nep-mac New Economics Papers
on Macroeconomics
Issue of 2022‒06‒27
73 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The Subjective Inflation Expectations of Households and Firms: Measurement, Determinants, and Implications By Michael Weber; Francesco D’Acunto; Yuriy Gorodnichenko; Olivier Coibion
  2. Liquidity Traps, Prudential Policies, and International Spillovers By Javier Bianchi; Louphou Coulibaly
  3. Bubbles and Stagnation By Inês Xavier
  4. Private Overborrowing under Sovereign Risk By Arce, Fernando
  5. Global Stagflation By Jongrim Ha; M. Ayhan Kose; Franziska Ohnsorge
  6. The Macroeconomic Expectations of Firms By Bernardo Candia; Olivier Coibion; Yuriy Gorodnichenko
  7. The Augmented Bank Balance-Sheet Channel of Monetary Policy By Carla Soares; Diana Bonfim; Christian Bittner; Florian Heider; Glenn Schepens; Farzad Saidi
  8. Treasury Supply Shocks and the Term Structure of Interest Rates in the UK By Andras Lengyel
  9. Durable Consumption, Limited VAT Pass-Through and Stabilization Effects of Temporary VAT Changes By Marius Clemens; Werner Röger
  10. Monetary Policy and Homeownership: Empirical Evidence,Theory, and Policy Implications By Daniel A. Dias; Joao B. Duarte
  11. Idiosyncrasy as a Leading Indicator By Randall Morck; Bernard Yeung; Lu Y. Zhang
  12. How Bad Can Financial Crises Be? A GDP Tail Risk Assessment for Portugal By Ivan De Lorenzo Buratta; Marina Feliciano; Duarte Maia
  13. Monetary-Based Asset Pricing: A Mixed-Frequency Structural Approach By Francesco Bianchi; Sydney C. Ludvigson; Sai Ma
  14. How Did It Happen?: The Great Inflation of the 1970s and Lessons for Today By Edward Nelson
  15. Macroeconomic uncertainty matters: A nonlinear effect of financial volatility on real economic activity By Nakajima, Jouchi
  16. Look who’s Talking: Individual Committee members’ impact on inflation expectations By Dooruj Rambaccussing; Craig Menzies; Andrzej Kwiatkowski
  17. What moves markets? By Kerssenfischer, Mark; Schmeling, Maik
  18. Sources and Channels of Nonlinearities and Instabilities of the Phillips Curve: Results for the Euro Area and Its Member States By Reichold, Karsten; Wagner, Martin; Damjanović, Milan; Drenkovska, Marija
  19. Forecasting a commodity-exporting small open developing economy using DSGE and DSGE-BVAR By Erlan Konebayev
  20. Real Effects of Stabilizing Private Money Creation By Chenzi Xu; He Yang
  21. The Phillips Curve during the Pandemic: Bringing Regional Data to Bear By Patrick C. Higgins
  22. Comparing estimated structural models of different complexities: What do we learn? By José R. Maria; Paulo Júlio
  23. The Term Structure of the Excess Bond Premium: Measures and Implications By Simon Gilchrist; Bin Wei; Vivian Z. Yue; Egon Zakrajšek
  24. An Update on the Economy and Monetary Policy By Loretta J. Mester
  25. Settlement Balances Deconstructed By Parnell Chu; Grahame Johnson; Scott Kinnear; Karen McGuinness; Matthew McNeely
  26. Public Debt and Inflation Dynamics: Empirical Evidence from Zimbabwe By Talknice Saungweme; Nicholas M. Odhiambo
  27. Business cycle clocks: Time to get circular By António Rua; Nuno Lourenço
  28. Effects of fiscal consolidation on income inequality: narrative evidence from South America By Dante Cardoso; Laura Carvalho
  29. Optimal cooperative taxation in the global economy By Pedro Teles; V. V. Chari; Juan Pablo Nicolini
  30. The transmission of financial shocks and leverage of financial institutions: An endogenous regime switching framework By Kirstin Hubrich; Daniel F. Waggoner
  31. Exorbitant Privilege Gained and Lost: Fiscal Implications By Zefeng Chen; Zhengyang Jiang; Hanno Lustig; Stijn Van Nieuwerburgh; Mindy Z. Xiaolan
  32. Retail CBDC and U.S. Monetary Policy Implementation: A Stylized Balance Sheet Analysis By Matthew Malloy; Francis Martinez; Mary-Frances Styczynski; Alex Thorp
  33. One scheme fits all: a central fiscal capacity for the EMU targeting eurozone, national and regional shocks By Beetsma, Roel; Cimadomo, Jacopo; van Spronsen, Josha
  34. Inflation and Economic Growth in Kenya: An Empirical Examination By Talknice Saungweme; Nicholas M. Odhiambo
  35. Explaining the Decline in the US Labor Share: Taxation and Automation By Burkhard Heer; Andreas Irmen; Bernd Süssmuth
  36. Public Debt and Inflation Nexus in Nigeria: An ARDL Bounds Test Approach By Akingbade U. Aimola; Nicholas M. Odhiambo
  37. INFLATION VOLATILITY, QUALITY OF INSTITUTIONS, AND OPENNESS By Mujahid, Hira; Uddin, Imam; Tabash, Mosab; Ayubi, Sharique; Asad, Muhammad
  38. Discovering the true Schumpeter: New insights into the finance and growth nexus By Bofinger, Peter; Geißendörfer, Lisa; Haas, Thomas; Mayer, Fabian
  39. Public Debt and Inflation: Empirical Evidence from Ghana By Akingbade U. Aimola; Nicholas M. Odhiambo
  40. Resume Inflasi dan Pengangguran Dalam Ekonomi Islam By Akbar, Muh.
  41. Preference for Wealth and Life Cycle Portfolio Choice By Campanale Claudio; Fugazza Carolina
  42. The Corona debt conundrum in the Eurozone: Limits to stabilisation by monetary policy and the search for alternatives By Tokarski, Paweł; Wiedman, Alexander
  43. Fiscal Consolidation under Market´s Scrutiny: How Do Fiscal Announcements Affect Bond Yields By Josef Sveda; Jaromir Baxa; Adam Gersl
  44. Climate change and the economy: an introduction By António R. Antunes; Bernardino Adão; João Valle e Azevedo; Nuno Lourenço; Miguel Gouveia
  45. Embedded Supervision: How to Build Regulation into Decentralised Finance By Raphael A. Auer
  46. The Use and Mis-Use of SVARs for Validating DSGE Models By Paul Levine; Joseph Pearlman; Alessio Volpicella; Bo Yang
  47. Implicaciones de la Economía Mundial en Galicia By Gonzalez Laxe, Fernando; Armesto Pina, José Francisco; Sanchez-Fernandez, Patricio
  48. Kantian optimization with quasi-hyperbolic discounting By Kirill Borissov; Mikhail Pakhnin; Ronald Wendner
  49. Foreign Exchange Interventions: The Long and the Short of It By Patrick Alexander; Sami Alpanda; Serdar Kabaca
  50. Bargaining over Taxes and Entitlements in the Era of Unequal Growth By Marina Azzimonti; Laura Karpuska; Gabriel Mihalache
  52. Optimal threshold taxation: an empirical investigation for developing economies By Lucas Menescal; José Alves
  53. Nowcasting Growth using Google Trends Data: A Bayesian Structural Time Series Model By Bhattacharjee, Arnab; Kohns, David
  54. Accounting for variety By Winkler, Julian
  55. Does China’s Zero Covid Strategy Mean Zero Economic Growth? By Hunter L. Clark; Lawrence Lin
  56. Structural relationships between cryptocurrency prices and monetary policy indicators By Jennifer Castle; Takamitsu Kurita
  57. Numerical Methods for Macroeconomists By Jeremy Greenwood; Ricardo Marto
  58. Expecting Brexit By Swati Dhingra; Thomas Sampson
  59. Mind the Build-up: Quantifying Tail Risks for Credit Growth in Portugal By Ivan De Lorenzo Buratta; Marina Feliciano; Duarte Maia
  60. Channels of Managerial Capital Accumulation - A Framework and New Evidence from UK Microdata By Anna Ardanaz-Badia; Josh Martin; Mika Morgan; Jakob Scheebacher
  61. Payment Habits of the Hungarian Households in 2020 By Vivien Deak; Istvan Nemecsko; Tamas Vegso
  62. Dépréciation réelle de la monnaie et croissance économique By Abdallah, Ali
  63. How Is the Corporate Bond Market Responding to Financial Market Volatility? By Nina Boyarchenko; Richard K. Crump; Anna Kovner; Or Shachar
  64. Heteroskedastic Proxy Vector Autoregressions: Testing for Time-Varying Impulse Responses in the Presence of Multiple Proxies By Martin Bruns; Helmut Lütkepohl
  65. Inflation macht Erhöhung der steuerlichen Freibeträge überfällig By Hentze, Tobias
  66. How Should We Measure Infrastructure? The Case of Highways and Streets By Robert Kornfeld; Barbara M. Fraumeni
  67. Drivers of Inflation: From Roots to Regressions By Abdul Jalil
  68. How to Prepare Expenditure Baselines By Ms. Eliko Pedastsaar; Fazeer Sheik Rahim; Mr. Claude P Wendling
  69. Heteroskedastic Proxy Vector Autoregressions: Testing for Time-Varying Impulse Responses in the Presence of Multiple Proxies By Martin Bruns; Helmut Luetkepohl
  70. Examining the determinants of import demand in Tanzania: An ARDL approach By Vacu, Nomfundo P; Odhiambo, Nicholas M
  71. Property Tax Reform: Implications for Housing Prices and Economic Productivity By Jason Nassios; James Giesecke
  72. The Market-Based Asset Price Probability By Victor Olkhov
  73. Financial Literacy and Cash Holdings in Turkey By Mustafa Recep Bilici; Saygin Cevik

  1. By: Michael Weber; Francesco D’Acunto; Yuriy Gorodnichenko; Olivier Coibion
    Abstract: Households’ and firms’ subjective inflation expectations play a central role in macroeconomic and intertemporal microeconomic models. We discuss how subjective inflation expectations are measured, the patterns they display, their determinants, and how they shape households’ and firms’ economic choices in the data and help us make sense of the observed heterogeneous reactions to business-cycle shocks and policy interventions. We conclude by highlighting the relevant open questions and why tackling them is important for academic research and policy making.
