nep-mac New Economics Papers
on Macroeconomics
Issue of 2023‒06‒19
sixteen papers chosen by
Daniela Cialfi
Universita' di Teramo

  1. Monetary Policy Interactions: The Policy Rate, Asset Purchases, and Optimal Policy with an Interest Rate Peg By Isabel Gödl-Hanisch; Ronald Mau; Jonathan Rawls
  2. Macroeconomic Effects of Inflation Targeting: A Survey of the Empirical Literature By Petrevski, Goran
  3. The impact of monetary policy on functional income distribution: a panel SVAR analysis (1970-2019) By Stefano Di Bucchianico; Antonino Lofaro
  4. Money Matters: Broad Divisia Money and the Recovery of Nominal GDP from the COVID-19 Recession By Michael D. Bordo; John V. Duca
  5. Climate Policy and the Economy: Evidence from Europe's Carbon Pricing Initiatives By Diego R. Känzig; Maximilian Konradt
  6. How inflation varies across Spanish households By Irene Monasterolo
  7. The Historical Effects of Banking Distress on Economic Activity By Falk Bräuning; Viacheslav Sheremirov
  8. Household debt, liquidity constraints and the interest rate elasticity of private consumption By Kärkkäinen, Samu; Silvo, Aino
  9. The spectre of financial dominance in the eurozone By BENIGNO, Pierpaolo; CANOFARI, Paola; DI BARTOLOMEO, Giovanni; MESSORI, Marcello
  10. Inflation and Monetary Policy in a Low-Income and Fragile State: The Case of Guinea By Mr. Yan Carriere-Swallow; Nelnan Fidèle Koumtingué; Mr. Sebastian Weber
  11. Components of autonomous demand growth and financial feedbacks: Implications for growth drivers and growth regime analysis By Ryan Woodgate; Eckhard Hein; Ricardo Summa
  12. Too Low for Too Long: Could Extended Periods of Ultra Easy Monetary Policy Have Harmful Effects? By Mr. Etibar Jafarov; Enrico Minnella
  13. Statistical Estimation for Covariance Structures with Tail Estimates using Nodewise Quantile Predictive Regression Models By Christis Katsouris
  14. Trade among moral agents with information asymmetries By José Ignacio Rivero Wildemauwe
  15. Strategies for Energy Management to Drive Green Entrepreneurship Growth in Agriculture By Saufillah, Zulfiyatus
  16. Comparing experiments for modelling farm risk management decisions with a focus on extreme weather losses By Duden, Christoph; Offermann, Frank; Mußhoff, Oliver

  1. By: Isabel Gödl-Hanisch; Ronald Mau; Jonathan Rawls
    Abstract: We study monetary policy in a New Keynesian model with a variable credit spread and scope for central bank asset purchases to matter. A novel financial and labor market interaction generates an endogenous cost-push channel in the Phillips curve and a credit wedge in the IS curve. The “divine coincidence” holds with the nominal short-term rate and central bank balance sheet available as policy tools. Credit spread-targeting balance sheet policy provides a determinate equilibrium with a fixed policy rate. This policy induces similar welfare losses relative to dual-instrument policy as inflation-targeting interest rate policy with a fixed balance sheet.
