|
on Macroeconomics |
|
Issue of 2021‒07‒19
eighty-one papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Kyle Dempsey; Felicia Ionescu |
| Abstract: | Using administrative data from Y-14M and Equifax, we find evidence for large spreads in excess of those implied by default risk in the U.S. unsecured credit market. These borrowing premia vary widely by borrower risk and imply a nearly flat relationship between loan prices and repayment probabilities, at odds with existing theories. To close this gap, we incorporate supply frictions – a tractably specified form of lending standards – into a model of unsecured credit with aggregate shocks. Our model matches the empirical incidence of both risk and borrowing premia. Both the level and incidence of borrowing premia shape individual and aggregate outcomes. Our baseline model with empirically consistent borrowing premia features 45% less total credit balances and 30% more default than a model with no such premia. In terms of dynamics, we estimate that lending standards were unchanged for low risk borrowers but tightened for high risk borrowers at the outset of Covid-19. Borrowing premia imply a smaller increase in credit usage in response to a negative shock, which this tightening reduced further. Since spreads on loans of all risk levels are countercyclical, all consumers use less unsecured credit for insurance over the cycle, leading to 60% higher relative consumption volatility than in a model with no borrowing premia. |
| Keywords: | Bankruptcy; Borrowing premia; Consumer credit; Business cycles |
| JEL: | E21 E32 E44 E51 G12 G21 G22 |
| Date: | 2021–06–24 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2021-39&r= |
| By: | Mosley, Max |
| Abstract: | This paper demonstrates how changes to welfare generosity during recessions induces a greater than usual economic response. This is predicated on the assumption that welfare recipients are likely to be liquidity-constrained and therefore highly responsive to a change in temporary income. This would result in two conclusions, (i) the effects of fiscal stimulus can be maximised when channelled through welfare and (ii) fiscal consolidation from these programs will have a strong contractionary effect on domestic output. Using tax-benefit microsimulation model UKMOD, we find 71% of means-tested welfare recipients are liquidity-constrained. We use this finding to calibrate an open-economy New Keynesian macroeconomic model to therefore illustrate the economic implications of positive changes to the program’s generosity, finding an impact fiscal multiplier of 1.5. For cuts to contributions, we find a negative multiplier of 1.8, implying past cuts to welfare had a sizeable contractionary effect on macroeconomic recovery. |
| Keywords: | Liquidity-Constrains, UKMOD, Fiscal Policy |
| JEL: | B22 E21 E62 H53 |
| Date: | 2021–06–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108620&r= |
| By: | Vladimir Asriyan; Luc Laeven; Alberto Martin; Alejandro Van der Ghote; Victoria Vanasco |
| Abstract: | What is the effect of declining interest rates on the efficiency of resource allocation and overall economic activity? We study this question in a setting in which entrepreneurs with different productivities invest in capital, subject to financial frictions. We show that a fall in the interest rate has an ambiguous effect on aggregate output. In partial equilibrium, a lower interest rate raises aggregate investment both by relaxing financial constraints and by prompting relatively less productive entrepreneurs to invest. In general equilibrium, this higher demand for capital raises its price and crowds out investment by the more productive entrepreneurs. When this crowding-out effect is strong enough, a fall in the interest rate becomes contractionary. Moreover, in a dynamic setup, such reallocation effects among entrepreneurs can interact with the classic balance-sheet channel, giving rise to a boom-bust impulse response of output to a fall in the interest rate. We provide evidence in support of our mechanism using data from the US and Spain. |
| Keywords: | low interest rates, financial frictions, firm heterogeneity, misallocation, credit asset prices, monetary policy |
| JEL: | E22 E32 E44 E52 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1268&r= |
| By: | Javier García-Cicco (Central Bank of Argentina) |
| Abstract: | We evaluate the dynamics of a small and open economy under alternative simple rules for different monetary-policy instruments, in a model with imperfectly anchored expectations. The inflation-targeting consensus is that interest-rate rules are preferred, instead of using either a monetary aggregate or the exchange rate; with arguments usually presented under rational expectations and full credibility. In contrast, we assume agents use econometric models to form inflation expectations, capturing limited credibility. In particular, we emphasize the exchange rate’s role in shaping medium- and long-term inflation forecasts. We compare the dynamics after a shock to external-borrowing costs (arguably one of the most important sources of fluctuations in emerging countries) under three policy instruments: a Taylor-type rule for the interest rate, a constant-growth-rate rule for monetary aggregates, and a fixed exchange rate. The analysis identifies relevant trade-offs in choosing among alternative instruments, showing that the relative ranking is indeed influenced by how agents form inflation-related expectations. |
| Keywords: | small open economy, monetary policy rules, macroeconomic models, inflation expectations |
| JEL: | E17 E52 E58 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:bcr:wpaper:202191&r= |
| By: | Federico Di Pace; Christoph Görtz |
| Abstract: | Using a structural vector autoregression, we document that a contractionary monetary policy shock triggers a decline in durable and non-durable outputs as well as a contraction in bank equity and a rise in the excess bond premium. The latter points to an important transmission channel of monetary policy via financial markets. It has long been recognized that a standard two-sector New Keynesian model, where durable goods prices are flexible and prices of non-durables and services sticky, does not generate the empirically observed sectoral co-movement across expenditure categories in response to a monetary policy shock. We show that introducing frictions in financial markets in a two-sector New Keynesian model can resolve its disconnect with the empirical evidence: a monetary tightening generates not only co-movement, but also a rise in credit spreads and a deterioration in bank equity. |
| Keywords: | financial intermediation, sectoral comovement, monetary policy, financial frictions, credit spreads |
| JEL: | E22 E32 E44 E52 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9142&r= |
| By: | Mohammed Ait Lahcen; Garth Baughman; Stanislav Rabinovich; Hugo van Buggenum |
| Abstract: | We argue that long-run inflation has nonlinear and state-dependent effects on unemployment, output, and welfare. Using panel data from the OECD, we document three correlations. First, there is a positive long-run relationship between anticipated inflation and unemployment. Second, there is also a positive correlation between anticipated inflation and unemployment volatility. Third, the long-run inflation-unemployment relationship is not only positive, but also stronger when unemployment is higher. We show that these correlations arise in a standard monetary search model with two shocks – productivity and monetary – and frictions in labor and goods markets. Inflation lowers the surplus from a worker-firm match, in turn making it sensitive to productivity shocks or to further increases in inflation. We calibrate the model to match the U.S. postwar labor market and monetary data, and show that it is consistent with observed cross-country correlations. The model implies that the welfare cost of inflation is nonlinear in the level of inflation and is amplified by the presence of aggregate shocks. |
| Keywords: | Money; Search; Inflation; Unemployment; Unemployment volatility; Fundamental surplus; Product-labor market interaction |
| JEL: | E24 E30 E40 E50 |
| Date: | 2021–06–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2021-40&r= |
| By: | Ha, Jongrim; Kose, M. Ayhan; Ohnsorge, Franziska |
| Abstract: | We analyze the evolution and drivers of inflation during the pandemic and the likely trajectory of inflation in the near-term using an event study of inflation around global recessions and a factor-augmented vector auto-regression (FAVAR) model. We report three main results. First, the decline in global inflation during the 2020 global recession was the most muted and shortest-lived of any of the five global recessions over the past 50 years and the increase in inflation since May 2020 has been the fastest. Second, the decline in global inflation from January-May 2020 was four-fifths driven by the collapse in global demand and another one-fifth driven by plunging oil prices, with some offsetting inflationary pressures from supply disruptions. The subsequent surge in inflation has been mostly driven by a sharp increase in global demand. Third, both model-based forecasts and current inflation expectations point to an increase in inflation for 2021 of just over 1 percentage point. For virtually all advanced economies and one-half of inflation-targeting emerging market and developing economies (EMDEs), an increase of this magnitude would leave inflation within target ranges. If the increase is temporary and inflation expectations remain well-anchored, it may not warrant a monetary policy response. If, however, inflation expectations risk becoming unanchored, EMDE central banks may be compelled to tighten monetary policy before the recovery is fully entrenched. |
| Keywords: | Global Inflation; COVID-19; Global Recession; FAVAR; Oil Prices; Global Shocks |
| JEL: | E31 E32 Q43 |
| Date: | 2021–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108677&r= |
| By: | André Teixeira; Zoë Venter |
| Abstract: | This paper shows that the recent surge in savings is a result of tighter macroprudential policy. Using a difference-in-differences approach with staggered treatment adoption, we find that households in EU countries that adopted macroprudential policy between 2000 and 2019 increased their savings up to one third more than households in countries without macroprudential policy. Furthermore, our results indicate that the loan-to-value ratio explains most of the variation on savings. Finally, we find that a longer exposure to macroprudential policy exacerbates savings with searing consequences on growth. |
| Keywords: | Macroprudential policy, savings, growth, difference-in-differences |
| JEL: | E21 E52 O47 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp01812021&r= |
| By: | Tweneboah Senzu, Emmanuel |
| Abstract: | The desire to rule a system has never been the interest of a contemporary civilize man rather than to successfully govern. The discoverable tool of a modern man as the greatest invention, to centrally manage a complex market system, dynamically evolving in it, the interaction process of agents, has been a quality policy design and application, which is often guided by an advanced theoretical inductive inference, deduce from historic experience in a framework of assumptions relating to a working system. The constructive foundation of this paper does appreciate the fact that in the practice of policy for unitary currency program involving sovereign nations, is not entirely new epistemology in the field of monetary economics, however, this very study is a complete unique in its deduction because it involves fragile economies managing soft currencies against hard currency economies, to promote sustainable growth, and compel for a competitive development using natural rate of interest as a policy sign-post. |
| Keywords: | Monetary economics, policy, Eco-currency, Kalman Filter, Wicksellian, Fragile economy |
| JEL: | E42 E43 E44 E47 E52 |
| Date: | 2021–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108527&r= |
| By: | Hülsewig, Oliver; Rottmann, Horst |
| Abstract: | In this study, we explore how fiscal policy in euro area periphery countries responds to monetary policy surprises that lower sovereign bond yields. In particular, we assess whether the disciplining effect of financial markets on public finances is undermined by the ability of monetary policy to affect the conditions of external funds. Using Jordà's (2005) local projection method we find that fiscal discipline, on average, does not wane in response to monetary policy innovations that bring down yields on sovereign bonds. The reaction of economic activity to shocks to monetary policy appears to determine the fiscal stance, rather than the adjustment of borrowing cost. |
| Keywords: | Euro area periphery countries,fiscal policy,market discipline,monetary policy shocks,local projections |
| JEL: | E52 E62 H62 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:hawdps:81&r= |
| By: | Eduardo de Sá Fortes Leitão Rodrigues |