    JEL: D1 D2 D8 D9 E2 E3 E4 E5 E7 J1
    Date: 2022–05
  2. By: Javier Bianchi; Louphou Coulibaly
    Abstract: This paper studies the transmission channels of monetary and macroprudential policies in an open economy framework and evaluates the normative implications for international spillovers and global welfare. An analytical decomposition uncovers the prominent role of expenditure switching for monetary policy, while macroprudential policy operates primarily through intertemporal substitution. We show that the risk of a liquidity trap generates a monetary policy tradeoff between stabilizing current output and containing capital inflows to lower the likelihood of a future recession, but leaning against the wind is not necessarily optimal. Finally, contrary to emerging policy concerns, capital controls can enhance global stability.
    JEL: E21 E23 E43 E44 E52 E62 F32
    Date: 2022–05
  3. By: Inês Xavier
    Abstract: This paper studies the consequences of asset bubbles for economies that are vulnerable to persistent stagnation. Stagnation is the result of a shortage of assets that creates an oversupply of savings and puts downward pressure on the level of interest rates. Once the zero lower bound on the nominal interest rate binds, the real rate cannot fully adjust downward, forcing output to fall instead. In such context, bubbles are useful as they expand the supply of assets, absorb excess savings and raise the natural interest rate - the real rate that is compatible with full employment - crowding in consumption and raising welfare. While safe bubbles are more likely to expand economic activity, riskier bubbles command a risk premium that, in equilibrium, lowers the real interest rate. A lower rate loosens borrowing constraints, potentially improving welfare when financing conditions are especially tight. Finally, fiscal policy that promises a bail-out transfer in case of a bubble collapse can support an existing bubble and improve welfare.
    Keywords: Bubbles; Secular stagnation; Liquidity traps
    JEL: E31 E32 E43 E44 G11
    Date: 2022–05–31
  4. By: Arce, Fernando
    Abstract: This paper proposes a quantitative theory of the interaction between private and public debt in an open economy. Excessive private debt increases the frequency of financial crises. During such crises the government provides fiscal bailouts financed with risky public debt. This response may cause a sovereign debt crisis, which is characterized by a higher probability of a sovereign default. The model is quantitatively consistent with the evolution of private debt, public debt, and sovereign spreads in Spain from 1999 to 2015, and provides an estimate of the degree of overborrowing, its effect on the spreads, and the optimal macroprudential policy.
    Keywords: Bailouts; credit frictions; financial crises; macroprudential policy; sovereign default
    JEL: E32 E44 F41 G01 G28
    Date: 2021–12–09
  5. By: Jongrim Ha; M. Ayhan Kose; Franziska Ohnsorge
    Abstract: Global inflation has risen sharply from its lows in mid-2020, on rebounding global demand, supply bottlenecks, and soaring food and energy prices, especially since the Russian Federation’s invasion of Ukraine. Markets expect inflation to peak in mid-2022 and then decline, but to remain elevated even after these shocks subside and monetary policies are tightened further. Global growth has been moving in the opposite direction: it has declined sharply since the beginning of the year and, for the remainder of this decade, is expected to remain below the average of the 2010s. In light of these developments, the risk of stagflation—a combination of high inflation and sluggish growth—has risen. The recovery from the stagflation of the 1970s required steep increases in interest rates by major advanced-economy central banks to quell inflation, which triggered a global recession and a string of financial crises in emerging market and developing economies. If current stagflationary pressures intensify, they would likely face severe challenges again because of their less well-anchored inflation expectations, elevated financial vulnerabilities, and weakening growth fundamentals.
    JEL: E31 E32 E52 Q43
    Date: 2022–06
  6. By: Bernardo Candia; Olivier Coibion; Yuriy Gorodnichenko
    Abstract: Using surveys of firms around the world, we review existing evidence on how firms form their macroeconomic expectations. Several facts stand out. First, the mean inflation forecasts of firms often deviate significantly from those of professional forecasters and households. Second, disagreement about inflation among firms is large. Third, firms often change their short-run and long-run inflation expectations jointly and by similar amounts. Fourth, firms in economies with a history of low and stable inflation are inattentive to inflation and monetary policy, but this is less true in countries with more volatile environments. Fifth, firms form expectations about inflation and the real economy jointly, but the way in which they do can differ widely across countries. Finally, we show that conditioning on firms’ inflation expectations generates a stable Phillips curve relationship. We also review evidence showing that exogenous variation in the macroeconomic expectations of firms affects their decisions.
    JEL: E03 E30 E40 E5
    Date: 2022–05
  7. By: Carla Soares; Diana Bonfim; Christian Bittner; Florian Heider; Glenn Schepens; Farzad Saidi
    Abstract: This paper studies how banks’ balance sheets and funding costs interact in the transmission of monetary-policy rates to banks’ credit supply to firms. To do so, we use credit-registry data from Germany and Portugal together with the European Central Bank’s policy-rate cuts in mid-2014. The pass-through of the rate cuts to banks’ funding costs differs across the euro-area currency union because deposit rates vary in their distance to the zero lower bound (ZLB). When the distance is shorter, banks’ financing constraints matter less for the supply of credit and there is more risk taking. To rationalize these findings, we provide a simple model of an augmented bank balance-sheet channel where in addition to costly external financing, there is screening of borrowers and a ZLB on retail deposit rates. An impaired pass-through of monetary policy to banks’ funding costs reduces their ability to lever up and weakens their lending standards.
    JEL: E44 E52 E58 E63 F45 G20 G21
    Date: 2022
  8. By: Andras Lengyel (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: How does the additional debt issued by the government affect the term structure of interest rates? In this paper we identify Treasury supply shocks using intraday high-frequency data, by exploiting the institutional setup of the UK government bond primary market. We find that supply shocks have positive effects on nominal and real interest rates. Most of the reaction is due to real term and inflation risk premia rather than the expectation component of yields. We argue both theoretically and empirically that supply shocks transmit via the repricing of duration and inflation risks in the economy. We also document that these effects are stronger under adverse economic and financial conditions.
    Keywords: Term structure, government debt, bond risk premia, high-frequency identification
    JEL: E43 E44 E60
    Date: 2022
  9. By: Marius Clemens; Werner Röger
    Abstract: This paper revives the question of whether a temporary VAT change is an adequate instrument for crisis stabilization. In empirical assessments, we find that durable goods consumption fluctuates strongly over the business cycle and that VAT rate changes affect durable goods in particular. Therefore, we build a dynamic stochastic general equilibrium (DSGE) model that is capable of addressing this major channel through which temporary VAT changes affect the economy. Furthermore, we allow for an imperfect pass-through of VAT measures to consumer prices via VAT-specific price adjustment costs. We compare the general VAT policy in the crisis with alternative stabilization policies, such as interest rate cuts, spending policies and a VAT cut only for durable goods. First, we find that considering durable goods in the model generates sizeable stabilization effects of VAT changes on consumption over a broad set of parameter ranges. Second, we find that the VAT policy can mimic monetary policy with minor exceptions. Third, the VAT rate cut has the highest short-term multiplier compared with government spending policies, but not in the medium-term. Fourth, a VAT rate reduction only on durable goods will generate strong GDP effects and even be self-financing in the first year. In contrast, a VAT reduction only on non-durables has small effects on GDP and is not self-financing. In view of our results, we conclude that a temporary VAT cut, when applied to durable goods, is an effective stabilization instrument.
    Keywords: Value added tax, durable consumption, multiplier, business cycle, zero lower bound
    JEL: E62 E63 H21
    Date: 2022
  10. By: Daniel A. Dias; Joao B. Duarte
    Abstract: We show that monetary policy affects homeownership decisions and argue that this effect is an important and overlooked channel of monetary policy transmission. We first document that monetary policy shocks are a substantial driver of fluctuations in the U.S. homeownership rate and that monetary policy affects households' housing tenure choices. We then develop and calibrate a two-agent New Keynesian model that can replicate the estimated transmission of monetary policy shocks to homeownership rates and housing rents. We find that the calibrated model provides an explanation to the "price puzzle" and delivers two important results with policy implications. First, the homeownership decision channel amplifies the redistributive effects of monetary policy, with contractionary shocks benefiting more outright homeowners and disadvantaging more renters and homeowners with a mortgage. Second, a monetary authority that reacts to a price index that includes housing rents generates excess house price, rents, and output volatility and larger real effects.
    Keywords: Monetary policy; Homeownership; Housing rents and housing prices; Inflation dynamics; Housing tenure choice; “Price puzzle
    JEL: E31 E43 R21
    Date: 2022–05–19
  11. By: Randall Morck; Bernard Yeung; Lu Y. Zhang
    Abstract: Disequilibrating macro shocks affect different firms' prospects differently, increasing idiosyncratic variation in forward-looking stock returns before affecting economic growth. Consistent with most such shocks from 1947 to 2020 enhancing productivity, increased idiosyncratic stock return variation forecasts next-quarter real GDP growth, industrial production growth, and consumption growth both in-sample and out-of-sample. These effects persist after controlling for other leading economic indicators.
