nep-mac New Economics Papers
on Macroeconomics
Issue of 2023‒11‒20
twelve papers chosen by
Daniela Cialfi, Universita' di Teramo

  1. One Monetary Policy and Two Bank Lending Standards: A Tale of Two Europes  By Sangyup Choi; Kimoon Jeong; Jiseob Kim
  2. Shocks to the Lending Standards and the Macroeconomy By Vivek Sharma
  3. International Portfolio Rebalancing and Fiscal Policy Spillovers By Sami Alpanda; Uluc Aysun; Serdar Kabaca
  4. Show Me the Money. Why Neglecting Money in Monetary Theory and Policy is a Bad Idea By Olivo, Victor
  5. Strategic Inattention, Inflation Dynamics, and the Non-Neutrality of Money By Hassan Afrouzi
  6. The Forward Guidance Trap By Athanasios Orphanides
  7. Evaluating policy institutions -150 years of US monetary policy- By Régis Barnichon; Geert Mesters
  8. Consumers' Macroeconomic Expectations By Lena Dräger; Michael J. Lamla; Michael Lamla
  9. An Extended Goodwin Model with Endogenous Technical Change: Theory and Simulation for the US Economy (1960-2019) By Cajas Guijarro, John
  10. Housing Tenure, Consumption and Household Debt: Life-Cycle Dynamics During a Housing Bust in Spain By Clodomiro Ferreira; Julio Gálvez; Myroslav Pidkuyko
  11. Macroeconomic Expectations and State-Dependent Factor Returns By Felix Haase; Matthias Neuenkirch
  12. Global Flight to Safety, Business Cycles, and the Dollar By Martin Bodenstein; Pablo A. Cuba-Borda; Nils M. Gornemann; Ignacio Presno; Andrea Prestipino; Albert Queraltó; Andrea Raffo

  1. By: Sangyup Choi; Kimoon Jeong; Jiseob Kim
    Abstract: This paper underscores the underappreciated role of bank mortgage lending standards in conjunction with imbalances stemming from the common monetary policy framework as drivers of divergent economic trajectories in the euro area’s core and periphery countries. To illustrate the mechanism, we compute a country-specific monetary policy stance gap and estimate the panel VAR model of credit and macroeconomy for each group. While the widening gap—the accommodative stance of the ECB relative to individual economic conditions—induces a similar increase in the demand for mortgage credit in both regions, it is followed by markedly different responses of the supply side of mortgage credit: bank mortgage lending standards are relaxed (tightened) in periphery (core) countries, which can rationalize vastly different responses in mortgage credit, residential investment, and housing prices between the two Europes. In searching for the source of different bank lending behaviors, we find that banks in core countries, subject to tighter macroprudential policies and reduced profit margins, increase cross-border lending to periphery countries, enabling them to relax lending standards toward mortgage loans.
    Keywords: Euro area, mortgage credit, monetary policy stance gap, bank lending survey, macroprudential policy, cross-border banking flows
    JEL: E21 E32 E44 F52 G21
    Date: 2023–10
  2. By: Vivek Sharma
    Abstract: This paper presents a model in which firms have endogenously-persistent lending relationships with banks which compete both on interest rates and collateral requirements. The economy features an endogenously-evolving lending standard which is subject to an exogenous shock. A shock to bank lending standards in this model leads to a spike in spread, drop in bank credit and amplification of macroeconomic volatility. These effects are higher at greater intensity and persistence of the lending relationships. This work shines a spotlight on how shocks to lending standards can have wider macroeconomic implications and shows how financial shocks can affect real economy.
    Keywords: Lending Standards, Deep Habits in Banking, Macroeconomic Fluctuations
    JEL: E32 E44
    Date: 2023–10
  3. By: Sami Alpanda; Uluc Aysun; Serdar Kabaca
    Abstract: We evaluate, both empirically and theoretically, the spillover effects that debt-financed fiscal policy interventions of the United States have on other economies. We first consider a two-country dynamic stochastic general equilibrium model with international portfolio rebalancing effects arising from an imperfect substitutability between short- and long-term domestic and foreign bonds. The model shows that US fiscal expansions financed by long-term debt issuance would, on net, hinder economic activity in the rest of the world (ROW). This is despite the standard trade channel’s net positive effect on the ROW economy given the depreciation in the ROW currency. The fall in ROW output occurs mainly due to the increase in the ROW term premia and long-term rates through the portfolio rebalancing channel. This is because the relative demand for ROW long-term bonds decreases following the increase in the supply of US long-term bonds accompanying the fiscal expansion. Testing the predictions of our theoretical model by using panel regressions and vector autoregressions, we find empirical support for the negative relationship between ROW output and US fiscal spending. The data also confirm the positive relationship between ROW term spreads and US fiscal spending.
