivier Coibion; Yuriy Gorodnichenko
  23. The Inflation Expectations of U.S. Firms: Evidence from a New Survey By Candia, Bernardo; Coibion, Olivier; Gorodnichenko, Yuriy
  24. The Economic Effects of COVID-19 Containment Measures By Deb, Pragyan; Furceri, Davide; Ostry, Jonathan D.; Tawk, Nour
  25. Oil Prices, Gasoline Prices and Inflation Expectations: A New Model and New Facts By Kilian, Lutz; Zhou, Xiaoqing
  26. Liquidity Traps in a Monetary Union By Kollmann, Robert
  27. Interest Rate Spreads in the Baltics and the Rest of the Euro Area: Understanding the Factors behind the Differences By Konstantins Benkovskis; Olegs Tkacevs; Karlis Vilerts
  28. Government Debt Maturity in Japan: 1965 to the Present By Junko Koeda; Yosuke Kimura
  29. Fundamental Disagreement about Monetary Policy and the Term Structure of Interest Rates By Cao, Shuo; Crump, Richard K.; Eusepi, Stefano; Moench, Emanuel
  30. Capital-Skill Complementarity and Inequality: Twenty Years After By Maliar, Lilia; Maliar, Serguei; Tsener, Inna
  31. Explaining Monetary Spillovers: The Matrix Reloaded By Kearns, Jonathan; Schrimpf, Andreas; Xia, Fan Dora
  32. Real Estate and Construction Sector Dynamics Over the Business Cycle By Konstantinos Vasilopoulos; William Tayler
  33. State Space Model to Detect Cycles in Heterogeneous Agents Models By Filippo Gusella; Giorgio Ricchiuti
  34. Economic Growth through Worker Reallocation: The Role of Knowledge Spillovers By Eero Mäkynen
  35. Dynamic linkages among financial stability, house prices and residential investment in Greece By Anastasiou, Dimitrios; Kapopoulos, Panayotis
  36. COVID-19 and Monetary Policy with Zero Bounds: A Cross-Country Investigation By Hakan Yilmazkuday
  37. Effective Demand Failures and the Limits of Monetary Stabilization Policy By Woodford, Michael
  38. When Does Monetary Policy Sway House Prices? A Meta-Analysis By Ehrenbergerova, Dominika; Bajzik, Josef; Havranek, Tomas
  39. Kicking the can down the road: government interventions in the European banking sector By Acharya, Viral V.; Jager, Maximilian; Steffen, Sascha; Steinruecke, Lea
  40. Micro level data for macro models: the distributional effects of monetary policy By Luisa Corrado; Daniela Fantozzi
  41. This Time It's Different: The Role of Women's Employment in a Pandemic Recession By Alon, Titan; Doepke, Matthias; Olmstead-Rumsey, Jane; Tertilt, Michèle
  42. Doubling Down on Debt: Limited Liability as a Financial Friction By Perla, Jesse; Pflueger, Carolin; Szkup, Michal
  43. A Multisector Perspective on Wage Stagnation By Ngai, Liwa Rachel; Sevinc, Orhun
  44. Nonbanks, Banks, and Monetary Policy: U.S. Loan-Level Evidence since the 1990s By Elliott, David; Meisenzahl, Ralf; Peydró, José Luis; Turner, Bryce C.
  45. Global Business and Financial Cycles: A Tale of Two Capital Account Regimes By Acalin, Julien; Rebucci, Alessandro
  46. Italy in the Eurozone By Keuschnigg, Christian; Kirschner, Linda; Kogler, Michael; Winterberg, Hannah
  47. Currency appreciation, distance to border and price changes: Evidence from Swiss retail prices By Foellmi, Reto; Jäggi, Adrian; Schnell, Fabian
  48. Nelson-Siegel Decay Factor and Term Premia in Japan By Junko Koeda; Atushi Sekine
  49. The Effects of Fiscal Policy on Households during the COVID-19 Pandemic: Evidence from Emerging Economies By Bui, Dzung; Dräger, Lena; Hayo, Bernd; Nghiem, Giang
  50. Exploring the usefulness of Fintech in the dark era of COVID-19 By PINSHI, Christian P.
  51. Why Do Couples and Singles Save During Retirement? By Mariacristina De Nardi; Eric French; John Bailey Jones; Rory McGee
  52. The Direct Employment Impact of Public Investment By Moszoro, Marian
  53. Pandemic Ebbs and Flows: Economic Data, Inflation Concerns, and Policymaking By Eric S. Rosengren
  54. Pandemic Ebbs and Flows: Economic Data, Inflation Concerns, and Policymaking By Eric S. Rosengren
  55. Pandemic Ebbs and Flows: Economic Data, Inflation Concerns, and Policymaking By Eric S. Rosengren
  56. The Effect of Containment Measures on the COVID-19 Pandemic By Deb, Pragyan; Furceri, Davide; Ostry, Jonathan D.; Tawk, Nour
  57. GDP Modelling and Forecasting Using ARIMA. An Empirical Assessment for Innovative Economy Formation By VINTU, Denis
  58. Systemic Risk Spillovers Across the EURO Area By Alexandros Skouralis
  59. Income-Driven Labor Market Polarization By Comin, Diego; Danieli, Ana; Mestieri, Martí
  60. Real-Time Inequality and the Welfare State in Motion: Evidence from COVID-19 in Spain By Aspachs, Oriol; Durante, Ruben; Graziano, Alberto; Mestres, Josep; Montalvo, Jose G; Reynal-Querol, Marta
  61. Debt Buildup and Currency Vulnerability: Evidence from Global Markets By Park , Donghyun; Ramayandi , Arief; Tian, Shu
  62. Selection into entrepreneurship and self-employment By Levine, Ross; Rubinstein, Yona
  63. When Creativity Strikes: News Shocks and Business Cycle Fluctuations By Bluwstein, Kristina; Hacioglu Hoke, Sinem; Miranda-Agrippino, Silvia
  64. Destabilizing Effects of Market Size in the Dynamics of Innovation By Matsuyama, Kiminori; Ushchev, Philip
  65. Life-cycle inequality: Blacks and whites differentials in life expectancy, savings, income, and consumption By De Giorgi, Giacomo; Gambetti, Luca; Naguib, Costanza
  66. The Long Recession and the Economic Consequences of the Pandemic By Tsoulfidis, Lefteris; Tsaliki, Persefoni
  67. Modelling the Relation between the US Real Economy and the Corporate Bond-Yield Spread in Bayesian VARs with non-Gaussian Disturbances By Kiss, Tamás; Mazur, Stepan; Nguyen, Hoang; Österholm, Pär
  68. Uncertainty, Misallocation and the Life-cycle Growth of Firms By Eero Mäkynen; Oskari Vähämaa
  69. Free Banking in Sweden: The Case of Private Bank Notes, 1831-1902 By Jonung, Lars
  70. Transatlantic Technologies: The Role of ICT in the Evolution of U.S. and European Productivity Growth By Gordon, Robert J; Sayed, Hassan
  71. Procyclical Asset Management and Bond Risk Premia By Barbu, Alexandru; Fricke, Christoph; Moench, Emanuel
  72. Women, Violence and Work: Threat of Sexual Violence and Women's Decision to Work By Chakraborty, Tanika; Lohawala, Nafisa
  73. Pandemic Control in ECON-EPI Networks By Azzimonti, Marina; Fogli, Alessandra; Perri, Fabrizio; Ponder, Mark
  74. Forecasting developing Asian economies during normal times and large external shocks: Approaches and challenges By Kensuke Tanaka
  75. Financial Returns to Household Inventory Management By Baker, Scott R.; Johnson, Stephanie; Kueng, Lorenz
  76. Are temporary value-added tax reductions passed on to consumers? Evidence from Germany's stimulus By Montag, Felix; Sagimuldina, Alina; Schnitzer, Monika
  77. Interest Rates, Market Power, and Financial Stability By Martinez Miera, David; Repullo, Rafael
  78. The Finnish Fiscal Policy – A Ship Without an Anchor By Kuusi, Tero; Puonti, Päivi; Kangasharju, Aki
  79. Concentration in Asia’s Cross-Border Banking: Determinants and Impacts By Lapid , Ana Kristel; Mercado, Jr. , Rogelio; Rosenkranz, Peter
  80. Beyond Pangloss: Financial sector origins of inefficient economic booms By Malherbe, Frédéric; McMahon, Michael
  81. Productivity dispersion and sectoral labour shares in Europe By Martina Lawless; Luke Rehill
  82. Permanent Income Shocks, Target Wealth, and the Wealth Gap By Jappelli, Tullio; Pistaferri, Luigi
  83. The Heterogeneous Impact of Short-Time Work: From Saved Jobs to Windfall Effects By Cahuc, Pierre; Kramarz, Francis; Nevoux, Sandra
  84. Slums and Pandemics By Brotherhood, Luiz; Cavalcanti, Tiago; Da Mata, Daniel; Santos, Cezar
  85. Corporate taxes, investment and the self-financing rate. The effect of location decisions and exports By Thomas von Brasch; Ivan Frankovic; Eero Tölö
  86. Economic Growth in Sub-Saharan Africa, 1885-2008 By Broadberry, Stephen N; Gardner, Leigh
  87. Nepotism vs. Intergenerational Transmission of Human Capital in Academia (1088--1800) By de la Croix, David; Goñi, Marc
  88. How Does U.S. Monetary Policy Affect Emerging Market Economies? By Ozge Akinci; Albert Queraltó
  89. The Dynamic Response of Municipal Budgets to Revenue Shocks By Helm, Ines; Stuhler, Jan
  90. Consumption and Income Inequality across Generations By Gallipoli, Giovanni; Low, Hamish; Mitra, Aruni
  91. Forecasting Output Growth of Advanced Economies Over Eight Centuries: The Role of Gold Market Volatility as a Proxy of Global Uncertainty By Afees A. Salisu; Rangan Gupta; Sayar Karmakar; Sonali Das
  92. ICT Diffusion, Foreign Direct Investment and Inclusive Growth in Sub-Saharan Africa By Isaac K. Ofori; Simplice A. Asongu
  93. Bubbles against Financial Repression By Plantin, Guillaume
  94. Central Bank Communication: One Size Does Not Fit All By Joan Huang; John Simon
  95. Support for Small Businesses amid COVID-19 By Goodhart, Charles A; Tsomocos, Dimitrios P; Wang, Xuan (Alex)
  96. ICT Diffusion, Foreign Direct Investment and Inclusive Growth in Sub-Saharan Africa By Ofori, Isaac Kwesi; Asongu, Simplice A.
  97. Balancing public-private partnerships in a digital age: CBDCs, central banks and technology firms By Ojo, Marianne
  98. Oil Price Shocks and Economic Growth in Oil-Exporting Countries By Ahmadi, Maryam; Manera, Matteo
  99. Trajectories to High Income: Growth Dynamics in Japan, the People’s Republic of China, and the Republic of Korea By Murach , Michael; Wagner , Helmut; Kim , Jungsuk; Park , Donghyun
  100. Independent Policy, Dependent Outcomes: A Game of Cross-Country Dominoes across European Yield Curves By Ioannis Chatziantoniou; David Gabauer; Alexis Stenfor
  101. Zentralbankpolitik: Einst und jetzt By Issing, Otmar
  102. Searching for the Nature of Uncertainty: Macroeconomic VS Financial By Nicolas Himounet
  103. Which firms benefit from corporate QE during the COVID-19 crisis? The case of the ECB's Pandemic Emergency Purchase Program By Demirguc-Kunt, Asli; Horvath, Balint; Huizinga, Harry
  104. Redesigning the Longitudinal Business Database By Melissa C. Chow; Teresa C. Fort; Christopher Goetz; Nathan Goldschlag; James Lawrence; Elisabeth Ruth Perlman; Martha Stinson; T. Kirk White
  105. Heterogeneous Global Booms and Busts By Maryam Farboodi; Péter Kondor
  106. Italy’s parabolas of GDP and subjective well-being: the role of education By Pugno, Maurizio
  107. Tiers of joy? Reserve tiering and bank behavior in a negative-rate environment By Andreas Fuster; Tan Schelling; Pascal Towbin
  108. Financial Intermediation and Technology: What's Old, What's New? By Boot, Arnoud W A; Hoffmann, Peter; Laeven, Luc; Ratnovski, Lev
  109. (Mis)Allocation Effects of an Overpaid Public Sector By Cavalcanti, Tiago; Dos Santos, Marcelo
  110. The Wellness Economy: A Comprehensive System of National Accounts Approach By Consing III, Rafael Martin M.; Barsabal, Michael John M.; Alvarez, Julian Thomas B.; Mariasingham , Mahinthan J.
  111. Is the United States Relying on Foreign Investors to Finance Its Bigger Budget Deficit? By Thomas Klitgaard
  112. Vector autoregression models with skewness and heavy tails By Karlsson, Sune; Mazur, Stepan; Nguyen, Hoang
  113. Combinatorial Growth with Physical Constraints: Evidence from Electronic Miniaturization By Pablo Azar
  114. Effect of Exchange Rate Volatility on Tax Revenue Performance in Sub-Saharan Africa By Isaac K. Ofori; Camara K. Obeng; Peter Y. Mwinlaaru
  115. Signaling, Random Assignment, and Causal Effect Estimation By Chemla, Gilles; Hennessy, Christopher
  116. Lessons from early central banking for today By Bindseil, Ulrich
  117. Feeding the Leviathan: political competition and soft budget constraints. Evidence from Argentine subnational districts By Osvaldo Meloni
  118. Equilibrium Reforms and Endogenous Complexity By Foarta, Dana; Morelli, Massimo
  119. La trampa de ingresos medios: nuevas exploraciones sobre sus determinantes By Carlos Bianchi; Fernando Isabella; Santiago Picasso
  120. Vector autoregression models with skewness and heavy tails By Sune Karlsson; Stepan Mazur; Hoang Nguyen
  121. Debt De-risking By Cutura, Jannic; Parise, Gianpaolo; Schrimpf, Andreas
  122. Labor Market Power By David W. Berger; Kyle F. Herkenhoff; Simon Mongey
  123. Estimating DSGE Models: Recent Advances and Future Challenges By Fernández-Villaverde, Jesús; Guerron-Quintana, Pablo A.
  124. Globalization: economic development and competitiveness By Martinez Meza, Santiago; Olivares Puente, Cindy; Reyna Balderas, Jaime; Solorio Corona, Marco
  125. Renta económica, régimen tributario y transparencia fiscal en la minería del cobre en Chile y el Perú By Jorratt, Michel
  126. Financing the extension of social insurance to informal economy workers: The role of remittances By Alexandre Kolev; Justina La

  1. By: Felipe, Jesus (Asian Development Bank); Fullwiler, Scott (University of Missouri-Kansas City); Estrada, Gemma (Asian Development Bank); Jaber, Maria Hanna (Asian Development Bank); Magadia, Mary Ann (Asian Development Bank); Patagan, Remrick (Asian Development Bank)
    Abstract: The severe economic downturn caused by the coronavirus disease (COVID-19) pandemic has forced governments worldwide to increase spending while tax revenues simultaneously collapsed. Concurrent with this, central banks in several of these countries are financing a significant percent of their direct income support through direct lending or purchases of government bonds in primary and/or secondary markets. Many oppose this for their alleged negative consequences on the economy, inflation in particular. This paper describes the actual workings of what most people (including many economists) often call monetization of government debt and its major implication, namely, that it leads to printing money and, consequently, to inflation. We show that the reality is very different: once one knows how modern central banks manage monetary policy (i.e., through a corridor interest rate targeting system), and how they coordinate their daily operations with their treasuries, monetization does not occur as it is often described, and it is not nearly as dangerous as its critics argue (and not as useful as its supporters claim). The examples of the People’s Republic of China, the Philippines, Singapore, and the United States clarify this.
    Keywords: central bank; corridor system; inflation; monetization; printing money
    JEL: E42 E52 E58
    Date: 2020–12–10
  2. By: Pincheira, Pablo; Hardy, Nicolas; Bentancor, Andrea; Henriquez, Cristóbal; Tapia, Ignacio
    Abstract: In this paper we show that the MSCI ACWI Metals and Mining Index has the ability to predict base metal prices. We use both in-sample and out-of-sample exercises to conduct such examination. The theoretical underpinning of these results relies on the present-value model for stock-price determination. This model has the implication of Granger causality from stock prices to their key determinants. In the case of metal and mining producers, one of the key elements determining the value of these firms is the price of the commodity they produce and export. Our results are consistent with this theoretical framework, as forecasts based on a model including the MSCI index outperform, in terms of Mean Squared Prediction Error, forecasts that do not use the information contained in that index.
    Keywords: Forecasting, commodities, base metals, univariate time-series models, out-of-sample comparison, base metal equity securities.
    JEL: C10 C12 C2 C22 C4 C5 C52 C53 C58 C6 E0 E3 E31 E32 E37 E4 E47 E6 F3 F31 F4 F44 F47 G0 G1 G12 G17
    Date: 2021–05–18
  3. By: Bibiana Lanzilotta (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Gabriel Merlo (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Gabriela Mordecki (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Viviana Umpierrez (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía)
    Abstract: Using different measures of uncertainty indexes, we quantify how economic uncertainty impacts on a set of nominal and real variables in a small and open economy like Uruguay. Our measures of uncertainty are based on two different methods: newspaper-based and composite index-based, covering roughly 15 years of monthly data. The main findings suggest that economic uncertainty has, to a certain extent, an impact on the real economy, whereas we find no evidence over the financial sector. This result can be linked to the high stability of the Uruguayan economy and the small size of its financial sector.