    JEL: E32 E44 G01 G14 G41
    Date: 2022–05
  12. By: Ivan De Lorenzo Buratta; Marina Feliciano; Duarte Maia
    Abstract: By monitoring the evolution of risks to economic activity over time, we quantify the likelihood and severity of future negative economic growth. Following the Growth-at-risk approach, we explore the non-linear relationship between the current financial situation and the distribution of future GDP growth for Portugal. We find that both financial vulnerability and risk have a negative effect on the left tail of the one-year-ahead GDP growth distribution. Financial vulnerability has the largest impact on GDP growth at the medium to long term horizon while financial risk is only significant at the short term horizon. The GDP-at-risk measure signals economic recessions, no matter whether fueled by financial stress or imbalances, reaching negative values before 2008 and stagnating at low levels before the European Sovereign Debt Crisis. To provide policymakers with better tools to signal an increase in the likelihood of a crisis, we compute a set of complementary risk measures. Among those analyzed, the distance between the tails of the conditional distribution of GDP growth complements GDP-at-risk in anticipating economic recessions since it signals the Great Financial Crisis with a clear downward trend before 2008. The moments of the GDP growth distribution have some power in signalling recessions, as they identify changes in the characteristics of the distribution. Finally, we argue that the expected shortfall and longrise can complement the GDP-at-risk measure since they encompass information which is not limited to a single percentile of the distribution.
    JEL: C53 E01 E17 E27 E32 E44 G01
    Date: 2022
  13. By: Francesco Bianchi; Sydney C. Ludvigson; Sai Ma
    Abstract: We integrate a high-frequency monetary event study into a mixed-frequency macro-finance model and structural estimation. The model and estimation allow for jumps at Fed announcements in investor beliefs, providing granular detail on why markets react to central bank communications. We find that the reasons involve a mix of revisions in investor beliefs about the economic state and/or future regime change in the conduct of monetary policy, and subjective reassessments of financial market risk. However, the structural estimation also finds that much of the causal impact of monetary policy on markets occurs outside of tight windows around policy announcements.
    JEL: E52 E58 E7 G12
    Date: 2022–05
  14. By: Edward Nelson
    Abstract: The pickup in the U.S. inflation rate to its highest rates in forty years has led to renewed attention being given to the Great Inflation of the 1970s. This paper asks with regard to the Great Inflation: “How did it happen?” The answer offered is the fact that, in both the United Kingdom and the United States, monetary policy and other policy instruments were guided by a faulty doctrine—a nonmonetary view of inflation that perceived the concerted restraint of aggregate demand as both ineffective and unnecessary for inflation control. In the paper’s analysis, the difference in the economic policy doctrine in the 1970s from that prevailing in more recent decades is represented algebraically, with this representation backed up by documentation of policymakers’ views. A key conclusion implied by the analysis is that the fact that a nonmonetary perspective on inflation is no longer prevalent in policy circles provides grounds for believing that monetary policy in the modern era is well positioned to prevent the recurrence of *entrenched* high inflation rates of the kind seen in the 1970s.
    Keywords: Great Inflation; Phillips curve; Monetary policy doctrine; Monetary policy strategy
    JEL: E58 E52
    Date: 2022–06–03
  15. By: Nakajima, Jouchi
    Abstract: A stock market volatility index is a widely-used proxy of uncertainty in the macroeconomy, and its increase is shown to dampen real economic activity. In contrast, the macroeconomic uncertainty index proposed by Jurado et al. (2015) measures the predictability of a wide range of macroeconomic indicators and thus is a comprehensive indicator of macroeconomy-wide uncertainty. This paper empirically investigates a nonlinear link between financial volatility and real economic activity depending on the level of the macroeconomic uncertainty index. Based on the United States and Japan data, empirical analysis suggests that an increase in the financial volatility lowers industrial production and business fixed investment more persistently when the macroeconomic uncertainty is higher.
    Keywords: Financial volatility, Macroeconomic uncertainty, Nonlinear effect
    JEL: E32 E52
    Date: 2022–06
  16. By: Dooruj Rambaccussing; Craig Menzies; Andrzej Kwiatkowski
    Abstract: We explore how speeches from individual members of the Monetary Policy Committee impact on inflation expectations, as proxied by the implied forward rate. Computational linguistics tools are used to quantify the sentiment (tonality) of individual speeches of members. External speakers have calming e ects on future expected inflation, whereas the e ects are somewhat mixed for the Bank’s Governor and the remaining internal members of the Committee. Members who deliver more speeches make the final selection in the model of the best fit. However, experience at the aggregate level does not unanimously imply more credibility. Speeches previously delivered by a selected few calm inflation expectations. The response to tonality di ers when considering pre-crisis, crisis and post-crisis regimes. The findings point out that markets’ are more responsive to the signals emitted by individual speeches in the post-crisis era.
    Keywords: Textual Analysis; Monetary Policy; Central Bank Communication; Committee Members
    JEL: D12 D84 E52 G53
    Date: 2022–06
  17. By: Kerssenfischer, Mark; Schmeling, Maik
    Abstract: What share of asset price movements is driven by news? We build a large, time-stamped event database covering scheduled macro news as well as unscheduled events. We find that news account for about 50% of all bond and stock price movements in the United States and euro area since 2002, suggesting that a much larger share of return variation can be traced back to observable news than previously thought. Moreover, we provide stylized facts about the type of news that matter most for asset prices, the persistence of news effects, and spillover effects between the US and euro area.
    Keywords: Macro news,Asset prices,High-Frequency Identification,Event Database
    JEL: E43 E44 G12 G14
    Date: 2022
  18. By: Reichold, Karsten (Department of Statistics, TU Dortmund University and Department of Economics, University of Klagenfurt); Wagner, Martin (Department of Economics, University of Klagenfurt, Bank of Slovenia, Ljubljana and Institute for Advanced Studies, Vienna); Damjanović, Milan (Bank of Slovenia, Ljubljana); Drenkovska, Marija (Bank of Slovenia, Ljubljana)
    Abstract: This paper presents evidence for sources and channels of nonlinearities and instabilities of the new Keynesian Phillips curve (NKPC) for the euro area and all but four member states over the last two decades prior to the COVID-19 crisis. The approach rests upon misspecification testing using auxiliary regressions based on the standard open-economy hybrid NKPC. Using a large number of specifications, this approach allows to systematically, i. e., based on a literature review, disentangle the evidence for nonlinearities and instabilities of the NKPC according to sources and channels. For the euro area and most considered member states, there is substantial evidence for nonlinearities and instabilities. The relatively most important channels of nonlinearities and instabilities are similar across countries, whereas the relatively most important sources differ across countries. The results strongly indicate the need for considering nonlinear NKPC relationships in empirical analyses and also point towards potentially useful nonlinear specifications.
    Keywords: Euro area, instability, new Keynesian Phillips curve, nonlinearity, specification analysis
    JEL: E31 E52 E58 F62 J11
    Date: 2022–06
  19. By: Erlan Konebayev (NAC Analytica, Nazarbayev University)
    Abstract: In this paper, we assess the forecasting performance of three types of structural models - DSGE, BVAR with Minnesota priors, and DSGE-BVAR - in the context of a commodity-exporting small open developing economy using the data for Kazakhstan. We find that BVAR and DSGE-BVAR models generally produce point forecasts that are more accurate and less biased compared to those of DSGE in the short term, and that BVAR forecasts rapidly deteriorate in quality as the length of the forecast horizon increases. The density forecast analysis shows that when all variables are considered, one of the BVAR models performs better than DSGE at the one quarter horizon, and when financial sector variables are omitted, one DSGE-BVAR and both BVAR models demonstrate superior performance in the short term.
    Keywords: DSGE; DSGE-BVAR; Bayesian estimation; forecasting; small open economy
    JEL: C11 E17 E32 E37
    Date: 2022–04
  20. By: Chenzi Xu; He Yang
    Abstract: We show that decentralized privately created money with unstable values can hinder the traded, more transaction-friction sensitive, sector of the economy. We do so in the context of the NationalBanking Act of 1864 in the United States that created a new federally-regulated, fully-backed currency as an alternative to the pre-existing money supply, which consisted of unsecured notes printed by thousands of local private banks. Using a discontinuous change across towns in the costs of accessing this new type of stable, federally-backed money as a natural experiment, we show that places gaining access to the new currency experienced a shift in the composition of agricultural production from non-traded to traded goods and increased employment in trade-related professions. In addition, counties gaining access to the new stable money increased their manufacturing output by sourcing more inputs, and they innovated more, all consistent with the stable currency improving their market access and allowing them to expand through trade.
    JEL: E42 E44 E51 F14 G21 N11 N21
    Date: 2022–05
  21. By: Patrick C. Higgins
    Abstract: The Phillips curve appears to have held up well at the regional level during the COVID-19 era. Areas of the country that took relatively large hits to their unemployment rate and employment-population ratio during the pandemic have had lower inflation, on average, than areas that took relatively small hits. And, just as prior to the pandemic, the inverse relationship between inflation and unemployment continues to be statistically stronger for the prices of services than of goods. The Phillips curve appears to have held up well at the regional level during the COVID-19 era. Areas of the country that took relatively large hits to their unemployment rate and employment-population ratio during the pandemic have had lower inflation, on average, than areas that took relatively small hits. And, just as prior to the pandemic, the inverse relationship between inflation and unemployment continues to be statistically stronger for the prices of services than of goods.
