nep-mac New Economics Papers
on Macroeconomics
Issue of 2021‒12‒20
88 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Financial constraints, risk sharing, and optimal monetary policy By Zaretski, Aliaksandr
  2. Skewness and Time-Varying Second Moments in a Nonlinear Production Network: Theory and Evidence By Ian Dew-Becker; Alireza Tahbaz-Salehi; Andrea Vedolin
  3. Perturbaciones reales sobre la Cuenta Corriente. Equilibrio parcial keynesiano vs. enfoque intertemporal de la cuenta corriente. By Mariano Fernández
  4. The fiscal response to the Italian COVID-19 crisis: A counterfactual analysis By Giovanni Di Bartolomeo; Paolo D'Imperio; Francesco Felici
  5. Consumption Spending during the COVID-19 Pandemic By Christopher D. Cotton; Vaishali Garga; Justin Rohan
  6. Central Bank Digital Currencies and The Emerging Markets: The Currency Substitution Challenge By Sebastian Edwards
  7. Assessing the fiscal-monetary policy mix in the euro area By Bańkowski, Krzysztof; Christoffel, Kai; Faria, Thomas
  8. Can central bank digital currency increase financial inclusion? Arguments for and against By Ozili, Peterson K
  9. Macroeconomic reversal rate in a low interest rate environment By van den End, Jan Willem; Konietschke, Paul; Samarina, Anna; Stanga, Irina M.
  10. Uncovering Heterogeneous Regional Impacts of Chinese Monetary Policy By Tsang, Andrew
  11. Labor Market Effects of Technology Shocks Biased toward the Traded Sector By Luisito Bertinelli; Olivier Cardi; Romain Restout
  12. The Geography of Job Creation and Job Destruction By Moritz Kuhn; Iourii Manovskii; Xincheng Qiu
  13. Quarterly Projection Model for the National Bank of Rwanda By Mr. Jan Vlcek; Mikhail Pranovich
  14. Keep It Simple, Not Stupid – How to Save the EU Fiscal Framework? By Kuusi, Tero; Puonti, Päivi
  15. Asset Prices and Business Cycles with Liquidity Shocks By Mahdi Nezafat; Ctirad Slavik
  16. Macroprudential Policy, Bank Competition and Bank Risk in East Asia By E Philip Davis; Ka Kei Chan; Dilruba Karim
  17. Monetary policy implications of deviations in inflation targeting: the need for a global cooperative, coordinated and correlated response By Ojo, Marianne; Dierker, Theodore
  18. The Evolution of Monetary Policy Focal Points By Alexis Stenfors; Ioannis Chatziantoniou; David Gabauer
  19. Empirical Investigation of a Sufficient Statistic for Monetary Shocks By Fernando E. Alvarez; Andrea Ferrara; Erwan Gautier; Hervé Le Bihan; Francesco Lippi
  20. Exchange Rates and Monetary Policy When Tradable and Nontradable Goods are Complements By William Craighead
  21. The aftermath of sovereign debt crises: a narrative approach By Lennard, Jason; Kenny, Seán; Esteves, Rui
  22. Firestorm: Multiplicity in Models with Full Information By Jonathan J Adams
  23. Spillovers of US Interest Rates: Monetary Policy & Information Effects By Santiago Camara
  24. Mongolia: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Mongolia By International Monetary Fund
  25. Financial frictions: micro vs macro volatility By Lee, Seungcheol; Luetticke, Ralph; Ravn, Morten O.
  26. Optimal Bank Reserve Remuneration and Capital Control Policy By Chun-Che Chi; Stephanie Schmitt-Grohé; Martín Uribe
  27. The role of systemic risk spillovers in the transmission of Euro Area monetary policy By Skouralis, Alexandros
  28. Developments in Banknotes in Circulation since the Start of the Pandemic By Kento Yoshizawa; Kohei Maehashi; Hiroaki Yanagihara; Yoichi Kadogawa; Masakazu Inada
  29. The impact of U.S. employer-sponsored insurance in the 20th century By Vegard M. Nygaard; Gajendran Raveendranathan
  30. Sovereign Risk and Financial Risk By Simon Gilchrist; Bin Wei; Vivian Z. Yue; Egon Zakrajšek
  31. Learning About the Long Run By Leland Farmer; Emi Nakamura; Jón Steinsson
  32. “Golden Ages”: A Tale of the Labor Markets in China and the United States By Hanming Fang; Xincheng Qiu
  33. Republic of San Marino: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of San Marino By International Monetary Fund
  34. Algeria: 2021 Article IV Consultation-Press Release; and Staff Report; and Statement by the Executive Director for Algeria By International Monetary Fund
  35. The Impact of r-g on the Euro-Area Government Spending Multiplier By Mr. Giovanni Melina; Mario di Serio; Matteo Fragetta
  36. Mistakes in Future Consumption, High MPCs Now By Chen Lian
  37. Expanding the Norwegian Armed Forces in the Time of Corona: Benefit-Cost Analysis in the Context of High Unemployment Rate By Lindgren, Petter Y.; Presterud, Ane Ofstad
  38. Cash demand in times of crises By Rösl, Gerhard; Seitz, Franz
  39. Uncertainty and Information Acquisition: Evidence from Firms and Households By Heiner Mikosch; Christopher Roth; Samad Sarferaz; Johannes Wohlfart
  40. The Transmission of External Shocks in Asia: Country Characteristics and Policy Responses By Mr. Shanaka J Peiris; Miss Sanaa Nadeem; Mr. Pragyan Deb
  41. Global spillovers of the Fed information effect By Pinchetti, Marco; Szczepaniak, Andrzej
  42. Is a €10 trillion European climate investment initiative fiscally sustainable? By Rafael Wildauer; Stuart Leitch; Jakob Kapeller
  43. Ukraine: First Review Under the Stand-By Arrangement, Requests for Extension and Rephasing of Access of the Arrangement, Waivers of Nonobservance of a Performance Criterion, Financing Assurances Review, and Monetary Policy Consultation-Press Release; Staff Report; and Statement by the Executive Director for Ukraine By International Monetary Fund
  44. "Still Flying Blind after All These Years: The Federal Reserve's Continuing Experiments with Unobservables" By Dimitri B. Papadimitriou; L. Randall Wray
  45. Labor Taxation: Insights From The World Economic Forum Survey By Moutsopoulos, Michael; Pelagidis, Theodore
  46. Guinea-Bissau: First Review Under the Staff Monitored Program By International Monetary Fund
  47. Price transmission along the Turkish poultry and beef supply chains By Mehmet Guncavdi; Murat Kors; Elif Ozcan Tok
  48. Mexico: Arrangement Under the Flexible Credit Line and Cancellation of Current Arrangement-Press Release; Staff Supplement; and Staff Report By International Monetary Fund
  49. Could transaction-based financial benchmarks be susceptible to collusive behaviour? By Lilian Muchimba
  50. Financialisation of Nature By Tone Smith
  51. CBDC as Imperfect Substitute for Bank Deposits: A Macroeconomic Perspective By Philippe Bacchetta; Elena Perazzi
  52. Some Alternative Monetary Facts By Mr. Manmohan Singh; Mr. Peter Stella
  53. Inequality and the size of US state government By Weijie Luo
  54. Addressing the endogeneity of slack in Phillips Curves By Dovì, Max-Sebastian; Koester, Gerrit; Nickel, Christiane
  55. Zombies on the Brink: Evidence from Japan on the Reversal of Monetary Policy Effectiveness By Ms. Deniz O Igan; Mr. Gee Hee Hong; Do Lee
  56. Borrower versus bank channels in lending: Experimental- and administrative-based evidence By Valentina Michelangeli; José-Luis Peydró; Enrico Sette
  57. Feeling the heat: extreme temperatures and price stability By Faccia, Donata; Parker, Miles; Stracca, Livio
  58. How did the Complementary Deposit Facility affect commercial bank fs demand for reserve? Empirical analysis using bank fs financial data By Katsutoshi Takehana; Hisashi Tanizaki
  59. What Has Been the Impact of COVID-19 on Debt? Turning a Wave into a Tsunami By Kose, M. Ayhan; Nagle, Peter; Ohnsorge, Franziska; Sugawara, Naotaka
  60. A nowcast of 2021-22 GDP growth and forecast for 2022-23 based on a Factor Augmented Time Varying Coefficients Regression Model. By Bhattacharya, Rudrani; Mundle, Sudipto
  61. Credit, crises and inequality By Bridges, Jonathan; Green, Georgina; Joy, Mark
  62. Firm expectations and economic activity By Enders, Zeno; Hünnekes, Franziska; Müller, Gernot J.
  63. Predicting Macroeconomic and Macrofinancial Stress in Low-Income Countries By Mr. Irineu E de Carvalho Filho; Hans Weisfeld; Fei Liu; Mr. Fabio Comelli; Mr. Andrea F Presbitero; Alexis Meyer-Cirkel; Mrs. Sandra V Lizarazo Ruiz; Klaus-Peter Hellwig; Rahul Giri; Chengyu Huang
  64. Fiscal and current account imbalances: the cases of Germany and Portugal By António Afonso; José Carlos Coelho
  65. The Aggregate-Demand Doom Loop: Precautionary Motives and the Welfare Costs of Sovereign Risk By Francisco Roldán
  66. Effect of Fiscal and Monetary Policies on Economic Activities in South Africa: The Role of Policy Uncertainty By Aye, Goodness
  67. Hysteresis in unemployment: evidence from OECD estimates of the natural rate By Ball, Laurence; Onken, Joern
  68. A Parsimonious Macroeconomic ABM for Labor Market Regulations By Caner Ates; Dietmar Maringer
  69. Fan charts 2.0: flexible forecast distributions with expert judgement By Sokol, Andrej
  70. Corporate Indebtedness and Investment: Micro Evidence of an Inverted U-Shape By Ibrahim Yarba
  71. Terms-of-Trade Shocks are Not all Alike By Luciana Juvenal
  72. The Macroeconomic Effects of Corporate Tax Reforms By Francesco Furno
  73. The fiscal implication of levelling up and UK governance devolution By Philip McCann
  74. Asymmetric Conjugate Priors for Large Bayesian VARs By Joshua C. C. Chan
  76. Unconventional Monetary Policies in Emerging Markets and Frontier Countries By Ms. Helene Poirson
  77. Prudential policy with distorted beliefs By Dávila, Eduardo; Walther, Ansgar
  78. Can Sticky Portfolios Explain International Capital Flows and Asset Prices? By Philippe Bacchetta; Margaret Davenport; Eric van Wincoop
  79. The decline of labour share in OECD and non-OECD since the 1980s By Kheng, Veasna; Mckinley, Justin; Pan, Lei
  80. Oil Market Shocks and Financial Instability in Asian Countries By Fakhri Hasanov; Leila Dagher
  81. Vermögenspreise, Zinseffekte und die Robustheit der öffentlichen Finanzen in Deutschland - eine Szenario-Analyse By Boysen-Hogrefe, Jens; Fiedler, Salomon; Gern, Klaus-Jürgen; Groll, Dominik; Jannsen, Nils; Kooths, Stefan
  82. Exploration of the Parameter Space in Macroeconomic Agent-Based Models By Karl Naumann-Woleske; Max Sina Knicker; Michael Benzaquen; Jean-Philippe Bouchaud
  83. Antidumpingzölle, Preise und China: Freihandel als Retter in der Not? By Gabriel Felbermayr; Alexander Sandkamp
  84. Evaluating the Accuracy of Counterfactuals The Role of Heterogeneous Expectations in Life Cycle Models By de Bresser, Jochem
  85. Covid-19 and firms’ stock price growth: The role of market capitalization. By Brueckner, Markus; Kang, Wensheng; Vespignani, Joaquin
  86. Impact of Macroeconomic Policies on Agricultural Performance in India: A Vector Auto Regression Approach By Mathew, Merlin
  87. Some issues related to the Japanese financial system raised by the amendment of Payment Act in 2020 By Katsutoshi Takehana; Hisashi Tanizaki
  88. Finance Act 2020 Notes: Section 15: loan charge not to apply to loans or quasi-loans made before 9 December 2010; Section 16: election for loan charge to be split over three tax years; Schedule 2: the loan charge: consequential amendments; Section 17: loan charge reduced where underlying liability disclosed but unenforceable; Section 18: relief from interest on tax payable by a person subject to the loan charge; Section 19: minor amendments relating to the loan charge; Section 20: repaying sums paid to HMRC under agreements relating to certain loans etc; Section 21: operation of the scheme By Blackwell, Michael

  1. By: Zaretski, Aliaksandr
    Abstract: I characterize optimal government policy in a sticky-price economy with different types of consumers and endogenous financial constraints in the banking and entrepreneurial sectors. The competitive equilibrium allocation is constrained inefficient due to a pecuniary externality implicit in the collateral constraint and other externalities arising from consumer type heterogeneity. These externalities can be corrected with appropriate fiscal instruments. Independently of the availability of such instruments, optimal monetary policy aims to achieve price stability in the long run and approximate price stability in the short run, as in the conventional New Keynesian environment. Compared to the competitive equilibrium, the constrained efficient allocation significantly improves between-agent risk sharing, approaching the unconstrained Pareto optimum and leading to sizable welfare gains. Such an allocation has lower leverage in the banking and entrepreneurial sectors and is less prone to the boom-bust financial crises and zero-lower-bound episodes observed occasionally in the decentralized economy.