    Keywords: economic uncertainty, EPU index, VAR, volatility, Uruguay
    JEL: D80 E32 E37 E44
    Date: 2020–10
  4. By: Andrea Carriero; Todd E. Clark; Massimiliano Marcellino; Elmar Mertens
    Abstract: Interest rate data are an important element of macroeconomic forecasting. Projections of future interest rates are not only an important product themselves, but also typically matter for forecasting other macroeconomic and financial variables. A popular class of forecasting models is linear vector autoregressions (VARs) that include shorter- and longer-term interest rates. However, in a number of economies, at least shorter-term interest rates have now been stuck for years at or near their effective lower bound (ELB), with longer-term rates drifting toward the constraint as well. In such an environment, linear forecasting models that ignore the ELB constraint on nominal interest rates appear inept. To handle the ELB on interest rates, we model observed rates as censored observations of a latent shadow-rate process in an otherwise standard VAR setup. The shadow rates are assumed to be equal to observed rates when above the ELB. Point and density forecasts for interest rates (short term and long term) constructed from a shadow-rate VAR for the US since 2009 are superior to predictions from a standard VAR that ignores the ELB. For other indicators of financial conditions and measures of economic activity and inflation, the accuracy of forecasts from our shadow-rate specification is on par with a standard VAR that ignores the ELB.
    Keywords: Macroeconomic forecasting; effective lower bound; term structure; censored observations
    JEL: C34 C53 E17 E37 E43 E47
    Date: 2021–03–29
  5. By: Sabri Boubakera; Duc Khuong Nguyen; Nikos Paltalidis
    Abstract: We build on a New Keynesian dynamic stochastic general equilibrium (DSGE) model to explore the macroeconomic consequences of fiscal expansionary shocks during the economic crisis of 2008 in Eurozone. In this setting, we find that the big four Eurozone economies (France, Germany, Italy and Spain) can effectively escape from their liquidity trap through fiscal policy interventions caused by government purchases. We estimate the government-spending multiplier to be above 1.8 when this policy is associated with a long-term commitment to keeping the nominal interest rate at the zero lower bound as suggested by Krugman (1998) and modeled by Eggertsson (2010) and Christiano, Eichenbaum and Rebelo (2011). Notably, the short-term deficit effect on the budget balance can be offset five years after the implementation of a large spending program. We also show that alternative policies with tax cuts that expand supply do not appear to have the same power in the short-run. Moreover, we provide novel empirical evidence that a large government debt renders a government spending policy ineffective.
    Keywords: Fiscal policy; Liquidity trap; Fiscal multipliers; Zero lower bound
    JEL: E12 E52 E62 E63
  6. By: Randal Verbrugge
    Abstract: In this paper, I review the history of “core” PCE inflation and its rationale: remove volatile items with transitory shocks to better highlight the trend in inflation. Structural changes in the inflation process imply that, on a “reducing volatility” basis, the list of items excluded from the “core” inflation basket (aside from gasoline) is far from optimal. This is true whether one assesses volatility on the basis of a weighted component monthly, or an index monthly, or a 12-month index, or a 5-year index. In addition, I demonstrate other deficiencies of exclusion indexes. Excluded items do not just experience transitory shocks, but also have persistent trends; thus excluding them imparts a significant time-varying bias to core inflation. Meanwhile, items that are not excluded can experience volatility and moreover can cause core inflation to depart notably from trend inflation, sometimes at crucial moments. Two other prominent trend inflation measures, trimmed mean PCE inflation and median PCE inflation, gracefully address these issues, but themselves have notable time-varying bias. I discuss the source of the bias in these other measures and how to correct for bias in real time. I then summarize and extend a wide variety of evidence comparing these three trend measures. I conclude that, for a variety of considerations that are relevant for monetary policy deliberations and communication, either trimmed mean PCE inflation or median PCE inflation are superior measures.
    Keywords: core inflation; forecasting; monetary policy; trimmed mean; median
    JEL: E0 E31 E37 E52 C8
    Date: 2021–05–18
  7. By: Evans, George W.; Honkapohja, Seppo; Mitra, Kaushik
    Abstract: Stagnation and fiscal policy are examined in a nonlinear stochastic New-Keynesian model with adaptive learning. There are three steady states. The steady state targeted by policy is locally but not globally stable under learning. A severe pessimistic expectations shock can trap the economy in a stagnation regime, underpinned by a low-level steady state, with falling inflation and output. A large fiscal stimulus may be needed to avoid or emerge from stagnation, and the impacts of forward guidance, credit frictions, central bank credibility and policy delay are studied. Our model encompasses a wide range of outcomes arising from pessimistic expectations shocks.
    Keywords: Adaptive Learning; Expectations; Fiscal policy; New-Keynesian model; Stagnation Trap
    JEL: D84 E52 E62 E63 E71
    Date: 2020–08
  8. By: Caballero, Ricardo; Simsek, Alp
    Abstract: We analyze optimal monetary policy when asset prices influence aggregate demand with a lag (as is well documented). In this context, as long as the central bank's main objective is to minimize the output gap, the central bank optimally induces asset price overshooting in response to the emergence of a negative output gap. In fact, even if there is no output gap in the present but the central bank anticipates a weak recovery dragged down by insufficient demand, the optimal policy is to preemptively support asset prices today. This support is stronger if the acute phase of the recession is expected to be short lived. These dynamic aspects of optimal policy give rise to potentially large temporary gaps between the performance of financial markets and the real economy. One vivid example of this situation is the wide disconnect between the main stock market indices and the state of the real economy in the U.S. following the Fed's powerful response to the Covid-19 shock.
    Keywords: asset prices; COVID-19; monetary policy; Output gap; Overshooting; Wall/Main Street disconnect
    JEL: E21 E32 E43 E44 E52 G12
    Date: 2020–08
  9. By: De Polis, Andrea; Delle Monache, Davide; Petrella, Ivan
    Abstract: We document a substantial increase in downside risk to US economic growth over the last 30 years. By modeling secular trends and cyclical changes of the predictive density of GDP growth, we recover an accelerating decline in the skewness of the conditional distributions, with significant, procyclical variations. Decreasing trend-skewness, turning negative in the aftermath of the Great Recession, is associated with the long-run growth slowdown stared in the early 2000s. Short-run skewness fluctuation imply negatively skewed predictive densities ahead, and during recessions, often anticipated by deteriorating financial conditions, while positively skewed distributions characterize expansions. The model delivers competitive out-of-sample (point, density and tail) forecasts, improving upon standard benchmarks, due to financial conditions providing strong signals of increasing downside risk.
    Keywords: Business cycle; Downside risk; financial conditions; score driven models; Skewness
    JEL: C53 E32 E44
    Date: 2020–07
  10. By: Beaudry, Paul; Hou, Chenyu; Portier, Franck
    Abstract: This papers begins by highlighting how the presence of a cost channel of monetary policy can offer new insights into the behavior of inflation when the Phillips curve is locally quite flat. For instance, we highlight a key condition whereby lax monetary policy can push the economy in a low inflation trap and we discuss how, under the same condition, standard policy rules for targeting inflation may need to be modified. In the second part of the paper we explore the empirical relevance of the conditions that give rise to these observations using US data. To this end, we present both (i) a wide set of estimates derived from single-equation estimation of the Phillips curve and (ii) estimates based on structural estimation of a full model. The results from both sets of empirical exercises strongly support the key condition we derived.
    Keywords: inflation; interest rates; monetary policy
    JEL: E24 E3 E32
    Date: 2020–08
  11. By: Monnet, Eric; Vari, Miklos
    Abstract: History suggests a conflict between current Basel III liquidity ratios and monetary policy, which we call the liquidity regulation dilemma. Although forgotten, liquidity ratios, named "securities-reserve requirements", were widely used historically, but for monetary policy (not regulatory) reasons, as central bankers recognized the contractionary effects of these ratios. We build a model rationalizing historical policies: a tighter ratio reduces the quantity of assets that banks can pledge as collateral, thus increasing interest rates. Tighter liquidity regulation paradoxically increases the need for central bank's interventions. Liquidity ratios were also used to keep yields on government bonds low when monetary policy tightened
    Keywords: Basel III; central bank history; Liquidity coverage ratio (LCR); liquidity ratios; Monetary policy implementation; reserve requirements
    JEL: E43 E52 E58 G28 N10 N20
    Date: 2020–07
  12. By: Di Bucchianico, Stefano
    Abstract: The mainstream concept of Secular Stagnation provides a comprehensive theoretical picture to explain sluggish economic growth and engenders a renewed role for fiscal policy. For these reasons, it should be praised. Given the difficulties entailed by the theoretical framework in which the theory is located, this paper offers a perspective on US stagnation that is grounded in some of the same foundational elements of the mainstream attempt (inequality, sluggish population growth and ageing, household debt, housing bubble) but relies on a model in which growth is driven by the autonomous components of aggregate demand. Stagnation is the result of the failure to move from a household debt-plus-bubble-led model to a model led by public expenditure. In the course of the analysis, a new treatment of ageing is offered.
    Keywords: Secular Stagnation,natural rate of interest,fiscal policy,aggregate demand,supermultiplier
    JEL: E31 E40 E52 E58
    Date: 2021
  13. By: Bubeck, Johannes; Maddaloni, Angela; Peydró, José Luis
    Abstract: We show that negative monetary policy rates induce systemic banks to reach-for-yield. For identification, we exploit the introduction of negative deposit rates by the European Central Bank in June 2014 and a novel securities register for the 26 largest euro area banking groups. Banks with more customer deposits are negatively affected by negative rates, as they do not pass negative rates to retail customers, in turn investing more in securities, especially in those yielding higher returns. Effects are stronger for less capitalized banks, private sector (financial and non-financial) securities and dollar-denominated securities. Affected banks also take higher risk in loans.
    Keywords: banks; negative rates; Non-Standard Monetary Policy; reach-for-yield; securities
    JEL: E43 E52 E58 G01 G21
    Date: 2020–07
  14. By: Forbes, Kristin
    Abstract: Countries are using macroprudential tools more actively with the goal of improving the resilience of their broader financial systems. A growing body of evidence suggests that these tools can accomplish specific domestic goals and should reduce country vulnerability to many domestic and international shocks. The evidence also suggests, however, that these policies are not an elixir. They will not insulate economies from volatility and they generate leakages to the non-bank financial system and spillovers through international borrowing, lending and other cross-border exposures. Some of these unintended consequences can mitigate the effectiveness of macroprudential policies and generate new vulnerabilities and risks. The "Corona Crisis" provides a lens to evaluate the effectiveness of current macroprudential regulations during a period of extreme market volatility and economic stress. Experience to date suggests that macroprudential tools provide some benefits and should remain a focus of macroeconomic policy, but with realistic expectations about what they can accomplish.
    Keywords: Bank Regulation; capital-flow measures; macroprudential; Spillovers
    JEL: E44 E5 F33 F36 F38 G21 G23 G28
    Date: 2020–08
  15. By: Bianchi, Francesco; Ludvigson, Sydney C.; Ma, Sai
    Abstract: This paper combines a data rich environment with a machine learning algorithm to provide estimates of time-varying systematic expectational errors ("belief distortions") about the macroeconomy embedded in survey responses. We find that such distortions are large on average even for professional forecasters, with all respondent-types over-weighting their own forecast relative to other information. Forecasts of inflation and GDP growth oscillate between optimism and pessimism by quantitatively large amounts. To investigate the dynamic relation of belief distortions with the macroeconomy, we construct indexes of aggregate (across surveys and respondents) expectational biases in survey forecasts. Over-optimism is associated with an increase in aggregate economic activity. Our estimates provide a benchmark to evaluate theories for which information capacity constraints, extrapolation, sentiments, ambiguity aversion, and other departures from full information rational expectations play a role in business cycles.
    Keywords: beliefs; Biases; Expectations; Machine Learning
    JEL: E17 E27 E32 E7 G4
    Date: 2020–07
  16. By: Woodford, Michael; Xie, Yinxi
    Abstract: This paper reconsiders the degree to which macroeconomic stabilization is possible when the zero lower bound is a relevant constraint on the effectiveness of conventional monetary policy, under an assumption of bounded rationality. In particular, we reconsider the potential role of countercyclical fiscal transfers as a tool of stabilization policy. Because Ricardian Equivalence no longer holds when planning horizons are finite (even when relatively long), we find that fiscal transfers can be a powerful tool to reduce the contractionary impact of an increased financial wedge during a crisis, and can even make possible complete stabilization of both aggregate output and inflation under certain circumstances, despite the binding lower bound on interest rates. However, the power of such policies depends on the degree of monetary policy accommodation. We also show that a higher level of welfare is generally possible if both monetary and fiscal authorities commit themselves to history-dependent policies in the period after the financial disturbance that causes the lower bound to bind has dissipated.
    Keywords: Monetary Accommodation; monetary and fiscal policy coordination; planning horizons
    JEL: E52 E63 E7
    Date: 2020–07
  17. By: Snezana Eminidou; Martin Geiger; Marios Zachariadis
    Abstract: We investigate public debt related state dependencies in the impact of fiscal policy shocks on the macroeconomy for a panel of fifteen euro area economies during the period from 2000:Q1 to 2019:Q4. Our estimated impulse response functions suggest that the impact of fiscal policy shocks varies depending on the level of public debt characterizing an economy. We observe that differences in the time-serial as well as in the cross-sectional dimension play an important role driving the impact of fiscal policy. In the high-debt cross sectional state, output, consumption and inflation, as well as consumption intentions and inflation expectations, go up in response to a positive government spending shock, and these responses are distinctly different from those in the low-debt state. Using an extended model that considers simultaneously time-serial and cross-sectional high- and low-debt states, our results suggest that cross-sectional debt variation is more important in driving cross-country differences in the responses to expenditure shocks across the euro area.
    Keywords: government spending, shock, debt-to-gdp, output, consumption, inflation, credit constraints, expectations
    JEL: E62 E3 H63 H3
    Date: 2021–05
  18. By: Niklas Engbom; Christian Moser
    Abstract: We show that a rise in the minimum wage accounts for a large decline in earnings inequality in Brazil since 1994. To this end, we combine rich administrative and survey data with an equilibrium model of the Brazilian labor market. Our results imply that the minimum wage has far-reaching spillover effects on wages higher up in the distribution, accounting for one-third of the 25.9 log point fall in the variance of log earnings in Brazil since 1994. At the same time, the minimum wage’s effects on employment and output are muted by reallocation of workers toward more productive firms.
    JEL: E24 E25 E61 E64 J31 J38
    Date: 2021–05
  19. By: Bilbiie, Florin Ovidiu; Monacelli, Tommaso
    Abstract: Stabilization and redistribution are intertwined in a model with heterogeneity, imperfect insurance, and nominal rigidity---making fiscal and monetary policy inextricably linked. Changes in government spending that are associated with changes in the distribution of taxes (progressive vs. regressive) induce a tradeoff for monetary policy: the central bank cannot stabilize real activity at its efficient level (including insurance) and simultaneously avoid inflation. Fiscal policy can be used in conjunction to monetary policy to strike the optimal balance between stabilization and insurance (redistribution) motives.
    Keywords: aggregate demand; inequality; Optimal Monetary-Fiscal Policy; redistribution; TANK
    JEL: D91 E21 E62
    Date: 2020–08
  20. By: Adrian, Tobias; Erceg, Christopher J.; Lindé, Jesper; Zabczyk, Pawel; Zhou, Jianping
    Abstract: Many central banks have relied on a range of policy tools, including foreign exchange intervention (FXI) and capital flow management tools (CFMs), to mitigate the effects of volatile capital flows on their economies. We develop an empirically-oriented New Keynesian model to evaluate and quantify how using multiple policy tools can potentially improve monetary policy tradeoffs. Our model embeds nonlinear balance sheet channels and includes a range of empirically-relevant frictions. We show that FXI and CFMs may improve policy tradeoffs under certain conditions, especially for economies with less well-anchored inflation expectations, substantial foreign currency mismatch, and that are more vulnerable to shocks likely to induce capital outflows and exchange rate pressures.
    Keywords: Capital Flow Measures; DSGE model; emerging economies; FX intervention; monetary policy
    JEL: C54 E52 E58 F41
    Date: 2020–07
  21. By: Lee, Seungcheol; Luetticke, Ralph; Ravn, Morten O
    Abstract: We examine the impact of frictional financial intermediation in a HANK model. An incentive problem restricts banking sector leverage and gives rise to an equilibrium spread between the returns on savings and debt. The size of this spread impacts on the wealth distribution and movements in it subject borrowers and savers to different intertemporal prices. The model generates a financial accelerator that is larger than in a representative agent setting, derives mainly from consumption rather than investment, and works through a countercyclical interest rate spread. Credit policy can mute this mechanism while stricter regulation of banking sector leverage inhibits households' ability to smooth consumption in response to idiosyncratic risk. Thus, although leverage restrictions stabilize at the aggregate level, we find substantial welfare costs.
    Keywords: business cycles; Financial Frictions; incomplete markets; macroprudential policy; monetary policy
    JEL: C11 D31 E32 E63
    Date: 2020–08
  22. By: Bernardo Candia; Olivier Coibion; Yuriy Gorodnichenko
    Abstract: Introducing a new survey of U.S. firms’ inflation expectations, we document key stylized facts involving what U.S. firms know and expect about inflation and monetary policy. The resulting time series of firms’ inflation expectations displays unique dynamics, distinct from those of households and professional forecasters. By any typical definition of “anchored” expectations, the inflation expectations of U.S. managers appear far from anchored, much like those of households. And like households, U.S. managers are largely uninformed about recent aggregate inflation dynamics or monetary policy. These results complement existing evidence on firms’ inflation expectations from other countries and confirm that inattention to inflation and monetary policy is pervasive among U.S. firms as well.