| Abstract: | This article investigates how increased uncertainty affects the effectiveness of public consumption on economic activity. The paper examines three main issues:first, the influence of uncertainty on output and macroeconomic aggregates. Second, the effects of public consumption on the economy. Third, the impact of a simultaneous shock of uncertainty and government consumption on economic activity.We use Vector Autoregression (VAR) models for the United States, Brazil and a panel VAR with six European countries. The empirical results indicate a disruptive effect of uncertainty on GDP, private consumption, investment and hours worked.The fiscal effects point to slightly different results for the two countries. For Brazil and the United States, the increase in public spending has positive and significant effects on GDP. Regarding the effects of government consumption (high uncertainty),the fiscal effects are not statistically significant, while in times of low uncertainty the effects are positive and significant.Subsequently, we designed a Dynamic Stochastic General Equilibrium (DSGE) model akin to Basu and Bundick (2017), and added three features: tax on labor income, the relationship between private consumption and government consumption and a simultaneous shock of uncertainty and government consumption. The model highlights four main conclusions. First, the negative influence of uncertainty on economic activity. Second, risk aversion magnifies the impact of the macroeconomic response. Third, public consumption has positive effects on economic activity. Finally, we examine the sensitivity of the economy’s responses to different configurations of the relationship between public and private consumption, under normal conditions or uncertainty shocks. The findings suggest that, when the economy is hit by a simultaneous shock of uncertainty and public consumption, it obscures the effectiveness of the fiscal stimulus on the economy, corroborating the empirical results. |
| Keywords: | Uncertainty Shocks, Public Consumption, Simultaneous Shocks |
| JEL: | D58 D80 E32 E62 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp01802021&r= |
| By: | Michael D. Bauer; Mikhail Chernov |
| Abstract: | Conditional yield skewness is an important summary statistic of the state of the economy. It exhibits pronounced variation over the business cycle and with the stance of monetary policy, and a tight relationship with the slope of the yield curve. Most importantly, variation in yield skewness has substantial forecasting power for future bond excess returns, high-frequency interest rate changes around FOMC announcements, and consensus survey forecast errors for the ten-year Treasury yield. The COVID pandemic did not disrupt these relations: historically high skewness correctly anticipated the run-up in long-term Treasury yields starting in late 2020. The connection between skewness, survey forecast errors, excess returns, and departures of yields from normality is consistent with a theoretical framework where one of the agents has biased beliefs. |
| Keywords: | bond markets, yield curve, skewness, biased beliefs, monetary policy |
| JEL: | E43 E44 E52 G12 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9150&r= |
| By: | Michael D. Bauer; Mikhail Chernov |
| Abstract: | Conditional yield skewness is an important summary statistic of the state of the economy. It exhibits pronounced variation over the business cycle and with the stance of monetary policy, and a tight relationship with the slope of the yield curve. Most importantly, variation in yield skewness has substantial forecasting power for future bond excess returns, high-frequency interest rate changes around FOMC announcements, and consensus survey forecast errors for the ten-year Treasury yield. The COVID pandemic did not disrupt these relations: historically high skewness correctly anticipated the run-up in long-term Treasury yields starting in late 2020. The connection between skewness, survey forecast errors, excess returns, and departures of yields from normality is consistent with a theoretical framework where one of the agents has biased beliefs. |
| JEL: | E43 E44 E52 G12 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28954&r= |
| By: | George McCandless (Central Bank of Argentina) |
| Abstract: | The object of this paper is to consider the effects on an economy of two alternative channels of monetary policy using a cash in advance model. One of the channels is simply giving money to less well of households (unskilled). The second channel is similar to central bank monetary policy, each period lump sum monetary transfers are given to or extracted from financial intermediaries by skilled and unskilled workers. Having a model with two channels of monetary policy that operate in fundamentally different ways allows one to think carefully about the effects of a monetary policy of sterilization of inflation through contraction of money on the financial side. In addition, having two groups of households, one unskilled, with lower wages and reduced opportunities for saving, and another skilled with higher wages and the ability to own and rent out capital in addition to holding bank deposits, permits a more careful consideration of the welfare effects of this type of policy. In addition, this kind of analysis helps explain why different countries, those with more or fewer unskilled workers, will choose to follow different policies with respect to a politically optimal inflation rate. |
| Keywords: | cash in advance models, monetary policy rules, monetary policy transmission channels, optimal inflation rate |
| JEL: | E17 E52 E58 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:bcr:wpaper:202192&r= |
| By: | Tetiana Yukhymenko (National Bank of Ukraine) |
| Abstract: | This research highlights the role played by the media in the inflation expectations formation process of different types of respondents in Ukraine. Using a large news corpus and machine learning techniques I constructed news-based measures transforming text into quantitative indicators, which reflect news topics relevant to inflation expectations. As such, I found evidence that the different news topics have an impact on inflation expectations and can explain part of their variance. Thus, my results can help understand inflation expectations, especially as anchoring inflation expectations remains a key challenge for central banks. |
| Keywords: | Inflation expectations; natural language processing; textual data; machine learning |
| JEL: | C55 C82 D84 E31 E58 |
| Date: | 2021–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp13-2021&r= |
| By: | Giuseppe Fiori; Filippo Scoccianti |
| Abstract: | This paper uses over two decades of Italian survey data on business managers' expectations to measure subjective firm-level uncertainty and quantify its economic effects. We document that firm-level uncertainty persists for a few years and varies across firms' demographic characteristics. Uncertainty induces long-lasting economic effects over a broad array of real and financial variables. The source of uncertainty matters with firms responding only to downside uncertainty, that is, uncertainty about future adverse outcomes. Economy-wide uncertainty, constructed aggregating firm-level uncertainty, is countercyclical but uncorrelated with typical proxies in the literature, and accounts for a sizable amount of GDP variation during crises. |
| Keywords: | Uncertainty; Business cycles; Investment; Expectations; Cash holdings; Downside uncertainty |
| JEL: | D24 E22 E24 |
| Date: | 2021–06–28 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1320&r= |
| By: | Fructuoso Borrallo Egea (Banco de España); Pedro del Río López (Banco de España) |
| Abstract: | Faced with a very prolonged period of low inflation, the Bank of Japan has been modifying its monetary policy strategy over the last two decades, pioneering the use of non-standard measures: it reduced policy interest rates to zero and, more recently, to negative levels, and has implemented several asset purchase programmes, forward guidance and, in September 2016, a yield curve control policy. Despite all these efforts, Japan has continued to experience persistently low inflation, with rates well below the central bank’s target in recent decades. This document analyses the changes in the Bank of Japan’s strategy in its struggle against low inflation, focusing in particular on the reasons that led it to adopt the interest rate control policy, describes how this policy works and its main features, and assesses the results obtained. This new strategy has allowed the Bank of Japan to control the yield curve more effectively and sustainably, reducing the volume of asset purchases and mitigating the potential adverse financial stability effects. However, empirical analysis shows that it has still not succeeded in modifying the adaptive and persistent nature of the process of formation of prices and inflation expectations in Japan. |
| Keywords: | monetary policy, inflation, inflation expectations, interest rates |
| JEL: | E31 E43 E52 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:2116e&r= |
| By: | Antonin Aviat; Frédérique Bec; Claude Diebolt; Catherine Doz; Denis Ferrand; Laurent Ferrara; Eric Heyer; Valérie Mignon; Pierre-Alain Pionnier (CY Cergy Paris Université, THEMA) |
| Abstract: | This paper proposes a reference quarterly dating for periods of expansion and recession in France since 1970, carried out by the Dating Committee of the French Economic Association (AFSE). The methodology used is based on two pillars: (i) econometric estimations from various key data to identify candidate periods, and (ii) a narrative approach that describes the economic background that prevailed at that time to finalize the dating chronology. Starting from 1970, the committee has identified four economic recession periods: the two oil shocks 1974-75 and 1980, the investment cycle of 1992-93, and the Great Recession 2008-09 spawned by the Global Financial Crisis. The peak before the Covid-19 recession has been dated to the last quarter of 2019. |
| Keywords: | Business cycles, French economy, Dating, Narrative approach, Econometric modeling |
| JEL: | E32 E37 C24 N14 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2021-15&r= |
| By: | Koffi, Siméon |
| Abstract: | This study sheds light on the effect of fiscal policy on the Ivorian economy by measuring the value of the different Keynesian multipliers and the possible origins of GDP fluctuation during the period of this study. For this paper, one preferred a Bayesian estimation of a Dynamic Stochastic General Equilibrium (DSGE) model using data from the Direction des Prévisions, des Politiques et des Statistiques Economiques (DPPSE), the Direction Générale du Budget et des Finances (DGBF) and the World Bank database over the period 2000Q1-2019Q4. The results show that (i) the increase in public investment has a positive effect on household consumption, the private sector, and then on the economic activity. The Keynesian multiplier of public investment has been estimated at about , (ii) lowering tax rates is likely to boost the economy but its impact remains weak, (iii) public expenditures, particularly personnel expenditures, have a negative effect on the Ivorian economy. |
| Keywords: | Bayesian estimation, DSGE, Keynesian multiplier, fiscal policy. |
| JEL: | C11 E61 E62 E63 |
| Date: | 2021–07–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108751&r= |
| By: | Jorge Pozo (Central Reserve Bank of Peru); Youel Rojas (Central Reserve Bank of Peru) |
| Abstract: | In this paper we develop a simple two-period model that reconciles credit demand and supply frictions. In this stylized but realistic model credit and deposit markets are interlinked and credit demand and credit supply frictions amplify each other in such a way that produces in equilibrium very low levels of credit and stronger reductions of the real and nominal interest, so an economy is much closer to the ZLB. However, an unconventional credit policy, that consists on central bank loans to firms that are guaranteed by the government, can undo partially the effects of the credit frictions and prevents the economy from reaching the ZLB. Since central bank loans are not subject to the moral hazard problem between bankers and depositors and are government-guaranteed, credit market interventions rise aggregate credit supply and positively affect the aggregate credit demand, respectively. However, once the economy is at the ZLB the effect of a credit policy is reduced due to a relatively stronger inflation reduction, which in turn reduces entrepreneurs' incentives to demand bank loans. |
| Keywords: | Unconventional credit policy; asymmetric information; moral hazard; zero Lower bound |
| JEL: | G21 G28 E44 E5 |
| Date: | 2021–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp14-2021&r= |
| By: | Lutz Kilian; Nikos Nomikos; Xiaoqing Zhou |