    Keywords: constrained efficiency; effective lower bound; financial constraints; leverage limits; optimal monetary policy; Ramsey equilibrium
    JEL: E32 E44 E52 E63 G28
    Date: 2021–05–16
  2. By: Ian Dew-Becker; Alireza Tahbaz-Salehi; Andrea Vedolin
    Abstract: This paper studies asymmetry in economic activity over the business cycle. It develops a tractable multisector model of the economy in which complementarity across inputs causes aggregate activity to be left skewed with countercyclical volatility. We then examine implications of the model regarding the time-series skewness of activity at the sector level, cyclicality of dispersion and skewness across sectors, and the conditional covariances of sector growth rates, finding support for each in the data. The empirical skewness of employment growth, industrial production growth, and stock returns increases with the level of aggregation, which is consistent with the model's implication that it is the nonlinearity in the production structure of the economy that generates the skewness. Other prominent models of asymmetry are not able to simultaneously match the range of empirical facts that the production network model can.
    JEL: E10 E23 E32 E44
    Date: 2021–11
  3. By: Mariano Fernández
    Abstract: El objetivo de este documento es contraponer el enfoque de equilibrio parcial keynesiano sobre el funcionamiento de la Cuenta Corriente con el enfoque moderno de equilibrio general, donde los desequilibrios de la Cuenta Corriente reflejan a la misma como un elemento amortiguador de shocks, tanto reales como monetarios. En el documento se intentará poner en evidencia el error del enfoque del equilibrio parcial y se analizaran cómo frente a distintos shocks reales, el resultado de la Cuenta Corriente sería el reflejo del desequilibrio macroeconómico que la generó. / The purpose of this paper is to contrast the Keynesian partial equilibrium framework of the Current Account with the modern intertemporal general equilibrium approach where the Current Account imbalances reflect, and act as a buffer, against both real and monetary shocks. The document will try to highlight the failure of the partial equilibrium approach and will analyze, in the face of different real shocks, how the outcome of the Current Account will be the mirror of the macroeconomic imbalance that caused it.
    Keywords: cuenta corriente, deficit, sustitucion intertemporal, estructuralismo, shocks reales, temporario, permanente.
    JEL: E12 E32 E62 E58 F32 F41
    Date: 2021–11
  4. By: Giovanni Di Bartolomeo; Paolo D'Imperio; Francesco Felici
    Abstract: The COVID-19 pandemic is an unprecedented worldwide event with a massive impact on the economic system. The first Western country that had to face the COVID-19 crisis was Italy, which therefore represents a natural “case study.†By using the microdata and granular policy information available at the Italian Ministry of Economy and Finance, this paper provides a macroeconomic quantitative assessment of the initial emergency fiscal measures introduced in 2020 and an analysis of the impact of the COVID-19 shock during the lockdown
    Keywords: COVID-19; Coronavirus; Macroeconomic impact; Fiscal policies; Lockdowns; Fiscal-policy-study case
    JEL: E32 E62 E65
    Date: 2021–12
  5. By: Christopher D. Cotton; Vaishali Garga; Justin Rohan
    Abstract: We use a novel empirical approach to decompose the impact of different economic, demographic, and COVID-19–related factors (such as lockdowns, case counts, and vaccination rates) on consumption spending on a week-by-week basis during the pandemic. This allows us to study how demographic and economic groups were differentially affected by the pandemic while crucially controlling for other factors. Our results imply that Hispanic and college-educated populations showed particularly large and persistent declines in relative spending. We also compute the relative importance of factors in driving consumption spending differences. We find that spending differences were persistently driven by political affiliation, age, education, and COVID factors. At a more disaggregated level of spending, political affiliation and COVID factors had a much stronger and more persistent impact on spending that was social-distancing sensitive (SDS), such as travel and restaurant dining, than on non-SDS spending.
    Keywords: consumption; inequality; COVID-19; economic factors; demographic factors
    JEL: E21 E32 E62
    Date: 2021–12–03
  6. By: Sebastian Edwards
    Abstract: In this paper, I discuss the implications for emerging countries of the adoption of central bank digital currencies (CBDCs) in advanced jurisdictions, such as the United States, the United Kingdom, and the Euro Zone. The analysis identifies benefits as well as costs. Among the former, one of the most important is lower costs for migrants’ remittances. Some of the costs of global CBDCs are associated with currency substitution, sudden currency depreciations, and lower seigniorage. At the global level, a smooth rollout of CBDCs in center countries requires international coordination. In addition, emerging countries will benefit from the implementation of stronger macroprudential regulations
    JEL: E31 E41 E58 F31 F36
    Date: 2021–11
  7. By: Bańkowski, Krzysztof; Christoffel, Kai; Faria, Thomas
    Abstract: This paper attempts to gauge the effects of various fiscal and monetary policy rules on macroeconomic outcomes in the euro area. It consists of two major parts – a historical assessment and an assessment based on an extended scenario until 2030 – and it builds on the ECB-BASE –a semistructural model for the euro area. The historical analysis (until end-2019, `pre-pandemic´) demonstrates that a consistently countercyclical fiscal policy could have created a fiscal buffer in good economic times and it would have been able to eliminate a large portion of the second downturn in the euro area. In turn, the post-pandemic simulations until 2030 reveal that certain combinations of policy rules can be particularly powerful in reaching favourable macroeconomic outcomes (i.e. recovering pandemic output losses and bringing inflation close to the ECB target). These consist of expansionary-for-longer fiscal policy, which maintains support for longer than usually prescribed, and lower-for-longer monetary policy, which keeps the rates lower for longer than stipulated by a standard reaction function of a central bank. Moreover, we demonstrate that in the current macroeconomic situation, fiscal and monetary policies reinforce each other and mutually create space for each other. This provides a strong case for coordination of the two policies in this situation. JEL Classification: E32, E62, E63
    Keywords: fiscal rules, joint analysis of fiscal and monetary policy, model simulations, monetary policy rules
    Date: 2021–12
  8. By: Ozili, Peterson K
    Abstract: This paper presents the arguments for and against central bank digital currency increasing financial inclusion. Financial inclusion is arguably one of the many reasons for issuing a central bank digital currency. The arguments in support of CBDC increasing financial inclusion are that CBDC can digitize value chains, CBDCs can improve access to digital financial services, CBDC can help to enlarge the digital economy, CBDC can enhance the efficiency of digital payments, CBDC can be used offline when there is no internet coverage, and CBDC offer low transaction costs. The arguments against CBDC increasing financial inclusion are that CBDC may not prioritize financial inclusion, the high cost to purchase digital devices for holding a CBDC, non-interest bearing CBDC, the strong preference for cash over digital currency, the burdensome identification and regulatory requirements, and the imposition of transaction costs. The arguments presented in this paper shows that there is still disagreement over whether a central bank digital currency can increase financial inclusion. Nevertheless, in the light of recent events, many central banks are determined to issue a central bank digital currency for many reasons. Even though a central bank digital currency does not achieve the intended financial inclusion objective, at least, the other objectives for issuing a central bank digital currency can be achieved such as the reduction in cash management costs and the effective conduct of monetary policy.
    Keywords: financial inclusion, central bank digital currency, CBDC, debate, arguments, digital currency, monetary policy, cash.
    JEL: E42 E50 E51 E52 E58 E59 G2 G21 I31 I38 I39
    Date: 2022
  9. By: van den End, Jan Willem; Konietschke, Paul; Samarina, Anna; Stanga, Irina M.
    Abstract: This paper investigates how the monetary policy transmission channels change once the economy is in a low interest rate environment. We estimate a nonlinear model for the euro area and its five largest countries over the period 1999q2-2019q1 and allow for the effects of monetary policy shocks to be state dependent. Using smooth transition local projections, we examine the impulse responses of investment, savings, consumption, and the output gap to an expansionary monetary policy shock under normal and low interest rate regimes. We find evidence for a macroeconomic reversal rate related to the substitution effects becoming weaker relative to the income effects in a low interest rate regime. In this regime the effects of monetary policy shocks are either less powerful or reverse sign compared with a normal rate regime. JEL Classification: E21, E22, E43, E52
    Keywords: low interest rate environment, monetary policy, reversal rate
    Date: 2021–12
  10. By: Tsang, Andrew
    Abstract: This paper applies causal machine learning methods to analyze the heterogeneous regional impacts of monetary policy in China. The method uncovers the heterogeneous regional im-pacts of different monetary policy stances on the provincial figures for real GDP growth, CPI inflation and loan growth compared to the national averages. The varying effects of expansionary and contractionary monetary policy phases on Chinese provinces are highlighted and explained. Subsequently, applying interpretable machine learning, the empirical results show that the credit channel is the main channel affecting the regional impacts of monetary policy. An imminent conclusion of the uneven provincial responses to the “one size fits all” monetary policy is that different policymakers should coordinate their efforts to search for the optimal fiscal and monetary policy mix.
    Keywords: China, monetary policy, regional heterogeneity, machine learning, shadow banking
    JEL: C54 C61 E52 R11
    Date: 2021–07–28
  11. By: Luisito Bertinelli; Olivier Cardi; Romain Restout
    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 estimate 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: E21 E32 F11 F41 O33
    Date: 2021
  12. By: Moritz Kuhn; Iourii Manovskii; Xincheng Qiu
    Abstract: Spatial di erences 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 di erences in unemployment, vacancies, job nding, and job lling within each country. This robust set of facts guides and disciplines the development of a theory of local labor market performance. We nd that a spatial version of a Diamond- Mortensen-Pissarides model with endogenous separations and on-the-job search quanti- tatively accounts for all the documented empirical regularities. The model also quanti- tatively rationalizes why di erences in job-separation rates have primary importance in inducing di erences in unemployment across space while changes in the job- nding rate are the main driver in unemployment uctuations over the business cycle.
