nep-mac New Economics Papers
on Macroeconomics
Issue of 2021‒08‒09
103 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The Welfare Costs of Business Cycles Unveiled: Measuring the Extent of Stabilization Policies By Fernando Barros; Fabio Gomes; Andre Luduvice
  2. Fiscal policy and informality in Colombia By García-Suaza, A; Gómez, M; Jaramillo, F
  3. MMTの数学モデルについて By Tanaka, Yasuhito
  4. The uneven economic consequences of COVID 19: A structural analysis By Martin Kuncl; Austin McWhirter; Alexander Ueberfeldt
  5. From Deviations to Shortfalls: The Effects of the FOMC's New Employment Objective By Brent Bundick; Nicolas Petrosky-Nadeau
  6. Fiscal targeting By Régis Barnichon; Geert Mesters
  7. Monetary policy in the age of automation By Luca Fornaro; Martin Wolf
  8. Financial Shocks, Uncertainty Shocks, and Monetary Policy Trade-Offs By Brianti, Marco
  9. Liquidity Traps, Prudential Policies, and International Spillovers By Javier Bianchi; Louphou Coulibaly
  10. Revisiting the macroeconomic effects of monetary policy shocks By Firmin Doko Tchatoka; Qazi Haque
  11. Inflation during the pandemic: What happened? What is next? By Jongrim Ha; M. Ayhan Kose; Franziska Ohnsorge
  12. Secular Stagnation, Low Interest Rates and Low Inflation: Causes and Implications for Policy By Kollmann, Robert; Lubik, Thomas; Roeger, Werner
  13. Money Creation in Russia: Does the Money Multiplier Exist? By Vadim O. Grishchenko; Alexander Mihailov; Vasily N. Tkachev
  14. Precautionary saving and un-anchored expectations By Grimaud, Alex
  15. Monetary Policy and the Persistent Aggregate Effects of Wealth Redistribution By Martin Kuncl; Alexander Ueberfeldt
  16. Inflation expectations, inflation target credibility and the COVID-19 pandemic: New evidence from Germany By Coleman, Winnie; Nautz, Dieter
  17. Macroeconomic stabilisation and monetary policy effectiveness in a low-interest-rate environment By Coenen, Günter; Montes-Galdón, Carlos; Schmidt, Sebastian
  18. Additional Information About the Updated Budget and Economic Outlook: 2021 to 2031 By Congressional Budget Office
  19. Efficiency wage (and slavery) efficiency: in theory and in time By Saccal, Alessandro
  20. Price rigidity in Brazil: Microeconomic evidence and Macroeconomic Implications By Debora Silva Oliveira; Mauro Rodrigues
  21. Dating business cycles in France: A reference chronology By Valérie Mignon; Antonin Aviat; Frédérique Bec; Claude Diebolt; Catherine Doz; Denis Ferrand; Laurent Ferrara; Eric Heyer; Pierre-Alain Pionnier
  22. TARGET2 - The European system for large-value payments settlement By Paolo Bramini; Matteo Coletti; Francesco Di Stasio; Pierfrancesco Molina; Vittorio Schina; Massimo Valentini
  23. Monetary policy shocks over the business cycle: Extending the Smooth Transition framework By Martin Bruns; Michele Piffer
  24. Assessing the Effects of Covid-19 Containment Measures on Manufacturing and Services Industries By Cem Ali Gokcen
  25. A new fiscal policy for Germany By Philippa Sigl-Gloeckner; Max Krahé; Pola Schneemelcher; Florian Schuster; Viola Hilbert; Henrika Meyer
  26. Financialization revisited: the economics and political economy of the vampire squid economy By Thomas Palley
  27. Revisiting fiscal responsibility norms: a cross country analysis of the impact of Covid-19 By Srivastava, Dinesh Kumar; Trehan, Ragini; Bharadwaj, Muralikrishna; Kapur, Tarrung
  28. Japanese monetary policy and household saving By Israel, Karl-Friedrich; Sepp, Tim; Sonnenberg, Nils
  29. Fiscal and monetary policy interactions in a low interest rate world By Boris Hofmann; Marco Jacopo Lombardi; Benoit Mojon; Athanasios Orphanides
  30. US Tax and Spending Shocks 1950-2019: SVAR Overidentification with External Instruments By Allan W. Gregory; James McNeil; Gregor W. Smith
  31. One-stop source: A global database of inflation By Jongrim Ha; M. Ayhan Kose; Franziska Ohnsorge
  32. Tracking weekly state-level economic conditions By Christiane Baumeister; Danilo Leiva-León; Eric Sims
  33. Inflation Expectations and Central Bank Communication with Unknown Prior By Tatsushi Okuda; Tomohiro Tsuruga
  34. Measuring Household Inflation Perceptions and Expectations: The Effect of Guided vs Non-Guided Inflation Questions By Bernd Hayo; Pierre-Guillaume Meon
  35. Exploring the potential benefits of inflation overshooting By Robert Amano; Marc-André Gosselin; Kurt See
  36. Does Government Education Expenditure Affect Educational Outcomes? New Evidence from Sub-Sahara African Countries By Adesoji O. Farayibi; Oludele Folarin
  37. Heavy Tailed, but not Zipf: Firm and Establishment Size in the U.S. By Illenin O. Kondo; Logan T. Lewis; Andrea Stella
  38. Disastrous Defaults By Gouriéroux, Christian; Monfort, Alain; Mouabbi, Sarah; Renne, Jean-Paul
  39. An elementary mathematical model for MMT (Modern Monetary Theory) By Tanaka, Yasuhito
  40. A tail of three occasionally-binding constraints: a modelling approach to GDP-at-Risk By Aikman, David; Bluwstein, Kristina; Karmakar, Sudipto
  41. Policy biases in a model with labor market frictions By Richard Dennis; Tatiana Kirsanova
  42. Impossible trinity in a small open economy: A state-space model informed policy simulation By Guna Raj Bhatta; Rabindra Nepal; Kankesu Jayanthakumaran; Charles Harvie
  43. Macroprudential Limits on Mortgage Products: The Australian Experience By Nicholas Garvin; Alex Kearney; Corrine Rosé
  44. Stressed but not Helpless: Strategic Behaviour of Banks Under Adverse Market Conditions By Grzegorz Halaj; Sofia Priazhkina
  45. Effects of Monetary Policy Communication in Emerging Market Economies: Evidence from Malaysia By Sui-Jade Ho; Oezer Karagedikli
  46. Optimal Corrective Policies under Financial Frictions By Andreas Schabert
  47. The Price of Violence: Interest Rates and Homicides in Mexico By Ethan B. Kapstein; Adityamohan Tantravahi
  48. Policy Distortions and Aggregate Productivity with Endogenous Establishment-Level Productivity By Jose-Maria Da-Rocha; Diego Restuccia; Marina M. Tavares
  49. Identifying the Effects of Sanctions on the Iranian Economy using Newspaper Coverage By Laudati, D.; Pesaran, M. H.
  50. Economic and social effects of the COVID-19 pandemic and the future of global value chains By Dünhaupt, Petra; Herr, Hansjörg; Mehl, Fabian; Teipen, Christina
  51. Price Levels, Size, Distribution and Growth of the World Economy: Insights from recent International Comparisons of Prices and Real Product By Alan Heston; D.S Prasada Rao
  52. Effects of Monetary Policy Communication in Emerging Market Economies: Evidence from Malaysia By Sui-Jade Ho; Özer Karagedikli
  53. Assessing the Impact of Tax Policies on Economic Growth in Tunisia: New Empirical and Policy Analysis By Mkadmi, Jamel Eddine; Bakari, Sayef; Msai, Achwak
  54. Tradable and Non-tradable Inflation in Turkey: Predicting Different States with Markov Regime-Switching Approach By Hulya Saygili; Aysun Turkvatan
  55. Fiscal consolidations By Markus Brueckner
  56. Pandemic Lockdown: The Role of Government Commitment By Christian Moser; Pierre Yared
  57. The Effect of Oil Uncertainty Shock on Real GDP of 33 Countries: A Global VAR Approach By Afees A. Salisu; Rangan Gupta; Abeeb Olaniran
  58. Eine neue deutsche Finanzpolitik By Philippa Sigl-Glöckner; Max Krahé; Pola Schneemelcher; Florian Schuster; Viola Hilbert; Henrika Meyer
  59. The Bank Liquidity Channel of Financial (In)stability By Joshua Bosshardt; Ali Kakhbod; Farzad Saidi
  60. The Positive Case for a CBDC By Andrew Usher; Edona Reshidi; Francisco Rivadeneyra; Scott Hendry
  61. Sub-national Budget Credibility Institutional Perspective and Reform Agenda in India. By Jena, Pratap Ranjan; Singh, Abhishek
  62. Automation, Growth, and Factor Shares in the Era of Population Aging By Andreas Irmen
  63. Macroprudential Policies, Credit Guarantee Schemes and Commercial Loans: Lending Decisions of Banks By Selva Bahar Baziki; Tanju Capacioglu
  64. A theory of optimal paid parental leave policies By Miyazaki, Koichi
  65. Public debt and inflation nexus in Nigeria: An ARDL bounds test approach By Aimola, Akingbade U; Odhiambo, Nicholas M
  66. Cash and COVID-19: The impact of the second wave in Canada By Heng Chen; Walter Engert; Marie-Hélène Felt; Kim P. Huynh; Gradon Nicholls; Daneal O'Habib; Julia Zhu
  67. Wages, Skills, and Skill-Biased Technical Change: The Canonical Model Revisited By Audra Bowlus; Lance Lochner; Chris Robinson; Eda Suleymanoglu
  68. Economic Growth as a Double-Edged Sword: The Pollution-Adjusted Kaldor-Verdoorn Effect By Guilherme de Oliveira; Gilberto Tadeu Lima
  69. Propuestas de política pública para el rescate social y la creación de empleo en Cali By Miguel Benítez
  70. Testing for uncovered interest parity conditions in a small open economy: A state space modelling approach By Guna Raj Bhatta; Rabindra Nepal; Charles Harvie; Kankesu Jayanthakumaran
  71. Three Liquid Assets By Nicola Amendola; Lorenzo Carbonari; Leo Ferraris
  72. Unternehmen gehen mit Zuversicht in das zweite Halbjahr 2021: IW-Konjunkturumfrage Sommer 2021 By Grömling, Michael
  73. Democracy and fiscal-policy responses to COVID-19 By Ceyhun Elgin; Abdullah Yalaman; Sezer Yasar
  74. Nueva Evidencia sobre la Relación entre Riesgo Argentino y Actividad Económica 1986-2019 By Jorge C. Ávila
  75. Transition to Democracy, Real Wages and Productivity: The Turkish Experience By Erol Taymaz; Ebru Voyvoda; Kamil Yilmaz
  76. Deflation and Declining Business Dynamism in a Cash-in-Advance Economy By FURUKAWA Yuichi; NIWA Sumiko
  77. Deutsche Reichsbank - Entstehung, Funktion und Politik By Heine, Michael; Herr, Hansjörg
  78. Poverty - A Simple Approach to Eradicate IT By Subramaniam, Viswanatha
  79. Spillovers among Energy Commodities and the Russian Stock Market By Costola, Michele; Lorusso, Marco
  80. Output expectations, uncertainty and the UK business cycle; Evidence from the CBI's suite of business surveys By Kevin Lee; Michael Mahony; Paul Mizen
  81. Sentiment and uncertainty about regulation By Tara M. Sinclair; Zhoudan Xie
  82. Risky mortgages, credit shocks and cross-border spillovers By Buesa, Alejandro; De Quinto, Alicia; Población García, Francisco Javier
  83. Tracking the Ups and Downs in Indonesia’s Economic Activity During COVID-19 Using Mobility Index: Evidence from Provinces in Java and Bali By Yose Rizal Damuri; Prabaning Tyas; Haryo Aswicahyono; Lionel Priyadi; Stella Kusumawardhani; Ega Kurnia Yazid
  84. Job Polarization and the Informal Labor Market By Gomez, M
  85. A digital euro: a contribution to the discussion on technical design choices By Emanuele Urbinati; Alessia Belsito; Daniele Cani; Angela Caporrini; Marco Capotosto; Simone Folino; Giuseppe Galano; Giancarlo Goretti; Gabriele Marcelli; Pietro Tiberi; Alessia Vita
  86. Higher Dividend Taxes, No Problem! Evidence from Taxing Entrepreneurs in France By Adrien Matray; Charles Boissel
  87. The growth-at-risk perspective on the system-wide impact of Basel III finalisation in the euro area By Budnik, Katarzyna; Dimitrov, Ivan; Giglio, Carla; Groß, Johannes; Lampe, Max; Sarychev, Andrei; Tarbé, Matthieu; Vagliano, Gianluca; Volk, Matjaz
  88. The impact of cognitive skills on investment decisions. An empirical assessment and policy suggestions By Lorenzo Esposito; Lorenzo Marrese
  89. Empirical evidence on the Euler equation for investment in the US By Guido Ascari; Qazi Haque; Leandro M. Magnusson; Sophocles Mavroeidis
  90. The return on human (STEM) capital in Belgium By Gert Bijnens; Emmanuel Dhyne
  91. PIDS-BSP Annual Macroeconometric Model for the Philippines: Preliminary Estimates and Ways Forward By Reyes, Celia M.; Abrigo, Michael R.M.; Quimba, Francis Mark A.; Baje, Lora Kryz C.; Tam, Zhandra C.; Calizo, Sylwyn C. Jr.; Bayudan-Dacuycuy, Connie; Borromeo, Nicoli Arthur B.; Hernandez, Gabriel Iñigo M.; Bautista, Dennis M.; Ocampo, Jan Christopher G.