    JEL: E3 E4 E5
    Date: 2021–05
  23. By: Candia, Bernardo (University of California, Berkeley); Coibion, Olivier (University of Texas at Austin); Gorodnichenko, Yuriy (University of California, Berkeley)
    Abstract: Introducing a new survey of U.S. firms' inflation expectations, we document key stylized facts involving what U.S. firms know and expect about inflation and monetary policy. The resulting time series of firms' inflation expectations displays unique dynamics, distinct from those of households and professional forecasters. By any typical definition of "anchored" expectations, the inflation expectations of U.S. managers appear far from anchored, much like those of households. And like households, U.S. managers are largely uninformed about recent aggregate inflation dynamics or monetary policy. These results complement existing evidence on firms' inflation expectations from other countries and confirm that inattention to inflation and monetary policy is pervasive among U.S. firms as well.
    Keywords: expectations, surveys, anchoring, rational inattention
    JEL: E3 E4 E5
    Date: 2021–05
  24. By: Deb, Pragyan; Furceri, Davide; Ostry, Jonathan D.; Tawk, Nour
    Abstract: Containment measures are crucial to halt the spread of the 2019 COVID-19 pandemic but entail large short-term economic costs. This paper tries to quantify these effects using daily global data on real-time containment measures and indicators of economic activity such as Nitrogen Dioxide (NO2) emissions, flights, energy consumption, maritime trade, and mobility indices. Results suggest that containment measures have had, on average, a very large impact on economic activity - equivalent to a loss of about 15 percent in industrial production over a 30-day period following their implementation. Using novel data on fiscal and monetary policy measures used in response to the crisis, we find that these policy measures were effective in mitigating some of these economic costs. We also find that while workplace closures and stayat- home orders are more effective in curbing infections, they are associated with the largest economic costs. Finally, while easing of containment measures has led to a pickup in economic activity, the effect has been lower (in absolute value) than that from the tightening of measures.
    Keywords: containment measures; COVID-19; Pandemics
    JEL: D43 E52 E58 L11
    Date: 2020–07
  25. By: Kilian, Lutz; Zhou, Xiaoqing
    Abstract: The conventional wisdom that inflation expectations respond to the level of the price of oil (or the price of gasoline) is based on testing the null hypothesis of a zero slope coefficient in a static single-equation regression model fit to aggregate data. Given that the regressor in this model is not stationary, the null distribution of the t-test statistic is nonstandard, invalidating the use of the normal approximation. Once the critical values are adjusted, these regressions provide no support for the conventional wisdom. Using a new structural vector regression model, however, we demonstrate that gasoline price shocks may indeed drive one-year household inflation expectations. The model shows that there have been several such episodes since 1990. In particular, the rise in household inflation expectations between 2009 and 2013 is almost entirely explained by a large increase in gasoline prices. However, on average, gasoline price shocks account for only 39% of the variation in household inflation expectations since 1981.
    Keywords: anchor; Expectations; gasoline price; Household survey; inflation; missing disinflation; oil price
    JEL: E31 E52 Q43
    Date: 2020–08
  26. By: Kollmann, Robert
    Abstract: The closed economy macro literature has shown that a liquidity trap can result from the self-fulfilling expectation that future inflation and output will be low (Benhabib et al. (2001)). This paper investigates expectations-driven liquidity traps in a two-country New Keynesian model of a monetary union. In the model here, country-specific productivity shocks induce synchronized responses of domestic and foreign output, while country-specific aggregate demand shocks trigger asymmetric domestic and foreign responses. A rise in government purchases in an individual country lowers GDP in the rest of the union. The result here cast doubt on the view that, in the current era of ultra-low interest rates, a rise in fiscal spending by Euro Area (EA) core countries would significantly boost GDP in the EA periphery (e.g. Blanchard et al. (2016)).
    Keywords: Euro Area; international fiscal spillovers; liquidity trap; monetary union; terms of trade; zero lower bound
    JEL: E3 E4 F2 F3 F4
    Date: 2020–08
  27. By: Konstantins Benkovskis (Bank of Latvia); Olegs Tkacevs (Bank of Latvia); Karlis Vilerts (Bank of Latvia)
    Abstract: This paper analyzes the determinants of interest rate spreads during the period 2014–2020 in the euro area, with a focus on the Baltic countries. Against the background of accommodative monetary policy, interest rates on loans in the euro area have declined markedly, except in a few countries. In Latvia, Lithuania and Estonia, interest rates on new loans to non-financial corporations in 2020 were about the same as in 2014, and at the same time they were among the highest in the euro area. In this study, we apply the Ho and Saunders (1981) theoretical framework to identify explanatory factors of spreads and use the obtained econometric estimates to calculate the so-called pure spread by subtracting the influence of the bank funding structure and other bank-specific factors from the interest rate spread. Our study shows that even after accounting for the conventional determinants of interest rate spread, differences in the pure spread between euro area countries, especially between the Baltic countries and the rest of the euro area, persist. In part, these differences can be explained by varying degrees of financial sector market concentration. However, the bulk of the gap in spreads remains unexplained. The findings of this paper suggest that properly designed policy measures are needed to reduce spreads in the Baltic countries and lessen the fragmentation in the euro area. This would allow for more effective monetary policy transmission and stimulate lending and post-Covid economic recovery in the Baltics.
    Keywords: tax interest rate spread, interest rate on loans, market concentration
    JEL: G21 L11 E43 E52
    Date: 2021–05–18
  28. By: Junko Koeda (Waseda University, 1-6-1 Nishi-Waseda, Shinjuku-ku, Tokyo 169-8050 Japan,); Yosuke Kimura (Tokyo Institute of Technology,)
    Abstract: This study constructs and analyzes a dataset of Japanese government bond's maturity structure for the fiscal years 1965?2019. Using the maturity structure data at the end of each fiscal year for the past three decades, this study proposes extracting the bond supply factor from the maturity structure variables, and structurally estimates a canonical preferred-habitat term structure model. The results provide a debt maturity equation in the fiscal year cycle, and demonstrate that two yield factors (bond supply factor and short-term interest rate) can account for annual-frequency variations in Japanese bond yields. The supply factor also explains the continued decline in the long-term interest rate in a zero lower bound environment for the past two decades.
    Keywords: maturity structure, yield curve, debt management, Japan, supply factor, bond yield
    JEL: E43 E52 G11 G12 H63
    Date: 2021–04
  29. By: Cao, Shuo; Crump, Richard K.; Eusepi, Stefano; Moench, Emanuel
    Abstract: Using a unique dataset of individual professional forecasts we document disagreement about the future path of monetary policy particularly at longer horizons. The stark differences in short rate forecasts imply strong disagreement about the risk-return trade-off of longer-term bonds. Longer-horizon short rate disagreement co-moves with term premiums. We estimate an affine term structure model in which investors hold heterogeneous beliefs about the long-run level of rates. Our model fits U.S. Treasury yields and the short rate paths predicted by different groups of professional forecasters very well. About a third of the variation in term premiums is driven by short-rate disagreement.
    Keywords: disagreement; heterogeneous beliefs; Noisy information; Speculation; Survey Forecasts; Term premium; yield curve
    JEL: D83 D84 E43 G10 G12
    Date: 2020–08
  30. By: Maliar, Lilia; Maliar, Serguei; Tsener, Inna
    Abstract: A seminal work of Krusell, Ohanian, Ríos-Rull and Violante (2000) demonstrated that the capital-skill-complementarity mechanism is capable of explaining a U-shaped skill premium pattern over the 1963-1992 period in the US economy. However, the world experienced an unprecedented technological change since then. In this paper, we ask how the finding of their article change if we consider more recent data. First, we find that over the 1992-2017 period, the skill premium pattern changed dramatically, from a U-shaped to monotonically increasing, however, the capital-skill complementarity framework remains remarkably successful in explaining the data. Second, we use this framework to construct a projection, and we conclude that the skill premium will continue to grow in the US economy.
    Keywords: capital-skill complementarity; CES production function; skill premium; skilled and unskilled labor
    JEL: C73 D90 E21
    Date: 2020–08
  31. By: Kearns, Jonathan; Schrimpf, Andreas; Xia, Fan Dora
    Abstract: This paper relies on a high-frequency identification approach to provide new insights into monetary policy spillovers by major central banks. Our long and broad sample (1999-2019, from four major economies to 47 advanced and emerging market economies) allows us to accurately identify the properties of spillovers and to shed light on different transmission channels. We find that spillovers by the Fed to foreign interest rates are large, but more surprisingly, document an intensification of spillovers by the ECB over time. Spillovers are more significant to bond yields in advanced economies than they are to those in emerging markets. Differentiating across key spillover channels, we find strongest support for a financial links channel, but weaker evidence for the macroeconomic links channel and FX regime channel.
    Keywords: Financial Integration; high-frequency data; monetary policy spillovers
    JEL: E44 F36 F42 F65
    Date: 2020–07
  32. By: Konstantinos Vasilopoulos; William Tayler
    Abstract: This paper explores the property prices and investment dynamics over the business cycle when there is competition between households and firms for real estate. We introduce a construction sector into an RBC framework, which uses land, capital and labour to produce both commercial and residential real estate. This market structure activates a real estate substitution channel, where an increase in demand for residential real estate also increases the cost of producing commercial structures, which crowds out commercial real estate investment. In general, we find that the residential/commercial land allocation acts as an anchor for the allocation of its real estate investment counterpart; however, there are notable separations, particularly following the financial crisis where there was a simultaneous fall in residential and commercial investment. Our results indicate that whilst residential real estate prices were predominately driven by increases in its demand in the buildup to the financial crisis, the fall in demand for commercial real estate played a significant role in generating price falls for both types of real estate in the aftermath. Furthermore, falls in the overall supply of real estate played an important role in reducing real estate investment which put upward pressure on prices throughout the past two decades.
    Keywords: Commercial Real Estate, Residential Real Estate, Real Estate Substitution, Land Prices, DSGE Models
    JEL: E32 E44 R21 R31
    Date: 2021
  33. By: Filippo Gusella; Giorgio Ricchiuti
    Abstract: We propose an empirical test to depict possible endogenous cycles within Heterogeneous Agent Models (HAMs). We consider a 2-type HAM into a standard small-scale dynamic asset pricing framework. On the one hand, fundamentalists base their expectations on the deviation of fundamental value from market price expecting a convergence between them. On the other hand, chartists, subject to self-fulling moods, consider the level of past prices and relate it to the fundamental value acting as contrarians. These pricing strategies, by their nature, cannot be directly observed but can cause the response of the observed data. For this reason, we consider the agents' beliefs as unobserved state components from which, through a state space model formulation, the heterogeneity of fundamentalist-chartist trader cycles can be mathematically derived and empirically tested. The model is estimated using the S&P500 index, for the period 1990-2020 at different time scales, specifically, daily, monthly, and quarterly.
    Keywords: Heterogeneous Agents Models, Endogenous Cycles, State Space Model, Kalman Filter
    JEL: C13 G10 E32
    Date: 2021
  34. By: Eero Mäkynen (University of Turku, Finland.)
    Abstract: An establishment can improve its productivity by hiring workers from more productive establishments. Then, how important is worker reallocation for aggregate productivity growth? To study this question, I develop a general equilibrium model where knowledge transmits as workers reallocate from one job to another. The calibrated model suggests that the knowledge diffusion mechanism increases the aggregate productivity growth by 0.14 percentage points and enhances welfare. Additionally, the mechanism significantly amplifies the adverse effect of firing costs on aggregate outcomes.
    Keywords: knowledge diffusion, firm dynamics, worker reallocation, economic growth
    JEL: D24 E23 E24 J62 O33 O47
    Date: 2021–05
  35. By: Anastasiou, Dimitrios; Kapopoulos, Panayotis
    Abstract: Constructing a financial stress index, we examine the relationship between financial stability and real estate price fluctuation in Greece, whose experience during the last two decades makes it an ideal laboratory. Employing a VAR and a Bayesian VAR model, we demonstrate the ability of this measure to explain the phases of the housing market (in terms of both residential prices and investment). We find that an adverse shock in financial stability has prolonged adverse effects in the Greek real estate market. Our findings also suggest that residential prices are more sensitive to changes in financial stress conditions than residential investment.
    Keywords: House prices; residential investment; financial stability; uncertainty
    JEL: C10 C22 E0 E44 E6
    Date: 2021
  36. By: Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: Using daily data on policy rates from 28 advanced economies and 32 emerging markets, this paper investigates the monetary policy reaction function of central banks during the Coronavirus Disease 2019 (COVID-19) outbreak. The results show that emerging markets or countries without a zero bound on their interest rates were able to reduce interest rates as a reaction to reduced economic activity and to the volatility in their exchange rates, whereas advanced economies or countries with a zero bound on their interest rates were not. Several policy implications follow for countries with a zero bound on their interest rates amid COVID-19.
    Keywords: COVID-19, Coronavirus, Monetary Policy, Reaction Function, Google Mobility, Exchange Rate
    JEL: E52 E58
    Date: 2021–05
  37. By: Woodford, Michael
    Abstract: The COVID-19 pandemic presents a challenge for stabilization policy that is different from those resulting from either "supply" or "demand" shocks that similarly affect all sectors of the economy, owing to the degree to which the necessity of temporarily suspending some (but not all) economic activities disrupts the circular flow of payments, resulting in a failure of what Keynes (1936) calls "effective demand." In such a situation, economic activity in many sectors of the economy can be much lower than would maximize welfare (even taking into account the public health constraint), and interest-rate policy cannot eliminate the distortions --- not because of a limit on the extent to which interest rates can be reduced, but because monetary stimulus fails to stimulate demand of the right sorts. Fiscal transfers are instead well-suited to addressing the fundamental problem, and can under certain circumstances achieve a first-best allocation of resources without any need for a monetary policy response.
    Keywords: circular flow; Covid-19 pandemic; Fiscal Transfers; Network structure
    JEL: E12 E52 E63
    Date: 2020–08
  38. By: Ehrenbergerova, Dominika; Bajzik, Josef; Havranek, Tomas
    Abstract: Several central banks have leaned against the wind in the housing market by increasing the policy rate preemptively to prevent a bubble. Yet the empirical literature provides mixed results on the impact of short-term interest rates on house prices: the estimated semi-elasticities range from -12 to positive values. To assign a pattern to these differences, we collect 1,447 estimates from 31 individual studies that cover 45 countries and 69 years. We then relate the estimates to 39 characteristics of the financial system, business cycle, and estimation approach. Our main results are threefold. First, the mean reported estimate is exaggerated by publication bias, because insignificant results are underreported. Second, omission of important variables (liquidity and long-term rates) likewise exaggerates the effects of short-term rates on house prices. Third, the effects are stronger in countries with more developed mortgage markets and generally later in the cycle when the yield curve is flat and house prices enter an upward spiral.
    Keywords: interest rates,house prices,monetary policy transmission,meta-analysis,publication bias,Bayesian model averaging
    JEL: C83 E52 R21
    Date: 2021
  39. By: Acharya, Viral V.; Jager, Maximilian; Steffen, Sascha; Steinruecke, Lea
    Abstract: We analyze the determinants and the long-run consequences of government interventions in the eurozone banking sector during the 2008/09 financial crisis. Using a novel and comprehensive dataset, we document that fiscally constrained governments "kicked the can down the road" by providing banks with guarantees instead of full-fledged recapitalizations. We adopt an econometric approach that addresses the endogeneity associated with governmental bailout decisions in identifying their consequences. We find that forbearance caused undercapitalized banks to shift their assets from loans to risky sovereign debt and engage in zombie lending, resulting in weaker credit supply, elevated risk in the banking sector, and, eventually, greater reliance on liquidity support from the European Central Bank.
    Keywords: Bank Recapitalization; evergreening; fiscal constraints; Forbearance; political economy; sovereign debt crisis; zombie lending
    JEL: E44 G21 G28 G32 G34
    Date: 2020–07
  40. By: Luisa Corrado; Daniela Fantozzi
    Abstract: In this paper we investigate the effect of standard and non-standard monetary policy implemented by the ECB on income inequality in Italy. We use a novel database based on the survey micro level data on Income and Living Conditions (EU-SILC, Istat) in a repeated cross-section experiment which enables us to compute measures of inequality and the distribution over time for different incomes and subgroups of individuals. The identification strategy is based on the monetary surprises estimated in the Euro area Monetary Policy Event-Study Database (EA-MPD) for the Euro area. Using a battery of Local Projections, we evaluate the impact of monetary policy by comparing the performance of the impulse response functions of our inequality measures in different policy scenarios: 1999-2012 (pre-QE) and 1999-2017 (including the QE period). The main findings show that an expansionary unconventional monetary policy shock compressed inequality of disposable, labor and financial income more persistently than a conventional monetary shock. These effects are heterogeneous and seem to benefit mostly the bottom of the distribution. The impact on financial wealth is ambiguous favoring the wealthy households mainly in the short-run. Our evidence suggests that QE is associated with a decrease in Italian households’ inequality.
