nep-mac New Economics Papers
on Macroeconomics
Issue of 2022‒01‒10
89 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The Prudence Principle: A New Framework for Eurozone Fiscal Policy By Eric Lonergan; Mark Blyth
  2. Macroeconomic modeling for optimal stabilization policy in Mongolia By Doojav, Gan-Ochir
  3. Central Bank Credibility During COVID-19: Evidence from Japan By Jens H. E. Christensen; Mark M. Spiegel
  4. A Note on State-Level Nonlinear Effects of Government Spending Shocks in the US: The Role of Partisan Conflict By Xin Sheng; Rangan Gupta
  5. Fostering cyclical convergence in the Euro Area By Filippo Gori
  6. Endogenous growth, downward wage rigidity and optimal inflation By Abbritti, Mirko; Consolo, Agostino; Weber, Sebastian
  7. Socio-economic recovery from the Covid-19 pandemic: Macroeconomic impacts and policy issues in Mongolia By Doojav, Gan-Ochir
  8. Managing Inequality over Business Cycles: Optimal Policies with Heterogeneous Agents and Aggregate Shocks By François Le Grand; Xavier Ragot
  9. Managing Inequality over Business Cycles: Optimal Policies with Heterogeneous Agents and Aggregate Shocks By François Le Grand; Xavier Ragot
  10. The Political Economy of Currency Unions By Kai Arvai
  11. Capital Return Jumps and Wealth Distribution By Jess Benhabib; Wei Cui; Jianjun Miao
  12. An Extended Quarterly Projection Model: Credit Cycle, Macrofinancial Linkages and Macroprudential Measures: The Case of the Philippines By Mr. Philippe D Karam; Mr. Jan Vlcek; Mikhail Pranovich
  13. Permanent and temporary monetary policy shocks and the dynamics of exchange rates By Alexandre Carvalho; João Valle e Azevedo; Pedro Pires Ribeiro
  14. The Effect of Inequality on the Transmission of Monetary and Fiscal Policy By Marco Del Negro; Keshav Dogra; Laura Pilossoph
  15. The Effect of Monetary and Fiscal Policy on Inequality By Marco Del Negro; Keshav Dogra; Laura Pilossoph
  16. Measuring Inflation Expectations in Interwar Britain By Jason Lennard; Finn Meinecke; Solomos Solomou
  17. Anchoring of Inflation Expectations: Do Inflation Target Formulations Matter? By Chistoph Grosse-Steffen
  18. Growth and Inflation in Turkey By Alkan, Berkay
  19. A Study of the Romer and Romer Monetary Policy Shocks Using Revised Data By Andersson, Fredrik N. G.; Kilman, Josefin
  20. An ECB’s Staff Narrative of Two Decades of European Central Banking: a critical review By Sergio Cesaratto
  21. Monetary Policy and COVID-19 By Marcin Kolasa; Michal Brzoza-Brzezina; Krzysztof Makarski
  22. In quest for policy 'silver bullets' towards triggering a v-shaped recovery By Bhadury, Soumya; Ghosh, Saurabh; Gopalakrishnan, Pawan
  23. The Inflation Shock of 2021 By James B. Bullard
  24. Customers and Retail Growth By Liran Einav; Peter J. Klenow; Jonathan D. Levin; Raviv Murciano-Goroff
  25. Examining the impact of debt on investment for Austrian non-financial sectors and firms By Dennis Dlugosch; Selçuk Gul
  26. Monetary policy communication: perspectives from former policy makers at the ECB By Ehrmann, Michael; Holton, Sarah; Kedan, Danielle; Phelan, Gillian
  27. Stimulus, Savings, and Inflation: The Top Five Liberty Street Economics Posts of 2021 By Peter Stevens
  28. Spending by Bottom-80% U.S. Households Is Persistently Greater than Income. What Funds the Deficit? By Roth, Steve
  29. A Real-Time Historical Database of Macroeconomic Indicators for Russia By Dmitry Gornostaev; Alexey Ponomarenko; Sergei Seleznev; Alexandra Sterkhova
  30. Motivating Banks to Lend? Credit Spillover Effects of the Main Street Lending Program By Camelia Minoiu; Rebecca Zarutskie; Andrei Zlate
  31. A Model To Think About Crypto-Assets and Central Bank Digital Currency By Hernán D. Seoane
  32. The Payday Loan Puzzle: A Credit Scoring Explanation By Tsung-Hsien Li; Jan Sun
  33. The exchange rate insulation puzzle By Corsetti, Giancarlo; Kuester, Keith; Müller, Gernot J.; Schmidt, Sebastian
  34. The Destruction of Price-Representativeness By LEOGRANDE, ANGELO
  35. The Destruction of Price-Representativeness By LEOGRANDE, ANGELO
  36. Morocco’s Monetary Policy Transmission in the Wake of the COVID-19 Pandemic By Mr. Maximilien Queyranne; Daniel Baksa; Azhin Abdulkarim; Vassili Bazinas; Mr. Roberto Cardarelli
  37. Population Aging and the US Labor Force Participation Rate By Daniel H. Cooper; Christopher L. Foote; Maria Jose Luengo-Prado; Giovanni P. Olivei
  38. Does Automation Technology increase Wage? By Ryosuke Shimizu; Shohei Momoda
  39. Corporate Liquidity During the Covid-19 Crisis: the Trade Credit Channel By Benjamin Bureau; Anne Duquerroy; Frédéric Vinas
  40. School Closures and Effective In-Person Learning during COVID-19: When, Where, and for Whom By Kurmann, André; Lalé, Etienne
  41. Household saving and fiscal policy: evidence for the euro area from a thick modelling perspective By Checherita-Westphal, Cristina; Stechert, Marcel
  42. The strategic allocation and sustainability of central banks' investment By Davide Di Zio; Marco Fanari; Simone Letta; Tommaso Perez; Giovanni Secondin
  43. A Double-Edged Sword – Can a Currency Board Help Stabilise the Lebanese Economy? By Uwe Böwer
  44. The Real Side of Financial Exuberance: Bubbles, Output and Productivity at the Industry Level By Francisco Queirós
  45. Changing Income Risk across the US Skill Distribution: Evidence from a Generalized Kalman Filter By J. Carter Braxton; Kyle F. Herkenhoff; Jonathan L. Rothbaum; Lawrence Schmidt
  46. Growth theory and the growth model perspective: Insights from the supermultiplier By Guilherme Spinato Morlin; Nikolas Passos; Riccardo Pariboni
  47. Firm pay dynamics By Engbom, Niklas; Moser, Christian; Sauermann, Jan
  48. Simple Allocation Rules and Optimal Portfolio Choice Over the Lifecycle By Victor Duarte; Julia Fonseca; Aaron S. Goodman; Jonathan A. Parker
  49. On the Cleansing Effect of Recessions and Government Policy: Evidence from Covid-19 By Pedro Dias Moreira; Nicholas Kozeniauskas; Cezar Santos
  50. Commercial Real Estate and Macrofinancial Stability During COVID-19 By Mr. Junghwan Mok; Andrea Deghi; Tomohiro Tsuruga
  51. The empirical modelling of house prices and debt revisited. A policy-oriented perspective By Pål Boug; Håvard Hungnes; Takamitsu Kurita
  52. Product market structure and monetary policy: evidence from the Euro Area By Ferrando, Annalisa; McAdam, Peter; Petroulakis, Filippos; Vives, Xavier
  53. The fiscal and welfare effects of policy responses to the Covid-19 school closures By Fuchs-Schündeln, Nicola; Krueger, Dirk; Kurmann, André; Lalé, Etienne; Ludwig, Alexander; Popova, Irina
  54. Do Different Estimation Methods Lead to Implausible Differences in the Size of the Non-Observed or Shadow Economies? A Preliminary Answer By Friedrich Schneider
  55. Stock market as a nowcasting indicator for real investment By Degiannakis, Stavros
  56. Smart Banknotes and Cryptobanknotes: Hybrid Banknotes for Central Bank Digital Currencies and Cryptocurrency Payments By Noll, Franklin; Lipkin, Andrei
  57. Financial Inclusion: Theory and Policy guide for fragile economies. By Tweneboah Senzu, Emmanuel
  58. Theoretical Economics and the Second-Order Economic Theory. What is it? By Olkhov, Victor
  59. The Effects of Fiscal Measures During COVID-19 By Davide Furceri; Mr. Pragyan Deb; Nour Tawk; Naihan Yang; Mr. Jonathan David Ostry
  60. Just Released: A New Tool for Tracking Regional Employment Trends By Jaison R. Abel; Jason Bram; Richard Deitz; Jonathan Hastings
  61. Uncertainty and Public Investment Multipliers: The Role of Economic Confidence By William Gbohoui
  62. Shock Symmetry and Business Cycle Synchronization: Is Monetary Unification Feasible among CAPADR Countries? By Jafet Baca
  63. Allocation and Employment Effect of the Paycheck Protection Program By Gustavo Joaquim
  64. Contagion in Debt and Collateral Markets By Chang, Jin-Wook
  65. Okun's Law, Development, and Demographics: Differences in the Cyclical Sensitivities of Unemployment Across Economy and Worker Groups By Mr. John C Bluedorn; Zidong An; Gabriele Ciminelli
  66. Is There Job Polarization in Developing Economies? A Review and Outlook By Antonio Martins-Neto; Nanditha Mathew; Pierre Mohnen; Tania Treibich
  67. Gaussian Process Vector Autoregressions and Macroeconomic Uncertainty By Niko Hauzenberger; Florian Huber; Massimiliano Marcellino; Nico Petz
  68. Does Inattentiveness Matter for DSGE Modelling? An Empirical Investigation By Chou, Jenyu; Easaw, Joshy; Minford, Patrick
  69. Bank equity, interest payments, and credit creation under Basel III regulations By Li, Boyao
  70. Inefficiency in Social Security Trust Funds Forecasts By Kajal Lahiri; Junyan Zhang; Yongchen Zhao
  71. Fiscal and current account imbalances: the cases of Germany and Portugal By Antonio Afonso; Jose Carlos Coelho
  72. Productivity and Pay in the US and Canada By Jacob Greenspon; Anna M. Stansbury; Lawrence H. Summers
  73. The Quadrilemma of a Small Open Circular Economy Through a Prism of the 9R Strategies By Patrick Grüning; Justina Banionienė; Lina Dagilienė; Michael Donadelli; Marcus Jüppner; Renatas Kizys; Kai Lessmann
  74. Distributed Ledgers and the Governance of Money By Raphael A. Auer; Cyril Monnet; Hyun Song Shin
  75. Natural Disasters and Fianacial Stress Can Macroprudential Regulation Tame Green Swans? By Pauline Avril; Gregory Levieuge; Camelia Turcu
  76. Monitoring the Climate Impact of Fiscal Policy - Lessons from Tracking the COVID-19 Response By Ms. Katja Funke; Guohua Huang; Khaled Eltokhy; Yujin Kim; Genet Zinabou
  77. Digitalisation and Beyond: The COVID-19 Pandemic and Productivity Growth in G20 Countries By Gaetano D’Adamo; Maria Bianchi; Lucia Granelli
  78. Life insurance convexity By Kubitza, Christian; Grochola, Nicolaus; Gründl, Helmut
  79. The qualification of cryptocurrencies through the prism of jurisprudence: an insoluble problem for the preservation of tax interests and public order? By Louis Brule Naudet
  80. Sharing Risk to Avoid Tragedy: Informal Insurance and Irrigation in Village Economies By Karol Mazur
  81. Climate and environmental risks: measuring the exposure of investments By Enrico Bernardini; Johnny Di Giampaolo; Ivan Faiella; Marco Fruzzetti; Simone Letta; Raffaele Loffredo; Davide Nasti
  82. Population growth, immigration, and labour market dynamics By Elsby, Michael W. L.; Smith, Jennifer C.; Wadsworth, Jonathan
  83. Natural Disasters and Financial Stress: Can Macroprudential Regulation Tame Green Swans? By Pauline AVRIL; Grégory LEVIEUGE; Camélia TURCU
  84. Economic sentiment: Disentangling private information from public knowledge By Heinisch, Katja; Lindner, Axel
  85. Macrofinancial Causes of Optimism in Growth Forecasts By Mr. Yan Carriere-Swallow; José Marzluf
  86. Information frictions in inflation expectations among five types of economic agents By Camille Cornand; Paul Hubert
  87. Central bank's stabilization and communication policies when firms have motivated overconfidence in their own information accuracy or processing By Camille Cornand; Rodolphe dos Santos Ferreira
  88. The low-carbon transition, climate commitments and firm credit risk By Carbone, Sante; Giuzio, Margherita; Kapadia, Sujit; Krämer, Johannes Sebastian; Nyholm, Ken; Vozian, Katia
  89. A Theoretical Foundation for Prudential Authorities Decision Making By Cristina Badarau; Corentin Roussel

  1. By: Eric Lonergan (M&G Investments); Mark Blyth (Brown University)
    Abstract: This working paper is an intervention into the on-going debate over the future of fiscal rules in the European Union. It argues that rather than writing down rules and expecting the world to conform to them, a better approach is to make the concept of ‘fiscal space’ operational by tying it explicitly to rates of interest on government debt. This permits huge flexibility in the size of the deficit, in the debt/GDP ratio, leaves inflation targeting to the central bank, and guarantees debt sustainability. It would also provide clarity to the public that the government is honoring its word.
