nep-mac New Economics Papers
on Macroeconomics
Issue of 2023‒10‒09
eleven papers chosen by
Daniela Cialfi, Universita' di Teramo

  2. Households' response to the wealth effects of inflation By Schnorpfeil, Philip; Weber, Michael; Hackethal, Andreas
  3. The effect of monetary policy on inflation heterogeneity along the income distribution By Miguel Ampudia; Michael Ehrmann; Georg Strasser
  4. The Euro Area Government Spending Multiplier in Demand- and Supply-Driven Recessions? By Di Serio, Mario; Fragetta, Matteo; Gasteiger, Emanuel; Melina, Giovanni
  5. Selective Default Expectations By Olivier Accominotti; Thilo N. H. Albers; Kim Oosterlinck
  6. Global Capital Allocation By Sergio Florez-Orrego; Matteo Maggiori; Jesse Schreger; Ziwen Sun; Serdil Tinda
  7. Government Investments and Entrepreneurship By Joao Ricardo Faria; Laudo Ogura; Mauricio Prado; Christopher J. Boudreaux
  8. Review essay: The young Hayek By Ivo Maes
  9. Mean Group Distributed Lag Estimation of Impulse Response Functions in Large Panels By Chi-Young Choi; Alexander Chudik
  10. Response to Gonzalez and Özak's (2023) Replication Report By Dickens, Andrew
  11. The 2022 EIF SME Access to Finance Index - August 2023 Update By Torfs, Wouter

  1. By: Alberto Botta; Eugenio Caverzasi (Universita' degli Studi dell'Insubria); Alberto Russo (Department of Economics and Social Sciences, Universita' Politecnica delle Marche)
    Abstract: This paper analyzes the macroeconomic and distributional implications of central banks' decisions to raise interest rates after a prolonged period at near the Zero Lower Bound (ZLB). The main goal of our study is to assess the interaction between monetary policy, inequality, and financial fragility, in a financialized economic system. Financialization is here portrayed as the presence in the economy of complex financial products, i.e., asset-backed securities, produced via the securitization of banks' loans. We do so in the context of a hybrid Agent-Based Model (ABM). We first compare the prevailing macroeconomic and nancial features of a low interest rate environment (LIRE) with respect to a "Great Moderation"(GM)-like setting. As expected, we show that LIRE tends to stimulate faster growth and higher employment, and to reduce income and wealth inequality, as well as (poor) households' indebtedness. Consistent with existing empirical literature, this comes at the cost of higher inflation and some signs of financial system's fragility, i.e., lower banks' profitability and Capital Adequacy Ratio (CAR), and higher "search for risk" given by credit extension to poorer households. We then show that increases in the central bank's policy rate, as motivated by the central bank's willingness to reduce inflation, effectively curb price dynamics and accomplish with central bank's inflation targeting mandate. Higher interest rates also improve commercial banks' CAR and profitability. However, they also cause a pronounced increase in non-performing loans (stronger than what possibly observed in a GM scenario) and some worrisome macro-financial dynamics. In fact, higher interest rates give rise to higher households' and overall economy indebtedness as allowed by wealthier households' demand for highyield complex financial products and mounting securitization. We finally show how financialization structurally changes the functioning of the economy and the behavior of central banks. Financialization actually contributes to create a (private sector) debt-led economy, which becomes structurally more resistant to central bank's attempts to control inflation. Central bank's reaction in terms of higher interest rates could likely come with perverse distributional consequences.
    Keywords: Low interest rate environment, Contractionary monetary policy, Securitization
    JEL: E24 E44 E52
    Date: 2023–09
  2. By: Schnorpfeil, Philip; Weber, Michael; Hackethal, Andreas
    Abstract: We study the redistributive effects of inflation combining administrative bank data with an information provision experiment during an episode of historic inflation. On average, households are well-informed about prevailing inflation and are concerned about its impact on their wealth; yet, while many households know about inflation eroding nominal assets, most are unaware of nominal-debt erosion. Once they receive information on the debt-erosion channel, households update upwards their beliefs about nominal debt and their own real net wealth. These changes in beliefs causally affect actual consumption and hypothetical debt decisions. Our findings suggest that real wealth mediates the sensitivity of consumption to inflation once households are aware of the wealth effects of inflation.