    Keywords: Local Labor Markets, Unemployment, Vacancies, Search and Matching
    JEL: J63 J64 E24 E32 R13
    Date: 2021–12
  13. By: Mr. Jan Vlcek; Mikhail Pranovich
    Abstract: National Bank of Rwanda (BNR) modernized monetary policy and transited to the price-based policy framework in January 2019. The Forecasting and Policy Analysis System (FPAS) is the cornerstone for the new forward-looking framework, which mobilizes and organizes resources and sets processes for regular forecasting rounds. The core of this system is a structural macroeconomic model for macroeconomic analysis and projections to support the BNR staff’s policy recommendations to the monetary policy committee. This paper documents the quarterly projection model (QPM) at the core of the FPAS at the BNR. The model is an extension of the canonical structure in Berg et al (2006) to reflect specifics of the interest-rate-based policy framework with a managed exchange rate, the effect of agricultural sector and harvests on prices, and the role of fiscal policies and aid flows.
    Keywords: Rwanda;Forecasting and Policy Analysis;Quarterly Projection Model;Monetary Policy;Managed Exchange Rate;Fiscal Impulse;Aid;WP;food price inflation;central bank;floating exchange rate;money market; nominal exchange rate depreciation; headline inflation; depreciation target; depreciation rate; demand shock; transmission mechanism; energy price inflation; inflation deviation; food inflation; real world oil price gap; price gap; Inflation; Food prices; Agricultural production; Exchange rates; Central bank policy rate; Global
    Date: 2020–12–21
  14. By: Kuusi, Tero; Puonti, Päivi
    Abstract: Abstract In this paper, we describe key problems of the current EU’s fiscal framework and offer constructive options for its reform. A comprehensive reassessment of the rules is necessary, as the development of the rules has reached an impasse for both political and technical reasons. In our view, Europe needs fiscal rules to ensure the sustainability of public finances. In order to reconcile the freedom and responsibility of member states’ fiscal policies, a balance must be struck in which the rules are simple enough to facilitate monitoring of compliance yet effective enough to mean that the need for cross-country bail-out measures is sufficiently rare. Our conclusion is that the new rules should emphasise the long-term debt sustainability target more clearly, while at the same time making its monitoring more effective through better short-term indicators, in particular the expenditure benchmark. We provide a proposal for a practical implementation option which is largely consistent with the current rules. At the same time, the expenditure benchmark should be reformed in order to further its countercyclical impact on fiscal policy, and it should replace the structural balance as the operational indicator of fiscal policy stance. Responsibility for economic policy decisions and their consequences should be fully restored to the Member States and the role of national supervisory bodies should be strengthened. Cross-country bail-out measures in times of crisis should be accompanied by strict conditionality that, in good times, the fiscal policy must be in line with the reformed EU framework.
    Keywords: Fiscal policy, EU, Fiscal rules, Public debt, Fiscal stance
    JEL: E61 E62 H60 H63
    Date: 2021–12–10
  15. By: Mahdi Nezafat; Ctirad Slavik
    Abstract: We develop a production based asset pricing model with financially constrained firms to explain the observed high equity premium and low risk-free rate volatility. Investment opportunities are scarce and firms face productivity and liquidity shocks. A negative liquidity shock forces firms to liquidate a fraction of their assets. We calibrate the model to U.S. data and find that it generates an equity premium and a level and volatility of risk-free rate comparable to those observed in the data. The model also fits key aspects of the behavior of aggregate quantities, in particular, the volatility of aggregate consumption and investment.
    Keywords: general equilibrium; business cycles; production based asset pricing; equity premium and risk-free rate puzzles;
    JEL: E20 E32 G12
    Date: 2021–11
  16. By: E Philip Davis; Ka Kei Chan; Dilruba Karim
    Abstract: Studies of the effect of macroprudential policy on bank risk tend to disregard the potential complementary role of bank competition, which could influence policy's effectiveness in achieving its financial stability objectives. Accordingly, we assess the relation of macroprudential policy and competition to bank risk jointly from a sample of 1373 banks from 13 East Asian countries, using the latest IMF dataset of macroprudential policy from 1990 to 2018. Among our results, we have found that whereas macroprudential policies did commonly have a beneficial effect on risk at a bank level controlling for competition, there are a number of cases where policies were deleterious through increased risk. Notably in the developing and emerging East Asian countries and in the short term, the interactions between competition and macroprudential measures often show a lesser response in terms of risk reduction for banks with more market power, a form of "competition-stability". We suggest that this links in turn to ability of such banks to undertake risk-shifting in response to macroprudential policy. On the other hand, we find for banks in advanced East Asian countries some tendency in the long term for banks facing intense competition to take relatively more risks in face of macroprudential measures, i.e. "competition fragility". These findings provide important implications for regulators.
    Keywords: Macroprudential policy, bank risk, Z score, bank competition
    JEL: E44 E58 G17 G28
    Date: 2021–12
  17. By: Ojo, Marianne; Dierker, Theodore
    Abstract: It is argued that “much of the variation in inflation is due to global factors such as imported goods and energy prices” and that much of that variation is expected to be transitory. However there are growing signs that such transitory nature of inflation may not be as transitory as was initially considered. As rightly argued, the extent and deviations of current inflationary levels necessitates extraordinary intervention – such as cannot be easily compared to previous experiences. To which it has to be added that the prevailing nature of inflation also necessitates a coordinated, cooperative global approach which incorporates the harnessing of similarities and expertise in historical supervisory and regulatory practices in facilitating a harmonized and correlated result. In order to better appreciate the magnitude of the issue at hand, reference needs to be made to past and current levels of energy prices, as well as other major contributors to current inflationary levels, and their implications for inflationary targeting and monetary policy. The nature and relationships involved in the inflationary dynamics is also not as straightforward and clear cut as it used to be and as it may appear to be – other previously absent variables having been incorporated into the equation. This paper aims to provide a clearer picture of the nature and relationships involved in the inflation dynamics – as well as illustrate the complexity of the relationships involved. Further, by highlighting similarities in the review frameworks and approaches by several major central banking economies and regulators, the paper also aims to highlight and illustrate that whilst coordination and cooperation may prove to be a daunting task, several approaches can be adopted to facilitate harmonization and coordination.
    Keywords: inflation, energy prices; imports, wage rates; monetary policy; central bank independence; the Global Financial Crisis (GFC); the Global Pandemic Collapse (GPC); the Effective Lower Bound (ELB); flexible average inflation targeting
    JEL: E5 F1 F16 F18 G2 G3 G38 K2
    Date: 2021–12–02
  18. By: Alexis Stenfors (University of Portsmouth); Ioannis Chatziantoniou (Hellenic Mediterranean University); David Gabauer (Software Competence Center Hagenberg)
    Abstract: With near-zero policy rates becoming the norm in many advanced economies, the focus on long-term bond yields has strengthened considerably. The unconventional monetary policy decision by the Bank of Japan (BOJ) in September 2016 to explicitly target the 10-year Japanese government bond (JGB) yield institutionalised this process – by effectively creating a new monetary policy focal point. In this paper, we study the importance of such focal points. Empirically, we also investigate how JGB benchmark maturities ranging from 1 to 30 years has affected other benchmark maturities over time. We find that the 10-year bond, indeed, became more influential in 2016. However, the effect was surprisingly short-lived. The results suggest that once financial market participants anchored their expectations of the 10-year JGB yield to the new BOJ target, the attention merely shifted towards even longer maturities. Contrary to the logic of the monetary transmission mechanism, we also find the short end of the yield curve has been an absorber, rather than transmitter, of influence during the last decades.
    Keywords: Bank of Japan; bonds; focal points; monetary policy; yield curve control
    JEL: C32 C5 E43 E52 G15
    Date: 2021–12–14
  19. By: Fernando E. Alvarez; Andrea Ferrara; Erwan Gautier; Hervé Le Bihan; Francesco Lippi
    Abstract: In a broad class of sticky price models the non-neutrality of nominal shocks is encoded by a simple sufficient statistic: the ratio of the kurtosis of the size-distribution of price changes over the frequency of price changes. We test this theoretical prediction using data for a large number of firms representative of the French economy. We use the micro data to measure the cross sectional moments, including kurtosis and frequency, for about 120 PPI industries and 220 CPI categories. We use a Factor Augmented VAR to measure the sectoral responses to a monetary shock, as summarized by the cumulative impulse response of sectoral prices (CIRP ), under three alternative identification schemes. The estimated CIRP correlates with the kurtosis and the frequency consistently with the prediction of the theory (i.e. they enter the relationship as a ratio). The analysis also shows that other moments not suggested by the theory, such as the mean, standard deviation and skewness of the size-distribution of price changes, are not correlated with the CIR . Several robustness checks are discussed
    JEL: E31 E5
    Date: 2021–11
  20. By: William Craighead (Department of Economics and Geosciences, US Air Force Academy)
    Abstract: This paper examines the implications of complementarity between tradable and nontradable goods for exchange rates and monetary policy in a two-country general equilibrium model. In doing so, it revisits well-known findings in the New Open Economy Macroeconomics literature that exchange rates are proportional to national money supplies and that optimal monetary policies respond only to domestic shocks. These results depend on a number of simplifying assumptions, including a unitary elasticity of substitution between tradable and nontradable goods. When this assumption is replaced by a more-realistic one of complementarity, exchange rates depend on relative productivity in addition to money supplies when prices are flexible. When prices are sticky, complementarity amplifies the effect of relative money supplies on the exchange rate and creates additional spillover effects from changes of the foreign money supply on domestic consumption. With complementarity, optimal monetary policies respond to external as well as internal shocks.
    Keywords: Complementarity, New Open Economy Macroeconomics, Exchange Rates, Monetary Policy, Nontradable Goods
    JEL: F42 E52
    Date: 2021–08
  21. By: Lennard, Jason; Kenny, Seán; Esteves, Rui
    Abstract: Default is as old as sovereign debt. Since 1820, sovereigns have spent 18% of time in a state of default. Despite the scale of the problem, the causes and consequences of defaults are still imperfectly understood. In this paper we quantify the aggregate cost of defaults, based on a sample of 50 sovereigns between 1870 and 2010. Since defaults are endogenous to the business cycle, we use the narrative approach to identify plausibly exogenous episodes. We find significant and persistent costs of defaults starting at 1.6% of GDP and peaking at 3.3% before recovering to the pre-crisis level after five years. Moreover, we identify a large heterogeneity of costs by the cause of default. Higher costs are associated with defaults initiated by negative supply shocks, political crises, or adverse terms of trade. In contrast, domestic demand shocks have a moderate effect that is quickly reversed.
    JEL: E32 F41 H63 N10 N20
    Date: 2021–11
  22. By: Jonathan J Adams (Department of Economics, University of Florida)
    Abstract: Dynamic stochastic models with full information and rational expectations (FIRE) are not as well determined as is commonly believed. In general, FIRE models exhibit a multiplicity that is implicitly ruled out by standard solution methods, which conjecture that equilibria are functions of past shocks alone. The multiplicity is due to the endogenous feedback from choices to information to choices, which in equilibrium may contain self-fulfilling news about future shocks. I demonstrate the multiplicity in several examples, including canonical asset pricing and business cycle models. Then I study how the multiplicity arises in a dynamic programming problem with decentralized markets. Finally, I conclude that the business cycle literature must adopt information frictions.
    JEL: C62 D50 D84 E32
    Date: 2021–12
  23. By: Santiago Camara
    Abstract: This paper quantifies the spillovers of US monetary policy in Emerging Market economies by exploiting the high-frequency movement of multiple financial assets around FOMC announcements. I show that identifying a US monetary policy tightening using only the high-frequency surprises of the Fed Funds Futures leads to puzzling dynamics: an economic expansion, an exchange rate appreciation and laxer financial conditions in Emerging Markets, in line with a recent literature. I challenge these results by using the identification methodology introduced by Jarocinski & Karadi (2020) which exploits both the high frequency movements of the FFF and the S&P 500. This methodology allows me to quantify the spillovers of two FOMC shocks: a pure US monetary policy and an information disclosure shock. On the one hand, a US tightening caused by a pure US monetary policy shock leads to an economic recession, an exchange rate depreciation and tighter financial conditions. On the other hand, a tightening of US monetary policy caused by the FOMC disclosing positive information about the state of the US economy is able to explain the recent puzzling dynamics. Augmenting the benchmark model with additional variables I show that the financial channel is the main propagation mechanism of US interest rates into Emerging Markets across the two FOMC shocks. Furthermore, the quantitative impact of these FOMC shocks depend on the Emerging Market's exchange rate regime and its dependency on commodity good exports.