| Abstract: | Since the 1970s, exports and imports of manufactured goods have been the engine of international trade and much of that trade relies on container shipping. This paper introduces a new monthly index of the volume of container trade to and from North America. Incorporating this index into a structural macroeconomic VAR model facilitates the identification of shocks to domestic U.S. demand as well as foreign demand for U.S. manufactured goods. We show that, unlike in the Great Recession, the primary determinant of the U.S. economic contraction in early 2020 was a sharp drop in domestic demand. Although detrended data for personal consumption expenditures and manufacturing output suggest that the U.S. economy has recovered to near 90% of pre-pandemic levels as of March 2021, our structural VAR model shows that the component of manufacturing output driven by domestic demand had only recovered to 57% of pre-pandemic levels and that of real personal consumption only to 78%. The difference is mainly accounted for by unexpected reductions in frictions in the container shipping market. |
| Keywords: | merchandise trade, container, shipping, manufacturing, consumption, Covid-19, supply chain, recession, recovery, globalization |
| JEL: | E32 E37 F47 F62 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9154&r= |
| By: | Ha, Jongrim; Kose, M. Ayhan; Ohnsorge, Franziska |
| Abstract: | This paper introduces a global database that contains inflation series: (i) for a wide range of inflation measures (headline, food, energy, and core consumer price inflation; producer price inflation; and gross domestic product deflator changes); (ii) at multiple frequencies (monthly, quarterly and annual) for an extended time period (1970-2021); and (iii) for a large number of (up to 196) countries. As it doubles the number of observations over the next-largest publicly available sources, our database constitutes a comprehensive, single source for inflation series. We illustrate the potential use of the database with three applications. First, we study the evolution of inflation since 1970 and document the broad-based disinflation around the world over the past half-century, with global consumer price inflation down from a peak of roughly 17 percent in 1974 to 2.5 percent in 2020. Second, we examine the behavior of inflation during global recessions. Global inflation fell sharply (on average by 0.9 percentage points) in the year to the trough of global recessions and continued to decline even as recoveries got underway. In 2020, inflation declined less, and more briefly, than in any of the previous four global recessions over the past 50 years. Third, we analyze the role of common factors in explaining movements in different measures of inflation. While, across all inflation measures, inflation synchronization has risen since the early 2000s, it has been much higher for inflation measures that involve a larger share of tradable goods. |
| Keywords: | Prices, global inflation, deflation, inflation synchronization, global factor |
| JEL: | E30 E31 F42 |
| Date: | 2021–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108678&r= |
| By: | Rumen Kostadinov (McMaster University); Francisco Roldán (International Monetary Fund) |
| Abstract: | We study the optimal design of a disinflation plan by a planner who lacks commitment and has imperfect control over inflation. The government’s reputation for being committed to the plan evolves as the public compares realized inflation to the announced targets. Reputation is valuable as it helps curb inflation expectations. At the same time, plans that are more tempting to break lead to larger expected reputational losses in the ensuing equilibrium. Taking these dynamics into consideration, the government announces a plan which balances promises of low inflation with dynamic incentives that make them credible. We find that, despite the absence of inflation inertia in the private economy, a gradual disinflation is preferred even in the zero-reputation limit. |
| Keywords: | Imperfect credibility, reputation, optimal monetary policy, time inconsistency |
| JEL: | E52 C73 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:aoz:wpaper:76&r= |
| By: | Johannes Brumm; Xiangyu Feng; Laurence J. Kotlikoff; Felix Kubler |
| Abstract: | Deficit finance is free when the growth rate routinely exceeds the government's borrowing rate. Or so many people say. This note presents three counterexamples. Each features a simple OLG economy with a zero growth rate and a negative government borrowing rate. None provides a basis for taking from the young and giving to the old. One example features idiosyncratic risk, one features policy uncertainty, and one features a safe borrowing rate that exceeds the safe lending rate. Progressive taxation cures the first problem. Policy resolution cures the second. And improved intermediation, perhaps organized by the government, cures the third. The three models are parables. Each conveys an inconvenient truth. Seemingly free deficits may, on careful inspection, be far more costly than they appear. Indeed, government intergenerational redistribution can lower the government borrowing rate, encouraging yet more inefficient deficit finance. |
| JEL: | E21 E6 H6 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28952&r= |
| By: | Aysu Celgin; Elif Akbostanci |
| Abstract: | In this paper, a monthly economic activity indicator is constructed for the Turkish economy for 1988-2020 period. Dynamic factor modelling framework is utilized in the estimation of the indicator. In the context of data selection, first of all, the variables are categorized into five types as: activity (hard data), activity (survey-based data or soft data), trade, employment and financial variables. After determining the candidate variables for each category, data selection is finalized by using the hard-thresholding method. The results indicate that monthly economic activity indicator is successful in detecting the past recessionary and contractionary periods of the Turkish economy and providing timely information about the course of the economic activity. |
| Keywords: | Economic activity, Dynamic factor model, Hard-thresholding, Real time analysis |
| JEL: | C22 E32 E37 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:2114&r= |
| By: | Holmberg, Johan (Department of Economics, Umeå University) |
| Abstract: | In this paper, we present a model of earnings dynamics that includes transitions in and out of employment as well as business cycle fluctuations. The model is estimated using the method of indirect inference and a mix of Swedish register, survey, and macro data. We find that the business cycle has a larger effect on transitions from unemployment to employment than on the risk of becoming unemployed. By simulating data from the model, we find that the business cycle has a relatively small impact on earnings inequality in Sweden and that women’s labor market outcomes are less sensitive to business cycle fluctuations compared to men’s. Finally, we find that economic crises have a more severe impact on young workers. |
| Keywords: | Earning dynamics; Unemployment; Business cycles; Inequality |
| JEL: | D31 E32 J24 J64 |
| Date: | 2021–06–24 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:0991&r= |
| By: | Magnus Reif; Mewael F. Tesfaselassie; Maik H. Wolters |
| Abstract: | Over the last decades, hours worked per capita have declined substantially in many OECD economies. Using a neoclassical growth model with endogenous work-leisure choice, we assess the role of trend growth slowdown in accounting for the decline in hours worked. In the model, a permanent reduction in technological growth decreases steady state hours worked by increasing the consumption-output ratio. Our empirical analysis exploits cross-country variation in the timing and the size of the decline in technological growth to show that technological growth has a highly significant positive effect on hours. A decline in the long-run trend of technological growth by one percentage point is associated with a decline in trend hours worked in the range of one to three percent. This result is robust to controlling for taxes, which have been found in previous studies to be an important determinant of hours. Our empirical finding is quantitatively in line with the one implied by a calibrated version of the model, though evidence for the model’s implication that the effect on hours works via changes in the consumption-output ratio is rather mixed. |
| Keywords: | productivity growth, technological growth, working hours, employment |
| JEL: | E24 O40 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9140&r= |
| By: | Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan); Yishuo Ma (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan) |
| Abstract: | Over the past decade, several dozen papers have been written that identify the People’s Bank of China’s monetary policy shocks. Yet, what often seems like minor differences in measurements of monetary policy and identifying assumptions yield vastly different implied shocks. In this paper, we pitch 20 shock time series from the literature against each other in a horse race. We use a local projections framework to produce impulse responses based on all shocks for production, prices, money and interest rates and use them to assess the economic plausibility of the competing results. Our results confirm the frequently mentioned relevance of monetary aggregates for Chinese monetary policy but also point the importance of using forward looking policy reaction functions (or account for forward looking variables in a VAR framework) when identifying monetary policy shocks. |
| Keywords: | China, monetary policy shocks, local projections, meta study |
| JEL: | C83 E52 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:fds:dpaper:202102&r= |
| By: | Christiane Baumeister; Danilo Leiva-León; Eric R. Sims |
| Abstract: | In this paper, we develop a novel dataset of weekly economic conditions indices for the 50 U.S. states going back to 1987 based on mixed-frequency dynamic factor models with weekly, monthly, and quarterly variables that cover multiple dimensions of state economies. We show that there is considerable heterogeneity in the length, depth, and timing of business cycles across individual states. We assess the role of states in national recessions and propose an aggregate indicator that allows us to gauge the overall weakness of the U.S. economy. We also illustrate the usefulness of these state-level indices for quantifying the main forces contributing to the economic collapse caused by the COVID-19 pandemic and for evaluating the effectiveness of federal economic policies like the Paycheck Protection Program. |
| Keywords: | local economic conditions, government policies, weekly indicators, state economies, cross-state heterogeneity, mixed-frequency dynamic factor model, economic weakness index, Markov-switching, recession, probabilities |
| JEL: | C32 C55 E32 E66 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9165&r= |
| By: | Christiane Baumeister (University of Notre Dame; University of Pretoria; NBER; CEPR); Danilo Leiva-Leon (Banco de Espana); Eric Sims (University of Notre Dame; NBER) |
| Abstract: | In this paper, we develop a novel dataset of weekly economic conditions indices for the 50 U.S. states going back to 1987 based on mixed-frequency dynamic factor models with weekly, monthly, and quarterly variables that cover multiple dimensions of state economies. We show that there is considerable heterogeneity in the length, depth, and timing of business cycles across individual states. We assess the role of states in national recessions and propose an aggregate indicator that allows us to gauge the overall weakness of the U.S. economy. We also illustrate the usefulness of these state-level indices for quantifying the main forces contributing to the economic collapse caused by the COVID-19 pandemic and for evaluating the effectiveness of federal economic policies like the Paycheck Protection Program. |
| Keywords: | local economic conditions, government policies, weekly indicators, state economies, cross-state heterogeneity, mixed-frequency dynamic factor model, economic weakness index, Markov-switching, recession probabilities |
| JEL: | C32 C55 E32 E66 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:202151&r= |
| By: | Matthieu PICAULT; Julien PINTER; Thomas RENAULT |
| Keywords: | , central bank communication, European Central Bank, textual analysis, inflation expectations |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:leo:wpaper:2895&r= |
| By: | Pagliacci, Carolina |
| Abstract: | Uncertainty has broad impacts on the economy, but it is unclear whether it affects only aggregate demand or both sides of the market. Using available uncertainty measures, this paper aims to quantify the impact of uncertainty shocks on output growth and inflation through their effects on aggregate supply and demand. The empirical strategy, applied to 19 advanced and 15 emerging countries, involves two steps. First, identifying in each country the parts of GDP-growth and GDP-inflation that are explained by shifts in aggregate supply and demand curves respectively. Second, estimating the country-effects of two (financial and non-financial) uncertainty shocks on the supply/demand components for growth and inflation. Considerations on reverse causality and identification of uncertainty types are made. Results show that in advanced and emerging economies, financial uncertainty shocks affect both sides of the market. When faced with greater uncertainty, consumers demand fewer goods, but producers reduce their supply as well, cutting back production and attempting to raise prices. Since the demand-side are larger than the supply-side effects, these shocks end up reducing inflation in all countries. Alternatively, non-financial uncertainty shocks’ impacts on output are rather small. |