    Keywords: Income Inequality, monetary policy, Local Projections, Survey Data, High-Frequency Data
    JEL: C81 D31 E52 E58
    Date: 2021–05
  41. By: Alon, Titan; Doepke, Matthias; Olmstead-Rumsey, Jane; Tertilt, Michèle
    Abstract: In recent US recessions, employment losses have been much larger for men than for women. Yet, in the current recession caused by the Covid-19 pandemic, the opposite is true: unemployment is higher among women. In this paper, we analyze the causes and consequences of this phenomenon. We argue that women have experienced sharp employment losses both because their employment is concentrated in heavily affected sectors such as restaurants, and due to increased childcare needs caused by school and daycare closures, preventing many women from working. We analyze the repercussions of this trend using a quantitative macroeconomic model featuring heterogeneity in gender, marital status, childcare needs, and human capital. Our quantitative analysis suggests that a pandemic recession will i) feature a strong transmission from employment to aggregate demand due to diminished within-household insurance; ii) result in a widening of the gender wage gap throughout the recovery; and iii) contribute to a weakening of the gender norms that currently produce a lopsided distribution of the division of labor in home work and childcare.
    Keywords: Business cycle; childcare; COVID-19; Gender equality; gender wage gap; Pandemics; Recessions; School Closures
    JEL: D13 E32 J16 J20
    Date: 2020–08
  42. By: Perla, Jesse; Pflueger, Carolin; Szkup, Michal
    Abstract: We investigate how a combination of limited liability and preexisting debt distort firms' investment and equity payout decisions. We show that equity holders have incentives to ``double-sell'' cash flows in default, leading to overinvestment, provided that the firm has preexisting debt and the ability to issue new claims to the bankruptcy value of the firm. In a repeated version of the model, we show that the inability to commit to not double-sell cash flows leads to heterogeneous investment distortions, where high leverage firms tend to overinvest but low leverage firms tend to underinvest. Permitting equity payouts financed by new debt mitigates overinvestment for high leverage firms, but raises bankruptcy rates and exacerbates low leverage firms' tendency to underinvest---as the anticipation of equity payouts from future debt raises their cost of debt issuance. Finally, we provide empirical evidence consistent with the model.
    Keywords: Debt overhang; equity payout restrictions; leverage; Overinvestment; underinvestment
    JEL: E20 E22 E44
    Date: 2020–08
  43. By: Ngai, Liwa Rachel; Sevinc, Orhun
    Abstract: Low-skill workers are concentrated in sectors that experience fast productivity growth and yet their wages have been stagnating. A multisector perspective is crucial to understand this stagnation as it is not due to an overall stagnation in the marginal product of low-skill workers but a labour reallocation into sectors with slower growth. We show this in a two-sector model where the faster productivity growth causes a fall in the relative price of the low-skill intensive output, which consists of capital and a consumption good that is a complement to the high-skill intensive output. When calibrated to the U.S., the model accounts for a substantial part of the low-skill wage stagnation and its divergence from aggregate productivity during 1980-2010.
    Keywords: Multisector model; Wage stagnation; Wage-productivity divergence
    JEL: E24 J23 J31
    Date: 2020–08
  44. By: Elliott, David; Meisenzahl, Ralf; Peydró, José Luis; Turner, Bryce C.
    Abstract: We show that credit supply effects and associated real effects of monetary policy depend on the size of nonbank presence in the respective lending market. Nonbank presence also alters how monetary policy affects the distribution of risk. For identification, we use exhaustive loan-level data since the 1990s and Gertler-Karadi (2015) monetary policy shocks. First, different from the literature showing that low monetary policy rates increase credit supply and risk-taking by banks, we find that higher monetary policy rates shifts credit supply for corporates, mortgages, and consumers shifts from regulated banks to less regulated, more fragile nonbanks. Moreover, this shift is more pronounced for ex-ante riskier borrowers. Second, nonbanks reduce the effectiveness of the bank lending channel of monetary policy at the loan-level. However, this reduction varies substantially across lending markets. Total credit and real effects are largely neutralized in consumer loans and the associated consumption, but not in corporate loans and investment.
    Keywords: consumer loans; monetary policy; Mortgages; Nonbank lending; Shadow banks; syndicated loans
    JEL: E51 E52 G21 G23 G28
    Date: 2020–07
  45. By: Acalin, Julien; Rebucci, Alessandro
    Abstract: Using a new equity price-based measure of the global financial cycle, this paper evaluates the relative importance of global financial shocks for quarterly equity returns and output growths in a large sample of advanced and emerging economies, as well as in South Korea and China--two countries on different sides of the trilemma triangle of international finance. We document that global financial shocks in both China and South Korea explain a substantial share of equity return variability (20 and 50 percent of total variance, respectively), but a much smaller portion of real output fluctuations (less than 10 percent in Korea and negligible in the case of China). We also find that the combination of a closer capital account and a more rigid exchange rate regime, as in China, is associated with some costs in terms of diversification opportunities quantified by very large exposures to domestic financial and real shocks, dwarfing the contribution of any other shock in the model. More surprisingly, the combination of a relatively open capital account and a flexible exchange rate, as in South Korea, not only is associated with a higher exposure to the global financial cycle than in China but also with a significant incidence of domestic financial shocks on output fluctuations.
    Keywords: business cycles; China; Factor-models; Global financial cycle; Panel VARs; South Korea
    JEL: C38 E44 F44 G15
    Date: 2020–08
  46. By: Keuschnigg, Christian; Kirschner, Linda; Kogler, Michael; Winterberg, Hannah
    Abstract: Using a DSGE model with nominal wage rigidity, we investigate two scenarios for the Italian economy. The first considers sustained policy commitment to reform. The results indicate the possibility of `growing out of bad initial conditions', if fiscal consolidation is combined with a program for bank recovery and for competitiveness and growth. The second scenario involves a strong asymmetric recession. It is likely to be very severe under the restrictions of the currency union. A benign exit from the Eurozone with stable investor expectations could substantially dampen the short-run impact. Stabilization is achieved by monetary expansion, combined with exchange rate depreciation. However, investor panic may lead to escalation. Capital market reactions would offset the benefits of monetary autonomy and much delay the recovery.
    Keywords: bad loans; Bank Recapitalization; competitiveness; eurozone crisis; Italy; Sovereign debt
    JEL: E42 E44 E60 F30 F36 F45 G15 G21
    Date: 2020–07
  47. By: Foellmi, Reto; Jäggi, Adrian; Schnell, Fabian
    Abstract: How does the exchange rate affect the way that firms adjust their prices? We use quarterly firm and product price data, underlying the Swiss sectoral consumer price index. The data allows us to trace the pricing decisions of the identified firm over time and as a function of the distance to the border distance. The appreciation of the Swiss franc results in an increase in the probability of both positive and negative price changes. When a firm is more closely located to the border, the probability of a negative price change is higher. On the intensive margin, we document that an appreciation of the Swiss Franc leads to price reductions, and that this effect is stronger the closer a firm is located to the nearest border. However, for firms located far away from the border, an appreciation of the Swiss Franc leads to no price reductions or even increases. We rationalise this by the relative strengths of income and substitution effects. The substitution effect dominates for firms close to the border, while the income effect dominates for firms located further away from the border.
    Keywords: Distance to Border; Exchange rate; Price Setting Behavior of Firms
    JEL: E30 E31
    Date: 2020–07
  48. By: Junko Koeda (Waseda University. Address: 1-6-1 Nishiwaseda, Shinjuku-ku, Tokyo, 169-8050.); Atushi Sekine (Graduate School of Social Sciences, Chiba University)
    Abstract: This study examines the two-decade-long low interest rate environment in Japan using the NelsonSiegel yield curve framework emphasizing the role of decay factor. We find that the decay factor has declined particularly after the global financial crisis, pushing down the entire yield curve as well as the conditional variance of bond yield in Japan. The decay factor was very low when BOJ's yield curve control started in 2016 and remained low with small fluctuations since. Decay factor shocks can be interpreted as long-dated term premium shocks, and these shocks tend to decrease with BOJ's bond purchases, controlling for other possible factors that affect term premia such as business cycles and economic uncertainty.
    Keywords: decay factor, Nelson Siegel, term premium, yield curve control, Japan, nonlinear state space model
    JEL: E58 E52 C32
    Date: 2021–04
  49. By: Bui, Dzung; Dräger, Lena; Hayo, Bernd; Nghiem, Giang
    Abstract: In response to the economic crisis created by the COVID-19 pandemic, many governments provided financial assistance to households. Using representative consumer surveys conducted during the pandemic in 2020, we examine the effects of this fiscal policy instrument on households in two emerging economies, Vietnam and Thailand. Our paper contributes to the literature by studying consumer sentiment and durable spending responses to government financial support and the underlying transmission channels for these responses. We find that government support improves consumer sentiment and increases the likelihood of durable spending. Possible channels for these effects include more optimistic macroeconomic expectations and higher trust in the government’s ability to deal with the pandemic, as well as less concern about the general impact of the crisis. We also find that financial support improves individuals’ mental health and life satisfaction. Our results suggest that government financial support not only helps stimulate the economy but also enhances people’s well-being more generally.
    Keywords: Fiscal policy; Financial support of households; Consumer sentiment; Durables spending; Expectations; Government trust; COVID-19; Thailand; Vietnam
    JEL: E62 E71 D12 D83 H31
    Date: 2021–05
  50. By: PINSHI, Christian P.
    Abstract: This article explores the potential opportunity of FinTech on the financial system in the dark and wicked era of COVID-19. We first provide a seven-figure overview of the unpleasant impact of COVID-19 on the financial system. FinTech sees itself on the one hand as a hope to rebalance the global financial system in this time of financial turmoil, and on the other hand becomes an ultimate weapon to strengthen the resilience of the financial system and respond to the crisis by ensuring the functioning system while respecting containment measures and preventing the spread of the virus.
    Keywords: FinTech, Financial system, COVID-19
    JEL: E2 E44 G2 O33
    Date: 2021–04
  51. By: Mariacristina De Nardi; Eric French; John Bailey Jones; Rory McGee
    Abstract: While the savings of retired singles tend to fall with age, those of retired couples tend to rise. We estimate a rich model of retired singles and couples with bequest motives and uncertain longevity and medical expenses. Our estimates imply that while medical expenses are an important driver of the savings of middle-income singles, bequest motives matter for couples and high-income singles, and generate transfers to non-spousal heirs whenever a household member dies. The interaction of medical expenses and bequest motives is a crucial determinant of savings for all retirees. Hence, to understand savings, it is important to model household structure, medical expenses, and bequest motives.
    JEL: D1 D12 D15 E21
    Date: 2021–05
  52. By: Moszoro, Marian
    Abstract: We evaluate the direct employment effect of the public investment in key infrastructure— electricity, roads, schools and hospitals, and water and sanitation. Using rich firm-level panel data from 41 countries over 19 years, we estimate that US$1 million of public spending in infrastructure create 3–7 jobs in advanced economies, 10–17 jobs in emerging market economies, and 16–30 jobs in low-income developing countries. As a comparison, US$1 million public spending on R&D yields 5–11 jobs in R&D in OECD countries. Green investment and investment with a larger R&D component deliver higher employment effect. Overall, we estimate that one percent of global GDP in public investment can create more than seven million jobs worldwide through its direct employment effects alone.
    Keywords: Crisis, Public Investment, Infrastructure, Stimulus, Employment, COVID, Recovery
    JEL: E12 E22 E24 H54
    Date: 2021–05–07
  53. By: Eric S. Rosengren
    Abstract: With a shock as large as the pandemic, policymakers need to be alert to potential changes to the economy. To date, inflation expectations and the underlying inflation rate look to be stable. It is important to keep in mind the difficulty that was experienced in achieving inflation of 2 percent in the United States and most of the developed world after the Great Financial Crisis. As a result, my perspective is that the emphasis on actual outcomes rather than forecasts of rising inflationary pressures when setting monetary policy appears justified. However, given the noise in the data, it will be important to carefully filter underlying inflation trends as labor markets tighten.
    Keywords: economic outlook; COVID-19; inflation; monetary policy; fiscal policy; labor market; inflationary trends
    Date: 2021–05–05
  54. By: Eric S. Rosengren
    Abstract: With a shock as large as the pandemic, policymakers need to be alert to potential changes to the economy. To date, inflation expectations and the underlying inflation rate look to be stable. It is important to keep in mind the difficulty that was experienced in achieving inflation of 2 percent in the United States and most of the developed world after the Great Financial Crisis. As a result, my perspective is that the emphasis on actual outcomes rather than forecasts of rising inflationary pressures when setting monetary policy appears justified. However, given the noise in the data, it will be important to carefully filter underlying inflation trends as labor markets tighten.
    Keywords: economic outlook; COVID-19; inflation; monetary policy; fiscal policy; labor market; inflationary trends
    Date: 2021–05–06
  55. By: Eric S. Rosengren
    Abstract: With a shock as large as the pandemic, policymakers need to be alert to potential changes to the economy. To date, inflation expectations and the underlying inflation rate look to be stable. It is important to keep in mind the difficulty that was experienced in achieving inflation of 2 percent in the United States and most of the developed world after the Great Financial Crisis. As a result, my perspective is that the emphasis on actual outcomes rather than forecasts of rising inflationary pressures when setting monetary policy appears justified. However, given the noise in the data, it will be important to carefully filter underlying inflation trends as labor markets tighten.
    Keywords: economic outlook; COVID-19; inflation; monetary policy; fiscal policy; labor market; inflationary trends
    Date: 2021–05–14
  56. By: Deb, Pragyan; Furceri, Davide; Ostry, Jonathan D.; Tawk, Nour
    Abstract: Countries have implemented several containment measures to halt the spread of the 2019 coronavirus disease, but it remains unclear the extent to which these unprecedented measures have been successful. We examine this question using daily data on the number of coronavirus disease cases as well as on real-time containment measures implemented by countries. Results suggest that these measures have been very effective in flattening the "pandemic curve", but there is significant heterogeneity across countries. Effectiveness is enhanced when measures are implemented quickly, where de facto mobility is curtailed, in countries with lower temperatures and population density, as well as in countries with a larger share of the elderly in total population and stronger health systems. We also find that easing of containment measures has resulted in an increase in the number of cases, but the effect has been lower (in absolute value) than that from a tightening of measures.
    Keywords: containment measures; COVID-19; Pandemics
    JEL: D43 E52 E58 L11
    Date: 2020–07
  57. By: VINTU, Denis
    Abstract: This article reconsiders the developing of a new forecast model using the interrupted timeseries of the gross domestic product for the Republic of Moldova. The theme arises from a first need to redefine, economic growth in the context of increasing globalization but also the complexity of commercial transactions. The forecasting method used is based on ARIMA each model partly emphasizing the urgent need to redefine, the economic growth in the context of the Association Agreement (AA) with the EU, which includes a Comprehensive Free Trade Agreement (2014) but also future prospects of integration among the countries with an average degree of development. The technique used comes to bring novelty in the field of forecasting, as an alternative to the one which should be —, a simultaneous equations method and traditional VAR. The policy and practical implications of the results are the strengths. The limits are due to the high degree of risk and uncertainty, which is due to the low degree of real convergence of the economy, but also to other factors such as the regional context, the lack of openness of the economy, the diversification of exports and services. The degree of complexity arises from the adaptation and study of the chronological interrupted series 1967−2019 for the branch – information and communications, subgroup GDP, categories of resources, which themselves have specific asymmetries and nuances. The basic ARIMA equations are generally used in conjunction with three sets of assumptions regarding the formation of the gross domestic product, referring to the elasticity of aggregate demand or excess sensitivity supply in the goods and labour markets. Another hypothesis concerns the rigid wage and sticky prices, including deflation with an positive output gap only in the telecom market. Also, the salary is rigid, while the price level is adjusted based on the market of goods and commodities, so that the excess supply appears only in the labour market. Finally, in a third assumption, both markets are assumed to be mutually adjusted. The multipliers of fiscal and monetary policy, besides the conclusions that can be drawn about economic policy, are obviously different in these three assumptions. The article presents a synthetic model that supports the three particular sub-regimes of assumptions of a single adapted ARIMA model, namely the trajectory of New Keynesian Small and Closed Economy Model – a balance in the goods and services, the labour market and the national financial system. In conclusion, the model aims not only to redefine the area of macroeconomic forecasting but also to offer a future perspective of adopting combined techniques such as the Stochastic Dynamic General Equilibrium (K-SDGE) Model with sticky prices and wages – technique, but also the scenario method. This framework is appealing because it has straight forward model setup, transparent mechanisms, sharp empirical analysis, and multiple important applications such as rational expectations.
    Keywords: economic growth and aggregate productivity, the gross domestic product, innovation and communications, cross-country output convergence, prediction and forecasting methods,time series analysis and modelling, ARIMA modelling, Box-Jenkins method.
    JEL: C12 C14 C22 C53 D62 D84 F15 F21 F61 O10 O30
    Date: 2021–04–23
  58. By: Alexandros Skouralis
    Abstract: The high degree of financial contagion across the Euro area during the sovereign debt crisis highlighted the importance of systemic risk. In this paper we employ a Global VAR (GVAR) model to analyse the systemic risk spillovers across the Euro area and to assess their role in the transmission of monetary policy. The results indicate a strong interconnectedness among core countries and also that peripheral economies have a disproportionate importance in spreading systemic risk. A systemic risk shock results in economic slowdown domestically and causes negative spillovers to the rest of the EMU economies. To examine how monetary policy impacts systemic risk, we incorporate high-frequency monetary surprises into the model. We find evidence of the risk-taking channel during normal times, whereas the relationship is reversed in the period of the ZLB with expansionary shocks to result in a more stable financial system. Our findings indicate that the signalling channel is the main driver of this effect and that the initiation of the QE program boosts the economic activity but results in higher systemic risk. Finally, our results suggest that spillovers play an important role in the transmission of the monetary policy and that there is evidence of significant heterogeneity amongst countries’ responses with core countries to benefit the most from changes in monetary policy.