    Keywords: Economic models; Fiscal policy; International topics
    JEL: E3 E32 E6 E62 F4 F41 F44
    Date: 2023–11
  4. By: Olivo, Victor
    Abstract: This paper discusses numerous and serious conceptual criticisms of arguments and theories that consider that inflation and the price level are exclusively a fiscal phenomenon in which money plays no distinctive role. The price level, substantial acceleration of the inflation rate or sustained inflation rates of two digits or more cannot be explained by expectations or changes in expectations alone as Sargent (1982), Woodford (2008) and the FTPL proponents claim. The empirical evidence obtained using cointegration and error correction models estimated using linear and non-linear techniques provides robust indication that money plays a crucial role in understanding the long-run evolution of the price level and the short-run dynamics of inflation.
    Keywords: Price Level; Inflation; Monetarism, Monetary, Monetary Base, Monetary Policy, Money, Money Stock.
    JEL: E31 E52
    Date: 2023–10–22
  5. By: Hassan Afrouzi
    Abstract: This paper studies how competition affects firms’ expectations in a new dynamic general equilibrium model with rational inattention and oligopolistic competition where firms acquire information about their competitors’ beliefs. In the model, firms with fewer competitors are less attentive to aggregate variables—a novel prediction supported by survey evidence. A calibrated version of the model matches the relationship between firms’ numbers of competitors and their uncertainty about aggregate inflation as a non-targeted moment. A quantitative exercise reveals that firms’ strategic inattention to aggregates significantly amplifies monetary non-neutrality and shifts output response disproportionately towards less competitive oligopolies by distorting relative prices.
    JEL: E31 E32 E71
    Date: 2023–10
  6. By: Athanasios Orphanides (Professor of the Practice of Global Economics and Management at the MIT Sloan School of Management (E-mail:
    Abstract: This paper examines the policy experience of the Fed, ECB and BOJ during and after the Covid-19 pandemic and draws lessons for monetary policy strategy and its communication. All three central banks provided appropriate accommodation during the pandemic but two failed to unwind this accommodation in a timely manner. The Fed and ECB guided real interest rates to inappropriately negative levels as the economy recovered from the pandemic, fueling high inflation. The policy error can be traced to decisions regarding forward guidance on policy rates that delayed lift-off while the two central banks continued to expand their balance sheets. The Fed and the ECB fell into the forward guidance trap. This could have been avoided if policy were guided by a forward-looking rule that properly adjusted the nominal interest rate with the evolution of the inflation outlook.
    Keywords: Monetary policy strategy, Forward guidance, Policy rules
    JEL: E52 E58 E61
    Date: 2023–10
  7. By: Régis Barnichon; Geert Mesters
    Abstract: How should we evaluate and compare the performances of policy institutions? We propose to evaluate institutions based on their reaction function, i.e., on how well they reacted to the different shocks that hit the economy. We show that reaction function evaluation is possible with only two sufficient statistics (i) the impulse responses of the policy objectives to non-policy shocks, which capture what an institution did on average to counteract these shocks, and (ii) the impulse responses of the policy objectives to policy shocks, which capture what an institution could have done to counteract the shocks. A regression of (i) on (ii) —a regression in impulse response space— allows to compute the distance to the optimal reaction function, and thereby evaluate and rank institutions. We use our methodology to evaluate US monetary policy; from the Gold standard period, the early Fed years and the Great Depression, to the post World War II period, and the post-Volcker regime. We find no material improvement in the reaction function over the first 100 years, and it is only in the last 30 years that we estimate large and uniform improvements in the conduct of monetary policy.
    Keywords: optimal policy, reaction function, structural shocks, impulse responses, monetary history
    JEL: C14 C32 E32 E52 N10
    Date: 2023–10
  8. By: Lena Dräger; Michael J. Lamla; Michael Lamla
    Abstract: After the financial crisis of 2008, central banks around the world have increased their communication efforts to reach consumers, with the aim of both guiding and anchoring their inflation expectations. For the expectations channel of monetary policy to work as intended, central banks need a thorough understanding of the formation process of expectations by the general public and of the relationship between expectations and economic choices. This warrants reliable and detailed data on consumers’ expectations of macroeconomic variables such as inflation or interest rates. We thus survey the available survey data and issues regarding the measurement of macroeconomic expectations. Furthermore, we discuss the research frontier on important aspects of the expectations channel: We evaluate the evidence on whether expectations are formed consistently with standard macroeconomic relationships, discuss the insights with respect to the anchoring of inflation expectations, explore the role of narratives and preferences and lastly, we survey the research on causal effects of central bank communication on expectations and economic choices.