    Keywords: inflation; unemployment; labor markets; Phillips curve; regional data; panel data
    JEL: C23 E31 E32
    Date: 2021–09–09
  22. By: José R. Maria; Paulo Júlio
    Abstract: We estimate various models of different complexities for the Portuguese economy. These differ along three key dimensions: the disaggregation of the final goods structure, the existence of a financial sector, and the complexity of the fiscal environment. Simpler models do get the key bullet points of storytelling right, but exacerbate the role of existing mechanisms. More complex models adress this problem, at the cost of greater potential mispecification. A more complex fiscal environment introduces a rule that adjusts labor taxes according to deviations in the fiscal balance from a target level. This mechanism may cushion or enhance the effects of other disturbances. The financial sector originates important differences in impulse responses, driven by inflationary domestic pressures that trigger a reduction in the real cost of credit. Many estimation outcomes are largely indistinguishable across models, such as smoothed shocks, standard deviations, and correlations with output growth.
    JEL: A C11 C13 E20 E32
    Date: 2022
  23. By: Simon Gilchrist; Bin Wei; Vivian Z. Yue; Egon Zakrajšek
    Abstract: In this article, we construct daily aggregate as well as short-, medium-, and long-term "excess bond premium" (EBP) measures using a widely available corporate bond database (known as "TRACE"). The novel EBP measures we construct provide an important gauge of strains in the financial sector at different horizons. We find that the short-term EBP measure increased more dramatically at the peaks of the COVID-19 pandemic and the 2007–09 global financial crisis, but the pattern was reversed around the interest rate liftoff at the end of 2015.
    Keywords: excess bond premium; term structure; TRACE; COVID-19
    JEL: E44 E58 G12
    Date: 2021–09–24
  24. By: Loretta J. Mester
    Abstract: The key challenge facing the economy is unacceptably high inflation, which reflects the imbalance between strong aggregate demand and constrained aggregate supply. The FOMC is committed to using its tools to get inflation under control, on a downward trajectory to its longer-run inflation goal of 2 percent, and the Committee has begun the process of repositioning monetary policy. This recalibration reflects the evolution of economic conditions, the economic outlook, and the risks around the outlook, and as the recalibration proceeds, it will continue to do so.
    Keywords: inflation; monetary policy
    Date: 2022–06–02
  25. By: Parnell Chu; Grahame Johnson; Scott Kinnear; Karen McGuinness; Matthew McNeely
    Abstract: Because of the COVID-19 pandemic, public interest in the Bank’s balance sheet and, more specifically, the size of settlement balances, has grown. This paper deconstructs the concept of settlement balances and provides some context on their history, current state and possible future evolution.
    Keywords: Central bank research; Coronavirus disease (COVID-19); Financial markets; Monetary policy implementation
    JEL: E E59 E6 G G01
    Date: 2022–06
  26. By: Talknice Saungweme; Nicholas M. Odhiambo
    Abstract: The study seeks to empirically test the hypothesis that public debt has a significant influence on inflation in Zimbabwe, covering the period 1980-2020. The study was motivated by recent trends in public debt and domestic inflation in Zimbabwe, and the need to guide debt-inflation related policy. These latest trends have started to ring alarming bells, which raises questions on the effectiveness of fiscal and monetary policies in bringing macroeconomic stability in the country. Applying the Autoregressive Distributed Lag (ARDL) bounds testing procedure to cointegration and an error correction mechanism (ECM), expanded by incorporating structural breaks, the study finds evidence in support of positive and significant impact of public debt on inflation dynamics in Zimbabwe, particularly in the long run. Based on the findings, public debt dynamics matter for inflation process in Zimbabwe. That is, fiscal policy can be considered to be an important determinant of the effectiveness of monetary policy in Zimbabwe. Therefore, the government should be mindful of increases in public debt as this was found to be inflationary.
  27. By: António Rua; Nuno Lourenço
    Abstract: Assessing the momentum of the business cycle is of utmost importance for policymakers and private agents. In this respect, the use of business cycle clocks has gained prominence among national and international institutions to depict the current stage of the business cycle. Drawing on circular statistics, we propose a novel approach to business cycle clocks in a datarich environment. The method is applied to the main euro area countries resorting to a large dataset covering the last three decades. We document the usefulness of the circular business cycle clock to capture the business cycle stage, including peaks and troughs, with the findings being supported by the cross-country evidence.
    JEL: C30 C55 E32
    Date: 2022
  28. By: Dante Cardoso; Laura Carvalho
    Abstract: Based on a narrative dataset constructed by David and Leigh (2018) for annual fiscal consolidation shocks, this paper estimates the dynamic effects of fiscal consolidations on income inequality from Jordá (2005)’s local projections method for nine South American economies in the 1991-2017 period. By decomposing fiscal shocks, the baseline results suggest that spending-based fiscal consolidations significantly increase the Gini index, while tax-based fiscal consolidations do not show statistically significant effects on income inequality. The Gini index for disposable income rises 2.48% in eight years after a spending-based fiscal adjustment of 1% of GDP. The magnitude of this effect is higher than in most of the previous studies carried out for OECD countries. Our main finding for the impact of spending-based fiscal consolidation on inequality in the medium run is robust when using alternative control variables, lag structures, country samples, and the Cyclically Adjusted Primary Balance (CAPB) strategy for identifying the fiscal shocks.
    Keywords: income inequality; fiscal consolidation; fiscal austerity; South America; local projections
    JEL: D30 D63 E60 E62
    Date: 2022–06–02
  29. By: Pedro Teles; V. V. Chari; Juan Pablo Nicolini
    Abstract: How should countries cooperate in setting fiscal and trade policies when government expenditures must be financed with distorting taxes? We show that even if countries cannot make explicit transfers to each other, every point on the Pareto frontier is production efficient, so that international trade and capital flows should be effectively free. Trade agreements must be supplemented with fiscal policy agreements. Residence-based income tax systems have advantages over source-based systems. Taxing all household asset income at a countryspecific uniform rate and setting the corporate income tax to zero yield efficient outcomes. Value-added taxes should be adjusted at the border.
    JEL: E60 E61 E62
    Date: 2022
  30. By: Kirstin Hubrich; Daniel F. Waggoner
    Abstract: We conduct a novel empirical analysis of the role of leverage of financial institutions for the transmission of financial shocks to the macroeconomy. For that purpose we develop an endogenous regime-switching structural vector autoregressive model with time-varying transition probabilities that depend on the state of the economy. We propose new identification techniques for regime switching models. Recently developed theoretical models emphasize the role of bank balance sheets for the build-up of financial instabilities and the amplification of financial shocks. We build a market-based measure of leverage of financial institutions employing institution-level data and find empirical evidence that real effects of financial shocks are amplified by the leverage of financial institutions in the financial-constraint regime. We also find evidence of heterogeneity in how financial institutions, including depository financial institutions, global systemically important banks and selected nonbank financial institutions, affect the transmission of shocks to the macroeconomy. Our results confirm the leverage ratio as a useful indicator from a policy perspective.
    Keywords: Regime switching models; Time-varying transition probabilities; Financial shocks; Leverage; Bank and nonbank financial institutions; Heterogeneity
    JEL: C11 C32 C53 C55 E44 G21
    Date: 2022–06–01
  31. By: Zefeng Chen; Zhengyang Jiang; Hanno Lustig; Stijn Van Nieuwerburgh; Mindy Z. Xiaolan
    Abstract: We study three centuries of U.K. fiscal history. Before WW-I, when the U.K. dominated global bond markets, the U.K.’s government debt was not always fully backed by its future surpluses, even after accounting for the seigniorage revenue from convenience yields. As predicted by theories of safe asset determination, investors concentrate extra fiscal capacity in a single country, the global safe asset supplier, based on relative macro fundamentals, and its debt growth may temporarily outstrip what is warranted by its own macro fundamentals. After the relative deterioration in U.K. fundamentals, due to the run-up in debt during WW-I and WW-II, bond investors focused exclusively on the U.K’s own macro fundamentals. Since then the U.K. debt has been fully backed by surpluses.
    JEL: E43 E62 G12
    Date: 2022–05
  32. By: Matthew Malloy; Francis Martinez; Mary-Frances Styczynski; Alex Thorp
    Abstract: This paper discusses how a Federal Reserve issued retail central bank digital currency (CBDC) could affect U.S. monetary policy implementation. Using a stylized balance sheet analysis, we analyze the effect a retail CBDC could have on the balance sheets of the Federal Reserve, commercial banks, and U.S. households. Then we consider how these balance sheet changes could affect monetary policy implementation for the Federal Reserve. We illustrate that the potential effects on monetary policy implementation from a retail CBDC are highly dependent on the initial conditions of the Federal Reserve’s balance sheet. Moreover, the analysis demonstrates how the Federal Reserve may use its existing tools to manage the effects of a retail CBDC on monetary policy implementation.