  92. Governance in mitigating the effect of oil wealth on wealth inequality: a cross-country analysis of policy thresholds By Henri Njangang; Simplice A. Asongu; Sosson Tadadjeu; Yann Nounamo; Brice Kamguia
  93. Negative Income Tax and Universal Basic Income in the Eyes of Aiyagari By Yongsung Chang; Jong-Suk Han; Sun-Bin Kim
  94. Catch me (if you can): assessing the risk of SARS-CoV-2 transmission via euro cash By Tamele, Barbora; Zamora-Pérez, Alejandro; Litardi, Chiara; Howes, John; Steinmann, Eike; Todt, Daniel
  95. International Evidence on Extending Sovereign Debt Maturities By Jens H. E. Christensen; Jose A. Lopez; Paul Mussche
  96. Estimating Large-Dimensional Connectedness Tables: The Great Moderation Through the Lens of Sectoral Spillovers By Felix Brunner; Ruben Hipp
  97. Concentration, Retail Markups, and Countervailing Power: Evidence from Retail Lotteries By Giroldo, Renato; Hollenbeck, Brett
  98. Identifying SteadyState Growth and Inflation in the South African Economy 19602020 By Johannes W. Fedderke
  100. Reversal of Fortune for Political Incumbents : Evidence from Oil Shocks By Arezki, Rabah; Simeon Djankov, Simeon; Nguyen, Ha; Yotzov, Ivan
  101. Caracterización de minas formales e informales en Colombia By Coy, F; Pacheco, J; Peralta, M; Saavedra, S; Llanes, Y
  102. Retrospective Voting Versus Risk-Aversion Voting: A Comment on Pástor and Veronesi (2020) By Ray C. Fair
  103. Risk, Inside Money, and the Real Economy By van Buggenum, Hugo

  1. By: Fernando Barros; Fabio Gomes; Andre Luduvice
    Abstract: How can we measure the welfare benefit of ongoing stabilization? We develop a methodology to calculate the welfare cost of business cycles taking into account that observed consumption is partially smoothed. We propose a decomposition that disentangles consumption in a mix of laissez-faire (absent policies) and riskless components. With a novel identification strategy, we estimate the span of stabilization power. Our results show that the welfare cost of total fluctuations is 5.81 percent of lifetime consumption, in which 80 percent is smoothed by the status quo, yielding a residual 1.05 percent to be tackled by policy.
    Keywords: business cycles; consumption; stabilization; macroeconomic history
    JEL: E32 E21 E63 N10
    Date: 2021–07–30
  2. By: García-Suaza, A; Gómez, M; Jaramillo, F
    Abstract: This paper studies how informality reacts to fiscal policy instruments. We develop an analytical framework with a dual labor market with frictions, where the formal sector, in contrast to the informal sector, produces with technology using capital and pay taxes. We calibrate the model for the Colombian economy and quantify to what extent a decrease in payroll taxes is effective to create formal jobs in a context where government compensates for the reduction in revenues by using other fiscal instruments, such as reducing expenditure or increasing other taxes, e.g., consumption or capital income taxes.
    Keywords: Informality; occupational choice; payroll taxes; fiscal policy
    JEL: E24 E62 J01 J21 J32
    Date: 2021–06–28
  3. By: Tanaka, Yasuhito
    Abstract: 近年MMT(Modern Monetary Theory,現代貨幣理論)と呼ばれる学派の主張が注目を集めているが,これまであまり理論的,あるいは数学的な分析がなされることはなかった。本稿は効用関数と予算制約式による消費者の効用最大化,独占的競争における企業の利潤最大化,財の需要・供給の均衡,などの新古典派的なミクロ経済学の枠組みの基本を維持しながら,MMTの主張の骨格をなすものを理論的に基礎づけることを目的とし,技術進歩による経済成長を含む単純な静学モデルを用いて以下の事柄を論証する。1) 経済が成長しているときに完全雇用を維持して行くためには継続的な財政赤字が必要であり,その財政赤字を将来の黒字によって埋め合わせる必要はない。2) 実際の財政赤字が完全雇用維持に必要・十分な水準を上回ることによってインフレーションが引き起こされる。さらなるインフレーションを起こさないためには安定的に一定の財政赤字を続ける必要がある。3) 財政赤字の不足は不況を招き非自発的失業を発生させる。そこから回復させるためには完 全雇用を維持して行くのに必要な水準を超える財政赤字が求められるが,完全雇用回復後 は継続的な財政赤字が必要なので,不況克服のために生じた赤字を将来の財政黒字によっ て埋め合わす必要はないし,そうしてはならない。
    Keywords: MMT,経済成長,財政赤字,インフレーション
    JEL: E12 E24
    Date: 2021–08–01
  4. By: Martin Kuncl; Austin McWhirter; Alexander Ueberfeldt
    Keywords: The COVID-19 shock had severe economic implications, which were unequally distributed across Canadian households and businesses. Using a structural model with wealth, housing and income differences across households, we create a scenario that mimics key aggregate economic consequences of the COVID-19 shock. We find the following:•The uneven shock consequences—in particular, higher unemployment risk faced by young households during the COVID-19 pandemic—amplified the negative implications for the macroeconomy, household vulnerabilities and consumption inequality. •Government support programs stimulated the economy and reduced consumption inequality and medium-term household vulnerabilities.•A stronger monetary policy response completely offsetting the effective lower bound constraint would have had positive implications for output, inequality and medium-term vulnerabilities.
    JEL: E20 E52 E62
    Date: 2021–08
  5. By: Brent Bundick; Nicolas Petrosky-Nadeau
    Abstract: The Federal Open Market Committee (FOMC) recently revised its interpretation of its maximum employment mandate. In this paper, we analyze the possible effects of this policy change using a theoretical model with frictional labor markets and nominal rigidities. A monetary policy which stabilizes “shortfalls” rather than “deviations” of employment from its maximum level leads to higher inflation and more hiring at all times due to expectations of more accommodative future policy. Thus, offsetting only shortfalls of employment results in higher nominal policy rates on average which provide more policy space and better outcomes during a zero lower bound episode. Our model suggests that the FOMC's reinterpretation of its employment mandate could alter the business-cycle and longer-run properties of the economy and result in a steeper reduced-form Phillips curve.
    Keywords: Monetary Policy; Equilibrium Unemployment; Nominal Rigidities; Zero Lower Bound
    JEL: E32 E52 J64
    Date: 2021–07–15
  6. By: Régis Barnichon; Geert Mesters
    Abstract: Fiscal rules are widely used to constrain policy decisions and promote fiscal discipline, but the design of flexible yet effective rules has proved a formidable task. In this paper, we propose to implement fiscal constraints through a fiscal targeting framework, paralleling central banks' move from monetary rules to inflation targeting. Under fiscal targeting, fiscal policy makers must optimally balance some fiscal objectives (e.g., keeping the deficit below 3%) with their own policy objectives (e.g., stabilizing output at potential). Fiscal targeting can be implemented with minimal assumption on the underlying economic model, and it promises a number of benefits over commonly used fiscal rules: (i) stronger buy-in from policy makers, (ii) higher fiscal discipline, (iii) transparency and ease of monitoring.
    Keywords: Fiscal rule, impulse responses, forecasting, stability and growth pact.
    JEL: C14 C32 E32 E52
    Date: 2021–07
  7. By: Luca Fornaro; Martin Wolf
    Abstract: We provide a framework in which monetary policy affects firms’ automation decisions (i.e. how intensively capital and labor are used in production). This new feature has far-reaching consequences for monetary policy. Monetary expansions can increase output by inducing firms to invest and automate more, while having little impact on inflation and employment. A protracted period of weak demand might translate into less investment and de-automation, rather than into deflation and involuntary unemployment. Running the economy hot, through expansionary monetary and fiscal policies, may have a positive long run impact on labor productivity and wages. Technological advances that increase the scope for automation may give rise to persistent unemployment, unless they are accompanied by expansionary macroeconomic policies.
    Keywords: monetary policy, automation, fiscal expansions, hysteresis, liquidity traps, secular stagnation, endogenous productivity, wages
    JEL: E32 E43 E52 O31 O42
    Date: 2021–07
  8. By: Brianti, Marco (University of Alberta, Department of Economics)
    Abstract: This paper separately identifies financial and uncertainty shocks using a novel SVAR procedure and discusses their distinct monetary policy implications. The procedure relies on the qualitatively different responses of corporate cash holdings: after a financial shock, firms draw down their cash reserves as they lose access to external finance, while uncertainty shocks drive up cash holdings for precautionary reasons. Although both financial and uncertainty shocks are contractionary, my results show that the former are inflationary while the latter generate deflation. I rationalize this pattern in a New-Keynesian model: after a financial shock, firms increase prices to raise current liquidity; after an uncertainty shock, firms cut prices in response to falling demand. These distinct channels have stark monetary policy implications: conditional on uncertainty shocks, the monetary authority can potentially stabilize output and inflation at the same time, while in the case of financial shocks, the central bank can stabilize inflation only at the cost of more unstable output fluctuations.
    Keywords: financial shocks; uncertainty shocks; SVAR; inflation; monetary policy
    JEL: E30 E31 E32 E44
    Date: 2021–08–02
  9. By: Javier Bianchi; Louphou Coulibaly
    Abstract: We present a simple open economy framework to study the transmission channels of monetary and macroprudential policies and evaluate the implications for international spillovers and global welfare. Using an analytical decomposition, we first identify three transmission channels: intertemporal substitution, expenditure switching, and aggregate income. Quantitatively, expenditure switching plays a prominent role for monetary policy, while macroprudential policy operates almost entirely through intertemporal substitution. Turning to the normative analysis, we show that the risk of a liquidity trap generates a monetary policy tradeoff between stabilizing output today and reducing capital flows to lower the likelihood of a future recession. However, leaning against the wind is not necessarily optimal, even in the absence of capital controls. Finally, we argue that contrary to emerging policy concerns, capital controls are not beggar-thy-neighbor and can enhance global macroeconomic stability.
    Keywords: Monetary and macroprudential policies; Liquidity traps; International spillovers; Capital flows
    JEL: E21 E52 F32 E62 E44 E43 E23
    Date: 2021–07–27
  10. By: Firmin Doko Tchatoka; Qazi Haque
    Abstract: We shed new light on the effects of monetary policy shocks in the US. Gertler and Karadi (2015) suggest that movements in credit costs may result in substantial impact of monetary policy shocks on economic activity. Using the proxy SVAR framework, we show that once the Volcker disinflation period is left out and one focuses on the post-1984 period, monetary policy shocks have no significant effects on output, despite large movements in credit costs. Our finding is robust to weak identification and alternative measure of economic activity.
    Keywords: Monetary policy shocks, Proxy-SVAR, Weak identification, Output Dynamics
    JEL: E31 E32 E43 E44 E52
    Date: 2021–07
  11. By: Jongrim Ha; M. Ayhan Kose; Franziska Ohnsorge
    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
  12. By: Kollmann, Robert; Lubik, Thomas; Roeger, Werner
    Abstract: Slow growth, low interest rates and low inflation have characterized the macroeconomic environment in the Euro Area and other advanced economies since the global financial crisis of 2008-09. In this economic landscape there are growing concerns that advanced economies will face continued stagnation. This has not abated in the wake of the COVID-19 pandemic as the underlying trends and driving factors are still in force. This special issue of the Journal of Economic Dynamics and Control consists of 8 papers that offer novel empirical and theoretical perspectives on slow growth, low interest rates and inflation rates, and discuss resulting challenges for macroeconomic policy. All papers were presented at a virtual conference organized by the Journal of Economic Dynamics and Control, the European Commission and the Centre for Economic Policy Research (CEPR) on 5-6 November 2020.
    Keywords: Secular stagnation; Low interest rates; Low inflation; Monetary and Fiscal Policy
    JEL: E3 E4 E5 E6 F3
    Date: 2021–07–30
  13. By: Vadim O. Grishchenko (Research and Forecasting Department, Bank of Russia); Alexander Mihailov (Department of Economics, University of Reading); Vasily N. Tkachev (International Finance Department, Moscow State University of International Relations (MGIMO- University))
    Abstract: For decades, the monetary economics literature has considered multiple deposit expansion via the money multiplier logic as empirically corroborated. However, the developments witnessed in advanced economies since the Global Financial Crisis challenged this settled view, and central banks as well as the Bank for International Settlements were among the first to openly reconsider it. In this paper, we revisit the issue empirically, but in a way aligned with a 'narrative' context of the evolving institutional frameworks for banking activities and monetary policy that profoundly and ultimately shape it out. Using a vector autoregression model estimated on Russian monthly data over two subsamples, 2005-2012 and 2012-2019, we find robust evidence that, while multiple deposit expansion may have existed in underdeveloped financial systems in the past, where the volume of lending was limited by the supply of bank reserves, nowadays lending is constrained mainly by the demand for credit. The key explanations we propose are: the rapid rise of money markets in the 20th- 21st centuries, the unlimited access to central bank liquidity provision facilities, and the evolution of bank management from the 'golden rule' of banking, where liquidity gaps aim at zero, to Asset and Liability Management, where banks flexibly manage liquidity gaps. Our results robustly show that the influence on real money balances of money supply factors, such as bank reserve requirements and the real monetary base, has become statistically insignificant over the recent decade in Russia, while that of money demand factors, such as the nominal interest rate, has remained significant and negative, which is consistent with the economic intuition we have suggested.
    Keywords: multiple deposit expansion, money multiplier, supply of bank reserves, demand for credit, evolution of bank management, monetary policy, Russia
    JEL: E41 E42 E44 E51 E58 G21
    Date: 2021–08–03
  14. By: Grimaud, Alex
    Abstract: This paper revisits monetary policy in a heterogeneous agents new Keynesian (HANK) model where agents use adaptive learning (AL) in order to form their expectations. Due to the households' finite heterogeneity triggered by idiosyncratic unemployment risk, the model is subject to micro-founded heterogeneous expectations that are not anchored to the rational expectation path. Households experience different histories which has non-trivial consequences on their individual AL processes. In this model, supply shocks generate precautionary saving and possible long-lasting disinflationary traps associated with excess saving. Dovish policies focused on closing the output gap dampen the learning effects which is in contradiction with previously established representative agent under learning results. Price level targeting appears to resolve most of the problem by netter anchoring long-run expectations of future utility flows.
    Keywords: Adaptive learning, supply shocks, precautionary saving, heterogeneous expectations, HANK and price level targeting
    JEL: E25 E31 E52
    Date: 2021–07–05
  15. By: Martin Kuncl; Alexander Ueberfeldt
    Abstract: We identify a sizable wealth redistribution channel which creates a monetary policy trade-off whereby short-term economic stimulus is followed by persistently lower output over the medium term. This trade-off is stronger in economies with more nominal household debt but weakened by a more aggressive monetary policy stance and underprice-level targeting. Given this trade-off, low-for-long episodes can lead to persistently depressed output. The medium-term implications of the wealth redistribution channel rely on the presence of labor supply heterogeneity, which we show both analytically and in the context of an estimated New Keynesian general equilibrium model with household heterogeneity.
    Keywords: Monetary policy framework; Monetary policy transmission
    JEL: E21 E50
    Date: 2021–08
  16. By: Coleman, Winnie; Nautz, Dieter
    Abstract: Using the exact wording of the ECB's definition of price-stability, we started a representative online survey of German citizens in January 2019 that is designed to measure long-term inflation expectations and the credibility of the inflation target. Our results indicate that credibility has decreased in our sample period, particularly in the course of the deep recession implied by the COVID-19 pandemic. Interestingly, even though inflation rates in Germany have been clearly below 2% for several years, credibility has declined mainly because Germans increasingly expect that inflation will be much higher than 2% over the medium term. We investigate how inflation expectations and the impact of the pandemic depend on personal characteristics including age, gender, education, income, and political attitude.
