nep-mac New Economics Papers
on Macroeconomics
Issue of 2021‒11‒29
100 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Value without Employment By Simcha Barkai; Stavros Panageas
  2. The Term Structure of Expectations By Richard K. Crump; Stefano Eusepi; Emanuel Moench; Bruce Preston
  3. Limited Asset Market Participation and Monetary Policy in a Small Open Economy By Paul Levine; Stephen McKnight; Alexander Mihailov; Jonathan Swarbrick
  4. Interactions between Monetary and Fiscal Policy: Yesterday, Today, and Tomorrow By Alan S. Blinder
  5. Parameter Uncertainty and Effective Lower Bound Risk By Naoto Soma
  6. FinTech as a Financial Liberator By Greg Buchak; Jiayin Hu; Shang-Jin Wei
  7. Determinacy and E-stability with interest rate rules at the zero lower bound By Eo, Yunjong; McClung, Nigel
  8. Monetary Policy Uncertainty and Economic Fluctuations at the Zero Lower Bound By Rachel Doehr; Enrique Martinez-Garcia
  9. Central Banking in the Time of Covid By Alan S. Blinder
  10. The one trillion euro digital currency: How to issue a digital euro without threatening monetary policy transmission and financial stability? By Paolo Fegatelli
  11. Medium- vs. short-term consumer inflation expectations: evidence from a new euro area survey By Ewa Stanisławska; Maritta Paloviita
  12. The Heterogeneous Impact of Referrals on Labor Market Outcomes By Benjamin Lester; David A. Rivers; Giorgio Topa
  13. Global models for a global pandemic: the impact of COVID-19 on small euro area economies By Pablo Garcia; Pascal Jacquinot; Crt Lenarcic; Matija Lozej; Kostas Mavromatis
  14. Inflation Narratives By Peter Andre; Ingar Haaland; Christopher Roth; Johannes Wohlfart
  15. Macroprudential Policies and The Covid-19 Pandemic: Risks and Challenges For Emerging Markets By Sebastian Edwards
  16. Relative prices and pure inflation since the mid-1990s By Hie Joo Ahn; Matteo Luciani
  17. Aggregate dynamics and microeconomic heterogeneity: the role of vintage technology. By Giuseppe Fiori; Filippo Scoccianti
  18. Okay Boomer... Excess Money Growth, Inflation, and Population Aging By Joseph Kopecky
  19. Aging, migration and monetary policy in Poland By Marcin Bielecki; Michał Brzoza-Brzezina; Marcin Kolasa
  20. Desired hours worked over the business cycle: stylised facts for European countries By Dora Tuda
  21. Should Central Banks Issue Digital Currency? By Todd Keister; Daniel R. Sanches
  22. The Geography of Job Creation and Job Destruction By Kuhn, Moritz; Manovskii, Iourii; Qiu, Xincheng
  23. The internationalization of domestic banks and the credit channel of monetary policy By Paola Morales; Daniel Osorio-Rodríguez; Juan S. Lemus-Esquivel; Miguel Sarmiento
  24. Disagreement inside the FOMC: New Insights from Tone Analysis By Davide Romelli; Hamza Bennani
  25. A Simple Macrofiscal Model for Policy Analysis: An Application to Morocco By Daniel Baksa; Mr. Ales Bulir; Mr. Roberto Cardarelli
  26. Distributional Effects of Monetary Policy By Ms. Deniz O Igan; Davide Furceri; Mrs. Nina T Budina; Mr. Machiko Narita; Mr. Balazs Csonto; Mr. Luis Brandao-Marques; Philipp Engler; Rui Mano; Gurnain Kaur Pasricha; Chiara Fratto; Valentina Bonifacio; Murad Omoev; Ms. Helene Poirson
  27. Leverage Cycles, Growth Shocks, and Sudden Stops in Capital Inflows By Lorenz Emter
  28. Wealth Effects, Price Markups, and the Neo-Fisherian Hypothesis By Marco Airaudo; Ina Hajdini
  29. The Effects of Forward Guidance: Theory with Measured Expectations By Mirko Wiederholt; Christopher Roth; Johannes Wohlfart
  30. The Murder-Suicide of the Rentier: Population Aging and the Risk Premium By Joseph Kopecky; Alan M. Taylor
  31. Tackling Large Outliers in Macroeconomic Data with Vector Artificial Neural Network Autoregression By Vito Polito; Yunyi Zhang
  32. Evaluation of mixed frequency approaches for tracking near-term economic developments in North Macedonia By Gani Ramadani; Magdalena Petrovska; Vesna Bucevska
  33. Markups as a Hedge for Input Price Uncertainty: Evidence from Sweden By Agrawal, Sneha; Gaurav, Abhishek; Suveg, Melinda
  34. Impact of the central bank’s financial result on the transfers of benefits across sectors of the economy By Krzysztof Kruszewski; Mikołaj Szadkowski
  35. Tax Incidence and Fiscal Sustainability in DSGE Model By Junko Doi; Kota Yamada; Masaya Yasuoka
  36. Permanent versus transitory income shocks over the business cycle By Agnes Kovacs; Concetta Rondinelli; Serena Trucchi
  37. Does Public Debt Granger-Cause Inflation in Tanzania? A Multivariate Analysis By Saungweme; Odhiambo
  38. Addressing Spillovers from Prolonged U.S. Monetary Policy Easing By Mr. Machiko Narita; Stephen Cecchetti; Umang Rawat; Ms. Ratna Sahay
  39. Labor Market Effects of Technology Shocks Biased Toward the Traded Sector By Luisito Bertinelli; Olivier Cardi; Romain Restout
  40. Language Learning: Human Capital Investment or Consumption? By Matthias Huber; Silke Uebelmesser
  41. Public Debt and Inflation Dynamics: Empirical Evidence from Zimbabwe By Saungweme; Odhiambo
  42. High Import Prices along the Global Supply Chain Feed Through to U.S. Domestic Prices By Mary Amiti; Sebastian Heise; Aidan Wang
  43. Market Power and Monetary Policy Transmission By Davide Furceri; Mr. Romain A Duval; Marina M. Tavares; Raphael Lee
  44. Past Exposure to Macroeconomic Shocks and Populist Attitudes in Europe By Despina Gavresi; Anastasia Litina
  45. Financial Dollarization in Argentina: A Historical Analysis of a Current Restriction By Eduardo Corso
  46. The contribution of Economic Policy Uncertainty to the persistence of shocks to stock market volatility By Paraskevi Tzika; Theologos Pantelidis
  47. Female Entrepreneurship in the U.S. 1982 - 2012: Implications for Welfare and Aggregate Output By Pedro Bento
  48. Investment Response to Monetary Policy in a Low Interest Rate Environment: Evidence from the ECB's Corporate QE By Guillaume Horny; Supriya Kapoor
  49. Efficiency versus Insurance: Capital Income Taxation and Privatizing Social Security By Makarski, Krzysztof; Tyrowicz, Joanna; Komada, Oliwia
  50. Dynamic Labor Reallocation with Heterogeneous Skills and Uninsured Idiosyncratic Risk By Faia, Ester; Kudlyak, Marianna; Shabalina, Ekaterina
  51. Two-way relationship between inequality and growth within fiscal policy channel: an empirical assessment for European countries By José Carlos Coelho; José Alves
  52. Concentration in Asia’s Cross-border Banking: Determinants and Impacts By Ana Kristel Lapid; Rogelio Jr Mercado; Peter Rosenkranz
  53. Barriers to Black Entrepreneurship: Implications for Welfare and Aggregate Output over Time By Pedro Bento; Sunju Hwang
  54. Unemployment Persistence in Europe: Evidence from the 27 EU Countries By Guglielmo Maria Caporale; Luis A. Gil-Alana; Pablo Vicente Trejo
  55. Retail Pricing Format and Rigidity of Regular Prices By Sourav Ray; Avichai Snir; Daniel Levy
  56. News from the frontier: Increased productivity dispersion across firms and factor reallocation By Paul Bouche; Gilbert Cette; Rémy Lecat
  57. What Drives Financial Sector Development in Africa? Insights from Machine Learning By Isaac K. Ofori; Christopher Quaidoo; Pamela E. Ofori
  58. Wealth Inequality and Return Heterogeneity During the COVID-19 Pandemic By Katya Kartashova; Xiaoqing Zhou
  59. Uncertainty and Change: Survey Evidence of Firms's Subjective Beliefs By Ruediger Bachmann; Kai Carstensen; Stefan Lautenbacher; Martin Schneider
  60. Fedwire Funds Service: Payments, Balances, and Available Liquidity By Anton Badev; Lauren Clark; Daniel Ebanks; Jeffrey C. Marquardt; David C. Mills
  61. TOSSD - Tracking global health expenditure in support of the SDGs By Aussama Bejraoui; Guillaume Delalande; Melissa Li; Julia Benn
  62. Financial condition indices for emerging market economies: can Google help? By Fabrizio Ferriani; Andrea Gazzani
  63. Financial Crises, Investment Slumps, and Slow Recoveries By Mr. Ruy Lama; Mai Hakamada; Ms. Valerie Cerra
  64. The Persistence of Wages By Carneiro, Anabela; Portugal, Pedro; Raposo, Pedro; Rodrigues, Paulo M. M.
  65. Social vouchers: Innovative tools for social inclusion and local development By OECD
  66. What Can We Learn from Financial Stability Reports? By Mr. Fabio Comelli; Ms. Sumiko Ogawa
  67. Taming the "Capital Flows-Credit Nexus": A Sectoral Approach By Daniel Carvalho; Etienne Lepers; Rogelio Jr Mercado
  68. Inflation and Economic Growth in Kenya: An Empirical Examination By Saungweme; Odhiambo
  69. On the Persistence of the China Shock By Autor, David; Dorn, David; Hanson, Gordon H.
  70. Can satellite data on air pollution predict industrial production? By Jean-Charles Bricongne; Baptiste Meunier; Thomas Pical
  71. Yield curve momentum By Sihvonen, Markus
  72. Marginal Product of Capital under Financial Frictions By Margarita Lopez Forero
  73. Concrete Thinking About Development By Martina Kirchberger; Keelan Beirne
  74. Enflasyon dinamiklerindeki değişim: Döviz kuru geçişkenliği güçleniyor mu? By Hakan Kara; Cagri Sarikaya
  75. Public support for tax policies in COVID-19 times: Evidence from Luxembourg By Javier Olivera; Philippe Van Kerm
  76. COVID-19 pandemic increases the divide between cash and cashless payment users in Europe By Radoslaw Kotkowski; Michal Polasik
  77. The Rise of Regional Financial Cycle and Domestic Credit Markets in Asia By Banti, Chiara; Bose, Udichibarna
  78. Exercising Economic Sovereignty in Today's Global Financial World: The Lessons from John Maynard Keynes By Biagio Bossone
  79. Financial Liberalization, Credit Market Dynamism, and Allocative Efficiency By Minetti, Raoul; Herrera, Ana Maria; Schaffer, Matthew
  80. The Political (In)Stability of Funded Social Security By Beetsma, Roel M. W. J.; Komada, Oliwia; Makarski, Krzysztof; Tyrowicz, Joanna
  81. O.M.W. Sprague (the Man Who “Wrote the Book” on Financial Crises) meets the Great Depression By Hugh Rockoff
  82. Major Streams in the Economics of Inequality: A Qualitative and Quantitative Analysis of the Literature since 1950s By Lima, Pedro G.; Teixeira, Pedro N.; Silva, Sandra T.
  83. Recoveries After Pandemics: The Role of Policies and Structural Features By Mrs. Swarnali A Hannan; Juan Pablo Cuesta Aguirre
  84. Zombie firms and the take-up of support measures during Covid-19. By Marco Pelosi; Giacomo Rodano; Enrico Sette
  85. Pooling Fiscal Risk in the ECCU: Quantifying Savings of a Regional Fund for Stabilization and Investment By Mr. Alejandro D Guerson
  86. What is the right level of spending needed for health and care in the UK? By Charlesworth, Anita; Anderson, Michael; Donaldson, Cam; Johnson, Paul; Knapp, Martin; McGuire, Alistair; McKee, Martin; Mossialos, Elias; Smith, Peter; Street, Andrew; Woods, Michael
  87. Crisis and complementarities: a comparative political economy of economic policies after COVID-19 By Hancké, Bob; Van Overbeke, Toon; Voss, Dustin
  88. On the Causality Between Household and Government Spending on Education: A Panel Analysis Across Countries By Naurin, Abida; Pourpourides, Panayiotis M.
  89. The risks of exiting too early the policy responses to the COVID-19 recession By Nuno Cassola; Paul De Grauwe; Claudio Morana; Patrizio Tirelli
  90. What Shapes Current Account Adjustment During Recessions? By Ms. Christina Kolerus
  91. Numerical Fiscal Rules for Economic Unions: the Role of Sovereign Spreads By Mr. Leonardo Martinez; Juan Carlos Hatchondo; Mr. Francisco Roch
  92. Trade Flows, Private Credit and the Covid-19-Pandemic: Panel Evidence from 35 OECD Countries By Guglielmo Maria Caporale; Anamaria Sova; Robert Sova
  93. A pandemic grant package for the world's poorest economies: Not as costly as you might think, but too costly to happen anytime soon By Steven B. Kamin; Ben Clements
  94. Measuring and Testing a Modified Version of the South African Financial Cycle By Malibongwe C Nyati; Christian K Tipoy; Paul F Muzindutsi
  95. Quantifying U.S. Treasury Investor Optimism By Jiang, Zhengyang; Lustig, Heanno; Van Nieuwerburgh, Stijn; Xiaolan, Mindy Z.
  96. Statistical challenges of stress test financial stability assessments By Paul H. Kupiec
  97. Financial-cycle ratios and multi-year predictions of GDP: Evidence from the United States By Graziano Moramarco
  98. Did prudent risk management practices or weak customer demand reduce Paycheck Protection Program lending by the largest banks? By Paul H. Kupiec
  99. An Evaluation of World Economic Outlook Growth Forecasts, 2004–17 By Oya Celasun; Mr. Allan Timmermann; Jungjin Lee; Mr. Mico Mrkaic
  100. r minus g By Robert J. Barro

  1. By: Simcha Barkai; Stavros Panageas
    Abstract: Young firms' contribution to aggregate employment has been underwhelming. However, a similar trend is not apparent in their contribution to aggregate sales or aggregate stock market capitalization. We study the implications of the arrival of “low marginal - high average” revenue-product-of-labor firms in a stylized model of dynamic firm heterogeneity, and show that the model can account for a large number of facts related to the decline in “business dynamism”. We study the long-term implications of the decline in business dynamism on the economy by providing analytical results that connect the decline in dynamism to the eventual decline of consumption.