    Keywords: unconventional monetary policy, optimal monetary policy, New Keynesian model, policy rate lower bound, interest rate peg
    JEL: E43 E52 E58
    Date: 2023
  2. By: Petrevski, Goran
    Abstract: This paper surveys the voluminous empirical literature of inflation targeting (IT). Specifically, the paper focuses on three main issues: the main institutional, macroeconomic, and technical determinants that affect the adoption of IT; the effects of IT on macroeconomic performance (inflation expectations, inflation persistence, average inflation rate, inflation variability, output growth, output volatility, interest rates, exchange rates, and fiscal outcomes); and disinflation costs of IT (the so-called sacrifice ratios). The main findings from our review are the following: concerning the determinants behind the adoption of IT, there is robust empirical evidence that larger and more developed countries are more likely to adopt the IT regime; similarly, the introduction of this regime is conditional on previous disinflation, greater exchange rate flexibility, central bank independence, and higher level of financial development; however, the literature suggests that the link between various macroeconomic and institutional determinants and the likelihood of adopting IT may be rather weak, i.e., they are not to be viewed either as strict necessary or sufficient conditions; the empirical evidence has failed to provide convincing evidence that IT itself may serve as an effective tool for stabilizing inflation expectations and for reducing inflation persistence; the empirical research focused on advanced economies has failed to provide convincing evidence on the beneficial effects of IT on inflation performance, concluding that inflation targeters only converged towards the monetary policy of non-targeters, while there is some evidence that the gains from the IT regime may have been more prevalent in the emerging market economies (EMEs); there is not convincing evidence that IT is associated with either higher output growth or lower output variability; the empirical research suggests that IT may have differential effects on exchange-rate volatility in advanced economies versus EMEs; although the empirical evidence on the impact of IT on fiscal policy is quite limited, it supports the idea that IT indeed improves fiscal discipline; the empirical support to the proposition that IT is associated with lower disinflation costs seems to be rather weak. Therefore, the accumulated empirical literature implies that IT does not produce superior macroeconomic benefits in comparison with the alternative monetary strategies or, at most, they are quite modest.
    Keywords: monetary policy, inflation targeting
    JEL: E52 E58
    Date: 2023
  3. By: Stefano Di Bucchianico; Antonino Lofaro
    Abstract: In most countries, recurrent crises episodes due to financial disorder, the pandemic, and the recent war have increased income and wealth inequality. Moreover, since the 2008 crisis, major central banks have adopted highly expansionary conventional and unconventional monetary policies. Thus, attention towards the connection between monetary policy and inequality is surging. However, first, there is no consensus in the empirical literature on what the impact of monetary policy shocks on inequality is. Second, the literature is mainly focused on the effects of monetary policy on personal rather than functional income distribution. Third, the conventional hypothesis is for monetary policy to have at most an impact over the cycle but not in the long-run. Therefore, our work grounds on three objectives. First, we tackle the role of monetary policy in shaping functional income distribution by looking at the long-run behavior of real wages and the labor share of income. Second, we employ for the first time a panel SVAR methodology to a new panel dataset of 15 advanced economies during the 1970-2019 period. Third, differently from extant literature, we pose special attention to the so called ‘cost’ and ‘labor market’ channels of monetary policy. According to our results, a contractionary monetary policy shocks generates long-run adverse effects on the level of real wages. While the labor share initially rises because of the fall in GDP, the subsequent pronounced fall in real wages lets the labor share fall back to the pre-shock level.
    Keywords: Monetary policy; functional income distribution; Panel SVAR; labor share; income inequality
    JEL: E24 E52 E58
    Date: 2023–05
  4. By: Michael D. Bordo; John V. Duca
    Abstract: The rise of inflation in 2021 and 2022 surprised many macroeconomists who ignored the earlier surge in money growth because past instability in the demand for simple-sum monetary aggregates had made these aggregates unreliable indicators. We find that the demand for more theoretically-based Divisia aggregates can be modeled and that their growth rates provide useful information for future nominal GDP growth. Unlike M2 and Divisia-M2, whose velocities do not internalize shifts in liabilities across commercial and shadow banks, the velocities of broader Divisia monetary aggregates are more stable and can be reasonably empirically modeled in both the short run and the long run through the COVID-19 pandemic and to date. In the long run, these velocities depend on regulatory changes and mutual fund costs that affect the substitutability of money for other financial assets. In the short run, we control for swings in mortgage activity and use vaccination rates and an index of the stringency of government pandemic restrictions to control for the unusual effects of the pandemic. The velocity of broad Divisia money temporarily declines during crises like the Great and COVID Recessions, but later rebounds. In each recession monetary policy lowered short-term interest rates to zero and engaged in quantitative easing of about $4 trillion. Nevertheless, broad money growth was more robust in the COVID Recession, likely reflecting that the banking system was less impaired and could promote rather than hinder multiple deposit creation. Partly as a result, our framework implies that nominal GDP growth and inflationary pressures rebounded much more quickly from the COVID Recession versus the Great Recession. We consider different scenarios for future Divisia money growth and the unwinding of the pandemic that have different implications for medium-term nominal GDP growth and inflationary pressures as monetary policy tightening seeks to restore low inflation.