| Keywords: | uncertainty, aggregate demand, aggregate supply, inflation, output growth |
| JEL: | C18 D8 E3 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108739&r= |
| By: | Ángel Luis Gómez (Banco de España); Ana del Río (Banco de España) |
| Abstract: | El impacto económico de la pandemia de COVID-19 ha sido desigual en los países de la zona del euro. Entre los factores que lo explican, estarían la intensidad de la crisis sanitaria en cada territorio y la severidad y la duración de las medidas de contención aplicadas para limitar la propagación del virus, así como las diferencias estructurales de las economías, y singularmente su especialización productiva. El análisis empírico presentado en este trabajo indica que la importancia relativa de las ramas de servicios más vulnerables —al conllevar una mayor interacción social— y la capacidad para implantar teletrabajo explican en buena parte el impacto económico diferencial de la pandemia entre los países de la zona del euro. |
| Keywords: | COVID-19, impacto económico, estructura productiva, restricciones de movilidad |
| JEL: | E01 E32 F00 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:2115&r= |
| By: | Gabriel Michelena (Central Bank of Argentina) |
| Abstract: | This document develops a Consistent Stock-Flow (SFC) model for the analysis of macroeconomic variables in Argentina. The main utility of SFC models is associated with the possibility of performing counterfactual exercises to evaluate different modifications of fiscal, tax, monetary and commercial policy. These models are characterized by the use of social accounting matrices (SAM), which allows a breakdown of the capital account and financial instruments of each institutional sector. This improves accounting consistency, since the SAM contains the main transactions of the real sector, as well as the monetary flows between the different institutions: households, companies, banks, government, central bank and the rest of the world. This model was developed with the objective of making medium-term projections on the main flows and stocks of the Argentine economy, complementing the results of other existing models in the literature. |
| Keywords: | monetary policy, simulations, stock-flow model |
| JEL: | C54 E16 E58 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:bcr:wpaper:202189&r= |
| By: | Stephen Millard,; Margarita Rubio; Alexandra Varadi |
| Abstract: | We use a DSGE model with financial frictions, leverage limits on banks, loan-to-value limits and debt- service ratio (DSR) limits on mortgage borrowing, to examine: i) the effects of different macroprudential policies on key macro aggregates; ii) their interaction with each other and with monetary policy; and iii) their effects on the volatility of key macroeconomic variables and on welfare. We find that capital requirements can nullify the effects of financial frictions and reduce the effects of shocks emanating from the financial sector on the real economy. LTV limits, on their own, are not sufficient to constrain house- hold indebtedness in booms, though can be used with capital requirements to keep debt-service ratios under control. Finally, DSR limits lead to a significant decrease in the volatility of lending, consumption and inflation, since they disconnect the housing market from the real economy. Overall, DSR limits are welfare improving relative to any other macroprudential tool. |
| Keywords: | Macroprudential Policy, Monetary Policy, Leverage Ratio, Affordability Constraint, Col-lateral Constraint. |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcfc:2020/14&r= |
| By: | Miyake, Yusuke |
| Abstract: | Although many policies to raise the fertility rate have been conducted in many developed countries, they experience the low fertility rate. In the first place, what kind of impact will rapid population decline have on economic growth? This study is to analyze to answer these questions with two sector labor augmented growth model using two periods over-lapping-generations model. We consider a public capital by classifying it into two types, firstly, labor-augmented general public capital in final goods sector which indicated by Futagami, et al. (1993) and secondly, considering a public capital in childcare sector like as nursery school. This paper clearly shows the relationship between the optimal policies against the declining birthrate and an increase in the economic growth. |
| Keywords: | Public capital - Childcare capital - Income tax - Economic growth |
| JEL: | D91 E6 E62 O4 O41 |
| Date: | 2021–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108311&r= |
| By: | EDO Onome Christopher (Auburn University at Montgomery, Montgomery, Alabama Author-2-Name: EDO Onome Christopher Author-2-Workplace-Name: Department of Information Systems, College of Business, Auburn University at Montgomery, Montgomery, Alabama. Author-3-Name: AKHIGBODEMHE Emmanuel Justice Author-3-Workplace-Name: Department of Economics, Faculty of Social Sciences, University of Benin, Edo- State- Nigeria. Author-4-Name: EDEOGHON Innocent Osaremen Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:) |
| Abstract: | Introduction - Income redistribution is central to the development of any nation. However, the issue of generating income and its redistribution in Nigeria has been challenging overtime, with the nation depending largely on oil with little consideration on other sources of income. Also, insufficient tax resources, tax collectors' illicit activities and a lack of awareness of the value of paying tax by taxpayers are some of the problems facing the country in terms of tax revenue generation. Objective - Our study therefore investigated the impact of direct taxes on income redistribution in the context of Nigeria, using company income tax, personal income tax, petroleum profit tax and education tax as direct tax variables. Methodology/Technique - The study covered the period 1990 to 2019 using annualized data set from Federal Inland Revenue Service (FIRS) and Central Bank of Nigeria Statistical Bulletin. The study employed the Fully Modified Least Squares (FMOLS) to analyze the data. Research Findings - Empirical results of our study revealed that, company income tax and education tax had insignificant negative effects on income redistribution, while personal income tax and petroleum profit tax had significant positive effects on income redistribution, thus reducing income inequality in the context of Nigeria. Recommendations - We thus recommended "inter alia" that, revenue generated from taxes should be effectively used by government in providing quality infrastructures like schools, railway, healthcare facilities and other business outfits across various states for the general wellbeing of the citizens as this is hoped to close the income distribution gap between the rich and the less privileged in the country. Type of Paper - Empirical. |
| Keywords: | Income redistribution; direct taxes; government expenditure on infrastructural goods; Fully Modified Least Squares (FMOLS), Nigeria; Income Inequality. |
| JEL: | E21 E42 E62 O23 |
| Date: | 2021–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:gtr:gatrjs:gjbssr596&r= |
| By: | Oleg Itskhoki; Dmitry Mukhin |
| Abstract: | The Mussa (1986) puzzle is the observation of a sharp and simultaneous increase in the volatility of both nominal and real exchange rates following the end of the Bretton Woods System of pegged exchange rates in 1973. It is commonly viewed as a central piece of evidence in favor of monetary non-neutrality because it is an instance in which a change in the monetary regime caused a dramatic change in the equilibrium behavior of a real variable (the real exchange rate) and is often further interpreted as direct evidence in favor of models with nominal rigidities in price setting. This paper shows that the data do not support this latter conclusion because there was no simultaneous change in the properties of the other macro variables, nominal or real. We show that an extended set of Mussa facts equally falsifies both conventional flexible-price RBC models and sticky-price New Keynesian models as explanations for the Mussa puzzle. We present a resolution to the broader Mussa puzzle based on a model of segmented financial market — a particular type of financial friction by which the bulk of the nominal exchange rate risk is held by financial intermediaries and is not shared smoothly throughout the economy. We argue that rather than discriminating between models with sticky versus flexible prices, or monetary versus productivity shocks, the Mussa puzzle provides sharp evidence in favor of models with monetary non-neutrality arising in the financial market, suggesting the importance of monetary transmission via the risk premium channel. |
| JEL: | E30 E40 E50 F30 F40 G10 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28950&r= |
| By: | Ángel Luis Gómez (Banco de España); Ana del Río (Banco de España) |
| Abstract: | The economic impact of the COVID-19 pandemic has been uneven across euro área countries. Among the factors explaining this are the intensity of the health crisis in each territory and the severity and duration of the containment measures applied to limit the spread of the virus, as well as the structural differences between the economies, and, in particular, their productive specialisation. The empirical analysis presented in this paper indicates that the variation of the economic impact of the pandemic across euro área countries is largely explained by the relative importance of the most vulnerable service industries – those involving greater face-to-face social interaction – and the capacity to implement teleworking. |
| Keywords: | COVID-19, economic impact, productive structure, mobility restriction |
| JEL: | E01 E32 F00 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:2115e&r= |
| By: | Emilio Blanco (Central Bank of Argentina); Laura D’Amato (IIEP UBA); Fiorella Dogliolo (Central Bank of Argentina); Lorena Garegnani (Central Bank of Argentina) |
| Abstract: | A correct and timely assessment of current macroeconomic conditions is a fundamental input for making monetary policy decisions. Although the main source of macroeconomic data comes from the System of National Accounts - published quarterly and with a significant lag - there is a growing availability of high-frequency economic indicators. In this context, central banks have adopted Nowcasting as a useful tool for more immediate and more precise monitoring of current developments. In this paper, the use of Nowcasting tools is extended to produce forward estimates of two components of domestic aggregate demand: consumption and investment. The exercise uses various sets of indicators, broad and restricted, to construct different dynamic factor models, as well as a combination of forecasts for investment. Finally, the different models are compared in a pseudo-real time exercise and their out of sample performance is evaluated. |
| Keywords: | dynamic factor models, forecasting, Nowcasting |
| JEL: | C22 C53 E37 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:bcr:wpaper:202190&r= |
| By: | Bom, Pedro R.D.; Erauskin, Iñaki |
| Abstract: | A recent body of literature has sought to determine the causes of the global decline of the labor share. We study the role played by government investment—which has also fallen in many advanced economies over the past few decades—in the labor share decline. We first establish a theoretical link between government investment and the labor share using a general equilibrium macroeconomic model, where government capital enters the production function in a factor-augmenting fashion. Our analytic results show that a permanent cut to government investment causes a steady-state decline in the labor share if the elasticity of substitution between private capital and labor is less than one and public capital augments private capital. We then study the empirical relationship between these variables using two panel datasets covering 79 countries, both developing and developed, over the period 1970-2017. Using a system GMM estimator, we find a positive and statistically significant association between government investment and the labor share in advanced economies; for developing countries, however, we find no effect. |
| Keywords: | productive government investment; public investment; public capital; public infrastructure; factor income shares; labor share |
| JEL: | E25 E60 H54 |
| Date: | 2021–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108381&r= |
| By: | Asger Lau Andersen (University of Copenhagen and CEBI); Niels Johannesen (University of Copenhagen and CEBI); Adam Sheridan (University of Copenhagen and CEBI) |
| Abstract: | How much and over what horizon do households adjust their consumption in response to stock market wealth shocks? We address these questions using granular data on spending and stock portfolios from a large bank and exploiting lottery-like variation in gains across investors with similar portfolio characteristics. Consistent with the permanent income hypothesis, spending responses to stock market gains are immediate and persistent. The responses cumulate to a marginal propensity to consume of around 4% over a one-year horizon. The estimates differ substantially by household liquidity, but not by financial attention, as measured by the frequency of account logins. |