    Keywords: debt, fiscal policy, monetary policy, interest rates, functional finance
    JEL: E5 E58 E62
    Date: 2021–12
  2. By: Doojav, Gan-Ochir
    Abstract: This paper develops three macroeconomic models such as large structural VAR, DSGE-based structural VAR and GAP models for Mongolia, a developing and commodity-exporting economy. All models are estimated using Bayesian methods on the quarterly data. Results suggest that (i) external shocks (i.e., China’s economic activity, commodity prices and FDI) are important sources of macroeconomic volatility in Mongolia, (ii) combining macroprudential and monetary policy measures is important in welfare loss by ensuring both macroeconomic and financial stability, and (iii) equilibrium values for inflation, growth, unemployment rate and real interest rate are estimated as 6 percent, 5 percent, 8 percent, and 3.5 percent for Mongolia, respectively. The paper also provides recommendations for macroeconomic stabilization policy.
    Keywords: External shocks, Open economy macroeconomics, Optimal stabilization policy, Bayesian analysis
    JEL: C11 C32 C51 E58 E63 F4
    Date: 2021–09
  3. By: Jens H. E. Christensen; Mark M. Spiegel
    Abstract: Japanese realized and expected inflation has been below the Bank of Japan’s two percent target for many years. We use the exogenous COVID-19 pandemic shock to examine the efficacy of monetary and fiscal policy responses for elevating inflation expectations from an arbitrage-free term structure model of nominal and real yields. We find that monetary and fiscal policy announcements during this period failed to lift inflation expectations, which instead declined notably and are projected to only slowly revert back to levels far below the announced target. Hence, our results illustrate the challenges faced in raising well-anchored low inflation expectations.
    Keywords: affine arbitrage-free term structure model; unconventional monetary policy; deflation risk; deflation protection
    JEL: C32 E43 E52 G12 G17
    Date: 2021–12–21
  4. By: Xin Sheng (Lord Ashcroft International Business School, Anglia Ruskin University, Chelmsford, United Kingdom); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)
    Abstract: Utilising a nonlinear (regime-switching) mixed-frequency panel vector autoregression model, we study the effects of government spending shocks in the United States (US) over the business cycle, while considering the role of partisan conflict. In particular, we investigate whether partisan conflict is relevant to the differences in fiscal spending multipliers in expansionary and recessionary business cycle phases upon the impact of annual government spending shocks using quarterly state-level data covering 1950:Q1 to 2016:Q4. We find new evidence that fiscal multipliers can vary with economic and political conditions. The cumulated effects of government spending shocks are strong and persistent in recessions when the level of partisan conflict is low.
    Keywords: Government Spending Shocks, Fiscal Policy Multiplier, Partisan Conflict, Panel Analysis, Vector Autoregressions, Mixed-Frequency
    JEL: C32 E32 E62 H3
    Date: 2021–12
  5. By: Filippo Gori
    Abstract: During the first decade of the currency union, business cycle fluctuations among Euro Area countries were relatively synchronised and similar in magnitude. This concordance disappeared during the 2008 financial turmoil and the following European sovereign debt crisis, a time when key flaws in the architecture of the euro area became apparent. The recovery helped reduce cross-country differences in unemployment and output gaps, but countries worst hit by the crisis took much longer to recover, and in some cases negative consequences of shocks became entrenched. The COVID-19 crisis could lead to a resurgence in euro area cyclical di-synchronisation, risking to exacerbate economic divergence among member states and putting to the test the macroeconomic stability of the currency union. Diverging cyclical paths among euro area countries originate from differences in economic structures and domestic institutions. However, such differences are compounded by features in the economic policy architecture of the currency union – such as the lack of a common fiscal stabilisation tool – and by remaining frictions in the functioning of the common labour and financial markets. Reforms to the common euro area economic policy framework combined with those to improve labour and capital mobility across euro area members are needed to foster cyclical convergence in the currency union.
    Keywords: Capital markets union, European deposit insurance, financial integration, labour market reforms, macroeconomic stabilisation
    JEL: E61 F42 E62 E32 H87
    Date: 2021–12–17
  6. By: Abbritti, Mirko; Consolo, Agostino; Weber, Sebastian
    Abstract: Standard New Keynesian (NK) models feature an optimal inflation target well below two percent, limited welfare losses from business cycle fluctuations and long-term monetary neutrality. We develop a NK framework with labour market frictions, endogenous productivity and downward wage rigidity (DWR) which challenges these results. The model features a non-vertical long-run Phillips curve between inflation and unemployment and a trade-off between price distortions and output hysteresis that change the welfare-maximizing inflation level. For a plausible set of parameters, the optimal inflation target is in excess of two percent, a target value commonly used across central banks. Deviations from the optimal target carry welfare costs multiple times higher than in traditional NK models. The main reason is that endogenous growth and DWR generate asymmetric and hysteresis effects on unemployment and output. Price level targeting or a Taylor-rule responding to the unemployment rate can handle better the asymmetric and hysteresis effects in our model and deliver significant welfare gains. Our results are robust to the inclusion of the effective lower bound on the monetary policy interest rate. JEL Classification: E24, E3, E5, O41, J64
    Keywords: downward wage rigidity, endogenous growth, monetary policy, monetary policy invariance hypothesis, optimal inflation target, zero lower bound
    Date: 2021–12
  7. By: Doojav, Gan-Ochir
    Abstract: This paper examines macroeconomic impacts of Covid-19 and policy issues for recovery in Mongolia, a developing and commodity-exporting economy, by estimating a Bayesian structural vector autoregression on quarterly data. Our estimates suggest that China’s GDP and copper price shocks respectively account for three-fifths and one-fifths of the drop in real GDP in 2020Q1. The recovery observed for 2020Q2-2021Q1 is also primarily due to positive shocks to the variables. However, the ‘W-shaped’ recovery is now expected instead of ‘V-shaped’ due to the domestic outbreak of Covid-19, leading to domestic adverse shocks. The paper also provides policy recommendations for sustainable, inclusive, and resilient recovery from the Covid-19 pandemic.
    Keywords: Covid-19, demand and supply shocks, macroeconomic policy, Bayesian analysis
    JEL: C32 E27 E32 E6 I15
    Date: 2021–08
  8. By: François Le Grand (EMLYON Business School); Xavier Ragot (Observatoire français des conjonctures économiques)
    Abstract: We present a truncation theory of idiosyncratic histories for heterogeneous agent models. This method allows us to derive optimal Ramsey policies in heterogeneous agent models with aggregate shocks, in general frameworks. We use this method to characterize the optimal level of unemployment insurance over the business cycle in a production economy, with occasionally binding credit constraints.
    Keywords: Incomplete markets; Optimal policies; Heterogeneous agent models
    JEL: E21 E44 D91 D31
    Date: 2020–12
  9. By: François Le Grand (EMLYON Business School); Xavier Ragot (Observatoire français des conjonctures économiques)
    Abstract: We present a truncation theory of idiosyncratic histories for heterogeneous agent models. This method allows us to derive optimal Ramsey policies in heterogeneous agent models with aggregate shocks, in general frameworks. We use this method to characterize the optimal level of unemployment insurance over the business cycle in a production economy, with occasionally binding credit constraints.
    Keywords: Incomplete markets; Optimal policies; Heterogeneous agent models
    JEL: E21 E44 D91 D31
    Date: 2020–12
  10. By: Kai Arvai
    Abstract: How can a currency union be sustained when member states have an exit option? This paper derives how fiscal and monetary policies can ensure the survival of a common currency, i countries want to leave the union. A union-wide central bank can prevent a break-up by setting interest rates in favor of the country that wants to exit. I show how a central bank does this by following a monetary rule with state-dependent country weights. The paper then demonstrates in a simulation that a central bank can only sustain the union for a while with this rule, but not permanently and that the best way to sustain the union is through fiscal transfers.
    Keywords: Currency union, Monetary policy, Lack of commitment, Exit option, Fiscal Policy
    JEL: E42 E52 E61 F33 F45
    Date: 2021
  11. By: Jess Benhabib; Wei Cui; Jianjun Miao
    Abstract: The distributions of wealth in the US and many other countries are strikingly concentrated on the top and skewed to the right. To explain the income and wealth inequality, we provide a tractable heterogeneous-agent model with incomplete markets in continuous time. We separate illiquid capital assets from liquid bond assets and introduce capital return jump risks. Under recursive utility, we derive optimal consumption and wealth in closed form and show that the stationary wealth distribution has an exponential right tail. Our calibrated model can match the income and wealth distributions in the US data including the extreme right tail. We also study the effect of taxes on the distribution of wealth.
    JEL: C61 D83 E21 E22 E31
    Date: 2021–12
  12. By: Mr. Philippe D Karam; Mr. Jan Vlcek; Mikhail Pranovich
    Abstract: We extend a modern practical Quarterly Projection Model to study credit cycle dynamics and risks, focusing on macrofinancial linkages and the role of macroprudential policy in achieving economic and financial stability. We tailor the model to the Philippines and evaluate the model’s properties along several dimensions. The model produces plausible dynamics and sensible forecasts. This along with its simplicity makes it useful for policy analysis. In particular, it should help policymakers understand the quantitative implications of responding to changes in domestic financial conditions, along with other shocks, through the joint use of macroprudential and monetary policies.
    Keywords: Philippines, Forecasting and Policy Analysis, Quarterly Projection Model, Monetary Policy, Macroprudential Policy, Credit Cycle, Leverage Ratio; credit cycle dynamics; policy analysis; projection model; model property; Quarterly Projection model; Credit; Macroprudential policy; Central bank policy rate; Credit gaps; Business cycles; Global
    Date: 2021–10–22
  13. By: Alexandre Carvalho; João Valle e Azevedo; Pedro Pires Ribeiro
    Abstract: Over the short run contractionary monetary policy shocks tend to be associated with domestic currency appreciations, which goes against standard interest rate parity conditions. How can this be reconciled with the fact that these conditions tend to be restored over the long run? We show the distinction between permanent and temporary monetary policy shocks is helpful to understand the impacts of monetary policy on exchange rates in the short as well as over the long run. Drawing on monthly data for the United States, Germany, France, Great Britain, Japan, Australia, Switzerland and the euro area from 1971 to 2019, and resorting to a simple structural vector error correction (SVEC) model and mild identifying restrictions, we find that a shock leading to a temporary increase in U.S. nominal interest rates leads to a temporary appreciation of the USD against the other currencies, in line with the literature on the exchange rate effects of monetary shocks and that on the forward premium puzzle. In turn, a monetary policy shock leading to a permanent rise in nominal interest rates - e.g. one associated with a normalisation of monetary policy after a long period at the zero lower bound - has the opposite impact, i.e., in line with interest parity conditions, in the short as well as over the long run. The ensuing depreciation may also contribute to higher (not lower) inflation, also in the short run. We thus confirm, in a simpler setting and for more economies, the results of Schmitt-Grohé and Uribe (2021). This highlights the relevance of differentiating between temporary and permanent monetary policy shocks in interpreting short-run exchange rate movements.