    Keywords: Velocity; monetary services index; Divisia; liquidity; money; shadow banks; mutual funds
    JEL: E51 E41 E52 E58
    Date: 2023–05–25
  5. By: Diego R. Känzig; Maximilian Konradt
    Abstract: This paper investigates the impact of carbon pricing on the economy, with a focus on European carbon taxes and the carbon market. Our analysis reveals three key findings. First, while both policies have successfully reduced emissions, the economic costs of the European carbon market are larger than for national carbon taxes. Second, we explore four factors that explain this difference: fiscal policy and revenue recycling, pass-through and sectoral coverage, spillovers and leakage, and monetary policy. Our findings suggest that all four factors play a significant role. Third, we document substantial regional heterogeneity in the impacts of the carbon market, which crucially depend on the share of freely allocated emission permits and the degree of market concentration in the power sector.
    JEL: E32 E62 H23 Q54 Q58
    Date: 2023–05
  6. By: Irene Monasterolo (BANCO DE ESPAÑA; URJC; BANCO DE ESPAÑA)
    Abstract: Inflation has distributional effects. Leveraging the data on consumption expenditure on goods across households provided in the Spanish Household Budget Survey we estimate household-specific inflation from 2006 to 2021 in Spain and analyse how it varies according to households’ known characteristics. We show that households with lower income and more members and whose head is less educated, older and male experience higher inflation. Lastly, we also depict the effects of the most recent price increases across households. The differences are substantial: in 2021, inflation for lower-income households (bottom quartile) was 2 percentage points higher than for higher-income households (top quartile), while for households whose head is over the age of 60 it was 1.5 percentage points higher than for younger households.
    Keywords: inflation inequality, household expenditure, household-level inflation
    JEL: E21 E31 D12
    Date: 2023–03
  7. By: Falk Bräuning; Viacheslav Sheremirov
    Abstract: The failures of several U.S. regional banks have stimulated discussions about the macroeconomic effects of a likely credit contraction triggered by the recent banking turmoil. Drawing on historical evidence from advanced economies, this study documents a sizable and persistent decline in output and rise in unemployment following non-systemic financial distress. The effects of a systemic banking crisis are two to four times as large. High corporate leverage exacerbates banking turmoil, whereas high bank capitalization and a relatively large share of market financing in corporate debt mitigate it. These channels approximately offset one another so that the estimates tailored to the current U.S. economy are in line with the average effect.
    Keywords: banking distress; real economy; financial crises
    JEL: E44 F30 G01 G21
    Date: 2023–05–25
  8. By: Kärkkäinen, Samu; Silvo, Aino
    Abstract: We study whether the level of household indebtedness is related to the interest rate elasticity of private consumption. Looking at Finnish aggregate data, we find no robust evidence of increased interest rate elasticity of private consumption even as the household sector's debt-to-income ratio has almost doubled in the past 20 years. Estimates based on the household-level Finnish Wealth Survey suggest that the share of liquidity-constrained households has declined over the same time period, which may have contributed towards muting the sensitivity of private consumption to interest rates even as aggregate debt of the household sector has grown significantly. Our results are consistent with the key role played by heterogeneity in credit and liquidity constraints in driving aggregate consumption and debt dynamics. Other factors behind muted responses of consumption to interest rates may include the recent low interest rate period, which has muted the cash-flow channel of monetary policy, and possible asymmetric effects of monetary policy.