    Keywords: Credibility of Inflation Targets,Household Inflation Expectations,Expectation Formation,Online Surveys,Covid-19 Pandemic
    JEL: E31 E52 E58
    Date: 2021
  17. By: Coenen, Günter; Montes-Galdón, Carlos; Schmidt, Sebastian
    Abstract: The secular decline in the equilibrium real interest rate observed over the past decades has materially limited the room for policy-rate reductions in recessions, and has led to a marked increase in the incidence of episodes where policy rates are likely to be at, or near, the effective lower bound on nominal interest rates. Using the ECB's New Area-Wide Model, we show that, if unaddressed, the effective lower bound can cause substantial costs in terms of worsened macroeconomic performance, as reflected in negative biases in inflation and economic activity, as well as heightened macroeconomic volatility. These costs can be mitigated by the use of nonstandard instruments, notably the joint use of interest-rate forward guidance and large-scale asset purchases. When considering alternatives to inflation targeting, we find that make-up strategies such as price-level targeting and average-inflation targeting can, if they are well-understood by the private sector, largely undo the negative biases and heightened volatility induced by the effective lower bound. JEL Classification: E31, E32, E37, E52, E58
    Keywords: asset purchases, effective lower bound, forward guidance, make-up strategies, monetary policy
    Date: 2021–07
  18. By: Congressional Budget Office
    Abstract: In this report, CBO provides additional detail about its projections of the federal budget and the U.S. economy under current law for this year and the decade that follows. (Those projections were published on July 1, 2021.) The projected deficit for 2021 is $3.0 trillion. Over the 2022–2031 period, projected deficits are much smaller, though still large by historical standards.
    JEL: E20 E23 E60 E62 E66 H20 H60 H61 H62 H63 H68
    Date: 2021–07–21
  19. By: Saccal, Alessandro
    Abstract: The formal differentiation of (i) pain incentives from ordinary rewards, (ii) of effortful from careful production and (iii) of diligent from slothful workers under labour market imperfect competition ultimately suggests that the optimal menu of contracts associates inducements to production kinds following the preference triggered by slothful workers: effortful production with pain incentives and careful production with ordinary rewards. The efficiency of the efficiency wage as interpreted by the sociological theory is therefore discerned to arise under a particular production kind and so is that of slavery its dual (undoubtedly illicit). More broadly, the confusion of the two production kinds under market and state capitalism respectively contributes to the Phillips curve and price rigidity, in the misapplication of ordinary rewards to effortful production. State capitalism jurisprudentially eliminates the risks of dismissal and redundancy and thereby lastly causes effortful production to enter stagnation.
    Keywords: care; diligence; efficiency; effort; pain; production; rewards; scourging; slavery; sloth; wages.
    JEL: D02 D24 D41 D42 D86 E11 E12 E13 E23 E31 E32 J41 N20 N30 O43 P10 P20 P22 P30 P37 P51 P52
    Date: 2021–07–30
  20. By: Debora Silva Oliveira; Mauro Rodrigues
    Abstract: This paper calibrates multi-sector models of menu costs with intermediate inputs to the Brazilian economy. In particular, we use the model proposed by Nakamura and Steinsson (2010) to undestand the degree of monetary non-neutralitry induced by price rigidity. For comparison, we estimate a VAR model for the aggregate economy (Shapiro and Watson, 1988) and compute the share of real GDP fluctuations due to nominal shocks. Multi-sector models account for up to 12.6% of output fluctuations. This is consistent with our VAR estimations, where the nominal component is responsible for approximately 15% of the observed variation in aggregate output.
    Keywords: Price rigidity; monetary non-neutrality; Microdata
    JEL: E30 E50
    Date: 2021–08–05
  21. By: Valérie Mignon; Antonin Aviat; Frédérique Bec; Claude Diebolt; Catherine Doz; Denis Ferrand; Laurent Ferrara; Eric Heyer; Pierre-Alain Pionnier
    Abstract: This paper proposes a reference quarterly chronology 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 identified in the last quarter of 2019.
    Keywords: Business cycles, French economy, Dating, Narrative approach, Econometric modeling
    JEL: E32 E37 C24 N14
    Date: 2021
  22. By: Paolo Bramini (Bank of Italy); Matteo Coletti (Bank of Italy); Francesco Di Stasio (Bank of Italy); Pierfrancesco Molina (Bank of Italy); Vittorio Schina (Bank of Italy); Massimo Valentini (Bank of Italy)
    Abstract: TARGET2 is the main European platform for the settlement of large-value payments in central bank money open to Central banks and commercial banks participation. TARGET2 was a prerequisite of the Monetary Union establishment and is a pillar for its functioning, for the single monetary policy conduct and the financial integration of the euro area. This publication explains its genesis and functioning, and outlines its possible future developments.
    Keywords: payment systems, market infrastructures, gross settlement
    JEL: E42 E58
    Date: 2021–07
  23. By: Martin Bruns (University of East Anglia); Michele Piffer (King's College London)
    Abstract: We extend the Smooth Transition Vector Autoregressive model to allow for identification via a combination of external instruments and sign restrictions, while estimating rather than calibrating the parameters ruling the nonlinearity of the model. We hence o er an alternative to using the recursive identification with selected calibrated parameters, which is the main approach currently available. We use the model to study how the effects of monetary policy shocks change over the business cycle. We show that financial variables, inflation and output respond to a monetary shock more in a recession than in an expansion, in line with the predictions from the financial accelerator literature.
    Keywords: Nonlinear models, proxy SVARs, monetary policy shocks, sign restrictions.
    JEL: C32 E52
    Date: 2021–08–05
  24. By: Cem Ali Gokcen
    Abstract: This paper analyzes the short-term economic impacts of non-pharmaceutical interventions introduced in response to the Covid-19 pandemic on the manufacturing and services industries using cross-country data and assesses the role that fiscal and monetary stimulus deployed had played so far. To this end, the manufacturing and services Purchasing Managers Indices (PMI) are regressed seperately in a panel data setting on Oxford StringencyIndex, which is a measure of government containment measures, and proxies for fiscal and monetary policy responses. Possible impacts of the progression of pandemic are also controlled for. The instrumental variable approach and system generalized method of moments are used to address potential endogeneity issue. Our empirical results from the cross-country analysis suggest that manufacturing PMI can fall by 3 points should the stringency of containment measures rise to the average maximum reached in the spring. We also show that the services PMI is more vulnerable to an increase in the stringency of non-pharmaceutical interventions. Our findings confirm that these adverse consequences can be averted by fiscal and monetary policy responses, which suggest that accommodative fiscal and monetary policies need to remain in place especially in countries with significant tightening in containment measures.
    Keywords: Pandemic, COVID-19, Lockdown, Non-pharmaceutical interventions, Economic impact, PMI
    JEL: C23 E52 E58 E62 H12 I18
    Date: 2021
  25. By: Philippa Sigl-Gloeckner (Dezernat Zukunft); Max Krahé (Dezernat Zukunft); Pola Schneemelcher (Dezernat Zukunft); Florian Schuster (Universitaet zu Koeln); Viola Hilbert (Deutschen Instituts fuer Wirtschaftsforschung (DIW)); Henrika Meyer (Mercator Research Institute for Global Commons and Climate Change)
    Abstract: The sustainability of public finances should be measured by the debt-to-GDP ratio; the debt-to-GDP ratio is best controlled by keeping the deficit in check. For decades, these ideas shaped German fiscal policy. In 2009, with the introduction of the debt brake, this approach found its way into the German constitution. Recent research, however, has shown that this paradigm yields suboptimal results in the current environment: It neither ensures the long-term sustainability of public finances, nor limits external imbalances, nor effectively contributes to solving the challenges Germany faces today, in particular decarbonisation and demographic change. As this is increasingly being recognised, a lively debate on the future of fiscal rules has developed, both in Germany and internationally. This working paper contributes to that debate by developing reform ideas that depart from a positive goal for fiscal policy rather than from the deficiencies of the current rules. The paper starts off with an overview over the current reform debate. Following this literature review, three closely related questions are answered: what is the right objective for fiscal policy? What might an institutional framework look like to put this objective into practice? And what concrete, politically realistic reform options could move us in that direction? In response to the three questions, we identify sustainable full capacity utilisation of the economy as a sound objective for fiscal policy; make a proposal for a framework consisting of four components; and develop detailed proposals for initial re-form steps to begin implementing this framework in Germany, including an adjustment of the cyclical component of the debt brake (governed by ordinary law), introducing an investment fund for municipal investments, and adding a watchman indicator for rising interest costs.
    Keywords: Fiscal Policy, Fiscal Rules, Debt Brake, Debt Management
    JEL: E62 E02 H62 H63
    Date: 2021–06
  26. By: Thomas Palley (Economics for Democratic and Open Societies (US))
    Abstract: This paper explores the economics and political economy of financialization using Matt Taibbi’s vampire squid metaphor to characterize it. The paper makes five innovations. First, it focuses on the mechanics of the “vampire squid” process whereby financialization rotates through the economy loading sector balance sheets with debt. Second, it identifies the critical role of government budget deficits for the financialization process. Third, it identifies the critical role of central banks, which are the lynchpin of the system and now serve as de facto guarantors of the value and liquidity of private sector liabilities. Fourth, the paper argues financialization imposes a form of policy lock-in. Fifth, it argues financialization transforms popular attitudes and understandings, thereby generating political support despite poor economic outcomes. In effect, there is a politics of financialization that goes hand-in-hand with the economics. The paper concludes with some observations on why mainstream macroeconomics has no equivalent construct to financialization and discusses the disquieting unexplored terrain that the economy is now in.
    Keywords: financialization, debt, central banks, lock-in
    JEL: E10 E44 E58 G18
    Date: 2021–07
  27. By: Srivastava, Dinesh Kumar; Trehan, Ragini; Bharadwaj, Muralikrishna; Kapur, Tarrung
    Abstract: In this paper, we have reviewed the Covid induced shock to the debt and deficit profiles of 10 of the largest economies by size of GDP in 2019 referred to in this paper as the Big-10 economies. There is a sharp upsurge in their government debt-GDP ratios because their policy responses to the Covid induced recession have been large fiscal stimuli based on borrowing. With low and often negative growth rates and high fiscal deficit, the debt-GDP ratios are projected to rise sharply in these economies. As normalcy is restored, these countries may attempt to sharply reduce their borrowing levels relative to GDP. However, we argue that before this is done, individual countries may do well to reassess their sustainability norms whether cast in terms of agreements such as the Maastricht Treaty or country level Fiscal Responsibility Legislations (FRLs) or other similar norms. This revision is called for because of the longer-term trends in these economies of rising money supply, falling nominal interest rates and nominal growth rate. The contribution of this article lies in highlighting that the existing FRL norms have become dated in the European and other similar economies because of significant changes in macro parameters such as the interest rate, the long-term growth rate and the government debt-GDP profiles of these countries as compared to the time when these norms were originally determined. There is thus a need now to re-determine these norms which may be higher than their current levels. Even though, some recent literature suggests that the sustainability benchmarks may have shifted upwards, we argue that the post Covid debt-GDP ratios have exceeded these revised benchmarks by significant margins in the case of a number of the Big-10 economies
    Keywords: Covid-19, Government Debt, Growth, Inflation, 2008 Economic Crisis
    JEL: E61 E62 H62 H63 H68
    Date: 2021–05–01
  28. By: Israel, Karl-Friedrich; Sepp, Tim; Sonnenberg, Nils
    Abstract: This paper analyzes the impact of monetary policy on household saving in Japan between 1993 and 2017. Using annual data from the Japan Panel Survey of Consumers it is shown that monetary expansion has contributed to a widening gap in households' net saving through an adverse effect on the volume of saving of non-academic households. In contrast, households with at least one academic tend to be able to compensate these adverse effects of monetary expansion or can even benefit from it. The paper documents how inequality in terms of the ability to build up wealth has increased in Japan over the past decades. The statistical analysis controls for household size as well as potential spatial effects in the transmission mechanism of monetary policy on household saving.
    Keywords: Japan,interest rate,monetary policy,household saving,inequality
    JEL: D31 D63 E52 E58
    Date: 2021
  29. By: Boris Hofmann; Marco Jacopo Lombardi; Benoit Mojon; Athanasios Orphanides
    Abstract: We analyse fiscal and monetary policy interactions when interest rate policy is hampered by the zero lower bound (ZLB) in an environment where expectations are formed with perpetual learning. The ZLB induces a deterioration of economic performance and raises the risk of persistent low ation that can disanchor in ation expectations and lead to debt de ation. Systematic use of quantitative easing (QE) can partially substitute for interest rate easing and, if sufficiently aggressive, can maintain average in ation in line with the central bank's goal. By compressing term premia on longterm interest rates, QE creates fiscal space that facilitates expansionary fiscal policy and reduces debt-de ation risk. The ZLB can be counteracted with less aggressive QE if mildly negative policy rates are feasible, if more countercyclical fiscal policy can be activated, or if the central bank can credibly communicate a clear in ation goal. Timidity in implementing QE and excessively debt-averse fiscal policies are counterproductive.
    Keywords: zero lower bound, fiscal policy, debt de ation, quantitative easing, perpetual learning
    Date: 2021–07
  30. By: Allan W. Gregory (Queen's University); James McNeil (Dalhousie University); Gregor W. Smith (Queen's University)
    Abstract: An SVAR in US federal spending, federal revenue, and GDP is a standard setting for the study of the impact of fiscal shocks. An appealing feature of identifying a fiscal shock with an external instrument is that one can find the effects of that shock without fully identifying the SVAR. But we show that fully or almost fully instrumenting the SVAR allows one to overidentify the model by restricting the shock covariances to be zero. In this application the overidentifying restrictions are not rejected. Compared to the unrestricted case the restricted SVAR yields (a) greater precision in estimating impulse response functions and multipliers and (b) smaller estimated effects of government spending shocks on output growth.
    Keywords: structural vector autoregression, fiscal policy, external instruments
    JEL: E62 C36
    Date: 2021–07
  31. By: Jongrim Ha; M. Ayhan Kose; Franziska Ohnsorge
    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
  32. By: Christiane Baumeister; Danilo Leiva-León; Eric 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 e 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
  33. By: Tatsushi Okuda (Associate Director and Economist, Institute for Monetary and Economic Studies (currently, Director, Financial System and Bank Examination Department), Bank of Japan (E-mail:; Tomohiro Tsuruga (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, International Monetary Fund, E-mail:
    Abstract: We construct a noisy information model of central bank communication on future inflation rates and highlight an informational friction that plays a key role in explaining several empirical properties of firms' inflation expectations. Using a survey of Japanese firms' inflation expectations, we document new empirical facts related to the size of firms and their inflation expectations. We observe a persistent deviation of expectations from the central bank's inflation target and find that the deviation is monotonically increasing in firm size, while the degree of the forecasting imprecision, responsiveness to actual inflation, and the heterogeneity in firms' expectations are monotonically decreasing in firm size. To reconcile these empirical regularities, we construct a dynamic model of inflation expectation formation by Bayesian firms where the central bank's inflation forecast serves as a noisy public signal of future inflation rates and propose an informational friction in the communication about future inflation: the central bank's prior about the future inflation rate, which is unknown to firms. In this setup, the sluggishness of the adjustment of inflation expectations is amplified by the central bank's communication. Moreover, this friction drastically changes the role and the effect of central bank communication on firms' expectations formation. Firms utilize the inflation forecast as a signal not of the level but of changes in future inflation rates.