    JEL: C32 E52 E58 F31
    Date: 2021
  14. By: Marco Del Negro; Keshav Dogra; Laura Pilossoph
    Abstract: Monetary policy can have a meaningful impact on inequality, as recent theoretical and empirical studies suggest. In light of this, how should policy be conducted? And how does inequality affect the transmission of monetary policy? These are the topics covered in the second part of the recent symposium on “Heterogeneity in Macroeconomics: Implications for Policy,” hosted by the new Applied Macroeconomics and Econometrics Center (AMEC) of the New York Fed on November 12.
    Keywords: inequality; monetary policy; fiscal policy
    JEL: E52
    Date: 2022–01–07
  15. By: Marco Del Negro; Keshav Dogra; Laura Pilossoph
    Abstract: How does accounting for households’ heterogeneity—and in particular inequality in income and wealth—change our approach to macroeconomics? What are the effects of monetary and fiscal policy on inequality, and what did we learn in this regard from the COVID-19 pandemic? What are the implications of inequality for the transmission of monetary policy, and its ability to stabilize the economy? These are some of the questions that were debated at a recent symposium on “Heterogeneity in Macroeconomics: Implications for Policy” organized by the new Applied Macroeconomics and Econometrics Center (AMEC) of the New York Fed on November 12.
    Keywords: inequality; monetary policy; fiscal policy
    JEL: H30 E52
    Date: 2022–01–06
  16. By: Jason Lennard; Finn Meinecke; Solomos Solomou
    Abstract: What caused the recovery from the British Great Depression? A leading explanation - the “expectations channel” - suggests that a shift in expected inflation lowered real interest rates and stimulated consumption and investment. However, few studies have measured, or tested the economic consequences of, inflation expectations. In this paper, we collect high-frequency information from primary and secondary sources to measure expected inflation in the United Kingdom between the wars. A VAR model suggests that inflation expectations were an important source of the early stages of economic recovery in interwar Britain.
    Keywords: policy regime change, economic history, Great Depression
    JEL: E30 E60 N14
    Date: 2021
  17. By: Chistoph Grosse-Steffen
    Abstract: Inflation target formulations differ across countries and over time. Most widespread are point targets, target ranges, hybrid combinations of the two, or mere definitions of price stability. This paper proposes a novel empirical measure of expectations anchoring based on the cross-sectional distribution of private sector inflation point forecasts. Applying this to a panel of 29 countries, it finds three main results. First, a numerical target definition per se does not improve anchoring compared to a definition of price stability, while the formulation of a numerical reference point increases the degree of anchoring. Second, point targets and hybrid target formulations are associated with better anchoring than target ranges. Third, periods of persistent target deviations lead to an increase in tail risks to the inflation outlook. Conditional on such periods, point targets and hybrid targets attenuate tail risks to the inflation outlook, with a stronger quantitative effect for point targets. The results are consistent with models suggesting that targets ranges are interpreted as zones where monetary policy is less active.
    Keywords: Monetary Policy, Inflation Targeting, Expectations Anchoring, Survey Forecasts, Inflation Risk
    JEL: E42 E52 D84
    Date: 2021
  18. By: Alkan, Berkay
    Abstract: In this paper I investigate the empirical relationship between economic growth (as measured by growth in real GDP) and inflation in Turkey. We use a relatively large dataset spanning from 1960 to 2020. Our correlation analysis indicates that the nature of the relationship between inflation and unemployment in Turkey is substantially different before and after early 1980s.
    Keywords: growth; inflation; Turkish economy
    JEL: E31 N10 O40
    Date: 2021–12–25
  19. By: Andersson, Fredrik N. G. (Department of Economics, Lund University); Kilman, Josefin (Department of Economics, Lund University)
    Abstract: Romer and Romer (2004) propose a simple method to estimate monetary policy shocks using forecasts and real-time data. However, such data is not always (publicly) available, especially in a historical context. We explore the consequences of using revised data instead of the original forecast and real-time data when estimating policy shocks using the Romer and Romer framework. To this end, we estimate policy shocks for the same period as Romer and Romer. We find that using revised data has little impact on actual shock estimates, and the estimated effects of monetary policy shocks are similar.
    Keywords: Monetary policy shocks; prices; GDP
    JEL: E20 E30 E40 E50 E60
    Date: 2021–12–21
  20. By: Sergio Cesaratto
    Abstract: Monetary Policy in Times of Crisis (Rostagno et al. 2021) has three relevant features. The first is its criticism of the absence of an adequate European fiscal policy during the financial crisis. This left the ECB on its own. The second feature concerns the explanation of the theoretical framework that guided the ECB's action. While it is interesting that the authors point out that monetary policy acts on the demand side (and is therefore neutral neither in the short nor in the long-run), a plain explanation of the channels through which the central bank can influence demand is absent. The third feature is the chronicle of events and of the clash of positions within the ECB. This aspect would have, however, gained from a bolder and less conventional interpretative scheme. The book thus appears to be lacking both in a clear exposition of the ECB's analytical background and its evolution during the crisis, and in a comprehensive explanation of its policies. It is likely that the authors' economic training based on the neo-Keynesian mainstream model has greatly conditioned them in a technically convoluted, but too often uninspiring interpretation of events and policies. It is also possible that the difficulty of demonstrating the effectiveness of the monetary policy measures undertaken by the ECB in the absence of a proactive fiscal policy contributed to the widespread technical laboriousness of the argument in many pages of the book. Especially for academic teaching, but also for the informed public debate, a more accessible level would have been advisable. An appendix seeks to explain T-LTRO operations, the logic of which the book fails to elucidate
    JEL: E11 E12 E52 E58 N14
    Date: 2021–12
  21. By: Marcin Kolasa; Michal Brzoza-Brzezina; Krzysztof Makarski
    Abstract: We study the macroeconomic effects of the COVID-19 epidemic in a quantitative dynamic general equilibrium setup with nominal rigidities. We evaluate various containment policies and show that they allow to dramatically reduce the welfare cost of the disease. Then we investigate the role that monetary policy, in its capacity to manage aggregate demand, should play during the epidemic. According to our results, treating the observed output contraction as a standard recession leads to overly expansionary policy. Finally, we check how central banks should resolve the trade-off between stabilizing the economy and containing the epidemic. If no administrative restrictions are in place, the second motive prevails and, despite the deep recession, optimal monetary policy is in fact contractionary. Conversely, if sufficient containment measures are introduced, central bank interventions should be expansionary and help stabilize economic activity.
    Keywords: COVID-19; Epidemics; Containment measures; Monetary policy
    Date: 2021–11–12
  22. By: Bhadury, Soumya; Ghosh, Saurabh; Gopalakrishnan, Pawan
    Abstract: In this paper, we attempt to identify silver bullets for a resilient post-Covid recovery, in the context of bank-dominated emerging market economies (EME). Our empirical findings using Indian data, business cycle dating, and dynamic factors analysis indicate that both private consumption and investment play important roles in activity recovery during the up-cycle phases. Private investment-led recoveries can enable a strong growth revival, as it impacts both consumption and output. Quantity and quality of Government capital expenditure play an important role, especially during a growth deceleration. Finally, for all these channels to work, credit off-take could be crucial for a bank-dominated economy. Besides policy rate reduction, accommodative liquidity stance, and policies to address legacy issues relating to banking NPAs, we also highlight some of the other policy measures that could help smoothen the path to growth recovery.
    Keywords: Turning Point Analysis, Investment-led Recovery, Capex, Credit, GNPA, Liquidity
    JEL: C32 C51 C53 E32
    Date: 2021–12–02
  23. By: James B. Bullard
    Abstract: During a presentation in Clayton, Mo., for the Missouri Bankers Association, St. Louis Fed President Jim Bullard said that there has been an unexpected inflation shock in the U.S. during 2021, and that U.S. monetary policy has so far remained very accommodative. Asset price inflation has been substantial as well, he added. He said that U.S. real GDP has fully recovered and that labor markets are quite strong and likely to get stronger. He also noted that pandemic risk remains. “These considerations suggest, on balance, that the Federal Open Market Committee (FOMC) should remove monetary policy accommodation,” he said.
    Keywords: COVID-19; inflation; monetary policy
    Date: 2021–12–03
  24. By: Liran Einav; Peter J. Klenow; Jonathan D. Levin; Raviv Murciano-Goroff
    Abstract: Using Visa debit and credit card transactions in the U.S. from 2016 to 2019, we document the importance of customers in accounting for sales variation across merchants, across stores within retail chains, and over time for individual merchants and stores. Customers, as opposed to transactions per customer or dollar sales per transaction, consistently account for about 80% of sales variation. The top 1% of growing and shrinking merchants account for about 70% of customer and sales reallocation in a given year. In order to illustrate some of the potential implications, we write down an endogenous growth model with and without the customer margin. In the context of this model, we find that the customer margin dramatically increases the size and growth contribution of the largest firms, but lowers the aggregate growth rate by diverting resources from research to customer acquisition activities.
    JEL: E21 L81 O4
    Date: 2021–12
  25. By: Dennis Dlugosch; Selçuk Gul
    Abstract: Using a micro-level model of investment, this paper finds that firm-debt and investment are negatively associated across firms in Austrian manufacturing industries. The finding is robust to various changes to the model specification. Moreover, in an extension of the basic model, different components of debt are examined, pointing out that debt owed to banks and long-term debt have a stronger negative effect than other forms of debt. Comparisons with investment models estimated for other European countries suggest that the impact of debt on investment is more negative in Austria than elsewhere. Results from interaction models of debt owed to banks with an index of credit easing show that firms in industries which are more bank-dependent invest relatively more than firms in industries that are less bank-dependent after an easing of credit conditions.
    Keywords: Austria, corporate debt, Corporate investment
    JEL: E22 E44
    Date: 2021–12–17
  26. By: Ehrmann, Michael; Holton, Sarah; Kedan, Danielle; Phelan, Gillian
    Abstract: This paper reports the results of a survey of former members of the Governing Council of the European Central Bank, which sought their views on monetary policy communication practices, the related challenges and the road ahead. Pronounced differences across the respondent groups are rare, suggesting that there is broad consensus on the various issues. Respondents view enhancing credibility and trust as the most important objective of central bank communication. They judge communication with financial markets and experts as extremely important and adequate, but see substantial room for improvement in the communication with the general public. The central bank objective is widely seen as the most important topic for monetary policy communication, and several respondents perceived a need for clarification of the ECB’s inflation aim, citing the ambiguity of the “below, but close to, 2%” formulation that was in place at the time of the survey. JEL Classification: E52, E58
    Keywords: central bank communication, monetary policy, survey
    Date: 2021–12
  27. By: Peter Stevens
    Abstract: New York Fed researchers tackled a wide array of topics on Liberty Street Economics (LSE) over the past year, with the myriad effects of the pandemic—on supply chains, the banking system, and inequality, for example—remaining a major area of focus. Judging by the list below, LSE readers were particularly interested in understanding what comes next: the most-viewed posts of the year analyze households’ use of stimulus payments, the implications of lockdown-period savings, the risk of a new housing bubble, the compression of the breakeven inflation curve, and the potential roles that central banks could play in the digital currency sphere. As the year draws to a close, take a look back at the top five posts of 2021.
    Keywords: stimulus payments; pandemic; excess savings; breakeven inflation; housing bubble; housing market; central bank digital currency; cryptocurrency; digital currency; COVID-19
    JEL: E2 R31
    Date: 2021–12–22
  28. By: Roth, Steve
    Abstract: This paper explores economic measures that are surprisingly hard to assemble: US household income quintiles’ annual spending relative to annual income. The total sector’s income-minus-spending surplus is heavily dominated by the top 20%. The bottom 80% runs persistent spending deficits, implying ongoing asset disaccumulation; the bottom 80%’s annual “propensity” to spend relative to income, or spending multiplier, is greater than one. This spending deficit is found to be largely explained or “funded” by two additional asset sources that are not included in income: borrowing from the financial/banks sector, and — to a far greater extent — capital gains on asset holdings.