| Keywords: | wealth shocks, household consumption, marginal propensity to consume, stock markets, permanent income hypothesis |
| JEL: | D12 G51 E21 |
| Date: | 2021–07–06 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kucebi:2111&r= |
| By: | Aizhan Bolatbayeva (NAC Analytica, Nazarbayev University) |
| Abstract: | This paper introduces a macroeconometric multicountry model for the Eurasian Economic Union (EAEU). The model consists of five single-country models of the union member states: Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia. The purpose of the research is to explain the structural relationship between the economies, evaluate the impact of internal and external shocks, and analyze the transmission mechanism of shocks across countries. The single-country models are linked to each other by the equations of bilateral trade and bilateral exchange rate. We find that the model fits actual data on main macroeconomic indicators of the countries in a dynamic ex-post simulation over 2004-2018. We also evaluate the effect of world trade and monetary policy shocks on the economies of the member states of the EAEU. |
| Keywords: | EAEU; Cowles Commission approach; Structural macroeconomic model; Simulation |
| JEL: | B22 E17 E27 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:ajx:wpaper:11&r= |
| By: | Taiki Murai; Gunther Schnabl |
| Abstract: | The paper analyses the role of fiscal and monetary policy for the development of the current account imbalances in the euro area, including the most recent developments during the coronavirus crisis. Several financial transmission channels such as international bank lending, changes in TARGET2 balances, international rescue credit and government bond purchases of euro area central banks are identified. It is found that differing fiscal policy stances which have interacted differently with the ECB’s monetary policy have been at roots of first diverging and then converging current account positions in the euro area. Since the European financial and debt crisis, public financing mechanisms and the unconventional monetary of the ECB have contributed to the persistence of intra-euro area current account imbalances. |
| Keywords: | current account, current account imbalances, financial account, euro, EU, European Monetary Union, monetary policy, fiscal policy, TARGET2 |
| JEL: | H62 F32 F33 F42 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9153&r= |
| By: | Kheng, Veasna; Pan, Lei |
| Abstract: | This paper develops and estimates a small open economy real-business cycle model to study the dynamics of Cambodian current account. Differing from previous studies, we include net unilateral transfers and net foreign direct investment (FDI) as additional sources of macroeconomic fluctuations. We show that these two sources explain the variations in current account better than the shocks that are widely identified in the literature (i.e. productivity and interest rate). Our model captures Cambodia’s saving-and investment behaviour and matches well the evolution of its current account. Specifically, the measurement error is nearly 4% and the correlation between data and model is around 0.93. As a step further, using our well-fitted model, we predict the future trend of Cambodian current account in the context of negative shocks in productivity, remittance, FDI and COVID-19 pandemic. |
| Keywords: | real business cycle; current account; FDI; unilateral transfer; COVID-19 |
| JEL: | F3 F41 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108489&r= |
| By: | Xiaoming Cai; Pieter A. Gautier; Ronald P. Wolthoff |
| Abstract: | We investigate the effect of search frictions on labor market sorting by constructing a model which is in line with recent evidence that employers collect a pool of applicants before interviewing a subset of them. In this environment, we derive the necessary and sufficient conditions for sorting in applications as well as matches. We show that positive sorting is obtained when production complementarities outweigh a force against sorting measured by a quality-quantity elasticity. Interestingly, we find that the required degree of production complementarity for positive sorting is increasing in the number of interviews: it ranges from square-root-supermodularity if each firm can interview a single applicant to log-supermodularity if each firm can interview all its applicants. |
| Keywords: | sorting, complementarity, search frictions, information frictions, heterogeneity |
| JEL: | C78 D82 D83 E24 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9158&r= |
| By: | Xiaoming Cai (Peking University); Pieter Gautier (Vrije Universiteit Amsterdam); Ronald Wolthoff (University of Toronto) |
| Abstract: | We investigate the effect of search frictions on labor market sorting by constructing a model which is in line with recent evidence that employers collect a pool of applicants before interviewing a subset of them. In this environment, we derive the necessary and sufficient conditions for sorting in applications as well as matches. We show that positive sorting is obtained when production complementarities outweigh a force against sorting measured by a quality-quantity elasticity. Interestingly, we find that the required degree of production complementarity for positive sorting is increasing in the number of interviews: it ranges from square-root-supermodularity if each firm can interview a single applicant to log-supermodularity if each firm can interview all its applicants. |
| Keywords: | sorting, complementarity, search frictions, information frictions, heterogeneity |
| JEL: | D82 D83 E24 |
| Date: | 2021–06–28 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20210058&r= |
| By: | Tiamiyu, Kehinde A. |
| Abstract: | The age-long consensus, in the literature, that lower level of foreign aid contributes positively to growth while higher level contributes negatively due to diminishing return and absorptive capacity issues brings to the fore the need; to investigate the possible non-linear relationship between foreign aid and growth over the period of 1981 and 2017 using threshold analysis approach; and to determine optimal foreign aid threshold for Nigeria. The conventional Augmented Dickey-Fuller (ADF) and Break-point unit root tests were both employed and compared for consistence. The overall findings showed that there exists one threshold upon which growth impact of aid can be felt, implying that the impact of net foreign aids received depends on the level of foreign aids. This therefore justifies the existence of a non-linear relationship between net foreign aids received and economic growth. Specifically, this is attributed to the fact that productive sectors of economy are not armed with enough liquidity and by implication the role of domestic investment in output growth is undermined. Similarly, results showed that the only significant determinant of growth in Nigeria is government final consumption expenditure, implying that government spending boosts aggregate demand with positive multiplier effect on output in line with the Keynesian theory. The policy implication from this study: optimal levels of foreign aids above 0.11% of GDP should be considered effective for growth, generated, adhered to, and directed to productive sector of the economy; strong institution, robust financial sector and conducive macroeconomic environment should be built to attract and make efficient use of higher aid flows. Besides, government spending should be biased towards stimulating the productiveness of the non-oil sector in the Nigerian economy. |
| Keywords: | Foreign aid, Economic growth, and Threshold |
| JEL: | F3 F35 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108588&r= |
| By: | Cai, Xiaoming (Peking University); Gautier, Pieter A. (Vrije Universiteit Amsterdam); Wolthoff, Ronald P. (University of Toronto) |
| Abstract: | We investigate the effect of search frictions on labor market sorting by constructing a model which is in line with recent evidence that employers collect a pool of applicants before interviewing a subset of them. In this environment, we derive the necessary and sufficient conditions for sorting in applications as well as matches. We show that positive sorting is obtained when production complementarities outweigh a force against sorting measured by a quality-quantity elasticity. Interestingly, we find that the required degree of production complementarity for positive sorting is increasing in the number of interviews: it ranges from square-root-supermodularity if each firm can interview a single applicant to log-supermodularity if each firm can interview all its applicants. |
| Keywords: | sorting, complementarity, search frictions, information frictions, heterogeneity |
| JEL: | C78 D82 D83 E24 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp14501&r= |
| By: | Andrej Cupák (National Bank of Slovakia); Martin Cesnak (National Bank of Slovakia); Ján Klacso (National Bank of Slovakia); Martin Å uster (National Bank of Slovakia) |
| Abstract: | A satisfactorily small share of households expects serious difficulties in resuming their debt instalments after a payment moratorium is lifted. As documented across six waves of a survey administered by the National Bank of Slovakia on indebted households, the payment moratorium programme was very important. Many households have suffered negative income or employment shocks, and the moratorium conserved household liquidity during the crisis. Loan payment deferral was used mainly at the beginning, and gradually households preferred individual agreements with their banks. The Covid-19 crisis disproportionately affected households that were highly indebted already before the crisis, working in sensitive sectors, less educated, or with large drops in income. As a result of the crisis, vulnerable households plan to keep higher financial buffers to cope with future risks, as well as better diversifying their income activities to less vulnerable sectors. |
| JEL: | C20 E44 G18 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:svk:wpaper:1077&r= |
| By: | Drydakis, Nick (Anglia Ruskin University) |
| Abstract: | This meta-analysis utilizes 24 papers published between 2012-2020 that focus on earnings differences by sexual orientation. The papers cover the period between 1991 and 2018, and countries in Europe, North America and Australia. The meta-analysis indicates that gay men earned less than heterosexual men. Lesbian women earned more than heterosexual women, while bisexual men earned less than heterosexual men. Bisexual women earned less than heterosexual women. According to the meta-analysis, in data sets after 2010, gay men and bisexual men and women continue to experience earnings penalties, while lesbian women continue to experience earnings premiums. The meta-regression estimates indicate relationships between study characteristics and the estimated earnings effects for sexual minorities. For instance, regions, sexual minority data set sizes, and earnings classifications influence the outcomes. The persistence of earnings penalties for gay men and bisexual men and women in the face of anti-discrimination policies represents a cause for concern and indicates the need for comprehensive legislation and workplace guidelines to guarantee that people receive fair pay and not experience any form of workplace inequality simply because of their sexual orientation. |
| Keywords: | sexual orientation, discrimination, earnings |
| JEL: | C93 E24 J15 J16 J71 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp14496&r= |
| By: | António Afonso; José Carlos Coelho |
| Abstract: | We study the relationship between the government budget balance and the current account balance for Portugal, using quarterly data from 1999 to 2019. On the one hand, the causality tests find a unidirectional relation running from the current account balance to the government budget balance. On the other hand, IV estimations show a bi-directional relationship between these variables, and the existence of a bilateral relationship between the structural components of both balances. Even so, the policy implication is that the use of fiscal policy to correct the external imbalance, especially in an economic crisis, is not substantial, due to the small size of the estimated impact. In addition, with an ARDL model, we find a negative long run relationship between the share of public consumption on GDP and the current account balance. As expected, the variation of real public consumption produces an adverse accumulated response on the current account balance. Finally, the investment rate negatively affects the cyclical component of the current account balance and contributes to the structural improvement of the budget balance. |
| Keywords: | budget balance; external balance; current account targeting hypothesis; twin deficits; government consumption; ARDL; causality; VAR; Portugal |
| JEL: | F32 F41 H62 C22 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp01822021&r= |