    Keywords: Imperfect information, inflation expectations, communication
    JEL: E50 D83 D84 D82
    Date: 2021–07
  34. By: Bernd Hayo (University of Marburg); Pierre-Guillaume Meon (Universite libre de Bruxelles)
    Abstract: An experiment using a representative survey of the German population shows that letting respondents report a number rather than asking them to choose from a list of predefined ranges lowers the response rate for both perceived past and expected inflation and decreases (increases) reported past (expected) inflation. Income, education, gender, objective and subjective knowledge about monetary policy, and political affiliation affect the effect’s size but not its sign. East and West German respondents who were 15 or older when the Berlin Wall fell have reactions different from those who were younger at that time, which supports the ‘impressionable years’ hypothesis based on different inflation experiences.
    Keywords: Inflation perception, inflation expectation, survey question design, Germany, household survey, impressionable years hypothesis
    JEL: E52 E58 Z1
    Date: 2021
  35. By: Robert Amano; Marc-André Gosselin; Kurt See
    Abstract: After a period with the interest rate at the effective lower bound, temporarily overshooting inflation may offer important economic benefits. This may be especially true for vulnerable segments of the population, such as workers with low attachment to the labour force and the long-term unemployed.
    Keywords: Inflation targets; monetary policy; monetary policy framework; and labour markets
    JEL: E52 J20
    Date: 2021–07
  36. By: Adesoji O. Farayibi (University of Ibadan, Nigeria); Oludele Folarin (University of Ibadan, Nigeria)
    Abstract: The human capital crisis, reflected in the weak global competitiveness of African education, has questioned the effectiveness of public spending in increasing educational outcomes in the continent. Thus, this article examines the impact of government education expenditure on educational outcomes in 31 sub-Saharan African (SSA) countries from 2000-2019 based on a Generalized Method of Moments (GMM). The study sheds light on the priorities of government education spending in the continent. Findings showed that the effect of government education spending on educational outcomes in SSA was driven by the measure of educational outcome used. Government spending in Africa had focused mainly on primary and secondary education to the detriment of tertiary education because it is convenient and generates political gains. Due to institutional rigidities which emanate from the governance structure, the inequitable allocation of government funding had made higher education in Africa less responsive to the changes in global knowledge and labour market demands. Therefore, the following policy agenda becomes imperative in the SSA: (i) government education spending should equitably target all education levels to improve the aggregate human capital development indicators in the region. (ii) There is a need to enhance government institutions' capacity to increase their level of effectiveness and performance.
    Keywords: Government Education Expenditure; Educational Outcomes Higher Education; System GMM; sub-Saharan Africa
    JEL: E24 E52 E62 J17 J21 J24
    Date: 2021–01
  37. By: Illenin O. Kondo; Logan T. Lewis; Andrea Stella
    Abstract: Heavy tails play an important role in modern macroeconomics and international economics. Previous work often assumes a Pareto distribution for firm size, typically with a shape parameter approaching Zipf’s law. This convenient approximation has dramatic consequences for the importance of large firms in the economy. But we show that a lognormal distribution, or better yet, a convolution of a lognormal and a non-Zipf Pareto distribution, provides a better description of the U.S. economy, using confidential Census Bureau data. These findings hold even far in the upper tail and suggest heterogeneous firm models should more systematically explore deviations from Zipf’s law.
    Keywords: Firm size distribution, TFP distribution, Lognormal, Pareto, Zipf’s law, Granularity
    JEL: L11 E24
    Date: 2021–07
  38. By: Gouriéroux, Christian; Monfort, Alain; Mouabbi, Sarah; Renne, Jean-Paul
    Abstract: We define a disastrous default as the default of a systemic entity, which has a negative effect on the economy and is contagious. Bringing macroeconomic structure to a no-arbitrage asset pricing framework, we exploit prices of disaster-exposed assets (credit and equity derivatives) to extract information on the expected (i) influence of a disastrous default on consumption and (ii) probability of a financial meltdown. Using European data, we find that the returns of disaster-exposed assets are consistent with a systemic default being followed by a 2% decrease in consumption. The recessionary influence of disastrous defaults implies that financial instruments whose payoffs are exposed to such credit events carry substantial risk premiums. We also produce systemic risk indicators based on the probability of observing a certain number of systemic defaults or a sharp drop of consumption.
    JEL: E43 E44 E47 G01 G12
    Date: 2021–08–02
  39. By: Tanaka, Yasuhito
    Abstract: In recent years, a school of economics called MMT (Modern Monetary Theory) has been attracting attention, but it has not been analyzed theoretically or mathematically. This study aims to provide a theoretical basis for the skeleton of the MMT argument, while maintaining the basics of the neoclassical microeconomic framework, such as utility maximization of consumers by means of utility functions and budget constraint, profit maximization of firms in monopolistic competition, and equilibrium of supply and demand of goods. Using a simple static model that includes economic growth due to technological progress, we will argue that: 1) a continuous budget deficit is necessary to maintain full employment when the economy is growing, and that this deficit does not have to be covered by future surpluses; 2) Inflation is caused when the actual budget deficit exceeds the level necessary and sufficient to maintain full employment. In order to avoid further inflation, it is necessary to maintain a certain level of budget deficit; 3) A shortfall in the budget deficit leads to recession and involuntary unemployment. To recover from this, a budget deficit that exceeds the level necessary to maintain full employment is required. However, since a continuous budget deficit is necessary after full employment is restored, the deficit created to overcome the recession does not need to be covered by future budget surpluses, nor should it be.
    Keywords: MMT, Economic growth, Budget deficit, Inflation
    JEL: E12 E24
    Date: 2021–08–02
  40. By: Aikman, David (King's College London); Bluwstein, Kristina (Bank of England); Karmakar, Sudipto (Bank of England)
    Abstract: We build a semi-structural New Keynesian model with financial frictions to study the drivers of macroeconomic tail risk (‘GDP-at-Risk’). We analyse the empirically observed fat left tail of the GDP distribution by modelling three key non-linearities emphasised in the literature: 1) an effective lower bound on nominal interest rates, 2) a credit crunch in bank credit supply when bank capital depletes, and 3) deleveraging by borrowers when debt service burdens become excessive. We obtain three key results. First, our model generates a significantly fat-tailed distribution of GDP – a finding that is absent in most linear New Keynesian and RBC models. Second, we show how these constraints interact with each other. We find that an economy prone to debt deleveraging will experience significantly more credit crunch and effective lower bound episodes than otherwise. Moreover, as the effective lower bound becomes more proximate, the frequency of credit crunch episodes increases significantly. As a rule of thumb, we find that each 50 basis point decline in monetary policy headroom requires additional capital buffers of 1% of assets or 2%–2.5% points lower debt service burdens to hold the risk level constant. Third, we use the model to generate a historical decomposition of GDP-at-Risk for the United Kingdom. The implied risk outlook deteriorates significantly in the run-up to the Global Financial Crisis, driven by depleted capital buffers and increasing debt burdens. Since then, GDP-at-Risk has remained elevated, with greater bank resilience and lower debt offset by the limited capacity of monetary policy to cushion adverse shocks.
    Keywords: Financial crises; bank capital; debt deleveraging; macroprudential policy; effective lower bound; GDP-at-Risk
    JEL: G01 G28
    Date: 2021–07–26
  41. By: Richard Dennis; Tatiana Kirsanova
    Abstract: We develop a model with labor-market matching frictions that is subject to a range of shocks, including shocks to matching efficiency and bargaining power, and use the model to examine how monetary policy should respond to such shocks. We show that optimal monetary policy is highly efficient at responding to these labor market shocks, producing outcomes that are close to the flex-price equilibrium. Moreover, this efficiency remains if monetary policy is conducted with discretion, indicating that time-inconsistency and forward-guidance are not central to the policy response. We also show that several popular simple rules are also effective at responding to these labor market shocks.
    Keywords: Labor market frictions, matching, optimal policy
    JEL: E52 E61 C62 C73
    Date: 2021–07
  42. By: Guna Raj Bhatta; Rabindra Nepal; Kankesu Jayanthakumaran; Charles Harvie
    Abstract: Should monetary policy independence be maintained when the exchange rate is fixed under closed capital account conditions in a small open economy? We apply the Kalman filter at State Space model to test the Nepalese economy’s policy trilemma condition involving restricting capital flow, maintaining policy independence and fixing the exchange rate over the period 1989-2019. Accounting for two-thirds of Nepal’s total trade, Nepal is heavily trade-dependent to India in South Asia, which underwent economic liberalisation during the early 1990s. We modify the traditional Taylor-rule-based monetary policy reaction function to more closely represent Nepal’s economic characteristics by mixing backward-looking and forward-looking strategies and incorporating a fixed exchange rate in the monetary policy reaction function. The simulation results provide strong evidence of policy trilemma failure and inevitable policy trade-offs. In the monetary policy reaction function of both domestic and foreign conditions, the parameter value of domestic condition needs to be close to zero, to get the simulated interest rate close to observed. The loss of monetary policy independence raises a range of policy issues for the Nepalese economy: the rationale for fixing the exchange rate, and the efficacy of capital account closure which might deteriorate the effectiveness of monetary policy.
    Keywords: Monetary Policy Independence, Impossible Trinity, State Space Model, Calibration, Policy Simulation
    JEL: E47 E52 E58
    Date: 2021–07
  43. By: Nicholas Garvin (Reserve Bank of Australia); Alex Kearney (Reserve Bank of Australia); Corrine Rosé (Reserve Bank of Australia)
    Abstract: The Australian Prudential Regulation Authority implemented 2 credit limits between 2014 and 2018. Unlike similar policies in other countries, these imposed limits on particular mortgage products – first investor mortgages, then interest-only (IO) mortgages. With prudential bank-level panel data, we empirically identify banks' credit supply and interest rate responses and test for other effects of these policies. The policies quickly reduced growth in the targeted type of credit while total mortgage growth remained steady. Banks met the limits by raising interest rates on targeted mortgage products and this lifted their income temporarily. The largest banks substituted into non-targeted mortgage products while smaller banks did not. Practical implementation difficulties slowed effects of the (first) investor policy, and led to some disproportionate bank responses, but had largely been overcome by the time the (second) IO policy was implemented.
    Keywords: macroprudential policy; banks; mortgages; mortgage rates
    JEL: E43 E5 G21 G28
    Date: 2021–07
  44. By: Grzegorz Halaj; Sofia Priazhkina
    Abstract: We model bank management actions in severe stress test conditions using a game-theoretical framework. Banks update their balance sheets to strategically maximize risk-adjusted returns to shareholders given three regulatory constraints and feedback effects related to fire sales, interactions of loan supply and demand, and deteriorating funding conditions. The framework allows us to study the role of strategic behaviors in amplifying or mitigating adverse macrofinancial shocks in a banking system and the role of macroprudential policies in the mitigation of systemic risk. In a macro-consistent stress testing application, we show that a trade-off can arise between banking stability (solvency) and macroeconomic stability (lending) and test whether the release of a countercyclical capital buffer can reduce systemic risk.
    Keywords: Central bank research; Economic models; Financial institutions; Financial stability; Financial system regulation and policies
    JEL: C72 G21
    Date: 2021–07
  45. By: Sui-Jade Ho (Bank Negara Malaysia); Oezer Karagedikli (South East Asian Central Banks Research and Training)
    Abstract: By conducting a high-frequency event study similar to Gürkaynak et al.(2005), we find that two factors are needed to adequately capture the effects of monetary policy announcements for a non-inflation targeting emerging market economy, Malaysia. These factors are the surprise changes in the policy rate (Overnight Policy Rate, OPR) and the information about the future path of monetary policy. We find that the path factor has a strong influence on long-term government bond yields, corporate bond yields and spreads. Our findings are indicative of the view that monetary policy communication is mostly about revealing information pertaining to the central bank’s assessment of the economic outlook, as opposed to an unconditional binding commitment to follow a specific policy path.
    JEL: J31 J64
    Date: 2021
  46. By: Andreas Schabert (University of Cologne, Center for Macroeconomic Research, Albertus-Magnus-Platz, 50923 Cologne, Germany)
    Abstract: This paper examines credit market policies under pecuniary externalities induced by collateral constraints. Pigouvian taxes/subsidies on debt or savings are derived as Ramsey-optimal policies. Firstly, prudential (ex-ante) debt taxes can restore constrained efficiency. Secondly, when policies are non-state and non-time contingent, debt subsidies can be superior to debt taxes. Thirdly, ex-ante saving subsidies are desirable when distributive effects dominate collateral effects. Fourthly, both effects can simultaneously be addressed by non-contingent saving subsidies. The analysis indicates that optimal policies can improve on constrained efficiency and that inefficiencies due to financial externalities can most effectively be addressed by interest rate reductions.
    Keywords: Pecuniary externalities, collateral constraint, incomplete markets, Pigouvian policies, inequality
    JEL: E44 G28 H23
    Date: 2021–07
  47. By: Ethan B. Kapstein (Princeton University and Arizona State University); Adityamohan Tantravahi (Princeton University)
    Abstract: Among its many deleterious effects on social well-being, violent conflict can undermine the economies of the countries in which it is ongoing. From a macroeconomic perspective, internal conflict can lead to reduced investment, output, and growth. We show that it can also increase the borrowing costs on government-issued debt. Speciï¬ cally, we examine the effects of crime-related homicides on the spread between the monetary policy rate and short-term Mexican treasury bills, called †CETES,†during the period 2010-2017. We show that homicides have a statistically signiï¬ cant effect on the spread, and in drawing a connection between violence and interest rates, we make a novel contribution to the literature on the macroeconomic effects of conflict.