    Date: 2021–11
  24. By: International Monetary Fund
    Abstract: A strong export-led recovery is underway. Despite early actions and a successful vaccination campaign, the pandemic is lingering in Mongolia as positivity rates remain high and borders largely closed. An export-led recovery which began in mid-2020, is gathering steam due to booming prices for Mongolia’s exports. Nevertheless, domestic demand, labor markets and the business sector remain weak. Policies were appropriately supportive during the pandemic. However, large, untargeted and continuing fiscal, quasi-fiscal and financial forbearance measures legislated by Parliament have heightened macrofinancial vulnerabilities: public debt has sharply increased, bank balance sheets have further weakened, and the Bank of Mongolia’s (BOM) operational independence has been compromised. On the plus side, external and fiscal buffers have been built, helped by the 2021 IMF SDR allocation of US$98.3 million (95.8 percent of quota), and the rollover of large external liabilities has increased policy space.
    Date: 2021–11–29
  25. By: Lee, Seungcheol; Luetticke, Ralph; Ravn, Morten O.
    Abstract: We introduce frictional financial intermediation into a HANK model. Households are subject to idiosyncratic and aggregate risk and smooth consumption through savings and consumer loans intermediated by banks. The banking friction introduces an endogenous countercyclical spread between the interest rate on savings and on loans. This interacts with incomplete markets because borrowers and savers face different intertemporal prices, and induces a time-varying mass point of high MPC households. Aggregate shocks through their impact on the spread give rise to consumption inequality. We show this mechanism to be empirically relevant. Ex-ante macro prudential regulation reduces welfare by reducing consumption smoothing. JEL Classification: C11, D31, E32, E63
    Keywords: business cycles, incomplete markets, macroprudential regulation, monetary policy, financial frictions
    Date: 2021–12
  26. By: Chun-Che Chi; Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: This paper studies optimal capital-control and bank-reserve remuneration policy in an open economy with a banking channel and a collateral constraint that limits household debt by a fraction of income. It finds that the unregulated economy borrows too little relative to what is optimal (underborrowing). This finding contrasts with the standard overborrowing result obtained in the absence of a banking channel. Under optimal policy, the central bank injects bank reserves during recessions. In this way, the monetary authority is able to uncouple household deleveraging from economy-wide deleveraging, thereby ameliorating the severity of the financial crisis. The paper documents that in emerging and developed economies the lending spread (lending rate minus deposit rate) displayed a muted response during the 2007-2009 financial crisis. This fact is consistent with a decline in the demand rather than in the supply of loans and gives credence to models in which the collateral constraint is placed at the level of the nonfinancial sector as opposed to at the level of the bank.
    JEL: E58 F38 F41
    Date: 2021–11
  27. By: Skouralis, Alexandros
    Abstract: This paper empirically investigates the transmission of systemic risk across the Euro Area by employing a Global VAR model. We find that a union aggregate systemic risk shock results in a sharp decline in output, with two thirds of the response to be attributed to cross-country spillovers. The results indicate that peripheral economies have a disproportionate importance in spreading systemic risk compared to core countries. Then, we incorporate high-frequency monetary surprises into the model and we find evidence of the risk-taking channel of monetary policy. However, the relationship is reversed in the period of the ZLB, when expansionary shocks mitigate systemic risk. Cross-country spillovers account for a significant fraction (17.4%) of systemic risk responses’ variation. We also show that near term guidance reduces systemic risk, whereas the initiation of the QE program has the opposite effect. Finally, the effectiveness of monetary policy exhibits significant asymmetries, with core countries driving the union response. JEL Classification: C32, E44, F36, F45
    Keywords: Eurozone, global VAR model, systemic risk
    Date: 2021–12
  28. By: Kento Yoshizawa (Bank of Japan); Kohei Maehashi (Bank of Japan); Hiroaki Yanagihara (Bank of Japan); Yoichi Kadogawa (Bank of Japan); Masakazu Inada (Bank of Japan)
    Abstract: In recent years, a phenomenon referred to as the gparadox of banknotes h has been observed worldwide: despite reduced opportunities to pay in cash due to the increase in cashless payments such as payment by credit card, the amount of banknotes in circulation has increased. Reasons that have been highlighted include the decline in the opportunity costs of holding cash amid the low interest rate environment as well as increased precautionary demand due to heightened economic uncertainty. Since the onset of the COVID-19 pandemic, this paradox has become more pronounced: cash in circulation has jumped even though opportunities to use cash have dropped sharply due to the economic downturn and the increase in e-commerce due to stay-at-home consumption. Our empirical analysis suggests that public health measures led to a significant increase in cash in circulation, with the effect being greatest immediately after the outbreak of pandemic and waning thereafter. It thus appears that developments in banknotes in circulation have been affected by precautionary demand for cash due to the heightened uncertainty brought about by the pandemic.
    Keywords: Banknotes; Cashless payments; COVID-19
    JEL: E41 E50 E51 E58
    Date: 2021–12–10
  29. By: Vegard M. Nygaard; Gajendran Raveendranathan
    Abstract: The introduction of employer-sponsored insurance (ESI) in the 1940s led to the largest decline in the uninsurance rate in U.S. history. To study the fiscal and welfare implications of this insurance expansion, we endogenize the selection of workers into jobs with and without ESI in a general equilibrium life-cycle model where consumers face idiosyncratic health shocks. Our model rationalizes non-targeted empirical patterns related to ESI coverage between 1940 and 2010 and in recent cross-sectional data. ESI leads to moderate welfare gains in the short run (0.5 percent of lifetime consumption for the average consumer) but zero gains or even moderate losses in the long run. The reason is that the health insurance benefit provided by ESI dominates in the short run but the tax increase required to offset ESI tax exemptions dominates in the long run. We substantiate these welfare estimates by showing that our model rationalizes both the level and rise in total ESI tax exemptions. Finally, we show that tax-financed universal health insurance — considered among policymakers in the 1930s — would have led to significantly higher welfare gains.
    Keywords: employer-sponsored insurance; general equilibrium life-cycle; heterogeneous agents; universal health-care insurance; welfare.
    JEL: E24 H51 I13 J33
    Date: 2021–12
  30. By: Simon Gilchrist; Bin Wei; Vivian Z. Yue; Egon Zakrajšek
    Abstract: In this paper, we study the interplay between sovereign risk and global financial risk. We show that a substantial portion of the comovement among sovereign spreads is accounted for by changes in global financial risk. We construct bond-level sovereign spreads for dollar-denominated bonds issued by over 50 countries from 1995 to 2020 and use various indicators to measure global financial risk. Through panel regressions and local projection analysis, we find that an increase in global financial risk causes a large and persistent widening of sovereign bond spreads. These effects are strongest when measuring global risk using the excess bond premium – a measure of the risk-bearing capacity of U.S. financial intermediaries. The spillover effects of global financial risk are more pronounced for speculative-grade sovereign bonds.
    JEL: E43 E44 F33 G12
    Date: 2021–11
  31. By: Leland Farmer; Emi Nakamura; Jón Steinsson
    Abstract: Forecasts of professional forecasters are anomalous: they are biased, forecast errors are autocorrelated, and forecast revisions predict forecast errors. Sticky or noisy information models seem like unlikely explanations for these anomalies: professional forecasters pay attention constantly and have precise knowledge of the data in question. We propose that these anomalies arise because professional forecasters don’t know the model that generates the data. We show that Bayesian agents learning about hard-to-learn features of the data generating process (low frequency behavior) can generate all the prominent aggregate anomalies emphasized in the literature. We show this for two applications: professional forecasts of nominal interest rates for the sample period 1980-2019 and CBO forecasts of GDP growth for the sample period 1976- 2019. Our learning model for interest rates also provides an explanation for deviations from the expectations hypothesis of the term structure that does not rely on time-variation in risk premia.
    JEL: E37 E47 G12
    Date: 2021–11
  32. By: Hanming Fang; Xincheng Qiu
    Abstract: We study the labor markets in China and the United States, the two largest economies in the world, by examining the evolution of their cross-sectional age-earnings profiles during the past thirty years. We find that, first, the peak age in the cross-sectional age-earnings profiles, which we refer to as the “golden age,” stayed almost constant at around 45-50 in the U.S., but decreased sharply from 55 to around 35 in China; second, the age-specific earnings grew drastically in China, but stayed almost stagnant in the U.S.; third, the cross-sectional and life-cycle age-earnings profiles were remarkably similar in the U.S., but differed substantially in China. We propose and empirically implement a decomposition framework to infer from the repeated cross-sectional earnings data the experience effect (i.e., human capital accumulation over the life cycle), the cohort effect (i.e., inter-cohort human capital growth), and the time effect (i.e., changes in the human capital rental prices over time), under an identifying assumption that the growth of the experience effect stops at the end of one's working career. The decomposition suggests that China has experienced a much larger inter-cohort productivity growth and higher increase in the rental price to human capital, but lower returns to experience, compared to the U.S. We also use the inferred components to revisit several important and classical applications in macroeconomics and labor economics, including growth accounting and the estimation of TFP growth, and the college wage premium and skill-biased technical change.
    JEL: E24 E25 J24 J31 O47
    Date: 2021–11
  33. By: International Monetary Fund
    Abstract: San Marino entered the pandemic with substantial vulnerabilities and still struggling from the consequences of the Global Financial Crisis (GFC). However, the economy has shown significant resilience supported by a timely and targeted policy response. Fiscal support was substantially scaled up after external borrowing was secured, including through a debut Eurobond. The banking system was rationalized, partly capitalized, its liquidity substantially improved, and a strategy is being adopted to address exceptionally high nonperforming loans (NPLs). Some of these measures, while effective, have increased official public debt substantially.
    Date: 2021–11–23
  34. By: International Monetary Fund
    Abstract: The concomitant Covid-19 pandemic and oil price shock in 2020 have taken a heavy toll on the Algerian economy and the population. The authorities’ response helped mitigate the social and economic impact of the crisis. Nevertheless, the crisis exacerbated the Algerian economy’s vulnerabilities, making even more urgent the need for a new, more inclusive and sustainable, growth model. A recovery is underway in 2021, but the outlook remains challenging. While the recent rebound in hydrocarbon prices should buoy the recovery and ease immediate financing constraints, addressing long-standing structural challenges will help to realize Algeria’s vast growth potential for the benefit of its population.
    Date: 2021–12–02
  35. By: Mr. Giovanni Melina; Mario di Serio; Matteo Fragetta
    Abstract: We compute government spending multipliers for the Euro Area (EA) contingent on the interestgrowth differential, the so-called r-g. Whether the fiscal shock occurs when r-g is positive or negative matters for the size of the multiplier. Median estimates vary conditional on the specification, but the difference between multipliers in the negative and positive r-g regimes differs systematically from zero with very high probability. Over the medium run (5 years), median cumulated multipliers range between 1.22 and 1.77 when r-g is negative, and between 0.51 and 1.26 when r-g is positive. We show that the results are not driven by the state of the business cycle, the monetary policy stance, or the level of government debt, and that the multiplier is inversely correlated with r-g. The calculations are based on the estimates of a factor-augmented interacted panel vector-autoregressive model. The econometric approach deals with several technical problems highlighted in the empirical macroeconomic literature, including the issues of fiscal foresight and limited information.