    Keywords: Inflation Beliefs, Information Treatment, Consumption, Monetary Policy
    JEL: D12 D14 D83 D84 E21 E31 E52
    Date: 2023
  3. By: Miguel Ampudia; Michael Ehrmann; Georg Strasser
    Abstract: This paper studies the effect of monetary policy on inflation along the income distribution in several euro area countries. It shows that monetary policy has differential effects and identifies two channels which point in opposite directions. On the one hand, different consumption shares imply that inflation by high-income households responds less to monetary policy. On the other hand, the paper provides novel evidence that there are substantial differences in shopping behaviour and its reaction to monetary policy, which imply that inflation by high-income households responds more to monetary policy.
    Keywords: inflation, distributional effects, monetary policy, shopping behaviour, substitution
    JEL: E31 E52 D30
    Date: 2023–09
  4. By: Di Serio, Mario; Fragetta, Matteo; Gasteiger, Emanuel; Melina, Giovanni
    Abstract: Road infrastructure has been a key input in the economic growth and poverty reduction strategies of China and India. The two countries have used very different instruments for road financing with China mobilizing substantial resources through directed credit by state-owned banks and India heavily relying on international institutions and fuel taxes. However, current modalities of road financing will be insufficient to meet future investment needs requiring both countries explore new mechanisms to attract private capital and expand the fiscal space of central and subnational governments. Different instruments of resource mobilization and intermediation are assessed and compared extracting lessons that could be valuable to many developing countries. Facilitating the participation of the private sector in road development would require inter alia strengthening regulatory frameworks and deepening and broadening domestic financial markets. But given the strong public good characteristics of large segments of the road networks in China and India most of the funding for road construction and maintenance would need to come from the establishment of efficient and sustainable systems of earmarked road-related charges, including a fuel tax in China.We estimate government spending multipliers in demand- and supply-driven recessions for the Euro Area. Multipliers in a moderately demand-driven recession are 2-3 times larger than in a moderately supply-driven recession, with the difference between multipliers being non-zero with very high probability. More generally, multipliers are inversely correlated with the deviation of inflation from its trend, implying that the more demand-driven a recession, the higher the multiplier. Median multipliers range from -0.5 in supply-driven recessions to about 2 in demand-driven recessions. The econometric approach leverages a factoraugmented interacted vector-autoregression model purified of expectations (FAIPVAR-X). The model captures the time-varying state of the business-cycle including strongly and moderately demand- and supply-driven recessions, by taking the whole distribution of inflation deviations from trend into account.
    Keywords: Fiscal Multiplier, Business Cycle, Interacted Panel VAR, Factor Models, Euro Area
    JEL: C32 C33 C38 E32 E62
    Date: 2023
  5. By: Olivier Accominotti (London School of Economics and Political Science); Thilo N. H. Albers (HU Berlin); Kim Oosterlinck (Université libre de Bruxelles)
    Abstract: This paper explores how selective default expectations affect the pricing of sovereign bonds in a historical laboratory: the German default of the 1930s. We analyze yield differentials between identical government bonds traded across various creditor countries before and after bond market segmentation. We show that, when secondary debt markets are segmented, a large selective default probability can be priced in bond yield spreads. Selective default risk accounted for one third of the yield spread of German external bonds over the risk-free rate during the 1930s. Selective default expectations arose from differences in the creditor countries' economic power over the debtor.
    Keywords: sovereign risk; debt default; secondary markets; creditor discrimination;
    JEL: F13 F34 G12 G15 H63 N24 N44
    Date: 2023–09–12
  6. By: Sergio Florez-Orrego; Matteo Maggiori; Jesse Schreger; Ziwen Sun; Serdil Tinda
    Abstract: We survey the literature on global capital allocation. We begin by reviewing the rise of cross-border investment, the shift towards portfolio investment, and the literature focusing on aggregate patterns in multilateral and bilateral positions. We then turn to the recent literature that uses micro-data to document patterns in global capital allocations. We focus on the importance of the currency of denomination of assets in international portfolios and the role that tax havens and offshore financial centers play in intermediating global capital. We conclude with directions for future research in this area.