    JEL: D24 E23 E24 E25 G24
    Date: 2021–10
  2. By: Richard K. Crump; Stefano Eusepi; Emanuel Moench; Bruce Preston
    Abstract: Economic theory predicts that intertemporal decisions depend critically on expectations about future outcomes. Using the universe of professional survey forecasts for the United States, we document the behavior of the entire term structure of expectations for output growth, inflation, and the policy rate. We show that a simple unobserved components model of the trend and cycle explains the joint behavior of both consensus measures of expectations and the observed disagreement among individual forecasters. Importantly, univariate models of each variable are outperformed by a multivariate model of the joint dynamics of these three variables, particularly for nominal interest rates. Consistent with the data, the model predicts a link between revisions in long-run expectations to short-term forecast errors. In structural models, learning about the long run has important empirical and theoretical implications for monetary and fiscal policy.
    Keywords: expectation formation; imperfect information; survey forecasts; shifting endpoint models; monetary policy; term premiums
    JEL: D83 D84 E32 E43 E44 G12
    Date: 2021–11–01
  3. By: Paul Levine (University of Surrey); Stephen McKnight (El Colegio de Mexico); Alexander Mihailov (University of Reading); Jonathan Swarbrick (University of St Andrews)
    Abstract: Limited asset market participation (LAMP) and trade openness are crucial features that characterize all real-world economies. We study equilibrium determinacy and optimal monetary policy in a model of a small open economy with LAMP. With low enough participation in asset markets, the conventional wisdom concerning the stabilizing benefits of policy inertia can be overturned irrespective of the constraint of a zero lower bound on the nominal interest rate. In contrast to recent studies, in LAMP economies trade openness can play an important stabilizing role. We also show that the central bank must balance the opposing influence of openness and LAMP on the aggressiveness of optimal policy, and that the equivalence between efficient and equitable optimal allocation found in closed economies breaks down in open economies. We derive targeting rules and demonstrate the superiority of commitment over discretion in implementable optimal interest rate rules.
    JEL: E31 E44 E52 E58 E63 F41
    Date: 2021–10
  4. By: Alan S. Blinder (Princeton Unviersity)
    Keywords: monetary policy, fiscal policy
    JEL: E52 E62 E63
    Date: 2021–09
  5. By: Naoto Soma (Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Associate Professor, Yokohama National University, E-mail:
    Abstract: Uncertainty is a fact of life for central banks, and the effective lower bound (ELB) of short-term nominal interest rates has become one source of uncertainty for many of them. This paper analyzes the effects of uncertainty about monetary policy transmission on inflation in a canonical New Keynesian model with optimal discretionary monetary policy under the ELB. The main finding is that a greater degree of uncertainty enlarges the "deflationary bias" of the economy. In the model, the central bank reacts to the uncertainty by attenuating the response of the nominal interest rate to exogenous shocks. Such inactive policy response leaves the fall in inflation caused by the ELB risk partially untreated, which lowers the inflation expectations of private agents and results in undershooting of the inflation target.
    Keywords: Model Uncertainty, Effective Lower Bound, Deflationary Bias, Risky Steady State
    JEL: D81 E32 E52
    Date: 2021–11
  6. By: Greg Buchak; Jiayin Hu; Shang-Jin Wei
    Abstract: A binding interest rate cap on household savings is a common form of financial repression in developing economies and typically benefits banks. Using proprietary data from a leading Chinese FinTech company, we study Fintech's role in ending financial repression in China through the introduction of a money market fund with deposit-like features available through an already widely-adopted household payment platform. Cities and banks whose depositor base is more exposed to FinTech see greater deposit outflows. Importantly, exposed banks respond to FinTech competition by offering competing products with market interest rates. FinTech thus facilitates a bottom-up interest rate liberalization.
    JEL: E21 E42 E43 E44 E52 E58 G21 G28 G51
    Date: 2021–11
  7. By: Eo, Yunjong; McClung, Nigel
    Abstract: We evaluate and compare alternative monetary policy rules, namely average inflation targeting, price level targeting, and traditional inflation targeting rules, in a standard New Keynesian model that features recurring, transient zero lower bound regimes. We use determinacy and expectational stability (E-stability) of equilibrium as the criteria for stabilization policy. We find that price level targeting policy, including nominal income targeting as a special case, most effectively promotes determinacy and E-stability among the policy frameworks, whereas standard inflation targeting rules are prone to indeterminacy. Average inflation targeting can induce determinacy and E-stability effectively, provided the averaging window is sufficiently long.
    JEL: E31 E47 E52 E58
    Date: 2021–11–15
  8. By: Rachel Doehr; Enrique Martinez-Garcia
    Abstract: We propose a TVP-VAR with stochastic volatility for the unemployment rate, core inflation and the federal funds rate augmented with survey-based interest rate expectations and uncertainty and a FAVAR with a wider set of observable variables and alternative monetary policy measures in order to explore U.S. monetary policy, accounting for the zero lower bound. We find that a rise in monetary policy uncertainty increases unemployment and lowers core inflation; the effects on unemployment in particular are robust (a gradual 0.4 percentage point increase), lasting more than two years after the initial shock. Interest rate uncertainty shocks explain a significant portion of macro fluctuations, particularly after the 2007-09 global financial crisis contributing to push the unemployment rate one percentage point higher during the early phase of the subsequent recovery. Furthermore, we find that higher interest rate uncertainty makes forward guidance shocks (but also federal funds rate shocks) less effective at moving unemployment and core inflation. We also posit a theoretical model to provide the structural backbone for our empirical results, via an “option value” channel. Theory yields sizeable real effects and a muted monetary policy transmission mechanism as firms choose to postpone investment decisions in response to heightened interest rate uncertainty.
    Keywords: Monetary Policy Transmission Mechanism; Monetary Policy Uncertainty; Forward Guidance; Business Cycle Propagation; Survey-Based Forecasts
    JEL: E30 E32 E43 E52
    Date: 2021–11–11
  9. By: Alan S. Blinder (Princeton Unviersity)
    Keywords: Covid, banks, central banking
    JEL: E50 E58 G01
    Date: 2021–09
  10. By: Paolo Fegatelli
    Abstract: The introduction of a general-purpose central bank digital currency (CBDC) carries the risk of bank disintermediation, potentially jeopardizing financial stability and monetary policy transmission through the bank lending channel. By adapting the theoretical framework of Dutkowsky and VanHoose (2018b, 2020) to the euro area, this study clarifies the conditions under which a digital euro could be introduced on a large scale without leading to bank disintermediation or a credit crunch. First, the central bank would need to set up proper mechanisms to manage the volume and the user cost of CBDC in circulation. Second, since some bank deposits will be converted into CBDC, the central bank should continue to facilitate access to its long-term lending facilities in order to provide banks with an alternative funding source at an equivalent cost. Depending on its design, a digital euro could improve bank profitability by absorbing large amounts of idle (and expensive) excess reserves without penalizing lending. A digital euro could also improve banks’ competitive position relative to non-bank lenders and encourage bank digitalization.
    Keywords: Central bank digital currency, cash, central bank, monetary policy, excess reserves, reserve requirements, universal central bank reserves, bank deposits, bank profitability, bank credit, inside money, collateral
    JEL: E41 E42 E51 E52 E58 G21
    Date: 2021–08
  11. By: Ewa Stanisławska (Narodowy Bank Polski); Maritta Paloviita (Bank of Finland)
    Abstract: Using the ECB Consumer Expectations Survey, this paper investigates how consumers revise medium-term inflation expectations. We provide robust evidence of their adjustment to the current economic developments. In particular, consumers adjust medium-term inflation views in response to changes in short-term inflation expectations and, to a lesser degree, to changes in inflation perceptions. We find that the strong adverse Covid-19 pandemic shock contributed to an increase in consumer inflation expectations. We show that consumers who declare high trust in the ECB adjust their medium-term inflation expectations to a lesser degree than consumers with low trust. Our results increase understanding of expectations formation, which is an important issue for medium-term oriented monetary policy.
    Keywords: Inflation expectations, consumer survey, micro-data
    JEL: D12 D84 E31 E58
    Date: 2021
  12. By: Benjamin Lester; David A. Rivers; Giorgio Topa
    Abstract: We document a new set of facts regarding the impact of referrals on labor market outcomes. Our results highlight the importance of distinguishing between different types of referrals—those from family and friends and those from business contacts—and different occupations. Then we develop an on-the-job search model that incorporates referrals and calibrate the model to key moments in the data. The calibrated model yields new insights into the roles played by different types of referrals in the match formation process and provides quantitative estimates of the effects of referrals on employment, earnings, output, and inequality.
    Keywords: Labor Markets; Referrals; Networks; Search Theory; Asymmetric Information
    JEL: E42 E43 E44 E52 E58
    Date: 2021–10–26
  13. By: Pablo Garcia; Pascal Jacquinot; Crt Lenarcic; Matija Lozej; Kostas Mavromatis
    Abstract: This paper analyses the effects of the COVID-19 pandemic shock on small open economies in a monetary union with an application to the euro area. Accounting for a high degree of openness and a strong dependence on intra and extra union trade, we focus on the size and the direction of international spillovers – both from the shock itself and from the ensuing fiscal response. To do so, we use a unified modelling framework: The Euro Area and the Global Economy (EAGLE) model. Furthermore, within this general framework, we assess the extent to which specific modelling features shape the dynamic responses to the COVID-19 pandemic. The main messages are as follows. First, fiscal spillovers from the rest of the monetary union do matter. Second, the effective lower bound amplifies the size of the spillovers. Third, the design of wage negotiations leads to wage subsidies having negative international fiscal policy spillovers. Fourth, import content of government spending interacts with the effective lower bound, strongly affecting the size and sign of spillovers. Fifth, when households have finite lifetimes, the responses of output and inflation are amplified compared to the case with infinitely lived households. Finally, a next generation EU instrument is more effective when financed using a tax on consumption.
    Keywords: DSGE Modelling, International Spillovers, Monetary Union, Euro Area, COVID-19
    JEL: C53 E32 E52 F45
    Date: 2021–10
  14. By: Peter Andre (University of Bonn); Ingar Haaland (University of Bergen and CESifo); Christopher Roth (University of Cologne, ECONtribute, briq, CESifo, CEPR, and CAGE Warwick); Johannes Wohlfart (Department of Economics and CEBI, University of Copenhagen, CESifo, and Danish Finance Institute)
    Abstract: We provide evidence on the stories that people tell to explain a historically no-table rise in inflation using samples of experts, U.S. households, and managers. We document substantial heterogeneity in narratives about the drivers of higher inflation rates. Experts put more emphasis on demand-side factors, such as fiscal and monetary policy, and on supply chain disruptions. Other supply-side factors, such as labor shortages or increased energy costs, are equally prominent across samples. Households and managers are more likely to tell generic stories related to the pandemic or mismanagement by the government. We also find that house-holds and managers expect the increase in inflation to be more persistent than experts. Moreover, narratives about the drivers of the inflation increase are strongly correlated with beliefs about its persistence. Our findings have implications for understanding macroeconomic expectation formation.
    Keywords: Narratives, Inflation, Beliefs, Macroeconomics, Fiscal Policy, Monetary Policy.
    JEL: D83 D84 E31 E52 E71
    Date: 2021–11
  15. By: Sebastian Edwards
    Abstract: This paper deals with COVID and macroprudential regulations in emerging markets. I document the build-up of a sturdy macroprudential structure during 2009-2019, and the relaxation of regulations in 2020-2021, as part of the effort to deal with the sanitary emergency. I show that in every country, regulatory forbearance played a key role in the response to COVID. I discuss capital controls as macroprudential instruments. I argue that rebuilding the macroprudential fabric is important to reduce the costs of future systemic shocks. I maintain that post-COVID regulations should incorporate the risks associated with digital currencies.
    JEL: E31 E52 E58 F3 F41
    Date: 2021–10
  16. By: Hie Joo Ahn; Matteo Luciani
    Abstract: This paper decomposes consumer price inflation into pure inflation, relative price inflation, and idiosyncratic inflation by estimating a dynamic factor model á la Reis and Watson (2010) on a data set of 146 monthly disaggregated prices from 1995 to 2019. We find that pure inflation is the trend around which PCE price inflation fluctuates, while relative price inflation and idiosyncratic inflation drive the fluctuation of PCE price inflation around the trend. Unlike Reis and Watson, we find that labor market slack is the main driver of pure inflation and that energy prices account for variation in relative price inflation.
    Keywords: Pure inflation; Relative price inflation; Phillips correlation; Dynamic factor model; Disaggregated consumer prices; Monetary policy
    JEL: C32 C43 C55 E31 E52
    Date: 2021–10–20
  17. By: Giuseppe Fiori (Board of Governors of the Federal Reserve System); Filippo Scoccianti (Bank of Italy)
    Abstract: We study how the timing of technology adoption through capital accumulation shapes firm-level productivity dynamics and quantify its aggregate implications in a model of heterogeneous firms. Using data on the census of incorporated Italian firms and exploiting the lumpiness of capital accumulation, we document that large investment episodes lead to productivity gains at the firm and sectoral level due to vintage effects. In a general equilibrium model of firm heterogeneity, we find that the presence of vintage technology constitutes a powerful microeconomic-based amplification mechanism of aggregate shocks relative to a benchmark real business cycle model.
    Keywords: business cycles, (S,s) policies, vintage effects, firm heterogeneity.