    Keywords: Fiscal multiplier;Panel VAR;Factor models;Euro Area;r-g.;WP;government spending multiplier;potential GDP;cumulated multiplier;EA country;government debt
    Date: 2021–02–12
  36. By: Chen Lian
    Abstract: In a canonical intertemporal consumption problem, I show how anticipation of future consumption mistakes leads to higher current marginal propensities to consume (MPCs). This result is driven by mistakes in future consumption's response to saving changes (i.e., changes in asset balances) and is independent of their specific behavioral foundations. My framework can accommodate many widely studied behavioral biases, such as inattention, present bias, diagnostic expectations, and near-rationality (epsilon-mistakes). This channel helps explain the empirical puzzle on high-liquidity consumers' high MPCs and can be significant. The same channel can also help explain other puzzles in intertemporal choices, such as violations of the fungibility principle, excess discounting of future income, and large risk aversion. Methodologically, I develop a general approach to study predictions of sophistication (i.e., the anticipation of future mistakes) independent of the underlying behavioral biases.
    JEL: D90 E21 E70 G40 G51
    Date: 2021–11
  37. By: Lindgren, Petter Y.; Presterud, Ane Ofstad
    Abstract: Could the Armed Forces in advanced economies exploit the high unemployment during the corona pandemic to provide jobs to unemployed and strengthen nations’ security and defense? Unemployment is expensive for individuals and societies. If a public sector is supposed to expand in size in the future, one mitigation policy against high unemployment is to accelerate the recruitment plan. In Norway, policymakers plan for a gradual expansion of the Armed Forces towards 2024. In this article, we calculate the costs and benefits to the Norwegian society from a personnel strategy that exploits the dramatic hike in unemployment rates to recruit new personnel immediately. We identify potential benefits and costs through a literature review of the scholarship on the costs of job displacement. Then, we build a benefit-cost model that calculate the net gains to society under several Norwegian economic futures. The results show that an immediate increase in personnel recruitment makes economic and societal sense if the macroeconomic conditions in Norway remain severe over half a year after program initiation and as long as the Norwegian Armed Forces target skills that are prevalent among unemployed.
    Keywords: Personnel Economics; Military Economics; Labor Economics; Benefit-Cost Analysis; Corona
    JEL: D61 E24 J80 M50
    Date: 2021–01–22
  38. By: Rösl, Gerhard; Seitz, Franz
    Abstract: In this paper, we focus on the role of different types of crises (technological crises, financial market crises, natural disasters) and their effects on the demand for cash in an international context. It becomes evident that over the past 30 years cash demand always increased in times of crises, independent of the nature of the crisis itself.However, the type of crises determines whether small or large banknote denominations are affected more. In case of payment uncertainties, we find a crisis-related increased demand for small denominations, probably reflecting an increased demand for transaction balances. In times of uncertainties regarding the financial and/or general economic development (also possibly driven by natural disasters), large banknote denominations were comparatively more in demand indicating that the crises-related need for non-transaction balances was the dominant driver.
    Keywords: Cash,banknotes,crises,Covid
    JEL: E41 E51 E58
    Date: 2021
  39. By: Heiner Mikosch (KOF and ETH Zurich); Christopher Roth (University of Cologne); Samad Sarferaz (KOF and ETH Zurich); Johannes Wohlfart (Department of Economics and CEBI)
    Abstract: We leverage the small open economy Switzerland as a testing ground for basic premises of macroeconomic models of endogenous information acquisition, using tailored surveys of firms and households. First, we show that firms perceive a greater exposure to exchange rate movements than households, which is reflected in higher levels of information acquisition and less dispersed beliefs about past and future exchange rate realizations. Similarly, within the two samples, acquisition of exchange rate information strongly increases in various proxies for stake size. Second, households who perceive higher costs of acquiring or processing information acquire less information. Finally, an exogenous increase in the perceived uncertainty of the exchange rate increases firms’ demand for a report about exchange rate developments, but not households’. Our findings inform the modeling of information frictions in macroeconomics.
    Keywords: Information acquisition, Uncertainty, Stake Size, Firms, Households,
    JEL: D12 D14 D83 D84 E32 G11
    Date: 2021–12–01
  40. By: Mr. Shanaka J Peiris; Miss Sanaa Nadeem; Mr. Pragyan Deb
    Abstract: Asian economies are increasingly integrated to the global economy through trade and financial linkages, exposing them to the international financial cycle. This paper explores how external shocks are transmitted to Asian economies and whether the use of policies, such as the monetary policy interest rate, foreign exchange intervention (FXI) and macroprudential measures (MPMs), can mitigate the impact of these external shocks. It uses panel quantile regressions on a sample of 14 Asian advanced and emerging economies (AEs and EMs) to assess the impact of financial and real shocks on investment and GDP growth at the median and 5th percentile tail. It finds that external financial shocks tend to have a larger effect on Asian economies than real shocks, and that the main transmission channels through which shocks are propagated are capital flows (particularly via corporate and bank balance sheets) for EMs, and credit for AEs. It also finds evidence that for Asian EMs, FXI may help dampen the capital flows and real exchange rate channels and mitigate financial shocks in the short run, and monetary policy transmission tends to be relatively weak; meanwhile MPMs can help mitigate the credit channel for both AEs and EMs.
    Keywords: Spillovers;international financial cycle;balance sheet;transmission channels;foreign exchange intervention;monetary policy;macroprudential measures;capital flows measures;WP;investment EMs;EM investment;transmission mechanism;exchange rate channel;EM growth
    Date: 2021–01–08
  41. By: Pinchetti, Marco (Bank of England); Szczepaniak, Andrzej (Ghent University)
    Abstract: This paper sheds lights on the open economy dimension of the Fed information effect, by evaluating its international spillovers on exchange rates, capital flows, and global economic activity. We provide empirical evidence that in response to unexpected increases in the Federal Funds rate associated with Fed information shocks, the dollar depreciates instead of appreciating. We show that this phenomenon occurs because Fed announcements affect investors’ risk appetite. Expansionary Fed information shocks increase investors’ risk appetite and drive capital towards foreign markets in pursuit of higher yields. Conversely, contractionary Fed information shocks decrease investors’ risk appetite and drive capital towards safe-haven currencies, causing an appreciation of the dollar and safe-haven currencies vis-à-visforeign currencies. We provide evidence that the Fed information effect is associated with large spillovers onto global safe-haven currencies, risk premia, cross-border credit, and ultimately, on global economic activity. These findings highlight the presence of global spillovers of the Fed information effect.
    Keywords: Monetary policy; information effects; international spillovers; flight to quality; high-frequency identification; sign restrictions; bayesian VAR
    JEL: E52 F31 F32 F41 F44
    Date: 2021–11–26
  42. By: Rafael Wildauer; Stuart Leitch; Jakob Kapeller
    Abstract: This policy study asks to what extent large-scale public investment efforts could be a viable tool to provide the necessary infrastructure to break Europe’s dependency on fossil fuel and carbon emissions more broadly. We estimate semi-structural VAR models for the EU27. These are used to study the impact of permanent as well as 5-year long public investment programmes. Three key findings emerge: First, government investment multipliers for the EU27 are large and range from 5.12 to 5.25. Second, debt-to-GDP ratios are likely to fall in response to the strong economic impulse generated by additional public investment spending. The study therefore classifies additional public investment spending in the EU27 as sustainable fiscal policy. Third, single country investment initiatives will likely lead to smaller economic expansions when compared to coordinated EU-wide investment, due to Europe’s strong intra-member state trade flows. A coordinated approach to fiscal policy is thus substantially more effective not only when it comes to delivering network-dependent infrastructure (rail, grid) but also with respect to the economic stimulus it creates.
    Keywords: Green fiscal policy, public debt sustainability
    JEL: E62 H63
    Date: 2021–12
  43. By: International Monetary Fund
    Abstract: After a number of critical setbacks and delays in the 16 months since program approval, the authorities have taken important corrective actions to address shocks to program objectives. Early tension around the authorities’ commitment to uphold the independence of the National Bank of Ukraine required a pause to assess policy continuity and to determine possible corrective actions. A prior action for this review and new commitments by the authorities provide a way forward in protecting a key policy pillar under the program. Similarly, adverse Constitutional Court rulings challenged the anticorruption framework in fundamental ways that required restoring its effectiveness before the review could proceed. In a push to make progress on delayed structural benchmarks, the authorities have recently met seven of the nine structural benchmarks set at the time of the program request.
    Date: 2021–11–24
  44. By: Dimitri B. Papadimitriou; L. Randall Wray
    Abstract: Institute President Dimitri B. Papadimitriou and Senior Scholar L. Randall Wray contend that the prevailing approach to monetary policy and inflation is influenced by a set of concepts that are a poor guide to action. In this policy brief, they examine two previous cases in which the Federal Reserve misread the data and raised rates too soon, as well as the evolution of the Fed's thought and practice over the past three decades--a period in which the central bank has increasingly turned to unobservable indicators that are supposed to predict inflation. Noting that their criticisms have now been raised by the Fed's own members and research staff, the authors highlight the ways in which we need to rethink our overall framework for monetary and fiscal policy. The Fed has far less control over inflation than is presumed, they argue, and, at worst, might have the whole inflation-fighting strategy backwards. Managing inflation, they conclude, should not be left entirely in the hands of central banks.
    Date: 2021–12
  45. By: Moutsopoulos, Michael; Pelagidis, Theodore
    Abstract: One of the main topics highlighted in the field of economic policy applications is the impact of taxation on labor. In an era in which macroeconomic stability, technological change, and globalization pressure the job market, there exists no strong consensus in the literature on how exactly taxation influences growth, choice between work and leisure, share of income attributed to labor, or participation in different job market segments. This article focuses on employment levels and uses the results of the World Economic Forum (WEF) Executive Opinion Survey (EOS) between 2013 and 2017 to bypass several challenges often faced in the literature. By doing so, we complement the insights of the existing literature by establishing that, in institutionally mature countries, taxation that is deemed by a survey of business executives to pose a disincentive to work reduces employment.
    Keywords: Labor, Taxation
    JEL: E2 F66 H21 J01
    Date: 2021
  46. By: International Monetary Fund
    Abstract: After two years of protracted political turmoil and delays in reforms, the authorities put in place in 2021 an ambitious fiscal consolidation program to ensure debt sustainability while creating fiscal space to address vast developmental needs. In late July, a 9-month SMP was approved to support the government’s reform program aimed at stabilizing the economy, strengthening governance, and building a sound track-record of policy implementation towards an Extended Credit Facility (ECF) arrangement. Guinea-Bissau is a fragile state with considerable needs to address the COVID-19 pandemic and developmental challenges. A Rapid Credit Facility (RCF) disbursement of SDR 14.2 million (50 percent of quota) was approved in January to provide urgent financing to support critical spending in health and catalyze additional donor resources. The RCF disbursement, the recent SDR 27.2 million allocation (96 percent of quota) and reforms underpinned by the SMP are contributing to address the adverse impact of the pandemic, improve government spending transparency and mitigate debt vulnerabilities, and create conditions that would help restore donor confidence and catalyze much-needed concessional financing.
    Date: 2021–11–30
  47. By: Mehmet Guncavdi; Murat Kors; Elif Ozcan Tok
    Abstract: In this study, we examine the price transmission in terms of magnitude and speed along the supply chains of Turkish poultry and beef markets. We develop a two-step model. In the first step, we employ indicator saturation method to identify the structural breaks of impulse-indicator saturation (IIS), step-indicator saturation (SIS) and trend-indicator saturation (TIS) types in the data. In the second step, we construct an autoregressive distributed lag-error correction model (ARDL-ECM) introducing the structural breaks into the analysis. The main findings indicate that the magnitudes of pass through of a price shock between different levels of supply chains are considerably large, and the largest effect is observed from wholesale prices to retail prices. The convergence to the long run equilibrium is also fast.