    Keywords: propensity; marginal; income; disposable income; personal income; capital gains; household; balance sheet; spending; saving; holding gains; borrowing; liabilities; assets; quintile; multiplier
    JEL: D14 D31 E21
    Date: 2021–11–13
  29. By: Dmitry Gornostaev (Bank of Russia, Russian Federation); Alexey Ponomarenko (Bank of Russia, Russian Federation); Sergei Seleznev (Bank of Russia, Russian Federation); Alexandra Sterkhova (Bank of Russia, Russian Federation)
    Abstract: We compile a database that contains data vintages of a large collection of short-term economic indicators. The main result of the work is a database which is available as an electronic annex to this working paper. The Research and Forecasting Department of the Bank of Russia plans to update this database in the future. We also perform an illustrative analysis of the properties of the revisions for a number of indicators. The preliminary results indicate that the magnitude of the revisions is in many cases substantial.
    Keywords: data revisions, data vintages, database, Russia
    JEL: E01 E2
    Date: 2021–07
  30. By: Camelia Minoiu; Rebecca Zarutskie; Andrei Zlate
    Abstract: We study the effects of the Main Street Lending Program (MSLP)—an emergency lending program aimed at supporting the flow of credit to small and mid-sized firms during the COVID-19 crisis on bank lending to businesses. Using instrumental variables for identification and multiple loan-level and survey data sources, we document that the MSLP increased banks' willingness to lend more generally outside the program to both large and small firms. Following the introduction of the program, participating banks were more likely to renew maturing loans and to originate new loans, as well as less likely to tighten standards on business loans than nonparticipating banks. Additional evidence suggests that the MSLP, despite low take-up, supported the flow of bank credit during the pandemic by serving as a backstop to the bank loan market and by increasing banks' levels of risk tolerance in the face of uncertainty.
    Keywords: Main Street Lending Program; Federal Reserve; Bank lending; COVID-19 pandemic; Emergency lending facilities
    JEL: E52 E58 E63 G21
    Date: 2021–12–17
  31. By: Hernán D. Seoane
    Abstract: This paper introduces digital assets, crypto assets in general, and Central Bank Dig- ital Currency in particular, into an otherwise standard New-Keynesian closed economy model with Financial Frictions. We use this setting to study the impact of a change in preferences towards the use of digital assets and to address whether the emergence of this type of instruments affect the transmission of monetary policy shocks. In this context we study the introduction of Central Bank Digital Currencies. The model is stylized but it could be a baseline for the design of models for quantitative analysis.
    Date: 2021
  32. By: Tsung-Hsien Li; Jan Sun
    Abstract: Many credit cardholders in the U.S. turn to expensive payday loans, even though they have not yet exhausted their credit lines. This results in significant monetary costs and has been coined the “Payday Loan Puzzle.” We propose the novel explanation that households use payday loans to protect their credit scores since payday lenders do not report to credit bureaus. To quantitatively examine this hypothesis, we build a two-asset Huggett-type model with two default options as well as hidden information and actions. Using our calibrated model, we can account for 40% of the empirically identified payday loan borrowers with liquidity left on their credit cards. We can also match the magnitude of monetary costs due to this seeming pecuniary mistake. To inform the policy debate over payday lending, we assess the welfare implications of several policy counterfactuals. We find that either banning payday loans or increasing their default costs results in aggregate welfare losses.
    Keywords: Consumer Credit, Bankruptcy, Default, Payday Loan, Financial Regulation, Type Score, Asymmetric Information, Hidden Action, Cross-Subsidization
    JEL: D82 E21 E49 G18 G51 K35
    Date: 2021–12
  33. By: Corsetti, Giancarlo; Kuester, Keith; Müller, Gernot J.; Schmidt, Sebastian
    Abstract: We confront the notion that flexible rates insulate a country from external disturbances with new evidence on spillovers from euro-area shocks to neighboring countries. We find that in response to euro-area shocks, spillovers are not smaller, and currency movements not significantly larger, in countries that float their currency, relative to those that peg to the euro—the insulation puzzle. Unconditionally, however, currency volatility is significantly higher for floaters. A state-of-the-art open-economy model can fit our conditional evidence on lack of insulation, provided monetary policy targets headline inflation, but only at the cost of missing the unconditional evidence on currency volatility. JEL Classification: F41, F42, E31
    Keywords: exchange-rate disconnect, exchange-rate regime, external shock, insulation, international spillovers
    Date: 2021–12
    Abstract: The development of industry 4.0 and e-commerce destroy the traditional mechanism of price determination, the rigidity of supply in the short run and the idea of price representativeness. Industry 4.0 has changed the traditional view of price formation. Firms know the individual purchasing history of customers. Firms can extract the reserve price for each individual due to big data. Price is no more the encounter of supply and demand, but it is determinated considering the maximum amount that individuals can pay. The combination of data, dynamic pricing and price discrimination has destroyed one of the pillars of the mainstream economics: price representativeness. Dynamic pricing is the ability to change prices. Price discrimination is the ability to apply different prices for different customers for the same product or service.
    Keywords: Industry 4.0, Customer Behavior, Supply, Demand, Digital Economy, Nudge.
    JEL: E21 E31 E64 E69
    Date: 2021–12–25
    Abstract: The development of industry 4.0 and e-commerce destroy the traditional mechanism of price determination, the rigidity of supply in the short run and the idea of price representativeness. Industry 4.0 has changed the traditional view of price formation. Firms know the individual purchasing history of customers. Firms can extract the reserve price for each individual due to big data. Price is no more the encounter of supply and demand, but it is determinated considering the maximum amount that individuals can pay. The combination of data, dynamic pricing and price discrimination has destroyed one of the pillars of the mainstream economics: price representativeness. Dynamic pricing is the ability to change prices. Price discrimination is the ability to apply different prices for different customers for the same product or service.
    Keywords: Industry 4.0, Customer Behavior, Supply, Demand, Digital Economy, Nudge.
    JEL: E21 E31 E64 E69
    Date: 2021–12–25
  36. By: Mr. Maximilien Queyranne; Daniel Baksa; Azhin Abdulkarim; Vassili Bazinas; Mr. Roberto Cardarelli
    Abstract: This paper finds that the neutral interest rate has been on a downward trajectory in Morocco since the global financial crisis and may have fallen in the wake of the pandemic. In that context, monetary policy transmission to output and prices appears relatively muted given limited exchange rate flexibility until recently. Also, monetary policy transmission to some market rates has somewhat weakened in the wake of the pandemic. A lower natural rate and low policy rates raise the question of whether further rate reductions would impair the banking system. We find that the sensitivity of cash demand to deposit rates is low, implying limited risks that banks would lose funding with further reductions. A reliance on checking and savings accounts for funding may impair monetary pass-through, however. If monetary policy reaches its effective lower bound, limited and credible recourse to an asset purchase program could usefully complement conventional measures and strengthen monetary policy transmission under an inflation-targeting regime with a flexible exchange rate.
    Keywords: Monetary policy, neutral interest rate, unconventional monetary policy.
    Date: 2021–10–21
  37. By: Daniel H. Cooper; Christopher L. Foote; Maria Jose Luengo-Prado; Giovanni P. Olivei
    Abstract: The labor force participation rate dropped sharply at the beginning of the pandemic, and as of November 2021 it had recovered only about half of its lost ground. The failure of the participation rate to get closer to its level immediately before the pandemic has puzzled many analysts. In this note, we show that the current participation rate is much less puzzling if one compares it with participation in November 2017 (the last time the unemployment rate was at its current level of 4.2 percent), rather than February 2020 (immediately before the pandemic). Since November 2017, population aging has continued to exert a strong downward pull on the participation rate, so that participation is now close to what one would expect, given the current unemployment rate and the current age structure of the population. In the future, rising educational attainment will offset the negative effect of aging on participation to some degree. But a complete recovery of the participation rate to its February 2020 level may be difficult to achieve without substantial further declines in the unemployment rate.
    Keywords: labor force participation; labor force composition; demographic trends; labor market conditions; COVID-19
    JEL: E24 J11 J21
    Date: 2021–12–20
  38. By: Ryosuke Shimizu (Assistant Professor, College of Economics, Aoyama Gakuin University); Shohei Momoda (Policy Research Institute, Ministry of Finance, Japan)
    Abstract: This paper examines the relationship between automation technology diffusion and the wage. In this model, producers either choose automation or non-automation technology, whichever is more profitable. Further, when the producers introduce automation technology, they must pay fixed costs, which differ between industries. The main results of this paper indicate that the improving the productivity of automation technology promotes automation diffusion, decreases labor share, and also decreases the wage when the level of automation technology diffusion is sufficiently high.
    Keywords: automation, the wage, labor share decline, technology choice
    JEL: E24 J23 O3
    Date: 2021–10
  39. By: Benjamin Bureau; Anne Duquerroy; Frédéric Vinas
    Abstract: Using unique daily data on payment defaults to suppliers in France, we show how the trade credit channel amplified the Covid-19 shock, during the first months of the pandemic. It dramatically increased short-term liquidity needs in the most impacted downstream sectors: a one standard deviation increase in net trade credit position leads to a rise in the probability of default of up to a third. This effect is short-term and cyclical and is concentrated on financially constrained firms. We argue that taking into account the trade credit channel is critical to properly quantify liquidity shortfalls in crisis times.
    Keywords: Firm, Corporate Finance, Trade Credit, Liquidity, Payment Default, Covid-19, Lockdown, Pandemic
    JEL: E32 G32 G33 H12 H32
    Date: 2021
  40. By: Kurmann, André (Drexel University); Lalé, Etienne (Université du Québec à Montréal)
    Abstract: We match cell phone data to administrative school records and combine it with information on school learning modes to study effective in-person learning (EIPL) in the U.S. during the pandemic. We find large differences in EIPL for the 2020-21 school year. Public schools averaged less EIPL than private schools. Schools in more affluent localities and schools with a larger share of non-white students provided lower EIPL. Higher school spending and federal emergency funding is associated with lower EIPL. These results are explained in large part by regional differences, reflecting political preferences, vaccination rates, teacher unionization rates, and local labor conditions.
    Keywords: COVID-19; School closures and reopenings; Effective in-person learning; Inequality
    JEL: E24 I24
    Date: 2021–12–21
  41. By: Checherita-Westphal, Cristina; Stechert, Marcel
    Abstract: We study the relationship between fiscal policy and household saving across the euro area countries for the period 1999-2019. To this extent, we propose a thick modelling approach, which allows a vast number of model specifications in a dynamic panel setting. We find that fiscal expansions are associated with an increase in household saving rate in the euro area, which supports a partial, but not full, Ricardian equivalence channel. The relationship holds regardless of how we measure the (discretionary) fiscal policy impulse. The median saving offset across all baseline specifications is around 19% in the short run and 41% in the long run. Various robustness checks underpin the basic results, while also pointing to model and estimation uncertainty and no robust evidence for total private saving offset. Our results for the euro area are broadly in line with the literature, albeit they tend to yield a somewhat weaker evidence for the saving offset of fiscal policy, particularly in relation to earlier studies. JEL Classification: D14, E62, H6
    Keywords: deficit and debt, fiscal policy, household saving, national budget
    Date: 2021–12
  42. By: Davide Di Zio (Bank of Italy); Marco Fanari (Bank of Italy); Simone Letta (Bank of Italy); Tommaso Perez (Bank of Italy); Giovanni Secondin (Bank of Italy)
    Abstract: In recent years, the extensive recourse to unconventional monetary policy measures and the growing importance of the transition process towards a sustainable economy have given rise to new challenges for the Eurosystem’s central banks in managing financial risks. In this context, central banks’ investment strategies, whose goal is to reinforce capital strength, have been combined with the adoption of criteria aimed at fostering a sustainable growth model. This work describes the strategic allocation process for investment developed by the Bank of Italy and the methodology adopted for applying sustainability criteria to some of the portfolio’s asset classes.