    Keywords: Bank behavior; Central banking; Households; Monetary policy implementation; Retail CBDC
    Date: 2022–05–31
  33. By: Beetsma, Roel; Cimadomo, Jacopo; van Spronsen, Josha
    Abstract: This paper proposes a central fiscal capacity for the euro area that generates transfers in response to eurozone, country, and region-specific shocks. The main novelty of this fiscal capacity is that it allows a joint response to these three types of shocks within a single scheme. Based on NUTS3 regional data over the last two decades and regional fiscal multiplier estimates, our analysis shows that - with a limited risk of moral hazard - substantial stabilisation could have been achieved in response to the eurozone and regional shocks, while country-specific shocks were on average less severe and therefore needed less stabilisation. JEL Classification: C38, E32, E62, E63
    Keywords: Bayesian inference, Central fiscal capacity, macroeconomic stabilisation, multilevel factor model
    Date: 2022–05
  34. By: Talknice Saungweme; Nicholas M. Odhiambo
    Abstract: This paper examines the relationship between inflation and economic growth in Kenya from an analytical and empirical standpoint. The paper applies the autoregressive distributed lag (ARDL) bounds testing approach and the multivariate Granger-causality test using time series data covering 1970-2019. Structural breaks in the time series were also conducted using the Perron (1997) (PPURoot) and Zivot-Andrews (1992) (ZAU Root) techniques. Incorporating structural breaks into time series increases statistical inference's overall validity. Inflation and economic growth in Kenya were found to have structural breaks in 1995 and 1991. These years are marked by Kenya's economic, financial, public sector and institutional reforms. The other findings of the study revealed that inflation has a statistically significant negative influence on long-term economic growth. The multivariate Granger-causality results showed a distinct short-run unidirectional causality from economic growth to inflation in Kenya. In order to mitigate the negative consequences of inflation and the coronavirus on the economy and welfare, the study recommends that Kenya's government should pursue prudent monetary, financial, and fiscal policies.
  35. By: Burkhard Heer; Andreas Irmen; Bernd Süssmuth
    Abstract: This study provides evidence for the US that the secular decline in the labor share is not only explained by technical change or globalization, but also by the dynamics of factor taxation, automation capital (robots), and population growth. First, we empirically find indications of co-integration for the period from the last quarter of the 20th to the first decade of the 21st century. Permanent effects on factor shares emanate from relative factor taxation. The latter also have a lasting effect on the use of robots. Variance decompositions reveal that taxing contributes to changes in the two income shares and in automation capital. Second, we analyse and calibrate a neoclassical growth model extended to include factor taxation, automation capital, and capital adjustment costs. Labor and automation capital are perfect substitutes whereas labor and traditional capital are complements. The model replicates the dynamics of the observed functional income distribution in the US during the 1965-2015 period. Counterfactual experiments suggest that the fall in the labor share would have been significantly smaller if labor and capital income tax rates had remained at their respective level of the 1960s.
    Keywords: functional income distribution, labor income share, income taxes, automation capital, demography, growth
    JEL: D33 E62 O41 J11 J20
    Date: 2022
  36. By: Akingbade U. Aimola; Nicholas M. Odhiambo
    Abstract: Inflationary tendencies of public debt have been the cause of an unsettling debate among policymakers in Nigeria. Using the autoregressive distributed lag (ARDL) framework, this study attempts to investigate the impact of total public debt on inflation in Nigeria for the period 1983–2018. The cointegrating regression results reveal evidence of a stable long-run relationship among inflation, total public debt, money supply, interest rate, economic growth, trade openness, and private investment in the presence of structural breaks. Empirical results show that the impact of public debt on inflation is statistically insignificant, irrespective of whether the regression was in the short or the long run. Hence, the study concludes that inflation in Nigeria could be driven by other factors other than public debt.
  37. By: Mujahid, Hira; Uddin, Imam; Tabash, Mosab; Ayubi, Sharique; Asad, Muhammad
    Abstract: The inflation instability creates destruction on the economy not only concerning change in prices but also over rising in the level of prices instability. The purpose of this paper is to investigate the relationship between inflation volatility, openness, and quality of institutions for the panel of 182 economies, OECD, and Non-OECD economies for the period of 1998 to 2018. The paper found that institutional quality has a significant impact on inflation volatility. It also suggests political stability and the absence of violence, regulatory quality, and rule of law dampen the inflation volatility of OECD. However, government effectiveness increases the inflation volatility in non- OECD economies. Trade openness reduces the inflation volatility of OECD conversely increases inflation volatility of non-OECD economies. The volatility of inflation of OECD and non-OECD can be improved by a low exchange rate. The policy implications are central banks do use measures internally and emphasize the stability of headline inflation rates over the medium term. It has to be taken into consideration that institutional quality influences average inflation rates.
    Keywords: Inflation Volatility, Institutions Quality, Voice Accountability, Control of Corruption.
    JEL: E60 H30 H80 P30
    Date: 2021
  38. By: Bofinger, Peter; Geißendörfer, Lisa; Haas, Thomas; Mayer, Fabian
    Abstract: Joseph A. Schumpeter is one of the most famous economists of the 20th century and the 'patron saint' of the finance and growth literature. We have discovered that the prevailing literature has, however, misinterpreted Schumpeter, which leads to puzzling empirical results and difficulties in explaining even fundamental relationships. We argue that this is due to a misrepresentation of the role of banks and liquidity creation and the role of household saving. After a critical discussion of the literature, we provide our own empirical analysis using a panel of 43 countries to explore the relationships between the important variables of the finance and growth literature. Our empirical analysis above all supports Schumpeter's view that credit growth supports GDP growth while saving is irrelevant for credit growth and GDP growth. In sum, a correct interpretation of Schumpeter helps to overcome the theoretical and empirical challenges which confront the prevailing literature.
    Keywords: Finance-growth nexus,Finance,Financial development,Economic growth,Economic development,Financial intermediation,Bank credit,Liquidity creation,Saving
    JEL: B20 B22 C10 E44 F30 F43 G21 O11 O16 O4
    Date: 2022
  39. By: Akingbade U. Aimola; Nicholas M. Odhiambo
    Abstract: This paper investigates the impact of public debt on inflation in Ghana using annual data during the period 1983-2018. The study uses the Autoregressive Distributed Lag (ARDL) bounds testing approach to cointegration and an error correction model to examine this linkage. The cointegrating regression results reveal evidence of a stable long-run relationship between inflation and the explanatory variables in the presence of a structural break. The findings also show a positive and significant impact of public debt on inflation. These results were found to hold, irrespective of whether the regression was conducted in the short run or the long run. The study confirms the presence of the inflationary effects of public debt in Ghana. The government should, therefore, be prudent when considering increases in public debt to minimise volatility in inflation and its associated risks to the economy.
  40. By: Akbar, Muh.
    Abstract: Inflasi merupakan keadaan dimana terjadi kenaaikan harga barang secara terus menerus yang dapat menyebabkan menurunnya daya beli masyarakat karena secara riil tingkat pendapatannya juga menurun. Ada macam-macam inflasi tergantung pada faktor pencetus terjadinya inflasi. Dilihat dari besarnya laju inflasi dapat dibagi menjadi beberapa macam1, yaitu: Inflasi merayap (creeping inflation), inflasi menengah (moderate inflation), Galloping inflation, dan Hyperinflasi.
    Date: 2022–04–24
  41. By: Campanale Claudio (Department of Economics, Social Studies, Applied Mathematics and Statistics (ESOMAS) and CERP (CCA) University of Torino, Italy); Fugazza Carolina (Department of Economics, Social Studies, Applied Mathematics and Statistics (ESOMAS) and CERP (CCA) University of Torino, Italy)
    Abstract: Do participation and investment in risky assets increase with wealth? Do the wealthiest households save at higher rates than the median households and is wealth more concentrated than earnings? Based on survey data, this paper shows that this is the case. Moreover, the paper provides a theoretical framework based on an extended version of the life-cycle model of consumption and portfolio choice that enables to explain differences in behavior between the wealthiest and others.
    Keywords: Life-cycle, Portfolio Choice, Preference over Wealth, Wealth Inequality
    JEL: D15 E21 G11
    Date: 2022–06
  42. By: Tokarski, Paweł; Wiedman, Alexander
    Abstract: One of the most serious economic and social consequences of the pandemic is the higher public debt of the Eurozone countries. The massive interventions of the Euro­system have lowered borrowing costs to record lows. For some time to come, the sustainability of the public finances of the most indebted Eurozone countries will depend on expansionary monetary policy. However, this approach raises questions. It is uncertain how long monetary policy can support the debt market of the EU-19, whether there are effective alternatives, and what impacts the high debt levels and the interventions of the European Central Bank (ECB) will have on the foundations of the Eurozone.
    Date: 2021
  43. By: Josef Sveda (Institute of Economic Studies, Faculty of Social Sciences, Charles University & The Czech National Bank, Prague, Czech Republic); Jaromir Baxa (Institute of Economic Studies, Faculty of Social Sciences, Charles University & The Czech Academy of Sciences, Institute of Information Theory and Automation, Prague, Czech Republic); Adam Gersl (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: We estimate the short-run reactions of bond spreads of selected EU member states vis-a-vis the German bund on fiscal announcements from January 2000 till December 2019. To avoid selection bias, the announcements are scrapped from the Factiva database, and then, depending on their tone, they are classified as hawkish or dovish. We show that announcements of fiscal consolidation decrease the spreads - however, the full-sample result masks substantial time and country variation. The impact of fiscal consolidation is statistically significant, namely in the post-crisis period since the Draghi´s "whatever it takes" speech, but not before the Great Recession or during the European Debt Crisis.
    Keywords: fiscal announcements, bond spreads, EU debt crisis, fiscal consolidation
    JEL: E62 G01 G12
    Date: 2022–06
  44. By: António R. Antunes; Bernardino Adão; João Valle e Azevedo; Nuno Lourenço; Miguel Gouveia
    Abstract: This work presents in an accessible way the functioning of the natural climate system and the mechanisms through which global warming occurs. The warming of the Earth’s surface and the evolution of precipitation throughout the 20th century are documented, including for the Portuguese case. The channels of transmission of climate change to the economy are also analysed. The likely impact on the level of global GDP is negative, with a range of estimates very sensitive to the occurrence of phenomena that are difficult to predict. It also discusses economic policy proposals addressing the problem of fossil carbon emissions. Significant carbon taxation will likely have to coexist with the existing carbon emission permit system. The role of central banks in mitigating the effects of excessive CO2 emissions is analysed, highlighting regulatory reporting with a focus on environmental issues and the assumption of concerns related to sustainability and corporate responsibility. Finally, modelbased estimates of economic costs associated to climate change are presented. In this example, we conclude that the adoption of an optimal global policy would save Portugal about 0.5ºC of warming.