    JEL: D24 E22 E32
    Date: 2021–11
  18. By: Joseph Kopecky (Department of Economics, Trinity College Dublin)
    Abstract: Is inflation a monetary phenomenon? In the decades since the influential work of Milton Friedman, the great moderation has seemingly put to bed the idea that monetary aggregates serve as a useful tool for policy makers. While many point to a structural change in the underlying relationship between money growth and inflation, there is limited understanding as to why this monetary transmission has broken down. In this paper, I provide evidence that population age structure has an important impact on the relationship between excess money growth and inflation. Estimating these effects using a long run sample of data, I find that the one-to-one relationship between excess money growth and inflation implied by the quantity theory appears to hold over long horizons, with short-to-medium run effects that are smaller, but significant. I then show that changes in the population age structure, particularly as the baby boomer generation has moved through it, can explain a strengthening of this transmission during the highly inflationary period of the 1970s, as well as a complete disappearance during the 1990s and early 2000s. At present demographic headwinds on this relationship seem to have abated, with their effect opening the door for a potential return to money driven inflation.
    Keywords: Inflation, Aging, Money Growth
    JEL: E31 E40 E50 E52
    Date: 2021–06
  19. By: Marcin Bielecki (Narodowy Bank Polski); Michał Brzoza-Brzezina (Narodowy Bank Polski); Marcin Kolasa (SGH Warsaw School of Economics)
    Abstract: Poland faces a particularly sharp demographic transition. The old-age dependency ratio is expected to increase from slightly above 20% in 2000 to over 60% in 2050. At the same time the country has recently witnessed a huge wave of immigration, mostly from Ukraine. In this paper we investigate how aging and migration will affect the Polish economy and what consequences these adjustments have for its monetary policy. Using a general equilibrium model with life-cycle considerations, we show that the decline in the natural rate of interest (NRI) due to demographic processes is substantial, amounting to more than 1.5 percentage points, albeit spread over a period of 40 years. The impact of migration flows is relatively small and cannot significantly alleviate the downward pressure on the NRI induced by populating aging. If the central bank is slow in learning about the declining NRI, an extended period of inflation running below the target is likely. In this case, the probability of hitting the zero lower bound (ZLB) becomes a major constraint on monetary policy while it could remain under control if the central bank uses demographic trends to update the NRI estimates in real time.
    Keywords: aging, monetary policy, migration, life-cycle models
    JEL: E43 E52
    Date: 2021
  20. By: Dora Tuda (Department of Economics, Trinity College Dublin)
    Abstract: This paper documents stylised facts on desired hours per employed worker in European countries and identifies the effect of recessions on desired hours. Actual hours worked are usually used to estimate preferences on the labour market. However, actual hours are constrained by labour demand and therefore measure hours worked in the general equilibrium. Descriptive statistics from EU Labour Force Survey show that desired hours are countercyclical and that the underemployment gap increases due to higher desired hours worked of employed individuals. I identify the effect of recessions on desired hours using variation in regional unemployment rates from 2000 to 2017. I find that a 1 percentage point higher unemployment rate increases desired hours, on average, by 2 - 8 hours on a yearly level (3 - 5 minutes in the reference week). The results offer a lower bound estimate for the whole sample period of booms and busts. To narrow the sample period, I use a panel of individuals from the French LFS (EEC) and find even bigger effects. In France, from 2007q4 to 2009q1, an increase in regional unemployment rate by 1 percentage point increases desired hours by 1.6 hours in the reference week. Bottom decile of the income distribution significantly increases desired hours in all countries, suggesting an income effect labour supply response in recessions.
    Keywords: desired hours worked, labour supply, underemployment, recession
    JEL: E24 E32 J22
    Date: 2020–05
  21. By: Todd Keister; Daniel R. Sanches
    Abstract: We study how the introduction of central bank digital currency affects interest rates, the level of economic activity, and welfare in an environment where both central bank money and private bank deposits are used in exchange. We highlight an important policy tradeoff: While a digital currency tends to promote efficiency in exchange, it may also crowd out bank deposits, raise banks’ funding costs, and decrease investment. We derive conditions under which targeted digital currencies, which compete only with physical currency or only with bank deposits, raise welfare. If such targeted currencies are infeasible, we illustrate the policy tradeoffs that arise when issuing a single, universal digital currency.
    Keywords: Monetary policy; public vs. private money; electronic payments; liquidity premium; disintermediation
    JEL: E42 E58 G28
    Date: 2021–11–03
  22. By: Kuhn, Moritz (University of Bonn); Manovskii, Iourii (University of Pennsylvania); Qiu, Xincheng (University of Pennsylvania)
    Abstract: Spatial differences in labor market performance are large and highly persistent. Using data from the United States, Germany, and the United Kingdom, we document striking similarities in spatial differences in unemployment, vacancies, job finding, and job filling within each country. This robust set of facts guides and disciplines the development of a theory of local labor market performance. We find that a spatial version of a Diamond-Mortensen-Pissarides model with endogenous separations and on-the-job search quantitatively accounts for all the documented empirical regularities. The model also quantitatively rationalizes why differences in job-separation rates have primary importance in inducing differences in unemployment across space while changes in the job-finding rate are the main driver in unemployment fluctuations over the business cycle.
    Keywords: local labor markets, unemployment, vacancies, search and matching
    JEL: J63 J64 E24 E32 R13
    Date: 2021–10
  23. By: Paola Morales; Daniel Osorio-Rodríguez; Juan S. Lemus-Esquivel; Miguel Sarmiento
    Abstract: How does the expansion of domestic banks in international markets affect the bank lending channel of monetary policy? Using bank-firm loan-level data, we find that loan growth and loan rates from international banks respond less to monetary policy changes than domestic banks and that internationalization partially mitigates the risk-taking channel of monetary policy. Banks with a large international presence tend to tolerate more their credit risk exposition relative to domestic banks. Moreover, international banks tend to rely more on foreign funding when policy rates change, allowing them to insulate better the monetary policy changes from their credit supply than domestic banks. This result is consistent with the predictions of the internal capital markets hypothesis. We also show that macroprudential FX regulation reduces banks with high FX exposition access to foreign funding, ultimately contributing to monetary policy transmission. Overall, our results suggest that the internationalization of banks lowers the potency of the bank lending channel. Furthermore, it diminishes the risk-taking channel of monetary policy within the limit established by macroprudential FX regulations. **** RESUMEN: ¿Cómo afecta la expansión de los bancos domésticos en los mercados internacionales el canal del crédito bancario de la política monetaria? Usando datos a nivel de banco-firma-préstamo, este estudio encuentra que el crecimiento del crédito y las tasas de interés de los créditos otorgados por los bancos internacionales (i.e., bancos domésticos que se expandieron en los mercados internacionales) responden menos a cambios en la política monetaria y que la internacionalización mitiga parcialmente el canal de la toma de riesgos de la política monetaria. Encontramos también que los bancos con una mayor presencia internacional tienden a tolerar mejor su exposición al riesgo de crédito frente a los bancos domésticos. Además, identificamos que los bancos internacionales tienden a usar más el fondeo externo cuando cambian las tasas de política, lo que les permite aislar en mayor medida su oferta de crédito de los cambios de la política monetaria en comparación con los bancos domésticos. Este resultado es consistente con las predicciones de la hipótesis de los mercados de capital internos. Se muestra que la regulación cambiaria macroprudencial reduce el acceso al fondeo externo por parte de los bancos con alta exposición cambiaria, lo que contribuye a la transmisión de la política monetaria. En general, los resultados sugieren que la internacionalización de los bancos disminuye la potencia del canal del crédito bancario y reduce el canal de la toma de riesgos de la política monetaria dentro del límite establecido por la regulación cambiaria macroprudencial.
    Keywords: Bank-lending channel, internationalization of banks, banks’ business models, monetary policy, bank risk-taking, macroprudential FX regulation, Canal del crédito bancario, internacionalización de la banca, modelos de negocio de los bancos, política monetaria, toma de riesgos bancarios, regulación cambiaria macroprudencial.
    JEL: E43 E52 F23 F34 F44
    Date: 2021–11
  24. By: Davide Romelli (Department of Economics, Trinity College Dublin); Hamza Bennani (School of Economics and Management (IAE), University of Nantes)
    Abstract: This paper analyses the drivers of divergence in tone among Federal Open Market Committee (FOMC) members using text analysis tools. We use a financial dictionary to measure the tone of FOMC transcripts at the speaker-meeting-round level. We then relate the tone of FOMC members’ remarks with their individual projections for inflation and unemployment rate. Our results show a positive relationship between inflation projections and the tone used by FOMC members, suggesting that divergence in tone among members is mainly driven by differences in their projected levels of inflation. We also show that Federal Reserve Bank presidents and voting members are those who use a more distinct tone, in particular during the economics go-round.
    Keywords: central banks, monetary policy committees, federal reserve, fomc.
    JEL: E52 E58
    Date: 2021–09
  25. By: Daniel Baksa; Mr. Ales Bulir; Mr. Roberto Cardarelli
    Abstract: The paper describes a semistructural macrofiscal approach to simulating and forecasting macroeconomic policies. The model focuses on only a few variables that are consistent with the New Keynesian framework. Thanks to its simplicity, it facilitates an initial and intuitive understanding of monetary and fiscal policy transmission channels, and their main impact on economic activity. The model is adapted to Morocco and we demonstrate its application with an illustrative scenario of policy responses to a slower-than-expected recovery from the Covid-19 pandemic, under different monetary policy and exchange rate regimes.
    Keywords: Fiscal Policy, Morocco, Fiscal Multiplier; fiscal policy transmission channels; Policy reaction function; B. aggregate supply; peg regime; fiscal policy transmission mechanisms; Exchange rate arrangements; Real exchange rates; Output gap; Inflation targeting; Maghreb; Global
    Date: 2021–07–16
  26. By: Ms. Deniz O Igan; Davide Furceri; Mrs. Nina T Budina; Mr. Machiko Narita; Mr. Balazs Csonto; Mr. Luis Brandao-Marques; Philipp Engler; Rui Mano; Gurnain Kaur Pasricha; Chiara Fratto; Valentina Bonifacio; Murad Omoev; Ms. Helene Poirson
    Abstract: As central banks across the globe have responded to the COVID-19 shock by rounds of extensive monetary loosening, concerns about their inequality impact have grown. But rising inequality has multiple causes and its relationship with monetary policy is complex. This paper highlights the channels through which monetary policy easing affect income and wealth distribution, and presents some quantitative findings about their importance. Key takeaways are: (i) central banks should remain focused on macro stability while continuing to improve public communications about distributional effects of monetary policy, and (ii) supportive fiscal policies and structural reforms can improve macroeconomic and distributional outcomes.
    Keywords: asset price channel; easing affect income; A. central bank mandate; wealth channel; A. savings-redistribution channel; Income inequality; Income distribution; Income; Wages; Consumption; Global; Caribbean
    Date: 2021–07–30
  27. By: Lorenz Emter (Central Bank of Ireland and Department of Economics, Trinity College Dublin)
    Abstract: Using a quarterly panel of 98 advanced as well as emerging and developing countries from 1990 to 2017 this paper shows that domestic variables are significantly related to the probability of incurring sharp reversals in capital inflows controlling for global push factors. In particular, negative growth shocks combined with high levels of leverage in the domestic private sector are a significant determinant of sudden stops. This is in line with real business cycle models including an occasionally binding credit constraint and income trend shocks.
    Keywords: international capital flows, sudden stops, financial stability
    JEL: E32 F30 F32 F34 G15
    Date: 2020–07
  28. By: Marco Airaudo; Ina Hajdini
    Abstract: By introducing Jaimovich-Rebelo (JR) consumption-labor nonseparable preferences into an otherwise standard New Keynesian model, we show that the occurrence of positive comovement between inflation and the nominal interest rate conditional on a nominal shock - the so-called neo-Fisherian hypothesis - depends on the extent of wealth effects in households’ labor supply decisions. Neo-Fisherianism appears more prominent in economic environments with i) weaker wealth effects on labor supply (in particular for Greenwood-Hercowitz-Huffmann preferences where wealth effects are absent), and ii) smaller price-to-wage markups (for which the steady state is less distorted). The stabilizing properties of Taylor rules under JR preferences are scrutinized.
    Keywords: Monetary Policy; Neo-Fisherianism; Wealth Effects; Markups
    JEL: E40 E50
    Date: 2021–11–17
  29. By: Mirko Wiederholt (LMU Munich and Sciences Po); Christopher Roth (University of Cologne); Johannes Wohlfart (Department of Economics and CEBI, University of Copenhagen)
    Abstract: We study the effects of forward guidance with an approach that combines theory with experimental estimates of counterfactual expectation adjustments. Guided by the model, we conduct experiments with representative samples of the US population to study how households adjust their expectations in response to changes in the Fed’s projections about future interest rates. Respondents significantly downward-adjust their inflation expectations in response to learning about an increase in the Fed’s projection about the federal funds rate three years in the future, and they expect inflation to respond most strongly immediately after the announcement. By contrast, respondents do not adjust their nominal income expectations. Our model-based estimates highlight a small average consumption response to forward guidance due to opposing effects from intertemporal substitution and changes in expected real income.
    Keywords: Expectation Formation, Information, Updating
    JEL: D12 D14 D83 D84 E32 G11
    Date: 2021–11–10
  30. By: Joseph Kopecky (Department of Economics, Trinity College Dublin); Alan M. Taylor (Department of Economics and Graduate School of Management, University of California, Davis)
    Abstract: Population aging has been linked to global declines in real interest rates. A similar trend is seen for equity risk premia, which are on the rise. An existing literature can explain part of the declining trend in safe rates using demographics, but has no mechanism to speak to trends in relative returns on different assets. We calibrate a heterogeneous agent life-cycle model with equity markets and aggregate risk, and we show that aging demographics can simultaneously account for both the majority of a downward trend in the risk free rate, while also increasing the return premium attached to risky assets. This is because the life-cycle savings dynamics that have been well documented exert less pressure on risky assets as older households shift away from risk. Under reasonable calibrations we find declines in the safe rate that are considerably larger than most existing estimates between the years 1990 and 2017. We are also able to account for most of the rise in the equity risk premium. Projecting forward to 2050 we show that persistent demographic forces will continue to push the risk free rate further into negative territory, while the equity risk premium remains elevated.