    Keywords: central banks, investment allocation, sustainability, Bayesian VAR
    JEL: E58 G11 G17 Q56
    Date: 2021–12
  43. By: Uwe Böwer
    Abstract: Lebanon is not defying gravity anymore. After a long period of surprising economic resilience, the Lebanese economy fell into a severe crisis in 2019, triggered by a sudden stop in life-sustaining capital inflows. The undercurrents of unsustainable public debt and twin deficits amid a weak institutional environment, however, had long been in the making. Drastic devaluation in parallel markets, high inflation and strong real GDP contractions reflect Lebanon’s deep crisis, which has only been aggravated by the COVID-19 pandemic and the devastating Beirut port explosions. The government is facing a momentous task to address the devaluation-inflation nexus, improve public governance, rebuild the electricity sector, restore sound public finances, repair the financial system and reinvigorate the private sector. This paper discusses the potential contributions of a currency board arrangement as a possible external anchor that could help stabilise Lebanon’s economy. Indeed, a currency board could end devaluation and rein in inflation, enhance discipline and governance, and, if accompanied by a broader reform agenda, help incentivise a return of capital inflows and improve private sector conditions. However, a currency board severely restricts certain macroeconomic adjustment mechanisms, requires a careful transition management and involves sizeable fiscal adjustments. While the stabilisation benefits of a currency board could be significant at Lebanon’s current juncture, getting the accompanying reforms in place, cushioning the social impact of the adjustment and ensuring solid implementation all present major challenges to make a currency board sustainable. Lebanon’s international partners stand ready to help. However, meeting these challenges first and foremost requires strong ownership by Lebanon itself.
    Keywords: Lebanon, currency board, exchange rate regime, monetary policy, inflation, Böwer.
    JEL: E52 E58 O53
    Date: 2021–12
  44. By: Francisco Queirós (Università di Napoli Federico II and CSEF)
    Abstract: There has been a growing interest in the theory of rational bubbles. Recent theories predict that bubbles are expansionary, but differ in the underlying mechanisms. This paper provides empirical evidence that help us assess different theories, and documents four main findings: stock market overvaluation is associated with (i) faster output and input growth, (ii) declining TFP growth, (iii) a greater contribution of labor for output growth, with no change in the contribution of capital, (iv) an increase in the number of firms. Overall, these findings suggest that bubbly expansions are driven by increased factor accumulation (in particular labor), and not from higher productivity growth.
    Keywords: Stock prices, fundamentals, bubbles, productivity growth.
    JEL: E44 G12 G31 G32
    Date: 2021–12–20
  45. By: J. Carter Braxton; Kyle F. Herkenhoff; Jonathan L. Rothbaum; Lawrence Schmidt
    Abstract: For whom has earnings risk changed, and why? To answer these questions, we develop a filtering method that estimates parameters of an income process and recovers persistent and temporary earnings for every individual at every point in time. Our estimation flexibly allows for first and second moments of shocks to depend upon observables as well as spells of zero earnings (i.e., unemployment) and easily integrates into theoretical models. We apply our filter to a unique linkage of 23.5m SSA-CPS records. We first demonstrate that our earnings-based filter successfully captures observable shocks in the SSA-CPS data, such as job switching and layoffs. We then show that despite a decline in overall earnings risk since the 1980s, persistent earnings risk has risen for both employed and unemployed workers, while temporary earnings risk declined. Furthermore, the size of persistent earnings losses associated with full year unemployment has increased by 50%. Using geography, education, and occupation information in the SSA-CPS records, we refute hypotheses related to declining employment prospects among routine and low-skill workers as well as spatial theories related to the decline of the Rust-Belt. We show that rising persistent earnings risk is concentrated among high-skill workers and related to technology adoption. Lastly, we find that rising persistent earnings risk while employed (unemployed) leads to welfare losses equivalent to 1.8% (0.7%) of lifetime consumption, and larger persistent earnings losses while unemployed lead to a 3.3% welfare loss.
    JEL: E24 J3 J6
    Date: 2021–12
  46. By: Guilherme Spinato Morlin; Nikolas Passos; Riccardo Pariboni
    Abstract: Recently, demand-led growth theories reshaped the study of comparative political economy. Since the Baccaro and Pontusson critique of Varieties of Capitalism, a new wave of studies has sought to analyze national economies in terms of their main demand driver of growth. Post-Keynesian authors provided extensions to perfect the fit between demand-led growth theories and comparative political economy. We argue that the Sraffian supermultiplier provides a growth theory compatible with the growth model perspective advanced by Baccaro and Pontusson and has advantages over Kaleckian and New Keynesian approaches. The concept of the autonomous components of demand, which comprise government spending, export, and debt-financed consumption, is already central for the studies of growth models. The supermultiplier provides a theory that coherently understands the relation between the autonomous demand drivers and the other induced components of demand. We demonstrate our arguments by decomposing the growth of four advanced economies: the United States, Germany, Japan, and Sweden. The decomposition shows the importance of separating the autonomous from the induced components and highlights the relevance of public expenditures and exports as growth drivers in advanced economies.
    Keywords: Comparative Political Economy, growth models, Sraffian supermultiplier
    JEL: B52 E12 O47 O57 P52
    Date: 2021–12
  47. By: Engbom, Niklas (New York University); Moser, Christian (Columbia University); Sauermann, Jan (IFAU - Institute for Evaluation of Labour Market and Education Policy)
    Abstract: We study the nature of firm pay dynamics. To this end, we propose a statistical model that extends the seminal framework by Abowd, Kramarz, and Margolis (1999a) to allow for idiosyncratically time-varying firm pay policies. We estimate the model using linked employer-employee data for Sweden from 1985 to 2015. By drawing on detailed firm financials data, we show that firms that become more productive and accumulate capital raise pay, whereas firms lower pay as they add workers. A secular increase in firm-year pay dispersion in Sweden since 1985 is accounted for by greater persistence of firm pay among incumbent firms as well as greater dispersion in firm pay among entrant firms, as opposed to more volatile firm pay.
    Keywords: Earnings Inequality; Worker and Firm Heterogeneity; Linked Employer-Employee Data; AKM; Two-Way Fixed Effects Model; Firm Dynamics
    JEL: D22 D31 E24 J31 M13
    Date: 2021–12–17
  48. By: Victor Duarte; Julia Fonseca; Aaron S. Goodman; Jonathan A. Parker
    Abstract: We develop a machine-learning solution algorithm to solve for optimal portfolio choice in a detailed and quantitatively-accurate lifecycle model that includes many features of reality modelled only separately in previous work. We use the quantitative model to evaluate the consumption-equivalent welfare losses from using simple rules for portfolio allocation across stocks, bonds, and liquid accounts instead of the optimal portfolio choices. We find that the consumption-equivalent losses from using an age-dependent rule as embedded in current target-date/lifecycle funds (TDFs) are substantial, around 2 to 3 percent of consumption, despite the fact that TDF rules mimic average optimal behavior by age closely until shortly before retirement. Our model recommends higher average equity shares in the second half of life than the portfolio of the typical TDF, so that the typical TDF portfolio does not improve on investing an age-independent 2/3 share in equity. Finally, optimal equity shares have substantial heterogeneity, particularly by wealth level, state of the business cycle, and dividend-price ratio, implying substantial gains to further customization of advice or TDFs in these dimensions.
    JEL: C61 D15 E21 G11 G51
    Date: 2021–12
  49. By: Pedro Dias Moreira; Nicholas Kozeniauskas; Cezar Santos
    Abstract: Recessions can have a cleansing effect by encouraging the reallocation of resources from lowproductivity firms towards higher-productivity ones. Whether this effect actually occurs is still debated. We contribute to answering this question by providing new evidence. Using a survey of firms matched with administrative data, we trace out the Covid-19 recession’s effects across the productivity distribution. Higher-productivity firms are found to have been more successful at maintaining employment, but there was not a rise in exit amongst lower-productivity firms. In line with the theory that support policies offset the cleansing effect of recessions, highproductivity firms are also found to have been less likely to take up government support.
    JEL: D22 E24 H81
    Date: 2021
  50. By: Mr. Junghwan Mok; Andrea Deghi; Tomohiro Tsuruga
    Abstract: The COVID-19 pandemic crisis has severely shocked the commercial real estate (CRE) sector, which could have important implications for macro-financial stability going forward because of the large size of the sector and its strong interconnectedness with the real economy. Using a novel methodology, this paper quantifies vulnerabilities in the CRE sector and analyzes policy tools available to mitigate related risks. The analysis shows that CRE prices were overvalued in several major advanced economies in 2020:Q1. It also shows that such price misalignments increase the likelihood of future price corrections and exacerbate downside risks to future GDP growth. While the path of recovery in the sector will depend inherently on the pace of overall economic recovery and the structural shifts induced by the pandemic, easy financial conditions may contribute to an increase in financial vulnerabilities and persistent price misalignment. Macroprudential policy can, however, be effective in curbing the financial stability risks posed by the CRE sector.
    Keywords: Commercial Real Estate; Asset Prices; Growth-at-Risk; Panel Quantile Regression; Macroprudential Policy
    Date: 2021–11–05
  51. By: Pål Boug; Håvard Hungnes (Statistics Norway); Takamitsu Kurita
    Abstract: The recent boom in house prices in many countries during the Covid-19 pandemic and the possibility of household financial distress are of concern among some central banks. We revisit the empirical modelling of house prices and household debt with a policy-oriented perspective using Norwegian data over the last four decades within the cointegrated VAR model. Our findings suggest, in line with previous work, a long-run mutually reinforcing relationship between these financial magnitudes, and thus the potential for the build-up of financial instabilities and spillover effects to the real economy. Applying a control analysis, we find that both house prices and debt are controllable magnitudes to some pre-specified target levels through the mortgage interest rate, which enables the central bank to reduce large fluctuations and bubble tendencies in the housing market. The present control analysis thus provides some useful policy implications from empirically relevant representations of two important financial factors entering the decision process of the policy maker.
    Keywords: House prices; household debt; econometric modelling; cointegrated VAR; policy control analysis; simulation
    JEL: C32 C53 E52 R21
    Date: 2021–11
  52. By: Ferrando, Annalisa; McAdam, Peter; Petroulakis, Filippos; Vives, Xavier
    Abstract: Monetary policy aims at affecting corporate borrowing by influencing the marginal costs of firms, but its potency can be conditioned by the degree of market competition. We first identify conditions under which changes in marginal costs may have different effects on credit constraints and output under different competitive environment, in a simple Cournot competition setting. We then exploit changes in monetary policy to examine whether the pass-through of borrowing costs is affected by market structure. First, we use as an experiment the announcement of the ECB Outright Monetary Transactions (OMT) program in a triple-differences specification. We show that small firms (which have low market power and higher credit constraints) in "stressed" countries (which benefited more from the policy) within less concentrated sectors experienced a larger reduction in credit constraints than similar firms in more concentrated sectors. Second, we exploit continuous state-of-the-art measures of monetary policy shocks to study how market structure affects pass-through to real variables, like investment and sales growth. We find evidence that firms with more market power respond less to monetary policy shocks. These results show that the interaction of borrowing capacity and market structure matters, and that concentration may have important effects on monetary policy transmission. JEL Classification: D4, E4, E5, L1
    Keywords: competition, credit constraints, marginal costs, monetary transmission, OMT
    Date: 2021–12
  53. By: Fuchs-Schündeln, Nicola; Krueger, Dirk; Kurmann, André; Lalé, Etienne; Ludwig, Alexander; Popova, Irina
    Abstract: Using a structural life-cycle model and data on school visits from Safegraph and school closures from Burbio, we quantify the heterogeneous impact of school closures during the Corona crisis on children affected at different ages and coming from households with different parental characteristics. Our data suggests that secondary schools were closed for in-person learning for longer periods than elementary schools (implying that younger children experienced less school closures than older children), and that private schools experienced shorter closures than public schools, and schools in poorer U.S. counties experienced shorter school closures. We then extend the structural life cycle model of private and public schooling investments studied in Fuchs-Schündeln, Krueger, Ludwig, and Popova (2021) to include the choice of parents whether to send their children to private schools, empirically discipline it with data on parental investments from the PSID, and then feed into the model the school closure measures from our empirical analysis to quantify the long-run consequences of the Covid-19 school closures on the cohorts of children currently in school. Future earnings- and welfare losses are largest for children that started public secondary schools at the onset of the Covid-19 crisis. Comparing children from the topto children from the bottom quartile of the income distribution, welfare losses are ca. 0.8 percentage points larger for the poorer children if school closures were unrelated to income. Accounting for the longer school closures in richer counties reduces this gap by about 1/3. A policy intervention that extends schools by 3 months (6 weeks in the next two summers) generates significant welfare gains for the children and raises future tax revenues approximately sufficient to pay for the cost of this schooling expansion.