    JEL: E21 E60 F40
    Date: 2022
  45. By: Raphael A. Auer
    Abstract: The emergence of so-called “decentralised finance” (DeFi) and a shadow financial system of cryptocurrency exchanges and stablecoin issuers raises the challenge of how to apply technology-neutral regulation so that similar risks are subject to the same rules. This paper makes the case for embedded supervision, ie a regulatory framework that provides for compliance in decentralised markets to be automatically monitored by reading the market’s ledger. This reduces the need for firms to actively collect, verify and deliver data. The paper explores the conditions under which distributed ledger data may be used to monitor compliance. To this end, a decentralised market is modelled that replaces today’s intermediary-based verification of legal data with blockchain-enabled credibility based on economic consensus. The key results set out the conditions under which the market’s economic consensus would be strong enough to guarantee that transactions are economically final, so that supervisors can trust the distributed ledger’s data. The paper concludes with a discussion of the legislative and operational requirements that would promote low-cost supervision and a level playing field for small and large firms.
    Keywords: decentralised finance, DeFi, tokenisation, asset-backed tokens, stablecoins, crypto-assets, cryptocurrencies, CBDC, regtech, suptech, regulation, supervision, Basel III, proportionality, blockchain, distributed ledger technology, digital currencies, proof
    JEL: D40 D20 E42 E51 F31 G12 G18 G28 G32 G38 K22 K24 L10 L50 M40
    Date: 2022
  46. By: Paul Levine (University of Surrey); Joseph Pearlman (City University); Alessio Volpicella (University of Surrey); Bo Yang (Swansea University)
    Abstract: This paper studies the potential ability of an SVAR to match impulse response functions of a well-established estimated DSGE model. We study the invertibility (fundamentalness) problem setting out conditions for the RE solution of a linearized Gaussian NK-DSGE model to be invertible taking into account the information sets of agents. We then estimate an SVAR by generating artificial data from the theoretical model. A measure of approximate invertibility, where information can be imperfect, is constructed. Based on the VAR(1) representation of the DSGE model, we compare three forms of SVAR-identification restrictions; zero, sign and bounds on the forecast error variance, for mapping the reduced form residuals of the empirical model to the structural shocks of interest. Separating out two reasons why SVARs may not recover the impulse responses to structural shocks of the DGP, namely non-invertibility and inappropriate identification restrictions, is then the main objective of the paper.
    JEL: C11 C18 C32 E32
    Date: 2022–06
  47. By: Gonzalez Laxe, Fernando; Armesto Pina, José Francisco; Sanchez-Fernandez, Patricio
    Abstract: The world economic situation entails a review of the economic integration processes and, subsequently, a return to national economies that were based on a rebound in domestic demand (that is, very supportive of orthodox Keynesianism), inspired by the commitment to income redistribution policies, the reduction of social inequalities and the extension of the principles of subsidiarity and aid to social welfare policies. The aim of this text is to present a descriptive analysis of the main implications of the recent changes in the world economy on the economy of Galicia, with special attention to what happened in the year 2021.
    Keywords: Galicia, National Accounts, Economic integration, Value chains
    JEL: E01 E02 H00 J01 J08
    Date: 2022–05
  48. By: Kirill Borissov (European University at St.Petersburg, Russia); Mikhail Pakhnin (European University at St.Petersburg, Russia); Ronald Wendner (University of Graz, Austria)
    Abstract: We consider a neoclassical growth model with quasi-hyperbolic discounting under Kantian optimization: each temporal self acts in a way that they would like every future self to act. We introduce the notion of a Kantian policy as an outcome of Kantian optimization in a given class of policies. We derive and characterize a Kantian policy in the class of policies with a constant saving rate for an economy with log-utility and Cobb--Douglas production technology and an economy with isoelastic utility and linear production technology. In all cases, the Kantian saving rate is higher than the saving rate of sophisticated agents, and a Kantian path Pareto dominates a sophisticated path.
    Keywords: Quasi-hyperbolic discounting; time inconsistency; kantian equilibrium; sophisticated agents; saving rate; welfare.
    JEL: C70 D15 D91 E21 O40
    Date: 2022–06
  49. By: Patrick Alexander; Sami Alpanda; Serdar Kabaca
    Abstract: We provide empirical evidence of the causal effects of changes in financial intermediaries’ net worth on the aggregate economy. Our strategy identifies financial shocks as high-frequency changes in the market value of intermediaries’ net worth in a narrow window around their earnings announcements, based on US tick-by-tick data. Using these shocks, we estimate that news of a 1% decline in intermediaries’ net worth leads to a 0.2% to 0.4% decrease in the market value of nonfinancial firms. These effects are more pronounced for firms with high default risk and low liquidity and when the aggregate net worth of intermediaries is low.
    Keywords: Business fluctuations and cycles; Exchange rate regimes; Exchange rates; Foreign reserves management; International financial markets; International topics
    Date: 2022–06
  50. By: Marina Azzimonti; Laura Karpuska; Gabriel Mihalache
    Abstract: Entitlement programs have become an increasing component of total government spending in the US over the last six decades. To some observers, this growth of the welfare state is excessive and unwarranted. To others, it is a welcome counter-acting force to the rapid increase in income inequality. Using a political-economy model where parties bargain over taxes and entitlements, we argue that such dynamics can be explained by two factors. The first one is that institutional features of policy determination, in particular budget rules, make the status quo levels of taxes and entitlements difficult to change. The second one is that the country experienced a process of “unequal growth,” where top earners became richer while the income levels of the bottom 50 percent remained stagnant. Richer agents would like the government to provide more public goods as the economy grows. Low-income earners are willing to support such policies only in exchange for an expansion of entitlement programs. Sustained bargaining power by a party that represents the latter, amid budget rules, results in a rising share of entitlements. We explain how parties can take advantage of budget rules to tilt the evolution of policy in their favor in a simple two-period model. We then calibrate an infinite horizon version of the model to the US, and show that it delivers dynamics consistent with the data. Through counter-factual experiments, we find that while entitlements programs are sub-optimally large, welfare outcomes are better than those under alternative budget rules and in scenarios without rules, making it explicit that the type of budget rule matters for both welfare and equity.
    JEL: C7 D6 E6 H2 H23 H3 H41 H53
    Date: 2022–05
  51. By: Abraham Assefa; Darya Lapitskaya; Lenno Uusküla
    Abstract: The paper studies the effects of technology shocks on the creation and destruction of firms. Using US data and a VAR model the paper finds Schumpeterian creative destruction for investment-specific technology shocks. A positive investment-specific technology shock increases the number of firms opening, but also leads to a higher number of firms closing. In contrast, labour-neutral technology shocks also benefit old firms. An increase in overall productivity leads to an increase in the number of new firms and a drop in the number of failures. Both margins contribute to an increase in the number of firms in the economy. A medium-scale DSGE model with endogenous entry and exit that is that is augmented with additional features is able to capture these stylised facts.
    Keywords: VAR, DSGE, Firm dynamics, Productivity, Firm turnover, Technology shocks, Investment specific technology shocks
    Date: 2022
  52. By: Lucas Menescal; José Alves
    Abstract: In this empirical study we assess both linear and nonlinear relationship between total taxation and several tax items with real per capita GDP growth rates for 43 developing countries between 1990 and 2019. We use panel data techniques to evaluate the effects of taxation on economic growth for both short and long run perspectives, and to find optimal tax threshold values. We obtain evidence of nonlinear relationships between all tax items, except for corporate income taxation, as well as an optimal value for total tax burden around 23,5% of GDP for the whole sample. When the sample is subdivided by countries’ income levels, we find threshold values for all tax items and an optimal tax burden around 23,6% of GDP for high income countries and 21,3% of GDP for low income. Our results provide support regarding the existence of nonlinearities and about policies focused on raising certain tax revenues, as a percentage of GDP, without hampering economic growth.
    Keywords: Economic Growth; Fiscal Policy; Optimal taxation; Tax thresholds
    JEL: E62 H21 O47
    Date: 2022–06
  53. By: Bhattacharjee, Arnab; Kohns, David
    Abstract: This paper investigates the benefits of internet search data in the form of Google Trends for nowcasting real U.S. GDP growth in real time through the lens of mixed frequency Bayesian Structural Time Series (BSTS) models. We augment and enhance both model and methodology to make these better amenable to nowcasting with large number of potential covariates. Specifically, we allow shrinking state variances towards zero to avoid overfitting, extend the SSVS (spike and slab variable selection) prior to the more flexible normal-inverse-gamma prior which stays agnostic about the underlying model size, as well as adapt the horseshoe prior to the BSTS. The application to nowcasting GDP growth as well as a simulation study demonstrate that the horseshoe prior BSTS improves markedly upon the SSVS and the original BSTS model with the largest gains in dense data-generating-processes. Our application also shows that a large dimensional set of search terms is able to improve nowcasts early in a specific quarter before other macroeconomic data become available. Search terms with high inclusion probability have good economic interpretation, reflecting leading signals of economic anxiety and wealth effects.
    Keywords: global-local priors, Google trends, non-centred state space, shrinkage
    JEL: C11 C22 C55 E37 E66
    Date: 2022–05
  54. By: Winkler, Julian
    Abstract: I introduce a general method to account for the distribution of underlying components (variety) of an aggregate quantity, using the notion of entropy. This accounting decomposition enables a number of insightful applications for index numbers in economics. The cross-entropy of GDP with respect to a benchmark captures the change in its distribution, and thus how well this benchmark matches data for price and volume indices across time. This 'error' changes demonstrably over time. Accounting of variety also lends itself to an decomposition of labour productivity growth by a technology component (how many more `average' goods are produced per unit of labor?), an allocation component (does the distribution of labor inputs converge to the distribution of outputs?), and cost disease (does the distribution of expenditures diverge from the distribution of outputs?).