    Keywords: Systemic risk, Global VAR model, Eurozone, High-frequency monetary policy shocks
    JEL: C32 E44 F36 F45
    Date: 2021
  59. By: Comin, Diego; Danieli, Ana; Mestieri, Martí
    Abstract: We propose a mechanism for labor-market polarization based on the nonhomotheticity of demand that we call the income-driven channel. Our mechanism builds on a novel empirical fact: expenditure elasticities and production intensities in low- and high-skill occupations are positively correlated across sectors. Thus, as income grows, demand shifts towards expenditure-elastic sectors, and the relative demand for low- and high-skill occupations increases, causing labor-market polarization. A calibrated general-equilibrium model suggests this mechanism accounts for 90% and 35% of the increase in the wage-bill share of low- and high-skill occupations observed in the US during 1980-2016, and for 64% and 28% of the rise in the employment shares of low- and high-skill occupations. This mechanism is similarly important for the polarization of labor markets in Western Europe during 1980-2016, as well as in the US during earlier decades and, possibly, the near future.
    Keywords: Labor Market Polarization; non-homothetic preferences
    JEL: E21 E23 J23 J31
    Date: 2020–07
  60. By: Aspachs, Oriol; Durante, Ruben; Graziano, Alberto; Mestres, Josep; Montalvo, Jose G; Reynal-Querol, Marta
    Abstract: Official statistics on economic inequality are only available at low frequency and with considerable delay. This makes it challenging to assess the impact on inequality of fast-unfolding crises like the COVID-19 pandemic, and to rapidly evaluate and tailor policy responses. We propose a new methodology to track income inequality at high frequency using anonymized data from bank records for over three million account holders in Spain. Using this approach, we analyse how inequality evolved between February and July 2020 (compared to the same months of 2019). We first show that the wage distribution in our data matches very closely that from official labour surveys. We then document that, in the absence of government intervention, inequality would have increased dramatically, mainly due to job losses and wage cuts experienced by low-wage workers. The increase in pre-transfer inequality was especially pronounced among younger and foreign-born individuals, and in regions more dependent on tourism. Finally, we find that public transfers and unemployment insurance schemes were very effective at providing a safety net to the most affected segments of the population and at offsetting most of the increase in inequality.
    Keywords: Administrative data; COVID-19; High Frequency Data; inequality
    JEL: C81 D63 E24 J31
    Date: 2020–07
  61. By: Park , Donghyun (Asian Development Bank); Ramayandi , Arief (Asian Development Bank); Tian, Shu (Asian Development Bank)
    Abstract: In this study, we examine how public and private debt buildup is related to currency depreciation pressure. Our empirical analysis of a panel dataset of 59 advanced and emerging markets reveals that both private and public debt exacerbate currency vulnerability. However, the evidence of a significant effect on currency depreciation pressure is more robust and consistent for private debt than public debt. Furthermore, we find that excessive private debt buildup can be particularly harmful in emerging markets. In addition, our evidence suggests that greater dependence on external financing exacerbates the impact of debt buildup on currency stress. Overall, the evidence highlights the importance of a comprehensive debt surveillance framework which monitors both public and private debt buildup, especially in emerging markets.
    Keywords: currency stress; exchange rate; financial vulnerability; private debt; public debt
    JEL: E44 E50 F31 G15
    Date: 2020–10–20
  62. By: Levine, Ross; Rubinstein, Yona
    Abstract: We study the effects of ability and liquidity constraints on entrepreneurship. We develop a three sector Roy model that differentiates between entrepreneurs and other self-employed to address puzzling gaps that have emerged between theory and evidence on entry into entrepreneurship. The model predicts-and the data confirm-that entrepreneurs are positively selected on highly-remunerated cognitive and non-cognitive human capital skills, but other self-employed are negatively selected on those same abilities; entrepreneurs are positively selected on collateral, but other self-employed are not; and entrepreneurship is procyclical, but self-employment is countercyclical.
    Keywords: business cycles; Corporate Finance; entrepreneurship; Human Capital; Occupational choice
    JEL: E32 G32 J24 L26
    Date: 2020–08
  63. By: Bluwstein, Kristina; Hacioglu Hoke, Sinem; Miranda-Agrippino, Silvia
    Abstract: We exploit information in a new dataset of monthly patent applications to construct an instrumental variable for the identification of technology news shocks that relaxes all the identifying assumptions traditionally used in the literature. Our sole requirement is that no structural disturbances affect the US economy via our instrument except for contemporaneous technology news. The instrument recovers news shocks that have no appreciable effect on aggregate productivity on impact, but are a significant driver of its trend component. News shocks prompt a sustained business cycle expansion in anticipation of the future increase in TFP, and are responsible for a sizeable share of economic fluctuations at business cycle frequencies. The stock market prices-in news shocks on impact, but consumer expectations take sensibly longer to adjust, consistent with the predictions of models of information frictions.
    Keywords: Business cycle; Information Frictions; Patent applications; SVAR-IV; Technology News Shocks
    JEL: C36 E32 O33 O34
    Date: 2020–07
  64. By: Matsuyama, Kiminori; Ushchev, Philip
    Abstract: In existing models of endogenous innovation cycles, market size alters the amplitude of fluctuations without changing the nature of fluctuations. This is due to the ubiquitous assumption of CES homothetic demand system, implying that monopolistically competitive firms sell their products at an exogenous markup rate in spite of the empirical evidence for the procompetitive effect of entry and market size. We extend a model of endogenous innovation cycles to allow for the procompetitive effect, using a more general homothetic demand system, which contains both CES and translog as special cases. We show that a larger market size and/or a smaller innovation cost, which causes the markup rate to decline through the procompetitive effect, has destabilizing effects on the dynamics of innovation.
    Keywords: Dynamic monopolistic competition; Endogenous innovation cycles; H.S.A.; market size; Periodic cycle; Piecewise-linear dynamical system; Procompetitive Effect; Robust chaotic attractor; the Judd model
    JEL: D43 E32 L13 O31
    Date: 2020–07
  65. By: De Giorgi, Giacomo; Gambetti, Luca; Naguib, Costanza
    Abstract: Life expectancy for Blacks is about 8 year shorter than for Whites. A shorter life expectancy, in line with the theoretical prediction of a simple model, determines a much lower amount of savings and wealth accumulation and therefore a lower degree of insurance. This, in turn, contributes to persistent racial differentials in life-cycle consumption. Starting from the same position in the consumption distribution Blacks end up in a lower percentile than Whites after a few decades. This is particularly marked for those Blacks who start at the top of the consumption distribution, where Whites are much more persistent. We document these facts using 40 years of PSID data (1981-2017).
    Keywords: Consumption; health; Income; inequality; Persistence
    JEL: C3 D12 E21 E63
    Date: 2020–08
  66. By: Tsoulfidis, Lefteris; Tsaliki, Persefoni
    Abstract: ABSTRACT In this article, we argue the rate of profit in combination with the movement of the real net profits determines the phase-change of the economy in its long cyclical pattern. Since WWII, the US and the world economy have experienced two such long cycles. The pandemic COVID-19 has deepened a recession that has been already underway since 2007. The growth rates in the first post-pandemic years are expected to be high; however, soon after, the economies will find themselves back to their old recessionary growth paths. The onset of a new long cycle requires the restoration of profitability, which can be sustained only through the introduction of ‘disruptive’ innovations backed by suitable institutional arrangements Long recession, secular stagnation, pandemic, long cycles, institutional changes, disruptive innovations
    Keywords: Long recession, secular stagnation, pandemic, long cycles, institutional changes, disruptive innovations
    JEL: B5 D33 E1 N12 O51
    Date: 2021–05–18
  67. By: Kiss, Tamás (Örebro University School of Business); Mazur, Stepan (Örebro University School of Business); Nguyen, Hoang (Örebro University School of Business); Österholm, Pär (Örebro University School of Business)
    Abstract: In this paper we analyze how skewness and heavy tails a ect the estimated relationship between the real economy and the corporate bond-yield spread, a popular predictor of real activity. We use quarterly US data to estimate Bayesian VAR models with stochastic volatility and various distributional assumptions regarding the disturbances. In-sample, we find that after controlling for stochastic volatility innovations in GDP growth can be well-described by a Gaussian distribution. In contrast, both the unemployment rate and the yield spread appear to benefit from being modelled using non-Gaussian innovations. When it comes to real-time forecasting performance, we find that the yield spread is an important predictor of GDP growth, and that accounting for stochastic volatility matters, mainly for density forecasts. Incremental improvements from non-Gaussian innovations are limited to forecasts of the unemployment rate. Our results suggest that stochastic volatility is of first order importance when modelling the relationship between yield spread and real variables; allowing for non-Gaussian innovations is less important.
    Keywords: Bayesian VAR; Generalized hyperbolic skew Students t distribution; Stochastic volatility
    JEL: C11 C32 C52 E44 E47 G17
    Date: 2021–05–24
  68. By: Eero Mäkynen (University of Turku, Finland.); Oskari Vähämaa (University of Helsinki, Finland.)
    Abstract: We develop a measure of static misallocation that separates uncertainty from misallocation generated by tax-like distortions. In the Finnish firm-level data, uncertainty accounts for the majority of ex post misallocation and explains a strong decreasing age-dependent trend in it. To understand these observations, we set up a life-cycle model of firm growth where new firms have to learn their productivity. We match our model with the salient features of the data and show that our model implies idiosyncratic distortions, in line with our accounting approach. According to our quantitative results, uncertainty suppresses output by 38%, while misallocation has a 26% negative effect on output.
    Keywords: firm dynamics, uncertainty, misallocation
    JEL: D24 E23 L11 O47
    Date: 2021–05
  69. By: Jonung, Lars (Department of Economics, Lund University)
    Abstract: This paper examines the Swedish record of competition in the supply of bank notes in the 19th century. Between 1831 and 1902, private commercial banks, organized as partnerships with unlimited liability for their owners, issued notes competing with the notes of the Riksbank, the bank owned by the Riksdag, the Swedish parliament. The private banks turned out to be competitive in this market despite several legal obstacles, most notably that private notes were never legal tender – only Riksbank notes were. The private note-issuing banks developed techniques to increase the distribution of their notes. No case of an overissue of notes or of runs by the public on private note banks occurred. No private bank failed to redeem its notes into Riksbank notes. Opinion in the Riksdag remained hostile to private bank notes, reflected in the gradual restriction of the denominations of the notes issued by private banks and in rising taxes on private notes. Eventually, the Riksdag gave its bank, the Riksbank, a monopoly of note issue in Sweden. The evidence from the Swedish experience of free banking suggests that the design of the legal system was the prime explanation for the successful performance of private notes.
    Keywords: Free banking; central banking; private bank notes; unlimited liability; currency competition; Riksbank; Sweden
    JEL: E42 E51 E58 G21 K20 N13 N23
    Date: 2021–05–11
  70. By: Gordon, Robert J; Sayed, Hassan
    Abstract: We examine the role of the ICT revolution in driving productivity growth behavior for the United States and an aggregate of ten Western European nations (the EU-10) from 1977 to 2015. We find that the standard growth accounting approach is deficient when it separates sources of growth between ICT capital deepening and TFP growth, because much of the effect of the ICT revolution was channeled through spillovers to TFP growth rather than being limited to the capital deepening pathway. Using industry-level data from EU KLEMS, we find that most of the 1995-2005 U.S. productivity growth revival was driven by ICT-intensive industries producing market services and computer hardware. In contrast the EU-10 experienced a 1995-2005 growth slowdown due to a paucity of ICT investment, a failure to capture the efficiency benefits of ICT, and performance shortfalls in specific industries including ICT production, finance-insurance, retail-wholesale, and agriculture. After 2005 both the U.S. and the EU-10 suffered a growth slowdown, indicating that the benefits of the ICT revolution were temporary rather than providing a new permanent era of faster productivity growth. This joint transatlantic post-2005 slowdown is consistent with the broader view that ongoing innovation has been less potent in boosting productivity growth compared to earlier decades of the postwar era.
    Keywords: Computers; Industry Structure; Information Technology; productivity slowdown
    JEL: E01 E24 O33 O47 O51 O52
    Date: 2020–07
  71. By: Barbu, Alexandru; Fricke, Christoph; Moench, Emanuel
    Abstract: We use unique institutional securities holdings data to examine the trading behaviour of delegated institutional capital and its impact on bond risk premia. We show that institutional fund managers trade strongly procyclically: they actively move into higher yielding, longer duration and lower rated securities as yields fall and spreads compress, and vice versa. Funds more exposed to negative yields increase their risk-taking more strongly, and this effect is particularly pronounced for those offering explicit minimum return guarantees. Institutional funds' investments have large and persistent price impact in both corporate and sovereign bond markets. We provide evidence that this procyclical behaviour is driven by career concerns among institutional fund managers.
    Keywords: Asset Price Volatility; career concerns; demand pressures; institutional accounts; Institutional funds; port- folio rebalancing; price impact; procyclical asset management
    JEL: E43 G11 G23
    Date: 2020–08
  72. By: Chakraborty, Tanika (Indian Institute of Management); Lohawala, Nafisa (University of Michigan)
    Abstract: The stagnancy of women's workforce participation in urban India is alarming and puzzling, considering the pace of economic development experienced in the previous decade. We investigate the extent to which the low workforce participation of women can be explained by growing instances of officially reported crimes against women. We employ a fixed effects strategy using district-level panel data between 2004-2012. To address additional concerns of endogeneity, we exploit state-level regulations in alcohol sale and consumption and provide estimates from two different strategies – an instrumental variable approach and a border-analysis. Our findings indicate that a one standard deviation increase in sexual crimes per 1000 women reduces the probability that a woman is employed outside her home by 9.4%. While we find some evidence of heterogeneity across regions and religions, overall, the deterrent effect seems to affect women equally across all economic, demographic and social groups.
    Keywords: crime-against-women, female labor supply, instrumental variable, alcohol regulation
    JEL: E24 J08 J16 J18
    Date: 2021–05
  73. By: Azzimonti, Marina; Fogli, Alessandra; Perri, Fabrizio; Ponder, Mark
    Abstract: We develop an ECON-EPI network model to evaluate policies designed to improve health and economic outcomes during a pandemic. Relative to the standard epidemiological SIR set-up, we explicitly model social contacts among individuals and allow for heterogeneity in their number and stability. In addition, we embed the network in a structural economic model describing how contacts generate economic activity. We calibrate it to the New York metro area during the 2020 COVID-19 crisis and show three main results. First, the ECON-EPI network implies patterns of infections that better match the data compared to the standard SIR. The switching during the early phase of the pandemic from unstable to stable contacts is crucial for this result. Second, the model suggests the design of smart policies that reduce infections and at the same time boost economic activity. Third, the model shows that re-opening sectors characterized by numerous and unstable contacts (such as large events or schools) too early leads to fast growth of infections.
    Keywords: Complex Networks; COVID-19; epidemiology; SIR; social distance
    JEL: D85 E23 E65 I18
    Date: 2020–08
  74. By: Kensuke Tanaka
    Abstract: Predicting future economic trends appropriately is essential to economic policy making. Currently, the DSGE model approach is a benchmark economic forecasting technique widely employed. However, large external shocks, such as large-scale natural disasters and COVID-19, challenge current approaches to economic forecasting. Multiple approaches will be needed in this situation, including reduced-form model and indicator-based approaches. This paper discusses different forecasting approaches, by comparing forecasts during normal times and crisis periods. The Medium-term Projection Framework (MPF), used in the Economic Outlook for Southeast Asia, China and India series, receives particular attention. The paper also examines challenges unique to developing Asia and large external shock periods. The measurement of potential output, difficulties in modelling the credit channel, and the incorporation of Big Data pose challenges regarding developing Asian countries, and large external shocks may force deviation from assumptions of traditional frameworks such as rational expectations. Finally, this paper points out that natural disasters will be a useful proxy for large shocks in Developing Asia. Il est essentiel de prévoir de manière appropriée les futures tendances économiques pour étayer les décisions de politique économique. Actuellement, l'approche modèle DSGE (d'équilibre général dynamique et stochastique) est une technique de prévision économique de référence largement utilisée. Cependant, les chocs externes importants, tels que les catastrophes naturelles à grande échelle et le COVID-19, posent des défis dans les prévisions économiques. L'utilisation de diverses approches, en particulier celle en forme réduite et celles fondées sur des indicateurs, sera grandement utile. Ce papier examine différentes approches de prévision, en comparant les prévisions en temps normal et en période de crise. Il observe notamment le cadre de projection à moyen terme (MPF) utilisé dans les projections de la série Perspectives économiques de l'Asie du Sud-Est, la Chine et l'Inde de l’OCDE. Le papier examine ensuite les défis de la prévision qui sont uniques aux pays asiatiques en développement ou aux grandes périodes de chocs externes. La mesure des résultats potentiels, des difficultés à modéliser le canal du crédit bancaire et l'intégration du « Big Data » sont des défis pour les pays d'Asie en développement, tandis que les chocs externes importants peuvent forcer la distanciation des cadres économiques traditionnels, tels que les anticipations rationnelles. Le papier montre enfin que les catastrophes naturelles représentent un indicateur utile des chocs importants dans l'Asie en développement.
