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on Macroeconomics |
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Issue of 2013‒10‒25
57 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Guido Ascari (University of Oxford and University of Pavia); Argia M. Sbordone (Federal Reserve Bank of New York) |
| Abstract: | Most macroeconomic models for monetary policy analysis are approximated around a zero inflation steady state, but most central banks target inflation at a rate of about 2 percent. Many economists have recently proposed even higher inflation targets to reduce the incidence of the zero lower bound constraint on monetary policy. In this Survey we show the importance of appropriately accounting for a low, positive trend inflation rate for the conduct of monetary policy. We first review empirical research on the evolution and dynamics of US trend inflation, and some proposed new measures to assess the volatility and persistence of trend-based inflation gaps. Then we construct a Generalized New Keynesian model (GNK) which accounts for a positive trend inflation rate and we show that in this model higher trend inflation is associated with a more volatile and unstable economy and tends to destabilize inflation expectations. This analysis offers a note of caution in evaluating recent proposals of addressing the existing ZLB situation by raising the underlying rate of inflation. |
| Keywords: | Trend Inflation, Inflation Target, Inflation Persistence |
| JEL: | E31 E52 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:pav:demwpp:demwp0053&r=mac |
| By: | Marco Casiraghi (Bank of Italy); Eugenio Gaiotti (Bank of Italy); Lisa Rodano (Bank of Italy); Alessandro Secchi (Bank of Italy) |
| Abstract: | We assess the impact on the Italian economy of the main unconventional monetary policies adopted by the ECB in 2011-2012 (SMP, 3-year LTROs and OMTs) by following a two-step approach. We evaluate their effects on money market interest rates, government bond yields and credit availability and then map them onto macroeconomic implications using the Bank of Italy quarterly model of the Italian economy. We find that the SMP and the OMTs have been effective in counteracting increases in government bond yields and that the LTROs have had a beneficial impact on credit supply and money market conditions. From a macroeconomic perspective, we find that the unconventional policies have had a large positive effect on the Italian economy, mainly through the credit channel, with a cumulative impact on GDP growth of 2.7 percentage points over the period 2012-2013. To conclude, while the policies did not prevent the Italian economy from falling into recession, they did avoid a more intense credit crunch and a larger output fall than those actually observed. |
| Keywords: | monetary policy, unconventional monetary measures |
| JEL: | E52 E58 E44 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_203_13&r=mac |
| By: | William T. Gavin; Benjamin D. Keen; Alexander W. Richter; Nathaniel A. Throckmorton |
| Abstract: | This article presents global solutions to standard New Keynesian models with a zero lower bound (ZLB) constraint on the nominal interest rate. Rather than focus on specific sequences of shocks, we provide the solution for all combinations of technology and discount factor shocks and a thorough explanation of how dynamics change across the state space. Our solution method emphasizes accuracy to capture important expectational effects of going to and returning from the ZLB, which commonly used solution methods based on specific sequences of shocks cannot capture. We focus on the New Keynesian model without capital, but we also study the model with capital, with and without capital adjustment costs. Capital adds another mechanism for intertemporal substitution, which strengthens the expectational effects of the ZLB and impacts dynamics even before the ZLB is hit. We also evaluate how monetary policy affects the likelihood of hitting the ZLB. A policy rule based on a dual mandate is more likely to cause ZLB events when the central bank places greater emphasis on output stabilization. |
| Keywords: | Monetary Policy; Zero Lower Bound; Global Solution Method |
| JEL: | E31 E42 E58 E61 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:abn:wpaper:auwp2013-17&r=mac |
| By: | Yi Wen |
| Abstract: | We use a general equilibrium finance model that features explicit government purchases of private debts to shed light on some of the principal working mechanisms of the Federal Reserve’s large-scale asset purchases (LSAP) and their macroeconomic effects. Our model predicts that unless private asset purchases are highly persistent and extremely large (on the order of more than 50% of annual GDP), money injections through LSAP cannot effectively boost aggregate output and employment even if inflation is fully anchored and the real interest rate significantly reduced. Our framework also sheds light on some long- standing financial puzzles and monetary policy questions facing central banks around the world, such as (i) the fight to liquidity under a credit crunch and debt crisis, (ii) the liquidity trap, (iii) the inverted yield curve, and (iv) the low inflation puzzle under quantitative easing. |
| Keywords: | Monetary policy ; Liquidity (Economics) ; Inflation (Finance) |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2013-028&r=mac |
| By: | Giorgio Motta; Patrizio Tirelli |
| Abstract: | Following a seminal contribution by Bilbiie (2008), the Limited Asset Market Participation hypothesis has triggered a debate on DSGE models determinacy when the central bank implements a standard Taylor rule. We reconsider the issue here in the context of an exogenous money supply rule, documenting the role of nominal and real frictions in determining these results. A general conclusion is that frictions matter for stability insofar as they redistribute income between Ricardian and non-Ricardian households when shocks hit the economy. Finally, we extend the model to allow for the possibility that consumers who do not participate to the market for interest-bearing securities hold money. In this case endogenous monetary transfers between the two groups allow to smooth consumption differences and the model is determinate provided that the non-negativity constraint on individual money holdings is satisfied. |
| Keywords: | Rule of Thumb Consumers, DSGE, Determinacy, Limited Asset Market Participation, Money Targeting |
| JEL: | E52 E58 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:257&r=mac |
| By: | Jordi Galí; Luca Gambetti |
| Abstract: | We estimate the response of stock prices to exogenous monetary policy shocks using vector-autoregressive models with time-varying parameters. Under our baseline identification scheme, the evidence cannot be easily reconciled with conventional views on the effects of interest rate changes on asset price bubbles. |
| Keywords: | leaning against the wind policies, financial stability, inflation targeting, asset price booms |
| JEL: | E52 G12 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:724&r=mac |
| By: | Nikolay Markov; Thomas Nitschka |
| Abstract: | This paper estimates Taylor rules using real-time inflation forecasts of the Swiss National Bank's (SNB) ARIMA model and real-time model-based internal estimates of the output gap since the onset of the monetary policy concept adopted in 2000. To study how market participants understand the SNB's behavior, we compare these Taylor rules to marketexpected rules using Consensus Economics survey-based measures of expectations. In light of the recent financial crisis, the zero-lower bound period and the subsequent massive Swiss franc appreciation, we analyze potential nonlinearity of the rules using a novel semi-parametric approach. First, the results show that the SNB reacts more strongly to its ARIMA inflation forecasts three and four quarters ahead than to forecasts at shorter horizons. Second, market participants have expected a higher inflation responsiveness of the SNB than found with the central bank's data. Third, the best fitting specification includes a reaction to the nominal effective Swiss franc appreciation. Finally, the semiparametric regressions suggest that the central bank reacts to movements in the output gap and the exchange rate to the extent that they become a concern for price stability and economic activity. |
| Keywords: | Taylor rules, real-time data, nonlinearity, semi-parametric-modeling |
| JEL: | E52 E58 C14 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2013-08&r=mac |
| By: | Alexander W. Richter; Nathaniel A. Throckmorton |
| Abstract: | When monetary policy faces a zero lower bound (ZLB) constraint on the nominal interest rate, determinacy is not guaranteed even if the Taylor principle is satisfied when the ZLB does not bind. This paper shows the boundary of the determinacy region imposes a clear tradeoff between the expected frequency and average duration of ZLB events. We show this tradeoff using a global solution to a nonlinear New Keynesian model with two alternative stochastic processes?one where monetary policy follows a 2-state Markov chain, which exogenously governs whether the ZLB binds, and the other where ZLB events arise endogenously due to technology shocks. In both cases, the household accounts for the possibility of going to and exiting the ZLB in expectation. We quantify the expectation al effect of the ZLB and show it depends on the parameters of the stochastic process. |