    Keywords: Covid-19,school closures,inequality,intergenerational persistence
    JEL: D15 D31 E24 I24
    Date: 2021
  54. By: Friedrich Schneider
    Abstract: In this paper, first, six micro (4) and macro (2) estimation approaches are briefly described; they are the National Accounts Statistics discrepancy method and two new micro survey methods, a third one using a combination of company manager surveys and their knowledge to calibrate the size of the shadow economy in firms, and the consumption-income-gap of households method. The two macro methods are the MIMIC method and a structured hybrid method of the Currency demand and MIMIC models. Second, a detailed comparison of the results of four micro estimation methods with the macro MIMIC method are presented. One major result is that the estimated size of the shadow economy using the MIMIC method comes close to the size of the shadow economy of various types of recently developed micro survey methods. Third, using behavioral economics, some remarks are made about the reasons that individuals work in the shadow economy, and which estimation methods are best suited to apply this approach.
    Keywords: MIMIC estimation methods, macro and adjusted, micro survey method asking company managers, micro survey method using household data, using the consumption-income-gap, comparison of results of size of shadow economy of mostly OECD countries, shadow economy
    JEL: E26 E01 H26 H32 K42 P24 O17
    Date: 2021
  55. By: Degiannakis, Stavros
    Abstract: The paper proposes a novel method to assess whether real investment can be nowcasted based on information that is available on the stock market. The stock market index on a daily sampling frequency is assessed as a predictor of gross fixed capital formation on a quarterly sampling frequency. For France, Germany, Greece and Spain (four representative countries of eurozone), we find significant empirical evidence that the information from the stock market does produce accurate nowcasting values of gross fixed capital formation.
    Keywords: Gross fixed capital formation, nowcasting, mixed frequency, predictor, real investment, stock market.
    JEL: C53 E22 E27 G17
    Date: 2021–12–31
  56. By: Noll, Franklin; Lipkin, Andrei
    Abstract: We are heading for a cashless world. At some point, we will say goodbye to all those pieces of paper and polymer and switch to an electronic alternative. The only problem with these statements is that people have been saying them since the late 1960s. Banknotes have a robust technology and will be around for quite some years to come. What is needed is a transitional device that will ease the transition from nineteenth-century cash to twenty-first-century digital currency. The answer is a hybrid banknote. Basically, a hybrid banknote is a physical banknote on a paper or polymer substrate that can transfer value over an electronic network. It is denominated and has all the physical properties of a traditional banknote, allowing it to pass hand to hand. However, when the need arises, the user can access an electronic network and transfer the denominated value off the hybrid banknote. In this paper, we look at the past and present of hybrid banknotes, identifying their two basic forms—smart banknotes and cryptobanknotes—and how they differ. We also offer three hybrid banknote models that can be used to address pressing needs in payments technology.
    Keywords: hybrid banknotes, smart banknotes, cryptobanknotes, central bank digital currency
    JEL: E4 E5
    Date: 2021–09–16
  57. By: Tweneboah Senzu, Emmanuel
    Abstract: It empirically argued that economic development depends on increasing productivity, mitigating income inequality, reducing dependency on natural resources, improving health outcomes, enhancing environmental quality, and importantly increasing economic growth. Which is complemented by the fact that, all requires a quality financial system, which collects information to facilitate the ex-ante evaluation and ex-post monitoring of investment opportunities to ease information asymmetry as a problem, and facilitates the allocation of resources to innovative projects and further produce complex products. The above postulation derives its core factor of achievement from sustainable financial inclusion, with the paper advancing a conceptual proposition towards an effective, and efficient financial inclusion in fragile economies, and its underlying policy architecture to sustain its performance efficiency, in medium and long term purpose.
    Keywords: Financial Inclusions, Financial ecosystem, Policy, Central Bank, Fragile Economy
    JEL: E2 E6 G23 G28 H5
    Date: 2021–12–09
  58. By: Olkhov, Victor
    Abstract: We consider economic agents, agent’s variables, agent’s trades and deals with other agents and agent’s expectations as ground for theoretical description of economic and financial processes. Macroeconomic and financial variables are composed by agent’s variables. In turn, sums of agent’s trade values or volumes determine evolution of agent’s variables. In conclusion, agent’s expectations govern agent’s trade decisions. We consider that trinity - agent’s variables, trades and expectations as simple bricks for theoretical description of economics. We note models that describe variables determined by sums of market trades during certain time interval Δ as the first-order economic theories. Most current economic models belong to the first-order economic theories. However, we show that these models are insufficient for adequate economic description. Trade decisions substantially depend on market price forecasting. We show that reasonable predictions of market price volatility equal descriptions of sums of squares of trade values and volumes during Δ. We call modeling variables composed by sums of squares of market trades as the second-order economic theories. If forecast of price probability uses 3-d price statistical moment and price skewness then it equals description of sums of 3-d power of market trades – the third-order economic theory. Exact prediction of market price probability equals description of sums of n-th power of market trades for all n. That limits accuracy of price probability forecasting and confines forecast validity of economic theories.
    Keywords: theoretical economics; price probability; volatility; market trades; expectations
    JEL: A1 C0 E0 E1 E3 G0
    Date: 2021–12–01
  59. By: Davide Furceri; Mr. Pragyan Deb; Nour Tawk; Naihan Yang; Mr. Jonathan David Ostry
    Abstract: This paper empirically examines the effects of fiscal policy measures during the COVID-19 pandemic, using a novel database of daily fiscal policy announcements—classified by type of fiscal measure—and high-frequency economic indicators for 52 countries from January 1 to December 31, 2020. The results suggest that fiscal policy announcements have been effective in stimulating economic activity, boosting confidence, and reducing unemployment, but their effect varies by type of measure and country characteristics. Emergency lifeline measures (which form the bulk of below-the-line measures) are more effective when containment policies are stringent, providing cashflow support to firms and households. Demand-support measures (which comprise most of above-the-line measures) are more effective when containment measures are relaxed.
    Keywords: Fiscal policy; COVID-19; multipliers; high-frequency data.
    Date: 2021–11–05
  60. By: Jaison R. Abel; Jason Bram; Richard Deitz; Jonathan Hastings
    Abstract: Today we are launching a Regional Employment web interactive that gives users a convenient place to measure and analyze employment trends in the Federal Reserve’s Second District. The interactive features the New York Fed’s early benchmarked regional employment data, which anticipate revisions that are made to official preliminary data released by the Bureau of Labor Statistics at a later date, and so tend to track employment trends more closely than initial monthly releases. The new interactive illustrates employment trends for more than twenty geographies in the region, including states and metropolitan areas, from the year 2000 to the latest available month.
    Keywords: Second District; regional employment; early benchmark
    JEL: R10 E24
    Date: 2021–12–17
  61. By: William Gbohoui
    Abstract: This paper investigates how macroeconomic uncertainty affects the fiscal multiplier of public investment. In theory, uncertainty can reduce the multiplier if the private sector becomes more cautious and does not respond to the fiscal stimulus. Conversely, it can increase the fiscal multiplier if public investment shocks improve private agents’ expectations about future economic outlook, and lead to larger private spending. Using the disagreement about GDP forecasts as a proxy for uncertainty, we find that unexpected increases in public investment have larger and longer-lasting effects on output, investment, and employment during periods of high uncertainty, with multipliers above 2, and the larger multipliers are not driven by economic slack. Public investment shocks are also found to boost private sector confidence during heightened uncertainty, driving-up expectations about future economic development which in turn magnify private sector response to the initial stimulus.
    Keywords: Public investment; private investment; fiscal multipliers; corporate balance sheet.
    Date: 2021–11–12
  62. By: Jafet Baca
    Abstract: In light of the ongoing integration efforts, the question of whether CAPADR economies may benefit from a single currency arises naturally. This paper examines the feasibility of an Optimum Currency Area (OCA) within seven CAPADR countries. We estimate SVAR models to retrieve demand and supply shocks between 2009:01 - 2020:01 and determine their extent of symmetry. We then go on to compute two regional indicators of dispersion and the cost of inclusion into a hypothetical OCA for each country. Our results indicate that asymmetric shocks tend to prevail. In addition, the dispersion indexes show that business cycles have become more synchronous over time. However, CAPADR countries are still sources of cyclical divergence, so that they would incur significant costs in terms of cycle correlation whenever they pursue currency unification. We conclude that the region does not meet the required symmetry and synchronicity for an OCA to be appropiate.
    Date: 2021–12
  63. By: Gustavo Joaquim
    Abstract: The Paycheck Protection Program (PPP) was a large and unprecedented small-business support program enacted as a response to the COVID-19 crisis in the United States. The PPP administered almost $800 billion in loans and grants to small businesses through the banking system. However, there is still limited consensus on its overall effect on employment. This paper explores why it is challenging to estimate the effect of the PPP. To do so, we first focus on the timing of the allocation of PPP funds across regions and firms. Counties less affected by COVID-19 and with a larger presence of community banks, as well as larger firms, received loans earlier in the program. This differential timing observed in the data suggests that the current estimates of the effect of the PPP are not representative of the overall effect of the program. We qualitatively reconcile some of the conflicting results in the empirical literature and point to key questions surrounding the program.
    Keywords: Paycheck Protection Program; COVID-19; small business lending; financial frictions
    JEL: E24 G28 H81 J21
    Date: 2021–12–21
  64. By: Chang, Jin-Wook
    Abstract: This paper investigates contagion in financial networks through both debt and collateral markets. Payment from a collateralized debt contract depends not only on the borrower's balance sheet but also on the price of the underlying collateral. I show that the existence of the collateral channel of contagion amplifies the contagion from the counterparty channel, and this additional channel generates different patterns of contagion for a given network structure. If the negative liquidity shock is small, then having more connections make the network safer as contagion through debt channel is minimized by diversified exposures while contagion through collateral channel is limited. However, if the liquidity shock is large, then having more connections make the network more vulnerable as contagions through both debt and collateral channels are maximized by more exposures. The most novel and surprising result is that the ring network is safer than the complete network when the shock is large. This is because the ring network minimizes the contagion through collateral channel while maximizing the contagion through debt channel. The model also provides the minimum collateral-debt ratio (haircut) to attain robust macro-prudential state for a given network structure and aggregate shock.
    Keywords: collateral, contagion, debt, financial networks, interconnectedness, systemic risk
    JEL: D52 D53 E44 G23 G24 G28
    Date: 2021–12–12
  65. By: Mr. John C Bluedorn; Zidong An; Gabriele Ciminelli
    Abstract: The negative and stable relationship between an economy’s aggregate demand conditions and overall unemployment is well-documented. We show that there is a large degree of heterogeneity in the cyclical sensitivities of unemployment across worker and economy groups. First, unemployment is more than twice as sensitive to aggregate demand in advanced as in emerging market and developing economies. Second, youth’s unemployment is twice as sensitive as that of adults’. Third, women’s unemployment is significantly less sensitive to demand than men’s in advanced economies. These findings point to the highly unequal impacts of the business cycle across worker and economy groups.
    Keywords: unemployment, business cycles, Okun’s Law, demographics
    Date: 2021–11–12
  66. By: Antonio Martins-Neto; Nanditha Mathew; Pierre Mohnen; Tania Treibich
    Abstract: This paper analyses the evidence of job polarization in developing countries. We carry out an extensive review of the existing empirical literature and examine the primary data sources and measures of routine intensity. The synthesis of results suggests that job polarization in emerging economies is only incipient compared to other advanced economies. We then examine the possible moderating aspects preventing job polarization, discussing the main theoretical channels and the existing empirical literature. Overall, the literature relates the lack of polarization as a natural consequence of limited technology adoption and the offshoring of routine, middle-earning jobs to some host developing economies. In turn, the limited technology adoption results from suboptimal capabilities in those economies, including the insufficient supply of educated workers. Finally, we present the main gaps in the literature in developing economies and point to the need for more micro-level studies focusing on the impacts of technology adoption on workers’ careers and studies exploring the adoption and use of technologies at the firm level.