    Keywords: Conditional ECM, Food supply chain, Vertical price transmission
    JEL: E31 E37 Q11 Q18
    Date: 2021
  48. By: International Monetary Fund
    Abstract: The government has successfully maintained external, financial, and fiscal stability despite the deepest recession in decades. However, Mexico is bearing a very heavy humanitarian, social, and economic cost from COVID-19, including over half a million excess deaths, sizable under-employment, and an increase in poverty.
    Date: 2021–11–19
  49. By: Lilian Muchimba (University of Portsmouth)
    Abstract: Prior to the series of manipulation scandals, financial benchmarks were perceived as a competitive and objective reflection of underlying money markets (Stenfors and Lindo 2018). For example, the manipulation of the London Interbank Offered Rate (LIBOR), underpinning financial contracts worth trillions of dollars was unthinkable. To prevent manipulation, financial market regulators around the world have recommended a paradigm shift from estimation-based to transaction-based financial benchmarks. This shift is based on the mainstream economic view that financial benchmarks anchored on actual transactions are not susceptible to anticompetitive behaviour. However, unlike auction markets, underlying interbank money markets have unique features. As most activity takes place over-the-counter, they are opaque and are governed by conventions, trust and reciprocity. This complicates the achievement of competitive pricing. Using a novel dataset from Bank of Zambia, this paper makes an empirical investigation into transaction-based benchmarks’ susceptibility to anticompetitive behaviour. Additionally, it contributes to the theoretical understanding of transaction-based financial market benchmarks. The study reflects on financial market regulators’ recommendation to transit from estimation-based to transaction-based financial market benchmarks. Further, the study is of interest to central bankers, as short-term interbank rates are the first stage of the monetary transmission mechanism.
    Keywords: Bank of Zambia; banks; collusion; LIBOR; monetary transmission mechanism; reference rates
    JEL: B52 E43 E52 G15 G28
    Date: 2021–12–14
  50. By: Tone Smith
    Abstract: The ‘financialisation of nature’ is related to a shift in environmental governance—from regulation to marked-based approaches—involving strong state support to facilitate the establishment of ‘innovative financial instruments’ and markets related to nature. Although innovative finance got a bad reputation after the 2008 financial crisis, they are strongly encouraged in the environmental policy domain and supported by actors such as UNEP or the CBD. This paper explains the theoretical underpinning and the process of establishing such financial instruments, focusing in particular on offsetting and related ideas such as ‘net-zero’ calculations and ‘nature-based solutions’. It explains how natural entities are converted into abstract units of equivalence to allow the establishment of schemes for tradable ‘nature credits’ (supposedly) compensating damage across time and space. The financialisation of nature is then analysed and critiqued with respect to its lack of environmental effectiveness, its problematic socio-economic consequences and its impact on human-nature relationships. Instead of dealing with the environmental problems at hand, the conversion of nature into financial assets simply turns nature into objects of investment and speculation, while simultaneously creating a potential for financial bubbles.
    Keywords: environmental governance, innovative financial instruments, natural capital, offsetting, biodiversity banking, mitigation hierarchy, net zero, nature-based solutions, restoration of nature
    JEL: D6 E44 F54 G10 Q01 Q2 Q57
    Date: 2021
  51. By: Philippe Bacchetta (University of Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Elena Perazzi (Ecole Polytechnique Fédérale de Lausanne)
    Abstract: The impact of Central Bank Digital Currency (CBDC) is analyzed in a small open economy model with monopolistic competition in banking and where CBDC is an imperfect substitute with bank deposits. The design of CBDC is characterized by its interest rate, its substitutability with bank deposits, and its relative liquidity. We examine how interest-bearing CBDC would affect the banking sector, public finance, GDP and welfare. Welfare may improve through three channels: seigniorage; a lower opportunity cost of money; and a redistribution away from bank owners. In our numerical analysis we find a maximum welfare improvement of 60 bps in consumption terms.
    Date: 2021–12
  52. By: Mr. Manmohan Singh; Mr. Peter Stella
    Abstract: In this paper, we discuss the modern history of monetarism and its alternatives, as well as the changing empirical relationship of various measures of money and inflation. After demonstrating that previous naïve correlations between money and inflation as established in the 20th century literature have largely disappeared, we explain why this cannot be taken as support for an increased reliance on permanent monetary finance. Rather, we argue that rapid technological innovation in payments systems—both public and private—including in global pledged collateral markets, portends a declining demand for central bank liabilities.
    Keywords: money aggregates;monetary financing;central bank balance sheet;WP;bank reserves;interest rate;financial market;balance sheet expansion;money demand
    Date: 2021–01–08
  53. By: Weijie Luo (Central University of Finance and Economics)
    Abstract: The median voter theory of government size argues that increased income inequality brings about greater demand for redistribution (Meltzer and Richard, 1981). However, this prediction is rejected empirically using US state-level data. Following Luo (2020), with the twist that income inequality is engendered from differences in capital income as well as differences in labor productivity, the purpose of this paper is to analyze how income inequality affects the size of US state government. Inequality induced by differences in capital income, derived from the Panel Study of Income Dynamics data, is found to be negatively associated with state government size. Moreover, this paper shows that capital income inequality plays a key role in poor states, whilst labor income inequality does in rich places regarding the explanation of the change in state government.
    Keywords: capital income, labor income, inequality, size of government
    JEL: D78 E62 H10
    Date: 2021–12
  54. By: Dovì, Max-Sebastian; Koester, Gerrit; Nickel, Christiane
    Abstract: Endogeneity of the labour market slack in reduced-form Phillips Curves (PCs) is usually addressed either by including proxies for omitted supply shocks, or by using instrumental variables. Using the Kiviet (2020) Kinky Least Squares estimator, we find evidence that supply-shock proxies should not be omitted from PCs, and that many popular instrumental variables seem to be invalid. We estimate a standard backward-looking wage Phillips Curve by Kinky Least Squares and find that unless a large negative correlation between the slack variable and the error term is assumed, the coefficient of the slack variable is significantly negative. JEL Classification: C1, E3
    Keywords: instrument-free inference, limited-information inference, Phillips Curves
    Date: 2021–12
  55. By: Ms. Deniz O Igan; Mr. Gee Hee Hong; Do Lee
    Abstract: How does unconventional monetary policy affect corporate capital structure and investment decisions? We study the transmission channel of quantitative easing and its potential diminishing returns on investment from a corporate finance perspective. Using a rich bank-firm matched data of Japanese firms with information on corporate debt and investment, we study how firms adjust their capital structure in response to the changes in term premia. Investment responds positively to a reduction in the term premium on average. However, there is a significant degree of cross-sectional variation in firm response: healthier firms increase capital spending and cash holdings, while financially vulnerable firms take advantage of lower long-term yields to refinance without increasing investment.
    Keywords: Transmission of unconventional monetary policy;Quantitative easing;Reversal rate;Zombie firms;Corporate balance sheet;Term premium;Corporate investment;WP;zombie firm;firm level;capital structure;coverage ratio
    Date: 2021–02–19
  56. By: Valentina Michelangeli; José-Luis Peydró; Enrico Sette
    Abstract: We identify the relative importance for bank lending of borrower (demand-side) versus bank (supply-side) factors. We submit thousands of fictitious mortgage applications, changing one borrower-level factor at time, to the major Italian online mortgage platform. Each application goes to all banks. Borrower and bank factors are equally strong in causing and explaining loan acceptance. For pricing, borrower factors are instead stronger. Moreover, banks supplying less credit accept riskier borrowers. Exploiting the administrative credit register, there is borrower-lender assortative matching, and the bank-level strength measure estimated on the experimental data is associated to credit supply and risk-taking to real firms.
    Keywords: credit; banks; mortgages; SMEs; risk-taking.
    JEL: G21 G51 E51
    Date: 2021–12
  57. By: Faccia, Donata; Parker, Miles; Stracca, Livio
    Abstract: We contribute to the debate surrounding central banks and climate change by investigating how extreme temperatures affect medium-term inflation, the primary objective of monetary policy. Using panel local projections for 48 advanced and emerging market economies (EMEs), we study the impact of country-specific temperature shocks on a range of prices: consumer prices, including the food and non-food components, producer prices and the GDP deflator. Hot summers increase food price inflation in the near term, especially in EMEs. But over the medium term, the impact across the various price indices tends to be either insignificant or negative. Such effect is largely non-linear, being more significant for larger shocks and at higher absolute temperatures. We also provide simulations from a two-country model to understand the rationale behind the results. Overall, our results suggest that temperature plays a non-negligible role in driving medium-term price developments. Climate change matters for price stability. JEL Classification: E03, E31, Q51, Q54
    Keywords: climate change, extreme temperatures, inflation, panel local projections
    Date: 2021–12
  58. By: Katsutoshi Takehana (Graduate School of Economics, Osaka University); Hisashi Tanizaki (Graduate School of Economics, Osaka University)
    Abstract: In this paper, we investigated how the Complementary Deposit Facility, interest on excess reserves, introduced by the Bank of Japan in Oct. 2008 affected commercial bank fs demands for reserves by empirical analysis using bank fs financial data. Our main findings are summarized as follows. First, interest on excess reserves has the significant impact on the commercial bank fs demand for reserves. Second, although the holdings of reserve with precautionary demand that was clarified in the previous researches w as confirmed in this study as well, the reasons why commercial banks have precautionary demand for reserve were not the same as these papers.
    Keywords: reserve demand, the Complementary Deposit Facility , bank fs financial data
    JEL: C23 E52
    Date: 2021–11
  59. By: Kose, M. Ayhan; Nagle, Peter; Ohnsorge, Franziska; Sugawara, Naotaka
    Abstract: This paper presents a comprehensive analysis of the impact of COVID-19 on debt, puts recent debt developments and prospects in historical context, and analyzes new policy challenges associated with debt resolution. The paper reports three main results. First, even before the pandemic, a rapid buildup of debt in emerging market and developing economies—dubbed the “fourth wave” of debt—had been underway. Because of the sharp increase in debt during the pandemic-induced global recession of 2020, the fourth wave of debt has turned into a tsunami and become even more dangerous. Second, five years after past global recessions, global government debt continued to increase. In light of this historical record, and given large financing gaps and significant investment needs in many countries, debt levels will likely continue to rise in the near future. Third, debt resolution has become more complicated because of a highly fragmented creditor base, a lack of transparency in debt reporting, and a legacy stock of government debt without collective action clauses. National policy makers and the global community need to act rapidly and forcefully ensure that the fourth wave does not end with a string of debt crises in emerging market and developing economies as earlier debt waves did.
    Keywords: Fiscal balance; government debt; private debt; global recessions; resolution
    JEL: E62 H62 H63
    Date: 2021–11
  60. By: Bhattacharya, Rudrani (National Institute of Public Finance and Policy); Mundle, Sudipto
    Abstract: In this paper we have used our recently updated Factor Augmented Time Varying Coefficients Regression (FA-TVCR) model (Bhattacharya, Chakravartti and Mundle, 2019; Bhattacharya, Bhandari and Mundle 2021) to nowcast GDP growth for 2021-22 and forecast it for the year 2022-23. Our GDP growth nowcast for 2021-22 is 9.9 per cent, somewhat higher than the RBI projection of 9.5 per cent. The forecast for 2022-23 is 5.2 per cent. Factoring in an inflation rate of 5 per cent, this would translate to a nominal GDP growth rate of 10.2 per cent which is lower than the RBI projection of 12.3-13 percent but slightly higher than the 15th Finance Commission projection of 9.5 percent.