| By: | Feld, Lars P.; Reuter, Wolf Heinrich |
| Abstract: | Germany introduced a new fiscal rule, the 'debt brake', after the Global Financial Crisis and since then experienced a strong decline in its public debt to GDP ratio until the coronavirus pandemic struck. The past ten years and the reaction to the current crisis in Germany illustrate the intended effects of fiscal rules very well. Debt ratios are reduced during normal economic times, such that fiscal policy can forcefully counteract a severe crisis. Escape clauses are therefore an essential part of the design of fiscal rules. Much of the success of fiscal rules depends on the public and political acceptance of the fiscal rules and thus high political costs of not complying with them. Furthermore, the design and framework of the rules among others by restricting cyclically adjusted figures and a strong legal anchoring are important. It will be important for Germany and other economies to repeat the reduction in the debt to GDP ratio in order to be prepared for the next unexpected crisis. This also means improving the design and framework of fiscal rules, e.g., by making the cyclical adjustment less uncertain and susceptible to revisions, improving the transparency of fiscal policy and rule compliance, as well as discussing as to how fiscal rules can contribute to improving the quality of public finances. However, an abolishment of fiscal rules would hamper the ability of fiscal policy to cope with the long-term challenges and to prepare for unexpected short-term challenges. |
| Keywords: | Public Debt,Fiscal Policy,Fiscal Rules |
| JEL: | H62 H63 D78 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:aluord:2110&r= |
| By: | Kheng, Veasna; Pan, Lei |
| Abstract: | The increase in dollarisation in Cambodia has been contrary to the general belief that macroeconomic and political stability help reduce dollarisation. We provide so far the first explanation for this counterfactual phenomenon. In doing so, this paper develops a theoretical model based on the framework ofUribe (1997) by including a dollar pricing index to amplify the network effects of using a foreign currency (denoted dollar). The dollar pricing index, a proportion of an economy denominated by the dollar, reduces the dollar’s transaction cost, thus increasing its usage in the economy. This increased use of the dollar further improves the experience of using it, hence results in higher usage of dollar in the price quotation. The positive interaction of using the dollar as a unit of account and a means of payment causes dollarisation continues to rise, even though the economy has achieved low inflation and political stability. |
| Keywords: | Dollarisation; Dollar pricing index; Network externalities |
| JEL: | E41 F41 |
| Date: | 2021–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108712&r= |
| By: | Hager Ben Romdhane (Central Bank of Tunisia) |
| Abstract: | The object of this paper is to nowcast, forecast and track changes in Tunisian economic activity during normal and crisis times. The main target variable is quarterly real GDP (RGDP) and we have collected a large and varied set of monthly indicators as predictors. We use several mixed frequency models, such as unrestricted autoregressive MIDAS (UMIDAS-AR), three pass regression filter (3PRF) and mixed dynamic factor models (MDFM). We evaluate these models by comparing them with benchmarking low frequency models including vector autoregressive (VAR) and ARMA models. The dynamic factor and the 3PRF forecasts are more accurate in terms of mean squared errors (MSE) than other alternatives models both in-sample and out of sample in normal times, meaning before the COVID19 period. Forecast errors derived from low frequency models including crisis periods are larger than errors from mixed data sampling approaches including autoregressive terms due mainly to the failure of the low frequency models to capture these tail events. Fortunately, the reliability of nowcasts and forecasts increase when using the mixed frequency dynamic factor model based on information at both monthly and quarterly frequencies. |
| Keywords: | Mixed Frequency Data Sampling; Nowcasting; short-term forecasting |
| JEL: | E37 C55 C55 F17 O11 |
| Date: | 2021–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp11-2021&r= |
| By: | Musgrave, Ralph S. |
| Abstract: | Fractional reserve banking is inherently risky, which in large part explains the hundreds of bank failures throughout history and the 2007/8 bank crisis which lead to catastrophic economic and social damage. So fractional reserve must have some amazing benefits to make up for the latter shambles, or so you might think. In fact the alleged benefits of fractional reserve as compared to the alternative, namely 100% reserves are unimpressive to put it politely. Three of the main alleged benefits are examined below: first, the fact that fractional reserve banks create liquidity / money, second that it gives private / commercial banks more flexibility and third that it involves lower interest rates. |
| Keywords: | bank; fractional reserve; 100% reserve |
| JEL: | E5 G21 |
| Date: | 2021–06–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108488&r= |
| By: | Selcuk Gul; Abdullah Kazdal |
| Abstract: | This paper compares several nowcast approaches that account for mixed-data frequency and “ragged-edge” problems. More specifically, it examines the relative performance of the factor-augmented MIDAS approach (Marcellino and Schumacher; 2010) in nowcasting Turkish GDP with respect to benchmark forecasts. By using 40 monthly indicators in factor extraction, several combinations of the factor-MIDAS models are estimated. Recursive pseudo-out-of sample forecasting exercise in evaluating the alternative models’ performance suggests that factor-augmented MIDAS performs better than the benchmarks, especially in nowcasting. However, they do not provide much information content to forecasting a quarter ahead. Results indicate that taking into account the “ragged-edge” characteristic of the data helps improve the predictive ability of the nowcast models. Besides, dynamic factor extraction methods provide better predictions than the static factor extraction methods. |
| Keywords: | Forecasting, Mixed frequency, Factor-MIDAS |
| JEL: | C52 C53 E37 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:2111&r= |
| By: | Jake Bradley |
| Abstract: | There has been a substantial body of work modeling the co-movement of employment, vacancies and output over the business cycle. This paper builds on this literature, and informed by empirical investigation, models worker and firm search and hiring behavior in a more systematic manner. Consistent with empirical findings, for a given vacancy, a firm receives many applicants, and chooses their preferred candidate amongst the set. Similarly, workers in both unemployment and employment, can evaluate many open vacancies simultaneously and choose to which they make an application. Business cycles are propagated through turbulence in the economy. Structural parameters of the model are estimated on U.S. data, targeting aggregate time series. Consistent with data, the model is able to generate large volatility in unemployment,vacancies, and worker ows across jobs and employment state. Further, it provides a theoretical mechanism for the shift in the Beveridge curve after the 2008 recession, a phenomenon often referred to as the jobless recovery. That is, persistently low employment after the recession, despite output per worker and vacancies having returned to pre-crisis levels. |
| Keywords: | Beveridge curve, jobless recovery, screening |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcfc:2020/11&r= |
| By: | Paolo Gorgi (Vrije Universiteit Amsterdam); Siem Jan Koopman (Vrije Universiteit Amsterdam); Julia Schaumburg (Vrije Universiteit Amsterdam) |
| Abstract: | We introduce a new and general methodology for analyzing vector autoregressive models with time-varying coefficient matrices and conditionally heteroskedastic disturbances. Our proposed method is able to jointly treat a dynamic latent factor model for the autoregressive coefficient matrices and a multivariate dynamic volatility model for the variance matrix of the disturbance vector. Since the likelihood function is available in closed-form through a simple extension of the Kalman filter equations, all unknown parameters in this flexible model can be easily estimated by the method of maximum likelihood. The proposed approach is appealing since it is simple to implement and computationally fast. Furthermore, it presents an alternative to Bayesian methods which are regularly employed in the empirical literature. A simulation study shows the reliability and robustness of the method against potential misspecifications of the volatility in the disturbance vector. We further provide an empirical illustration in which we analyze possibly time-varying relationships between U.S. industrial production, inflation, and bond spread. We empirically identify a time-varying linkage between economic and financial variables which are effectively described by a common dynamic factor. The impulse response analysis points towards substantial differences in the effects of financial shocks on output and inflation during crisis and non-crisis periods. |
| Keywords: | time-varying parametersvector autoregressive model, dynamic factor model, Kalman filter, generalized autoregressive conditional heteroskedasticity, orthogonal impulse response function |
| JEL: | C32 E31 |
| Date: | 2021–06–28 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20210056&r= |
| By: | Knut Anton Mork (Department of Economics, Norwegian University of Science and Technology); Vegard Skonseng Bjerketvedt (Department of Industrial Economics and Technology Management, Norwegian University of Science and Technology) |
| Abstract: | Models of habit formation in consumption typically specify utility over the excess of consumption above some habit level. This specification is unsatisfactory in settings where agents occasionally have to tolerate consumption below the habit level. More importantly, they often imply infeasible solutions with realistically low riskless rates. We propose an alternative specification, where the curvature of the utility function rises steeply for consumption below the habit level, but without utility falling abruptly to minus infinity. We explore analytically the key features of the implied behavior and present representative numerical solutions of the model in continuous time. We then simulate investor-consumer behavior with these preferences and compare this behavior to simpler rules of thumb. We find that soft habits, like hard habits, imply procyclical risk taking. Soft habits also allow some smoothing, especially in the downward direction. However, its most distinguishing feature takes the form of deliberate efforts to build sufficient capital to limit the probability of consumption having to fall below habits. Because the priority given to the buildup of wealth, the question of smoothing remains mostly moot in practice. The simpler rules of thumb tend to smooth more and save less that the base case and thus lead to insufficient buildup of capital over time. Of the simpler rules, the relatively best result is found for behavior as if preferences were CRRA with risk aversion somewhere between the soft-habit risk aversion for consumption above and below the habit level. |
| Keywords: | Habit formation; Withdrawal smoothing; Risk taking; Long-term fund-preservation |
| JEL: | C63 E21 G11 |
| Date: | 2021–06–29 |
| URL: | http://d.repec.org/n?u=RePEc:nst:samfok:18921&r= |
| By: | Zhao, Guo |
| Abstract: | To explore the interactions between financial decisions and production decisions of representative firm, we propose a dynamic production model under the joint constraints of technology, budget and no arbitrage. Theoretical and numerical analysis shows that dynamic production in no arbitrage equilibrium may undergo a bifurcation into a stable capital-intensive state and an unstable labor-intensive state. Further, it is shown that in no-arbitrage equilibrium a firm’s capital structure is endogenously determined by its endowment structure. These findings are consistent with empirical evidences and hence justify the no-arbitrage based production model as a useful framework with methodological advantages. |
| Keywords: | production theory, no arbitrage, multiple equilibria, conditional convergence, capital structure puzzle |
| JEL: | D24 E23 G32 |
| Date: | 2021–06–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108492&r= |
| By: | Riko Stevens (Business School, The University of Western Australia) |