    Keywords: National accounting, beyond GDP, entropy, misallocation
    JEL: E01 O47
    Date: 2022–05–24
  55. By: Hunter L. Clark; Lawrence Lin
    Abstract: The Chinese government has followed a “zero covid strategy” (ZCS) ever since the world’s first COVID-19 lockdowns ended in China around late March and early April of 2020. While this strategy has been effective at maintaining low infection levels and robust manufacturing and export activity, its viability is being severely strained by the spread of increasingly infectious coronavirus variants. As a result, there now appears to be a fundamental incompatibility between the ZCS and the government’s economic growth objectives.
    Keywords: China; COVID-19; growth
    JEL: E2 F00 I15
    Date: 2022–06–02
  56. By: Jennifer Castle; Takamitsu Kurita
    Abstract: The rapid expansion of the global cryptocurrency market raises the question of whether there are stable relationships between the prices of representative cryptocurrencies and economic indicators capturing expectations of future monetary policy. In this paper multivariate time-series analysis reveals a single but significant cointegrating relationship between cryptocurrencies and the term spread. This evidence reveals direct policy implications for the implementation of monetary policy allowing for the growing influence of digital assets. While the cointegrating linkage plays a critical role in modelling cryptocurrencies in sample, it contributes little to forecasting them out of sample, thus indicating potential efficiency in the digital currency market.
    Date: 2022–06–08
  57. By: Jeremy Greenwood (University of Pennsylvania); Ricardo Marto (University of Pennsylvania)
    Abstract: This primer will cover some of the numerical methods that are used in modern macroeconomics. You will learn how to: (1) solve nonlinear equations via bisection and Newton's method; (2) compute maximization problems via golden section search, discretization, and the particle swarm algorithm; (3) simulate difference equations using the extended path and multiple shooting algorithms; (4) differentiate and integrate functions numerically; (5) conduct Monte Carlo simulations by drawing random variables; (6) construct Markov chains; (7) interpolate functions and smooth data; (8) compute dynamic programming problems; (9) solve for policy functions using the Coleman, endogenous grid, and parameterized expectation algorithms; (10) study the Aiyagari heterogeneous agent model. This will be done while studying economic problems, such as the determination of labor supply, economic growth, and business cycle analysis. Calculus is an integral part of the primer and some elementary probability theory will be drawn upon. The MATLAB programming language will be used. It is time to move into the modern age and learn these techniques. Besides, using computers to solve economic models is fun. The primer is self contained so little prior knowledge is required.
    Keywords: Aiyagari model, calibration, Coleman algorithm, difference equations, dynamic programming, endogenous grid method, interpolating functions, linearization, Markov chains, maximization problems, Monte Carlo simulation, nonlinear equations, numerical differentiation and integration, parameterized expectations, random number generation
    JEL: E10 E17
    Date: 2022–06
  58. By: Swati Dhingra; Thomas Sampson
    Abstract: The Brexit vote precipitated the unravelling of the UK's membership of the world's deepest economic integration agreement. This paper reviews evidence on the realized economic effects of Brexit. The 2016 Brexit referendum changed expectations about future UK-EU relations. Studying its consequences provides new insights regarding the economic impacts of news and uncertainty shocks. Voting for Brexit had large negative effects on the UK economy between 2016 and 2019, leading to higher import and consumer prices, lower investment, and slower real wage and GDP growth. However, at the aggregate level, there was little or no trade diversion away from the EU, implying that many of the anticipated long-run effects of Brexit did not materialize before the new UK-EU trade relationship came into force in 2021.
    Keywords: Brexit, UK economy, import prices, consumer prices
    Date: 2022–12
  59. By: Ivan De Lorenzo Buratta; Marina Feliciano; Duarte Maia
    Abstract: We quantify the effect of cyclical systemic risk and economic sentiment on non-financial corporations and households’ (total) credit growth for Portugal between 1991Q1 and 2020Q2, following the Growth-at-risk methodology. We focus on the right-hand tail of the future credit growth distribution, as credit booms are potentially detrimental to financial stability. A set of measures of the upside tail risk in credit growth is computed to provide policymakers with more information to anticipate credit build-ups. We find that financial vulnerabilities and industrial sector economic confidence increase the upper tail risk of credit growth realizations for non-financial corporations in the short term (4 quarters horizon). At the medium to long term (12 quarters horizon), the impact of those indicators almost cancels each other out. As regards households, increasing financial vulnerabilities and consumers’ economic confidence display opposite effects on the upper tail risk of credit growth, at short and medium to long terms. Credit-at-risk anticipates credit build-ups preceding financial crises and decelerations corresponding to recessions. The upper tail to median and the upper to lower tail distances identify the upper tail dynamics as the main responsible for future credit growth uncertainty. Expected longrise reinforces Credit-at-risk results while the probabilities of observing future credit growth above its mean and credit growth one standard deviation above its current value exhibit high levels before 2008 for both non-financial corporations and households, followed by deep falls during recessions which signal credit busts. For all the measures, the 2013-2018 increase in tail risk depends on the structural change in credit growth dynamics observed in the early 2000s. The most recent results highlight the predominant role of confidence indicators, further dampened in 2020 by the COVID-19 effects on the economic outlook.
    JEL: A1
    Date: 2022
  60. By: Anna Ardanaz-Badia; Josh Martin; Mika Morgan; Jakob Scheebacher
    Abstract: Organisational capital is usually estimated indirectly, from workforce data or as a residual from balance sheets. In this paper, we focus on a particular subset of organisational capital: managerial capital. We propose a comprehensive framework for measuring the contribution of different channels of managerial capital accumulation, investigate how to measure them in UK microdata sources, and highlight the trade-offs involved in the available choices. We then use novel evidence on the distribution of management scores in Great Britain from the Management and Expectations Survey (MES) to empirically assess the relative importance of these different accumulation channels. Our analysis provides a user guide for other researchers and new facts about managerial capital in Great Britain. We find high correlations between the different channels of managerial capital accumulation, and distinct bundles of choices across industries and types of firms.
    Keywords: intangible assets, management, managerial capital, organisational capital
    JEL: E22 M10
    Date: 2022–06
  61. By: Vivien Deak (Magyar Nemzeti Bank (Central Bank of Hungary)); Istvan Nemecsko (Magyar Nemzeti Bank (Central Bank of Hungary)); Tamas Vegso (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: In our study, we analyse the payment habits of the Hungarian population based on data from a representative questionnaire survey conducted in autumn 2020 using basic statistical methods, regression analysis and cluster analysis. Our results show that at least 90 per cent of households in Hungary have at least one bank account or payment card. Overall coverage is high and falls significantly short of 100 per cent only for the over-60s , so this is not a major barrier to further adoption of electronic payments. Although in decreasing proportions, cash incomes are still present in the Hungarian economy today, especially for those performing manual labour and entrepreneurial activities. In European comparison, Hungarians withdraw cash fewer times, but in significantly larger amounts, and the possibility of free cash withdrawals twice a month is likely to have had a strong influence on the consolidation of this practice. Around 80 per cent of the population use electronic payments, a proportion that is steadily increasing, but at the same time almost all citizens still use cash, too. An important change compared to previous data is that the share of people using electronic payments to pay their utility bills now exceeds the share of people using cash, and the same is true for online purchases. The use of, and choice between, different payment methods is most influenced by different socio-demographic factors (age, education, employment status, household income per capita), transaction situation and the perceived cost of each payment method to consumers. The coronavirus pandemic and the restrictions it imposed increased the use of electronic payment methods even further, but cash still remained the most commonly used means of payment during this period. In the future, the mandatory acceptance of electronic payments for online cash register users from 1 January 2021 and the emergence of user-friendly, low-cost applications based on instant payments are expected to further support the growth of electronic payments. However, for certain demographic groups, cash use may remain dominant even in the long term.
    Keywords: retail payments, payment habits, household behaviour, electronic payment methods, financial integration
    JEL: C38 D12 D14 E42
    Date: 2022
  62. By: Abdallah, Ali
    Abstract: The real exchange rate alone cannot decide the fate of growth. The wider and less aggregative the model adopted, the lower is the effect of a currency depreciation. Especially when the depreciation monitored over a long period of time and integrated into the behaviour of economic actors. In the model elaborated here, a successful real depreciation requires a powerful Marshall-Lerner effect that offsets the depressive effects on consumption and investment, in the presence of a strong contribution of the manufacturing sector to production and a high share of local products in consumption, which is extremely sensitive at the level of urban employment. Otherwise, a contraction in output is to expect, all the stronger as the real wage is sensitive to tensions in the goods market. Growth-oriented policies should provide an enabling environment rather than follow an endless depreciation of the currency, which without support would eventually exhaust its effects, if any, and lead to adverse effects. A comprehensive approach in terms of the portfolio of instruments is more than necessary.
    Keywords: JEL: F31 - Foreign Exchange; F43 - Economic Growth of Open Economies; O11 - Macroeconomic Analyses of Economic Development; O41 - One, Two, and Multisector Growth Models; P52 - Comparative Studies of Particular Economies.