    Keywords: COVID-19, Developing Asia, DSGE model, Forecasting, large external shocks, natural disasters, time series analysis
    JEL: C53 E17 O20 O53 Q54
    Date: 2021–05–27
  75. By: Baker, Scott R.; Johnson, Stephanie; Kueng, Lorenz
    Abstract: Households tend to hold substantial amounts of non-financial assets in the form of inventory. Households can obtain significant financial returns from strategic shopping and optimally managing these inventories of consumer goods. In addition, they choose to maintain liquid savings - household working capital - not just for precautionary motives but also to support this inventory management. We demonstrate that households earn high returns from inventory management at low levels of inventory, though returns decline rapidly as inventory levels increase. We provide evidence using scanner and survey data that supports this conclusion. High returns from inventory management that are declining in wealth offer a new rationale for poorer households not to participate in risky financial markets, while wealthier households invest in both financial assets and working capital.
    Keywords: financial returns; household working capital; Inventory; Stock Market Participation; stockpiling
    JEL: D11 D12 D13 D14 E21 G11 G51
    Date: 2020–08
  76. By: Montag, Felix; Sagimuldina, Alina; Schnitzer, Monika
    Abstract: This paper provides the first estimates of the pass-through rate of the ongoing temporary value-added tax (VAT) reduction, which is part of the German fiscal response to COVID-19. Using a unique dataset containing the universe of price changes at fuel stations in Germany and France in June and July 2020, we employ a difference-in-differences strategy and find that pass-through is fast and substantial but remains incomplete for all fuel types. Furthermore, we find a high degree of heterogeneity between the pass-through estimates for different fuel types. Our results are consistent with the interpretation that pass-through rates are higher for customer groups who are more likely to exert competitive pressure by shopping for lower prices. Our results have important implications for the effectiveness of the stimulus measure and the cost-effective design of unconventional fiscal policy.
    Keywords: COVID-19; Pass-Through; Stimulus; value-added taxes
    JEL: E62 H22 H32
    Date: 2020–08
  77. By: Martinez Miera, David; Repullo, Rafael
    Abstract: This paper shows the relevance of market power to assess the effects of safe interest rates on financial intermediaries' risk-taking decisions. We consider an economy where (i) intermediaries have market power in granting loans, (ii) intermediaries monitor borrowers which lowers their probability of default, and (iii) monitoring is costly and unobservable which creates a moral hazard problem with uninsured depositors. We show that lower safe rates lead to lower intermediation margins and higher risk-taking when intermediaries have low market power, but the result reverses for high market power. We examine the robustness of this result to introducing non-monitored market finance, heterogeneity in monitoring costs, and entry and exit of intermediaries. We also consider the effect of replacing uninsured by insured deposits, market power in raising deposits, and funding with both deposits and capital.
    Keywords: Bank monitoring; bank risk-taking; Imperfect Competition; intermediation margins; monetary policy
    JEL: E52 G21 L13
    Date: 2020–07
  78. By: Kuusi, Tero; Puonti, Päivi; Kangasharju, Aki
    Abstract: Abstract In Finland, ceilings for the central government budget spending are used is to limit the rise of public spending during parliamentary terms. In its unprecedented, mid-term decision, the current government renounced its commitment to return to the ceilings in the years 2022 and 2023. We argue that the decision seriously undermines the credibility of the budgeting process, especially because it will coincide with a post-pandemic, economic upturn and the roll out of the EU stimulus and recovery package. The exceptional decision also implies reluctance of the government to return to the EU fiscal rules after the Covid-19 crisis. This, in turn, is problematic, as Finland lacks adequate structural reforms to speed up its economic growth and improve its fiscal sustainability. We argue that the government should recommit to the ceilings and complement the current system with a debt anchor and an expenditure rule derived from the anchor. In the future, the ceilings should also cover the entire public sector.
    Keywords: Fiscal policy, Fiscal fules, Ceiling for budget expenditure, Fiscal sustainability
    JEL: H6 H3 H1
    Date: 2021–05–24
  79. By: Lapid , Ana Kristel (Asian Development Bank); Mercado, Jr. , Rogelio (Asian Development Bank); Rosenkranz, Peter (Asian Development Bank)
    Abstract: Cross-border bank positions in Asia and the Pacific remain highly concentrated to few counterparties, exposing the region to financial risks and policy spillovers. Consequently, assessing the determinants and impacts of the region’s cross-border banking concentration is relevant to the design of appropriate policies for promoting financial development and safeguarding financial stability. To this end, we construct cross-border bank concentration measures for 47 economies in Asia and the Pacific from 2000 to 2019. The results show that higher openness of capital account and trade, as well as better per capita income, are significantly associated with lower cross-border bank concentration. Moreover, elevated cross-border bank concentration tends to lower domestic credit growth and nonperforming loans. We find no impact on bank profitability for the region.
    Keywords: Asia and the Pacific; bank profitability; credit growth; cross-border bank concentration; cross-border bank exposures; nonperforming loans
    JEL: E44 F36 G21 O16
    Date: 2021–05–06
  80. By: Malherbe, Frédéric; McMahon, Michael
    Abstract: Government guarantees to banks are ubiquitous. We study an equilibrium model where, in the presence of such guarantees, the equilibrium allocation can be characterised as Panglossian: it corresponds to that of a deterministic economy where the best possible state always occurs. However, GDP is inefficiently high and expected consumption inefficiently low. Financial sophistication magnifies this distortion, taking the allocation beyond the Panglossian outcome (i.e. with even higher GDP and even lower expected consumption). We argue that this mechanism is empirically relevant for advanced economies and suggest that the Great Recession, partly, reversed a Great Distortion.
    JEL: E22 G28
    Date: 2020–08
  81. By: Martina Lawless; Luke Rehill
    Abstract: The stability of the labour share of income is a fundamental feature of macroeconomic models, with broad implications for the shape of the production function, inequality, and macroeconomic dynamics. However, empirically, this share has been slowly declining in many countries for several decades, though its causes are subject of much debate. This paper analyses the drivers of labour share developments in Europe at a sectoral level. We begin with a simple shift-share analysis which demonstrates that the decline across countries has been primarily driven by changes within industries. We then use aggregated microdata from CompNet to analyse drivers of sector-level labour shares and to decompose their effects into shifts in the sector average or reallocation of resources between firms. Our main findings are that the advance of globalisation and the widening productivity gap between “the best and the rest” have negative implications for the labour share. We also find that most of the changes are due to reallocation within sectors providing support for the “superstar firms” hypothesis. The finding that globalisation has had a negative impact on the labour share is of relevance for policy in the context of the current backlash against globalisation and reinforces the need to ensure benefits of globalisation and productivity are passed on to workers.
    Keywords: globalisation, labour shares, productivity
    JEL: E25 O40 F62
    Date: 2021–05–26
  82. By: Jappelli, Tullio; Pistaferri, Luigi
    Abstract: We test the key implication of the buffer stock model, namely that any revision in permanent income leads to a proportionate revision in target wealth. We use panel data on the amount of wealth held for precautionary purposes available in the 2002-2016 SHIW. Using an instrumental variable approach to overcome measurement error issues and direct estimates of the permanent component of income, we find that households indeed revise approximately one-for-one their target wealth in response to permanent income shocks. We explore heterogeneity of the response across the cash-on-hand distribution, for positive and negative shocks, and for shocks of different size. We also find that the change in the ratio of cash-on-hand to permanent income is negatively correlated with the "wealth gap", particularly for individuals whose wealth is substantially above target.
    Keywords: Buffer Stock Model; Permanent Income Shocks; Target Wealth; wealth gap
    JEL: D12 D14 E21
    Date: 2020–08
  83. By: Cahuc, Pierre (Sciences Po, Paris); Kramarz, Francis (CREST (ENSAE)); Nevoux, Sandra (CREST (ENSAE))
    Abstract: To understand which firms take-up short-time work and which workers they enroll in this program, we provide a model which shows that short-time work may save jobs in firms hit by strong negative revenue shocks, but not in less severely-hit firms, where hours worked are reduced, without saving jobs. Using detailed data on the administration of the program covering the universe of French establishments in the 2008-2009 Great Recession, we find that short-time work did indeed save jobs and increase hours of work in firms faced with large negative shocks. These firms have been able to recover rapidly in the aftermath of the Recession thanks to short-time work. We also provide evidence of large windfall effects which significantly increased the cost of the policy per job saved; yet we also find that short-time work remains more cost-efficient at saving jobs than wage subsidies.
    Keywords: short-time work, employment, hours of work
    JEL: E24 J22 J65
    Date: 2021–05
  84. By: Brotherhood, Luiz; Cavalcanti, Tiago; Da Mata, Daniel; Santos, Cezar
    Abstract: This paper studies the role of slums in shaping the economic and health dynamics of pandemics. Using data from millions of mobile phones in Brazil, an event-study analysis shows that residents of overcrowded slums engaged in less social distancing after the outbreak of Covid-19. We develop a choice-theoretic equilibrium model in which poorer agents live in high-density slums and others do not. The model is calibrated to Rio de Janeiro. Slum dwellers account for a disproportionately high number of infections and deaths. In a counterfactual scenario without slums, deaths fall overall but increase in non-slum neighborhoods. Policy simulations indicate that: reallocating medical resources cuts deaths and raises output and the welfare of both groups; mild lockdowns favor slum individuals by mitigating the demand for hospital beds whereas strict confinements mostly delay the evolution of the pandemic; and cash transfers benefit slum residents in detriment of others, highlighting important distributional effects.
    Keywords: COVID-19; health; Public Policies; Slums; Social distancing
    JEL: C63 D62 E17 I10 I18 O18
    Date: 2020–08
  85. By: Thomas von Brasch (Statistics Norway); Ivan Frankovic; Eero Tölö
    Abstract: In this paper, we study how lower corporate tax rates impact investment by including two novel channels into a DSGE model used for fiscal policy analysis in Norway. We capture both how foreign firms relocate and invest in the country when corporate taxes are reduced and how the inflow of FDI increase exports which spills over to domestic firms who then increase their investment further. We find that a one percentage point reduction in the corporate tax rate increases investment by 0.6%, most of which can be attributed to the FDI-export link. The corporate tax cut becomes self-financed when the FDI-export link is included, but only if other countries do not follow suit and also lower their corporate tax rates. When using the model to analyze the tax reform in Norway from 2014 to 2019, we find overall positive effects on investment and employment.
    Keywords: Corporate profit tax; Foreign direct investment; Exports; Imports; User cost of capital; Depreciation; Tax reform
    JEL: E62 H21 H25 H32
    Date: 2021–05
  86. By: Broadberry, Stephen N; Gardner, Leigh
    Abstract: Sub-Saharan Africa (SSA) is often absent from discussions of long-run growth owing to the lack of data on aggregate economic performance before 1950. This paper provides estimates of GDP per capita on an annual basis for eight African economies for the period since 1885. Although the growth experienced in most of SSA since the mid-1990s has had historical precedents, there have also been episodes of negative growth or "shrinking", so that long run progress has been limited. Despite some heterogeneity across countries, this must be seen as a disappointing performance for the region as a whole, given the possibilities of catch-up growth, although African performance was not notably worse than other non-western regions before the 1980s. Avoiding episodes of shrinking needs to be given a higher priority in understanding the transition to sustained economic growth.
    Keywords: Africa; economic growth; GDP per capita; shrinking
    JEL: E01 N37 O10
    Date: 2020–08
  87. By: de la Croix, David; Goñi, Marc
    Abstract: We argue that the waning of nepotism in academia bolstered scientific production in pre-industrial Europe. We build a database of families of scholars (1088-1800), measure their scientific output, and develop a general method to disentangle nepotism from inherited human capital -two determinants of occupational persistence. This requires jointly addressing measurement error in human capital proxies and sample selection bias arising from nepotism. Our method exploits multi-generation correlations together with parent-child distributional differences to identify the structural parameters of a first-order Markov process of human capital transmission with nepotism. We find an intergenerational human capital elasticity of 0.59, higher than that suggested by parent-child elasticities, yet lower than multi-generation estimates ignoring nepotism. On average, 16 percent of scholars' sons achieved their position because of nepotism. Nepotism was lower in science than in law and in Protestant than in Catholic institutions, and declined during the Scientific Revolution and the Enlightenment---two periods of buoyant scientific advancement.
    Keywords: human capital transmission; intergenerational mobility; Nepotism; pre-industrial Europe; university scholars; Upper-Tail Human Capital
    JEL: C31 E24 J1
    Date: 2020–08
  88. By: Ozge Akinci; Albert Queraltó
    Abstract: The question of how U.S. monetary policy affects foreign economies has received renewed interest in recent years. The bulk of the empirical evidence points to sizable effects, especially on emerging market economies (EMEs). A key theme in the literature is that these spillovers operate largely through financial channels—that is, the effects of a U.S. policy tightening manifest themselves abroad via declines in international risky asset prices, tighter financial conditions, and capital outflows. This so-called Global Financial Cycle has been shown to affect EMEs more forcefully than advanced economies. It is because higher U.S. policy rates have a disproportionately larger impact on rates in EMEs. In our recent research, we develop a model with cross-border financial linkages that provides theoretical foundations for these empirical findings. In this Liberty Street Economics post, we use the model to illustrate the spillovers from a tightening of U.S. monetary policy on credit spreads and on the uncovered interest rate parity (UIP) premium in EMEs with dollar-denominated debt.
    Keywords: financial frictions; U.S. monetary policy spillovers; currency premium; financial conditions
    JEL: E52 F00
    Date: 2021–05–17
  89. By: Helm, Ines (Stockholm University); Stuhler, Jan (Universidad Carlos III de Madrid)
    Abstract: We study the fiscal and tax response to intergovernmental grants, exploiting quasi-experimental variation within Germany's fiscal equalization scheme triggered by Census revisions of official population counts. Municipal budgets do not adjust instantly. Instead, spending and investments adapt within five years to revenue gains, while adjustment to revenue losses is more rapid. Yet, the long-run response is symmetric. The tax response is particularly slow, stretching over more than a decade. Well-known empirical "anomalies" in public finance such as the flypaper effect are thus primarily a short-run phenomenon, while long-run fiscal behavior appears more consistent with standard theories of fiscal federalism.
    Keywords: intergovernmental grants, fiscal transfers, government spending, local taxation, Census Shock, flypaper effect
    JEL: H71 H72 H77 E62
    Date: 2021–05
  90. By: Gallipoli, Giovanni; Low, Hamish; Mitra, Aruni
    Abstract: We characterize the joint evolution of cross-sectional inequality in earnings, other sources of income and consumption across generations in the U.S. To account for cross-sectional dispersion, we estimate a model of intergenerational persistence and separately identify the influences of parental factors and of idiosyncratic life-cycle components. We find evidence of family persistence in earnings, consumption and saving behaviours, and marital sorting patterns. However, the quantitative contribution of idiosyncratic heterogeneity to cross-sectional inequality is significantly larger than parental effects. Our estimates imply that intergenerational persistence is not high enough to induce further large increases in inequality over time and across generations.
    Keywords: Consumption; Income; inequality; Intergenerational Persistence
    JEL: D1 D64 E24
    Date: 2020–08
  91. By: Afees A. Salisu (Centre for Econometric & Allied Research, University of Ibadan, Ibadan, Nigeria); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield, 0028, South Africa); Sayar Karmakar (Department of Statistics, University of Florida, 230 Newell Drive, Gainesville, FL 32601, USA); Sonali Das (Department of Business Management, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)
    Abstract: In this paper we develop a proxy for global uncertainty based on the volatility of gold market over the annual period of 1311 to 2019, and then use this proxy metric to forecast historical growthrates for eight advance economies namely, France, Germany, Holland, Italy, Japan, Spain, the United Kingdom (UK), and the United States (US). We find that for the within-sample period, uncertainty negatively impacts output growth, but more importantly, over the out-of-sample period, gold market volatility produces statistically significant forecasting gains. Our findings are robust to an alternative measure of uncertainty based on the volatility of the changes in long-term sovereign real-rates over 1315 to 2019. These historical results have important implications for investors and policymakers in the current context in which high frequency gold price data is available.
    Keywords: Historical output growth, advance economies, gold market volatility, forecasting
    JEL: C22 C53 E32 Q02
    Date: 2021–05
  92. By: Isaac K. Ofori (University of Insubria, Varese, Italy); Simplice A. Asongu (Yaoundé, Cameroon)
    Abstract: This study examines the joint effects of ICT diffusion (composed of access, usage and skills), and foreign direct investment (FDI) on inclusive growth in sub-Saharan Africa (SSA). The study draws on data from the World Bank’s World Development Indicators, and the Global Consumption and Income Project for the period 1980–2019 for the analysis. The study provides evidence robust to several specifications from ordinary least squares and dynamic system GMM estimation techniques to show that: (1) FDI and ICT diffusion and corresponding components (ICT access, usage, skills) induce inclusive growth in SSA; (2) compared to its direct effect, FDI is remarkable in fostering shared growth in SSA in the presence of greater ICT diffusion, and (3) compared to ICT access and usage, ICT skills are more effective in driving inclusive growth in SSA. Overall FDI modulates ICT dynamics to engender positive synergy effects on inclusive growth. Policy recommendations are provided in line with the implementation of the African Continental Free Trade Area (AfCFTA) Agreement and the projected rise in FDI in SSA from 2022.