    Date: 2021–12
  61. By: Bridges, Jonathan (Bank of England); Green, Georgina (Bank of England); Joy, Mark (Bank of England)
    Abstract: Using a panel dataset of 26 advanced economies over the five decades preceding the Covid crisis, we show that inequality rises following recessions and that rapid credit growth in the run up to a downturn exacerbates that effect. A one standard deviation credit boom leads to a 40% amplification of the distributional fallout in the bust that follows. These links between inequality, credit and downturns are particularly significant for recessions associated with financial crises. We also find some evidence that low bank capital ahead of a downturn amplifies the inequality increase that follows. These insights add a new dimension to policy cost-benefit analysis, at the distributional level. Newly established macroprudential regimes have been empowered with tools to safeguard financial stability by bolstering both lender and borrower resilience. Using those tools may have distributional effects, potentially limiting individual borrowing choices. Our findings make clear, however, that not using those tools can lead to distributional costs, in the event of an untamed crisis.
    Keywords: Recessions; local projections; inequality; macroprudential policy
    JEL: D63 G01 N10
    Date: 2021–11–12
  62. By: Enders, Zeno; Hünnekes, Franziska; Müller, Gernot J.
    Abstract: We assess how firm expectations about future production impact current production and pricing decisions. Our analysis is based on a large survey of firms in the German manufacturing sector. To identify the causal effect of expectations, we rely on the timing of survey responses and match firms with the same fundamentals but different views about the future. Firms that expect their production to increase (decrease) in the future are 15 percentage points more (less) likely to raise current production and prices, compared to firms that expect no change in production. In a second step, we show that expectations also matter even if they turn out to be incorrect. Lastly, we aggregate expectation errors across firms and find that they account for about 15 percent of aggregate fluctuations. JEL Classification: E32, D84, E71
    Keywords: business cycle, news, noise, propensity score matching, survey data
    Date: 2021–12
  63. By: Mr. Irineu E de Carvalho Filho; Hans Weisfeld; Fei Liu; Mr. Fabio Comelli; Mr. Andrea F Presbitero; Alexis Meyer-Cirkel; Mrs. Sandra V Lizarazo Ruiz; Klaus-Peter Hellwig; Rahul Giri; Chengyu Huang
    Abstract: In recent years, Fund staff has prepared cross-country analyses of macroeconomic vulnerabilities in low-income countries, focusing on the risk of sharp declines in economic growth and of debt distress. We discuss routes to broadening this focus by adding several macroeconomic and macrofinancial vulnerability concepts. The associated early warning systems draw on advances in predictive modeling.
    Keywords: Early warning systems; crisis prediction; machine learning; low-income countries; inflation crisis; stress episode; crisis concept; crisis probability; missed crisis; LIC inflation trend; Inflation; Banking crises; Commodity prices; Global
    Date: 2020–12–18
  64. By: António Afonso; José Carlos Coelho
    Abstract: We investigate the bilateral relationship between government budget balances and current account balances for Portugal and Germany. We find that the response of the current account balance to the budget balance is greater in Portugal than in Germany. On the other hand, the response of the budget balance to the current balance is higher in Germany than in Portugal. In Portugal and Germany, a fiscal rules index has a negative impact on the current account balance and the government effectiveness index has a positive impact on the government balance. The public debt as a percentage of GDP positively affects the current account balance in Portugal, and in Germany it does not. During the period of implementation of the external assistance programme in Portugal, the current account balance improved, while the government balance did not.
    Keywords: budget deficit; external deficit; Portugal; Germany; fiscal rules; time-series
    JEL: F32 F41 H62 C31 C32
    Date: 2021–12
  65. By: Francisco Roldán
    Abstract: Sovereign debt crises coincide with deep recessions. I propose a model of sovereign debt that rationalizes large contractions in economic activity via an aggregate-demand amplification mechanism. The mechanism also sheds new light on the response of consumption to sovereign risk, which I document in the context of the Eurozone crisis. By explicitly separating the decisions of households and the government, I examine the interaction between sovereign risk and precautionary savings. When a default is likely, households anticipate its negative consequences and cut consumption for self-insurance reasons. Such shortages in aggregate spending worsen economic conditions through nominal wage rigidities and boost default incentives, restarting the vicious cycle. I calibrate the model to Spain in the 2000s and find that about half of the output contraction is caused by default risk. More generally, sovereign risk exacerbates volatility in consumption over time and across agents, creating large and unequal welfare costs even if default does not materialize.
    Keywords: Sovereign risk;default;heterogeneous agents;precautionary motives;aggregate demand;WP;default probability;government debt;debt price;default incentive;open economy
    Date: 2020–12–18
  66. By: Aye, Goodness
    Keywords: Agricultural Finance, Agricultural and Food Policy
    Date: 2021–08
  67. By: Ball, Laurence; Onken, Joern
    Abstract: This paper studies the dynamics of unemployment (u) and its natural rate (u*), with u* measured by real-time estimates for 29 countries from the OECD. We find strong evidence of hysteresis: an innovation in u causes u* to change in the same direction, and therefore has permanent effects. For our baseline specification, a one percentage point deviation of u from u* for one year has a long-run effect of 0.16 points on both variables. When we allow asymmetry, we find, perhaps surprisingly, that decreases in u have larger long-run effects than increases in u. JEL Classification: E24
    Keywords: high-pressure economy, hysteresis, natural rate, unemployment
    Date: 2021–12
  68. By: Caner Ates; Dietmar Maringer
    Abstract: The literature on macroeconomic agent-based models (MABMs) has gained growing attention since the early 2000s. Most MABMs dealing with market regulations have been focusing on the financial market. In contrast, only a small number of MABMs investigate the effects of labor market regulations. In this paper, we provide a parsimonious yet extendable agent-based model that focuses on labor market dynamics within a macroeconomic framework, suitable to analyze labor market regulations such as minimum wages and employment protection legislations. The model is stock-flow-consistent and small-scaled, i.e., there are only workers and firms interacting in the goods and in the labor market. There are two different types of workers, namely skilled and unskilled, and firms produce according to a CES production function. This allows for substitutability between the two types of workers. A one-factor-at-a-time (OFAT) sensitivity analysis is performed to gain insights into the mechanisms and patterns produced by the model. Results show that the model is sensitive to the minimum wage parameter and that for reasonable values of the minimum wage, income inequality decreases, while aggregate consumption rises. Overall, the results suggest that the model can be used to further investigate aggregate and distributional effects of labor market regulations.
    Keywords: Labor market; minimum wage; stock-flow consistent; macroeconomic agent-based model; CATS.
    Date: 2021–12–09
  69. By: Sokol, Andrej
    Abstract: I propose a new model, conditional quantile regression (CQR), that generates density forecasts consistent with a specific view of the future evolution of some variables. This addresses a shortcoming of existing quantile regression-based models, for example the at-risk framework popularised by Adrian et al. (2019), when used in settings, such as most forecasting processes within central banks and similar institutions, that require forecasts to be conditional on a set of technical assumptions. Through an application to house price inflation in the euro area, I show that CQR provides a viable alternative to existing approaches to conditional density forecasting, notably Bayesian VARs, with considerable advantages in terms of flexibility and additional insights that do not come at the cost of forecasting performance. JEL Classification: C22, C53, E37, R31
    Keywords: at-risk, conditional forecasting, density forecast evaluation, house prices, quantile regression
    Date: 2021–12
  70. By: Ibrahim Yarba
    Abstract: This study investigates the link between corporate indebtedness and investment by utilizing a novel firm-level data, which contains the universe of all incorporated manufacturing firms in Turkey over the last decade. The results of the panel regression model with multi-dimensional fixed effects provide significant evidence of an inverted-U relationship between indebtedness and investment, indicating that leverage increases investment up to a certain level, and after that further increase in leverage has an adverse impact on investment. This non-monotonic relationship is evident for all firm size groups. Conspicuously, the indebtedness level that becomes an impediment to investment is significantly lower for SMEs than large firms, which is in support of the arguments that small firms are more likely to be affected by debt overhang. Results also reveal that firms holding more cash can sustain higher level of debts without hurting investment activity. This is also the case for high capital-intensive firms and exporters. Findings of this paper highlight the importance of policies to make equity financing more attractive, incentivise the uptake and provision of equity capital from private investors, and deepen the capital markets.
    Keywords: Corporate debt, Firm investment; Cash policy; SMEs, Debt overhang
    JEL: C23 D22 E22 G31 G32
    Date: 2021
  71. By: Luciana Juvenal
    Abstract: When analyzing terms-of-trade shocks, it is implicitly assumed that the economy responds symmetrically to changes in export and import prices. Using a sample of developing countries our paper shows that this is not the case. We construct export and import price indices using commodity and manufacturing price data matched with trade shares and separately identify export price, import price, and global economic activity shocks using sign and narrative restrictions. Taken together, export and import price shocks account for around 40 percent of output fluctuations but export price shocks are, on average, twice as important as import price shocks for domestic business cycles.
    Keywords: Commodity Prices;Business Cycles;World Shocks;WP;price shock;terms-of-trade shock;import share;export share;export price shock;import price shock;share exhibit
    Date: 2020–12–11
  72. By: Francesco Furno
    Abstract: This paper extends a standard general equilibrium framework with a corporate tax code featuring two key elements: tax depreciation policy and the distinction between c-corporations and pass-through businesses. In the model, the stimulative effect of a tax rate cut on c-corporations is smaller when tax depreciation policy is accelerated, and is further diluted in the aggregate by the presence of pass-through entities. Because of a highly accelerated tax depreciation policy and a large share of pass-through activity in 2017, the model predicts small stimulus, large payouts to shareholders, and a dramatic loss of corporate tax revenues following the Tax Cuts and Jobs Act (TCJA-17). These predictions are consistent with novel micro- and macro-level evidence from professional forecasters and sectoral tax returns. At the same time, because of less-accelerated tax depreciation and a lower pass-through share in the early 1960s, the model predicts sizable stimulus in response to the Kennedy's corporate tax cuts - also supported by the data. The model-implied corporate tax multipliers for Trump's TCJA-17 and Kennedy's tax cuts are +0.6 and +2.5, respectively.
    Date: 2021–11
  73. By: Philip McCann (Sheffield University Management School, The Productivity Institute)
    Keywords: productivity, Levelling Up, fiscal, devolution, decentralisation
    Date: 2021–12
  74. By: Joshua C. C. Chan
    Abstract: Large Bayesian VARs are now widely used in empirical macroeconomics. One popular shrinkage prior in this setting is the natural conjugate prior as it facilitates posterior simulation and leads to a range of useful analytical results. This is, however, at the expense of modeling flexibility, as it rules out cross-variable shrinkage -- i.e., shrinking coefficients on lags of other variables more aggressively than those on own lags. We develop a prior that has the best of both worlds: it can accommodate cross-variable shrinkage, while maintaining many useful analytical results, such as a closed-form expression of the marginal likelihood. This new prior also leads to fast posterior simulation -- for a BVAR with 100 variables and 4 lags, obtaining 10,000 posterior draws takes less than half a minute on a standard desktop. We demonstrate the usefulness of the new prior via a structural analysis using a 15-variable VAR with sign restrictions to identify 5 structural shocks.