| Abstract: | This paper examines the theory of speculation in the work of prominent Cambridge School economist Arthur Cecil Pigou (1877-1959). Although his treatment of speculation has been examined insofar as it relates to his theory of the business cycle, Pigou’s microeconomic analysis of speculation has received very little attention from historians of economic thought. This study contributes to the literature by providing an exposition and interpretation of Pigou’s treatment of the subject of speculation with particular reference to organised markets. It sheds light on an aspect of Pigou’s theory of speculation that has been overlooked in the secondary literature— namely, that Pigou’s assessment of the welfare consequences of speculation depends crucially upon the nature of the institutional context within which that activity takes place. Recognising this aspect of Pigou’s analysis of speculation not only provides a more faithful representation of his views on the subject but it also allows us to identify some of the more fruitful insights contained therein. In this connection, it is argued that Pigou’s treatment of the subject of speculation yields considerable insight into how best to interpret Alfred Marshall’s views on the subject—a matter which has constituted an important unresolved question in the secondary literature. |
| Keywords: | economic welfare, institutions, organised markets, Pigou, speculation, stock exchanges |
| JEL: | B13 D84 E44 G10 G41 P48 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:uwa:wpaper:21-15&r= |
| By: | Wilson Quijano; Diego Alejandro Guevara-Castañeda |
| Abstract: | Resumen Este artículo presenta los resultados arrojados por las estimaciones del modelo de las leyes de Kaldor para la búsqueda de evidencias de la desindustrialización de la economía colombiana en el periodo 2005-2017. El ejercicio econométrico muestra el papel de la industria manufacturera como motor de crecimiento. La metodología emplea un modelamiento en dos paneles: el primero de tipo balanceado con datos agregados para 23 áreas metropolitanas, y el segundo de tipo desbalanceado agregando datos desde el nivel de firma, con la muestra obtenida de la Encuesta Anual Manufacturera (EAM) para dicho periodo. Con base en los resultados de múltiples estimaciones, se encuentra y reafirma que el debilitamiento del sector manufacturero se evidencia en el declive sostenido del porcentaje de participación que tiene este en el empleo total y el PIB; y en el vínculo nocivo entre la dinámica del empleo manufacturero y el crecimiento del producto. Las evidencias de la desindustrialización identificadas, permiten concluir que el aporte de la manufactura al crecimiento económico se sustenta en rendimientos crecientes a escala estáticos. Abstract This article presents the results given by the calculations made using Kaldor’s growth model for the search of evidence of deindustrialization in the Colombian economy in the period that spans 2005-2017. This econometric exercise shows the role of the manufacturing industry as a motor for growth. The methodology uses modelling in two panels: the first, a balanced type with data added for 23 metropolitan areas; the second, a balanced type adding data from a company level, with a sample obtained from the Encuesta Anual Manufacturera (EAM) – Annual Manufacturing Survey for said period. Based on the results of multiple calculations, it is found and reaffirmed that the weakening of the manufacturing sector is evidenced in decline sustained by the percentage of participation that it has in total employment and GDP, and the harmful link between the dynamics of manufacturing employment and growth of the product. The evidence of deindustrialization identified allows a conclusion that the contribution of manufacturing to economic growth is based on static economies of scale. |
| Keywords: | desindustrialización; Kaldor; rendimientos crecientes; manufactura; crecimiento económico; ley de Kaldor-Verdoorn. |
| JEL: | B50 E12 L60 O47 |
| Date: | 2021–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:col:000418:019342&r= |
| By: | Robert Hillman; Sebastian Barnes; George Wharf; Duncan MacDonald |
| Abstract: | This paper develops a new large-scale firm-level simulation model, the Corporate Sector Agent-Based (CAB) Model, which is applied to analyse the COVID-19 shock and policy options in Barnes, Hillman, MacDonald and Wharf (2021). Agent-based models (ABMs) simulate the interaction of autonomous agents to generate emergent aggregate behaviours. The CAB model takes into account: heterogeneity across firms; a realistic customer-supplier network; interactions between firms; rule-of-thumb behaviour by firms and bankruptcy constraints. |
| Keywords: | agent-based modelling, bankruptcy, Covid-19, credit guarantees, financial stability, firm dynamics, firm-level data, input-output analysis, network analysis, short-time working schemes |
| JEL: | D21 D22 D57 D85 E27 G33 |
| Date: | 2021–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:1675-en&r= |
| By: | David Rivero; Hugo Rodríguez Mendizábal |
| Abstract: | In this paper we show that nominal demand-deposits are not, in general, Pareto optimal contracts. We construct a variation of the ? model where inside money is essential. In this setting, we show that the interplay between non-contingent deposit contracts and price flexibility is not a sufficient mechanism to provide efficient risk-sharing. Furthermore, state-contingent deposit contracts are not incentive compatible and implementing them would require banks to gather specific information regarding customer preferences that is beyond the scope of current depository institutions. |
| Keywords: | deposit contracts, risk-sharing, money creation, state contingencies |
| JEL: | G21 E42 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1265&r= |
| By: | Egor Gornostay (Peterson Institute for International Economics); Madi Sarsenbayev (Peterson Institute for International Economics) |
| Abstract: | An intense debate has erupted over whether the unprecedented size of the US fiscal stimulus will cause the US economy to overheat and generate high inflation. To date, the debate has focused primarily on the United States, even though many other developed economies responded to the COVID-19 crisis with unprecedented economic stimulus packages. By some measures, Japan stands out: The total amount of its three consecutive stimulus packages is estimated to exceed 50 percent of its GDP, about twice as high as the US fiscal packages (about 26 percent of US GDP). However, overheating concerns are not being actively raised for Japan. This Policy Brief finds that although Japan’s headline number looks astonishingly high, the actual size of its discretionary fiscal measures is about 16 percent of GDP, substantially smaller than the total size of the US packages. US fiscal stimulus is the largest among Group of Seven (G7) countries relative to GDP, justifying the attention economists have given it. The United Kingdom is estimated to spend more than Japan as a proportion of GDP, but even the UK stimulus program markedly lags behind that of the United States. If additional stimulus measures making their way through the legislative process in Canada are counted, Japan’s fiscal stimulus looks even smaller and would amount to being only average in size among G7 countries. Given this and the lackluster performance of its economy in the first quarter of 2021, it is unlikely that Japan will find itself in overheating territory any time soon. |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb21-12&r= |
| By: | Mahdi Ebrahimi Kahou; Jesús Fernández-Villaverde; Jesse Perla; Arnav Sood |
| Abstract: | We propose a new method for solving high-dimensional dynamic programming problems and recursive competitive equilibria with a large (but finite) number of heterogeneous agents using deep learning. The "curse of dimensionality" is avoided due to four complementary techniques: (1) exploiting symmetry in the approximate law of motion and the value function; (2) constructing a concentration of measure to calculate high-dimensional expectations using a single Monte Carlo draw from the distribution of idiosyncratic shocks; (3) sampling methods to ensure the model fits along manifolds of interest; and (4) selecting the most generalizable over-parameterized deep learning approximation without calculating the stationary distribution or applying a transversality condition. As an application, we solve a global solution of a multi-firm version of the classic Lucas and Prescott (1971) model of "investment under uncertainty." First, we compare the solution against a linear-quadratic Gaussian version for validation and benchmarking. Next, we solve nonlinear versions with aggregate shocks. Finally, we describe how our approach applies to a large class of models in economics. |
| JEL: | C02 E00 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28981&r= |
| By: | Haoyang Liu; Zhaogang Song; James Vickery |
| Abstract: | Agency mortgage-backed securities (MBS) issued by Fannie Mae and Freddie Mac have historically traded in separate forward markets. We study the consequences of this fragmentation, showing that market liquidity endogenously concentrated in Fannie Mae MBS, leading to higher issuance and trading volume, lower transaction costs, higher security prices, and a higher rate of return on securitization for Fannie Mae. We then analyze a change in market design – the Single Security Initiative – which consolidated Fannie Mae and Freddie Mac MBS trading into a single market in June 2019. We find that consolidation increased the liquidity and prices of Freddie Mac MBS without measurably reducing liquidity for Fannie Mae; this was in part achieved by aligning characteristics of the underlying MBS pools issued by the two agencies. Prices partially converged prior to the consolidation event, in anticipation of future liquidity. Consolidation increased Freddie Mac’s fee income by enabling it to remove discounts that previously compensated loan sellers for lower liquidity |
| Keywords: | MBS; TBA; Single Security Initiative; UMBS; liquidity |
| JEL: | G12 G18 G21 E58 |
| Date: | 2021–06–24 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:92849&r= |
| By: | Clemens Fuest; Florian Neumeier; Daniel Stöhlker |
| Abstract: | On 3 June 2020, the German government announced a temporary value added tax (VAT) rate reduction. VAT rates were reduced on 1 July 2020 and went back to their previous level on 1 January 2021. We study the price effects of the temporary VAT rate reduction using a web-scraped data set covering the daily prices of roughly 130,000 supermarket products. To identify the causal price effects, we compare the development of prices in Germany to those in Austria. Our findings indicate an asymmetric price response to the VAT rate cut and subsequent increase. The reduction of VAT rates led to a price decrease of roughly 1.3%, implying that about 70% of the tax cut were passed on to consumers. In contrast, the price effect of the VAT increase was only about half that size. We also study the link between tax incidence and the intensity of competition. Pass-through of the VAT reduction was higher in product groups with a large number of competing products. We rationalize this finding by analyzing consumption tax incidence in the ‘love of variety’ model of consumption. |
| Keywords: | value added tax, tax incidence, fiscal policy, price effects, competition |
| JEL: | E31 H22 H25 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9149&r= |
| By: | Sebastian Barnes; Robert Hillman; George Wharf; Duncan MacDonald |
| Abstract: | Covid-19 and the associated restrictions on interaction have led to an unprecedented shock to activity and firms’ balance sheets. To assess the impact, this paper applies a new large-scale firm-level simulation model calibrated to the United Kingdom (UK). The paper specifically examines the Coronavirus Job Retention Scheme (CJRS) furlough program and a credit guarantee.The Corporate Sector Agent-Based (CAB) Model (Hillman, Barnes, Wharf and MacDonald, 2021) takes into account: heterogeneity across firms; interactions between firms across a realistic customer-supplier network; and rule-of-thumb behaviour by firms and bankruptcy constraints. The model amplifies the effect of shocks and generates substantial persistence and overshooting, as well as displaying a number of non-linearities. The CAB uses a data-rich approach based on ORBIS firm-level data and the OECD Input-Output tables. Simulations in this paper are calibrated to the observed path of UK output in 2020. |
| Keywords: | agent-based modelling, bankruptcy, Covid-19, credit guarantees, financial stability, firm dynamics, firm-level data, input-output analysis, network analysis, short-time working schemes |
| JEL: | D21 D22 D57 D85 E27 G33 |
| Date: | 2021–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:1674-en&r= |
| By: | Anastasiya Ivanova (National Bank of Ukraine); Alona Shmygel (National Bank of Ukraine); Ihor Lubchuk (National Bank of Ukraine) |
| Abstract: | Using data for the Ukrainian economy, we applied and adapted the growth-at-risk (GaR) framework to examine the association between financial conditions, credit and sectors' activity, and external conditions and the probability distribution of GDP growth in Ukraine. We applied CSA and PCA approaches to construct indices of these partitions. We further derived GDP growth distributions and explored their behavior under different scenarios. Results from the model with PCA indices suggest that the relationships between financial conditions as well as external conditions indices and economic activity are inverse regardless of quantile of GDP distribution. Moreover, we found that the financial conditions index has the largest effect on the GDP growth on the lower quantiles, which could generate significant downside risk to the economy. |