| Keywords: | Monetary policy; zero lower bound; determinacy; global solution method |
| JEL: | E31 E42 E58 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:abn:wpaper:auwp2013-16&r=mac |
| By: | José A Carrasco-Gallego; Margarita Rubio |
| Abstract: | The recent financial crisis has raised the discussion among policy makers and researchers on the need of macroprudential policies to avoid systemic risks in financial markets. However, these new measures need to be combined with the traditional ones, namely monetary policy. The aim of this paper is to study how the interaction of macroprudential and monetary policies affect the economy. We take as a baseline a dynamic stochastic general equilibrium (DSGE) model which features a housing market in order to evaluate the performance of a rule on the loan-to-value ratio (LTV) interacting with the traditional monetary policy conducted by central banks. We find that, introducing the macroprudential rule mitigates the effects of booms on the economy by restricting credit. From a normative perspective, results show that the combination of monetary policy and the macroprudential rule is unambiguously welfare enhancing, especially when monetary policy does not respond to output and house prices and only to inflation. |
| Keywords: | Macroprudential, monetary policy, collateral constraint, credit,loan-to-value |
| URL: | http://d.repec.org/n?u=RePEc:not:notcfc:13/05&r=mac |
| By: | Gary Gorton |
| Abstract: | An examination of U.S. banking history shows that economically efficient private bank money requires that information-revealing securities markets for bank liabilities be closed. That is, banks are optimally opaque, which is why they are regulated and examined. I show this by examining the transition from private bank notes, the predominant form of money before the U.S. Civil War, to demand deposits and show that markets endogenous closed. The opacity of bank money in the recent financial crisis is also briefly discussed. |
| JEL: | E32 E41 E42 E44 G01 G21 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19540&r=mac |
| By: | Schlicht, Ekkehart |
| Abstract: | This note identifies a severe mistake in my article “Unexpected Consequences of Ricardian Expectations” that appeard in this journal in the July 2013 issue. |
| Keywords: | Barro-Ricardo equivalence; Ricardian equivalence; fiscal policy; debt; taxation; rational expectations; Ricardian expectations; Barro expectations; tax neutrality |
| JEL: | E2 E12 E6 H6 |
| Date: | 2013–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:17249&r=mac |
| By: | Alexander W. Richter; Nathaniel A. Throckmorton |
| Abstract: | Recent proposals to reduce U.S. debt reveal large differences in their implied targets. These differences demonstrate the uncertainty surrounding future tax rates and long-run debt targets. We use a standard real business cycle model in which a Bayesian household learns about the state-dependent debt target in an endogenous tax rule. The household extracts the debt target state from a noisy tax process and jointly estimates the transition probabilities. We compare the household's ability to learn and the consequences of the uncertainty across different limited information sets. The information set influences the household's behavior but also impose two-sided risk. Despite the popular viewpoint that fiscal uncertainty has negative effects, limited information can result in welfare gains or losses, depending on whether the household's expectations are consistent with the realization of future states. Although the welfare distribution includes gains, we stress that the uncertainty created by the recent fiscal policy debate slowed the recovery and led to welfare losses. When Congress provides clarity about future policy, output and welfare increase and the economy quickly recovers. |
| Keywords: | Bayesian learning; Limited information; Fiscal uncertainty; Welfare |
| JEL: | D83 E32 E62 H68 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:abn:wpaper:auwp2013-18&r=mac |
| By: | José A Carrasco-Gallego; Margarita Rubio |
| Abstract: | In this paper, we analyse the implications of macroprudential and monetary policies for business cycles, welfare, and .nancial stability. We consider a dynamic stochastic general equilibrium (DSGE) model with housing and collateral constraints. A macroprudential rule on the loan-to-value ratio (LTV), which responds to output and house price deviations, interacts with a traditional Taylor rule for monetary policy. From a positive perspective, introducing a macroprudential tool mitigates the effects of booms in the economy by restricting credit. However, monetary and macroprudential policies may enter in conflict when shocks come from the supply-side of the economy. From a normative point of view, results show that the introduction of this macroprudential measure is welfare improving. Then, we calculate the combination of policy parameters that maximizes welfare and find that the optimal LTV rule should respond relatively more aggressively to house prices than to output deviations. Finally, we study the efficiency of the policy mix. We propose a tool that includes not only the variability of output and inflation but also the variability of borrowing, to capture the effects of policies on financial stability: a three-dimensional policy frontier (3DPF). We find that both policies acting together unambiguously improve the stability of the system. |
| Keywords: | Macroprudential, monetary policy, welfare, financial stability, three-dimensional policy frontier, loan-to-value, Taylor curve |
| URL: | http://d.repec.org/n?u=RePEc:not:notcfc:13/04&r=mac |
| By: | Paul De Grauwe (LSE; CEPS); Yuemei Ji (University College London) |
| Abstract: | We analyze the similarities and the differences in the fragility of the European Monetary System (EMS) and the Eurozone. We test the hypothesis that in the EMS the fragility arose from the absence of a credible lender of last resort in the foreign exchange markets while in the Eurozone it was the absence of a lender of last resort in the long-term government bond markets that caused the fragility. We conclude that in the EMS the national central banks were weak and fragile, and the national governments were insulated from this weakness by the fact that they kept their own national currencies. In the Eurozone the roles were reversed. The national central banks that became part of the Eurosystem were strengthened. |
| Keywords: | government bond markets, interbank money market, interest rate spread, Eurozone, EMS, fragility |
| JEL: | E42 E52 E58 F33 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201310-243&r=mac |
| By: | Ratti, Ronald A (School of Business, University of Western Sydney Author-Workplace Homepage:http://www.uws.edu.au/sob/school_of_business); Vespignani, Joaquin L. (School of Economics and Finance, University of Tasmania) |
| Abstract: | This paper investigates the influence of liquidity in the major developed and major developing economies on commodity prices. Unanticipated increases in the BRIC countries? liquidity is associated with significant and persistent increases in commodity prices that are much larger than the effect of unanticipated increases in G3 liquidity, and the difference increases over time. Over 1999-2012 BRIC liquidity is strongly linked with global energy prices and global real activity whereas G3 liquidity is not. The impact of BRIC liquidity on mineral and metal prices is twice as large as that of G3 liquidity. BRIC liquidity is significantly connected with global tightening while G3 liquidity is not. Granger casualty goes from liquidity to commodity prices. BRIC and G3 liquidity and commodity prices are cointegrated. BRIC and G3 liquidity and global output and global prices are cointegrated. We constructed a structural factor-augmented error correction (SFAVEC) model. |
| Keywords: | Commodity Prices, BRIC countries, G3, Global liquidity, SFAVEC |
| JEL: | E31 E32 E51 F01 G15 Q43 |
| Date: | 2013–01–09 |
| URL: | http://d.repec.org/n?u=RePEc:tas:wpaper:17096&r=mac |
| By: | Eugenia Vella; Evangelos Dioikitopoulos (Brunel University); Sarantis Kalyvitis (DIEES, AUEB) |
| Abstract: | This paper studies optimal fiscal policy, in the form of taxation and the allocation of tax revenues between infrastructure and environmental investment, in a general-equilibrium growth model with endogenous subjective discounting. A green spending reform, defined as a reallocation of government expenditures towards the environment, can procure a double dividend by raising growth and improving environmental conditions, although the environment does not impact the production technology. Also, endogenous Ramsey fiscal policy eliminates the possibility of an `environmental and economic poverty trap'. Contrary to the case of exogenous discounting, green spending reforms are the optimal response of the Ramsey government to a rise in the agents' environmental concerns. |
| Keywords: | endogenous time preference, growth, environmental quality, second-best fiscal policy |
| JEL: | D90 E21 E62 H31 |
| URL: | http://d.repec.org/n?u=RePEc:aue:wpaper:1335&r=mac |
| By: | Koen van der Veer; Marco Hoeberichts |