    Keywords: life-cycle model, demographics, rates of return, safe assets, risky assets, secular stagnation
    JEL: E21 E43 G11 J11
    Date: 2020–03
  31. By: Vito Polito; Yunyi Zhang
    Abstract: We develop a regime switching vector autoregression where artificial neural networks drive time variation in the coefficients of the conditional mean of the endogenous variables and the variance covariance matrix of the disturbances. The model is equipped with a stability constraint to ensure non-explosive dynamics. As such, it is employable to account for nonlinearity in macroeconomic dynamics not only during typical business cycles but also in a wide range of extreme events, like deep recessions and strong expansions. The methodology is put to the test using aggregate data for the United States that include the abnormal realizations during the recent Covid-19 pandemic. The model delivers plausible and stable structural inference, and accurate out-of-sample forecasts. This performance compares favourably against a number of alternative methodologies recently proposed to deal with large outliers in macroeconomic data caused by the pandemic.
    Keywords: nonlinear time series, regime switching models, extreme events, Covid-19, macroeconomic forecasting
    JEL: C45 C50 E37
    Date: 2021
  32. By: Gani Ramadani (National Bank of the Republic of North Macedonia); Magdalena Petrovska (National Bank of the Republic of North Macedonia); Vesna Bucevska (Faculty of Economics, Ss Cyril and Methodius University)
    Abstract: Aggregate demand forecasting, also known as nowcasting when it applies to current quarter assessment, is of notable interest to policy makers. This paper concentrates on the empirical methods dealing with mixed-frequency data. In particular, it focuses on the MIDAS approach and its later extension, the Bayesian MF-VAR. The two strategies are evaluated in terms of their accuracy to nowcast Macedonian GDP growth, using same monthly frequency data set. The results of this study indicate that the MIDAS regressions demonstrate comparable forecasting performance to that of MF-VAR model. Moreover, it is interesting to note that the two approaches are reciprocal, since in general, their combined forecast demonstrates clear superiority in predicting business cycle turning points. Additionally, the MF-VAR model showed higher precision in times of increased uncertainty.
    Keywords: MF-VAR, Bayesian estimation, MIDAS, Forecast pooling, Forecast evaluation
    JEL: E37 C53
    Date: 2021
  33. By: Agrawal, Sneha (International Monetary Fund); Gaurav, Abhishek (Princeton University); Suveg, Melinda (Research Institute of Industrial Economics (IFN))
    Abstract: In this paper, we study a new channel to explain firms’ price-setting behavior. We propose that uncertainty about factor prices has a positive effect on markups. We show theoretically that firms with higher shares of inputs with volatile prices set higher markups. We use the Bartik shift-share approach to empirically test whether firms that use more oil relative to other inputs set higher markups when oil prices are more volatile. Our estimates imply that a one standard deviation increase in oil price volatility leads to a 0.38 percent increase in the markup of firms with average oil exposure.
    Keywords: Price setting; Markups; Input price volatility; Precautionary pricing
    JEL: D21 D22 D24 D42 D80 E31 E32 L11 L60
    Date: 2021–11–16
  34. By: Krzysztof Kruszewski (Narodowy Bank Polski); Mikołaj Szadkowski (Narodowy Bank Polski, Warsaw School of Economics)
    Abstract: This paper presents an analysis of the impact of the central bank’s financial result and its components on the inter-sectoral transfers of benefits and the creation of central bank money. Transfers of benefits depend on the structure of the central bank’s balance sheet and its financial result. The structure of its balance sheet, its financial result as well as profit distribution influence central bank money creation. If the central bank records a profit, fully transferred to the state budget, and its assets are mainly denominated in domestic currency, then the central bank’s financial result can be seen only as a tool for intermediation in the transfer of benefits between different sectors of the national economy. In such a situation, the bank’s financial result does not affect the volume of the central bank’s money. On the other hand, if the central bank records a profit, fully paid to the state budget, and its assets are mainly denominated in foreign currency, then there is a transfer from foreign entities to the domestic economy, and there is simultaneously an increase in central bank money volume. However, if the central bank incurs a loss and the loss is not covered, for example, by the government, then the central bank transfers benefits directly from itself to other sectors of the economy, and regardless of the structure of its balance sheet, there is an increase in the central bank’s money issuance.
    Keywords: central bank, financial result, balance sheet, transfers between sectors of the economy
    JEL: E51 E58
    Date: 2021
  35. By: Junko Doi (Kansai University); Kota Yamada (kansai University); Masaya Yasuoka (Kwansei Gakuin University)
    Abstract: The aims of our study are to set a Dynamic Stochastic General Equilibrium (DSGE) model and to examine how increased income or consumption tax rates affect the ratio of public debt to GDP and other macroeconomic parameters. We consider taxation of three types, on labor income, capital income, and consumption. Results derived from our simulation show that an increase in income tax rates of these forms of taxation raises the ratio of public debt to GDP because GDP and tax revenues decrease. An increase in consumption tax rate can reduce the ratio of public debt to GDP because of an increase in the aggregate demand that is pulled up by the investment. Our study shows that a decrease in the income tax rate reduces the ratio of public debt to GDP.
    Keywords: DSGE Model, Fiscal Sustainability, Taxation.
    JEL: E60
    Date: 2021–11
  36. By: Agnes Kovacs (The University of Manchester); Concetta Rondinelli (Bank of Italy); Serena Trucchi (Cardiff University)
    Abstract: This paper investigates how income shocks shape consumption dynamics over the business cycle. First, we break new ground and create a unique panel dataset of transitory and permanent income shocks by combining household-level income expectations with the findings of the DNB Household Survey conducted in the Netherlands in the period 2006-2018. We then use the first and second moments of the identified income shocks in a structural life-cycle framework and show that the model matches the observed consumption patterns well. Finally, using counterfactual model simulations, we assess the importance of the nature of income shocks (permanent income hypothesis), future income uncertainties (precautionary saving motive), and cohort effects, and show how they individually shaped consumption dynamics over that period in the Netherlands.
    Keywords: subjective expectations, income shocks, consumption, business cycle
    JEL: C13 D12 D91 E21
    Date: 2021–11
  37. By: Saungweme; Odhiambo
    Abstract: The optimal balance between fiscal and monetary policy in achieving price stability has been contested in literature. In the main, however, it is widely recognised that whether public debts are financed in a monetary way or otherwise, the choice of policy action affects the effectiveness of monetary policy in ensuring price stability. This study contributes to the debate by testing the dynamic causal relationship between public debt and inflation in Tanzania covering the period 1970-2020. The study applies the autoregressive distributed lag (ARDL) bounds testing technique to cointegration and the ECM-based Granger-causality test to explore this relationship. In order to address the omission-of-variable bias, which has been the major methodological deficiency detected in some previous studies, two monetary variables, namely money supply and interest rate, were added as intermittent variables alongside public debt and inflation. The findings from this study show that there is a consistent long-run cointegrating relationship between public debt, inflation, money supply and interest rate in Tanzania. However, the results fail to find evidence of causality between public debt and inflation in Tanzania, irrespective of whether the causality is estimated in the short run or in the long run. The findings of this study, therefore, show that Tanzania’s current debt is not inflationary; hence, policymakers may continue to pursue the desirable fiscal policies necessary for the country’s long-term optimal growth path.
    Date: 2021–10
  38. By: Mr. Machiko Narita; Stephen Cecchetti; Umang Rawat; Ms. Ratna Sahay
    Abstract: There is growing recognition that prolonged monetary policy easing of major economies can have extraterritorial spillovers, driving up financial system leverage in other countries. When faced with such a rise of threats to financial stability, what can countries do? Specifically, is there a role for macroprudential tools, capital controls or foreign exchange intervention in safeguarding financial stability from risks arising externally? We examine the efficacy of these policy interventions by exploring whether preemptive or reactive policy interventions can mitigate such risks. Using a sample of 950 bank and nonbank financial firms across 28 non-U.S. economies over the past two decades, we show that if policymakers are able to implement policies prior to an additional consecutive decline in U.S. interest rates, financial institutions do not increase their leverage by as much as they otherwise would. By contrast, it is more difficult to counter the spillovers with reactive policy interventions. In practice, however, policymakers need to remain cautious about the timing of preventative tightening, especially when their economies face large negative shocks such as a pandemic.
    Keywords: Spillovers, prolonged monetary policy easing, financial stability, macroprudential policies, foreign-exchange intervention, capital flow management measures; U.S. monetary policy; monetary policy easing; leverage ratio; financial institution leverage; monetary policy spillover; FXI policy; Macroprudential policy; Spillovers; Capital inflows; Capital flow management; Macroprudential policy instruments; Global
    Date: 2021–07–09
  39. By: Luisito Bertinelli (Department of Economics and Management, Université du Luxembourg); Olivier Cardi (Lancaster University Management School); Romain Restout (Université de Lorraine, Université de Strasbourg, CNRS, BETA)
    Abstract: Motivated by recent evidence pointing at an increasing contribution of asymmetric shocks across sectors to economic fluctuations, we explore the labor market effects of technology shocks biased toward the traded sector. Our VAR evidence for seventeen OECD countries reveals that the non-traded sector alone drives the increase in total hours worked following a technology shock that increases permanently traded relative to non-traded TFP. The shock generates a reallocation of labor toward the non-traded sector which contributes to 35% on average of the rise in non-traded hours worked. Both labor reallocation and variations in labor income shares are found empirically connected with factor-biased technological change. Our quantitative analysis shows that a two-sector open economy model with flexible prices can reproduce the labor market effects we document empirically once we allow for imperfect mobility of labor, gross substitutability between home- and foreign-produced traded goods, and factor- biased technological change. When calibrating the model to country-specific data, its ability to account for the cross-country reallocation and redistributive effects we esti- mate increases once we let factor-biased technological change vary between sectors and across countries.
    Keywords: Sector-biased technology shocks; Factor-augmenting efficiency; Open economy; Labor reallocation; CES production function; Labor income share
    JEL: E25 E32 F11 F41
    Date: 2021
  40. By: Matthias Huber (Friedrich Schiller University Jena and Federal Office for Migration and Refugees); Silke Uebelmesser (Friedrich Schiller University Jena and CESifo)
    Abstract: This paper focuses on foreign language learning as human capital investment or consumption. We apply the human capital investment framework to foreign language learning and enlarge it by adding consumption motives. Based on a novel dataset collected from language course participants in 14 countries worldwide, we estimate individual and country-level determinants of the different motives for language learning and of the expected use of language skills in the labour market. We highlight possible spillovers from the consumption motive to professional use in the labour market, which emerge mostly in a "tied-mover" context. This provides guidance for targeted migration and integration policies.
    Keywords: Language learning, new dataset, human capital investment, consumption
    JEL: C82 E21 E22 F15 F22
    Date: 2021–11–22
  41. By: Saungweme; Odhiambo
    Abstract: The study seeks to empirically test the hypothesis that public debt has a significant influence on inflation in Zimbabwe, covering the period 1980-2020. The study was motivated by recent trends in public debt and domestic inflation in Zimbabwe, and the need to guide debt-inflation related policy. These latest trends have started to ring alarming bells, which raises questions on the effectiveness of fiscal and monetary policies in bringing macroeconomic stability in the country. Applying the Autoregressive Distributed Lag (ARDL) bounds testing procedure to cointegration and an error correction mechanism (ECM), expanded by incorporating structural breaks, the study finds evidence in support of positive and significant impact of public debt on inflation dynamics in Zimbabwe, particularly in the long run. Based on the findings, public debt dynamics matter for inflation process in Zimbabwe. That is, fiscal policy can be considered to be an important determinant of the effectiveness of monetary policy in Zimbabwe. Therefore, the government should be mindful of increases in public debt as this was found to be inflationary.
    Date: 2021–10
  42. By: Mary Amiti; Sebastian Heise; Aidan Wang
    Abstract: The prices of U.S. imported goods, excluding fuel, have increased by 6 percent since the onset of the COVID-19 pandemic in February 2020. Around half of this increase is due to the substantial rise in the prices of imported industrial supplies, up nearly 30 percent. In this post, we consider the implications of the increase in import prices on U.S. industry inflation rates. In particular, we highlight how rising prices of imported intermediate inputs, like industrial supplies, can have amplified effects through the U.S. economy by increasing the production cost of goods that rely heavily on these inputs.
    Keywords: inflation; import prices; inputs; supply chains
    JEL: F0 E31
    Date: 2021–11–08
  43. By: Davide Furceri; Mr. Romain A Duval; Marina M. Tavares; Raphael Lee
    Abstract: We show that firms’ market power dampens the response of their output to monetary policy shocks, using firm-level data for the United States and a large cross-country firm-level dataset for 14 advanced economies. The estimated impact of a firm’s markup on its response to a monetary policy shock is large enough to materially affect monetary policy transmission. We also find some evidence that the role of markup in monetary policy transmission, while independent from other channels, is greater for firms whose characteristics — notably size and age — are likely to be associated with greater financial constraints. We rationalize these findings through a simple partial equilibrium model in which borrowing constraints amplify disproportionately low-markup firms’ responses to changes in interest rates.
    Keywords: Monetary policy; interest rates; imperfect competition; market power; markups; monetary policy transmission; monetary policy shock; responses to change; firms' market power; firms' response; Central bank policy rate; Competition; Global
    Date: 2021–07–09
  44. By: Despina Gavresi (University of Ioannina); Anastasia Litina (Department of Economics, University of Macedonia)
    Abstract: This paper explores the interplay between past exposure to macroeconomic shocks and populist attitudes. We document that individuals who experienced a macroeconomic shock during their impressionable years (between 18 and 25 years of age), are currently more prone to voting for populist parties, and manifest lower trust both in national and European institutions. We use data from the European Social Survey (ESS) to construct the differential individual exposure to macroeconomic shocks during impressionable years. Our findings suggest that it is not only current exposure to shocks that matters (see e.g., Guiso et al. (2020)) but also past exposure to economic recessions, which has a persistent positive effect on the rise of populism. Interestingly, the interplay between the two, i.e., past and current exposure to economic shocks, has a mitigating effect on the rise of populism. Individuals who were exposed to economic shocks in the past are less likely to manifest populist attitudes when faced with a current crisis, as suggested by the experience-based learning literature.