    JEL: F4 F43 O11 O24 O41
    Date: 2022–05–25
  63. By: Nina Boyarchenko; Richard K. Crump; Anna Kovner; Or Shachar
    Abstract: The Russian invasion of Ukraine increased uncertainty around the world. Although most U.S. companies have limited direct exposure to Ukrainian and Russian trading partners, increased global uncertainty may still have an indirect effect on funding conditions through tightening financial conditions. In this post, we examine how conditions in the U.S. corporate bond market have evolved since the start of the year through the lens of the U.S. Corporate Bond Market Distress Index (CMDI). As described in a previous Liberty Street Economics post, the index quantifies joint dislocations in the primary and secondary corporate bond markets and can thus serve as an early warning signal to detect financial market dysfunction. The index has risen sharply from historically low levels before the invasion of Ukraine, peaking on March 19, but appears to have stabilized around the median historical level.
    Keywords: corporate bond market conditions; invasion of Ukraine
    JEL: E5 G12
    Date: 2022–06–01
  64. By: Martin Bruns; Helmut Lütkepohl
    Abstract: We propose a test for time-varying impulse responses in heteroskedastic structural vector autoregressions that can be used when the shocks are identified by external proxy variables as a group. The test can be used even if the shocks are not identified individually. The asymptotic analysis is supported by small sample simulations which show good properties of the test. An investigation of the impact of productivity shocks in a small macroeconomic model for the U.S. illustrates the importance of the issue for empirical work.
    Keywords: Structural vector autoregression, proxy VAR, heteroskedasticity, productivity shocks
    JEL: C32
    Date: 2022
  65. By: Hentze, Tobias
    Abstract: Die aktuell hohe Inflation stellt die Steuerpolitik vor neue Aufgaben. Seit Jahren unveränderte Freibeträge bedürfen einer Anpassung. Beim Grundfreibetrag und der Werbungskostenpauschale ist die Regierung bereits tätig geworden. Wann die geplante Erhöhung des Sparerpauschbetrags und des Ausbildungsfreibetrags kommt, ist dagegen offen.
    Date: 2022
  66. By: Robert Kornfeld; Barbara M. Fraumeni
    Abstract: The recent debates on infrastructure spending have led to renewed interest in the measurement of infrastructure and its effects on growth and well-being. This paper updates estimates of one important type of infrastructure capital—highways and streets. We compare BEA’s capital measures with more readily understood physical measures of road and lane miles, road quality and usage, and other measures from Highway Statistics (HS) data from FHWA. We also use the HS data and related research to disaggregate investment in highways and streets into more detailed types, such as new construction, repair and resurfacing, and bridge work, and apply separate depreciation rates to each type to produce updated estimates of net wealth stocks and depreciation. Relative to published BEA estimates, constant-price depreciation is revised up by about $9–$12 billion annually in recent years, and constant-price net stocks are revised down by about 22 percent. For the period from 2007 forward, net stocks per capita are flat in the published BEA estimates but decline slightly in the revised estimates. In addition, we update Fraumeni’s (2007) estimates of productive stocks that are converted to wealth stocks to facilitate a comparison. These updated wealth estimates also show lower net stocks and higher depreciation than in the published BEA estimates. We hope this paper encourages discussion about how to measure infrastructure capital, particularly highways and streets, and its effects.
    JEL: E01
    Date: 2022–05
  67. By: Abdul Jalil (Pakistan Institute of Development Economics)
    Abstract: Inflation has become a topic of serious discussion since the 1970s due to its well-documented cost (see Box 1), and the policy-makers always try to concentrate on inflation-averse policies. Therefore, the understanding of the drivers of inflation is essential for designing policies to control inflation.
    Keywords: Drivers, Inflation, Roots to Regressions
    Date: 2021
  68. By: Ms. Eliko Pedastsaar; Fazeer Sheik Rahim; Mr. Claude P Wendling
    Abstract: Expenditure baseline projections (hereafter, “base¬lines”) are a key analytical concept in budget preparation that refers to estimates of future expenditure on the assumption that current policies remain unchanged. They serve as reference points against which other data, such as proposed or approved budgets, or expenditure ceilings, can be compared. In many countries they are a basic tool for starting the preparation of the budget. They represent neither future spending allocations nor total expected outturn as they do not incorporate estimates of the cost of new policies and the expected impact of saving measures. Other features of baselines are that they are generally produced over a multiyear period, they can be calcu¬lated at any level or form of the budget classification (that is, ministries, economic classification, specific policies, functions or programs), and can be summed up to higher levels (such as the whole budget). Hence, they can be useful at both a micro and an aggregate level. This note aims to clarify and establish a framework that covers baselines’ various purposes and uses. It first discusses the definition and objectives of baselines and the methodology used for producing them before outlining how they should be prepared. It concludes with a discussion of the key success factors for making the most effective use of baselines.
    Keywords: expenditure baselines; economic policies; ministry of finance; line ministries and agencies; social welfare; pension spending; budget frameworks; expenditure baseline; publication order; publication service; baseline projection; spending needs; baseline expenditure; budget negotiations; Budget planning and preparation; Wages; Fiscal space; Wage adjustments; Africa
    Date: 2022–06–01
  69. By: Martin Bruns (School of Economics, University of East Anglia, Norwich); Helmut Luetkepohl (DIW Berlin and Freie Universitaet Berlin)
    Abstract: We propose a test for time-varying impulse responses in heteroskedastic structural vector autoregressions that can be used when the shocks are identified by external proxy variables as a group. The test can be used even if the shocks are not identified individually. The asymptotic analysis is supported by small sample simulations which show good properties of the test. An investigation of the impact of productivity shocks in a small macroeconomic model for the U.S. illustrates the importance of the issue for empirical work.
    Keywords: Structural vector autoregression, proxy VAR, heteroskedasticity, productivity shocks
    JEL: C32
    Date: 2022–05–30
  70. By: Vacu, Nomfundo P; Odhiambo, Nicholas M
    Abstract: This study estimates the determinants of import demand in Tanzania using time-series data for the period from 1985 to 2015.The study applied the ARDL approach on Tanzania?s time-series data to examine the key drivers of import demand. The study used both aggregate import demand model (i.e., Model 1) and disaggregated import demand models, i.e., Model 2 (for consumer goods), Model 3 (for intermediate goods) and Model 4 (for capital goods) to examine this linkage. The study found that in Model 1, aggregate imports in Tanzania are positively influenced by investment and exports, and negatively determined by trade policy. In Model 2, it was found that imports for consumer goods to are positively influenced by consumer spending and foreign reserves, but negatively influenced by trade policy. In Model 3, imports for intermediate goods were found to be positively influenced by exports in the long run. Finally, in Model 4, the study found imports for capital goods to be positively influenced by exports (in the short- and long-run), but negatively influenced by investment (in short run). The study recommends that policymakers in Tanzania should strengthen their macroeconomic policies to ensure that their imports are not consumption based and have an enhancing effect on the country?s economic activities.
    Keywords: Aggregate Imports, Disaggregated Imports, Tanzania, ARDL, Error Correction Model
    Date: 2021–12
  71. By: Jason Nassios; James Giesecke
    Abstract: Australia has high housing prices by world standards. Australian state and local governments also have a high reliance on a variety of property taxes. This has generated calls for state tax reform. However, with property prices high, a concern of policy makers is that property tax reform might push house prices higher still. We investigate the effects of seventeen property tax reform options, with a particular focus on potential trade-offs between efficiency benefits and house price impacts.
    Keywords: CGE modelling, Immovable property tax, Recurrent property tax, Housing prices, Excess burden
    JEL: C68 E62 H2 H71 R38
    Date: 2022–06
  72. By: Victor Olkhov
    Abstract: This paper introduces the market-based asset price probability during time averaging interval $\Delta$. We substitute the present problem of guessing the "correct" form of the asset price probability by description of the price probability as function of the market trade value and volume statistical moments during $\Delta$. We define n-th price statistical moments as ratio of n-th statistical moments of the trade value to n-th statistical moments of the trade volume. That definition states no correlations between time-series of n-th power of the trade volume and price during $\Delta$, but doesn't result statistical independence between the trade volume and price. The set of price n-th statistical moments defines Taylor series of the price characteristic function. Approximations of the price characteristic function that reproduce only first m price statistical moments, generate approximations of the market-based price probability. That approach unifies probability description of market-based asset price, price indices, returns, inflation and their volatilities. Market-based price probability approach impacts the asset pricing models and uncovers hidden troubles and usage bounds of the widespread risk hedging tool -- Value-at-Risk, lets you determine the price autocorrelations and revises the classical option pricing from one to two dimensional problem. Market-based approach doesn't simplify the price probability puzzle but establishes direct economic ties between asset pricing, market randomness and economic theory. Description of the market-based price and returns volatility, Skewness and Kurtosis requires development of economic theories those model relations between second, third and forth order macroeconomic variables. Development of these theories will take a lot of efforts and years.
    Date: 2022–05
  73. By: Mustafa Recep Bilici; Saygin Cevik
    Abstract: This paper examines the effect of financial literacy level on cash holdings in Turkey. Utilizing the Methods of Payment Survey, which includes both financial literacy and cash-related data, we first investigate the fundamentals of financial literacy in Turkey. Based on the performance on financial literacy questions, we categorize respondents into three groups. Subsequently, we analyze how cash holding behavior differs among financial literacy groups. Our results reveal that financially literate respondents tend to hold less cash on hand and store more cash elsewhere. Moreover, card ownership increases through financial literacy and the change in payment behavior of financially literate respondents is more significant during Covid-19 pandemic. The results imply that promoting financial literacy may result in less cash usage at points of sale accompanied by the currency in circulation growth, due to the overwhelming effect of increased non-transactional demand following a positive change in financial literacy level.
    Keywords: Financial literacy, Money demand, Cash demand
    JEL: C50 E41 G53
    Date: 2022

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