| Abstract: | Do tightenings of bank lending standards permanently reduce bank lending? We construct a measure of a bank’s level of lending standards using micro-data from the sample of banks participating in the Eurosystem Bank Lending Survey in The Netherlands and show that this level measure affects business lending. The level effect is statistically robust and economically relevant; a one point tightening reduces a bank’s quarterly growth rate of business lending by about half a percentage point until bank lending standards are eased. This level effect of bank lending standards helps to explain low bank lending growth after a period of prolonged tightening as well as high bank lending growth in a period of prolonged easing. As such, the analysis provides another potential indicator for macroprudential policy. |
| Keywords: | bank lending standards; bank lending survey; bank lending; level effect; macroprudential policy |
| JEL: | E44 E51 G01 G21 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:396&r=mac |
| By: | Martin Gächter; Aleksandra Riedl |
| Abstract: | The authors examine whether the introduction of the euro had a significantly positive impact on the synchronization of business cycles among members of Economic and Monetary Union (EMU) which might arise due to the lack of country-specific monetary policy shocks in the euro area. Empirical evidence on this relationship is rare so far and suffers from methodical weaknesses, such as the absence of time variability, which is crucial for addressing this issue. Using a synchronization index that is constructed on a year-by-year basis (1993{2011), the authors uncover a strong and robust empirical finding: the adoption of the euro has significantly increased the correlation of member countries' business cycles above and beyond the effect of higher trade integration. Thus, the authors’ results substantially strengthen the conclusion by Frankel & Rose (1998), i.e. a country is more likely to satisfy the criteria for entry into a currency union ex post rather than ex ante. Remarkably, however, this reasoning is even verifed when controlling for the effect of increased trade linkages implied by entering a currency union. JEL classification: E02, E32, E58, F15, F33 |
| Keywords: | Business cycles, EMU, endogeneity, optimum currency areas |
| Date: | 2013–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:186&r=mac |
| By: | Gerald Carlino; Robert P. Inman |
| Abstract: | The American Recovery and Reinvestment Act (ARRA) was the US government’s fiscal response to the Great Recession. An important component of ARRA’s $796 billion proposed budget was $318 billion in fiscal assistance to state and local governments. We examine the historical experience of federal government transfers to state and local governments and their impact on aggregate GDP growth, recognizing that lower-tier governments are their own fiscal agents. The SVAR analysis explicitly incorporates federal intergovernmental transfers, disaggregated into project (e.g., infrastructure) aid and welfare aid, as separate fiscal policies in addition to federal government purchases and federal net taxes on household and firms. A narrative analysis provides an alternative identification strategy. To better understand the estimated aggregate effects of aid on the economy, we also estimate a behavioral model of state responses to such assistance. The analysis reaches three conclusions. First, aggregate federal transfers to state and local governments are less stimulative than are transfers to households and firms. It is important to evaluate the two policies separately. Second, within intergovernmental transfers, matching (price) transfers for welfare spending are more effective for stimulating GDP growth than are unconstrained (income) transfers for project spending. Matching aid is fully spent on welfare services or middle-class tax relief; half of project aid is saved and only slowly spent in future years. Third, simulations using the SVAR specification suggest ARRA assistance would have been 30 percent more effective in stimulating GDP growth had the share spent on government purchases and project aid been fully allocated to private sector tax relief and to matching aid to states for lower-income support. |
| JEL: | E62 H39 H77 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19559&r=mac |
| By: | Ferrara, L.; Marsilli, C.; Ortega, J-P. |
| Abstract: | The Great Recession endured by the main industrialized countries during the period 2008–2009, in the wake of the financial and banking crisis, has pointed out the major role of the financial sector on macroeconomic fluctuations. In this respect, many researchers have started to reconsider the linkages between financial and macroeconomic areas. In this paper, we evaluate the leading role of the daily volatility of two major financial variables, namely commodity and stock prices, in their ability to anticipate the output growth. For this purpose, we propose an extended MIDAS (Mixed Data Sampling) model that allows the forecasting of the quarterly output growth rate using exogenous variables sampled at various higher frequencies. Empirical results on three industrialized countries (US, France, and UK) show that mixing daily financial volatilities and monthly industrial production is useful at the time of predicting gross domestic product growth over the Great Recession period. |
| Keywords: | Great Recession, GDP Forecasting, Financial variables, MIDAS approach, Volatility. |
| JEL: | C53 E17 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:454&r=mac |
| By: | Gouriéroux, C.; Monfort, A.; Pegoraro, F.; Renne, J-P. |
| Abstract: | This article proposes an overview of the usefulness of the regime switching approach for building various kinds of bond pricing models and of the roles played by the regimes in these models. Both default-free and defaultable bonds are considered. The regimes can be used to capture stochastic drifts and/or volatilities, to represent discrete target rates, to incorporate business cycles or crises, to introduce contagion, to reproduce zero lower bound spells, or to evaluate the impact of standard or nonstandard monetary policies. From a technical point of view, we stress the key role of Markov chains, Compound Autoregressive (Car) processes, Regime Switching Car processes and multihorizon Laplace transforms. |
| Keywords: | term structure, regime switching, affine models, car process, multi-horizon Laplace transform, contagion, default risk, monetary policy. |
| JEL: | E43 G12 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:456&r=mac |
| By: | Tommaso Trani (School of Economics and Business Administration University of Navarra) |
| Abstract: | In this paper, I study the international transmission of shocks when assets traded across borders are differently suitable as collateral for borrowing (i.e., pledgeability). Under financial integration, differences in pledgeability have implications for the demand for assets. For instance, if a shock makes it more difficult to pledge the assets of the country receiving the shock, agents expect these assets to yield a relatively higher premium than foreign assets in the near future. I develop an approach to determine the optimal portfolio allocations, as existing methods cannot be directly applied to capture differences in asset pledgeability. In this case of heterogeneously pledgeable assets, financial shocks are transmitted from one country to another because the same asset is held by residents of different countries. Valuation effects arise as a consequence of the reaction of asset returns in different countries. In contrast, a standard model cannot generate any of these implications when assets have the same degree of pledgeability. Indeed, when assets have the same degree of pledgeability, financial shocks are country-specific and hinder the access to credit only for the residents of the country hit by the shock. * The external appendix with the methodological details is available upon request. |
| Keywords: | international portfolio choice, riskiness of pledged collateral, return dierentials, macroeconomic interdependence |
| JEL: | E44 F32 F41 G11 G15 |
| Date: | 2013–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:una:unccee:wp0213&r=mac |
| By: | Carolina Achury (Exeter School of Business, University of Exeter); Christos Koulovatianos (CREA, University of Luxembourg); John Tsoukalas (Department of Economics, University of Glasgow) |
| Abstract: | We study how excessive debt-GDP ratios affect political sustainability of prudent fiscal policy in country members of a monetary union. We develop a model with free choice of distinct rent-seeking groups to cooperate (or not) in providing public goods, in seeking rents, and in austere debt issuing through international markets. Noncooperation of rent-seeking groups on fiscal prudence triggers collective fiscal impatience: fiscal debt is issued excessively because each group expropriates extra rents before other groups do so, too. Such collective fiscal impatience leads to a vicious circle of high international interest rates and external-debt default. Our calibration suggests that debt-GDP ratios below 137% foster cooperation among rent-seeking groups, which avoids collective fiscal impatience and default. Our analysis helps in understanding the politicoeconomic sustainability of sovereign rescue packages, emphasizing the need for fiscal targets and for possible debt haircuts. |
| Keywords: | sovereign debt, rent seeking, world interest rates, international lending, incentive compatibility, tragedy of the commons, EU crisis |