    Keywords: Macroeconomic Shocks, Trust, Attitudes, Populism
    JEL: D72 E60 F68 P16 Z13
    Date: 2021–11
  45. By: Eduardo Corso (Central Bank of Argentina)
    Abstract: For more than half a century, the evolution of saving patterns in Argentina has been characterized by the dollarization of households and firms’ stores of value. We will explore the main elements that conditioned the saving decisions of households and firms throughout the argentine monetary history. To this end, we will begin by analyzing the evolution of the real returns of the main private sector’s stores of value over almost eighty years. Understanding the effects of changing monetary and exchange rate environments on real returns, constitutes a central element of the analysis. It allows us to shed light on asset substitution between stores of value denominated in local currency and those denominated in dollars. From a methodological perspective, in order to rationalize the households and firms’ stores of value demands, we will use optimal portfolio selection approaches under alternative preferences schemes. The main contribution of this article is to use portfolio theory to show that the dollarization of private sector stores of value observed in Argentina for more than fifty years constitutes an adaptive response by households and firms exposed to uncertain economic environments, characterized by disruptive exchange rate shocks and persistent inflationary processes.
    Keywords: dollarization, store of value, portfolio selection
    JEL: E41 E44 G11
    Date: 2021–07
  46. By: Paraskevi Tzika (Department of Economics, University of Macedonia); Theologos Pantelidis (Department of Economics, University of Macedonia)
    Abstract: This paper examines the contribution of Economic Policy Uncertainty (EPU) to the persistence of shocks to stock market volatility. The study applies an innovative approach that compares the half-life of a shock in the context of a bivariate V AR model that includes the volatility of stock returns and EPU, with the half-life of the equivalent univariate ARMA model for the stock return volatility. Based on daily data for the UK and the US, the empirical results corroborate that EPU contributes to the persistence of shocks to stock market volatility for both countries. This contribution is higher for the US, where 14.3% of the persistence of shocks to stock market volatility can be attributed to the EPU index.
    Keywords: Economic Policy Uncertainty, Stock Market Volatility, Persistence, Half-Life
    JEL: C22 C32 E44
    Date: 2021–09
  47. By: Pedro Bento (Texas A&M University, Department of Economics)
    Abstract: The number of women-owned businesses in the U.S. has soared over the last several decades, even compared to the rise in female labor market participation. In 1982 less than 9 percent of working women owned businesses, compared to over 17 percent of men. By 2012 more than 18 percent of women owned businesses while the analogous rate for men only slightly increased to almost 20 percent. This and other evidence suggests that women have faced significant barriers to starting and running businesses and these barriers have been declining over time. I examine the impact of these trends on aggregate output and the welfare of women and men in the labor force. Interpreted through the lens of a model of entrepreneurship, observed trends imply substantial declines in several barriers facing female entrepreneurs. Together, these changes account for over 12 percent of observed growth in aggregate output and a 2 percent increase in workers' consumption-equivalent welfare since 1982. By 2012, lower barriers increased the welfare of female entrepreneurs by a dramatic 33 percent, while lowering the welfare of male entrepreneurs by 6 percent. These impacts are in addition to any gains to workers from declining labor-market barriers.
    Keywords: women, entrepreneurship, business dynamism, misallocation, aggregate productivity, economic growth.
    JEL: E02 E1 J7 O1 O4
    Date: 2021–11–08
  48. By: Guillaume Horny (Banque de France); Supriya Kapoor (Technological University Dublin)
    Abstract: We study how an easing in corporate bond funding conditions affect the asset structure of firms’ fixed assets. This paper employs ECB's Corporate Sector Purchase Program as a quasi-natural experiment that reduces bond yields for firms eligible to ECB purchases. We identify eligible firms using information on their bond ratings. Using consolidated balance sheet information on non-financial firms in France, we find that firms increase investment expenses but only to replace existing assets, whether tangible and intangible, instead of investing in new equipment to grow in scale. This replacement is however not homogeneous across asset classes, since intangible assets increase in importance relative to tangible ones. The shift towards intangible assets is stronger for firms with a BBB rating than for safer firms (AAA-A rating). This suggest that while BBB rated firms were to some extent constraint in their funding, they do not use the proceeding to reinforce the collateral value of their assets. These effects are robust to the inclusion of several fixed effects. We conclude that an easier access to market debt can have an effect on the mix of fixed assets used by firms to produce. This raises questions as to whether firms eligible to CSPP purchases increased their productivity since new equipment can be more efficient than the deprecated ones.
    Keywords: CSPP, bond issuances, monetary policy, credit risk, investment
    JEL: D24 E52 G01 G32
    Date: 2021–10
  49. By: Makarski, Krzysztof (Warsaw School of Economics); Tyrowicz, Joanna (University of Warsaw); Komada, Oliwia (GRAPE)
    Abstract: We study the interactions between capital income tax and social security privatization in the context of rising longevity. In an economy with idiosyncratic income shocks, redistributive defined benefit social security provides some insurance against income uncertainty. This insurance comes at the expense of efficiency loss due to labor supply distortions. The existing view in the literature states that reducing this distortion by introducing (partially funded) defined contribution social security would reduce welfare because the loss of insurance and the transitory fiscal gap dominate the efficiency gains. However, prior research financed the transitory costs of the reform by taxing consumption. We show that in the context of longevity, capital income taxation provides a superior alternative: welfare gains are sufficient to outweigh the loss of insurance and transitory fiscal gap. We provide explanations for a mechanism behind this result and we reconcile our results with the earlier literature.
    Keywords: longevity, capital income taxation, social security reform, fiscal policy, welfare effects
    JEL: C68 D72 E62 H55 J26
    Date: 2021–10
  50. By: Faia, Ester (Goethe University Frankfurt); Kudlyak, Marianna (Federal Reserve Bank of San Francisco); Shabalina, Ekaterina (Goethe University Frankfurt)
    Abstract: Occupational specificity of human capital motivates an important role of occupational reallocation for the economy's response to shocks and for the dynamics of inequality. We introduce occupational mobility, through a random choice model with dynamic value function optimization, into a multi-sector/multi-occupation Bewley (1980)-Aiyagari (1994) model with heterogeneous income risk, liquid and illiquid assets, price adjustment costs, and in which households differ by their occupation-specific skills. Labor income is a combination of endogenous occupational wages and idiosyncratic shock. Occupational reallocation and its impact on the economy depend on the transferability of workers' skills across occupations and occupational specialization of the production function. The model matches well the statistics on income and wealth inequality, and the patterns of occupational mobility. It provides a laboratory for studying the short- and long-run effects of occupational shocks, automation and task encroaching on income and wealth inequality. We apply the model to the pandemic recession by adding an SIR block with occupation-specific infection risk and a ZLB policy and study the impact of occupational and aggregate labor supply shocks. We find that occupational mobility may tame the effect of the shocks but amplifies earnings inequality, as compared to a model without mobility.
    Keywords: occupational mobility, heterogeneous agents, skills, income and wealth inequality, discrete choice optimization
    JEL: J22 J23 J31 J62 E21 D31
    Date: 2021–10
  51. By: José Carlos Coelho; José Alves
    Abstract: We investigate the role of fiscal policy, through several measures of government revenues and expenditures and redistribution, on disposable and market income inequality and economic growth as well as the interaction between inequality and growth for 31 European countries from 1995 to 2019. In this article, we employ SUR regressions and SEM models, and we conclude that: i) while post-tax and transfers inequality has a negative impact on public expenditure variables and redistribution, pre-tax and transfers inequality has a positive impact; ii) public expenditure variables and direct taxation negatively influence economic growth; iii) average post-tax and transfers inequality has a negative effect on growth and average pre-tax and transfers inequality has a positive impact; iv) growth contributes to the reduction of average post-tax and transfers inequality and to the increase in average pre-tax and transfers inequality; and v) fiscal policy allows for the attenuation of disposable income inequality. The different results between the role of pre and post-tax and transfers inequality levels lead us to suggest tax progressivity as an important feature to take into account when analyse the trivariate relationship between fiscal policy, growth, and inequalities.
    Keywords: inequality; economic growth; fiscal policy; seemingly unrelated regressions; three-stage least squares
    JEL: D63 E62 O47
    Date: 2021–11
  52. By: Ana Kristel Lapid (Asian Development Bank); Rogelio Jr Mercado (Asian Development Bank); Peter Rosenkranz (Asian Development Bank)
    Abstract: Cross-border bank positions in the Asia and the Pacific region remain highly concentrated to few counterparties, exposing the region to financial risks and policy spillovers. Consequently, assessing the determinants and impacts of the region’s cross-border banking concentration is relevant in designing appropriate policies to promote financial development and safeguard financial stability. To this end, we construct cross-border bank concentration measures for 47 economies in Asia and the Pacific from 2000 to 2019. The results show that higher capital account and trade openness as well as per capita income are significantly associated with lower cross-border bank concentration. Moreover, elevated cross-border bank concentration tends to lower domestic credit growth and nonperforming loans, while we find no impact on bank profitability for the region.
    Keywords: cross-border bank exposures, cross-border bank concentration, credit growth, non-performing loans, bank profitability, Asia and the Pacific
    JEL: E44 F36 G21 O16
    Date: 2021–01
  53. By: Pedro Bento (Texas A&M University, Department of Economics); Sunju Hwang (Texas A&M University, Department of Economics)
    Abstract: The number of black-owned businesses in the U.S. has increased dramatically since the 1980s, even compared to the number of non-black-owned businesses and the rise in black labor-market participation. In 1982 less than 4 percent of black labor-market participants owned businesses, compared to over 14 percent of other participants. By 2012 more than 16 percent of black participants owned businesses while the analogous rate for non-black participants increased to only 19 percent. Combined with other evidence, this suggests black entrepreneurs have faced significant barriers to starting and running businesses and these barriers have declined over time. We examine the impact of these trends on aggregate output and welfare. Interpreted through a model of entrepreneurship, declining barriers from 1982 to 2012 led to a permanent 2 percent increase in (consumption-equivalent) black welfare, a 0.7 percent increase in output per worker (a small fraction of the observed 70 percent increase), and a 0.7 percent decrease in the welfare of other labor-market participants. These impacts are in addition to any gains from declining labor-market barriers.
    Keywords: black, minority, distortions, entrepreneurship, business dynamism, misallocation, aggregate productivity, economic growth.
    JEL: E02 E1 J7 J15 O1 O4
    Date: 2021–11–08
  54. By: Guglielmo Maria Caporale; Luis A. Gil-Alana; Pablo Vicente Trejo
    Abstract: This paper investigates unemployment persistence in the 27 EU member states by applying fractional integration methods to quarterly data (both seasonally adjusted and unadjusted) from 2000q1 to 2020q4. The obtained evidence points to high levels of persistence in all cases. With seasonally adjusted data, a small degree of mean reversion is found in the case of Belgium, Luxembourg and Malta, but this evidence disappears under the assumption of weakly correlated disturbances. More cases of mean reversion are found instead when analysing the unadjusted series. In particular, countries such as Belgium, France, Croatia, Italy, Luxembourg and Malta display orders of integration significantly lower than 1. In addition, significant negative time trends are found in the case of Bulgaria, Croatia, Malta and Romania, and a positive one for Luxembourg. Finally, the Covid-19 pandemic had mixed effects, with (seasonal) persistence increasing in some countries whilst decreasing in others and not changing in a minority of cases. On the whole, our results support the hysteresis hypothesis for the European economies.
    Keywords: unemployment persistence, long memory, Europe, fractional integration
    JEL: C22 E24 O52
    Date: 2021
  55. By: Sourav Ray (DeGroote School of Business, McMaster University, Canada); Avichai Snir (Department of Banking & Finance, Netanya Academic College, Israel); Daniel Levy (Department of Economics, Bar-Ilan University, Israel; Department of Economics, Emory University, USA; Rimini Centre for Economic Analysis; Research Centre for Economic Analysis)
    Abstract: We study different notions of sale and regular prices, and their variability with store pricing-formats. We use data from three large stores with different pricing-formats (EDLP/Hi-Lo/Hybrid) that are located within 1-km radius. Importantly, the data contain both the actual transaction prices and the actual regular prices as displayed on the store shelves. We combine these data with two “generated” regular price series and study their rigidity. Regular-price rigidity varies with store-formats because different format stores define regular-prices differently. Correspondingly, the meaning of price-cuts varies across store-formats. To interpret the findings, we consider the store pricing format distribution across the US.
    Keywords: Price Rigidity, Sticky Prices, Regular Prices, Sale Prices, Filtered Prices, Reference Prices, Transaction Prices, Price Cuts, Pricing Format, Every Day Low Price (EDLP), Hi-Lo, Hybrid
    JEL: E31
    Date: 2021–11
  56. By: Paul Bouche; Gilbert Cette; Rémy Lecat
    Abstract: Analysing French firms over 1991-2016, we find first that since the beginning of the century, one or two downward significant productivity breaks have occurred in all industries, both at the frontier and for laggard firms, suggesting a decline in the contribution of technological progress to productivity growth. Second, the median labour share is always higher for the laggard firms than for the frontier firms, with a sharp decrease from the mid-1990s to 2008, and an increase from 2008 onwards. Third, factor reallocation decreased significantly in the 2000s, at the time when we observed an increase in productivity dispersion, with a growing productivity gap between frontier and laggard firms. It appears also that reallocation has been lower on average over the whole period for sectors with a high import share, which can be related to the impact of global value chains.
    Keywords: Productivity, Frontier Firms, Reallocation
    JEL: D24 E24 J23 L25
    Date: 2021
  57. By: Isaac K. Ofori (University of Insubria, Varese, Italy); Christopher Quaidoo (University of Insubria, Varese, Italy); Pamela E. Ofori (University of Insubria, Varese, Italy)
    Abstract: This study uses machine learning techniques to identify the key drivers of financial development in Africa. To this end, four regularization techniques— the Standard lasso, Adaptive lasso, the minimum Schwarz Bayesian information criterion lasso, and the Elasticnet are trained based on a dataset containing 86 covariates of financial development for the period 1990 – 2019. The results show that variables such as cell phones, economic globalisation, institutional effectiveness, and literacy are crucial for financial sector development in Africa. Evidence from the Partialing-out lasso instrumental variable regression reveals that while inflation and agricultural sector employment suppress financial sector development, cell phones and institutional effectiveness are remarkable in spurring financial sector development in Africa. Policy recommendations are provided in line with the rise in globalisation, and technological progress in Africa.