    Keywords: Mexico, Conflict, Crime, Political Economy, Development, State Fragility
    JEL: E52 F52 O54
    Date: 2021–07
  48. By: Jose-Maria Da-Rocha; Diego Restuccia; Marina M. Tavares
    Abstract: What accounts for income per capita and total factor productivity (TFP) differences across countries? We study resource misallocation across heterogeneous production units in a general equilibrium model where establishment productivity and size are affected by policy distortions. We solve the model in closed form and show that the effect of policy distortions hinges crucially on the size distribution of establishments approximately satisfying Zipf's law, an empirical phenomenon that can be interpreted to imply that misallocation is low or that the establishments' lifespan is long, or both. More distorted economies feature higher establishment lifespan which amplifies the negative effect of distortions on productivity and establishment growth. Policy distortions substantially reduce aggregate TFP, an effect that is 2.8-fold larger than in the model with unrestricted size distribution and 6.9-fold larger with perfectly correlated distortions.
    Keywords: distortions, misallocation, investment, productivity, Zipf's law.
    JEL: O11 O3 O41 O43 O5 E0 E13 C02 C61
    Date: 2021–08–03
  49. By: Laudati, D.; Pesaran, M. H.
    Abstract: This paper considers how sanctions affected the Iranian economy using a novel measure of sanctions intensity based on daily newspaper coverage. It finds sanctions to have significant effects on exchange rates, inflation, and output growth, with the Iranian rial over-reacting to sanctions, followed up with a rise in inflation and a fall in output. In absence of sanctions, Iran’s average annual growth could have been around 4-5 per cent, as compared to the 3 per cent realized. Sanctions are also found to have adverse effects on employment, labor force participation, secondary and high-school education, with such effects amplified for females.
    Keywords: Newspaper coverage, identification of direct and indirect effects of sanctions, Iran output growth, exchange rate depreciation and inflation, labor force participation and employment, secondary education, and gender bias
    JEL: E31 E65 F43 F51 F53 O11 O19 O53
    Date: 2021–07–29
  50. By: Dünhaupt, Petra; Herr, Hansjörg; Mehl, Fabian; Teipen, Christina
    Abstract: The COVID-19 crisis is unique in many respects and, as the IMF (2021, p. 43) puts it: "a crisis like no other". A global economic contraction occurred that was unprecedented in its speed and depth. Support packages were put together in some parts of the world that also dwarfed anything seen up to that point. Also, the massive differences in how countries, sectors and people were affected by the crisis is unusual in many respects. What is already visible is that national government policies are playing a significant role during the pandemic and its impact on social groups. In this comment, we will briefly assess the impacts of the COVID-19 pandemic up to now (July 2021) and discuss possible future trends for the reorganization of global value chains (GVCs). First, we will give an overview of the pandemic's economic and social effects as well as various policy responses by governments and international organizations. Second, we will discuss the effects of the pandemic on GVCs as well as different scenarios of further restructuring dynamics in GVCs. To conclude, we will argue that although the COVID-19 pandemic might not fundamentally alter the current globalization model, it could serve as a catalyst for already ongoing changes.
    Keywords: COVID-19,Monetary Policy,Fiscal Policy,Crisis Management,Global Value Chains,Global North,Global South
    JEL: E52 E62 F01 F6
    Date: 2021
  51. By: Alan Heston (University of Pennsylvania); D.S Prasada Rao (The University of Queensland, Australia)
    Abstract: We highlight and extend findings of the recent International Comparison Program (ICP) for the years 2011 and 2017 that provides PPP based national accounts for 173 countries. The growth and distribution of world GDP are examined and some convergence is found. The ICP price level story is consistent with that of previous ICP rounds of the 1970s. Using new methods, international prices were compared between the 1975 ICP and 2017. Updating the results to 2019, it is clear China is number one and that gains of the lower income countries are another casualty of covid-19.
    Keywords: Purchasing power parities; price levels; global growth; inequality; price structures
    JEL: E01 E31 I31 O57
    Date: 2021–07
  52. By: Sui-Jade Ho (Bank Negara Malaysia); Özer Karagedikli (South East Asian Central Banks (SEACEN) Research and Training Centre and Centre for Applied Macroeconomic Analysis (CAMA))
    Abstract: By conducting a high-frequency event study similar to Gürkaynak et al. (2005), we find that two factors are needed to adequately capture the effects of monetary policy announcements for a non-inflation targeting emerging market economy, Malaysia. These factors are the surprise changes in the policy rate (Overnight Policy Rate, OPR) and the information about the future path of monetary policy. We find that the path factor has a strong influence on long-term government bond yields, corporate bond yields and spreads. Our findings are indicative of the view that monetary policy communication is mostly about revealing information pertaining to the central bank’s assessment of the economic outlook, as opposed to an unconditional binding commitment to follow a specific policy path.
    Date: 2021–07
  53. By: Mkadmi, Jamel Eddine; Bakari, Sayef; Msai, Achwak
    Abstract: The present paper aims to investigate the impact of tax policy on economic growth in Tunisia over the period 1995 - 2020, by using cointegration analysis and Autoregressive Distributed Lag (ARDL). To explain tax policy, we use tax revenue and degree of fiscal freedom. Empirical results mark that in the long run tax revenue and degree of fiscal freedom has a positive impact on economic growth, while the impact of tax revenues is positive. Our findings provide evidence that tax policy is seen as a source of growth in Tunisia. From these results, we extract several basic policy conclusions.
    Keywords: Tax Policy, Economic Growth, Tunisia, ARDL Model.
    JEL: C22 E62 O40 O47 O55
    Date: 2021
  54. By: Hulya Saygili; Aysun Turkvatan
    Abstract: The recent literature debates the significance of different regimes of inflation and trade linkages in explaining the relationship between inflation and alternative reference indicators. This paper contributes to this literature in several respects. First, it explores which states of the reference indicators are more related with low, normal or high regimes of inflation. Second, it takes globalization into account and performs the analysis for goods and services in the consumer basket classified with respect to their trade openness and content of intermediate imports: tradable/non-tradable items and items with low/high imported intermediate share. It applies Markov regime-switching models to determine the states of inflation and reference series then compare probability scores of matching different regimes of inflation and different regimes of reference indicators. Third, it computes Consumer Price Indices in tradable/non-tradable and low/high imported intermediate details for an emerging country, Turkey which distinguishes from the others with high trade openness, high global integration rate and implementation of inflation targeting regime.
    Keywords: Inflation regimes, Tradable/non-tradable inflation, Markov regime-switching models, Probability score analysis
    JEL: E31 F41 C11
    Date: 2021
  55. By: Markus Brueckner
    Abstract: I examine whether action-based fiscal consolidations are exogenous to contemporaneous GDP growth. Based on the narrative record, these fiscal consolidations had the primary objective to reduce a budget deficit. I find that temperature changes, the GDP growth rate of trading partners, and an international commodity price index have significant: (i) negative contemporaneous effects on action-based fiscal consolidations; (ii) positive contemporaneous effects on GDP growth. These results imply that it is highly unlikely that action-based fiscal consolidations are exogenous to contemporaneous GDP growth. Using an instrumental variables approach, I find that action-based fiscal consolidations have significant positive effects on GDP growth.
    Keywords: Fiscal Consolidations, GDP Growth, Identification, Narrative Approach, Simultaneous Systems of Equations
    JEL: E0 O4
    Date: 2021–07
  56. By: Christian Moser; Pierre Yared
    Abstract: This paper studies lockdown policy in a dynamic economy without government commitment. Lockdown imposes a cap on labor supply, which improves health prospects at the cost of economic output and consumption. A government would like to commit to the extent of future lockdowns in order to guarantee an economic outlook that supports efficient levels of investment into intermediate inputs. However, such a commitment is not credible, since investments are sunk at the time when the government chooses a lockdown. As a result, lockdown under lack of commitment deviates from the optimal policy. Rules that limit a government’s lockdown discretion can improve social welfare, even in the presence of noncontractible information. Quantitatively, lack of commitment causes lockdown to be significantly more severe than is socially optimal. The output and consumption loss due to lack of commitment is greater for higher intermediate input shares, higher discount rates, higher values of life, higher disease transmission rates at and outside of work, and longer vaccine arrival times.
    Keywords: Lockdown; Coronavirus; Commitment; Flexibility; Non-pharmaceutical interventions; Pandemic restrictions; SIRD model; Rules; Optimal policy; COVID-19; SARS-CoV-2
    JEL: E61 I18 H12
    Date: 2021–08–03
  57. By: Afees A. Salisu (Centre for Econometric & Allied Research, University of Ibadan, Ibadan, Nigeria; Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Abeeb Olaniran (Centre for Econometric & Allied Research, University of Ibadan, Ibadan, Nigeria)
    Abstract: In this paper, we investigate the effect of oil price uncertainty shock on real Gross Domestic Product (GDP) of 33 developed and emerging economies using the Global Vector Autoregressive (VAR) framework that allows us to capture the transmission of global shocks while simultaneously accounting for distinct characteristics of individual countries. Utilizing quarterly data over the period of 1980Q1 to 2019Q2, we show that, in general, oil price uncertainty shock has a statistically significant negative impact on GDP for 28 out of the 33 countries, but with varying magnitude and persistence. Overall though, we find the adverse effect on real GDP to be relatively stronger for the developed group of countries than the emerging ones. Hence, our results suggest that policymakers must be ready to undertake expansionary policies (of varying order) in the wake of an oil price uncertainty shock to prevent deep recessions, except in the cases of Norway, Philippines and Saudi Arabia, for which output tends to increase in a statistically significant manner.
    Keywords: Oil price uncertainty shock, Real GDP, GVAR
    JEL: C32 E32 Q02
    Date: 2021–07
  58. By: Philippa Sigl-Glöckner (Dezernat Zukunft); Max Krahé (Dezernat Zukunft); Pola Schneemelcher (Dezernat Zukunft); Florian Schuster (Universität zu Köln); Viola Hilbert (Deutschen Instituts für Wirtschaftsforschung (DIW)); Henrika Meyer (Mercator Research Institute for Global Commons and Climate Change)
    Abstract: Über Jahrzehnte war die deutsche Fiskalpolitik von der Idee geprägt, dass die Tragfähigkeit der öffentlichen Finanzen an der Schuldenquote zu messen sei; die Schuldenquote wiederum sei am besten über das jährliche Haushaltsdefizit zu kontrollieren. Mit der Einführung der Schuldenbremse fand dieser Ansatz 2009 Eingang in die deutsche Verfassung. Die neuere Forschung hat jedoch herausgearbeitet, dass dieses Paradigma im heutigen Kontext zu suboptimalen Ergebnissen führt: Insbesondere gewährleistet es weder die langfristige Tragfähigkeit der öffentlichen Finanzen noch ein außenwirtschaftliches Gleichgewicht noch einen effizienten Beitrag zur Lösung der heute vor uns stehenden Herausforderungen, insbesondere der Dekarbonisierung und des demographischen Wandels. Eine wachsende Erkenntnis dieser Tatsache hat sowohl in Deutschland als auch international zu einer lebhaften Debatte über die Zukunft von Fiskalregeln geführt. Dieses Working Paper baut auf der Debatte auf und geht einen Schritt weiter, indem es nicht von den Unzulänglichkeiten des heutigen Paradigmas, sondern von einer positiven Zielsetzung aus in Richtung neuer Reformideen denkt. Einführend geben wir einen Überblick zum Stand der Diskussion um Alternativen und Reformen der Schuldenbremse. Anschließend werden drei eng miteinander verknüpfte Fragen beantwortet: was ist die richtige Zielsetzung für Fiskalpolitik? Wie könnte ein institutionelles Rahmenwerk aussehen, um diese Zielsetzung in die Praxis umzusetzen? Und welche konkreten, politische realistischen Reformoptionen könnten uns in diese Richtung bewegen? Dabei identifizieren wir nachhaltige Vollauslastung der Wirtschaft als sinnvolles Ziel für Fiskalpolitik; machen einen Vorschlag für ein viergliedriges Rahmenwerk, und entwickeln detaillierte Vorschläge für erste Reformschritte, mit denen dieses Rahmenwerk in Deutschland umgesetzt werden könnte, darunter eine Anpassung der einfachgesetzlich geregelten Konjunkturkomponente der Schuldenbremse, die Einführung einer Investitionsgesellschaft für kommunale Investitionen, sowie die Einführung eines Frühwarnindikators für Zinskosten.
    Keywords: Fiscal Policy, Fiscal Rules, Debt Brake, Debt Management
    JEL: E62 E02 H62 H63
    Date: 2021–06
  59. By: Joshua Bosshardt (Federal Housing Finance Agency); Ali Kakhbod (Rice University); Farzad Saidi (UniversityofBonn & CEPR)
    Abstract: We examine the system-wide effects of liquidity regulation on banks’ balance sheets. In the general equilibrium model, banks have to hold liquid assets, and choose among illiquid assets varying in the extent to which they are difficult to value before maturity, e.g., structured securities. By improving the liquidity of interbank markets, tighter liquidity requirements induce banks to invest in such complex assets. We evaluate the welfare properties of combining liquidity regulation with other financial-stability policies, and show that it can complement ex-ante policies, such as asset-specific taxes, whereas it can undermine the benefits of ex-post interventions, such as quantative easing.
    Keywords: liquidity regulation, securitization, interbank markets, financial stability, quantitative easing
    JEL: E44 G01 G21 G28
    Date: 2021–08
  60. By: Andrew Usher; Edona Reshidi; Francisco Rivadeneyra; Scott Hendry
    Abstract: In this paper we discuss the competition and innovation arguments for issuing a central bank digital currency (CBDC). A CBDC could be an effective competition policy tool for payments. On innovation, we argue that a CBDC could be necessary to support the vibrancy of the digital economy by helping solve market failures and fostering competition and innovation in new digital payments markets. Overall, competition and innovation are supporting arguments for issuing a CBDC.
    Keywords: Digital currencies and fintech; Financial institutions; Financial stability
    JEL: E58 L5
    Date: 2021–07
  61. By: Jena, Pratap Ranjan (National Institute of Public Finance and Policy); Singh, Abhishek (National Institute of Public Finance and Policy)
    Abstract: The fiscal management principles enshrined in fiscal responsibility acts of states emphasize on formulating budget in a realistic manner with due regard to general economic outlook and realistic revenue prospects and minimizing deviations during a year. Failure to implement the budgets as planned may result in shifting spending priorities, exceeding deficit targets, and compromising on critical service delivery promises. This budgetary tenet assumes significance as the states have to respond to disruption in revenues, rising expenditure burdens and changes in priorities in the wake of Covid-19 pandemic and face challenges to restore fiscal consolidation process. The paper assesses the budget credibility of states in India to explain their ability to implement planned activities and respond to fiscal stress. It also focuses on strengthening institutional framework to utilize fiscal instruments optimally for better service delivery and development.