    Keywords: job polarization, routine intensity, skills, developing countries
    JEL: J24 J63 O33 E24
    Date: 2021
  67. By: Niko Hauzenberger; Florian Huber; Massimiliano Marcellino; Nico Petz
    Abstract: We develop a non-parametric multivariate time series model that remains agnostic on the precise relationship between a (possibly) large set of macroeconomic time series and their lagged values. The main building block of our model is a Gaussian Process prior on the functional relationship that determines the conditional mean of the model, hence the name of Gaussian Process Vector Autoregression (GP-VAR). We control for changes in the error variances by introducing a stochastic volatility specification. To facilitate computation in high dimensions and to introduce convenient statistical properties tailored to match stylized facts commonly observed in macro time series, we assume that the covariance of the Gaussian Process is scaled by the latent volatility factors. We illustrate the use of the GP-VAR by analyzing the effects of macroeconomic uncertainty, with a particular emphasis on time variation and asymmetries in the transmission mechanisms. Using US data, we find that uncertainty shocks have time-varying effects, they are less persistent during recessions but their larger size in these specific periods causes more than proportional effects on real growth and employment.
    Date: 2021–12
  68. By: Chou, Jenyu (School of Economics, University of Nottingham Ningbo China); Easaw, Joshy (Cardiff Business School); Minford, Patrick (Cardiff Business School)
    Abstract: The purpose of this paper is to investigate the empirical performance of the standard New Keynesian dynamic stochastic general equilibrium (DSGE) model in its usual form with full-information rational expectations and compare it with versions assuming inattentiveness- namely sticky information and imperfect information data revision. Using a Bayesian estimation approach on US quarterly data (both realtime and survey) from 1969 to 2015, we find that the model with sticky information fits best and is the only one that can generate the delayed responses observed in the data. The imperfect information data revision model is improved fits better when survey data is used in place of real-time data, suggesting that it contains extra information.
    Keywords: Forecasting Popular Votes Shares; Electoral Poll; Forecast combination, Hybrid model; Support Vector Machine
    Date: 2021–12
  69. By: Li, Boyao
    Abstract: Both equity and regulation play key roles in determining the ability of credit creation of banks. The equity endogenously varies while the regulations are exogenously imposed. I propose a banking model to investigate how the changes in bank equity due to interest receipt and expenditure affect credit and money creation under the Basel III regulations. Three Basel III regulations are discussed: the capital adequacy ratio, liquidity coverage ratio, and net stable funding ratio. The effects on credit creation are demonstrated by the changes in the credit supply in response to the interest payments changing the equity. My results indicate that the changes in equity cause multiplier effects on the credit supply. The multipliers depend on the regulatory constraints. Similarly, I present the impacts on money creation, given by the multiplier effects on the money supply. This study sheds considerable light on how bank equity and Basel III regulations affect credit and money creation.
    Keywords: Credit creation; Basel III; Bank equity; Interest payments; Multiplier effect; Balance sheet
    JEL: E51 G21 G28 G32
    Date: 2021–12–28
  70. By: Kajal Lahiri; Junyan Zhang; Yongchen Zhao
    Abstract: We examine forecast accuracy and efficiency of the Social Security Administration’s projections for cost rate, trust fund balance, trust fund ratio made during 1980-2020 with horizons up to 95 years. We find that the reported deterioration in the accuracy of the forecasts during 2010’s has reversed. The level of informational inefficiency was pervasive during 1990-2009, although it shows signs of improvement after 2010.
    Keywords: social security trust funds, long-range solvency forecasts, Nordhaus test, forecast efficiency, fixed-event forecast revisions
    JEL: C53 E37 E66 H55 H68
    Date: 2021
  71. By: Antonio Afonso (Universidade de Lisboa); Jose Carlos Coelho (Universidade de Lisboa)
    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: F
    Date: 2021
  72. By: Jacob Greenspon; Anna M. Stansbury; Lawrence H. Summers
    Abstract: We study the productivity-pay relationship in the United States and Canada along two dimensions. The first is divergence: the degree to which the levels of productivity and pay have diverged. The second is delinkage: the degree to which incremental increases in the rate of productivity growth translate into incremental increases in the rate of growth of pay, holding all else equal. We show that in both countries the pay of typical workers has diverged substantially from average labor productivity over recent decades, driven by both rising labor income inequality and a declining labor share of income. Even as the levels of productivity and pay have grown further apart, we find evidence for some linkage between productivity and pay in both countries: a one percentage point increase in the rate of productivity growth is associated with a positive increase in the rate of pay growth, holding all else equal. This linkage appears stronger in the US than in Canada. Overall, our findings lead us to tentatively conclude that policies or trends which lead to incremental increases in productivity growth, particularly in large relatively closed economies like the USA, will tend to raise middle class incomes. At the same time, other factors orthogonal to productivity growth have been driving productivity and typical pay further apart, emphasizing that much of the evolution in middle class living standards will depend on measures bearing on relative incomes.
    JEL: E24 J24 J3
    Date: 2021–12
  73. By: Patrick Grüning (Latvijas Banka & Vilnius University); Justina Banionienė (Kaunas University of Technology); Lina Dagilienė (Kaunas University of Technology); Michael Donadelli (University of Brescia); Marcus Jüppner (Deutsche Bundesbank, Goethe University); Renatas Kizys (University of Southampton); Kai Lessmann (Potsdam Institute for Climate Impact Research)
    Abstract: The Circular Economy (CE) challenges the traditional linear economy model to arrive at a sustainable economy that minimizes resource use, its negative environmental impact, and dependency on resource imports. We develop a multi-sector dynamic stochastic general equilibrium small open economy model with endogenous adoption of exogenous foreign technology innovations, endogenous environmental quality, and CE elements, comprising recyclable waste as well as recycling and refurbishing sectors. We analyze the model-implied impulse response functions with respect to several economic shocks and conduct a rich scenario-based analysis, for which the scenarios are derived from the 9R strategies. We find important trade-offs to be considered by the economy with respect to circularity, trade, environment, and growth – the four dimensions of the quadrilemma of a small open circular economy. We find that none of the six shocks considered and in none of the eight scenarios analyzed the quadrilemma can be resolved. However, a positive shock to the price of energy or a lower energy share in one of the two intermediate goods sectors provide benefits to three out of four dimensions of the quadrilemma.
    Keywords: Circular economy, Small open economy, Recycling, Refurbishing, Endogenous economic growth, Technology adoption, General equilibrium, Energy
    JEL: E2 F4 O3 O4 Q4 Q5
    Date: 2021–11–24
  74. By: Raphael A. Auer; Cyril Monnet; Hyun Song Shin
    Abstract: Blockchain technology breathes new life into the classical analysis of money as a substitute for a ledger of all past transactions. While it involves updating the ledger through a decentralized consensus on the unique truth, the robustness of the equilibrium that supports this consensus depends on who has access to the ledger and how it can be updated. To find the optimal solution, Buterin’s “scalability trilemma” needs to be addressed, so that a workable balance can be found between decentralization, security (i.e. a robust consensus), and scale (the efficient volume of transactions). Using a global game analysis of an exchange economy with credit, we solve for the optimal ledger design that balances the three objectives of this trilemma. We characterize the optimal number of validators, supermajority threshold, fees and transaction size. When intertemporal incentives are strong, a centralized ledger is always optimal. Otherwise, decentralization may be optimal, and validators need to be selected from the set of users of the system.
    Keywords: market design, money distributed ledger technology, DLT, blockchain, decentralized finance, global game, consensus
    JEL: C72 C73 D40 E42 G20 L86
    Date: 2021
  75. By: Pauline Avril (Université d'Orléans); Gregory Levieuge (Banque de France, Université d'Orléans); Camelia Turcu (Université d'Orléans)
    Abstract: We empirically investigate the impact of natural disasters on the external finance premium (EFP), conditional on the stringency of macroprudential regulation. The intensity of natural disasters is measured through an original set of geophysical indicators for a sample of 88 countries over the period 1996-2016. Using local projections, we show that, following storms, the EFP significantly drops (rises) when macroprudential regulation is stringent (lax). This suggests that regulated financial systems could foster favorable financing conditions to replace destroyed capital with more productive capital. Macroprudential stringency seems less crucial in the case of floods, the predictability of which may prompt self-discipline.
    Keywords: Financial stress, External finance premium, Macroprudential policy, Natural disasters, Local projections.
    JEL: E
    Date: 2021
  76. By: Ms. Katja Funke; Guohua Huang; Khaled Eltokhy; Yujin Kim; Genet Zinabou
    Abstract: In the wake of the COVID-19 crisis, governments around the world announced unprecedented fiscal packages to address the economic impact of the crisis. The unusually large scale of the packages was accompanied by widespread calls for “greening” them to meet the dual goals of economic recovery and environmental sustainability. In response, several researchers and international organizations attempted to assess the “greenness” of the fiscal policy response of the world’s largest economies. This paper takes stock of the contributions made by these various trackers, identifies strengths and weaknesses of their methodologies, and draws lessons for assessing the climate impact of fiscal policy going forward. It finds that: trackers provided useful assessments of the (generally low) level of greenness and raised awareness; trackers’ methodologies, while valid and innovative, varied significantly with some important, if currently largely unavoidable, weaknesses; and the way forward should involve tracking the greenness of entire government budgets, rather than just their response to the COVID-19 crisis.
    Keywords: Green fiscal policy tracker, green budgeting, COVID-19 response, climate impact assessment; IMF Green tracker policy archetype; climate impact; green fiscal policy tracker; climate relevance; fiscal policy response; Greenhouse gas emissions; Climate policy; Climate change; Environmental policy; Global
    Date: 2021–10–29
  77. By: Gaetano D’Adamo; Maria Bianchi; Lucia Granelli
    Abstract: The Italian G20 presidency has included reviving productivity growth as one of its priorities. Against this background, this Economic Brief discusses productivity growth in G20 economies in the context of the COVID-19 pandemic, paying attention to digitalisation, the emergence of digital platforms and intangible investment, and highlights related policy priorities. The COVID-19 pandemic is affecting productivity growth in many ways (e.g. through human capital, investment, resource reallocation, frictions to global value chains, etc.) and is likely to leave scars. Fostering digitalisation and intangible investment can help the recovery thanks to their overall positive impact on productivity. Key policies to unlock productivity growth discussed in the paper include: (i) high-quality investments in innovation, human capital and infrastructure, (ii) well-functioning labour and product markets to facilitate resource reallocation also across sectors, to absorb the shock of the crisis, (iii) facilitating access to finance and liquidity, and (iv) a supportive business environment. There is strong value added in international cooperation for productivity-enhancing policies: international cooperation can allow the sharing of information on lessons learnt and best practices. Moreover, common efforts and joint initiatives (for example, in investment) can maximise the impact of the measures and the positive spillovers. International coordination in the G20 can also contribute to fill existing data gaps to enable more evidence-based policy decisions.
    Keywords: productivity, digitalisation, COVID-19, investment, structural reforms, Gaetano D’Adamo, Maria Bianchi, Lucia Granelli.
    JEL: D24 E22 F42
    Date: 2021–07
  78. By: Kubitza, Christian; Grochola, Nicolaus; Gründl, Helmut
    Abstract: Life insurers massively sell savings contracts with surrender options which allow policyholders to withdraw a guaranteed amount before maturity. These options move toward the money when interest rates rise. Using data on German life insurers, we estimate that a 1 percentage point increase in interest rates raises surrender rates by 17 basis points. We quantify the resulting liquidity risk in a calibrated model of surrender decisions and insurance cash flows. Simulations predict that surrender options can force insurers to sell up to 3% of their assets, depressing asset prices by 90 basis points. The effect is amplified by the duration of insurers' investments, and its impact on the term structure of interest rates depends on life insurers' investment strategy.