    Keywords: Africa, Elasticnet, Financial Development, Financial Inclusion, Lasso, Regularization, Variable Selection
    JEL: C01 C14 C52 C53 C55 E5 O55
    Date: 2021–01
  58. By: Katya Kartashova; Xiaoqing Zhou
    Abstract: Wealth inequality in the U.S., measured by the top 1% wealth share, experienced dramatic changes in the first year of the COVID-19 pandemic. Economic theory suggests that the key to understanding wealth inequality is heterogeneity in the return to net worth across households. To understand the dynamics of wealth inequality during the COVID-19 pandemic, we develop a novel methodology that allows us to estimate the returns to net worth for different groups of households at relatively high frequency. We show that portfolio heterogeneity and asset price movements are the main determinants of wealth returns and inequality, whereas saving-rate heterogeneity and within-class return differences played a minor role. As the stock market continued to outperform the housing market, the return of the wealthy has risen faster than that of other households, reinforcing the wealth concentration at the top. We also document a widening racial return gap between white and black households later in the pandemic. Nearly all of the racial differences in the wealth return, however, are explained by the differences in wealth, not by race itself. Whereas the previous literature has evaluated return heterogeneity and its implications for long-run wealth inequality in low-frequency data, our analysis suggests that return heterogeneity together with large asset price movements is also key to understanding short-run dynamics in wealth inequality.
    Keywords: COVID-19; wealth inequality; asset prices; returns to wealth; heterogeneity; racial wealth gap
    JEL: D31 E21 G11 G51
    Date: 2021–11–10
  59. By: Ruediger Bachmann; Kai Carstensen; Stefan Lautenbacher; Martin Schneider
    Abstract: This paper studies how managers plan under uncertainty. In a new survey panel on German manufacturing firms, we show that uncertainty reflects change: Planning incorporates higher subjective uncertainty about future sales growth when the firm has just experienced unusual growth, and more so if the experience was negative. At the quarterly frequency, subjective uncertainty closely tracks conditional volatility of shocks: Both exhibit an asymmetric V-shaped relationship with past growth. In the cross section of firms, however, subjective uncertainty differs from conditional volatility: planning in successful firms—either large or fast-growing—reflects lower subjective uncertainty than in unsuccessful firms even when the size of the shocks is the same.
    Keywords: expectation formation, firms, measurement, subjective uncertainty, survey data
    JEL: C83 D22 E20 E23
    Date: 2021
  60. By: Anton Badev; Lauren Clark; Daniel Ebanks; Jeffrey C. Marquardt; David C. Mills
    Abstract: We analyze the universe of payments settled through the Fedwire Funds Service--the primary U.S. real-time gross settlement service operated by the Federal Reserve--for the period January 2004 to December 2020. We report on trends in payments volume, payments value, balances, and overdrafts, in addition to documenting changes in the behavior of financial institutions transacting via the Fedwire Funds Service.
    Keywords: Fedwire; Payments; Overdrafts; Liquidity
    JEL: E58 G20
    Date: 2021–11–05
  61. By: Aussama Bejraoui; Guillaume Delalande; Melissa Li; Julia Benn
    Abstract: The COVID-19 pandemic has underscored the need for better tracking and monitoring domestic and international investments in health, including on pandemic preparedness. The total official support for sustainable development (TOSSD) framework can help, as it captures both cross‑border flows to developing countries, such as international assistance, and domestic contributions to global public goods, such as pandemic preparedness. This pilot study tests the current TOSSD methodology for tracking the global financing for health, and explores how TOSSD can be shaped to best respond to the emerging information needs of the international community.
    JEL: I15 I14 H41 H87 C4 O11 F3 E44
    Date: 2021–11–25
  62. By: Fabrizio Ferriani (Bank of Italy); Andrea Gazzani (Bank of Italy)
    Abstract: We compare different approaches to constructing financial condition indices (FCIs) for major emerging market economies (EMEs). We further test whether measures of web-search intensity for keywords related to financial tensions can complement the information content of traditional financial variables. We find that an index constructed as a simple average of key financial variables augmented with data from Google searches outperforms several alternative definitions of FCIs in explaining business cycle fluctuations and capital flows episodes. These results hold true when controlling for proxies of the global financial cycle, highlighting that local financial market conditions are important for the macroeconomic performance of EMEs
    Keywords: financial condition index, emerging markets, Google search, principal component analysis, VAR, quantile regressions
    JEL: C51 E44 F30 G01 G15
    Date: 2021–11
  63. By: Mr. Ruy Lama; Mai Hakamada; Ms. Valerie Cerra
    Abstract: One of the most puzzling facts in the wake of the Global Financial Crisis (GFC) is that output across advanced and emerging economies recovered at a much slower rate than anticipated by most forecasting agencies. This paper delves into the mechanics behind the observed slow recovery and the associated permanent output losses in the aftermath of the crisis, with a particular focus on the role played by financial frictions and investment dynamics. The paper provides two main contributions. First, we empirically document that lower investment during financial crises is the key factor leading to permanent loss of output and total factor productivity (TFP) in the wake of a crisis. Second, we develop a DSGE model with financial frictions and capital-embodied technological change capable of reproducing the empirical facts. We also evaluate the role of financial policies in stabilizing output and TFP in response to disruptions in financial markets.
    Keywords: Medium-term TFP loss; impulse response; investment dynamics; hysteresis effect; aftermath of a financial crises; Total factor productivity; Global financial crisis of 2008-2009; Banking crises; Self-employment; Global
    Date: 2021–06–25
  64. By: Carneiro, Anabela (University of Porto); Portugal, Pedro (Banco de Portugal); Raposo, Pedro (Universidade Catolica Portuguesa, Lisbon); Rodrigues, Paulo M. M. (Banco de Portugal)
    Abstract: This paper provides comprehensive and detailed empirical regression analyses of the sources of wage persistence. Exploring a rich matched employer-employee data set and the estimation of a dynamic panel wage equation with high-dimensional fixed effects, our empirical results show that permanent unobserved heterogeneity plays a key role in driving wage dynamics. The decomposition of the omitted variable bias indicates that the most important source of bias is the persistence of worker characteristics, followed by the heterogeneity of firms' wage policy and last by the job-match quality. We highlight the importance of the incidental parameter problem, which induces a severe downward bias in the autoregressive parameter estimate, through both an in-depth Monte Carlo study and an empirical analysis. Using three alternative bias correction methods (the split-panel Jackknife (Dhaene and Jochmans, 2015), an analytical expression (Hahn and Kuersteiner, 2002), and a residual based bootstrap approach (Everaert and Pozzi, 2007, Gonçalves and Kaffo, 2015)), we observe that up to one-third of the reduction of the autoregressive parameter estimates induced by the control of permanent heterogeneity (high dimensional fixed effects) may not be justified.
    Keywords: wage persistence, high-dimensional fixed effects, match effects, incidental parameter problem
    JEL: J31 J63 J65 E24
    Date: 2021–10
  65. By: OECD
    Abstract: This paper explores the role of social vouchers as a tool for social inclusion and local development. It presents a typology of vouchers and their objectives, governing institutional and regulatory frameworks, use by national and local governments, and the social economy (Section1). It analyses the challenges and opportunities for the development of vouchers in light of the COVID-19 crisis and suggests recommendations to effectively capitalise on social vouchers as a tool to “build back better” (Section 2). Finally, it illustrates and analyses specific cases in Belgium, Brazil, the Czech Republic, France, Mexico, Morocco and Romania (Section 3).
    Keywords: culture, local development, social economy, social vouchers, target spending consumption
    JEL: D31 I38 D61 E21 E26
    Date: 2021–11–23
  66. By: Mr. Fabio Comelli; Ms. Sumiko Ogawa
    Abstract: This paper reviews the approaches to systemic risk analysis in 32 central bank financial stability reports (FSRs). We compare and contrast the systemic risk analysis in FSRs with the IMF Article IV staff reports, noting that Article IV staff reports and FSRs frequently pick up analytical content from each other. All reviewed FSRs include a systemic risk assessment, which has not always been the case in Article IV staff reports. Also, compared to Article IV staff reports, on average, FSRs tend to cover a wider range of financial risks and vulnerabilities and tend to have more extensive discussions of the policy mix to mitigate systemic risk. In these assessments, FSRs utilize sophisticated analytical tools, such as stress tests and growth-at-risk, more frequently than Article IV staff reports. We emphasize that a central bank FSR typically presents a rich resource that IMF country teams can leverage, as already done by some, in forming their independent view about systemic risk.
    Keywords: IMF article IV staff report; IMF country team; central bank FSR; IMF article IV surveillance; IMF article IV consultation; Systemic risk; Financial sector stability; Macroprudential policy; Stress testing; Systemic risk assessment; Global; Caribbean
    Date: 2021–07–30
  67. By: Daniel Carvalho (Banco de Portugal); Etienne Lepers (Organisation for Economic Co-operation and Development); Rogelio Jr Mercado (Asian Development Bank)
    Abstract: An important channel through which capital flows may lead to financial vulnerabilities is by fuelling domestic credit booms, the so-called "capital flows-credit growth nexus". This paper makes two important contributions to the study of this nexus (i) it adopts a sectoral approach to the relationship between cross-border capital flows and domestic credit growth and (ii) it studies how di erent macroprudential and financial policies affect that relationship. Using novel datasets on both sectoral flows and policy measures for 36 emerging economies for the 2000-2018 period, the results not only underscore the importance of a granular sectoral approach to identify the full range of connections between capital flows and credit growth, but also regarding the appropriate policy response. While, in general, macroprudential policies and foreign currency-based measures are more suited to mitigate the impact of banking sector flows, capital controls may be e ective in the presence of non-financial corporates (NFC) and other financial corporates flows. Breaking by borrowing sectors, within macroprudential measures, lending standards and measures targeted at household credit weaken the impact of inflows on household credit and measures aimed at household credit actually strengthen the relationship between NFC flows and NFC credit suggesting a potential shift in composition.
    Keywords: capital flows, domestic credit, sectors
    JEL: E51 F32 G15
    Date: 2021–09
  68. By: Saungweme; Odhiambo
    Abstract: This paper examines the relationship between inflation and economic growth in Kenya from an analytical and empirical standpoint. The paper applies the autoregressive distributed lag (ARDL) bounds testing approach and the multivariate Granger-causality test using time series data covering 1970-2019. Structural breaks in the time series were also conducted using the Perron (1997) (PPURoot) and Zivot-Andrews (1992) (ZAU Root) techniques. Incorporating structural breaks into time series increases statistical inference's overall validity. Inflation and economic growth in Kenya were found to have structural breaks in 1995 and 1991. These years are marked by Kenya's economic, financial, public sector and institutional reforms. The other findings of the study revealed that inflation has a statistically significant negative influence on long-term economic growth. The multivariate Granger-causality results showed a distinct short-run unidirectional causality from economic growth to inflation in Kenya. In order to mitigate the negative consequences of inflation and the coronavirus on the economy and welfare, the study recommends that Kenya's government should pursue prudent monetary, financial, and fiscal policies.
    Date: 2021–10
  69. By: Autor, David (MIT); Dorn, David (University of Zurich); Hanson, Gordon H. (University of California, San Diego)
    Abstract: We evaluate the duration of the China trade shock and its impact on a wide range of outcomes over the period 2000 to 2019. The shock plateaued in 2010, enabling analysis of its effects for nearly a decade past its culmination. Adverse impacts of import competition on manufacturing employment, overall employment-population ratios, and income per capita in more trade-exposed U.S. commuting zones are present out to 2019. Over the full study period, greater import competition implies a reduction in the manufacturing employment-population ratio of 1.54 percentage points, which is 55% of the observed change in the value, and the absorption of 86% of this net job loss via a corresponding decrease in the overall employment rate. Reductions in population headcounts, which indicate net out-migration, register only for foreign-born workers and the native-born 25-39 years old, implying that exit from work is a primary means of adjustment to trade-induced contractions in labor demand. More negatively affected regions see modest increases in the uptake of government transfers, but these transfers primarily take the form of Social Security and Medicare benefits. Adverse outcomes are more acute in regions that initially had fewer college-educated workers and were more industrially specialized. Impacts are qualitatively—but not quantitatively—similar to those caused by the decline of employment in coal production since the 1980s, indicating that the China trade shock holds lessons for other episodes of localized job loss. Import competition from China induced changes in income per capita across local labor markets that are much larger than the spatial heterogeneity of income effects predicted by standard quantitative trade models. Even using higher-end estimates of the consumer benefits of rising trade with China, a substantial fraction of commuting zones appears to have suffered absolute declines in average real incomes.
    Keywords: import competition, China trade, local labor markets, manufacturing decline, job loss
    JEL: E24 F14 F16 J23 J31 L60 O47 R12 R23
    Date: 2021–10
  70. By: Jean-Charles Bricongne; Baptiste Meunier; Thomas Pical
    Abstract: The Covid-19 crisis has highlighted innovative high-frequency dataset allowing to measure in real-time the economic impact. In this vein, we explore how satellite data measuring the concentration of nitrogen dioxide (NO2, a pollutant emitted mainly by industrial activity) in the troposphere can help predict industrial production. We first show how such data must be adjusted for meteorological patterns which can alter data quality and pollutant emissions. We use machine learning techniques to better account for non-linearities and interactions between variables. We then find evidence that nowcasting performances for monthly industrial production are significantly improved when relying on daily NO2 data compared to benchmark models based on PMIs and auto-regressive (AR) terms. We also find evidence of heterogeneities suggesting that the contribution of daily pollution data is particularly important during “crisis” episodes and that the elasticity of NO2 pollution to industrial production for a country depends on the share of manufacturing in the value added. Available daily, free-to-use, granular and covering all countries including those with limited statistics, this paper illustrates the potential of satellite-based data for air pollution in enhancing the real-time monitoring of economic activity.
    Keywords: Data Science, Big Data, Satellite Data, Nowcasting, Machine Learning, Industrial Production
    JEL: C51 C81 E23 E37
    Date: 2021
  71. By: Sihvonen, Markus
    Abstract: I analyze time series momentum along the Treasury term structure. Past bond returns predict future returns both due to autocorrelation in bond risk premia and because unexpected bond return shocks increase the premium. Yield curve momentum is primarily due to autocorrelation in yield changes rather than autocorrelation in bond carry and can largely be captured using a single bond return or yield change factor. Because yield changes are partly induced by changes in the federal funds rate, yield curve momentum is related to post-FOMC announcement drift. The momentum factor is unspanned by the information in the term structure today and is hence inconsistent with standard term structure, macrofinance and behavioral models. I argue that the results are consistent with a model with unpriced longer term dependencies.