    Keywords: consumers’ macroeconomic expectations, central bank communication, survey data
    JEL: E52 E30 D84 C83
    Date: 2023
  9. By: Cajas Guijarro, John
    Abstract: This paper extends the two-dimensional Goodwin model of distributive cycles by incorporating endogenous technical change, inspired on some insights originally formulated by Marx. We introduce a three-dimensional dynamical system, expanding the model to include wage share, employment rate, and capital-output ratio as state variables. Theoretical analysis demonstrates an economically meaningful and locally stable equilibrium point, and the Hopf bifurcation theorem reveals the emergence of stable limit cycles as the mechanization-productivity elasticity surpasses a critical value. Econometric estimation of model parameters using ARDL bounds cointegration tests is performed for the US economy from 1965 to 2019. Simulations show damped oscillations, limit cycles, and unstable oscillations, contributing to the understanding of complex capitalist dynamics.
    Keywords: Goodwin model, endogenous technical change, Hopf bifurcation, ARDL, numerical simulations
    JEL: C61 E11 E32 O33 O41
    Date: 2023–10–15
  10. By: Clodomiro Ferreira (Banco de España); Julio Gálvez (CUNEF Universidad/SHOF); Myroslav Pidkuyko (Banco de España)
    Abstract: The housing bust in Spain was characterized by a significant and rapid drop in home ownership among the younger cohorts, a relatively homogeneous but significant decrease in consumption, and significant movements in the rent-to-house price ratio. To uncover the causes of these movements, we solve and estimate an equilibrium life-cycle model with non-linear income dynamics, mortgages, housing, and rental markets and simulate a series of counterfactual policy changes and macroeconomic conditions observed in Spain during the period. The lion’s share of the observed drop in home ownership and consumption and the housing market dynamics can be explained by the tightening of credit conditions and the major shift in income dynamics observed in Spain between the boom and bust phases.
    Keywords: life-cycle models, mortgage debt, housing
    JEL: E21 E44
    Date: 2023–11
  11. By: Felix Haase; Matthias Neuenkirch
    Abstract: We examine the asymmetric impact of shocks to macroeconomic expectations and their underlying dispersion on equity risk premia across different market regimes. First, we rely on a two-state logit mixture vector autoregressive model and use Consensus Economics survey data on GDP growth, inflation, and short-term interest rates to approximate macroeconomic expectations and the underlying disagreement in the United States for the period 1989M10–2022M09. We demonstrate that unexpected changes of survey forecasts and their dispersion significantly affect cyclical factor returns in a dynamic setting and that the state of the economy matters for the magnitude, persistence, and occasionally also for the sign of the effect. Second, by extending the dynamic asset pricing model of Adrian et al. (2015), we show that GDP forecasts and their dispersion are priced in the cross section and drive the size and value premium, whereas inflation expectations serve as robust predictors for the price of risk. We also document that the survey expectations-augmented specification reduces pricing and premium errors when compared to a common benchmark of return predictors.
    Keywords: consensus forecasts, dynamic asset pricing model, factor risk premia, macroeconomic expectations, mixture VAR, state-dependency
    JEL: C32 E44 G12 G14
    Date: 2023
  12. By: Martin Bodenstein; Pablo A. Cuba-Borda; Nils M. Gornemann; Ignacio Presno; Andrea Prestipino; Albert Queraltó; Andrea Raffo
    Abstract: We develop a two-country macroeconomic model that we fit to a set of aggregate prices and quantities for the U.S. and the rest of the world. In addition to a standard array of shocks, the model includes time variation in agents’ preference for safe bonds. We allow for a component of this time variation to be common across countries and biased toward dollar-denominated safe assets, and refer to this component as global flight to safety (GFS). We find that GFS shocks are the most important shocks driving world business cycles, and are also important drivers of activity in the U.S. and especially abroad. An adverse GFS shock lowers global GDP and inflation, widens global corporate credit spreads, and appreciates the dollar. These effects are very close to those obtained from a structural VAR which uses the excess bond premium (Gilchrist and Zakraj¡sek, 2012) as proxy for global flight to safety.
    Keywords: Macroeconomic activity; Econometrics and economic theory; International economics
    JEL: H22 F30 E32
    Date: 2023–10–11

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