    Keywords: FDI; ICT Access; ICT Diffusion; ICT Skills; ICT Usage; Inclusive Growth; sub- Saharan Africa
    JEL: E23 F21 F30 L96 O55
    Date: 2021–05
  93. By: Plantin, Guillaume
    Abstract: During a financial crisis, a central bank temporarily subsidizes the interest rate so as to maintain borrowing at normal levels. Savers may search for yield and blow rational stochastic bubbles that generate a higher expected return than the policy rate before bursting at the end of monetary easing. Unlike standard rational bubbles, that are not monetary phenomena, these bubbles are "bad" in the sense that they crowd out investments that would otherwise generate a higher expected return than that on the bubbles.
    Date: 2020–08
  94. By: Joan Huang (Reserve Bank of Australia); John Simon (Reserve Bank of Australia)
    Abstract: High-quality central bank communication can improve the effectiveness of monetary policy and is an essential element in providing greater central bank transparency. There is, however, no agreement on what high-quality communication looks like. To shed light on this, we investigate 3 important aspects of central bank communication. We focus on how different audiences perceive the readability and degree of reasoning within various economic publications; providing the reasons for decisions is a critical element of transparency. We find that there is little correlation between perceived readability and reasoning in the economic communications we analyse, which highlights that commonly used measures of readability can miss important aspects of communication. We also find that perceptions of communication quality can vary significantly between audiences; one size does not fit all. To dig deeper we use machine learning techniques and develop a model that predicts the way different audiences rate the readability of and reasoning within texts. The model highlights that simpler writing is not necessarily more readable nor more revealing of the author's reasoning. The results also show how readability and reasoning vary within and across documents; good communication requires a variety of styles within a document, each serving a different purpose, and different audiences need different styles. Greater central bank transparency and more effective communication require an emphasis not just on greater readability of a single document, but also on setting out the reasoning behind conclusions in a variety of documents that each meet the needs of different audiences.
    Keywords: central bank communications; machine learning; natural language processing; readability; central bank transparency
    JEL: C61 C83 D83 E58 Z13
    Date: 2021–05
  95. By: Goodhart, Charles A; Tsomocos, Dimitrios P; Wang, Xuan (Alex)
    Abstract: A sizeable proportion of enterprises, especially SMEs, in receipt of financial assistance from the government, will fail to repay. In this paper we asked whether, and to what extent, it may be beneficial to apply a screening mechanism to deter those mostly likely to fail to repay from seeking such financial assistance in the first place. The answer largely turns on the relative weights attached for the objectives of stabilisation as compared with allocative efficiency. For this purpose, we develop a two-sector infinite horizon model featuring oligopolistic small businesses and a screening contract in the presence of a pandemic shock with asymmetric information. The adversely affected sector with private information can apply for government loans to reopen businesses once the pandemic has passed. First, we show that a pro-allocation government sets a harsh default sanction to deter entrepreneurs with bad projects from reentering and improves aggregate productivity in the long run, but the economy suffers persistent unemployment in the near term. However, a pro-stabilisation government sets a lenient default sanction or provides full guarantees to reach full employment in the short term, but the economy will be shifted to a lower equilibrium in the long run. The optimal default sanction balances the trade-off between allocation and stabilisation. Then, we derive an analytic measure of "Stabilisation Proclivity" and characterise the parameter space and the macro-financial frictions that render the government either more pro-allocation or more pro-stabilisation. Finally, we solve for the optimal default sanction numerically and conducts comparative statics for various policy analyses.
    Keywords: Adverse Selection; COVID-19; Government Guarantees; optimal default sanction; private information; productivity; screening; unemployment
    JEL: D82 E44 G38 H81
    Date: 2020–07
  96. By: Ofori, Isaac Kwesi; Asongu, Simplice A.
    Abstract: This study examines the joint effects of ICT diffusion (composed of access, usage and skills), and foreign direct investment (FDI) on inclusive growth in sub-Saharan Africa (SSA). The study draws on data from the World Bank’s World Development Indicators, and the Global Consumption and Income Project for the period 1980–2019 for the analysis. The study provides evidence robust to several specifications from ordinary least squares and dynamic system GMM estimation techniques to show that: (1) FDI and ICT diffusion and corresponding components (ICT access, usage, skills) induce inclusive growth in SSA; (2) compared to its direct effect, FDI is remarkable in fostering shared growth in SSA in the presence of greater ICT diffusion, and (3) compared to ICT access and usage, ICT skills are more effective in driving inclusive growth in SSA. Overall FDI modulates ICT dynamics to engender positive synergy effects on inclusive growth. Policy recommendations are provided in line with the implementation of the African Continental Free Trade Area (AfCFTA) Agreement and the projected rise in FDI in SSA from 2022.
    Keywords: FDI; ICT Access; ICT Diffusion; ICT Skills; ICT Usage; Inclusive Growth; sub-Saharan Africa
    JEL: E23 F21 F30 L96 O55
    Date: 2021–05–13
  97. By: Ojo, Marianne
    Abstract: What roles exist for public and private partnerships within the context of central bank digital currencies (CBDCs), in an increasingly digitalized global system? Do central bank digital currencies (CBDCs) serve as public goods rather than tools which should primarily remain within the realm and governance of private sector firms? What challenges or risks are presented through the use of CBDCs and how can such risks be mitigated through current existing structures - as well as models which have been propounded in relation to public – private partnerships? This paper aims to contribute to the literature on the topic through a consideration of several variants and models of CBDCs under which the public private partnership would function, namely the synthetic CBDC (sCBDC) and the two-tiered CBDC. Further, two other types of CBDCs, namely the wholesale CBDC and the retail CBDC will be distinguished - as well as the account based CBDC, which is contrasted to CBDCs based on digital tokens. Whilst concerns for privacy and security remain paramount and cannot be undermined, particularly from the perspectives of distributed ledger technologies (and blockchains – through which such platforms operate), such concerns need to be weighed against the need for identification since regulators will be better supported in their goals in enforcing the law, as well as identifying fraudulent operations, where sufficient identification procedures have been put in place
    Keywords: CBDCs; synthetic CBDCs; two tiered CBDCs; retail CBDC; distributed ledger technologies; regulation; governance; anti trust ; competition; financial stability
    JEL: E58 F2 F64 G3
    Date: 2021–05
  98. By: Ahmadi, Maryam; Manera, Matteo
    Abstract: The aim of this paper is to investigate how major net oil exporter economies react to oil price shocks. We contribute to the literature by considering, at the same time, the possible nonlinearity and asymmetry of this relationship with respect to sign, size and causes of the oil price shocks, as well as the state of the economy in which the shocks occur. We apply a Threshold Structural VAR approach, characterized by a separation of the observations into different regimes based on a threshold variable, to model time series non-linearities. We use the economic activity as the threshold variable, as it divides economic development in two regimes under which we expect the effects of oil price shocks to differ. First, We find that the effects of oil price shocks on oil exporting economies greatly depend on the underlying cause of the shocks as well as the state of the economy. Second, we find little evidence of asymmetric response of output to the sign of oil price shocks. Our main findings warn decision makers in the area of macroeconomic planning that, when making decisions based on the oil price, the underlying causes of its variations as well as the state of the economy in which the oil price shocks occur have to be considered.
    Keywords: Resource /Energy Economics and Policy
    Date: 2021–05–24
  99. By: Murach , Michael (FernUniversität in Hagen); Wagner , Helmut (FernUniversität in Hagen); Kim , Jungsuk (Sejong University); Park , Donghyun (Asian Development Bank)
    Abstract: We analyze and compare the patterns of economic growth and development in the Japan, the People’s Republic of China, and the Republic of Korea in the postwar period. The geographical proximity and cultural affinity between the three countries, as well as the key role of the development state in the economies, suggest that an analytical comparison would be a meaningful and valuable exercise. Furthermore, Japan and the Republic of Korea are two of the few economies that have jumped from middle income to high income in a short period and thus offer potentially valuable lessons for the PRC. We use Cobb–Douglas production functions to assess the long-run equilibrium relationships between per capita gross domestic product, capital, and labor by means of cointegrated vector autoregressive models. We show that such equilibrium relationships cannot be rejected for all three countries, while the evidence is stronger for the PRC and the Republic of Korea than for Japan. Our hypothesis tests show that the estimated Cobb–Douglas production functions display coefficients of capital and employment that sum up to 1 and broken linear trends that can be attributed to structural breaks and (changes in) total factor productivity growth. We observe a striking similarity between the experience in the Republic of Korea and the PRC, which gives some optimism that the PRC may be capable of graduating to high income, like the Republic of Korea.
    Keywords: aggregate production function; comparative economic growth; economic development; Japan; People’s Republic of China; Republic of Korea
    JEL: E23 O47 O53 O57 P52
    Date: 2020–10–09
  100. By: Ioannis Chatziantoniou (University of Portsmouth); David Gabauer (Software Competence Center Hagenberg); Alexis Stenfor (University of Portsmouth)
    Abstract: This study investigates the dynamic transmission mechanism between 2Y, 5Y and 10Y interest rate swaps (IRS) for six European currencies (CHF, DKK, EUR, GBP, NOK and SEK) from August 6, 1999 to March 4, 2021 applying the time-varying parameter vector autoregressive connectedness approach in the spirit of Antonakakis et al. (2020). Furthermore, the connectedness approach (Diebold and Yılmaz, 2012, 2014) is extended to allow analyzing aggregated and conditional connectedness measures which improve their interpretability and obtain more in-depth information concerning the cross-maturity/cross-currency propagation mechanism. We document that EUR and DKK have been the most prominent transmitters of shocks in the network. We also find that the 10Y IRS has increasingly assumed a net-transmitting role at the expense of the 2Y IRS – in line with a shift towards unconventional monetary policy and quantitative easing. From a policymaking perspective, this implies means that the role of the domestic short-term interest rate has lost relevance for the monetary transmission mechanism at the expense of the foreign long-term interest rate.
    Keywords: Dynamic Connectedness; Aggregated Connectedness, Conditional Connectednes; Interest Rate Swaps; TVP-VAR; Yield Curves.
    JEL: C32 C5 F3 G15
    Date: 2021–05–25
  101. By: Issing, Otmar
    Abstract: Am 20. Januar 2021 veranstalteten das Institut für bankhistorische Forschung und das Center for Financial Studies eine vielbeachtete Video-Konferenz zum Thema 'Die Rolle von Zentralbanken in Krisenzeiten - Lehren aus der Zeit vor 1800'. Anlass war das Erscheinen des Buches von Ulrich Bindseil "Central Banking before 1800" (Oxford 2019). Derselbe Autor hatte einige Jahre zuvor bereits ein ebenfalls bemerkenswertes Buch veröffentlicht: "Monetary Policy Operations and the Financial System" (Oxford 2014). Dieser Beitrag bringt Kommentare zu beiden Publikationen verbunden mit eigenen Überlegungen zur Notenbankpolitik.
    JEL: E5 N2
    Date: 2021
  102. By: Nicolas Himounet (Université Sorbonne Paris Nord)
    Abstract: A growing empirical literature on how to measure uncertainty has emerged following the 2007-2008 financial crisis. This paper review the different methods measuring uncertainty. From a principal component analysis (PCA) including the various measures of uncertainty provided by this growing empirical literature, a monthly global measure of uncertainty for the United States on the period 1990-2015 has been developed and the factors explaining fluctuations in uncertainty have been determined. The US global measure from the PCA has similarities with a composite index from a dynamic factor model. The same methodology is used using euro area data. We find many similarities between US uncertainty peaks and the uncertainty peaks of the euro area. The second factor provides a switch between two natures of uncertainty: macroeconomic and financial. Finally, we extend our analysis adding a measure related to the pandemic risk to take into account the current COVID-19 pandemic.
    Keywords: Uncertainty, principal component analysis, economic activity, COVID-19
    JEL: F
    Date: 2021
  103. By: Demirguc-Kunt, Asli; Horvath, Balint; Huizinga, Harry
    Abstract: Using an event study methodology, this paper examines how European firms have been affected by the announcement of the Pandemic Emergency Purchase Program (PEPP) of the ECB. Firms with an investment-grade rating benefit relatively more as evidenced by higher share prices and lower CDS spreads, which reflects that the ECB is restricted to purchasing investment-grade corporate debt securities. The gains to shareholders relative to the total gains of shareholders and debtholders are negatively related to firm leverage, consistent with the existence of debt overhang. Firms more heavily impacted by the pandemic benefit relatively little from the PEPP, which could reflect that the business models of some of these firms are heavily damaged by the pandemic. Monetary policy in the form of the PEPP and national fiscal responses to the pandemic are shown to be complements in the sense that a strong pre-PEPP fiscal response enhances the potential for the PEPP to positively affect equity and debt valuations.
    Keywords: Equity returns; Pandemic; Quantitative easing
    JEL: E52 G14
    Date: 2020–08
  104. By: Melissa C. Chow; Teresa C. Fort; Christopher Goetz; Nathan Goldschlag; James Lawrence; Elisabeth Ruth Perlman; Martha Stinson; T. Kirk White
    Abstract: In this paper we describe the U.S. Census Bureau's redesign and production implementation of the Longitudinal Business Database (LBD) first introduced by Jarmin and Miranda (2002). The LBD is used to create the Business Dynamics Statistics (BDS), tabulations describing the entry, exit, expansion, and contraction of businesses. The new LBD and BDS also incorporate information formerly provided by the Statistics of U.S. Businesses program, which produced similar year-to-year measures of employment and establishment flows. We describe in detail how the LBD is created from curation of the input administrative data, longitudinal matching, retiming of economic census-year births and deaths, creation of vintage consistent industry codes and noise factors, and the creation and cleaning of each year of LBD data. This documentation is intended to facilitate the proper use and understanding of the data by both researchers with approved projects accessing the LBD microdata and those using the BDS tabulations.
    JEL: D0 E0 F0 J0 L0
    Date: 2021–05
  105. By: Maryam Farboodi; Péter Kondor
    Abstract: We investigate the heterogeneous boom and bust patterns across countries that emerge as a result of global shocks. Our analysis sheds light on the emergence of core and periphery countries, and the joint determination of the depth of recessions and tightness of credit markets across countries. The model implies that interest rates are similar across core and periphery countries in booms, with larger credit and output growth in periphery countries. However, a common global shock that leads to a credit crunch across the globe gives rise to a sharper spike in interest rates and a deeper recession in periphery countries, while a credit flight to the core alleviates the adverse consequences in these countries. We explore the implication of the model about credit spreads, portfolio rebalancing, investment, non-performing debt and concentration of debt ownership during booms and busts, both in the time series and in the cross-section, and connect them to existing stylized facts. We further demonstrate how the anatomy of the global economy evolves as a result of aggregate demand and supply shocks to financing, such as a global saving glut.
    JEL: F4 F44 G15
    Date: 2021–05
  106. By: Pugno, Maurizio
    Abstract: The rise and decline of the Italian economy over the past 60 years form a surprisingly regular parabola, if the main European partner economies are taken as benchmark, so that its vertex equal to 1 means that Italy completely caught-up Europe around the 1990s. This implies that, in order to repeat that experience of catching-up, Italy needs to grow at extraordinary rates, which are not on the horizon. The paper shows that the Italians’ morale is even in worse conditions and explores why. The analysis firstly focuses on subjective well-being (and other subjective indices), thus finding another parabola and with more worrying features than the economic parabola. Then it explores the role of education in shaping the long-run dynamics of both the economy and subjective well-being. As a first result, the paradox of the excess supply of educated workers in Italy becomes clearer. The second result shows how poor education weakened Italians’ ability to fully enjoy their income, in particular after the shocks of the 1990s. An education policy thus becomes urgent to provide both specialized skills for production and general skills for people’s lives, thus definitively reinforcing the recent weak rebound in educational levels.
    Keywords: economic decline, subjective well-being, education, Italy
    JEL: I25 I31 J24 O15 O52
    Date: 2021–05–30
  107. By: Andreas Fuster; Tan Schelling; Pascal Towbin
    Abstract: As negative interest rates exert pressure on bank profitability, several central banks have introduced reserve tiering systems to lessen the burden. Reserve tiering means that banks are only charged the negative policy rate above a certain threshold of reserves. Altering the threshold affects bank profits and therefore has potential effects on the macroeconomy and financial stability. However, assessing these effects is challenging, because the introduction or modification of reserve tiers has usually been accompanied by other monetary policy actions, such as rate changes or quantitative easing measures. We are able to circumvent these issues by exploiting an unexpected decision by the Swiss National Bank in September 2019 to change the threshold calculation without taking any other policy actions. This change led to a large increase in overall exemptions, but with variation across banks. Using a difference-in-differences approach, we find that banks that experience a larger increase in their exemption threshold tend to raise their SNB sight deposit holdings, funded through more interbank borrowing and more customer deposits. The interbank market is important for the funding choice: banks with low collateral holdings (a proxy for market access) use less interbank borrowing and instead grow their customer deposits; they also pass on negative rates on a smaller share of their deposits. Effects on bank lending behavior are moderate; if anything, banks that benefit from a larger increase in the exemption threshold tend to charge higher spreads and take less risk.
    Keywords: Reserve tiering, negative interest rates, banking, risk-taking channel
    JEL: E52 G21
    Date: 2021
  108. By: Boot, Arnoud W A; Hoffmann, Peter; Laeven, Luc; Ratnovski, Lev
    Abstract: We study the effects of technological change on financial intermediation, distinguishing between innovations in information (data collection and processing) and communication (relationships and distribution). Both follow historic trends towards an increased use of hard information and less in-person interaction, which are accelerating rapidly. We point to more recent innovations, such as the combination of data abundance and artificial intelligence, and the rise of digital platforms. We argue that in particular the rise of new communication channels can lead to the vertical and horizontal disintegration of the traditional bank business model. Specialized providers of financial services can chip away activities that do not rely on access to balance sheets, while platforms can interject themselves between banks and customers. We discuss limitations to these challenges, and the resulting policy implications.