    JEL: G12 E43 E47
    Date: 2021–11–16
  72. By: Margarita Lopez Forero (Université d'Evry and Université Paris-Saclay, France)
    Abstract: We link the Lucas' Paradox to the interaction between sector and countrylevel financial frictions. First, we compute proper measures of the aggregate marginal product of capital (MPK), accounting for natural capital and relative capital prices, for a panel of 50 developed and developing countries over 1995-2008. Our aggregate MPK measures imply there are little incentives for capital to flow to capital-poor economies over the sample period. Next, we examine how sector and country-level financial frictions interact to shape the aggregate MPK of a country. To do so, we use industry-level data to construct an annual country-level measure of external financial dependence and assess its effects on aggregate MPK conditional on the level of financial development and alternatively, on legal origins, our instrumental variable. We find that external financial dependence positively relates to MPK in developed countries, regardless of their level of financial development while it negatively relates to MPK in developing economies. Financial development appears to be a necessary condition in order for production in financially dependent sectors to positively affect aggregate MPK in developing countries. Our results taken altogether suggest that sector and country level financial frictions act as inefficiencies precluding improvements of MPK in developing economies despite large differences in capital-to-labor rations with respect to developed countries.
    Keywords: Financial Dependence, Financial Development, Marginal Product of Capital, Financial Frictions, Legal Origins, Lucas Paradox
    JEL: E22 F11 F21 F32 F41 F63 O11 O16 O47
    Date: 2021
  73. By: Martina Kirchberger (Department of Economics, Trinity College Dublin); Keelan Beirne (Department of Economics, Princeton University)
    Abstract: This paper uses new micro-data on key input prices in the construction sector and market structure to understand the reasons for price differences and their implications for capital accumulation. Our key motivating facts are that (i) there is large dispersion in prices of eight key construction sector inputs and that cement prices were particularly high in Sub-Saharan Africa compared to the rest of the world; (ii) using data on the market structure of the cement industry at a global level, cement prices are highest in countries with few firms; (iii) cement plays a significant role in construction sector expenditures, particularly in the poorest countries. Estimates from our model of oligopoly suggest that lower levels of competition lead to significantly higher prices. Financial accounts data point toward substantial pure profits, and there is no evidence from plant size distributions that minimum efficient scale is driving high prices. Finally, embedding the oligopoly model into a neoclassical growth model, we show that distortions in investment producing sectors have a disproportionate impact on productive capacity and that the steady-state capital stock in the poorest countries is most sensitive to changes in markups in cement.
    Keywords: construction, infrastructure, capital, cement, investment, markups, general equilibrium
    JEL: E22 H54 L13 L74 O18 O41
    Date: 2021–06
  74. By: Hakan Kara (Bilkent University, Ankara, Turkey); Cagri Sarikaya (CBRT)
    Abstract: Türkiye’de 2006 yılında enflasyon hedeflemesine geçildiği dönemden itibaren 2017 yılına kadar enflasyon tek hanelerde istikrarlı seyretmiş, 2017 yılından itibaren ise çift haneli düzeylerde oynak bir seyir izlemiştir. Enflasyon dinamiklerindeki bu değişimin yakından incelenmesi enflasyonla mücadele programlarının tasarımı açısından önem taşımaktadır. Bu doğrultuda çalışma, 2006-2021 yılları arasında beklentiler ve fiyatlama davranışlarındaki değişimi mercek altına almaktadır. Bulgularımız, 2017 sonrasında enflasyonun çıpalanma derecesinin zayıfladığını, fiyat dinamiklerinde belirgin değişimler olduğunu, bu çerçevede özellikle enflasyon katılığının ve kur geçişkenliğinin önemli ölçüde arttığını göstermektedir. Bu sonuçlar, beklentilerin ve fiyatlama davranışlarının düzelmesi açısından hedeflere olan güvenin yeniden tesis edilmesinin önemine işaret etmektedir.
    Keywords: Enflasyon, Phillips eğrisi, Zaman serisi modelleri, Türkiye.
    JEL: C22 C32 C51 E31
    Date: 2021–11
  75. By: Javier Olivera; Philippe Van Kerm
    Abstract: We study attitudes towards the introduction of hypothetical new taxes to finance the cost of the COVID-19 pandemic. We rely on survey data collected in Luxembourg in 2020. The survey asks for the agreement of respondents over: a one-time net wealth tax, an inheritance tax, a temporary solidarity income tax, and a temporary increase in VAT. All questions include different and randomly assigned tax attributes (tax rates and exemption amounts). We find a clear divide with relatively high support for new wealth and inheritance taxes on the one hand and a low support for increases in VAT and income taxes on the other hand. While 58% of respondents agree or strongly agree with a one-time tax levied on net worth, only 24% are in favor of a small increase in VAT. Support for any tax is however negatively associated with the size of the tax as measured by the predicted revenues. Our results indicate that a one-time wealth tax could raise substantial revenues and still garner public support.
    Keywords: COVID-19; wealth tax; inheritance tax; income tax; VAT; preference for redistribution
    JEL: D31 E62 H20 I38
    Date: 2021–11
  76. By: Radoslaw Kotkowski (Narodowy Bank Polski); Michal Polasik (Nicolaus Copernicus University)
    Abstract: This paper investigates the way in which the COVID-19 pandemic has changed an important aspect of everyday life, viz. how people make payments. The empirical study is based on a survey of over 5,000 respondents from 22 European countries. It shows that consumers who had been making cashless payments prior to the outbreak of the pandemic have been even more likely to do so since it broke out. On the other hand, the consumers who had mostly been paying in cash have often continued to do so. Results indicate that the usage of banking and payment innovations proved to be the catalyst leading to the growth of cashless payment usage. The divide between those who pay in cash and those who do not, therefore, seems to have widened during the pandemic. We found that the probability of more frequent cashless payments as a result of the pandemic differs considerably between countries and therefore depends on local conditions. The results indicate that the pandemic has exacerbated major financial inclusion issues and that this needs to be addressed by policymakers, but also that further analysis of factors differentiating usage of cash and the cashless instrument is needed.
    Keywords: COVID-19 pandemic; Cash; Cashless payments; Change in payment behaviour
    JEL: E41 E42 I12 I18
    Date: 2021
  77. By: Banti, Chiara; Bose, Udichibarna
    Abstract: This paper documents the emergence of a regional financial cycle in Asia, evidenced by commonality in regional bank flows, and its impact on domestic credit. Using a dataset of 24,169 non-financial Indian firms for the period 2001-2019, we establish that the regional financial cycle has a positive and significant impact on domestic corporate debt, as opposed to an insignificant effect on foreign currency corporate debt, after controlling for the global financial cycle. We find that both interbank markets and monetary policy conditions in the region act as transmission channels for this effect. We show that transparent firms which have lower monitoring costs are relatively more exposed to the regional financial cycle, suggesting that affiliates of foreign banks play an important role. However, the exposure of domestic credit markets reduces once regulators institute more stringent policy actions such as macroprudential policies, selective capital controls and floating currency regimes.
    Keywords: Regional financial cycle; domestic credit markets; macroprudential policies; capital controls; emerging markets
    Date: 2021–11–19
  78. By: Biagio Bossone (World Bank (US))
    Abstract: In this article, I argue that current macroeconomic models (both orthodox and heterodox), centered as they are on local agents or agencies, do not recognize the role that "global investors" play in determining the space for effective macroeconomic policies. I therefore argue that these important players must be placed at the center of macroeconomic analysis if we are to understand how macroeconomic policies really work in the global financial environment. The article describes the key characteristics of global investors, analyzes their power to determine the value at which public sector liabilities (money and debt) are traded on international markets and how this power affects policy effectiveness. Consequently, no country is truly sovereign in a globalized world and the government of every country is subject to an intertemporal budget constraint (IBC), although, of course, not all countries are equal and not all IBCs are equally binding: the IBCs are flexible and endogenous to the decisions of global investors but in any case, unavoidable. I conclude the article by arguing that the policy choices of countries in today's globalized financial environment would benefit from revisiting some of John Maynard Keynes's teachings, considering his in-depth knowledge of global financial markets and how they affect economies. of the countries.
    Keywords: economic sovereignty; exchange rates; global financial markets; global investors; macroeconomic policies; money; policy credibility; policy space; public debt
    JEL: E60 F62 F65 G15
    Date: 2021–11
  79. By: Minetti, Raoul (Michigan State University, Department of Economics); Herrera, Ana Maria (University of Kentucky); Schaffer, Matthew (UNC Greensboro)
    Abstract: We investigate the effects of financial liberalization on the dynamism of the credit market, as measured by the intensity of credit reallocation across firms. We construct measures of inter-firm credit reallocation in the U.S. states following a methodology akin to Davis and Haltiwanger (1992). We then exploit the staggered deregulation of the credit markets of the states of the eighties as a natural experiment to identify an exogenous shock to the process of credit reallocation. The analysis reveals that the credit market liberalization intensified inter-firm credit reallocation in the states, even within narrowly defined groups of continuing firms, while leaving aggregate credit growth essentially unaltered. The results suggest that, in turn, the increased allocative dynamism of the credit market enhanced the allocation of funds to more productive firms and the TFP growth of the states.
    Keywords: Credit Market; Credit Reallocation; Allocative Efficiency; Liberalization
    JEL: E44 G20
    Date: 2021–11–18
  80. By: Beetsma, Roel M. W. J. (University of Amsterdam); Komada, Oliwia (GRAPE); Makarski, Krzysztof (Warsaw School of Economics); Tyrowicz, Joanna (University of Warsaw)
    Abstract: We analyze the political stability of funded social security. Using a stylized theoretical framework we study the mechanisms behind governments capturing social security assets in order to lower current taxes. The results and the driving mechanisms carry over to a fully-fledged and carefully calibrated overlapping generations model with an aging population. Funding is efficient in a Kaldor-Hicks sense. We demonstrate that, even though we can rationalize the actual introduction of a two-pillar defined-contribution scheme with funding through a majority vote, a new vote to curtail the funded pillar through asset capture or permanent diversion of contributions to the pay-as-you-go pillar always receives majority support. For those alive and thus allowed to vote, the temporary reduction in taxes outweighs the reduction in retirement benefits. This result is robust to substantial intra-cohort heterogeneity and other extensions, and only overturned with a sufficient degree of altruism. Our analysis rationalizes the experience of Central and Eastern European countries, who rolled back their funded pension pillars soon after setting them up.
    Keywords: social security, funding, pay-as-you-go, asset capture, majority vote, welfare
    JEL: H55 D72 E17 E27
    Date: 2021–10
  81. By: Hugh Rockoff
    Abstract: When the Great Depression struck the United States, Oliver M.W. Sprague was America’s foremost expert on financial crises. His History of Crises under the National Banking System is a frequently cited classic. Had he diagnosed a banking panic and called for an aggressive response by the Federal Reserve, it might have made a difference; but he did not. Sprague’s misdiagnosis had, I argue, two causes. First, the crisis lacked the symptoms of a panic, such as high short-term interest rates in the New York money market, which Sprague had identified from his studies of previous crises. Second, Sprague’s macro-economic ideas led him to conclude that an expansionary monetary policy would be of little help once a depression was underway. Sprague’s main concern was that abandoning the gold standard would intensify the crisis, a concern that led him to resign his position as advisor to the U.S. Treasury to protest Roosevelt’s gold policy.
    JEL: B2 N12 N2
    Date: 2021–10
  82. By: Lima, Pedro G. (University of Porto); Teixeira, Pedro N. (University of Porto); Silva, Sandra T. (University of Porto)
    Abstract: Since the late twentieth century there has been a growing interest in academic and political circles on inequality. In this paper, we develop a systematic analysis of the literature on this topic published in economic journals since the 1950s. This is done through an innovative approach that presents (i) an identification and characterization of the main streams of research about Inequality since the 1950s; (ii) the development of a new method of analysis that combines (ii-a) a quantitative bibliometric analysis using the VOSviewer software, which maps them into different clusters, (ii-b) a qualitative analysis, where we determine the main streams of research, based, not only on the content of each reference, but also on the context where they are cited, and provide context to the development of each cluster by analysing the most important journals, authors, and institutions. The analysis leads to the identification of seven clusters, each of them with several streams of research. Each of the clusters is characterized according to several aspects such as the journals where the contributions were published, the alma matres and academic affiliations of the authors, and the countries in which those authors are based. The leading journals and the dominant academic institutions are the same as found in economics broadly considered, but they vary from cluster to cluster. Among the authors that have had major influence in the development of this field of economic research, stand out Anthony Atkinson, Simon Kuznets, Michael Kalecki, and Thomas Piketty.
    Keywords: inequality, distribution of income, wealth, bibliometrics, Kuznets, Atkinson, Piketty, Kalecki
    JEL: B2 D31 E24
    Date: 2021–10
  83. By: Mrs. Swarnali A Hannan; Juan Pablo Cuesta Aguirre
    Abstract: To shed light on the possible scarring effects from Covid-19, this paper studies the economic effects of five past pandemics using local projections on a sample of fifty-five countries over 1990-2019. The findings reveal that pandemics have detrimental medium-term effects on output, unemployment, poverty, and inequality. However, policies can go a long way toward alleviating suffering and fostering an inclusive recovery. The adverse output effects are limited for countries that provided relatively greater fiscal support. The increases in unemployment, poverty, and inequality are likewise lower for countries with relatively greater fiscal support and relatively stronger initial conditions (as defined by higher formality, family benefits, and health spending per capita).