    Keywords: PEFA ; Budgeting System ; Multi-year Expenditure Framework ; Fiscal Rules ; Performance Budgeting
    JEL: H61 H68 E62
    Date: 2021–07
  62. By: Andreas Irmen
    Abstract: How does population aging affect economic growth and factor shares in times of increasingly automatable production processes? The present paper addresses this question in a new macroeconomic model of automation where competitive firms perform tasks to produce output. Tasks require labor and machines as inputs. New machines embody superior technological knowledge and substitute for labor in the performance of tasks. Automation is labor-augmenting in the reduced-form aggregate production function. If wages increase then the incentive to automate becomes stronger. Moreover, the labor share declines even though the aggregate production function is Cobb-Douglas. Population aging due to a higher longevity reduces automation in the short and promotes it in the long run. It boosts the growth rate of absolute and per-capita GDP in the short and the long run, lifts the labor share in the short and reduces it in the long run. Population aging due to a decline in fertility increases automation, reduces the growth rate of GDP, and lowers the labor share in the short and the long run. In the short run, it may or may not increase the growth rate of per-capita GDP, in the long run it unequivocally accelerates per-capita GDP growth.
    Keywords: population aging, automation, factor shares, endogenous technical change, endogenous labor supply
    JEL: E22 J11 J22 J23 O33 O41
    Date: 2021
  63. By: Selva Bahar Baziki; Tanju Capacioglu
    Abstract: We study the effect of two counter-cyclical credit policies on banks’ lending decisions using a unique matched bank-firm-loan micro level data. These two policy actions; the implementation of commercial real estate loan-to-value (LTV) ratio and an expansion of a collateral guarantee scheme, stand out as they give banks the freedom of choice over which customers would be subject to the policy and to what degree. When faced with a tightening LTV policy banks elect to issue loans above the LTV cap to firms with better credit history and with whom they had a longer established relationship while charging higher interest rates. Firms constrained by the policy see an increase in their other borrowing while the policy is in effect, suggesting the existence of credit spillover across loan types. In the second policy, banks again prefer firms with healthier credit histories and with whom they have a longer relationship into the credit guarantee scheme. In contrast to the existing literature, we do not see a preference for riskier firms under the scheme. At the same time, among the recipients of scheme loans, those with stronger relationships but relatively lower past credit performance have larger amounts of loans. Scheme loans are issued for larger amounts, longer periods and at higher interest rates compared to loans issued to non-participating firms during the same period. Finally, we show that the increase in scheme utilization has resulted in lower other corporate credit and general-purpose loans in banks with larger utilization rates.
    Keywords: Macroprudential policy, Commercial real estate, Corporate loans, Loan-to-value, Relationship banking, Credit guarantee funds
    JEL: E51 E61 G20 G21 G28 G32
    Date: 2021
  64. By: Miyazaki, Koichi
    Abstract: This study examines paid parental leave policies in which a pregnant worker can choose not to take a temporary leave and a worker on leave can choose not to return to work after the leave period ends. An optimal paid parental policy is defined as a policy that maximizes social welfare. In the optimal paid parental leave policy, where a pregnant worker voluntarily chooses to take a leave and a worker on leave voluntarily chooses to return to work after the leave period ends, the income risk caused by the leave is not necessarily perfectly shared among workers and workers on leave. In addition, by lengthening the leave period, another feasible parental leave policy that does not satisfy the incentive constraint improves social welfare, implying that the length of the leave under the optimal paid parental leave policy is ``short." A numerical example of the model justifies that both a short-leave-with-generous-leave-benefits policy and the long-leave-with-less-generous-leave-benefits policy observed across most OECD countries can be optimal.
    Keywords: Paid parental leave policy; lack of commitment; incentive constraint; optimal policy
    JEL: D61 E24 J38
    Date: 2021–08–03
  65. By: Aimola, Akingbade U; Odhiambo, Nicholas M
    Abstract: Inflationary tendencies of public debt have been the cause of an unsettling debate among policymakers in Nigeria. Using the autoregressive distributed lag (ARDL) framework, this study attempts to investigate the impact of total public debt on inflation in Nigeria for the period 1983?2018. The cointegrating regression results reveal evidence of a stable long-run relationship among inflation, total public debt, money supply, interest rate, economic growth, trade openness, and private investment in the presence of structural breaks. Empirical results show that the impact of public debt on inflation is statistically insignificant, irrespective of whether the regression was in the short or the long run. Hence, the study concludes that inflation in Nigeria could be driven by other factors other than public debt.
    Keywords: public debt; inflation; ARDL; Nigeria.
    Date: 2021–07
  66. By: Heng Chen; Walter Engert; Marie-Hélène Felt; Kim P. Huynh; Gradon Nicholls; Daneal O'Habib; Julia Zhu
    Abstract: We use consumer surveys conducted in April, July and November 2020 to study how the COVID-19 pandemic affected the demand for cash and the use of various methods of payment. Continuing from Chen et al. (2020, 2021), we use data from the Bank Note Distribution System (BNDS) to track how the amount of cash in circulation changed throughout 2020. The November 2020 survey included a three-day payment diary. We compare this diary with similar diaries from 2009, 2013 and 2017 to study long-term trends in cash use and payment methods.
    Keywords: Bank notes; Central bank research; Coronavirus disease (COVID-19); Digital currencies and fintech; Econometric and statistical methods
    JEL: C12 E4 O54
    Date: 2021–07
  67. By: Audra Bowlus; Lance Lochner; Chris Robinson; Eda Suleymanoglu
    Abstract: The canonical supply-demand model of the wage returns to skill has been extremely influential; however, it has faced several important challenges. Several studies show that the standard approach sometimes produces theoretically wrong-signed elasticities of substitution, yields counterintuitive paths for skill-biased technical change (SBTC), and does not account for the observed deviations in college premia for younger vs. older workers. This paper shows that these failings can be explained by mis-measurement of relative skill prices and supplies (based on standard demographic composition-adjustments) and by inadequate ad hoc functional form assumptions about the path for SBTC. Improved estimates of skill prices and supplies that account for variation in skill across cohorts within narrowly defined groups help explain the observed deviation in the college premium for younger vs. older workers, even with perfect substitutability across age. Re-estimating the model with these prices and supplies produces a good fit with better out-of-sample prediction and robustly yields positive elasticities of substitution between high and low skill workers. The estimates suggest greater substitutability across skill and a more modest role for SBTC. We implement two new approaches to modelling SBTC. First, we study the extent to which recessions induce jumps or trend-adjustments in skill bias and find evidence that both features are important (but differ across recessions). Second, we link SBTC to direct measures of information technology investment expenditures and show that these measures explain the evolution of skill bias quite well. Together, these approaches suggest that the ad hoc assumptions for SBTC previously employed in the literature are too crude to fit the data well, leading to the incorrect conclusion that SBTC slowed during the early-1990s and under-estimates of the elasticity of substitution between high and low skill workers.
    Keywords: skills, human capital, college, skill-biased technical change, wage premium
    JEL: E24 J24 J31 O33
    Date: 2021
  68. By: Guilherme de Oliveira; Gilberto Tadeu Lima
    Abstract: There is evidence that pollution concentration impacts negatively on labor productivity, which has implications for the Kaldor-Verdoorn law. While the growth rate of labor productivity varies positively with the growth rate of output, the growth rate of pollution concentration also varies positively with the latter. As a result, an increase in pollution concentration leading to environmental degradation might offset the productivity-enhancing effect of a rise in the scale of output production. This paper explores such a double-edged sword feature of output growth in a demand-led macrodynamic framework having pollution concentration as a further influence on the class conflict over the functional distribution of the social product. The stability of the environment-economy system in the long run hinges on how output growth varies with the functional distribution of income. When output growth is positively related to the wage share, the balanced growth path is unstable. When output growth varies positively with the profit share, stability is a possibility, but the system undergoes fluctuations in the wage share and the ratio of capital to pollution concentration when converging to the balanced growth path. Environmental preservation and functional distribution and growth of the social product interact to each other in a complex way.
    Keywords: Economic growth; pollution concentration; labor productivity; functional Distribution of the social product
    JEL: E11 O44 Q52
    Date: 2021–07–26
  69. By: Miguel Benítez
    Abstract: La ciudad de Cali atraviesa una profunda crisis económica y social. En 2020, la capital vallecaucana fue la tercera ciudad del país con un mayor incremento de la pobreza, un indicador que ya venía deteriorándose desde antes de la pandemia. Adicionalmente, la tasa de desempleo en Cali –históricamente más elevada que en el resto del país– aumentó dramáticamente como resultado del covid-19, al igual que la destrucción de puestos de trabajo, con caídas especialmente elevadas para los jóvenes y las mujeres. Esta situación ocurre con el agravante de que los programas sociales del Estado dejan desprotegido al 55% de la población pobre en Cali. Esta difícil coyuntura requiere diversas respuestas de política pública que permitan recomponer el tejido social caleño, reducir la pobreza y estimular la creación de empleo formal. En esa línea, este documento realiza un diagnóstico de la situación económica actual en Cali, y ofrece tres recomendaciones de política pública para hacerle frente a la crisis. Estas recomendaciones están relacionadas con (i) la creación de un programa de transferencias monetarias a nivel distrital focalizada en los hogares en pobreza extrema, (ii) un programa ambicioso de construcción y adecuación de centros educativos de primera infancia y (iii) la financiación distrital de una parte de los aportes a pensiones de empresas, asalariados y trabajadores independientes de Cali. En su conjunto, estas políticas podrían crear al menos 14 mil nuevos empleos, y sacar a 80 mil personas de la pobreza extrema.
    Keywords: Política Pública, Pobreza, Empleo, Cali
    JEL: I38 J48 I32 E24
    Date: 2021–07–07
  70. By: Guna Raj Bhatta; Rabindra Nepal; Charles Harvie; Kankesu Jayanthakumaran
    Abstract: This is the first study to apply the Kalman filter analysis based on state space modelling to test for the existence of the uncovered interest parity (UIP) condition and simulate the risk premium between the pegged currencies of Nepal and India. We find significant evidence that the UIP condition does not hold in Nepal. Simultaneously, a negative risk premium of about 12 per cent exists on average based on our model calibration using the monthly and the annual time-series data. The Kalman filter simulations further confirm our modelling assumptions that the ordinary least squares-based risk premium estimation is substantially biased in both sign and magnitude. The presence of a negative risk premium provides three key policy implications: a preference to hold foreign assets by residents, the expectation of a future currency devaluation, and obstacles to attracting foreign deposits.
    Keywords: uncovered interest parity, State Space Model, Kalman filter, risk premium
    JEL: E43 F33
    Date: 2021–07
  71. By: Nicola Amendola (Università di Roma Tor Vergata, Italy); Lorenzo Carbonari (Università di Roma Tor Vergata, Italy); Leo Ferraris (Università di Milano-Bicocca, Italy)
    Abstract: We examine a theoretical model of liquidity with three assets - money, government bonds and equity- that are used for transaction purposes. Money and bonds complement each other in the payment system. The liquidity of equity is derived as an equilibrium outcome. Liquidity cycles arise from the loss of confidence of the traders in the liquidity of the system. Both open market operations and credit easing play a beneficial role for different purposes.
    Keywords: Money, Bonds, Equity, Liquidity, Credit Easing
    JEL: E40
    Date: 2021–07
  72. By: Grömling, Michael
    Abstract: Die wirtschaftlichen Perspektiven haben sich in Deutschland in den letzten Monaten erheblich verbessert. Die dritte Infektionswelle vom Frühjahr 2021 konnte erfolgreich zurückgedrängt werden und die Impfung der Bevölkerung macht große Fortschritte. Die Ergebnisse der IW-Konjunkturumfrage vom Sommer 2021 untermauern - trotz der bestehenden Produktionseinschränkungen infolge stockender Zulieferungen aus dem Inland und dem Ausland und der ver-bleibenden Pandemierisiken infolge weiterer potenzieller Infektionswellen durch Virusmutationen - die bereits im zweiten Quartal 2021 eingesetzten Auftriebskräfte. Die Unternehmen gehen mit hoher Zuversicht in die zweite Jahreshälfte 2021. Die Hälfte der gut 2.000 vom Institut der deutschen Wirtschaft befragten Unternehmen erwartet für 2021 eine höhere Produktionstätigkeit als im Krisenjahr 2020, nur noch 15 Prozent sehen einer schwächeren Geschäftstätigkeit entgegen. Die Erholung wird von allen Wirtschaftsbereichen getragen. Relativ hoher Optimismus herrscht in der Industrie: Fast 60 Prozent dieser Firmen erwarten eine höhere Produktion als im Vorjahr. Im Dienstleistungssektor ist es die Hälfte. In beiden Bereichen gehen lediglich 13 Prozent von einer geringeren Produktion als im Krisenjahr 2020 aus. Bei den Investitionen und bei der Beschäftigung sehen jeweils über zwei Fünftel der Betriebe für das gesamte Jahr 2021 einen Zuwachs gegenüber 2020. Mit diesen zuversichtlichen Investitions- und Beschäftigungsperspektiven gewinnt die Erholung an Substanz.
    JEL: C81 E32 I15
    Date: 2021
  73. By: Ceyhun Elgin; Abdullah Yalaman; Sezer Yasar
    Abstract: In this paper, we investigate the relationship between the level of democracy and fiscal-policy response to the economic crisis induced by the COVID-19 pandemic. We use a novel cross-country dataset of fiscal-policy responses with time variation. Our results suggest that more democratic countries adopted substantially larger fiscal-policy packages (in % GDP) and the gap regarding the size of packages between more democratic and less democratic countries widened over time. Moreover, our regressions with different measures of democracy as well as instrumental variable estimations support a robust and causal relationship between a higher level of democracy and a larger fiscal-package size.
    Keywords: COVID-19, Democracy, Fiscal Policy, Pandemic
    JEL: D72 H12 H30 H59
    Date: 2021–07
  74. By: Jorge C. Ávila
    Abstract: Entre 1986 y 2003 la prima de riesgo argentino era capaz de explicar, prácticamente sola, el ciclo económico argentino. Con el paso del tiempo, la prima fue perdiendo su poder explicativo hasta perderlo por completo entre 2011 y 2019. En el ínterin, un fuerte aumento del gasto público habría provocado un cambio de régimen. Investigamos la pérdida de poder explicativo de la prima y el surgimiento de los términos de intercambio y el gasto público como nuevas variables explicativas del ciclo. E intentamos responder dos preguntas: ¿por qué perdió la prima su poder explicativo? y ¿por qué se estancó la economía argentina entre 2011 y 2019? / Between 1986 and 2003 the Argentine risk premium was able to explain, almost alone, the Argentine business cycle. As time went by, the premium lost gradually its explanatory power till losing it all between 2011 and 2019. Meanwhile, a huge increase in public expenditure might have triggered a regime change. We investigate the loss of explanatory power of the Argentine premium and the emergence of the terms of trade and public expenditure as additional explanatory variables of the business cycle. And we attempt to answer two questions: why did the premium lose its power? and why did the Argentine economy stagnate between 2011 and 2019?