| JEL: | H63 F34 F36 E44 E43 D72 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:13-23&r=mac |
| By: | Juan José Echavarría; Luis Fernando Melo Velandia; Mauricio Villamizar |
| Abstract: | To date, there is still great controversy as to which exchange rate model should be used or which monetary channel should be considered, when measuring the effects of monetary policy. Since most of the literature relies on structural models to address identification problems, the validity of results largely turn on how accurate the assumptions are in describing the full extent of the economy. In this paper we compare the effect of different types of central bank interventions using an event study approach for the Colombian case during the period 2000-2012, without imposing restrictive parametric assumptions or without the need to adopt a structural model. We find that all types of interventions (international reserve accumulation options, volatility options and discretionary) have been successful according to the smoothing criterion. In particular, volatility options seemed to have the strongest effect. We find that results are robust when using different windows sizes and counterfactuals. |
| Keywords: | Central bank intervention, foreign exchange intervention mechanisms, event study. Classification JEL: E52, E58, F31. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:784&r=mac |
| By: | Barattieri, Alessandro; Eden, Maya; Stevanovi, Dalibor |
| Abstract: | This paper proposes a measure of the extent to which a financial sector is connected to the real economy. The Measure of Connectedness is a measure of the composition of assets, namely the share of credit to the non-financial sectors over the total credit market instruments. The aggregate Measure of Connectedness for the United States declines by about 27 percent in the period 1952-2009. The authors suggest that this increase in disconnectedness between the financial sector and the real economy may have dampened the sensitivity of the real economy to monetary shocks. They present a stylized model that illustrates how interbank trading can reduce the sensitivity of lending to the entrepreneur's net worth, thereby dampening the credit channel transmission of monetary policy. The Measure of Connectedness is interacted with both a structural vector autoregressive model and a factor-augmented vector autoregressive model for the United States economy. The analysis establishes that the impulse responses to monetary policy shocks are dampened as the level of connection declines. |
| Keywords: | Debt Markets,Access to Finance,Emerging Markets,Financial Intermediation,Economic Theory&Research |
| Date: | 2013–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6667&r=mac |
| By: | Fabio Busetti (Bank of Italy); Pietro Cova (Bank of Italy) |
| Abstract: | This work analyzes the macroeconomic impact of the euro-area sovereign debt crisis on the Italian economy by estimating the contribution of the main transmission channels underlying the recessionary dynamics at play since the second half of 2011. By means of a counterfactual analysis undertaken using the Bank of Italy’s quarterly econometric model it is estimated that (i) compared with a “no-crisis scenario”, the GDP loss amounts cumulatively to around 6.5 percentage points in 2012-2013; (ii) the drop in investment stems mainly from a worsening of financing conditions for firms, while the contraction in consumption expenditure hinges chiefly on the negative impact on households’ disposable income of the fiscal measures enacted in response to the crisis, as well as heightened uncertainty and lower confidence levels; and (iii) unlike the 2008-09 recession, during the sovereign debt crisis the major impact on economic activity stems from internal factors, which account for about two thirds of the downturn in GDP. |
| Keywords: | Italian economy, european sovereign debt crisis, forecasting and simulation |
| JEL: | G21 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_201_13&r=mac |
| By: | Rüdiger, Sina |
| Abstract: | This paper studies the actions of the U.S. Federal Reserve Bank during the financial crisis from 2007-2012. Whereas the first two parts concentrate on asset bubble theory and the development of the housing bubble, the third part rates the performance of the Federal Reserve during the crisis. The chosen scoring model approach shows that the average performance of five specific measures taken by the Federal Reserve only ranks between fair and good. Comparing Stiglitz (2010) viewpoints with those of the Federal Reserve, this paper analyzes the federal funds rate, the bailout of AIG, the lending to Bear Stearns, the Term Auction Facility and the failure of Lehman Brothers. This paper argues that the resulting decisions were well intentioned but that the outcome was different from expectations because of missing regulations and restrictions. Furthermore, the structure of the Federal Reserve is examined and criticized. -- |
| Keywords: | Federal Reserve,financial crisis,housing bubble,monetary policy |
| JEL: | E52 E58 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ipewps:252013&r=mac |
| By: | Datta, Soumya |
| Abstract: | Using a macroeconomic example, the paper proposes an algorithm to symbolically construct the topological normal form of Andronov-Hopf bifurcation. It also offers a program, using the Computer Algebra System `Maxima', to apply this algorithm. In case the limit cycle turns out to be unstable, the possibilities of the dynamics converging to another limit cycle is explored. |
| Keywords: | Andronov-Hopf bifurcation, Limit cycles |
| JEL: | C62 C69 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:50814&r=mac |
| By: | Landier, Augustin; Sraer, David; Thesmar, David |
| Abstract: | We show empirically that banks' exposure to interest rate risk, or income gap, plays a crucial role in monetary policy transmission. In a first step, we show that banks typically retain a large exposure to interest rates that can be predicted with income gap. Secondly, we show that income gap also predicts the sensitivity of bank lending to interest rates. Quantitatively, a 100 basis point increase in the Fed funds rate leads a bank at the 75th percentile of the income gap distribution to increase lending by about 1.6 percentage points annually relative to a bank at the 25th percentile. |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:27663&r=mac |
| By: | Martin Feldkircher |
| Abstract: | This paper puts forward a global macro model comprising 43 countries and covering the period from Q1 1995 to Q4 2011. Our regional focus is on countries in Central, Eastern and Southeastern Europe (CESEE) and the Commonwealth of Independent States (CIS). Applying a global VAR (GVAR) model, we are able to assess the spatial propagation and the time profile of foreign shocks to the region. Our results show that first, the region’s real economy reacts nearly equally strongly to an U.S. output shock as it does to a corresponding euro area shock. The pivotal role of the U.S.A. in shaping the global business cycle thus seems to partially offset the region’s comparably stronger trade integration with the euro area. Second, an increase in the euro area’s short-term interest rate has a negative effect on output in the long run throughout the region. This effect is stronger in the CIS as well as in Southeastern Europe, while it is comparably milder in Central Europe. Third, the region is negatively affected by an oil price hike, with the exception of Russia, one of the most important oil exporters worldwide. The oil-driven economic expansion in Russia seems to spill over to other – oil-importing – economies in CIS, thereby offsetting the original drag brought about by the hike in oil prices. Finally, our results corroborate the strong integration of advanced economies with the global economy. By contrast, the responses in emerging Europe are found to be more diverse, and country-specifics seem to play a more important role. JEL classification: C32, F44, E32, O54 |
| Keywords: | Global VAR, transmission of international shocks, Eastern Europe, CESEE, great recession, emerging Europe, global macro model, foreign shock |
| Date: | 2013–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:185&r=mac |
| By: | Kohn, Wolfgang |
| Abstract: | In der einfachen finanzmathematischen Welt herrscht ein konstanter Zinssatz. Wird die Modellwelt hinsichtlich einer nicht flachen Zinsstruktur abgeändert, so sollten die Barwertfaktoren um zwischenzeitliche Zinszahlungen (Zinseszinsen) neutralisiert werden. Die Berechnung der Barwertfaktoren mittels der Duplizierung von Zahlungsströmen (Bootstrapping) führt zu Kapitalwerten, die steigende bzw. fallende Finanzierungskosten der Investition besser im Kapitalwert berücksichtigen. Die Kapitalwerte der Investitionen fallen bzw. steigen gegenüber der herkömmlichen Berechnung und berücksichtigen damit besser die Markterwartungen aus der Zinsstrukturkurve. Die Unternehmensentscheidungen wirken damit stabilisierender auf die konjunkturelle Entwicklung. Ferner wird gezeigt, dass eine Barwertmarge bzw. Rentabilitätsmarge berechnet werden kann, die die Differenz zur gegebenen Zinsstruktur angibt, bei der der Kapitalwert Null wird. Alle Ergebnisse entsprechen dem traditionellen Ansatz, wenn die Zinsstruktur flach ist. -- The simple financial world assumes a constant interest rate over time (flat yield curve). If this restriction is released for a non constant interest rate (non-flat yield curve) the compounded interest should be neutralized for this interest payments. The net present value with neutralized interest payments (bootstraping method) leads towards net present values which takes better increasing and decreasing interest terms structures into account which results in lower or higher net present values. Therefore the investment decisions are more in line with the interest term structure. Further on a net present value margin is introduced, which shows for a given interest term structure the margin when the net present value is zero. It is an extension of the internal return of investment. All calculations are in line with a flat interest term structure. |