    Keywords: pandemics, output, unemployment, poverty, inequality, fiscal support, informality, social expenditure, health expenditure.; increases in unemployment; copyright page; potential GDP; group four; expenditure group; COVID-19; Income inequality; Health care spending; Maternity and childcare benefit spending; Global
    Date: 2021–07–09
  84. By: Marco Pelosi (Bank of Italy); Giacomo Rodano (Bank of Italy); Enrico Sette (Bank of Italy)
    Abstract: In this paper, we analyse the incidence of zombie firms, how they have been affected by the pandemic, and their take-up of economic support measures. While balance sheet data for 2020 are not available yet, we find that in 2019, they represented 3 to 5 per cent of all corporations. In 2020, they were more likely to experience liquidity deficits and spikes in their default probability, as well as to exit the market. Importantly, we also find that they were less likely to take up the economic support measures. Overall, as fewer firms exited the market in 2020 than in 2019, the pandemic is likely to have boosted the zombie share. However, compared with other firms, zombies have exited the market more and had a lower take-up of support measures. Thus, the Government’s policies are unlikely to have amplified such a trend.
    Keywords: zombie firms, Covid-19.
    JEL: L25 E61 G38 H32
    Date: 2021–11
  85. By: Mr. Alejandro D Guerson
    Abstract: This paper quantifies the savings obtained from risk pooling with a Regional Stabilization Fund (RSF) for the Eastern Caribbean Currency Union. A Monte Carlo experiment is used to estimate the size of a RSF conditional on probabilities of depletion under specific saving-withdrawal rules. Results indicate that regional risk pooling requires about half of the saving amount relative to the sum of individual-country savings. In addition to reducing the amount of saving requirements for stabilization, the RSF can improve welfare by realocating government consumption savings during booms towards public investment during recessions, resulting in an increase of public investment in the range of 0.5-1.5 percent of GDP per year depending on the country, with positive growth dividends. Moreover, the RSF also reduces the dispersion of public debt outcomes in light of the cross-country cyclical synchronicity of output and revenue, thereby strengthening the stability of the regional currency board.
    Keywords: RSF conditional; saving-withdrawal rule; Monte Carlo experiment; fund simulation; saving-investment rule; Public investment spending; Standing facilities; Government consumption; Caribbean
    Date: 2021–07–16
  86. By: Charlesworth, Anita; Anderson, Michael; Donaldson, Cam; Johnson, Paul; Knapp, Martin; McGuire, Alistair; McKee, Martin; Mossialos, Elias; Smith, Peter; Street, Andrew; Woods, Michael
    Abstract: The health and care sector plays a valuable role in improving population health and societal wellbeing, protecting people from the financial consequences of illness, reducing health and income inequalities, and supporting economic growth. However, there is much debate regarding the appropriate level of funding for health and care in the UK. In this Health Policy paper, we look at the economic impact of the COVID-19 pandemic and historical spending in the UK and comparable countries, assess the role of private spending, and review spending projections to estimate future needs. Public spending on health has increased by 3·7% a year on average since the National Health Service (NHS) was founded in 1948 and, since then, has continued to assume a larger share of both the economy and government expenditure. In the decade before the ongoing pandemic started, the rate of growth of government spending for the health and care sector slowed. We argue that without average growth in public spending on health of at least 4% per year in real terms, there is a real risk of degradation of the NHS, reductions in coverage of benefits, increased inequalities, and increased reliance on private financing. A similar, if not higher, level of growth in public spending on social care is needed to provide high standards of care and decent terms and conditions for social care staff, alongside an immediate uplift in public spending to implement long-overdue reforms recommended by the Dilnot Commission to improve financial protection. COVID-19 has highlighted major issues in the capacity and resilience of the health and care system. We recommend an independent review to examine the precise amount of additional funds that are required to better equip the UK to withstand further acute shocks and major threats to health.
    Keywords: Knowledge and Exchange Impact
    JEL: E6
    Date: 2021–05–22
  87. By: Hancké, Bob; Van Overbeke, Toon; Voss, Dustin
    Abstract: We examine economic policy responses to the COVID-19 induced economic collapse in Germany (a coordinated market economy) and the UK (a liberal market economy). The two countries responded to the symmetric economic shock with very similar furlough and business credit schemes to stabilize the demand and supply sides of the economy. However, since these policies fed into very different political-economic structures in both countries, they produced very different results. We attribute this divergence to the effect of “institutional complementarities,” the notion in Varieties of Capitalism that different elements of a system are mutually articulated and, therefore, mutually reinforcing beyond their initial contribution, or vice versa. Our results serve as a cautionary tale to policymakers that introducing policy elements developed in other institutional contexts is complex and challenge us to consider systematically the way in which institutional frameworks actively shape policy outcomes.
    Keywords: Covid-19; coronavirus; CUP deal
    JEL: J1 E6
    Date: 2021–06–04
  88. By: Naurin, Abida (Pakistan Institute of Development Economics, Quaid-i-Azam University Campus); Pourpourides, Panayiotis M. (Cardiff Business School)
    Abstract: This paper sheds light on an important causality which is of primary interest for policy makers, both at country level as well as broad institutional level, though it is largely ignored in the literature. Using panel data from a diversified group of countries and after controlling for various factors and endogeneities within the context of multivariate models, we present evidence that an increase in the intensity of government spending on education leads to an overall increase in the intensity of household spending on education of a roughly equal magnitude, within a span of two years. We further find that the reverse causality does not hold. Specifically, a 1% increase in the intensity of government spending on education induces a contemporaneous increase in the intensity of household spending on education of 3%, followed by a correction of 2% the subsequent year. Our mediation analysis within our set of variables suggests that the causality is only direct, and that there is no statistically significant distinction between low- and high-income countries.
    Keywords: Household Spending on Education, Government Spending on Education, Causality,Credit Market
    JEL: E2 G5 I22
    Date: 2021–11
  89. By: Nuno Cassola (CefES; CEMAPRE, University of Lisbon, Portugal); Paul De Grauwe (EI, London School of Economics and Political Science, UK); Claudio Morana (University of Milano-Bicocca, Italy; CefES; Rimini Centre for Economic Analysis; CeRP; Center for European Studies, Harvard University, USA); Patrizio Tirelli (Department of Economics and Management, University of Pavia, Italy; Griffith University, Australia; CefES; Rimini Centre for Economic Analysis)
    Abstract: This policy brief warns about the risks of discontinuing the policy responses to the COVID-19 crisis by pursuing exit strategies too early and/or too sharply. It outlines a comprehensive strategy for limiting such risks globally and offers an in-depth discussion of the European situation. Due to fiscal rules written in a pre- COVID-19 era and excessive emphasis on controlling public debt ratios, the Euro Area could be left with long-lasting scars, so its situation requires special treatment. Therefore, we articulate some policy proposals designed to preserve and strengthen the recovery in the EMU.
    Date: 2021–11
  90. By: Ms. Christina Kolerus
    Abstract: This paper studies the dynamics of external accounts during 278 economic recession events in the past 60 years and sheds light on key factors that shape these patterns. Economic recessions trigger highly-persistent increases in the current account, driven by an initial, sharp decline in investment and fueled by medium term deleveraging, more so in advanced economies than in emerging markets. The strengthening of the current account is more pronounced when internal and external imbalances are present, and less when recessions are synchronized across countries. During severe natural disasters or epidemics, however, current accounts tend to weaken in the short term. Consistent with these findings, the COVID-19 shock, with comparatively moderate pre-existing imbalances yet high synchronization, had a muted effect on current account balances. The compositional changes, however, were unique and driven by unprecedented policy intervention, with record public dissaving more than offsetting exceptional private saving.
    Keywords: response to recession; synchronized recession; current account sensitivity; current account response; Non-commodity EMs; Economic recession; Current account; Credit booms; Private savings; Natural disasters; Global
    Date: 2021–07–30
  91. By: Mr. Leonardo Martinez; Juan Carlos Hatchondo; Mr. Francisco Roch
    Abstract: We study gains from introducing a common numerical fiscal rule in a “Union” of model economies facing sovereign default risk. We show that among economies in the Union, there is significant disagreement about the common debt limit the Union should implement: the limit preferred by some economies can generate welfare losses in other economies. In contrast, a common sovereign spread limit results in higher welfare across economies in the Union.
    Keywords: limit result; debt level; debt-limit rule; debt intolerance; elasticity function; hight-debt-intolerance economy; Fiscal rules; Debt limits; Asset prices
    Date: 2021–07–23
  92. By: Guglielmo Maria Caporale; Anamaria Sova; Robert Sova
    Abstract: This paper analyses the impact of the Covid-19 pandemic on exports and imports in the case of 35 OECD countries during the 2019Q1-2021Q2 period using a dynamic panel approach, specifically the system Generalized Method of Moments (GMM). In contrast to earlier studies, the empirical specification incorporates not only an index for the restrictive (and fiscal) measures adopted by national governments, but also an interaction term with private credit which captures the role of the financial sector in the context of the current crisis. The findings suggest that the negative effects of the Covid-19 pandemic on international trade can be attenuated through (policies supporting) private credit, which confirms the importance of the trade-finance nexus.
    Keywords: Covid-19 pandemic, stringency index, overall government response index, credit to the private non-financial sector, dynamic panel models, GMM
    JEL: C25 E61 F13 F15
    Date: 2021
  93. By: Steven B. Kamin (American Enterprise Institute); Ben Clements
    Abstract: The emerging-market and developing economies face a multitude of grave challenges as they confront the COVID-19 pandemic, including a critical lack of budgetary space. Observers have highlighted the need to bolster the international financial institutions' lending capacity in the event of a "sudden stop" in global capital flows such as occurred in March.
    Keywords: Budget deficit, Coronavirus, Fiscal policy, grants, Gross Domestic Product GDP, International economy, International Monetary Fund IMF
    JEL: A
    Date: 2020–08
  94. By: Malibongwe C Nyati; Christian K Tipoy; Paul F Muzindutsi
    Abstract: This study reports on measuring and testing of a Composite Financial Cycle Index (CFCI) as a modified version of a South African Financial Cycle (FC). This is achieved through the adoption of thirteen monthly financial time series indicators observed over the period 2000M1 to 2018M12. In this context, a Two-Step Markov Switching Dynamic Factor in State-Space Form is utilised. The analyses are extended through the measurement of the SARB proxy index in order to facilitate comparison. The study provided evidence that the indicators of credit, house price and equity prices are the best indicators for measuring FCs in South Africa. However, there exist room for extension of the scope of financial time series variables used beyond these indicators. The added indicators proved to have more information content for financial crises forecasting. They have further proved to be better signals and to be better early warning indicators of financial crises in South Africa. Therefore, the addition of time series indicators beyond credit, house price and equity, increased the accuracy in measuring FCs, which could help prevent vulnerabilities from accumulating unnoticed.
    Keywords: Composite Financial Cycle Index, Macroprudential policy, State Space modelling, Dynamic Factor Model, Multinomial Logit Model, Markov Regime Switching
    Date: 2021–10
  95. By: Jiang, Zhengyang (Northwestern Kellogg); Lustig, Heanno (Stanford GSB and NBER); Van Nieuwerburgh, Stijn (Columbia Business School and NBER); Xiaolan, Mindy Z. (UT Austin McCombs)
    Abstract: When the government commits to a debt policy, the future value of government primary surpluses at all horizons is dictated by the debt dynamics under the risk-neutral measure. We compare the present discounted value of future surpluses implied by the U.S. federal government debt dynamics in a no-arbitrage bond pricing model to the PDV of actual government surpluses. Since the late 1990s, the debt-implied PDV of surpluses have consistently and persistently exceeded realized surpluses. They have also exceeded surplus forecasts resulting from tax and spending policy rules. U.S. Treasury investors appear to have been overly optimistic when assessing future surpluses.
    JEL: E6 G1 H6
    Date: 2021–01
  96. By: Paul H. Kupiec (American Enterprise Institute)
    Abstract: Banking system stress tests are a key component of IMF/World Bank financial stability assessments.
    Keywords: Bank Regulation, Banking Crisis, Financial Stability, Macroeconomics, Monetary Policy, Stress Tests
    JEL: A
    Date: 2020–12
  97. By: Graziano Moramarco
    Abstract: Using a large quarterly macroeconomic dataset over the period 1960Q1-2017Q4, this paper documents the usefulness of selected financial ratios from the housing market and firms' aggregate balance sheets for predicting GDP in the United States over multi-year horizons. A house price-to-rent ratio adjusted for the business cycle and the liabilities-to-income ratio of the nonfinancial noncorporate business sector provide the best in-sample fit and out-of-sample forecasts of cumulative GDP growth over horizons of 1-5 years, outperforming all other predictors as well as popular high-dimensional forecasting models and forecast combinations.
    Date: 2021–11
  98. By: Paul H. Kupiec (American Enterprise Institute)
    Abstract: Analysis of data on bank-specific average PPP loan size produces results that are inconsistent with a loan demand explanation. Absent good measures of PPP loan demand, the source of the observed differences in bank PPP loan activity cannot be definitively identified using bank regulatory data alone.
    Keywords: Banks, Coronavirus, Fiscal Stimulus, Risk, US Economy
    JEL: A
    Date: 2020–12
  99. By: Oya Celasun; Mr. Allan Timmermann; Jungjin Lee; Mr. Mico Mrkaic
    Abstract: This paper examines the performance of World Economic Outlook (WEO) growth forecasts for 2004-17. Short-term real GDP growth forecasts over that period exhibit little bias, and their accuracy is broadly similar to those of Consensus Economics forecasts. By contrast, two- to five-year ahead WEO growth forecasts in 2004-17 tend to be upward biased, and in up to half of countries less accurate than a naïve forecast given by the average growth rate in the recent past. The analysis suggests that a more efficient use of available information on internal and external factors—such as the estimated output gap, projected terms of trade, and the growth forecasts of major trading partners—can improve the accuracy of some economies’ growth forecasts.
    Keywords: Forecasting, forecasting bias and efficiency; WEO growth forecast; forecasting bias; Consensus Economics forecast; World Economic Outlook growth; forecast error; Emerging and frontier financial markets; Terms of trade; GDP forecasting; Output gap; Global financial crisis of 2008-2009; Caribbean; Middle East; North Africa; Global; Europe
    Date: 2021–08–06
  100. By: Robert J. Barro (American Enterprise Institute)
    Abstract: Long-term data show that the dynamic efficiency condition r>g holds when g is represented by the average growth rate of real GDP if r is the average real rate of return on equity, E(re ), but not if r is the risk-free rate, rf .
    Keywords: Economic Growth, Economic Risk, Economics, Gross Domestic Product (GDP)
    JEL: A
    Date: 2020–10

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