    JEL: E32
    Date: 2021–07
  75. By: Erol Taymaz (Department of Economics, METU); Ebru Voyvoda (Department of Economics, METU); Kamil Yilmaz (Department of Economics, Koç University)
    Abstract: We analyze the behavior of plant-level real wages and productivity in Turkish manufacturing after the transition to democracy in 1987 and test whether wages under democracy causes productivity. The Turkish experience provides almost an experimental case: real wages in manufacturing increased by 120% in the 1987-93 period due to (exogenous) political changes, together with unprecedented total factor productivity and labor productivity growth. While these observations provide support for the “democracies pay higher wages” hypothesis, they also stimulate further evaluation of the consequences of such politically-motivated ‘exogenous’ wage hikes on economic performance. Our analysis shows that real wage hikes during the democratic transition forced firms to increase productivity to stay competitive. The findings also help explain why countries that undergo an orderly transition from autocracy to democracy may achieve rapid productivity gains.
    Keywords: Democratic transition, Real wages, Total factor productivity, Labor productivity, Labor unions, Efficiency wages, Long-run growth.
    JEL: D24 E24 J24 P16
    Date: 2021–07
  76. By: FURUKAWA Yuichi; NIWA Sumiko
    Abstract: This study considers the relationship between deflation and declining business dynamism. We do this by incorporating the empirical evidence that inflationary factors essentially affect all stages of an R&D firm's life cycle―entry, exit, and survival―into an R&D-based growth model. Our model has a new feature; namely, the entry, exit, and survival of R&D firms are all endogenous and subject to a cash-in-advance constraint. The core finding is that deflation can significantly affect the nature of business dynamism. Specifically, a decrease in the inflation rate potentially encourages or discourages innovation and survival investments; however, it necessarily discourages both if the entry cost is sufficiently high. In this case, deflation stifles business dynamism, leading to lower entry and exit rates and a maturity bias in the firm age distribution. Calibrating the model to the U.S. economy, we show that deflation causes declining business dynamism under realistic values of entry, exit, and growth rates. Then, we show that deflation also causes welfare loss if the natural rate of firm exit is higher.
    Date: 2021–07
  77. By: Heine, Michael; Herr, Hansjörg
    Abstract: Zusammen mit der Gründung des Deutschen Reiches im Jahr 1871 wurde eine neue Geldverfassung mit der Mark als nationaler Währung geschaffen zusammen mit der Gründung der Deutschen Reichsbank im Jahre 1876. England folgend wurde der Goldstandard etabliert mit dem Recht Banknoten in Gold zu tauschen und umgekehrt. Die Deckung der Banknoten wurde durch ein kompliziertes System geregelt. Im Vergleich zur Bank of England konnte die Reichsbank ihre Funktion als Lender of Last Resort flexibler wahrnehmen. Das Hauptziel der Geldpolitik der Reichsbank, das dann auch bis zum Beginn des Ersten Weltkrieges 1914 erfüllt wurde, war die Einlösung ihrer Banknoten in Gold und damit implizit die Verteidigung der fixen Wechselkurse im Goldstandard. Andere Ziele, etwa Preisniveaustabilität oder Wachstum des Sozialproduktes, waren von zweitrangiger Bedeutung. Über die Jahre wurde die Reichsbank immer mächtiger, bekam neue Instrumente und entwickelte sich zu einer modernen Zentralbank. Jedoch blieb Gold immer eine Fessel für ein für eine kapitalistische Ökonomie funktionales Geldsystem.
    Keywords: Deutsche Reichsbank,Goldstandard,Geldpolitik
    JEL: N13 E58 F02
    Date: 2021
  78. By: Subramaniam, Viswanatha
    Abstract: A Country is a predefined territory, where people live along with the nature and other living species. A Nation is with registered and identified group of people as the citizens. Each living group in a nation is identified as a Household. Poverty is the inability to buy the Basic Needs by a Household. Saving is the local money value of the Arithmetic difference between the monthly earnings of a household (Husband+Wife+Children), AND the Cost of monthly Basic Needs for them. Basic needs are the Cost of Food, Shelter and Clothing for each Household. if the Cost of monthly Basic needs are lower, then there is a saving. It is the joint and coordinated responsibility of the administrative heads of the Rural, Urban, Thaluk, District, State and the Central Government in every nation to ensure that every Household has a reasonable savings per month. A nation where the households, lead a satisfied life and make a reasonable saving in every month, is a Developed nation. A nation where the lead an unsatisfied life and do not make a reasonable saving in every month is a Developing nation. A nation where the Basic needs are not available to meet the monthly requirements of the households OR the costs of Basic Needs are very high, is an under developed nation. Population is an asset as a productive work force. It is a liability, if lethargic and nonproductive. National administration should be divided from top to bottom with a full employment approach, through integrated Training and Development infrastructure. A Household is a Father, Mother and 2 children. Each administrative head should identify every Household, and provide a “Living card”. This card should have the estimated monthly income, value of reasonable basic needs (Vegetarian food+4 sets of clothing and applicable rent value per year divided into month) for each Household. Households with monthly income less than the total monthly value of basic needs should be marked as “P” for poor. Each administrative head should attempt to reduce and eradicate the Poor category. This is a direct bottom level approach to eradicate poverty. Induction of savings through Cost reduction of Basic needs is a planned management approach. Effective management of Man Power, Materials and Techno-Commercial Infrastructure is a Macro level approach. All these lead to savings at Household level. And it is a source for Domestic investment to direct the nation towards accelerated Development.
    Keywords: children, clothing, closed cycle, country, developing, development, domestic savings, employment, food, geometric model, household, living indices, nation, national administration, population, poverty, shelter, training, under developed
    JEL: E21 H31 I21 I24 I25 I38 M53 M54 O35 O43 R11 R13 R21 R28
    Date: 2021–07–24
  79. By: Costola, Michele; Lorusso, Marco
    Abstract: We examine the connectedness in the energy commodities sector and the Russian stock market over the period 2005-2020 using the variance decomposition approach. Our analysis identifies the booms and busts in the correspondence of political and war episodes that are related to spillover effects in the Russian economy, as well as the energy commodities markets. Our findings show that the Russian Oil & Gas and Metals & Mining sectors are net shock contributors of crude oil and have the highest spillovers to other Russian sectors. Furthermore, we disentangle the sources of spillovers that originated from the financial and energy commodity markets and find that a positive change in the energy commodity volatility spillover is associated with an increase in Russian geopolitical uncertainty. Finally, we show that the spread of COVID-19 increases the stock market volatility spillover, whereas it lowers the energy commodity volatility spillover.
    Keywords: Spillover Effects, Russian Stock Market, Russian Sectoral Indices, Commodity Markets, International Financial Markets
    JEL: C3 C58 E44 G1
    Date: 2021–07–31
  80. By: Kevin Lee; Michael Mahony; Paul Mizen
    Abstract: Novel methods are used to produce quantitative measures of output expectations and output uncertainties in the UK based on the information provided by the CBI business surveys since 2000. These are employed alongside actual output data in an analysis of the source of innovations and propagation mechanisms underlying output dynamics. The coverage of the surveys (conducted separately for the manufacturing, distributive trade and service sectors) and the sample length (covering the periods before and after the Financial Crisis and through the Brexit period) means the analysis provides a compelling characterisation of UK business cycle experiences over the last twenty years.
    Keywords: business cycles; survey data; expectations; uncertainty
    Date: 2020
  81. By: Tara M. Sinclair; Zhoudan Xie
    Abstract: Regulatory policy can create economic and social benefits, but poorly designed or excessive regulation may generate substantial adverse effects on the economy. In this paper, we present measures of sentiment and uncertainty about regulation in the U.S. over time and examine their relationships with macroeconomic performance. We construct the measures using lexicon-based sentiment analysis of an original news corpus, which covers 493,418 news articles related to regulation from seven leading U.S. newspapers. As a result, we build monthly indexes of sentiment and uncertainty about regulation and categorical indexes for 14 regulatory policy areas from January 1985 to August 2020. Impulse response functions indicate that a negative shock to sentiment about regulation is associated with large, persistent drops in future output and employment, while increased regulatory uncertainty overall reduces output and employment temporarily. These results suggest that sentiment about regulation plays a more important economic role than uncertainty about regulation. Furthermore, economic outcomes are particularly sensitive to sentiment around transportation regulation and to uncertainty around labor regulation.
    Keywords: Regulation, text analysis, NLP, sentiment analysis, uncertainty
    Date: 2021–07
  82. By: Buesa, Alejandro; De Quinto, Alicia; Población García, Francisco Javier
    Abstract: This paper describes a novel methodology of measuring risky and conservative mortgage credit using household survey data for 18 European Union countries and the United Kingdom. In addition, we construct time series for both types of credit and embed them into a global vector autoregressive (GVAR) model, so as to study how shocks to both variables affect domestic output and propagate across countries through cross-border banking exposures. The results show that a decrease in risky credit can have long-lasting positive effects on GDP, both in the originating country and its most exposed peers, while a fall in conservative credit is detrimental. In some geographies, negative shocks to both types of credit reduce output, a feature linked to the lower relevance of homeownership which implies that mortgage credit plays a less prominent role in the domestic economy. JEL Classification: C32, F47, G21, G51
    Keywords: borrower-based measures, cross-border spillovers, LTV limits, Mortgage rating
    Date: 2021–08
  83. By: Yose Rizal Damuri (Centre for Strategic and International Studies (CSIS), Indonesia); Prabaning Tyas (Tenggara Strategics, Indonesia); Haryo Aswicahyono (Centre for Strategic and International Studies (CSIS), Indonesia); Lionel Priyadi (Tenggara Strategics, Indonesia); Stella Kusumawardhani (Tenggara Strategics, Indonesia); Ega Kurnia Yazid (Centre for Strategic and International Studies (CSIS), Indonesia)
    Abstract: A timely and reliable prediction of economic activities is crucial in policymaking, especially in the current COVID-19 pandemic situation, which requires real-time decisions. However, making frequent predictions is challenging due to the substantial delays in releasing aggregate economic data. This study aims to nowcast Indonesia’s economic activities during the COVID-19 pandemic using the novel high-frequency Facebook Mobility Index as a predictor. Employing mixed-frequency, mixed-data sampling, and benchmark least-squares models, we expanded the mobility index and used it to track the growth dynamics of the gross regional domestic product of provinces in Java and Bali and performed a bottom-up approach to estimate the aggregated economic growth of the provinces altogether. Our results suggested that the daily Facebook Mobility Index was a considerably reliable predictor for projecting economic activities on time. All models almost consistently produced reliable directional predictions. Notably, we found the mixed data sampling-autoregressive model to be slightly superior to the other models in terms of overall precision and directional predictive accuracy across observations.
    Keywords: COVID-19, nowcasting, GDP, mobility, Mixed-frequency
    JEL: C20 C53 R11
    Date: 2021–07–05
  84. By: Gomez, M
    Abstract: This paper analyses the incidence of job polarization in developing and emerging countries, where a substantial fraction of the urban labor force works in the informal sector. I build a general equilibrium model with informality and endogenous occupational choice. Workers in the informal sector do not pay taxes, are less productive, and have the same ability to perform manual tasks. The analytical solution of the model shows that job polarization, driven by a Routine-Biased Technological Change (RBTC), could lead to a decrease in the share of employment in the informal sector and a reduction in the wage inequality at the bottom of the skill distribution.
    Keywords: Informality; Job polarization; Technological change; Wage distribution
    JEL: E26 J24 J31 J46
    Date: 2021–05–28
  85. By: Emanuele Urbinati (Bank of Italy); Alessia Belsito (Bank of Italy); Daniele Cani (Bank of Italy); Angela Caporrini (Bank of Italy); Marco Capotosto (Bank of Italy); Simone Folino (Bank of Italy); Giuseppe Galano (Bank of Italy); Giancarlo Goretti (Bank of Italy); Gabriele Marcelli (Bank of Italy); Pietro Tiberi (Bank of Italy); Alessia Vita (Bank of Italy)
    Abstract: In the last decade, the advent of new technologies has dramatically changed the banking and financial ecosystem. Financial operators have transformed their services in the context of the Fintech phenomenon; households’ payment habits are rapidly changing as well, embracing the revolution brought by the digital innovations. In this context, a number of central banks are devoting significant resources to examining the feasibility of introducing a digital currency as a complement to physical money. After an introduction that illustrates the main characteristics defining a Central Bank Digital Currency (CBDC), the paper presents ongoing CBDC-related work around the globe, discusses how a digital currency could support a central bank in performing its functions, and analyses its key features. The paper then illustrates a possible digital euro solution based on the integration of an account-based platform with a DLT-based one. The integration of these two components would make it possible to reap the benefits of two complementary solutions, reciprocally balancing their advantages and disadvantages, as regards, for instance, privacy. Finally, the paper presents the findings of experiments on the digital euro carried out by experts of the euro-area National Central Banks and the ECB; according to the results of those experiments, the integration of an account-based platform with a DLT-based one may provide a sound basis on which to build a fully-fledged solution, capable of meeting both regulatory and retail users’ needs.
    Keywords: digital euro, payment systems, financial market infrastructure, blockchain
    JEL: E42
    Date: 2021–07
  86. By: Adrien Matray (Princeton University); Charles Boissel (HEC-Paris)
    Abstract: This paper investigates how the 2013 three-fold increase in the dividend tax rate in France affected firms’ investment and performance. Using administrative data covering the universe of firms over 2008–2017 and a quasi-experimental setting, we find that firms swiftly cut dividend payments. Firms use this tax-induced increase in liquidity to invest more, particularly when facing high demand and return on capital. For every euro of undistributed dividends, firms increase their investment by 0.3 euro, leading to higher sales growth. Heterogeneity analyses show that no group of firms cut their investment, thereby rejecting models in which higher dividend taxes increase the cost of capital. Overall, our results show that the tax-induced increase in liquidity relaxes credit constraints and can reduce capital misallocation.