    Keywords: consumption, interest rates, household debt, liquidity constraints
    JEL: E21 E52 G51
    Date: 2023
  9. By: BENIGNO, Pierpaolo; CANOFARI, Paola; DI BARTOLOMEO, Giovanni; MESSORI, Marcello
    Abstract: Differently from previous crises, the European institutions responded promptly to the Covid-19 pandemic by implementing an appropriate policy mix. However, this policy mix has proven to be insufficient for reducing the risks of financial instability in the European Union due to the temporary horizon of the centralised fiscal policy and the persistence of adverse shocks. In fact, the impact of the pandemic was exacerbated by the dramatic consequences of the war in Ukraine. The possible inefficiencies in implementing the Next Generation-EU (NG-EU) and an inadequate response to the war’s shock could trigger, at best, the revival of financial and fiscal dominance in the euro-area economies. However, by using a simple model referred to the post-pandemic and war period, we show that the overburdening of the European Central Bank’s role would come with high costs. Hence, we argue that it is necessary to pursue sustainable development based on the successful implementation of the NG-EU and the related transformation of the one-shot centralised fiscal policy into a recurrent policy tool.
    Keywords: Fiscal dominance, Financial dominance, ECB, Monetary policy
    JEL: E31 E51 E58
    Date: 2023–03
  10. By: Mr. Yan Carriere-Swallow; Nelnan Fidèle Koumtingué; Mr. Sebastian Weber
    Abstract: Inflation in low-income countries is often high and volatile, driven by external shocks. In addition, inflation in fragile states is affected by highly volatile domestic factors that complicate monetary policy’s ability to deliver price stability. We estimate the drivers of inflation in Guinea since the early 2000s, a period in which the country suffered major shocks from pandemics, commodity price movements, and multiple military coups, and during which inflation averaged 12 percent. Results confirm that global commodity and transport prices account for a large share of the variation in inflation. The contribution of monetary policy shocks to inflation is moderate, reflecting its broadly neutral stance throughout most of the last two decades. However, monetary policy has occasionally made larger contributions to inflation, and recently helped contain price pressures from high commodity prices. The effectiveness of monetary policy reflects a strong relationship between monetary aggregates and the exchange rate.
    Keywords: Monetary Policy; Inflation; Low-income Countries; Fragile States; inflation dynamics; shocks to inflation; monetary policy shock; commodity price movement; inflation development; Monetary base; Exchange rates; Exchange rate arrangements; Nominal effective exchange rate; Global; Sub-Saharan Africa
    Date: 2023–04–21
  11. By: Ryan Woodgate; Eckhard Hein; Ricardo Summa
    Abstract: Since autonomous demand has to be financed independently of income from current production, this paper starts with the requirement that autonomous demand-led growth models have to include endogenous money and credit, and hence financial dynamics. It then seeks to make two contributions. First, we show that the inclusion of financial stock-flow interactions in a simple closed economy autonomous demand-led growth model provides an endogenous mechanism which, under certain conditions, aligns two autonomous growth rates, as a requirement for long-run equilibrium. Second, using that model, we prove that the relative size of autonomous growth contributions may be misleading as a guide to classify growth regimes if autonomous growth rates are interdependent, both for the steady state growth equilibrium as well as for the traverse towards this equilibrium. Furthermore, we show that the relative growth contributions are economic policy contingent. Therefore, in Sraffian supermultiplier demand-led growth decomposition exercises, interdependencies between autonomous growth components should not be ignored when growth drivers are supposed to be identified, both in medium- to long-run growth regime analysis, as well as in the analysis of autonomous drivers of short-run cycles.
    Keywords: Sraffian supermultiplier and endogenous credit, two autonomous growth drivers, demand-led growth accounting, growth regimes
    JEL: E11 E12 E20 E62
    Date: 2023–05
  12. By: Mr. Etibar Jafarov; Enrico Minnella
    Abstract: Extended periods of ultra-easy monetary policy in advanced economies have rekindled debates about the zombification of weak companies and its impact on resource allocation, economic growth, inflation, and financial stability. Using both firm-level and macroeconomic data, we find that recessions are a critical factor in the rapid increase in the number of zombie firms. Expansionary monetary policy can help reduce zombification when interest rates are at the zero lower bound (ZBL), but a too-accommodative monetary policy for extended periods is associated with a higher probability of zombification. Small and medium enterprises are more likely to become zombie firms. This raises concerns about the sustainability of too-easy monetary policy implementation, especially in countries where growth is lackluster. Our findings imply a tradeoff between conducting a countercyclical monetary policy, which also helps contain the increase in the number of zombie firms in cyclical downturns, and using an expansionary monetary policy for long periods, which may lead to a combination of low interest rates, low growth, and high financial vulnerability. Such a tradeoff is not a concern currently when most countries are tightening their monetary policy stance, but policymakers should be mindful of it during future recessions.