| Keywords: | Kapitalwertmethode,Zinsstrukturkurve,Marktzinsmodell,Finanzmathematik |
| JEL: | E43 E44 G11 G31 |
| Date: | 2013–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:83786&r=mac |
| By: | Antonio Scalia (Bank of Italy); Sergio Longoni (Bank of Italy); Tiziana Rosolin (Bank of Italy) |
| Abstract: | Based on a review of the analytical underpinnings of the effects of the NSFR on banks’ choices, this paper attempts to relate banks’ strategies to developments in the value of the ratio in the euro area. In spite of a not-so-near implementation date, the evidence is that the NSFR already matters for banks’ choices, and it might be more relevant as a decision variable than alternative leverage indicators. As part of a convergence process towards the 100 per cent threshold, we estimate that the ECB’s 3-year LTROs have raised the available stable funding by €429 billion as of June 2012 for the sample banks with a shortfall and that the NSFR may affect loans to the economy. In view of the phasing-in of the Basel III liquidity standards, the evidence suggests that, when evaluating non-standard monetary policy measures, central banks should also take into account their impact on the fulfilment of the NSFR and the possible cliff effects related to their expiration. |
| Keywords: | Basel III, liquidity regulation, central bank operations |
| JEL: | E5 G2 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_195_13&r=mac |
| By: | Nakhoda, Aadil |
| Abstract: | The role of the banking industry in export promotion cannot be over-emphasized as banks provide the necessary financial support for borrowers in various industries to undertake investment activities. The banking industry consists of larger and smaller banks and the former are likely to be the preferred lenders as they provide loans for investment activities at a lower interest rate but may only finance the good borrowers within selected industries that are considered profitable. The banks require an appropriate market structure based on the level of competition in order to finance the maximum number of industries and in turn promote exporting activities across several industries within an economy. The influence of the market structure on export diversification is determined by the level of financial development and the prevailing macroeconomic conditions within an economy. With the help of an industry-level dataset on bilateral trade flows between various countries, I consider OLS and IV regressions to determine whether the Lerner Index of the banking industry, an indicator on the degree of competition, influences the number of industries exported. In order to consider the impact of competition in the banking industry on export diversification at different levels of financial development of the exporting countries, I split the countries into OECD member countries, non OECD countries and include a pooled set of countries. As macroeconomic conditions are likely to influence the market structure of the banking industry, I further split the samples of countries on the basis of the median levels of lending and the deposit rate spread, foreign bank participation rate and the ratio of government credit to private credit provided by the domestic banks for the respective groups of countries based on their OECD membership status and find varying results under different macroeconomic conditions and levels of financial development. In the recent years, several studies have determined the role of financial markets on exporting activities to be significant at the country-level as well as at the firm-level. To the best of my knowledge, this is one of the first paper to study the influence of competition within the banking industry on export diversification at the industry-level. |
| Keywords: | International trade; export diversification; financial markets; banking industry; financial intermediation; bank competition; foreign banks; government debt; lending and deposit rate spread; transaction-based and relationship-based lending; |
| JEL: | E52 E58 F14 G21 G28 L25 L60 |
| Date: | 2013–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:50774&r=mac |
| By: | Pauwels, Laurent; Vasnev, Andrey |
| Abstract: | This paper proposes the use of forecast combination to improve predictive accuracy in forecasting the U.S. business cycle index as published by the Business Cycle Dating Committee of the NBER. It focuses on one-step ahead out-of-sample monthly forecast utilising the well-established coincident indicators and yield curve models, allowing for dynamics and real-time data revisions. Forecast combinations use logscore and quadratic-score based weights, which change over time. This paper finds that forecast accuracy improves when combining the probability forecasts of both the coincident indicators model and the yield curve model, compared to each model's own forecasting performance. |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:syb:wpbsba:2123/8933&r=mac |
| By: | Lina Gálvez-Muñoz; Paula Rodríguez-Modroño; Tindara Addabbo |
| Abstract: | Contrary to consolidated economic theory principles, in Europe (but also in other world regions), austerity policy has been implemented instead of stimulus measures which have proven to be successful in crisis associated with credit crunch and insufficient demand. These policies cannot be only considered as an "austericide" due to ideological blindness. They also need to be considered as a strategy for imposing an economic and social reform which proved too difficult to be implemented in the years previous to the great recession. The ongoing fiscal contraction policies include the typical adjustment measures which are now driving the European economy towards a new type of insertion within the international economy. And as a consequence, they imply deep changes on the gender division of work deepening gender inequality. This article analyses the different effects of European Union austerity policy on women and men’s participation in the labour markets in two Southern European countries beaten by the Debt crisis: Spain and Italy. During the first part of this economics crisis, unemployment grew higher for men than for women, but in the second phase with the all sectors hit by the recession and the implementation of harsh austerity policies affecting public-sector jobs, women are also losing their jobs at the same rate than men. We have estimated labour supply models for individuals aged 25 to 54 living in couples with or without children by gender by using the EU-SILC 2011 micro data for Spain and Italy. The analysis carried out shows a strong countercyclical added-worker effect for women in response to transitory shocks in partner’s earnings, in contrast with a procyclical discouraged-worker effect for men. However though the added-worker effect prevails for women in Spain, in Italy still the discouraged worker effect dominates. The results show also a positive effect of the provision of childcare services on women’s labour supply. A cut in social and care services due to austerity promotion may turn the tendency to a decline in women’s participation and employment rates in the labour force with the subsequent loss of total well-being, due to gender differences in education performance, and especially of women’s well-being. |
| Keywords: | gender, labour supply, austerity policy, Great Recession |
| JEL: | J22 J16 H53 E62 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:mod:cappmo:0108&r=mac |
| By: | Gang Sun (University of St Andrews) |
| Abstract: | Although standard incomplete market models can account for the magnitude of the rise in consumption inequality over the life cycle, they generate unrealistically concave age profiles of consumption inequality and unrealistically less wealth inequality. In this paper, I investigate the role of discount rate heterogeneity on consumption inequality in the context of incomplete market life cycle models. The distribution of discount rates is estimated using moments from the wealth distribution. I find that the model with heterogeneous income profiles (HIP) and discount rate heterogeneity can successfully account for the empirical age profile of consumption inequality, both in its magnitude and in its non-concave shape. Generating realistic wealth inequality, this simulated model also highlights the importance of ex ante heterogeneities as main sources of life time inequality. |
| Keywords: | consumption inequality discount rate heterogeneity life cycle risk sharing |
| JEL: | D31 D91 E21 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1311&r=mac |