    JEL: F0 F3 F30
    Date: 2023–08
  7. By: Joao Ricardo Faria; Laudo Ogura; Mauricio Prado; Christopher J. Boudreaux
    Abstract: How can governments attract entrepreneurs and their businesses? The view that new business creation grows with the optimal level of government investments remains appealing to policymakers. In contrast with this active approach, we build a model where governments may adopt a passive approach to stimulating business creation. The insights from this model suggest new business creation depends positively on factors beyond government investments--attracting high-skilled migrants to the region and lower property prices, taxes, and fines on firms in the informal sector. These findings suggest whether entrepreneurs generate business creation in the region does not only depend on government investments. It also depends on location and skilled migration. Our model also provides methodological implications--the relationship between government investments and new business creation is endogenously determined, so unless adjustments are made, econometric estimates will be biased and inconsistent. We conclude with policy and managerial implications.
    Date: 2023–09
  8. By: Ivo Maes (Robert Triffin Chair, University of Louvain and Visiting Fellow, Bruegel)
    Abstract: Friedrich Hayek has been one of the dominating intellectual figures of the 20th century. Hayek, together with Gunnar Myrdal, received the 1974 Nobel Memorial Prize in economics, for “their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena”. Bruce Caldwell (Duke University) and Hansjoerg Klausinger (WU Vienna University of Economics and Business), two distinguished historians of economic thought, have produced a massive (840 pages) work, covering the first five decades of Hayek’s existence. Hayek: A Life, 1899-1950 is a monumental and sympathetic biography. The book is based on painstaking archival research and shows great scholarship. The novelty is very much in bringing the person of Hayek to life, with its strengths and weaknesses.
    Keywords: Friedrich Hayek, Austrian school, biography, business cycle theory
    JEL: B20 B31 B53 E14 G28 N10 P00
    Date: 2023–09
  9. By: Chi-Young Choi; Alexander Chudik
    Abstract: This paper develops Mean Group Distributed Lag (MGDL) estimation of impulse responses in large panels with one or two cross-section dimensions. Sufficient conditions for asymptotic consistency and asymptotic normality are derived, and satisfactory small sample performance is documented using Monte Carlo experiments. MGDL estimators are used to estimate the effects of crude oil price increases on U.S. city- and product-level retail prices.
    Keywords: panel data; impulse response functions; estimation; inference; Mean Group Distributed Lag (MGDL)
    JEL: C23
    Date: 2023–09–22
  10. By: Dickens, Andrew
    Abstract: Gonzalez and Özak (2023) provide a direct and successful replication of Dickens (2022). Using a reconstructed version of the main independent variables from the same original sources, in addition to an updated version of the source data, the replicators confirm the main finding of the original study. In addition to the replication, Gonzalez and Özak (2023) develop an alternative measure of potential gains from inter-ethnic trade. They use this new measure in an interesting extension that delves deeper into the the specifics of the inter-ethnic trade mechanism proposed and tested by Dickens (2022). In this response, I clarify two minor points about how the original data set was constructed, and contrast the potential shortcomings of the original and alternative measures of inter-ethnic gains from trade.
    Date: 2023
  11. By: Torfs, Wouter
    Abstract: This working paper elaborates on the most recent update of the EIF SME Access to Finance (ESAF) Index, a composite indicator used to monitor the state of SME external financing markets in the EU. The current update, using data for 2022, constitutes the tenth iteration of this exercise, resulting in a 10-year long time series for each of the 27 EU countries. The latest data captures the first impact of the rise in inflationary pressures and sustained geopolitical uncertainty arising from the war in Ukraine on European SMEs' access to finance. For an extensive overview of the current state of SME financing markets the reader is referred to the EIF's European Small Business Finance Outlook (Kraemer-Eis et al., 2023). The EIF Working Papers are designed to make available to a wider readership selected topics and studies in relation to EIF's business. The Working Papers are edited by EIF's Research & Market Analysis and are typically authored or co-authored by EIF staff or are written in cooperation with EIF.
    Date: 2023

This nep-mac issue is ©2023 by Daniela Cialfi. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.