    Keywords: France; Financing Policy; Business Taxes; Capital and Ownership Structure
    JEL: G11 G32 H25 O16
    Date: 2020–09
  87. By: Budnik, Katarzyna; Dimitrov, Ivan; Giglio, Carla; Groß, Johannes; Lampe, Max; Sarychev, Andrei; Tarbé, Matthieu; Vagliano, Gianluca; Volk, Matjaz
    Abstract: This paper assesses the macroeconomic implications of the Basel III finalisation for the euro area, employing a large-scale semi-structural model encompassing over 90 banks and 19-euro area economies. The new regulatory framework will influence banks’ reactions to economic conditions and, as a result, affect the ability of the banking system to amplify or dampen economic shocks. The assessment covers the entire distribution of conditional economic predictions to measure the cost and benefit of the reforms. Looking at the means of conditional forecasts of output growth provides an indication of the costs of the reform, namely a transitory reduction in euro area gross domestic product (GDP) and in lending to the non-financial private sector. Looking at the lower percentile of output growth forecasts, i.e. growth at risk, captures the long-term benefits of the Basel III finalisation package in terms of improved resilience and the ability of the banking system to supply lending to the real economy under adverse conditions. These permanent growth-at-risk benefits ultimately outweigh the short-term costs of the reform. JEL Classification: E37, E58, G21, G28
    Keywords: banking sector, Basel III finalisation, impact assessment, real-financial feedback mechanism, regulatory policy
    Date: 2021–07
  88. By: Lorenzo Esposito (Dipartimento di Politica Economica, DISCE, Università Cattolica del Sacro Cuore – Banca d'Italia, Milano); Lorenzo Marrese (DISCE, Università Cattolica del Sacro Cuore)
    Abstract: Results of behavioral economics pose a strong challenge to mainstream finance theory conclusions. We discuss, theoretically and empirically, the connections of cognitive skills, biases and financial decisions using the Cognitive Reflection Test (Frederick, 2005). In particular, we have chosen overconfidence, risk aversion, bandwagon effect, time preference and money illusion, among the biases most discussed in the literature. The experiment we conducted confirmed a role of the cognitive skills in determining the decision mechanism of the investor although not neatly, especially for more complex biases, such as money illusion. Finally, we expose policy alternatives, focusing on the role of financial education to tackle cognitive biases in finance and monetary policy.
    Keywords: cognitive biases, financial education, behavioral economics, CRT
    JEL: G41
    Date: 2021–07
  89. By: Guido Ascari; Qazi Haque; Leandro M. Magnusson; Sophocles Mavroeidis
    Abstract: The Euler equation model for investment with adjustment costs and variable capital utilization is estimated using aggregate US post-war data with econometric methods that are robust to weak instruments and exploit information in possible structural changes. Various alternative identification assumptions are considered, including external instruments, and instruments obtained from Dynamic Stochastic General Equilibrium models. Results show that the elasticity of capital utilization and investment adjustment cost parameters are very weakly identified. This is because investment appears to be unresponsive to changes in capital utilization and the real interest rate.
    Date: 2021–07
  90. By: Gert Bijnens (Economics and Research Department, NBB); Emmanuel Dhyne (Economics and Research Department, NBB)
    Abstract: Whilst overall productivity growth is stalling, firms at the frontier are still able to capture the benefits of the newest technologies and business practices. This paper uses linked employer-employee data covering all Belgian firms over a period of almost 20 years and investigates the differences in human capital between highly productive firms and less productive firms. We find a clear positive correlation between the share of high-skilled and STEM workers in a firm's workforce and its productivity. We obtain elasticities of 0.20 to 0.70 for a firm's productivity as a function of the share of high-skilled workers. For STEM (science, technology, engineering, mathematics) workers, of all skill levels, we find elasticities of 0.20 to 0.45. More importantly, the elasticity of STEM workers is increasing over time, whereas the elasticity of high-skilled workers is decreasing. This is possibly linked with the increasing number of tertiary education graduates and at the same time increased difficulties in filling STEM-related vacancies. Specifically, for high-skilled STEM workers in the manufacturing sector, the productivity gain can be as much as 4 times higher than the gain from hiring additional high-skilled non-STEM workers. To ensure that government efforts to increase the adoption of the latest technologies and business practices within firms lead to sustainable productivity gains, such actions should be accompanied by measures to increase the supply and mobility of human (STEM) capital. Without a proper supply of skills, firms will not be able to reap the full benefits of the digital revolution.
    Keywords: : human capital, skills, education, productivity, linked employer-employee data
    JEL: E24 I26 J24
    Date: 2021–07
  91. By: Reyes, Celia M.; Abrigo, Michael R.M.; Quimba, Francis Mark A.; Baje, Lora Kryz C.; Tam, Zhandra C.; Calizo, Sylwyn C. Jr.; Bayudan-Dacuycuy, Connie; Borromeo, Nicoli Arthur B.; Hernandez, Gabriel Iñigo M.; Bautista, Dennis M.; Ocampo, Jan Christopher G.
    Abstract: Given new programs and policies in the Philippines, there is a need to formulate a macroeconometric model (MEM) to gain more insights on how the economy and its sectors are affected. This paper discusses the estimation of an annual MEM that will be used for policy analysis and forecasting with respect to the opportunities and challenges brought about by new developments. The formulation of an annual MEM is useful in assisting major macroeconomic stakeholder, such as the National Economic and Development Authority and the Bangko Sentral ng Pilipinas (BSP) in their conduct of policy simulations, macroeconomic surveillance, and economic analysis. Given this backdrop, PIDS and BSP have collaborated to estimate an annual MEM, which has four blocks, namely, the real sector, fiscal sector, trade sector, and monetary sector. Using an Autoregressive Distributed Lag model approach, these sectors are modeled separately although the linkages with each other are specified. These sectoral models are then put together and tests on the predictive accuracy of the forecast of the overall model are conducted. Some ways to further improve the annual MEM are provided.
    Keywords: policy analysis, macroeconometric model, Autoregressive Distributed Lag Model, National Income Accounting
    Date: 2020
  92. By: Henri Njangang (University of Dschang, Cameroon); Simplice A. Asongu (Yaoundé, Cameroon); Sosson Tadadjeu (University of Dschang , Cameroon); Yann Nounamo (University of Douala, Douala, Cameroon); Brice Kamguia (University of Dschang, Cameroon)
    Abstract: The study assesses the role of governance in modulating the effect of oil wealth on wealth inequality in 45 countries in the world. The empirical evidence is based on Pooled Ordinary Least Squares and the Generalised Method of Moments. The findings show that oil rents unconditionally increase wealth inequality while govenance dyanmics (in terms of rule of law, corruption-control, government effectiveness, regulatory quality) moderate oil rents for an overall net negative effect on wealth inequality. Good governance thresholds at which the unconditional effect of oil rents on the wealth inequality changes from positive to negative are computed and discussed. It follows that while governance is a necessary condition for improving the redistributive effects of oil wealth, it becomes a sufficient condition for net positive improvements in wealth distribution only when some critical levels of good governance have been reached. Other policy implications are discussed.
    Keywords: Governance; Oil wealth; Wealth inequality, Panel data
    JEL: F21 F54 L71
    Date: 2021–01
  93. By: Yongsung Chang; Jong-Suk Han; Sun-Bin Kim
    Abstract: We compare two redistribution programs - negative income tax (NIT) and universal basic income (UBI) - through the lens of Aiyagari (1994), a standard heterogeneous agent general equilibrium model. Mankiw (2020) proposes an example where an NIT and a UBI appear identical. We show that while Mankiw's example provides identical economic incentives to individual workers, the size of the government vastly differs. According to our quantitative analysis designed to replicate Mankiw's example, the UBI requires a program budget that is 15% of GDP, whereas the NIT requires 3.8% of GDP. Nevertheless, neither redistribution program significantly improves social welfare in the long run because of the reduction in capital and labor - via (i) tax distortion and (ii) a weak motive for precautionary saving and working.
    Keywords: Redistribution; Negative Income Tax; Universal Basic Income; Government Budget;
    Date: 2021–07
  94. By: Tamele, Barbora; Zamora-Pérez, Alejandro; Litardi, Chiara; Howes, John; Steinmann, Eike; Todt, Daniel
    Abstract: In the light of fears that the SARS-CoV-2 virus might be transmitted via cash – fears that were stoked by statements in the media and from public authorities – this paper aims to address the following issues: (1) to provide a descriptive account of the change in the circulation of euro banknotes and the use of cash in transactions during the pandemic; and (2) to assess the survivability of the virus on cash and the potential transmission risks. The pandemic has caused a significant increase in demand for cash as a store of value but a decrease in the use of cash in transactions. Although citizens reported using cash less in transactions partly out of fear of infection, research confirms that the risk of the virus being transmitted by banknotes and coins is very low. This supports the findings from the scientific community concluding that SARS-CoV-2 mainly spreads via respiratory fluids and airborne transmission, and that surfaces play a very minor role. JEL Classification: I10, I12, E41, E58
    Keywords: banknotes, cash demand, cash use, coins, COVID-19 pandemic, safety, SARS-CoV-2 virus, survivability, transferability
    Date: 2021–07
  95. By: Jens H. E. Christensen; Jose A. Lopez; Paul Mussche
    Abstract: Portfolio diversification is as important to debt management as it is to asset management. In this paper, we focus on diversification of sovereign debt issuance by examining the extension of the maximum maturity of issued debt. In particular, we examine the potential costs to the U.S. Treasury of introducing 50-year bonds as a financing option. Based on evidence from foreign government bond markets with such long-term debt, our results suggest that a 50-year Treasury bond would likely trade at an average yield that is at most 20 basis points above that of a 30-year bond. Our results based on extrapolations from a dynamic yield curve model using just U.S. Treasury yields are similar.
    Keywords: term structure modeling; yield extrapolation; debt management
    JEL: E43 E47 G12 G13
    Date: 2021–07–22
  96. By: Felix Brunner; Ruben Hipp
    Abstract: We estimate sectoral spillovers around the Great Moderation with the help of forecast error variance decomposition tables. Obtaining such tables in high dimensions is challenging since they are functions of the estimated vector autoregressive coefficients and the residual covariance matrix. In a simulation study, we compare various regularization methods for both and conduct a comprehensive analysis of their performance. We show that standard estimators of large connectedness tables lead to biased results and high estimation uncertainty, which can both be mitigated by regularization. To explore possible causes for the Great Moderation, we apply a cross-validated estimator on sectoral spillovers of industrial production in the US from 1972 to 2007. We find that a handful of sectors considerably decreased their outgoing links, which hints at a complimentary explanation for the Great Moderation.
    Keywords: Business fluctuations and cycles; Econometric and statistical methods
    JEL: C52 E27
    Date: 2021–08
  97. By: Giroldo, Renato; Hollenbeck, Brett
    Abstract: In this note, we investigate the causal link between market concentration and markups in a retail setting. We study the Washington retail cannabis industry, which features exogenous variation in market concentration that resulted from retail licenses being awarded via lotteries. We observe markups directly. We find a negative causal relationship between markups and concentration, where more concentrated markets have significantly lower markups and wholesale prices. The results provide direct evidence of countervailing buyer power by retailers. These results highlight the value of using industry specific data and rich models of competition to advance the debate on concentration and markups.
    Keywords: markups, market concentration, retail, countervailing buyer power, cannabis policy
    JEL: E20 L13 L16 L22 L41 L81 M31 R12 R32
    Date: 2021–07–31
  98. By: Johannes W. Fedderke
    Abstract: Identifying Steady-State Growth and Inflation in the South African Economy, 1960-2020
    Date: 2021–07–29
  99. By: Teles Huo; Miguel St. Aubyn
    Abstract: This article is about the construction of time series on the stock of public and private capital and Public Private Partnerships (PPPs) in Mozambique, from 1960 to 2017, in local currency (meticais), at constant 2009 prices. The construction of these series was based on the IMF methodology, using data on investment and on the depreciation of the capital stock, based on a geometric depreciation model. For investment, data from the National Institute of Statistics (INE) gross fixed capital formation (GFCF), from 1991 to 2017, were considered. For the periods previous to 1991, INE investment data were extended regressively, from 1990 to 1960, considering the proportions of investment in real GDP, by sectors: public, private and PPPs. For this purpose, the proportions of total investment implicit in the IMF data from 1960 to 2013 were used. These proportions were applied to INE GDP data) to obtain the investment data in metical’s at 2009 constant prices, from 1960 to 1990. The result of the capital stock series shows an increasing trend of the total capital stock from 1960 to 2017. From the beginning of the 90's until roughly 2014, the public capital stock exceeded the stock of private capital. The share of the public capital stock in the total capital stock is, in general, greater than the share of the private capital stock. These data shows that despite Mozambique embarked on capitalism, the private sector development remained weak, with a low investment capacity in fixed capital to increase its capital stock.
    Keywords: capital stock, public capital stock, private capital stock, public private partnership capital stock, investments, GDP, capital stock depreciation
    Date: 2021–07
  100. By: Arezki, Rabah (African Development Bank & Harvard’s Kennedy School of Government); Simeon Djankov, Simeon (London School of Economics & Peterson Institute for International Economics); Nguyen, Ha (Middle East and North Africa at the World Bank); Yotzov, Ivan (University of Warwick)
    Abstract: Using a new dataset of 198 national elections across 48 democracies, this paper is the first to systematically examine the effects of oil price shocks on incumbents’ political fortunes in developed oil-importing countries. We find that oil price increases systematically lower the odds of reelection for incumbents and increase the likelihood of changes in the ideology of the incoming government. These shocks are found to operate through lowering consumption growth
    Keywords: Elections ; Incumbent ; Oil Prices ; Economic Shocks JEL Classification: D72 ; E21 ; P16 ; Q43
    Date: 2021
  101. By: Coy, F; Pacheco, J; Peralta, M; Saavedra, S; Llanes, Y
    Abstract: Más del 60% de los trabajadores en el mundo se encuentra en el sector informal. En el caso de la minería, la informalidad no sólo representa ausencia de prestaciones sociales y pago de impuestos. También existen externalidades ambientales, conflictos sociales y riesgos laborales. En este documento presentamos estadísticas descriptivas de una encuesta realizada a mineros en Colombia. Encontramos que las minas formales reciben en promedio un precio de venta 30% más alto que las informales. Con este diferencial estimamos que los costos de formalización se recuperan en 2 a 4 años aproximadamente . De hecho, el 80% de los mineros consideran rentable formalizarse, pero solo la mitad lo ha intentado. A pesar de los beneficios económicos, los mineros mencionan barreras administrativas por parte del gobierno que impiden la formalización.
    Keywords: Minería; Informalidad; Colombia
    JEL: E26 L72 O17
    Date: 2021–06–30
  102. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: According to retrospective voting, a bad economy hurts the incumbent party and vice versa. According to risk-aversion voting as discussed in Pástor and Veronesi (2020), high risk aversion favors the Democrats over the Republicans and vice versa. If high risk aversion is associated with a bad economy, then risk-aversion voting implies that a bad economy favors the Democrats and vice versa. The two theories thus have different implications for the Democrats. This paper tests both theories under the assumption that high risk aversion is associated with a bad economy. The results provide no support for risk-aversion voting under this assumption.
    Keywords: Retrospective voting, Risk-aversion voting
    JEL: E00
    Date: 2021–03
  103. By: van Buggenum, Hugo (Tilburg University, Center For Economic Research)
    Keywords: inside and outside money; Risk; policy; Investment; new monetarism
    Date: 2021

This nep-mac issue is ©2021 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.