    Date: 2021–11
  75. By: TEKILASAYA KAVUNZU, François
    Abstract: The day after Tuesday, February 18, 2020, enthusiasm was observed following the publication by the Ministry of Finance of a cash flow plan (PTR) for the 2020 fiscal year, with a level of expected revenue lower than that set in the Finance Law of the same year. There was confusion in the comments of the population between the state budget (finance law of the year) and the public sector treasury plan. The purpose of this article was to shed light on the difference in nature between the state budget and the treasury plan as well as the reason for its revision. The article established that, the State budget is a planning instrument which is annual or multi-year and fixed in time, on the other hand the cash flow plan is an instrument, a tool of management and piloting of the execution. of the State Budget with regard to fluctuations in the economic situation and the constraints found in the field. It is an instrument that can be adjusted according to the economic development involved. Its development is based on the need for the Government to have a better tool for steering budget execution. Its revision is therefore a result of the changing nature of the parameters used in the preparation of the state budget.
    Keywords: Cash flow plan, state budget, finance law
    JEL: E62 E64
    Date: 2020–02–21
  76. By: Ms. Helene Poirson
    Abstract: The COVID-19 crisis induced an unprecedented launch of unconventional monetary policy through asset purchase programs (APPs) by emerging market and developing economies. This paper presents a new dataset of APP announcements and implementation from March until August 2020 for 27 emerging markets and 8 small advanced economies. APPs’ effects on bond yields, exchange rates, equities, and debt spreads are estimated using different methodologies. The results confirm that APPs were successful in significantly reducing bond yields in EMDEs, and these effects were stronger than those of policy rate cuts, suggesting that such UMP could be important tools for EMDEs during financial market stress.
    Keywords: Unconventional monetary policy;emerging markets;COVID-19;local currency bond markets.;WP;market dysfunctionalities;app announcement;CB transparency;market functioning;markets query;tackling market dysfunctionality;transparency Index; exchange rates; market mechanism; CB credibility; market participant; CB intervention; CB monetary policy stance; Sovereign bonds; Bond yields; Yield curve; Securities; Bonds; Africa; Global
    Date: 2021–01–22
  77. By: Dávila, Eduardo; Walther, Ansgar
    Abstract: This paper studies leverage regulation and monetary policy when equity investors and/or creditors have distorted beliefs relative to a planner. We characterize how the optimal leverage regulation responds to arbitrary changes in investors’ and creditors’ beliefs and relate our results to practical scenarios. We show that the optimal regulation depends on the type and magnitude of such changes. Optimism by investors calls for looser leverage regulation, while optimism by creditors, or jointly by both investors and creditors, calls for tighter leverage regulation. Monetary policy should be tightened (loosened) in response to either investors’ or creditors’ optimism (pessimism). JEL Classification: G28, G21, E61, E52
    Keywords: bailouts, distorted beliefs, leverage regulation, monetary policy, prudential policy
    Date: 2021–12
  78. By: Philippe Bacchetta (University of Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Margaret Davenport (University of Lausanne); Eric van Wincoop (University of Virginia - Department of Economics; National Bureau of Economic Research (NBER))
    Abstract: Recently portfolio choice has become an important element of many DSGE open economy models. Yet, a substantial body of evidence is inconsistent with standard frictionless portfolio choice models. In this paper we introduce a quadratic cost of changes in portfolio allocation into a two-country DSGE model. We investigate the level of portfolio frictions most consistent with the data and the impact of portfolio frictions on asset prices and net capital flows. We find the portfolio friction accounts for (i) micro evidence of portfolio inertia by households, (ii) macro evidence of the price impact of financial shocks and related disconnect of asset prices from fundamentals, (iii) a broad set of moments related to the time series behavior of saving, investment and net capital flows, and (iv) other phenomena relating to excess return dynamics. Financial and saving shocks each account for close to half of the variance of net capital flows.
    Date: 2021–12
  79. By: Kheng, Veasna; Mckinley, Justin; Pan, Lei
    Abstract: This paper examines the causes of falling labour share in OECD and non-OECD countries since the 1980s. The results show that export and volatility are key drivers in OECD countries, but in non-OECD countries, the significant factors are financial openness and the capital’s relative price.
    Keywords: Elasticity of substitution; Financial openness; Labour share; Trade; Volatility
    JEL: E25 F66 O33
    Date: 2021–10
  80. By: Fakhri Hasanov; Leila Dagher (King Abdullah Petroleum Studies and Research Center)
    Abstract: There is no commodity whose interlinkages with the macroeconomy have been studied as extensively as oil, starting with Hamilton’s (1983) seminal study. Thousands of subsequent studies have examined the relationship between oil prices and various economic variables, including the stock market. This strand of the literature began with the pioneering work of Kling (1985). Since then, other financial markets, such as banking, have also received a fair share of analysis.
    Keywords: Agent Based Modeling, Oil Market, Macroeconomics
    Date: 2021–11–23
  81. By: Boysen-Hogrefe, Jens; Fiedler, Salomon; Gern, Klaus-Jürgen; Groll, Dominik; Jannsen, Nils; Kooths, Stefan
    Abstract: Die äußerst günstigen Finanzierungskonditionen hatten in den 2010er Jahren einen wesentlichen Anteil daran, dass die Bruttostaatsschuldenquote in Deutschland nach der Weltfinanzkrise merklich zurückgeführt wurde. Die Autoren stellen fest, dass es jedoch keineswegs klar ist, wie lange die extreme Niedrigzinsphase andauert, was Fragen der Resilienz der Staatsfinanzen in der längeren Frist aufwirft. Die Folgen einer möglichen Zinswende für die öffentlichen Finanzen hängen maßgeblich von den Ursachen für die zurückliegende Niedrigzinsphase ab. Die in der Studie durchgeführte Szenarioanalyse konzentriert sich auf vier zyklische Einflussfaktoren auf das Zinsniveau: Geldpolitik- und Risikoprämienschock sowie Investitions- und Preisschock. Wird die Zinswende durch Faktoren verursacht, die auch eine höhere makroökonomische Dynamik induzieren, wirkt dies im öffentlichen Budget dem Anstieg der Zinslast entgegen. Die Zinswende stellt in solchen Fällen kein ernsthaftes Problem für die öffentlichen Haushalte dar. Wird die Zinswende durch Faktoren verursacht, die eine makroökonomische Abschwächung induzieren, ergibt sich ein deutlicher Anpassungsbedarf für die öffentlichen Haushalte. Dies wäre insbesondere dann der Fall, wenn die Geldpolitik der Europäischen Zentralbank derzeit 'zu expansiv' ausgerichtet ist. In einem solchen Szenario befände sich die deutsche Wirtschaft in einem monetären Boom, der bei einer Normalisierung der Zinsen wegfallen würde. Fluktuationen von Vermögenspreisen, die durch Zinsschwankungen hervorgerufen werden, dürften hingegen eine untergeordnete Rolle spielen, da das deutsche Steuer- und Transfersystem in dieser Hinsicht vergleichsweise wenig sensitiv ist. Ein wesentlicher Grund hierfür ist, dass sich Immobilienpreisschwankungen nur unwesentlich in Einnahmeveränderungen bei der Einkommensteuer übersetzen.
    Keywords: Öffentliche Finanzen,Staatsschulden,Zinsentwicklung,gesamtwirtschaftliche Szenarien,Public finance,government debt,interest rates,macroeconomic scenarios
    Date: 2021
  82. By: Karl Naumann-Woleske; Max Sina Knicker; Michael Benzaquen; Jean-Philippe Bouchaud
    Abstract: Agent-Based Models (ABM) are computational scenario-generators, which can be used to predict the possible future outcomes of the complex system they represent. To better understand the robustness of these predictions, it is necessary to understand the full scope of the possible phenomena the model can generate. Most often, due to high-dimensional parameter spaces, this is a computationally expensive task. Inspired by ideas coming from systems biology, we show that for multiple macroeconomic models, including an agent-based model and several Dynamic Stochastic General Equilibrium (DSGE) models, there are only a few stiff parameter combinations that have strong effects, while the other sloppy directions are irrelevant. This suggest an algorithm that efficiently explores the space of parameters by primarily moving along the stiff directions. We apply our algorithm to a medium-sized agent-based model, and show that it recovers all possible dynamics of the unemployment rate. The application of this method to Agent-based Models may lead to a more thorough and robust understanding of their features, and provide enhanced parameter sensitivity analyses. Several promising paths for future research are discussed.
    Date: 2021–11
  83. By: Gabriel Felbermayr (Austrian Institute of Economic Research); Alexander Sandkamp (Kiel Institute for the World Economy)
    Abstract: Die jüngste Kombination aus wieder anziehender Nachfrage und anhaltenden Unterbrechungen der Lieferketten hat zu einer besorgniserregenden Rückkehr der Inflation geführt. In der EU stiegen die Erzeugerpreise der Industrie im Juli 2021 um 12,2% gegenüber dem Vorjahr. In diesem Research Brief wird auf der Grundlage zweier aktueller Arbeiten argumentiert, dass die Abschaffung der EU-Antidumpingzölle den Druck auf die Vorleistungs- und Verbraucherpreise zumindest teilweise mildern würde. Im Gegensatz dazu könnte die jüngste Abschaffung der differenzierten Behandlung Chinas in der EU-Antidumpinggesetzgebung sogar zu einem Anstieg der Importpreise beigetragen haben.
    Keywords: Antidumping, Europäische Union, China, Inflation, Protektionismus
    Date: 2021–10–22
  84. By: de Bresser, Jochem (Tilburg University, Center For Economic Research)
    Keywords: Subjective expectations; life cycle model
    Date: 2021
  85. By: Brueckner, Markus (Research School of Economics, Australian National University); Kang, Wensheng (Department of Economics at Kent State University, Ohio, USA); Vespignani, Joaquin (Tasmanian School of Business & Economics, University of Tasmania)
    Abstract: This paper studies the role of capitalization on firms’ stock price growth in response to new cases of Covid-19 infections in the United States. Controlling for firm and time fixed effects, our panel model estimates show that the effect of new cases of Covid-19 infections on firms’ stock price growth is significantly increasing in capitalization: For each one standard deviation increase in capitalization, a one standard deviation increase in new cases of Covid-19 infections increases the weekly growth rate of firms’ stock prices by about 0.7 percentage points. Effects of capitalization on the impact that Covid-19 infections have on firms’ stock price growth are largest in the travel, tourism, and hospitality sector. Smaller but still positive effects of capitalization are present in the pharmaceutical products, high-tech, and banking and finance sectors.
    Keywords: Covid-19, performance of firms, stock market capitalization, U.S. stock market
    JEL: G10 E30
    Date: 2021
  86. By: Mathew, Merlin
    Keywords: Agricultural and Food Policy
    Date: 2021–08
  87. By: Katsutoshi Takehana (Graduate School of Economics, Osaka University); Hisashi Tanizaki (Graduate School of Economics, Osaka University)
    Abstract: In this paper, we tried to evaluate the changes about the Funds Transfer Service that have been changed by the amendment of Payment Acts in 2020 and extract issues suggested by this change. In particular, the newly introduced gregulation on the retention of user fs money h can be evaluated as being consistent with the actual situation of funds transfer service providers and existing legal systems such as Investment Law. On the other hand, it can be also evaluated that this changes raised substantial issue related to the legal aspect of financial system how sustainable the current boundary between banks and fund transfer service provider is.
    Keywords: Payment Act, Funds transfer service provider, Bank, regulation on the retention of user fs money
    JEL: E42
    Date: 2021–11
  88. By: Blackwell, Michael
    Abstract: Notes amendments made by the Finance Act 2020 ss.15-21 and Sch.2 to the loan charge rules introduced to combat tax avoidance through disguised remuneration. Details the legislative background to the loan charge, the impact of cases such as R. (on the application of Cartref Care Home Ltd) v Revenue and Customs Commissioners (Admin), and whether the recommendations of the December 2019 Morse Review of the loan charge are reflected by the 2020 Act.
    Keywords: disguised remuneration; employee benefit trusts; fair balance; loan charge; protection of property; tax avoidance
    JEL: E6
    Date: 2020–11–25

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