| By: | Loumrhari, Ghizlan |
| Abstract: | In this paper we investigate empirically the relationship between population aging begins in Morocco and private savings. To do this, we use an overlapping generations model (OLG) and annual data from 1980 to 2010. Econometric estimates show that if the increase in the dependency ratio negatively affects the growth rate of savings, as predicted by the lifecycle theory, longevity to the contrary tends to stimulate the same savings. However, it seems that the first effect outweighs the second. Economic policies to promote private savings and incentives for households to have more children are needed to meet the challenge of severe aging population which will face Morocco in the coming decades. |
| Keywords: | Population aging, private saving, OLG model |
| JEL: | C13 E21 J11 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:50649&r=mac |
| By: | Matthias Doepke; Martin Schneider |
| Abstract: | We develop a theory that rationalizes the use of a dominant unit of account in an economy. Agents enter into non-contingent contracts with a variety of business partners. Trade unfolds sequentially in credit chains and is subject to random matching. By using a dominant unit of account, agents can lower their exposure to relative price risk, avoid costly default, and create more total surplus. We discuss conditions under which it is optimal to adopt circulating government paper as the dominant unit of account, and the optimal choice of "currency areas" when there is variation in the intensity of trade within and across regions. |
| JEL: | E4 E5 F33 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19537&r=mac |
| By: | Nicholas Oulton |
| Abstract: | The productivity performance of the UK economy in the period 1990-2007 was excellent. Based entirely on pre-crisis data, and using a two-sector growth model, I project the future growth rate of GDP per hour in the market sector to be 2.61% p.a. But the financial crisis and the Great Recession which began in Spring 2008 have dealt this optimistic picture a devastating blow. Both GDP and GDP per hour have fallen and are still below the level reached at the peak of the boom. So I discuss a wide range of hypotheses which seek to explain the productivity collapse, including the impact of austerity. Most of the conclusions here are negative: the explanation in question doesn't work. I next turn to the long run impact of financial crises, particularly banking crises, on productivity, capital, TFP and employment. Based on a cross-country panel analysis of 61 countries over 1950-2010, I argue that banking crises generally have a long run impact on the level of productivity but not necessarily on its long run growth rate. I therefore predict that the UK will eventually return to the growth rate predicted prior to the crisis. This prediction is conditional on the UK continuing to follow good policies in other respects, in particular not allowing the government debt-GDP ratio to rise excessively. Nonetheless the permanent reduction in the level of GDP per worker resulting from the crisis could be substantial, about 5½%. The cross-country evidence also suggests that there are permanent effects on employment, implying a possibly even larger hit to the level of GDP per capita of about 9%. |
| Keywords: | productivity, potential output, growth, financial, banking crisis, recession |
| JEL: | J24 E32 O41 G01 H63 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepops:37&r=mac |
| By: | Isabell Koske |
| Abstract: | The recent crisis has revealed large differences in external competitiveness between euro area member countries. Since nominal exchange rate devaluation is not an option for members of a currency area, governments in troubled member countries have been considering so-called fiscal devaluation, i.e. a shift from employers’ social security contribution to value added tax, as an alternative means to restore competitiveness. This paper discusses the potential benefits and drawbacks of such a reform and investigates under which circumstances it would have the intended effects. It argues that a fiscal devaluation can have transitory effects, but that any permanent real effects are likely to be small in size. The policy tool can thus not be a substitute for deeper structural reforms of labour, product and financial markets. However, it may be helpful as part of a broader package of reforms. Dévaluation fiscale - peut-elle aider à stimuler la compétitivité ? La crise récente a révélé de grandes différences de compétitivité externe entre les pays membres de la zone euro. Comme la dévaluation du taux de change nominal n'est pas une option pour les membres d'une zone monétaire, les gouvernements des pays membres en difficulté ont examiné la dévaluation fiscale, c'est à dire substitution de la taxe à la valeur ajoutée aux cotisations sociales des employeurs, comme un autre moyen de rétablir la compétitivité. Ce document examine les avantages et les inconvénients d'une telle réforme et analyse les circonstances dans lesquelles il aurait les effets escomptés. Il soutient que la dévaluation fiscale peut avoir des effets transitoires, mais que les effets réels permanents sont susceptibles d'être faibles. Cet outil de politique ne peut donc pas se substituer à des réformes structurelles plus profondes des marchés du travail, des produits et financiers. Toutefois, il peut être utile dans le cadre d'un ensemble plus large de réformes. |
| Keywords: | value added tax, fiscal devaluation, social security contributions, competitiveness, compétitivité, Dévaluation fiscale, cotisations sociales, taxe à la valeur ajoutée |
| JEL: | E62 F13 H23 |
| Date: | 2013–10–02 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:1089-en&r=mac |
| By: | Richard S. Grossman (Dept of Economics, Wesleyan University&Institute for Quantitiative Social Science, Harvard University); Ronan C. Lyone (Trinity College, Dublin&Balliol College, Oxford); Kevin Hjortshoj O'Rourke (All Souls College, Oxford, CEPR & NBER & IIIS, Trinity College Dublin); Madalina A. Ursu (London School of Economics, UK) |
| Abstract: | Information on the performance of equities during the latter part of the globalized long nineteenth century is scarce, particularly for smaller European economies such as Ireland. Using a dataset of over 35,000 price-year observations from the Investor’s Monthly Manual, this paper constructs new monthly Irish stock market price indices for the period 1864-1930, encompassing periods of significant economic and political turmoil in Irish history. In addition to a total marker index covering all 118 equity securities issued by 94 companies, sector-specific indices are present for railways, financial services, companies, and miscellaneous industrial and retail companies. Weighted for market capitalization, nominal equity prices were largely static in the 1860s, before increasing by almost 60% in normal terms between 1870 and 1878. Between 1878 and 1879, equity prices fell by one sixth in the space of a year, after which there was a spectacular rise in equity prices for two decades, with equity prices in 1899 twice what they had been in 1864. Between the turn of the century and the outbreak of the Great War, though, prices fell by 25%, a pattern that stands in stark contrast to returns on the London exchange, which were greater during 1894-1913 then during the preceding two decades. The period from 1914 and 1929 saw a number of boom-bust cycles, concurrent with the war and other political events affecting Ireland, including its independence movement. Railway equities, which had trebled between the mid-1860s and the turn of the century, fell sharply during the 1910s and 1920s. In contrast financial equity prices – which were just 20% higher in 1920 than in 1864 – rose strongly during the 1920s. Overall, the average annual gain in equity prices over the period was just 0.9%, well bellow levels associated with an equity premium puzzle. |
| Keywords: | Irish stock exchange; Investor's Monthly Manual; long-run stock returns; 19th Century; 20th Century; Ireland |
| JEL: | E3 G12 N23 N24 |
| Date: | 2013–10–13 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:esohwp:_120&r=mac |
| By: | Antonia Díaz; Luis A. Puch |
| Abstract: | In this paper we propose a theory of investment and energy use to study the response of macroeconomic aggregates to energy price shocks. In our theory this response depends on the interaction between the energy efficiency built in capital goods (which is irreversible throughout their lifetime) and the growth rate of Investment Specific Technological Change (ISTC hereafter). We show that ISTC is a sort of energysaving technical change and, therefore, a substitute of energy efficiency: it rises the productivity of capital without rising energy use, which increases effective energy efficiency (i.e., the amount of energy use required per unit of quality-adjusted capital). Hence, our theory can account for the fall of energy use per unit of output observed during the 1990s, a period in which energy prices fell below trend. By increasing investment in the years of high ISTC growth, the economy was increasing the average efficiency of the economy (the capital-energy ratio), shielding the economy against the impact of the 2003-08 price shock. |
| Keywords: | Energy use, Vintage capital, Energy price shocks, Investment-specific technology shocks |