    Keywords: Life Insurance,Liquidity Risk,Interest Rates,Fire Sales,Systemic Risk
    JEL: G22 E52 G32 G28
    Date: 2021
  79. By: Louis Brule Naudet (PSL - Université Paris sciences et lettres, Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres)
    Abstract: If we focus on a historical observation of monetary obligations, the Old Law made use of a diversity of instruments of account and payment, whose contemporary tendency tends to aggregate their functions. The absence of a strict legal definition of money remains a fact that is apparently quite esoteric to explain. The Monetary and Financial Code limits itself to an evasive formula: "The currency of France is the euro", without making any precise suggestions as to the criteria for its qualification, and the question of cryptographic currencies remains latent, both in terms of case law and in terms of legal or regulatory provisions. In this sense, the decision of February 26, 2020 is fundamental for the understanding of cryptocurrencies in domestic order, in particular for their future appropriation by the tax authorities, and has an interesting scope with regard to the socio-economic stakes of the horizontalization of relations between agents. In this jurisprudence note, we will successively address: the recognition by the judge of the functional criterion of Bitcoin, assimilating it to a payment instrument and a unit of account according to its secondary classification in the sense of Civil Law (1), then, we will question the will to sacralize the organic approach and its effects in the long run, in the correction of legal voids (2) Table of contents : 1- A secondary classification similar to that of legal tender under civil law 1.1- Acceptance of a liberating power as an instrument of payment 1.2- Compliance with the requirement of fungibility: a determining criterion for the design of a theoretical unit of account ; 2- The sacralization of the organic approach: a clear break with functional evaluation in favor of regalian competence 2.1- Between trust and the modern conception of state sovereignty: the rejection of competition in monetary matters 2.2- A denial of the socio-economic reality weighing on public order in favor of a happy solution concerning the fiscal problem
    Abstract: Si l'on s'attache à une observation historique de l'obligation monétaire, l'Ancien Droit faisait usage d'une diversité d'instruments de compte et de paiement, dont la tendance contemporaine tend à agréger les fonctions. Reste un fait, en apparence, bien ésotérique à expliquer, que celui de l'absence de définition légale stricte de la monnaie. Le Code monétaire et financier se restreindra à une formule évasive : « La monnaie de la France est l'euro », sans pour autant émettre de suggestions précises quant aux critères permettant sa qualification, et la question des monnaies cryptographiques reste latente, tant sur le plan jurisprudentiel que légal ou réglementaire. En ce sens, la décision du 26 Février 2020 est fondamentale pour la compréhension des monnaies cryptographiques en ordre interne, notamment pour leur appropriation future par l'administration fiscale, et présente une portée intéressante au regard des enjeux socio-économiques de l'horizontalisation des rapports entre les agents. Au sein de cette note de jurisprudence, nous aborderons successivement : la reconnaissance par le juge du critère fonctionnel du Bitcoin, l'assimilant à un instrument de paiement et une unité de compte selon sa classification secondaire au sens du Droit civil (1), puis, nous questionnerons la volonté de sacralisation de l'approche organique et ses effets à terme, dans la correction des vides juridiques (2). Table des matières : 1- Une classification secondaire analogue à celle de la monnaie légale au sens du Droit civil 1.1- L'acceptation d'un pouvoir libératoire en tant qu'instrument de paiement 1.2- Le respect de l'exigence de fongibilité : critère déterminant pour la conception d'une unité de compte théorique ; 2- La sacralisation de l'approche organique : une rupture claire avec l'évaluation fonctionnelle au profit de la compétence régalienne 2.1- Entre confiance et conception moderne de la souveraineté étatique : le rejet d'une concurrence en matière monétaire 2.2- Une négation de la réalité socio-économique pesant sur l'ordre public au bénéfice d'une solution heureuse concernant la problématique fiscale
    Keywords: Cryptomonnaies,Monnaie,Jurisprudence,Droit fiscal,Droit des obligations,Fongibilité,Consomptibilité,Monnaies cryptographiques,Ordre public
    Date: 2021–12–04
  80. By: Karol Mazur
    Abstract: I present a model of joint co-operation over irrigation and risk sharing in presence of limited commitment constraints. I estimate the model to the setting of three village economies in rural India. The implied dynamics are validated by non-targeted empirical evidence and show that if access to irrigation can be regulated by villagers, the two institutions reinforce each other. However, if ir¬rigation is non-excludable (as is the case with provision by central authorities), such investments harm local co-operation. Counterfactual experiments quan¬tify mutual reinforcement between the two institutions and gains attainable by replacing the government-owned irrigation.
    Keywords: Risk Sharing; Limited Commitment; Informal Institutions
    JEL: E20 O12 O11 O13 Q15
    Date: 2020
  81. By: Enrico Bernardini (Bank of Italy); Johnny Di Giampaolo (Bank of Italy); Ivan Faiella (Bank of Italy); Marco Fruzzetti (Bank of Italy); Simone Letta (Bank of Italy); Raffaele Loffredo (Bank of Italy); Davide Nasti (Bank of Italy)
    Abstract: This paper presents a number of methodologies for assessing the climate risk exposure of several financial asset classes. Regarding government bonds, the paper proposes using public information; in order to develop forward-looking measures of countries’ risk exposure, the paper uses historical trends combined with governments’ climate commitments and the scenarios developed by the Network for Greening the Financial System. With regard to private sector issuers, the paper finds quite a high coverage and correlation amongst the carbon emissions data from different providers, while the divergences in the data for other environmental indicators are still significant. Finally, the paper shows that the application of sustainability criteria in the Bank of Italy’s investment strategy delivered a non-negligible reduction in the exposure to the climate and environmental risks of the portfolios.
    Keywords: sustainable finance, investments, climate risks, environmental risks
    JEL: E58 G11 Q56
    Date: 2021–12
  82. By: Elsby, Michael W. L. (University of Edinburgh); Smith, Jennifer C. (University of Warwick, CAGE, Migration Advisory Committee); Wadsworth, Jonathan (Royal Holloway University of London, Centre for Economic Performance at the LSE, CReAM at UCL and IZA Bonn)
    Abstract: This paper examines the role of population flows on labour market dynamics across immigrant and native-born populations in the United Kingdom. Population flows are large, and cyclical, driven first by the maturation of baby boom cohorts in the 1980s, and latterly by immigration in the 2000s. New measures of labour market flows by migrant status uncover both the flow origins of disparities in the levels and cyclicalities of immigrant and native labour market outcomes, as well as their more recent convergence. A novel dynamic accounting framework reveals that population flows have played a nontrivial role in the volatility of labour markets among both the UK-born and, especially, immigrants.
    Keywords: Immigration, worker flows, labour market dynamics JEL Classification: E24, J6
    Date: 2021
  83. By: Pauline AVRIL; Grégory LEVIEUGE; Camélia TURCU
    Date: 2021
  84. By: Heinisch, Katja; Lindner, Axel
    Abstract: This paper addresses a general problem with the use of surveys as source of information about the state of an economy: Answers to surveys are highly dependent on information that is publicly available, while only additional information that is not already publicly known has the potential to improve a professional forecast. We propose a simple procedure to disentangle the private information of agents from knowledge that is already publicly known for surveys that ask for general as well as for private prospects. Our results reveal the potential of our proposed technique for the usage of European Commissions' consumer surveys for economic forecasting for Germany.
    Keywords: consumer confidence,private information,public information,survey data
    JEL: C83 D12 D82 E37
    Date: 2021
  85. By: Mr. Yan Carriere-Swallow; José Marzluf
    Abstract: We analyze the causes of the apparent bias towards optimism in growth forecasts underpinning the design of IMF-supported programs, which has been documented in the literature. We find that financial variables observable to forecasters are strong predictors of growth forecast errors. The greater the expansion of the credit-to-GDP gap in the years preceding a program, the greater its over-optimism about growth over the next two years. This result is strongest among forecasts that were most optimistic, where errors are also increasing in the economy’s degree of liability dollarization. We find that the inefficient use of financial information applies to growth forecasts more broadly, including the IMF’s forecasts in the World Economic Outlook and those produced by professional forecasters compiled by Consensus Economics. We conclude that improved macrofinancial analysis represents a promising avenue for reducing over-optimism in growth forecasts.
    Keywords: Macroeconomic forecasting; Financial markets and the macroeconomy; Credit growth
    Date: 2021–11–12
  86. By: Camille Cornand (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS - Centre National de la Recherche Scientifique - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UL2 - Université Lumière - Lyon 2 - ENS Lyon - École normale supérieure - Lyon); Paul Hubert
    Abstract: We compare disagreement in expectations and the frequency of forecast revisions among five categories of agents: households, firms, professional forecasters, policymakers and participants to laboratory experiments. We provide evidence of disagreement among all categories of agents. There is however a strong heterogeneity across categories: while policymakers and professional forecasters exhibit low disagreement, firms and households show strong disagreement. This translates into a heterogeneous frequency of forecast revision across categories of agents, with policymakers revising more frequently their forecasts than firms and professional forecasters. Households last revise less frequently. We are also able to explore the external validity of experimental expectations.
    Keywords: inflation expectations,information frictions,disagreement,forecast revisions,experimental forecasts,survey forecasts,central bank forecasts
    Date: 2021–12–07
  87. By: Camille Cornand (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS - Centre National de la Recherche Scientifique - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UL2 - Université Lumière - Lyon 2 - ENS Lyon - École normale supérieure - Lyon); Rodolphe dos Santos Ferreira
    Abstract: Using a simple microfounded macroeconomic model with price making firms and a central bank maximizing the welfare of a representative household, it is shown that the presence of firms' motivated beliefs has stark consequences for the conduct of optimal communication and stabilization policies. Under pure communication (resp. communication and stabilization policies), motivated beliefs about own private information (resp. own ability to process information) reverse the bang-bang solution of transparency (resp. opacity with full stabilization) found in the literature under objective beliefs and lead to intermediate levels of communication (and stabilization).
    Keywords: Motivated beliefs,public and private information (accuracy),overconfidence,communication policy,stabilization policy
    Date: 2021–12–07
  88. By: Carbone, Sante; Giuzio, Margherita; Kapadia, Sujit; Krämer, Johannes Sebastian; Nyholm, Ken; Vozian, Katia
    Abstract: This paper explores how the need to transition to a low-carbon economy influences firm credit risk. It develops a novel dataset which augments data on firms’ green-house gas emissions over time with information on climate disclosure practices and forward-looking emission reduction targets, thereby providing a rich picture of firms’ climate-related transition risk alongside their strategies to manage such risks. It then assesses how such climate-related metrics influence two key measures of firms’ credit risk: credit ratings and the market-implied distance-to-default. High emissions tend to be associated with higher credit risk. But disclosing emissions and setting a forward-looking target to cut emissions are both associated with lower credit risk, with the effect of climate commitments tending to be stronger for more ambitious targets. After the Paris agreement, firms most exposed to climate transition risk also saw their ratings deteriorate whereas other comparable firms did not, with the effect larger for European than US firms, probably reflecting differential expectations around climate policy. These results have policy implications for corporate disclosures and strategies around climate change and the treatment of the climate-related transition risk faced by the financial sector. JEL Classification: E58, G11, G32, Q51, Q56, C58
    Keywords: climate change, credit risk, disclosure, green finance, net zero, transition risk
    Date: 2021–12
  89. By: Cristina Badarau (Université de Bordeaux); Corentin Roussel (Université de Bordeaux)
    Abstract: In the aftermath of the Global Financial Crisis, financial regulation uses micro- and macro-prudential rules, most of the time motivated by empirical studies. This article suggests a theoretical explanation for countercyclical and progressive capital requirements that incorporate micro- and macro-prudential stabilization objectives. The Capital Adequacy Ratio (CAR) imposed to individual banks by a Prudential Authority (PA) would thus represent an optimal regulation whose aim is to avoid individual and systemic risk accumulation by imposing minimal constraints to financial institutions. This corresponds to the implementation of optimal time-varying prudential capital requirements to banks, with non-linear structure, that allows PA to take progressive countercyclical actions in order to insure financial stability. We also test the mechanism in a DSGE model and show that it would be more suitable for the financial and real stability compared to the existing fixed prudential ratios.
    Keywords: prudential regulation model, optimal CAR, time-varying capital requirements, DSGE model
    JEL: E
    Date: 2021

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