| Keywords: | Quantile regression; economic growth; GDP; principal component analysis; GDP growth distribution |
| JEL: | C31 C53 E17 |
| Date: | 2021–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp10-2021&r= |
| By: | Müller, Henrik; Rieger, Jonas; Hornig, Nico |
| Abstract: | In this paper we update our Uncertainty Perception Indicator (UPI) with data from the first quarter of 2021. UPI values have declined in recent quarters. At first glance this might come as a surprise, with the third Corona wave having less of an impact than the first one, even though the former was several magnitudes bigger than the latter in Germany. This result underscores the difference between perception and actual impact: a shock hits the hardest when it first occurs because by then its nature is still unknown. As shown in previous versions of the UPI, uncertainty has mainly been fed by the political sphere since the 2010s. Towards the end of our observation period, however, uncertainty from the international and European political spheres is declining, while German domestic politics is on the rise. The end of Angela Merkel's chancellorship marks the end of a long period of relative political stability. Without her in the race the outcome of German federal elections in September is hardly predictable. Whatever coalition may succeed, it is likely that any future government will engineer a shift in (economic) policy. The potential strength of this "election uncertainty effect" is evident in our data. An update of our Fear Gauge shows profound shift in public discourse in Germany. With the pandemic in retreat for now, climate change and the question to what extent policies should follow science (whether on pandemics or global warming) are taking center stage in Germany. Looking ahead, we expect UPI values to rise again as the federal elections loom and the economic and political consequences of the pandemic (e. g. higher debt levels) become apparent. Uncertainty shocks tend to come in waves. Given the severity of the Corona pandemic, a host of difficulties - ranging from unexpected inflation to debt crises to geostrategic tensions - are possibly in the making. |
| Keywords: | Uncertainty,Narratives,Latent Dirichlet Allocation,Business Cycles,Covid-19,Text Mining,Computational Methods,Climate Change |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:docmaw:7&r= |
| By: | Lukas Reiss |
| Abstract: | This study analyses the extent of fiscal risk sharing and redistribution for Austria from 2000 to 2019. Overall, fiscal policy smooths about one tenth of regional GDP shocks. While this is primarily driven by the federal budget and social security funds, there is also a significant contribution of the revenue sharing scheme between the federal government and subnational governments. Most interestingly, the case of the Austrian revenue sharing system shows that there are intergovernmental transfer schemes which achieve risk sharing without much redistribution. This is due to mechanisms within this system which grant high-income states shares in federal revenue which are higher than their respective population shares. Furthermore, due to other mechanisms, the Austrian fiscal system is overall highly redistributive between states, but net contributions vary substantially over time. |
| Keywords: | Risk sharing, fiscal federalism, regional accounts |
| Date: | 2021–05–12 |
| URL: | http://d.repec.org/n?u=RePEc:wfo:wpaper:y:2021:i:629&r= |
| By: | Richard Davis; Serena Ng |
| Abstract: | The paper provides three results for SVARs under the assumption that the primitive shocks are mutually independent. First, a framework is proposed to study the dynamic effects of disaster-type shocks with infinite variance. We show that the least squares estimates of the VAR are consistent but have non-standard properties. Second, it is shown that the restrictions imposed on a SVAR can be validated by testing independence of the identified shocks. The test can be applied whether the data have fat or thin tails, and to over as well as exactly identified models. Third, the disaster shock is identified as the component with the largest kurtosis, where the mutually independent components are estimated using an estimator that is valid even in the presence of an infinite variance shock. Two applications are considered. In the first, the independence test is used to shed light on the conflicting evidence regarding the role of uncertainty in economic fluctuations. In the second, disaster shocks are shown to have short term economic impact arising mostly from feedback dynamics. |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2107.06663&r= |
| By: | Xavier Gabaix; Ralph S. J. Koijen |
| Abstract: | We develop a framework to theoretically and empirically analyze the fluctuations of the aggregate stock market. Households allocate capital to institutions, which are fairly constrained, for example operating with a mandate to maintain a fixed equity share or with moderate scope for variation in response to changing market conditions. As a result, the price elasticity of demand of the aggregate stock market is small, and flows in and out of the stock market have large impacts on prices. Using the recent method of granular instrumental variables, we find that investing $1 in the stock market increases the market's aggregate value by about $5. We also develop a new measure of capital flows into the market, consistent with our theory. We relate it to prices, macroeconomic variables, and survey expectations of returns. We analyze how key parts of macro-finance change if markets are inelastic. We show how general equilibrium models and pricing kernels can be generalized to incorporate flows, which makes them amenable to use in more realistic macroeconomic models and to policy analysis. Our framework allows us to give a dynamic economic structure to old and recent datasets comprising holdings and flows in various segments of the market. The mystery of apparently random movements of the stock market, hard to link to fundamentals, is replaced by the more manageable problem of understanding the determinants of flows in inelastic markets. We delineate a research agenda that can explore a number of questions raised by this analysis, and might lead to a more concrete understanding of the origins of financial fluctuations across markets. |
| JEL: | E7 G1 G32 G4 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28967&r= |
| By: | Tut, Daniel; Cao, Melanie |
| Abstract: | Does policy uncertainty affect productivity? Policy uncertainty creates delays as firms await new information about prices, costs and other market conditions before committing resources. Such delays can have real consequences on firms’ productivity and corporate decisions. First, we find that economic policy uncertainty has a negative impact on firm-level productivity. Second, debt magnifies the adverse effects of policy uncertainty on productivity, but access to external financing during periods of significant policy uncertainty shocks has a positive impact on firm� level productivity. Third, Policy uncertainty is positively related to cash holdings but this effect is mostly driven by highly productive firms and by firms with higher levels of irreversible investments since these firms face higher opportunity costs in future states. The three findings are robust to various specifications and provide an affirmative answer to the opening question. |
| Keywords: | Policy Uncertainty, Capital Reallocation, TFP, Leverage, Cash, Business Cycles |
| JEL: | G0 G2 G28 G3 G31 G32 G38 |
| Date: | 2021–06–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108528&r= |
| By: | Ly Dai Hung (Vietnam Institute of Economics, Hanoi, Vietnam) |
| Abstract: | The paper estimates the steady state economic growth rate of Vietnam, defined as the equilibirum that the economy converge without new shocks. The method employs a bayesian structural vector autoregressive model (BSVAR) which captures the Triffin policy trilemma at international financial integration. On a quarterly sample over Q2/2008-Q4/2019, the evidence records that the steady state growth based on Minnesota prior is 6.13%. This result is robust by normal-diffuse prior, normal-wishart prior and timely average method. For policy implication, the Vietnam government's objective of annual growth rate at 7.0% over 2021-2030 can only be attained for economic expansion periods. |
| Keywords: | Economic Growth,Vector Autoregression,Vietnam Economy |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03275275&r= |
| By: | Bremer, Björn; Di Carlo, Donato; Wansleben, Leon |
| Abstract: | Public investment spending declined steadily in advanced economies during the last three decades. Germany is a case in point where the aggregate decline coincided with growing inequality in investments across districts. What explains variation in local investment spending? We assembled a novel dataset to investigate the effects of structural constraints and partisanship on German districts' investment spending from 1995 to 2018. We find that the lack of fiscal and administrative capacity significantly influences local investment patterns. Yet, within these constraints, partisanship matters. Conservative politicians tend to prioritize public investment more than the left. This is especially the case when revenues from local taxes are low. As the fiscal conditions improve, left-wing politicians increase investment more strongly and hence the difference between the left and the right disappears. Our findings are indicative of how regional economic divergence can emerge even within cooperative federalist systems and show that, despite rigid fiscal rules, partisanship matters when parties face trade-offs over discretionary spending. |
| Keywords: | constrained partisanship,fiscal federalism,Germany,local politics,public investment,Deutschland,Fiskalföderalismus,Lokalpolitik,öffentliche Investitionen,politische Parteien |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:mpifgd:214&r= |
| By: | Takao Asano (Okayama University); Akihisa Shibata (Kyoto University); Masanori Yokoo (Okayama University) |
| Abstract: | This paper constructs a simple overlapping generations (OLG) model with the working and capitalist classes and two types of production technologies. The behavior of agents belonging to the working class is basically the same as that in the standard Diamond (1965) type OLG model, whereas agents belonging to the capitalist class face two available technologies, select the one with a higher return on capital, and bequeath their assets to the next generation without supplying labor. We show that in an extreme case, in which one technology is linear and the other is of the Leontief type, the dynamics of capital stock supplied by the capitalist class, which can be interpreted as public debt, is characterized by a rigid rotation on the circle, giving rise to quasi-periodic motions for a large set of parameter values. |
| Keywords: | Endogenous business cycles; technology choice; quasi-periodic motion; OLG model |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:1063&r= |
| By: | Rebecca Reubenstein; Asani Sarkar |
| Abstract: | Regulations are not written in stone. The benefits derived from them, along with the costs of compliance for affected institutions and of enforcement for regulators, are likely to evolve. When this happens, regulators may seek to modify the regulations to better suit the specific risk profiles of regulated entities. In this post, we consider the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) passed by Congress in 2018, which eased banking regulations for smaller institutions. We focus on one regulation—the Liquidity Coverage Ratio (LCR)—and assess how its relaxation affected newly exempt banks’ assets and liabilities, and the resilience of the banking system. |
| Keywords: | banking regulations; tailoring; liquidity coverage ratio |
| JEL: | E5 K2 |
| Date: | 2021–07–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:92863&r= |
| By: | Adam Copeland; Darrell Duffie; Yilin Yang |
| Abstract: | The Federal Reserve's “balance-sheet normalization,” which reduced aggregate reserves between 2017 and September 2019, increased repo rate distortions, the severity of rate spikes, and intraday payment timing stresses, culminating with a significant disruption in Treasury repo markets in mid-September 2019. We show that repo rates rose above efficient-market levels when the total reserve balances held at the Federal Reserve by the largest repo-active bank holding companies declined and that repo rate spikes are strongly associated with delayed intraday payments of reserves to these large bank holding companies. Intraday payment timing stresses are magnified by early-morning settlement of Treasury security issuances. Substantially higher aggregate levels of reserves than existed in the period leading up to September 2019 would likely have eliminated most or all of these payment timing stresses and repo rate spikes. |
| Keywords: | repo rates; reserves; Treasuries; payments; central bank balance sheet |
| JEL: | G14 D47 D82 |
| Date: | 2021–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:92866&r= |