| JEL: | E22 E23 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we1320&r=mac |
| By: | Nicholas Oulton |
| Abstract: | If official figures overstated the growth of banking output in the UK in the recent boom, does this mean that GDP growth was overstated too? The answer is no. It is truer to say that if banking output was overstated then the output of some other industry or industries must have been understated, leaving GDP relatively unaffected. The reason is that the Office for National Statistics measures the real growth of GDP primarily from the expenditure side. And from the expenditure side most of the problematic part of banking output drops out since it constitutes intermediate consumption not final expenditure. Consequently, the effect of any mis-measurement of banking output on GDP growth in the boom of 2000-2007 is likely to have been small: GDP growth might have been overstated by about 0.1% p.a. |
| Keywords: | GDP, national income accounting, banking, financial services, mis-measurement |
| JEL: | E01 G21 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepops:33&r=mac |
| By: | Michael Bleaney; Paul Mizen; Veronica Veleanu |
| Abstract: | This paper provides a new insight into the relationship between financial market tightness and real activity using a unique new database extracted from Bloomberg to construct a credit spread index from 500 corporate bonds issued in eight European countries. We find that European bond spread measures have a significant negative relationship with four real activity measures at horizons of one quarter to two years ahead. The relationship is robust to inclusion of measures of monetary policy tightness, other leading indicator variables and factors extracted from a large macro dataset, as well as alternative measures of the bond spreads. These results provide strong support for models previously only evaluated on US data. We find that a sub-set of northern European countries have similar sensitivity of real GDP to bond spreads, but others have higher spreads and greater sensitivity to these spreads, which reveals a diverse response in Europe to financial market tightness. |
| Keywords: | corporate bond spreads, external bond premium, economic activity |
| URL: | http://d.repec.org/n?u=RePEc:not:notcfc:13/09&r=mac |
| By: | Ivan Petrella (Department of Economics, Mathematics & Statistics, Birkbeck); Raffaele Rossi (Lancaster University); Emiliano Santoro (University of Copenhagen) |
| Abstract: | This paper contributes to a recent debate about the structural and institutional conditions under which discretion may be superior to timeless perspective. We show this is unlikely when the policy maker relies on a welfare-theoretic loss function obtained as a second-order approximation of households’utility, even in the presence of features that should enhance the relative performance of discretionary policy-making in the baseline New Keynesian model. This result stands in contrast to the existing studies, whose analysis has typically relied on ad hoc welfare criteria that reject neither households’preferences, nor the degree of rigidity in price-setting. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:1306&r=mac |
| By: | Audrino, Francesco; Camponovo, Lorenzo |
| Abstract: | We derive new theoretical results on the properties of the adaptive least absolute shrinkage and selection operator (adaptive lasso) for time series regression models. In particular we investigate the question of how to conduct finite sample inference on the parameters given an adaptive lasso model for some fixed value of the shrinkage parameter. Central in this study is the test of the hypothesis that a given adaptive lasso parameter equals zero, which therefore tests for a false positive. To this end we construct a simple (conservative) testing procedure and show, theoretically and empirically through extensive Monte Carlo simulations, that the adaptive lasso combines efficient parameter estimation, variable selection, and valid finite sample inference in one step. Moreover, we analytically derive a bias correction factor that is able to significantly improve the empirical coverage of the test on the active variables. Finally, we apply the introduced testing procedure to investigate the relation between the short rate dynamics and the economy, thereby providing a statistical foundation (from a model choice perspective) to the classic Taylor rule monetary policy model. |
| Keywords: | Adaptive lasso; Time series; Oracle properties; Finite sample inference; Taylor rule monetary policy model. |
| JEL: | C12 C22 E43 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:usg:econwp:2013:27&r=mac |
| By: | Georges Prat |
| Abstract: | Partant des observations empiriques et de l’analyse économique de Rueff (1925, 1931) concernant le chômage anglais des années 1920, cet article montre que l’auteur distinguait : [a] un chômage « permanent » attribuable à un excès des salaires réels par rapport au rendement du travail (« loi de Rueff »), [b] un chômage « temporaire » attribuable à une baisse de l’activité économique liée à une diminution cyclique des prix, enfin [c].un chômage «minimal» de type frictionnel prévalant dans le fonctionnement normal de l’économie. Au total, Rueff a produit sur l’analyse du chômage plus un résultat empirique nouveau (« loi de Rueff ») qu’une idée ou une méthode d’analyse pouvant être qualifiée de nouvelle. La confrontation entre la contribution de Rueff et les analyses postérieures du chômage dans la littérature permet de dégager que : (i) la courbe de Phillips et son extension avec le NAIRU est un non-héritage ; (ii) la courbe des salaires (« wage curve ») s’accorde avec les idées de Rueff tout en constituant un intéressant complément à la dite « loi de Rueff » ; (iii) l’équation proposée par Allais pour expliquer le chômage français se décalque très bien sur les trois types de chômage [a], [b] et [c] distingués par Rueff; (iv) bien qu’étant aujourd’hui délaissée, la théorie des équilibres temporaires à prix fixes inclut le chômage de type [a] considéré par Rueff, ceci que l’on regarde le régime de chômage « classique » ou celui de chômage « keynésien » ; (v) la nouvelle micro-économie keynésienne du travail montre qu’un chômage de type [a] peut être expliqué par le comportement rationnel des agents sans faire intervenir des rigidités exogènes imposées par l’Etat ; ce résultat généralise l’idée d’un chômage de type [a] mais constitue une réfutation de la possibilité admise par Rueff d’un équilibre concurrentiel pouvant se réaliser sur le marché du travail en l’absence de rigidités exogènes; (vi) dans l’optique des fondements microéconomiques de la macroéconomie, le modèle de concurrence imparfaite WS-PS traduisant la négociation entre salariés et employeurs s’accorde avec les trois types de chômage [a], [b] et [c], au point où l’on peut y voir une synthèse structurée et rigoureuse rejoignant Rueff et Allais, sauf que - et ce n’est pas un détail - l’équilibre concurrentiel ne correspond pas ici à un état naturel du marché en raison de l’existence de rigidités pouvant être à la fois de nature exogènes et endogènes.Finalement, le lien entre Rueff et les approches néokeynésiennes n’est pas très étonnant, car la « Théorie Générale » d’après laquelle la rigidité des salaires joue un grand rôle dans l’explication du chômage a été publiée 11 ans après l’article signé par Rueff en 1925 : il est difficile de penser que Keynes n’ait pas été marqué par les résultats présentés par Rueff. Chez ce dernier comme chez ses successeurs, on trouve la préoccupation essentielle de prendre en compte les rigidités du monde réel sans pour autant abandonner l’hypothèse de comportements rationnels et la référence à l’équilibre. |
| Keywords: | marché du travail, chômage, rigidités des salaires, Rueff, Allais, modèles néokeynésiens |
| JEL: | E24 J2 J30 N34 |
| Date: | 2013–10–15 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:26&r=mac |
| By: | Casey B. Mulligan |
| Abstract: | Uncertainty and its composition can affect the demand for social insurance, and thereby the labor market. This paper shows that small to medium-sized increases in uncertainty or risk aversion are enough to recommend an expansion of the safety net that would be broadly similar to the actual safety net expansions, which significantly depressed the labor market. Labor market effects of uncertainty through investment and insurance channels are also examined with employer and employee labor wedges. |
| JEL: | D33 E24 I38 J22 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19553&r=mac |
| By: | Launov, Andrey (University of Mainz); Wälde, Klaus (University of Mainz) |
| Abstract: | To which extent does an increase in operating effectiveness of public employment agencies on the one hand and a reduction of unemployment benefits on the other reduce unemployment? Using the recent labour market reform in Germany as background we find that the role of unemployment benefit reduction for the reduction of unemployment is very modest (7% of the observed decline). Enhanced effectiveness of public employment agencies, to the contrary, explains a substantial part (34%) of the observed post-reform unemployment decline. If disincentive effects of PEA reforms had been avoided, the effect could have increased to 51%. |
| Keywords: | employment agencies, unemployment benefits, labour market reform, unemployment, structural model |