    Keywords: communication; financial innovation; Financial Intermediation; Fintech; Information
    JEL: E58 G20 G21 O33
    Date: 2020–07
  109. By: Cavalcanti, Tiago; Dos Santos, Marcelo
    Abstract: There is a large body of evidence showing that for many countries the structure of wages and pensions and the labor law legislation are different for public and private employees. Such differences affect the occupational choice of agents and might generate some type of misallocation. We develop a life-cycle model with endogenous occupational choice and heterogeneous agents to study the implications of an overpaid public sector. The model is estimated to be consistent with micro and macro evidence for Brazil, a country with a high public sector earnings premium. Our counterfactual exercises demonstrate that public-private earnings premium can generate important allocation effects and sizeable productivity losses. For instance, a reform that would decrease the public-private wage premium from its benchmark value of 19% to $15 and would align the pension of public sector workers with the one in place for private sector workers could increase aggregate output by 11.2% in the long-run without any decrease in the supply of public infrastructure. We provide a decomposition of the aggregate effect into changes in factors accumulation and changes in TFP and implement a welfare distributive analysis.
    Keywords: and development; Misallocation; Public Private earnings premium
    JEL: E6 H3 J2 O1
    Date: 2020–08
  110. By: Consing III, Rafael Martin M. (Asian Development Bank); Barsabal, Michael John M. (Asian Development Bank); Alvarez, Julian Thomas B. (Asian Development Bank); Mariasingham , Mahinthan J. (Asian Development Bank)
    Abstract: This paper provides a comprehensive discussion on different, interconnected methods of using the system of national accounts to measure the relevance of a country’s wellness sector to its overall economy. Procedures are discussed for using input–output analysis to derive the production and employment linkages between wellness and nonwellness sectors. We also discuss procedures for using the hypothetical extraction method to derive and decompose the production and employment losses that may arise when a country’s wellness sector is removed from the economy. These procedures are then used to provide estimates for ten countries in developing Asia across two time periods which together provide a proxy for the region (Asia-10), along with a discussion on how these wellness economies have grown and how each one's labor productivity and wellness sector structure have evolved between the two periods.
    Keywords: economy; employment; input–output; national accounts; wellness
    JEL: C67 D57 E01 I39 R15
    Date: 2020–12–29
  111. By: Thomas Klitgaard
    Abstract: The fiscal packages passed in 2020 and 2021 to help the economy cope with the pandemic caused a dramatic increase in federal government borrowing. One might have expected that foreign investors were important buyers of this new debt, but that was not the case. They were instead net sellers of Treasury securities. Still, the amount of money flowing into the United States increased last year, which helped fund the government’s borrowing, if only indirectly. The upturn in inflows, though, was quite modest as a surge in domestic personal saving largely covered the government’s heightened borrowing needs. How the reliance on foreign funds changes in 2021, when the government deficit will again be quite elevated, will depend on whether domestic personal saving remains high.
    Keywords: COVID-19; pandemic; budget deficit; financial flows; saving; investment; spending; balance of payments; financial account; federal government; fiscal policy
    JEL: F00 H0
    Date: 2021–05–21
  112. By: Karlsson, Sune (Örebro University School of Business); Mazur, Stepan (Örebro University School of Business); Nguyen, Hoang (Örebro University School of Business)
    Abstract: With uncertain changes of the economic environment, macroeconomic downturns during recessions and crises can hardly be explained by a Gaussian structural shock. There is evidence that the distribution of macroeconomic variables is skewed and heavy tailed. In this paper, we contribute to the literature by extending a vector autore- gression (VAR) model to account for a more realistic assumption of the multivariate distribution of the macroeconomic variables. We propose a general class of generalized hyperbolic skew Student's t distribution with stochastic volatility for the error term in the VAR model that allows us to take into account skewness and heavy tails. Tools for Bayesian inference and model selection using a Gibbs sampler are provided. In an empirical study, we present evidence of skewness and heavy tails for monthly macroe- conomic variables. The analysis also gives a clear message that skewness should be taken into account for better predictions during recessions and crises.
    Keywords: Vector autoregression; Skewness and heavy tails; Generalized hyper- bolic skew Students t distribution; Stochastic volatility; Markov Chain Monte Carlo
    JEL: C11 C15 C16 C32 C52
    Date: 2021–05–20
  113. By: Pablo Azar
    Abstract: In the past sixty years, transistor sizes and weights have decreased by 50 percent every eighteen months, following Moore’s Law. Smaller and lighter electronics have increased productivity in virtually every industry and spurred the creation of entirely new sectors of the economy. However, while the effect of the increasing quality of computers and electronics on GDP has been widely studied, the question of how electronic miniaturization affects economic growth has been unexplored. To quantify the effect of electronic miniaturization on GDP, this paper builds an economic growth model that incorporates physical constraints on firms’ production sets. This model allows for new types of productivity spillovers that are driven by products’ physical characteristics. Not only are there spillovers from changes in industry productivity, but also, there can be “size spillovers,” where the miniaturization of one industry’s product leads to miniaturization of products that are downstream in the supply chain, reflecting how transistor miniaturization has led to the decrease in size of a large variety of electronic products. Using a new data set of product weights and sizes, we test the predictions of the model and show that Moore’s Law accounts for approximately 3.5 percent of all productivity growth in the 1982-2007 period, and for 37.5 percent of the productivity growth in heavy manufacturing industries. The results are robust under multiple specifications, and increase in strength during the 1997-2007 subperiod.
    Keywords: economic growth; productivity; electronic miniaturization
    JEL: O30 O40 E00
    Date: 2021–05–01
  114. By: Isaac K. Ofori (University of Insubria, Varese, Italy); Camara K. Obeng (University of Cape Coast, Cape Coast, Ghana); Peter Y. Mwinlaaru (University of Cape Coast, Cape Coast, Ghana)
    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: E5 H2 H7 F6 O4 Q55
    Date: 2021–01
  115. By: Chemla, Gilles; Hennessy, Christopher
    Abstract: Causal evidence from random assignment has been labeled "the most credible." We argue it is generally incomplete in finance/economics, omitting central parts of the true empirical causal chain. Random assignment, in eliminating self-selection, simultaneously precludes signaling via treatment choice. However, outside experiments, agents enjoy discretion to signal, thereby causing changes in beliefs and outcomes. Therefore, if the goal is informing discretionary decisions, rather than predicting outcomes after forced/mistaken actions, randomization is problematic. As shown, signaling can amplify, attenuate, or reverse signs of causal effects. Thus, traditional methods of empirical finance, e.g. event studies, are often more credible/useful.
    Keywords: Causal effect; CEO; Corporate Finance; Government Policy; household finance; investment; random assignment; selection; signal
    JEL: D82 E6 G14 G18 G28 G3 J24
    Date: 2020–08
  116. By: Bindseil, Ulrich
    Abstract: Contrary to popular belief, the history of central banking begins much earlier than 1800. Many current issues of central bank policy can be traced back to the public giro banks of the 15th century, and have been discussed in numerous essays at least since the 17th century. Are the same debates merely repeating themselves in new shapes? And, more importantly, what can we learn today from those first four centuries of central bank history and debates? This paper argues that despite the end of convertibility into precious metal of central bank money, relevant lessons can be derived from early central banking for today, and develops this around five concrete themes.
    JEL: E5 N2
    Date: 2021
  117. By: Osvaldo Meloni (Universidad Nacional de Tucumán)
    Abstract: In a context of political competition incumbents trade-off the probability of losing office due to an increment in taxes to finance spending against the increase in the probability of remaining in office. However, this is not usual situation faced by subnational jurisdictions authorities that financed a large fraction of local expenditures with sizable discretionary transfers from the central government. It is expected that incumbents use that additional low-cost spending power given by federal transfers to feed clientelistic networks, increase public employment, direct subsidies to constituencies, thus enhancing their chances to remain in office. This paper presents evidence of the influence of political competition on the behavior of fiscal policy in argentine provinces from 1987 to 2015. Contrary to the predominant theory and empirical evidence from subnational districts my estimations of a dynamic panel data show that political competition is associated with increases in public outlays and changes in its composition. This finding is strongly related to the large vertical fiscal imbalances that characterize the argentine fiscal federalism.
    Keywords: political competition soft budget constraints vertical fiscal imbalance
    JEL: D72 P16
    Date: 2020–03
  118. By: Foarta, Dana; Morelli, Massimo
    Abstract: Decision makers called to evaluate and approve a reform, proposed by an interest group, a politician, or a bureaucracy, suffer from a double asymmetric information problem: about the competence of the proposer and the consequences of the proposal. Moreover, the ability of decision makers to evaluate proposals depends on the complexity of the legislative environment, itself a product of past reforms. We model the strategic interaction between reformers and decision makers as a function of legislative complexity, and study the dynamics of endogenous complexity and stability of reforms. Complexication-simplication cycles can occur on the equilibrium path, and expected long-run complexity may be higher when competence of reform proposers is lower. The results apply to regulatory reforms, legislative politics, and institutional design.
    Keywords: bureaucracy; Checks and balances; competence; Incremental Reforms; Information; interest groups; Politicians; Regulatory Complexity
    JEL: D73 G28 H83 L51
    Date: 2020–08
  119. By: Carlos Bianchi (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Fernando Isabella (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Santiago Picasso (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía)
    Abstract: This article provides evidence that the external constraint, measured through export margins, explains the middle income trap (MIT)condition. This refers to the situation of stagnation or slowing down of economic growth that many countries face when they reach middle income levels. This results from an endogenous mechanism that makes these countries unable to follow the growth strategy based on simple products and standardized technologies, because their production costs increased as the country increased its income levels. However, these countries lack the necessary capacities to transform their production, incorporating sophisticated goods and services, to sustain growth and continue to increase the living standards of their population. Using static and dynamic econometric models, we corroborate a positive and significant relationship between export margin and the growth of GDPpc for those countries defined as MIT. On the contrary, this relationship is not found for other countries. Hence, a mechanism is identified that explains the situation of entrapment in middle income, overcoming the mere identification of stagnation and its empirical demarcation, and allowing us to distinguish between countries that are in transit within middle income thresholds and those that are trapped in them.
    Keywords: Middle Income Trap, external constraint, growth, development
    JEL: I10 J13 C89
    Date: 2020–11
  120. By: Sune Karlsson; Stepan Mazur; Hoang Nguyen
    Abstract: With uncertain changes of the economic environment, macroeconomic downturns during recessions and crises can hardly be explained by a Gaussian structural shock. There is evidence that the distribution of macroeconomic variables is skewed and heavy tailed. In this paper, we contribute to the literature by extending a vector autoregression (VAR) model to account for a more realistic assumption of the multivariate distribution of the macroeconomic variables. We propose a general class of generalized hyperbolic skew Student's t distribution with stochastic volatility for the error term in the VAR model that allows us to take into account skewness and heavy tails. Tools for Bayesian inference and model selection using a Gibbs sampler are provided. In an empirical study, we present evidence of skewness and heavy tails for monthly macroeconomic variables. The analysis also gives a clear message that skewness should be taken into account for better predictions during recessions and crises.
    Date: 2021–05
  121. By: Cutura, Jannic; Parise, Gianpaolo; Schrimpf, Andreas
    Abstract: We examine the incentive of corporate bond fund managers to manipulate portfolio risk in response to competitive pressure. We find that bond funds engage in a reverse fund tournament in which laggard funds actively de-risk their portfolios, trading-off higher yields for more liquid and safer assets. De-risking is stronger for laggard funds that have a more concave sensitivity of flows-to-performance, in periods of market stress, and when bond yields are high. We provide evidence that debt de-risking also reduces ex post liquidation costs by mitigating the investors' incentive to run ex ante. We argue that, in the presence of de-risking behaviors, flexible NAVs (swing pricing) may be counter-productive and induce moral hazard.
    Keywords: bonds; De-risking; liquidity; Mutual funds; swing pricing; tournaments
    JEL: E43 G11 G23 G32
    Date: 2020–07
  122. By: David W. Berger; Kyle F. Herkenhoff; Simon Mongey
    Abstract: To measure labor market power in the US economy, we develop a tractable quantitative, general equilibrium, oligopsony model of the labor market. We estimate key model parameters by matching the firm-level relationship between labor market share and employment size and wage responses to state corporate tax changes. The model quantitatively replicates quasi-experimental evidence on (i) imperfect productivity-wage pass-through, (ii) strategic behavior of dominant employers, and (iii) the local labor market impact of mergers. We then measure welfare losses relative to the efficient allocation. Accounting for transition dynamics, we quantify welfare losses from labor market power relative to the efficient allocation as roughly 6 percent of lifetime consumption. An analytical decomposition attributes equal parts to dead-weight losses and misallocation. Lastly, we find that declining local concentration added 4 ppt to labor's share of income between 1977 and 2013.
    Keywords: Labor markets; Market structure; Oligopsony; Strategic interaction
    JEL: E20 J20 J42
    Date: 2021–05–13
  123. By: Fernández-Villaverde, Jesús; Guerron-Quintana, Pablo A.
    Abstract: We review the current state of the estimation of DSGE models. After introducing a general framework for dealing with DSGE models, the state-space representation, we discuss how to evaluate moments or the likelihood function implied by such a structure. We discuss, in varying degrees of detail, recent advances in the field, such as the tempered particle filter, approximated Bayesian computation, the Hamiltonian Monte Carlo, variational inference, and machine learning, methods that show much promise, but that have not been fully explored yet by the DSGE community. We conclude by outlining three future challenges for this line of research.
    Keywords: Bayesian methods; DSGE models; estimation; MCMC; Variational Inference
    JEL: C11 C13 E30
    Date: 2020–08
  124. By: Martinez Meza, Santiago; Olivares Puente, Cindy; Reyna Balderas, Jaime; Solorio Corona, Marco
    Abstract: From a theoretical point of view, competitiveness is raised more in terms of increase and mechanisms for obtaining it are not specified, as well as, it is continuously limited to productivity, foreign investment, training, among others. Moreover, in the last 20 years in Tamaulipas, a system of successful municipalities such as those of the border strip, the capital of the state and the southern metropolitan area has been consolidated. The relationship between the agglomeration and the NGE is good for productivity, that is, economic activity works better in this way, than when they are scattered and fragmented. Mexico’s manufacturing sector generates about 20% of GDP. Mexico as one of the countries with major investment and especially more by the United States thanks to NAFTA, that is not enough to grow and develop as there are bureaucratic problems, crime, corruption control and level of education.
    Keywords: Globalization, competitiveness, development.
    JEL: A1 E0
    Date: 2021–05–21
  125. By: Jorratt, Michel
    Abstract: Este documento busca contribuir a la discusión de algunos de los temas claves de los regímenes fiscales en la minería, como la captura de las rentas económicas por parte de los gobiernos, con instrumentos que ofrezcan mayor progresividad, equidad y eficiencia a los sistemas fiscales, o la transparencia en la apropiación, uso y distribución de los ingresos fiscales derivados de la actividad minera. Para ello, se estudian los casos de la minería del cobre en Chile y en el Perú y se analiza la renta económica, el régimen fiscal, la estructura de ingresos tributarios y no tributarios y la transparencia en la apropiación, el uso y la distribución de los ingresos fiscales provenientes del sector de ambos países.
    Date: 2021–05–11
  126. By: Alexandre Kolev; Justina La
    Abstract: Informal employment, defined through the lack of employment-based social protection, constitutes the bulk of employment in developing countries, and entails a level of vulnerability to poverty and other risks that are borne by all who are dependent on informal work income. Results from the Key Indicators of Informality based on Individuals and their Households database (KIIbIH) show that a disproportionately large number of middle‑class informal economy workers receive remittances. Such results confirm that risk management strategies, such as migration, play a part in minimising the potential risks of informal work for middle‑class informal households who may not be eligible to social assistance. They further suggest that middle‑class informal workers may have a solvent demand for social insurance so that, if informality-robust social insurance schemes were made available to them, remittances could potentially be channelled to finance the extension of social insurance to the informal economy. L'emploi informel, défini par l'absence de protection sociale basée sur l'emploi, constitue la majeure partie de l'emploi dans les pays en développement, et entraîne un niveau de vulnérabilité à la pauvreté et à d'autres risques qui sont supportés par tous ceux qui dépendent des revenus du travail informel. Les résultats de la base de données des Indicateurs clés de l'informalité en fonction des individus et leurs ménages (KIIbIH) montrent qu'un nombre disproportionné de travailleurs de l'économie informelle de la classe moyenne reçoivent des transferts de fonds. Ces résultats confirment que les stratégies de gestion des risques, telles que la migration, jouent un rôle dans la minimisation des risques potentiels du travail informel pour les ménages informels de la classe moyenne qui peuvent ne pas être éligibles à l'aide sociale. Ils suggèrent en outre que les travailleurs informels de classe moyenne peuvent avoir une demande solvable d'assurance sociale, de sorte que, si des régimes d'assurance sociale respectueux de l'informalité leur étaient accessibles, les transferts de fonds pourraient potentiellement être canalisés pour financer l'extension de l'assurance sociale à l'économie informelle.
    Keywords: development, informal workers, middle class workers, migrant workers, migration, poverty, remittances, risk-pooling, savings, social insurance, social protection
    JEL: E26 F22 F24 G52 H55 I38
    Date: 2021–05–26

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