    Keywords: Too Low for Too Long; Zombie Firms; Financial Stability
    Date: 2023–05–19
  13. By: Christis Katsouris
    Abstract: This paper considers the specification of covariance structures with tail estimates. We focus on two aspects: (i) the estimation of the VaR-CoVaR risk matrix in the case of larger number of time series observations than assets in a portfolio using quantile predictive regression models without assuming the presence of nonstationary regressors and; (ii) the construction of a novel variable selection algorithm, so-called, Feature Ordering by Centrality Exclusion (FOCE), which is based on an assumption-lean regression framework, has no tuning parameters and is proved to be consistent under general sparsity assumptions. We illustrate the usefulness of our proposed methodology with numerical studies of real and simulated datasets when modelling systemic risk in a network.
    Date: 2023–05
  14. By: José Ignacio Rivero Wildemauwe (Université de Cergy-Pontoise, THEMA)
    Abstract: This research builds an integrated chain of models to compute the economic costs of population Two agents trade an item in a simultaneous offer setting, where the exchange takes place if and only if the buyer’s bid price weakly exceeds the seller’s ask price. Each agent is randomly assigned the buyer or seller role. Both agents are characterized by a certain degree of Kantian morality, whereby they pick their bidding strategy behind a veil of ignorance, taking into account how the outcome would be affected if their trading partner were adopting their strategy. I consider two variants with asymmetric information, respectively allowing buyers to have private information about their valuation or sellers to be privately informed about the item’s quality. I show that when all trades are socially desirable, even the slightest degree of morality guarantees that the outcome is fully efficient. In turn, when quality is uncertain and some exchanges are socially undesirable, full efficiency is only achieved with sufficiently high moral standards. Moral concerns also ensure equal ex-ante treatment of the two agents in equilibrium. Finally, I show that if agents are altruistic rather than moral, inefficiencies persist even with a substantial degree of altruism.
    Keywords: bilateral trade; altruism; homo moralis.
    JEL: D03 D82 D91 C78
    Date: 2023
  15. By: Saufillah, Zulfiyatus
    Abstract: Energy management is critical to achieving sustainable agriculture development and reducing environmental impacts. The strategies for energy management discussed in this essay, including energy efficiency measures, energy management systems, and green financing, can help drive green entrepreneurship growth in the agriculture sector. Implementing these strategies can help green entrepreneurs reduce energy consumption and costs, improve productivity, promote sustainable development, and create new growth opportunities. Therefore, policymakers, investors, and other stakeholders should work together to support the implementation of these strategies in the agriculture sector.
    Date: 2023–05–08
  16. By: Duden, Christoph; Offermann, Frank; Mußhoff, Oliver
    Abstract: Extreme weather events pose an economic threat to farms. The risk management behaviour against such events is often studied using prospect theory as a framework, but empirically deriving corresponding parameters in the field involving farmers is challenging. To address this issue, we compare three methods of eliciting prospect theory parameters using a multiple price list design in Germany: a framed field experiment, a framed student experiment and an artefactual field experiment. The results show that these experiments generate different prospect theory parameters. The lower the probability the higher the differences, which is particularly important for managing risk from low-probability shocks. Despite these differences, the mean coefficients of the three experiments reveal a low willingness to pay for crop insurance. We find evidence that individual responses to the artefactual and student experiments correlate with the risk attitude self-assessment, whereas responses to the framed field experiment correlate with the purchase of crop insurance.
    Keywords: prospect theory, risk management, catastrophic risk, behavioural economics, decision analysis
    Date: 2023

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