| JEL: | E24 J65 J68 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7659&r=mac |
| By: | Arthur Grimes (Motu Economic and Public Policy Research and the University of Auckland); Sean Hyland (Motu Economic and Public Policy Research) |
| Abstract: | We analyse the multiple channels of influence that GFC-induced credit restrictions had on New Zealand’s subnational housing markets. Our model isolates dynamics caused by impacts on the supply and the demand sides of the market. These dynamics are compared to those caused by a migration shock, a more common form of housing shock in New Zealand. We focus on the impacts on two outcome variables: house prices and housing supply; both shocks cause substantial cyclical adjustments in each variable. Similar cyclical dynamics could complicate the conduct of macro-prudential policies which are designed to affect bank credit allocation. |
| Keywords: | House prices, housing supply, credit restrictions, GFC, migration |
| JEL: | E51 R21 R31 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:mtu:wpaper:13_12&r=mac |
| By: | Gang Sun (University of St Andrews) |
| Abstract: | Recent risk sharing tests strongly reject the hypothesis of complete markets, because in the data: (1) the individual consumption comoves with income and (2) the consumption dispersion increases over the life cycle. In this paper, I revisit the implications of these risk sharing tests in the context of a complete market model with discount rate heterogeneity, which is extended to introduce the individual choices of e¤ort in education. I find that a complete market model with discount rate heterogeneity can pass both types of the risk sharing tests. The endogenous positive correlation between income growth rate and patience makes the individual consumption comove with income, even if the markets are complete. I also show that this model is quantitatively admissible to account for both the observed comovement of consumption and income and the increase of consumption dispersion over the life cycle. |
| Keywords: | complete markets, discount rate heterogeneity, risk sharing |
| JEL: | E21 D31 D58 D91 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1310&r=mac |
| By: | Jeremy Greenwood; David Weiss |
| Abstract: | James A. Schmitz (2005) documents, in a well-known case study, a dramatic rise in productivity in the U.S. and Canadian iron-ore industry following an increase in competition from Brazil. Prior to the increased competition, the industry was not competitive. Surplus in profits was divided between business and unions. Schmitz attributes the increase in productivity to a change in work practices in the industry, as old negotiated union work rules were abandoned or modified. This research formalizes a mechanism through which a rise in competition can lead to increased productivity in the iron-ore industry. |
| JEL: | E13 J51 O47 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19556&r=mac |
| By: | Garry Barrett; Peter Levell; Kevin Milligan |
| Abstract: | This paper presents a comparative assessment of the performance of the household expenditure survey programs in Australia, Canada, the UK and US. Cross-country and time series variation in survey methodology and experience is used to assess the role of factors influencing the performance of the household surveys. First, coverage of aggregate expenditure relative to national account is examined. Coverage rates are highest in Canada and the UK. Over the past three decades coverage remained fairly stable in Canada and Australia; in the UK and US coverage rates declined sharply. Survey response rates and top income shares are then considered in tandem with coverage rates. Falls in response rates are found to be predictive of changes in coverage rates. Further, the change in coverage rates over time coincided with the growing concentration of income, indicating that growing inequality contributed to declining coverage rates. Specific expenditure components were then examined. There was no clear pattern by collection method. Most evident is the high and stable coverage of regularly purchased items (e.g. food), along with the more volatile coverage of irregular and larger expenditure items (e.g. vehicles, furniture and household equipment). The aggregate patterns in coverage cannot be attributed to specific expenditure components or collection methods. |
| JEL: | C83 E01 E21 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19544&r=mac |
| By: | Gouriéroux, C.; Monfort, A.; Renne, J-P. |
| Abstract: | In order to derive closed-form expressions of the prices of credit derivatives, standard credit-risk models typically price the default intensities, but not the default events themselves. The default indicator is replaced by an appropriate prediction and the prediction error, that is the default-event surprise, is neglected. Our paper develops an approach to get closed-form expressions for the prices of credit derivatives written on multiple names without neglecting default-event surprises. This approach differs from the standard one, since the default counts necessarily cause the factor process under the risk-neutral probability, even if this is not the case under the historical probability. This implies that the standard exponential pricing formula of default does not apply. Using U.S. bond data, we show that allowing for the pricing of default events has important implications in terms of both data-fitting and model-implied physical probabilities of default. In particular, it may provide a solution to the credit spread puzzle. Besides, we show how our approach can be used to account for the propagation of defaults on the prices of credit derivatives. |
| Keywords: | Credit Derivative, Default Event, Default Intensity, Frailty, Contagion, Credit Spread Puzzle. |
| JEL: | E43 E47 G12 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:455&r=mac |
| By: | Brenzel, Hanna; Gartner, Hermann; Schnabel, Claus |
| Abstract: | Using a representative establishment dataset, this paper is the first to analyze the incidence of wage posting and wage bargaining in the matching pro-cess from the employer's side. We show that both modes of wage determination coexist in the German labor market, with about two-thirds of hirings being charac-terized by wage posting. Wage posting dominates in the public sector, in larger firms, in firms covered by collective agreements, and in part-time and fixed-term contracts. Job-seekers who are unemployed, out of the labor force or just finished their apprenticeship are also less likely to get a chance of negotiating. Wage bar-gaining is more likely for more-educated applicants and in jobs with special requirements as well as in tight regional labor markets. -- Dieser Aufsatz analysiert erstmals mit Hilfe einer reprä-sentativen Betriebsbefragung die Verbreitung von fixen Lohnangeboten der Arbeit-geber und von Lohnverhandlungen bei Neueinstellungen. Wir zeigen, dass sowohl individuelle Lohnverhandlungen als auch fixe Lohnangebote in Deutschland vor-kommen, wobei bei rund zwei Drittel der Neueinstellungen ein fixer Lohn angeboten wird. Besonders häufig gibt es fixe Lohnangebote im öffentlichen Dienst, in tarif-gebundenen Firmen und bei Teilzeit- oder befristeter Beschäftigung. Mit Personen, die vorher nicht erwerbstätig waren oder eine Ausbildung beendet haben, wird seltener über den Lohn verhandelt. Wahrscheinlicher ist eine Lohnverhandlung, wenn die eingestellte Person höher qualifiziert ist, wenn spezielle Qualifikationen verlangt werden oder wenn die regionale Arbeitslosigkeit gering ist. |
| Keywords: | wage posting,wage bargaining,hiring,matching,Germany |
| JEL: | E24 J30 J63 M51 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:faulre:85&r=mac |
| By: | Larry G. Epstein; Emmanuel Farhi; Tomasz Strzalecki |
| Abstract: | Though risk aversion and the elasticity of intertemporal substitution have been the subjects of careful scrutiny when calibrating preferences, the long-run risks literature as well as the broader literature using recursive utility to address asset pricing puzzles have ignored the full implications of their parameter specifications. Recursive utility implies that the temporal resolution of risk matters and a quantitative assessment of how much it matters should be part of the calibration process. This paper gives a sense of the magnitudes of implied timing premia. Its objective is to inject temporal resolution of risk into the discussion of the quantitative properties of long-run risks and related models. |
| JEL: | E0 G0 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19541&r=mac |
| By: | Philippe Aghion; Timothy Besley; John Browne; Francesco Caselli; Richard Lambert; Rachel Lomax; Christopher Pissarides; Nick Stern; John Van Reenen |
| Abstract: | What institutions and policies are needed to sustain UK economic growth in the dynamic world economy of the twentyfirst century? After years of inadequate investment in skills, infrastructure and innovation, there are longstanding structural weaknesses in the economy, all rooted in a failure to achieve stable planning, strategic vision and a political consensus on the right policy framework to support growth. This must change if we are to meet our current challenges and those that may arise in the future. |
| Keywords: | GDP, innovation, infrasstructure, UK economy, skills, apprenticeships, education, government policy |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepsps:28&r=mac |